Grupa LOTOS Annual Report 2014

Plain-text annual report

LADENBURG THALMANN FINANCIAL SERVICES INC. ANNUAL REPORT FOR YEAR ENDED DECEMBER 31, 2014 Dear Fellow Shareholder: April 14, 2015 Ladenburg performed very well in 2014, achieving record revenues, net income and EBITDA, as adjusted, across our businesses. During the year, we continued the progress we’ve made since 2006 in creating a truly differentiated diversiﬁed ﬁnancial services ﬁrm built on a foundation of recurring operating revenues that enable us to invest for the long term in our key business drivers. We have grown our platform to include ﬁve independent broker dealers, investment banking and wholesale trust services, asset management, distribution of life insurance products. Together, our businesses produce $1.1 billion of revenue today on an annualized basis, up from $31 million ten years ago. This progress reﬂects the hard work, dedication and success of our 5,000 employees and advisors, many of whom are shareholders of our company. Our strong 2014 results are further validation of our strategy of growing our complementary and proﬁtable Independent Brokerage and Advisory Services (IBD) businesses and capital markets and investment banking. Both businesses produced strong results, with additional opportunities ahead. Below we provide a review of Ladenburg’s business developments and ﬁnancial highlights for 2014 and how we are positioned for future success. 2014 Overview (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) 2014 revenues increased 16% to $921.3 million, a record high up from $793.1 million in 2013. Advisory fees revenues increased by 25% year-over-year, and investment banking revenues increased by 12%. 2014 EBITDA, as adjusted, grew to $61.2 million, an increase of 7% from $57.2 million in the prior-year period. Shareholders’ equity grew to $336.5 million at year end. In 2014, we repurchased 2,846,395 shares of our common stock at a cost of approximately $9.5 million, representing an average price per share of $3.35. By the end of 2014, we had approximately $125 billion in client assets company-wide and approximately 4,000 ﬁnancial advisors at the Ladenburg ﬁrms, underscoring our role as a leading independent brokerage and advisory services business. 2014 recurring revenues, which include advisory fees, trailing commissions, cash sweep fees and certain other fees, represented approximately 71% of revenues from our IBD business. Recurring revenues for this business were approximately 66% for full year 2013. Our investment banking group participated in 106 underwritten offerings that raised approximately $19.1 billion, and placed eight registered direct and PIPE offerings that raised an aggregate of approximately $214 million, for clients in healthcare, biotechnology, energy and other industries. Ladenburg’s internal wealth management division, Ladenburg Thalmann Asset Management (LTAM), also recorded a strong year, with approximately $2 billion in assets under management. Acquired KMS Financial Services and Securities Service Network to strengthen our position as a leading network of independent broker-dealer ﬁrms. Acquired Highland Capital Brokerage, allowing entry into the wholesale life insurance business. Premier Trust, our advisor-friendly trust company, also recorded strong growth and reached $873 million in assets under administration at year end. 1 Ladenburg’s Independent Brokerage and Advisory Services (IBD) Business Ladenburg’s IBD ﬁrms drove increased revenues of 13% compared to solid 2013 results. Bolstering our to, one of the fastest growing sectors of the ﬁnancial services industry, position in, and commitment Ladenburg completed the acquisitions of KMS Financial Services, based in Seattle, Washington in 2014 and completed the acquisition of Securities Service Network (SSN), based in Knoxville, Tennessee, at the beginning of 2015. Ladenburg also acquired Highland Capital Brokerage, a leading independent insurance brokerage ﬁrm, based in Birmingham, Alabama, in 2014. With these valuable additions to our company, our leading independent advisor platform now has approximately 4,000 ﬁnancial advisors and Ladenburg has an annual revenue run rate of approximately $1.1 billion. One of the hallmarks of Ladenburg’s strategy is that we maintain each of our IBD ﬁrms as a separate stand-alone broker-dealer and RIA operating on an entrepreneurial basis under its existing management team. Each of the ﬁrms that Ladenburg has acquired has its own special history and culture, which together with the long term relationships between the ﬁrm’s advisors and its management team and home office staff, are an important part of the ‘‘glue’’ which ties our independent ﬁnancial advisors to our ﬁrms. While we increasingly seek to take advantage of the scale we have created, by sharing technology, back office and other services on an enterprise basis, we never want to lose sight of our commitment to the independence of our subsidiaries. We are committed to open architecture, do not pressure advisors to sell house products and strive to conduct our business in an ethical and socially responsible manner. We make available to our approximately 4,000 advisors a differentiated platform with the widest array of services and resources within the IBD channel — what we refer to as the ‘‘Ladenburg Wealth Management Advantage’’. In addition to preeminent technology and practice management tools, value-added innovations and a full suite of wealth management products, Ladenburg’s affiliated advisors have access to all the services and resources of our companies, including: investment banking services; access to proprietary institutional equity syndicate/capital market products; research (we currently cover over 230 companies); a dedicated ﬁxed income trading desk; the advisor-friendly trust services of Ladenburg subsidiary, Premier Trust, Inc.; Highland’s insurance solutions and point-of-sale support; and LTAM’s asset management services. It’s no surprise that with this model, three successful companies — SSN, KMS and Highland — found new homes as part of Ladenburg, and we remain committed to investing in their growth. The past year also saw strong levels of recruiting at our ﬁrms, as we believe Ladenburg has found a niche ‘‘sweet spot’’ leveraging the power of our IBD network’s supportive programs and the unique advantages of our wealth management services to attract new high-performing advisors to our IBD ﬁrms. In terms of the macro economic trends, we continue to expect the retirement of nearly 80 million baby boomers and the continued need for related independent ﬁnancial management and advisory services to support this transition. Our IBD advisors continue to meet with clients that seek truly independent ﬁnancial advice, and focus on providing the best investment advice for clients from an open architecture platform with a wide variety of products and services. We would be remiss not to mention that the work of our advisors and employees matters greatly to our country and to our society. Millions of Americans have to take responsibility for educating their children and assuring they will have a ﬁnancially secure retirement, and their need for independent, unbiased ﬁnancial advice has never been greater. That is exactly what our advisors do every day and do very well, and it is something all of us at Ladenburg are very proud of. Ladenburg’s Investment Banking and Capital Markets Business Our investment banking and capital markets business also delivered robust results in 2014, growing revenues by 12%. Our business is primarily focused on raising equity capital for small and mid-sized public companies. Over the past two years this business has performed very well with the support of strong equity markets and the concurrent high levels of capital markets activity. While we recognize the increase in volatility in the equity markets and the uncertainty surrounding interest rates that have characterized recent months, we look forward to building on this success in 2015. During the past two years, we made investments in our business to better position us to capitalize on future opportunities in the ﬁnancial markets. We added senior bankers and research analysts to our team, 2 including bringing on talented personnel to our technology and healthcare practices. We see substantial growth opportunities in these sectors, and adding new expertise has been invaluable as we continue to grow and advance Ladenburg’s institutional research, sales and trading capabilities. Across the healthcare, biotechnology, energy, and other sectors, this year our 18 investment bankers participated in 106 underwritten offerings that raised approximately $19.1 billion and placed eight registered direct and PIPE offerings that raised an aggregate of approximately $214 million. We are also continuing our track record in yield-oriented offerings in Mortgage and Equity Real Estate Investment Trusts (REITs), Business Development Companies (BDCs) and Master Limited Partnerships (MLPs). Since 2012, Ladenburg has participated in 206 yield-oriented offerings, which raised over $35.4 billion. We now have 16 research analysts on board covering more than 230 companies, and our approximately 28 institutional sales and trading personnel cover investors worldwide and help our clients maximize their full potential. Net Income, Recurring Revenues and Stock Repurchase Program Net income attributable to the Company for ﬁscal 2014 was $33.4 million, as compared to net loss of $0.5 million in 2013. This improvement was impacted by Ladenburg’s acquisitions of Highland and KMS, which added $26.2 million and $19.8 million, respectively, in revenues during 2014 and contributed to a $23.3 million income tax beneﬁt. Another reason we’ve been attracted to the IBD sector is the recurring revenues this business can drive. We deﬁne recurring revenues as advisory fees, trailing commissions, cash sweep fees and certain other fees — in 2014 this represented approximately 71% of revenues from the Company’s independent brokerage and advisory services business, and we expect that percentage to grow in the future. During 2014, Ladenburg repurchased 2,846,395 shares of common stock at a cost of approximately $9.5 million, representing an average price per share of $3.35. Since the inception of our stock repurchase program in March 2007, Ladenburg has repurchased 14,096,152 shares at a total cost of approximately $23.3 million, including purchases of 7,500,000 shares outside our stock repurchase program. During the fourth quarter of 2014, Ladenburg’s Board of Directors authorized the repurchase of up to an additional 10,000,000 shares of common stock under our current repurchase program. Importantly, our Board of Directors and senior leadership team are major shareholders in the ﬁrm and aligned with Ladenburg’s investors in building shareholder value. Continued Recognition and Support for the Women in our Company In 2014, we hosted our third annual Ladenburg Institute of Women & Finance (LIWF) symposium in Atlanta, Georgia. We are incredibly proud of Ladenburg’s female advisors, and it brings us great pride to see such accomplished, talented people come together to share their experiences and wisdom at this event. In addition to offering advisors solutions for managing their ﬁrms more efficiently and strategies for working with clients across all generations, the LIWF introduced new mentors and mentees through our ‘‘LIFT’’ Mentoring Program, whereby younger advisors and career changers are given the opportunity to learn and the following year, setting their own beneﬁt from the experience of more seasoned advisors throughout agendas to speak and meet regularly. We will hold our fourth annual symposium in October 2015 in Chicago, Illinois and are excited to include female advisors from our new IBD ﬁrms. A Look Back, and a Look Forward This past year, Ladenburg was honored to reﬂect back on our history with the 135th anniversary of Ladenburg Thalmann & Co. Inc’s NYSE membership. Since current leadership took the helm in 2006, we’ve grown revenues approximately 2,900% and strengthened the company across all of our businesses. We look forward to adding potential new business lines in the future and believe there are still many future synergies between our current businesses. It is our view that the combination of strong operating results and continued additions to our diversiﬁed ﬁnancial services offerings position us to improve shareholder value for years to come — we are squarely focused on the future, and are enthusiastic about Ladenburg’s prospects for ongoing success. We expect to continue to grow organically across the company, and also remain interested in new opportunities to 3 strategically grow our business. As a company focused on driving value for shareholders, we are always considering alternatives to move into complementary businesses within our industry that ﬁt with our current model. In conclusion, we believe Ladenburg’s businesses are increasingly well positioned in the most dynamic growth areas in the ﬁnancial services industry. We are truly excited about the future. We extend our sincere thanks to our shareholders, ﬁnancial advisors and employees for their role in positioning us for long-term success. We cannot express enough our gratitude, and look forward to a strong 2015 ahead. Sincerely, Phillip Frost, M.D. Chairman of the Board Richard J. Lampen President & Chief Executive Officer 4 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, 2014 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 offıces) 65-0701248 (I.R.S. Employer Identiﬁcation Number) 33137 (Zip Code) (305) 572-4100 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, par value $.0001 per share 8.00% Series A Cumulative Redeemable Preferred Stock, Liquidation Preference $25.00 per share NYSE MKT 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 □ No (cid:3) 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 □ No (cid:3) 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 (cid:3) No □ Indicate by check mark whether the registrant has submitted electronically and posted on its 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 (cid:3) No □ 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. (cid:3) 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 □ Smaller reporting company □ Accelerated ﬁler (cid:3) Non-accelerated ﬁler □ (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 □ No (cid:3) As of June 30, 2014 (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 $313,333,000. As of March 9, 2015, there were 185,334,449 shares of the registrant’s common stock outstanding. 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 2015 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. Documents Incorporated by Reference: [This page intentionally left blank.] LADENBURG THALMANN FINANCIAL SERVICES INC. Form 10-K TABLE OF CONTENTS PART 1 Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 2. Item 3. Item 4. PART II Item 5. Item 6. Item 7. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . Item 8. Item 9. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes In and Disagreements with Accountants on Accounting and 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 1 14 28 28 29 29 30 31 31 47 48 48 48 51 51 51 51 51 51 52 57 i [This page intentionally left blank.] PART I ITEM 1. BUSINESS. This business description should be read in conjunction with our audited consolidated ﬁnancial statements and accompanying notes thereto appearing elsewhere in this annual report, which are incorporated herein by this reference. General We are a diversiﬁed ﬁnancial services company engaged in independent brokerage and advisory services, investment banking, equity research, institutional sales and trading, asset management services, wholesale life insurance brokerage and trust services through our principal subsidiaries, Securities America, Inc. (collectively with related companies, ‘‘Securities America’’), Triad Advisors, Inc. (‘‘Triad’’), Securities Service Network, Inc. (‘‘SSN’’), Investacorp, Inc. (collectively with related companies, ‘‘Investacorp’’), KMS Financial Services, Inc. (‘‘KMS’’), Ladenburg Thalmann & Co. Inc. (‘‘Ladenburg’’), Ladenburg Thalmann Asset Management Inc. (‘‘LTAM’’), Highland Capital Brokerage, Inc. (‘‘Highland’’), and Premier Trust, Inc. (‘‘Premier Trust’’). We acquired Highland and KMS in 2014 and we acquired SSN in 2015. 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, Triad, SSN, Investacorp and KMS, 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 4,000 ﬁnancial advisors located in 50 states, we have become one of the 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 ﬂow 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 expected transfer of retirement assets from 401(k) and group plans to individual retirement 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 insurance and bank backdrop of the steady migration of client assets and advisors from the wirehouse, channels to the independent channel. We operate each of our independent broker-dealers separately under their own management teams in a network model, 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. While we keep each ﬁrm separate, we seek to share intellectual capital and best practices among the ﬁrms. For instance, we offer Securities America’s industry recognized Next Level practice development tools to our other advisors. Similarly, the advisors in our independent brokerage and advisory services segment have other resources to enhance their practices, including access to Ladenburg’s proprietary research, investment banking and capital markets services, ﬁxed income trading and syndicate products, Premier Trust’s trust services, Highland’s insurance solutions and LTAM’s wealth management solutions. 1 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’s and Premier Trust’s clients, as well as clients of our independent ﬁnancial advisors. Highland is a leading independent insurance brokerage that delivers life insurance, ﬁxed and equity indexed annuities and long-term care solutions to investment and insurance providers. Highland provides specialized point-of-sale support along with advanced marketing and estate and business planning techniques, delivering customized insurance solutions to both institutional clients and independent producers. 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 Securities America, Triad, SSN, Investacorp, KMS and Ladenburg 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 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. Highland is subject to regulation by various regulatory bodies, including state attorneys general and insurance departments. Premier Trust is subject to regulation by the Nevada Department of Business and Industry Financial Institutions Division. We were incorporated under the laws of the State of Florida in February 1996. Available Information Our securities 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 the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’), and any Section 16(a) of 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. Our code of ethics is also available, free of charge, on our Web site. Any amendments to or waivers from a provision of this code of ethics will be posted on our Web site. 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. You should note that forward-looking statements in this document speak only as of the date of this annual report on Form 10-K. We expressly disclaim any obligation to update or alter any forward-looking statements, whether as a result of new information, subsequent events or otherwise, except as required by law. 2 Business Segments We have three operating segments: (i) the independent brokerage and advisory services segment, (ii) the Ladenburg segment and (iii) the insurance brokerage segment. Prior to our acquisition of Highland, we had two operating segments. The independent brokerage and advisory services segment includes the broker-dealer and investment advisory services provided by our independent broker-dealer subsidiaries to their independent contractor ﬁnancial advisors and the wealth management 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. The insurance brokerage segment includes the wholesale insurance brokerage activities provided by Highland, which delivers life insurance, ﬁxed and equity indexed annuities and long-term care solutions to investment and insurance providers. See Note 9, ‘‘Segment Information,’’ in the accompanying consolidated ﬁnancial statements for information regarding revenue, pre-tax income (loss), EBITDA, as adjusted, identiﬁable assets, depreciation and amortization, interest, capital expenditures, and non-cash compensation for our three operating segments. Independent Brokerage and Advisory Services Segment Overview Securities America, Triad, SSN, Investacorp and KMS 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 89%, 91% and 92% of our total revenues for 2014, 2013 and 2012, 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 the market share of retail assets declines at large national ﬁrms. New independent ﬁnancial advisors require client and back office support services and access to technology and often affiliate 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 1 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 either the capital expenditures that would be required to open company-owned offices, or the additional administrative and other costs of hiring ﬁnancial advisors as in-house employees. An independent ﬁnancial advisor 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. 3 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. 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 these ﬁnancial advisors. See Item 1.A — Risk Factors — Risks Relating to our Business. 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 licensed third-party insurance brokers. We are not an insurance company, and we retain no insurance risk related to insurance or 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 focus on increasing our independent broker-dealer networks of ﬁnancial advisors, revenues and client assets as described below. (cid:129) (cid:129) (cid:129) Provide our advisors with a differentiated independent platform. We believe we have built a meaningfully differentiated platform by offering our independent ﬁnancial advisors the unique and valued beneﬁts of access to Ladenburg’s wealth management division, capital markets products, investment banking services, proprietary equity research and ﬁxed income trading desk, Highland’s insurance solutions and Premier Trust’s trust services and planning capabilities. it to solutions technological home-office independent Provide employees. We believe that independent broker-dealers possess imperative that our 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. ﬁnancial advisors and is 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 accelerate 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. 4 (cid:129) (cid:129) (cid:129) 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 targeted recruits experienced ﬁnancial professionals. These efforts are supported by advertising, 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 also may pursue the acquisition of other independent brokerage ﬁrms and groups of ﬁnancial advisors. Our ability to realize growth through acquisitions depends, among other things, 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, the costs associated with the integration of new businesses and personnel may be greater than anticipated. Brokerage Business Each of our independent broker-dealers provides full support services to its ﬁnancial advisors, including: trusts and access to stock, bond and options execution; products such as insurance, mutual funds, unit 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 revenue from traditional commission schedule, our commissions charged on variable annuity, mutual fund, equity and ﬁxed income transactions. independent broker-dealers primarily derive their 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 $873 million in assets under administration at December 31, 2014. 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 Segment 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 5 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 18 investment banking professionals serve clients nationwide and worldwide. 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 capital markets are not 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 2014, we participated in 106 underwritten offerings that raised an aggregate of approximately $19.1 billion. In 2014, Ladenburg placed 8 registered direct and PIPE offerings, which raised an aggregate of approximately $214 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 bankers focus primarily on three speciﬁc areas: mortgage and equity 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 2012, Ladenburg has participated as a manager in 206 offerings of these products, which raised over $35.4 billion. Similarly, Ladenburg also has dedicated investment bankers focused on healthcare and biotechnology companies, as well as the energy, utilities and technology sectors. From 2012 through 2014, Ladenburg participated as a manager in 69 offerings, which raised over $2.6 billion in the healthcare and biotechnology sectors. 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 the ﬁrm to 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, leveraged buyouts and restructurings, going-private transactions and certain other market acquisitions, activities. 6 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. In 2012, Ladenburg added a ﬁxed income trading desk, Ladenburg Fixed Income (LFIX). 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 strengthened the value proposition of our broker-dealer platform and is a natural complement to Ladenburg’s efforts in yield-oriented equities because many of the same companies to which Ladenburg provides investment banking services 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 239 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 equity 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: (cid:129) (cid:129) (cid:129) (cid:129) reviews and analyzes general market conditions and industry groups; issues written reports on companies; furnishes information to retail and institutional customers; and responds to inquiries from customers and account executives. 7 Ladenburg Thalmann Asset Management LTAM is a registered investment advisor offering various asset management products utilized by Ladenburg clients, as well as clients of our independent broker-dealers’ 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. At December 31, 2014, LTAM had approximately $2.0 billion of assets under management and more than 15,000 client accounts. 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 low minimum account size, risk analysis, customized rebalancing at investment policy statements and comprehensive performance reporting. the asset class and security level, Investment Consulting Services LTAM’s Investment Consulting Services (‘‘ICS’’) provides clients with access to professional money managers who are usually available only to large institutions. Whether the client requires a complete asset allocation strategy or an investment manager for a single asset class, ICS provides access to money managers across the spectrum of major asset classes, and 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. Alternative Strategies Fund LTAM has created a closed-end interval fund, the Alternative Strategies Fund, that includes alternative investment products and allows clients to access these investments with low minimums and without having 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, and BDCs. 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 with 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 select 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 the registered investment advisors of our broker-dealer subsidiaries. 8 Investment Activities Ladenburg may, from time to time, seek to realize investment gains by purchasing, selling and holding securities for its own account, including through LFIX. 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. 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(cid:4) company, as its clearing agent on a fully disclosed basis. Each of Securities America and SSN use the services of NFS and Pershing LLC, a subsidiary of the Bank of New York Mellon Corporation, as its clearing agent on a fully disclosed basis. KMS uses the services of Pershing as its clearing agent 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. Insurance Brokerage Segment that provides brokers, Highland operates through a brokerage general agency model typically either independent life insurance advisors or institutions, support as needed. The independent life insurance advisors or institutions then distribute life insurance products and services directly to individual clients. Highland provides its partners with access to major insurance carriers, advanced planning support, expertise in risk underwriting, back office processing and point of sale support, if needed. Highland generally receives allowances paid by the insurance carrier for facilitating the placement of the product. The amount of the allowance is a percentage of the product premium. Revenue tends to be concentrated in the year that the policy is originated. Historically, revenue in the wholesale life brokerage business is weighted towards the fourth quarter as clients ﬁnalize tax-planning decisions at year end. For the year ended December 31, 2014, Highland, which we acquired on July 31, 2014, accounted for 3% of our total revenue. 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 downturns 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 9 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 there is substantial commission investment recommendations and research. Moreover, ﬁnancial planning, 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 online 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. Government Regulation is subject including our business, The securities industry, 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, Triad, SSN, Investacorp, KMS and Ladenburg is a registered broker-dealer with the SEC. Each such ﬁrm 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: (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) 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: (cid:129) (cid:129) (cid:129) limitations on the ability of non-refundable fees; investment advisors to charge clients performance-based or record-keeping and reporting requirements; disclosure requirements; 10 (cid:129) (cid:129) 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. These plans include deﬁned beneﬁt pension plans and individual account plans, such as 401(k) 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. Failure to comply with the ERISA requirements could result in signiﬁcant monetary penalties and could severely limit the ability of our investment advisory subsidiaries to act as ﬁduciaries. 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. Highland is subject to regulation by various regulatory bodies, including state attorneys general and insurance departments. 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 Approximately 29% of our total assets at December 31, 2014 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. 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. 11 Each of Securities America, Triad, Investacorp and Ladenburg has elected to compute its net capital under the alternative method allowed by the Net Capital Rule and at December 31, 2014, each had a $250,000 minimum net capital requirement (except for Ladenburg which had a minimum net capital requirement of $253,000, as calculated under 15c3-1(a)(4), minimum capital for market makers). At December 31, 2014, Securities America had regulatory net capital of $5,396,000, Triad had regulatory net capital of $6,025,000, Investacorp had regulatory net capital of $5,176,000 and Ladenburg had regulatory net capital of $20,506,000. requirement KMS has elected to compute its net capital under the basic method allowed by the Net Capital Rule and at December 31, 2014, it had net capital of $3,075,000, which was $2,516,000 in excess of its required net capital of $559,000, and had a net capital ratio of 2.7 to 1. SSN has elected to compute its net capital under the basic method allowed by the Net Capital Rule and at December 31, 2014, it had net capital of $3,878,000, which was $3,559,000 in excess of its required net capital of $319,000, and had a net capital ratio of 1.2 to 1. Securities America, Triad, SSN, Investacorp, KMS and Ladenburg 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 clearing broker on a fully disclosed basis. KMS also claims an exemption from the provisions of the SEC’s Rule 15c3-3 pursuant to paragraph (k)(2)(i) of such rule as they maintain a special bank account for the exclusive beneﬁt of their customers. 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 that 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. 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, 2014, Premier Trust had stockholder’s equity of approximately $1,366,000, least $250,000 in cash. including at 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, Triad had a short-term net-capital deﬁciency and in March 2014 entered into a settlement with FINRA under which Triad agreed to a ﬁne and censure. 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 allow them to facilitate underwriting transactions. 12 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, 2014, we had 1,109 full-time employees. No employees are covered by a collective bargaining agreement. We consider our relationship with our employees to be good. 13 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 ability to attract and retain ﬁnancial advisors, clients and employees, and our failure, or perceived failure, to appropriately operate our business or deal with matters that give rise to reputational risk may materially and adversely harm our business, prospects and results of operations. Those matters giving rise to reputational risk include the risks discussed in this Item 1A, as well as appropriately dealing with legal and regulatory requirements, anti money-laundering practices, privacy, record keeping, and sales and trading practices, as well as our proper identiﬁcation of the legal, reputational, credit, liquidity, and market risks inherent in ﬁnancial products. Also, our inability to sell securities that we have underwritten on expected terms, including anticipated prices, could result in reputational damage that results in our loss of investment banking business, which would adversely impact our Ladenburg segment. Our failure to deliver appropriate standards of service and quality, or our failure or perceived failure to treat clients fairly, could 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 be detrimental to our business. Changing conditions in ﬁnancial markets and the economy could adversely affect our ﬁnancial condition and results of operations. Our ﬁnancial results have been adversely affected by turmoil in the ﬁnancial markets, such as during the economic downturn that particularly characterized the period from late 2008 through 2010, and downturns in 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: (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) 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. investment performance by portfolio Even in the absence of a market downturn, below-market 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. 14 We have incurred, and may again incur, signiﬁcant losses. We achieved proﬁtability in 2014. We cannot assure you that we will sustain our proﬁtability or have 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, 2015, if we are unable to sustain our proﬁtability, it would have a material adverse effect on our business and results of operations. We have a signiﬁcant amount of debt, which limits cash ﬂow available for operations and may impair our ability to obtain additional ﬁnancing. Our total debt, as of December 31, 2014, was approximately $56 million. Our substantial amount of indebtedness: (cid:129) (cid:129) (cid:129) 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, including payment of dividends on our Series A Preferred Stock. 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 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 competition for key personnel remains intense. We cannot assure you that the loss of ﬁnancial advisors and key personnel will not occur in the future. We expend signiﬁcant resources in recruiting, trading or training and retaining our ﬁnancial advisors. The loss of a key ﬁnancial advisor, investment banking professional, or broker-dealer executive, particularly a senior banking professional or executive with signiﬁcant industry contacts, or the failure to recruit productive ﬁnancial advisors could materially and adversely affect our results of operations. Also, difficultly in recruiting young advisors, due to the low number of persons entering our industry, combined with the high average age of our existing ﬁnancial advisors, may adversely impact our ability to retain client assets and our ﬁnancial results. 15 Misconduct by our employees and independent ﬁnancial advisors, who operate in a decentralized environment, is difficult to detect and deter and could harm our business, reputation, 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: (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) recommending transactions that are not suitable for the client or in the client’s best interests; 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; failure, whether negligent or intentional, to effect securities transactions on behalf of clients; failure to perform reasonable diligence on a security, product or strategy; failure to supervise a ﬁnancial advisor; failure to provide insurance carriers with complete and accurate information; engaging in unauthorized or excessive trading to the detriment of clients; 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 historical behavior. As a result, these methods may not predict future risk exposures, which could be signiﬁcantly greater than indicated historically. Other risk management methods depend on our management’s evaluation of information regarding markets, clients or other matters that are publicly available or otherwise accessible. 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 exist. We seek to monitor and control our risk exposure through a variety of separate but complementary the effectiveness of our ability to ﬁnancial, credit, operational and legal reporting systems. Nonetheless, 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, regardless of our risk management policies and procedures. 16 Poor performance of the investment products and services recommended or sold to our clients may have a material adverse effect on our business. Our advisors’ clients 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 generally 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. Systems failures could signiﬁcantly disrupt our business and subject us to losses, litigation and regulatory actions. 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 also are implementing new technology platforms and failures in connection with such implementation may cause disruption to our operations, which could result in liability and reputational damage. 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, human error, 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. Our operational systems and networks have been, and will continue to be, subject to evolving cybersecurity or other technological risks, which could result in the disclosure of conﬁdential client information, loss of our proprietary information, damage to our reputation, additional costs to us, regulatory penalties and other adverse impacts. The secure transmission of conﬁdential information over public networks is a critical element of our operations. A portion of our business is conducted through the Internet, mobile devices and our internal computer systems. We rely on technology to provide the security necessary to effect secure transmission of conﬁdential information over the Internet. Maintaining the integrity of these systems and networks is critical to the success of our business operations, including the retention of our advisors and their clients, and to the protection of our proprietary information and client information. We rely on our advisors and employees to comply with our policies and procedures to safeguard conﬁdential data. The failure of our advisors and employees to comply with such policies and procedures could result in the loss or wrongful use of their information or other sensitive information. The increased use of mobile and cloud clients’ conﬁdential technologies can heighten these and other operational risks. Also, even if we and our advisors comply with 17 our policies and procedures, persons who circumvent security measures could wrongfully use our conﬁdential information or the conﬁdential information of our advisors’ clients, or cause interruptions or malfunctions in our operations and we may not be able to detect such breaches for an extended period of time. During such time, we may not know the extent of the harm or how best to remediate it and certain errors or actions may be repeated or compounded before they are discovered and rectiﬁed, all or any of which would further increase the costs and consequences of a cyber attack. To date, we have not experienced any material breaches of, or interference with, our systems and networks; however, we routinely encounter and address such threats. Our experiences with cybersecurity and technology threats have included phishing scams, introductions of malware, attempts at electronic break-ins and unauthorized payment requests. Any such breaches or interference by third parties or by our advisors or employees that may occur in the future and the failure of our controls and procedures to detect or prevent such breaches or interference could have a material adverse impact on our business, ﬁnancial condition or results of operations. Although we take protective measures and endeavor to modify them as circumstances warrant, the computer systems, software and networks may be vulnerable to unauthorized access, human error, computer viruses, denial-of-service attacks, or other malicious code and other events that could impact the security, reliability, and availability of our systems. If one or more of these events occur, this could jeopardize our own, our advisors’ or their clients’ or counterparties’ conﬁdential and other information processed, stored in and transmitted through our computer systems and networks, or otherwise cause interruptions or malfunctions in our own, our advisors’ or their clients’, our counterparties’ or third parties’ operations. We may be required to to investigate and remediate expend signiﬁcant additional resources to modify our protective measures, vulnerabilities or other exposures or to make required notiﬁcations, and we may be subject to litigation, regulatory sanctions and ﬁnancial losses that are either not insured or are not fully covered through any insurance we maintain. in legal claims, regulatory scrutiny and liability, reputational damage, Despite the measures we have taken and may in the future take to address and mitigate cybersecurity and technology risks, we cannot assure that our systems and networks will not be subject to breaches or interference. Any such event may result in operational disruptions, unauthorized access to, or the disclosure or loss of, our own, our advisors’ or their clients’ or counterparties’ conﬁdential or other information. This in turn may result incurrence of costs to eliminate or mitigate further exposure, loss of advisors or client assets or other damage to our business. While we maintain cyber liability insurance that provides both third-party liability and ﬁrst-party liability coverages, this insurance may not be sufficient to protect us against all losses. Also, the trend toward broad consumer and general public notiﬁcation of such incidents could exacerbate the harm to our business, ﬁnancial condition or results of operations. Even if we successfully protect our technology infrastructure and the conﬁdentiality of sensitive data, we may incur signiﬁcant expenses in connection with our responses to any such attacks and the to litigation and adoption and maintenance of appropriate security measures. We also may be subject regulatory sanctions. We could also suffer harm to our business and reputation if attempted security breaches are publicized. We cannot be certain that advances in criminal capabilities, discovery of new vulnerabilities, attempts to exploit vulnerabilities in our systems, data thefts, physical system or network break-ins or inappropriate access, or other developments will not compromise or breach the technology or other security measures protecting the networks and systems used in connection with our business. An inability to collect sublease payments 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 $2 million through June 2015. If Ladenburg is unable to collect such sublease payments, 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. 18 We rely on two clearing brokers and the termination of our clearing agreements could disrupt our business. Each of Triad, to process securities Investacorp, KMS and Ladenburg uses one clearing broker transactions and maintain customer accounts on a fee basis. Securities America and SSN use two clearing brokers 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 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. its clearing broker for 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. 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. Additionally, is considering eliminating commissions and 12b-1 fees on qualiﬁed retirement accounts, including IRAs. the U.S. Department of Labor, which promulgates rules related to retirement plans, Any decrease in client assets or assets under management may decrease our revenues. The results of operations of our independent broker-dealer subsidiaries depend on their level of assets under management and client assets. Assets under management balances are impacted by both the ﬂow of client assets in and out of accounts and changes in market values. Poor investment performance by ﬁnancial products and ﬁnancial advisors could result in a loss of managed accounts and could result in reputational damage that might make it more difficult to attract new investors. A reduction in client assets or assets under management may cause our revenues to decline. 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. Signiﬁcant proﬁtability and ﬁnancial condition. interest rate changes and the termination of our cash sweep agreement could affect our Our revenues are exposed to interest rate risk primarily from changes in fees payable to us from banks participating in cash sweep programs, which are based on prevailing interest rates. Our revenues from our sweep program are negatively impacted by periods of low interest rates. If our contracts with participants in cash sweep programs are terminated, we may not be able to obtain contracts on similar terms, which would decrease our revenue and proﬁtability. Also, decreases in interest rates or clients moving assets out of our cash 19 sweep programs would decrease our revenue and proﬁtability. We may also be limited in the amount we can reduce interest rates payable to clients in cash sweep programs and still offer a competitive return. A sustained low interest rate environment may negatively impact our ability to negotiate contracts on comparable terms. We may be unable to underwrite 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 Ladenburg’s commitment 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: (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) 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: (cid:129) (cid:129) (cid:129) holding securities of third parties; executing securities trades that fail the required time due to non-delivery by the counterparty or systems failure by clearing agents, exchanges, clearing houses or other ﬁnancial intermediaries; and to settle at 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. Intense competition from existing and new entities may adversely affect our revenues and results of operations. The ﬁnancial services 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. 20 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: (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) 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. 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 intentional misconduct, unauthorized transactions, supervise, breach of ﬁduciary duty, employee errors, 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 21 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 legal and other securities class actions against Ladenburg. As a result, Ladenburg may incur signiﬁcant 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, Triad, SSN, Investacorp, KMS and Ladenburg is a registered broker-dealer with the SEC and FINRA. Highland is subject to regulation by various regulatory bodies, including state attorneys general and insurance departments. 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: (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) 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. 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 to rules, been delegated to self-regulatory organizations, principally FINRA. FINRA adopts SEC approval, that govern broker-dealers and conducts periodic examinations of ﬁrms’ operations. subject 22 If we are found to have violated any applicable regulation, formal administrative or judicial proceedings may be initiated against us that may result in: (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) censure; ﬁne; civil penalties, including treble damages in the case of insider trading violations; the issuance of cease-and-desist orders; the termination or suspension of our broker-dealer activities; the suspension or disqualiﬁcation of our officers, employees or ﬁnancial advisors; or other adverse consequences. Certain of our subsidiaries have been subject to some of the penalties listed above. For instance, in March 2014, two of our broker-dealer subsidiaries entered into agreements with FINRA under which they agreed to ﬁnes, censures and other relief. The imposition of any of the penalties listed above could have a material adverse effect on our operating results and ﬁnancial condition. Extensive or frequent changes in regulations could adversely affect our business and results of operations. The securities industry is subject to extensive and frequently changing requirements under federal and state securities and other applicable laws and self-regulatory organization rules. The SEC, FINRA, various securities exchanges and other U.S. governmental or regulatory authorities continuously review legislation and regulatory initiatives and may adopt new or revised laws and regulations. Such laws and regulations may be complex, and we may not have the beneﬁt of regulatory or federal interpretations to guide us in compliance. Changes in laws and regulation or new interpretations of existing laws and regulations also could have an adverse effect on our methods and costs of doing business. For example, certain state securities regulators require that investors in certain securities meet minimum income and/or net worth standards. These standards vary from state to state and change frequently. Changes to suitability standards may require us to expend resources to ensure that we and our ﬁnancial advisors comply with the new standards. If a ﬁnancial advisor does not satisfy the requirements with regard to suitability standards, we could be subject to substantial liability, including ﬁnes, penalties and possibly rescission. Along with suitability requirements, state regulators have also imposed limitations on an investor’s exposure to direct investment programs. The breadth and scope of these limitations have varied considerably and may operate to limit the exposure that a resident of a particular state has to a product, sponsor or direct investment programs generally. These concentration limitations have been applied with increasing frequency and have increasingly targeted all direct investment programs. FINRA has identiﬁed rollovers of client assets from group retirement plans to individual retirement its periodic regulatory accounts (IRAs) as an area of examinations of broker-dealers will focus on this area, including compliance with regulations regarding suitability, conﬂicts of interest, disclosures to clients and supervision. This enhanced regulatory focus may discourage rollovers of assets into IRAs, which would negatively impact our results of operations. increased scrutiny. FINRA has announced that to direct Also, with respect investment programs, FINRA has amended its rules, effective as of April 2016, that govern disclosure of a per share estimated value of a direct investment program security. The new rules provide different methodologies for calculating and reporting such per share estimated values and require enhanced disclosure to investors. These new rules could adversely impact direct investment programs if investors or ﬁnancial advisors react negatively to the new disclosure regime, and such an adverse impact may harm our results of operations. Additionally, the Dodd-Frank Act may impact the manner in which we operate our business and interact with regulators and many regulations under the Dodd-Frank Act have not yet been proposed or implemented. In particular, the impact of the establishment of a ﬁduciary standard for broker-dealers is uncertain and may require us to expend resources to ensure that we and our ﬁnancial advisors comply with the new standards. 23 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 tax to change the status of independent contractors’ classiﬁcation to employees for either employment 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, Triad, SSN, Investacorp and KMS 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 these broker-dealers’ 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. Failure to comply with capital requirements could subject us to suspension, revocation or ﬁnes by the SEC, FINRA or other regulators. subject to the net capital 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 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, 2014, 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 the broker-dealer’s position in securities, be valued in a conservative manner 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, Triad had a short-term net-capital deﬁciency and in March 2014 entered into a settlement with FINRA under which Triad agreed to a ﬁne and censure. to avoid inﬂation of 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. 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, 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 24 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. 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 and Series A Preferred Stock may ﬂuctuate signiﬁcantly, and this may make it difficult for you to resell the shares of our 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 $2.32 to a high of $4.50 per share for the 52 week period ended December 31, 2014. The trading price of our Series A Preferred Stock, as reported by the NYSE MKT, has ranged from a low of $20.62 to a high of $25.44 per share during 2014. We expect that the market price of our common stock and Series A Preferred Stock will continue to ﬂuctuate signiﬁcantly. The market price of our stock may ﬂuctuate in response to numerous factors, many of which are beyond our control. These factors include: (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) variations in quarterly operating results; general economic and business conditions, investment banking markets; including conditions in the securities brokerage and prevailing interest rates, increases in which may have an adverse effect on the market price of the Series A Preferred Stock; trading prices of similar securities; the annual yield from dividends on the Series A Preferred Stock as compared to yields on other ﬁnancial instruments; 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; 25 (cid:129) (cid:129) (cid:129) (cid:129) (cid:129) 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 ﬂuctuations in stock market price and volume. Any one of these factors could have an adverse effect on the market price of our common stock and/or Series A Preferred 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. 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, 2015 our named executive officers, directors and their affiliates, beneﬁcially owned approximately 53.02% 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’ projections. Similarly, if one or more of the analysts who cover 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 share issuances may cause signiﬁcant dilution. At December 31, 2014, we had outstanding 184,968,487 shares of common stock, options and warrants to purchase a total of 56,462,532 shares of common stock and 11,096,231 shares of our Series A Preferred Stock. We are authorized to issue up to 800,000,000 shares of common stock and 25,000,000 shares of preferred 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 they would own a warrants, our other shareholders may be signiﬁcantly diluted, which means that smaller percentage of our company. 26 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 25,000,000 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 on our common stock. 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 and our obligation to pay dividends on our Series A Preferred Stock restrict our ability to pay dividends on our common stock. Market interest rates may materially and adversely affect the value of the Series A Preferred Stock. interest rates. An increase in market One of the factors that inﬂuences the price of the Series A Preferred Stock is the dividend yield on the Series A Preferred Stock (as a percentage of the market price of the Series A Preferred Stock) relative to market low levels relative to historical rates, may lead prospective purchasers of the Series A Preferred Stock to expect a higher dividend yield (and higher interest rates would likely increase our borrowing costs and potentially decrease funds available for dividend payments). Thus, higher market interest rates could cause the market price of the Series A Preferred Stock to materially decrease. interest rates, which are currently at We may not be able to pay dividends on the Series A Preferred Stock. Under Florida law, we may not make any distribution to our shareholders, including holders of the Series A Preferred Stock, if, after giving effect to the distribution, we would not be able to pay our debts as they become due in the usual course of business, or our total assets would be less than the sum of our total liabilities plus the amount that would be needed, if we were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferred rights are superior to those receiving the distribution. Our ability to pay cash dividends on the Series A Preferred Stock will require us to have positive net assets (total assets less total liabilities) over our capital and to be able to pay our debts as they become due in the usual course of business. Further, notwithstanding these factors, we may not have sufficient cash to pay dividends on the Series A Preferred Stock. Our ability to pay dividends may be impaired if any of the risks described in this report were to occur. Also, payment of our dividends depends upon our ﬁnancial condition and other factors as our board of directors may deem relevant from time to time. We cannot assure you that our businesses will generate sufficient cash ﬂow from operations or that future borrowings will be available to us in an amount sufficient to enable us to make distributions on our common stock, if any, and preferred stock, including the Series A Preferred Stock, to pay our indebtedness or to fund our other liquidity needs. If our common stock is delisted, the ability to transfer or sell shares of our Series A Preferred Stock may be limited and the market value of our Series A Preferred Stock will likely be materially adversely affected. Other than in connection with a Change of Control (as deﬁned in the terms of our Series A Preferred Stock), our Series A Preferred Stock does not contain provisions that are intended to protect a holder if our common stock is delisted from the NYSE MKT. Since the Series A Preferred Stock has no stated maturity date, holders may be forced to hold shares of our Series A Preferred Stock and receive stated dividends on the Series A Preferred Stock when, as and if authorized by our board of directors and paid by us with no assurance as to ever receiving the liquidation value thereof. Also, if our common stock is delisted from the NYSE MKT, it is likely that our Series A Preferred Stock will be delisted from the NYSE MKT as well. Accordingly, if our common stock is delisted from the NYSE MKT, the ability to transfer or sell shares of our Series A Preferred Stock may be limited and the market value of our Series A Preferred Stock will likely be materially adversely affected. 27 The change of control conversion rights of our Series A Preferred Stock may make it more difficult for a party to acquire us or discourage a party from acquiring us. Upon the occurrence of a Change of Control, each holder of the Series A Preferred Stock has the right (subject to our election to redeem the Series A Preferred Stock in whole or in part prior to the date the Series A Preferred Stock is to be converted) to convert some or all of such holder’s Series A Preferred Stock into shares of our common stock (or under speciﬁed circumstances, certain alternative consideration). The Change of Control conversion feature of the Series A Preferred Stock may have the effect of discouraging a third party from making an acquisition proposal for us or of delaying, deferring or preventing certain of our change of control transactions under circumstances that otherwise could provide the holders of our common stock and Series A Preferred Stock with the opportunity to realize a premium over the then-current market price of such stock or that shareholders may otherwise believe is in their best interests. 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 18,150 square feet of office space. The lessor is Frost Real Estate the Board and principal Holdings, LLC, an entity affiliated with Dr. Phillip Frost, our Chairman of shareholder. Our lease was renewed in March 2013 and now expires in February 2018, and the amount of office space leased was increased from approximately 15,800 square feet. Ladenburg’s principal executive offices are located at 570 Lexington Avenue, 11th ﬂoor, New York, New York 10022, where it subleases approximately 38,000 square feet of office space under a lease that expires in April 2017. Ladenburg previously occupied office space at 520 Madison Avenue, New York, New York; Ladenburg entered into an agreement to terminate that sublease effective in December 2013. 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 $2 million with respect to 2015. 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: Subsidiary Securities America Triad SSN Investacorp KMS Premier Trust Location La Vista, NE Norcross, GA Knoxville, TN Miami, FL Seattle, WA Las Vegas, NV Approximate Square Footage Lease Expiration Date 80,000 21,835 15,000 11,475 8,575 14,450 January 2018 February 2025 March 2020 September 2015(1) September 2024 September 2019 (1) The lessor is Frost Real Estate Holdings, LLC, an entity affiliated with Dr. Phillip Frost, our Chairman of the Board and principal shareholder. Highland’s principal executive offices are located in Birmingham, AL, where it leases approximately 13,935 square feet under a lease that expires in March 2021. 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. 28 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. 29 PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. Our common stock trades on the 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: Period First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth Quarter High $3.25 3.18 4.34 4.50 Low $2.32 2.57 3.10 3.29 High $1.72 1.74 2.02 3.54 Low $1.20 1.36 1.61 1.68 2014 2013 Our Series A Preferred Stock trades on the NYSE MKT under the symbol ‘‘LTS PrA.’’ Holders At March 9, 2015, there were approximately 3,334 record holders of our common stock. Common Stock Dividends We have never paid or declared any dividends on our common stock. We do not anticipate paying cash dividends on our common stock in the foreseeable future. The payment of future dividends, if any, will be at our board of directors’ 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, the obligation to pay dividends on our outstanding preferred stock and covenants contained in our outstanding debt agreements also restrict our ability to pay dividends. Issuer Purchases of Equity Securities This table shows information regarding our purchases of our common stock during the fourth quarter of 2014. Period October 1 to October 31, 2014 . . . . . . November 1 to November 30, 2014 . . . December 1 to December 31, 2014 . . . Total . . . . . . . . . . . . . . . . . . . . . . . . Total Number of Shares Purchased Average Price Paid per Share — 87,409 314,496 401,905 — $3.59 3.60 $3.60 Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs — 87,409 314,496 401,905 Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(1) 11,305,753 11,218,344 10,903,848 (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. In November 2014, our board amended this repurchase program to permit the purchase of up to an additional 10,000,000 shares. As of December 31, 2014, 6,596,152 shares have been repurchased for $15,624 under the program. On August 15, 2013, we purchased 3,000,000 shares of our common stock at a price of $1.67 per share in a privately-negotiated transaction, which was not made pursuant to a stock repurchase program. 30 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: 2014 Year Ended December 31, 2012 (In thousands, except share and per share amounts) 2013 2011 2010 Operating Results: . . . . . . . . . . . . . . Total revenues Total expenses . . . . . . . . . . . . . . Income (loss) before item shown below . . . . . . . . . . . . . . . . . . Change in fair value of contingent consideration . . . . . . . . . . . . . . Income (loss) before income taxes . . . . . . . . . . . . . . Net income (loss) $ 921,253(a) $ 911,259 793,116 790,591 $ 650,111 672,114 $ 273,600(b) $ 285,902 194,526 204,616 9,994 12 10,006 33,352 2,525 (121) 2,404 (522) (22,003) (12,302) (10,090) 7,111 (14,892) (16,354) — (12,302) 3,893 — (10,090) (10,951) Per common and equivalent share: Income (loss) per common share − basic . . . . . . . . . . . . . . Income (loss) per common share − diluted . . . . . . . . . . . . . $ $ Basic weighted average common 0.09 0.08 $ $ (0.04) (0.04) $ $ (0.09) (0.09) $ $ 0.02 0.02 $ $ (0.06) (0.06) shares . . . . . . . . . . . . . . . . . . 182,768,494 182,295,476 183,572,582 183,023,590 175,698,489 Diluted weighted average common shares . . . . . . . . . . . . . . . . . . 206,512,437 182,295,476 183,572,582 189,014,028 175,698,489 Balance Sheet Data: Total assets . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . Shareholders’ equity . . . . . . . . . . . Other Data: Book value per common share . . . . $ $ $ 510,758 174,287 336,460 360,820 167,407 193,361 $ $ 338,129 286,908 51,221 347,145 283,702 63,443 $ 101,825 54,906 46,919 1.82 $ 1.06 $ 0.28 $ 0.34 $ 0.26 (a) (b) Includes $26,164 of revenue from Highland (acquired July 31, 2014) and $19,840 of revenue from KMS (acquired October 15, 2014). See Note 3 to our consolidated ﬁnancial statements included in this report. Includes $57,090 of revenue from Securities America (acquired November 4, 2011). See Note 3 to our consolidated ﬁnancial statements included in this report. 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 a diversiﬁed ﬁnancial services company engaged in independent brokerage and advisory services, investment banking, equity research, institutional sales and trading, asset management services, wholesale life insurance brokerage and trust services through our principal subsidiaries, Securities America, Triad, SSN, Investacorp, KMS, Ladenburg, LTAM, Highland 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 three operating segments. The independent brokerage and advisory services segment includes the broker-dealer and investment advisory services provided by our independent broker-dealer subsidiaries to their independent contractor ﬁnancial advisors and wealth management 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. The insurance brokerage segment includes the 31 wholesale insurance brokerage activities conducted by Highland, which delivers life insurance, ﬁxed and equity indexed annuities, as well as long-term care solutions to investment and insurance providers. Acquisition Strategy We continue to explore opportunities to grow our businesses, including through possible 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 would 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 possible 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 successfully integrate acquired businesses into our existing business and operations. Recent Developments Securities Service Network, Inc. Acquisition On January 2, 2015, we acquired all of the issued and outstanding capital stock of SSN and Renaissance Capital Corporation (‘‘RCC’’). SSN is a leading independent broker-dealer, registered investment advisor and insurance agency based in Knoxville, TN. At the closing of the acquisition, we paid approximately $45,000, consisting of $25,000 principal amount of secured short-term promissory notes, which bore interest at 0.41% per annum and were paid in full on the business day following the closing date, and $20,000 principal amount of secured four-year promissory notes, bearing interest at 1.74% per annum and payable in equal quarterly installments of principal and interest. The promissory notes are secured by a pledge of the shares of SSN and RCC purchased in the acquisition pursuant to a stock pledge agreement. Preferred Stock Offerings During the year ended December 31, 2014, we sold 4,906,734 shares of Series A Preferred Stock pursuant to ‘‘at the market’’ programs, which provided net proceeds of $108,617. From January 1, 2015 through March 12, 2015, we sold 2,601,898 shares of Series A Preferred Stock pursuant to ‘‘at the market’’ programs, which provided net proceeds of $61,241. Stock Repurchases During 2014, we repurchased an aggregate of 2,846,395 shares of our common stock for $9,535. In November 2014, our board of directors approved an amendment to our stock repurchase program to permit the repurchase of an additional 10,000,000 shares of common stock. As of March 12, 2015, we have the authority to repurchase an additional 10,654,193 shares. 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 our broker-dealer subsidiaries 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 our broker-dealer subsidiaries’ 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 $47, $148 and $8 for the years ended December 31, 2014, 2013 and 2012, respectively. 32 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 $359 at December 31, 2014 and $3,291 at December 31, 2013 for potential losses. See Note 13 to our consolidated ﬁnancial statements included in this report. 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. 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. 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, 2014, which consist principally of the tax beneﬁt of net operating loss carryforwards, compensation charges related to equity instruments, deferred compensation liabilities and intangible assets, amounted to $3,216. After consideration of all the evidence, both positive and negative, especially the fact that we realized pre-tax income for the ﬁscal years ended in 2013 and 2014, we have determined that it was more likely than not that deferred tax assets would be realized. At December 31, 2014, we had consolidated net operating loss carryforwards of approximately $62,000 for federal income tax purposes, expiring in various years from 2021 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 and restricted stock, based on the grant-date fair value of the award. The 33 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. the carrying amount may be not 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 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. is not subject Goodwill. Goodwill 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. Accounting guidance on the testing of goodwill for impairment allows entities the option of performing a qualitative assessment to determine the likelihood of goodwill impairment and whether it is necessary to perform such two-step quantitative impairment test. The annual impairment tests performed at December 31, 2014 and 2013 based on quantitative and qualitative assessments 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. 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, Securities America, Highland (since July 31, 2014), KMS (since October 15, 2014) and our other wholly-owned subsidiaries, other than SSN, which was acquired after December 31, 2014. 34 The following table includes a reconciliation of EBITDA, as adjusted, to net income (loss) attributable to the Company as reported: Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) before income taxes . . . . . . . . . . . . . . Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . Reconciliation of EBITDA, as adjusted, to net income (loss) attributable to the Company: 2014 $921,253 911,259 10,006 33,352 Year Ended December 31, 2013 $793,116 790,591 2,404 (522) 2012 $650,111 672,114 (14,892) (16,354) EBITDA, as adjusted . . . . . . . . . . . . . . . . . . . . . . . $ 61,178 $ 57,203* $ 35,828* Add: Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in fair value of contingent consideration . . . . . Less: . . . . . . . . . . . . . . . . Loss on extinguishment of debt Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax beneﬁt (expense) . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . Non-cash compensation expense . . . . . . . . . . . . . . . . Acquisition-related expense . . . . . . . . . . . . . . . . . . . Amortization of retention and forgivable loans . . . . . . Financial advisor acquisition expense . . . . . . . . . . . . Net income (loss) attributable to the Company . . . . . . 245 12 194 (121) 185 7,111 (548) (6,990) 23,346 (18,397) (10,541) (2,342) (11,041) (1,489) $ 33,433 (4,547) (15,438) (2,926) (15,315) (6,766) — (11,544) (1,194) (454) $ — (24,541) (1,462) (16,061) (4,744) — (11,664) (1,006) $ (16,354) * Includes increases of $5,578 in 2013 and $5,324 in 2012 related to amortization of forgivable loans and ﬁnancial advisor acquisition expenses to conform to the 2014 presentation. and taxes, before interest, adjusted Earnings depreciation amortization, or EBITDA, for acquisition-related expense, amortization of retention and forgivable loans, change in fair value of contingent consideration related to acquisitions, loss on extinguishment of debt, non-cash compensation expense and ﬁnancial advisor acquisition 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 our Board of Directors and management to monitor and evaluate the business on a consistent basis. We use EBITDA, as adjusted, as a primary measure, among others, to analyze and evaluate ﬁnancial and strategic planning decisions regarding future operating investments and potential acquisitions. We believe that EBITDA, as adjusted, eliminates items that are not indicative of our core operating performance, such as amortization of retention and forgivable loans and ﬁnancial advisor acquisition expenses, 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, income before income taxes, net income and cash ﬂows from operating activities. We have three operating segments. The independent brokerage and advisory services segment includes the broker-dealer and investment advisory services provided by our independent broker-dealer subsidiaries to their independent contractor ﬁnancial advisors and the wealth management 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. The insurance brokerage segment includes the wholesale insurance brokerage activities provided by Highland, which delivers life insurance, ﬁxed and equity indexed annuities and long-term care solutions to investment and insurance providers. 35 2014 Revenues . . . . . . . . . . . . . . . . . . . . Income (loss) before income taxes . . . EBITDA, as adjusted(6) . . . . . . . . . . 2013 Revenues . . . . . . . . . . . . . . . . . . . . Income (loss) before income taxes . . . EBITDA, as adjusted(6) . . . . . . . . . . 2012 Revenues . . . . . . . . . . . . . . . . . . . . Income (loss) before income taxes . . . EBITDA, as adjusted(6) . . . . . . . . . . Independent Brokerage and Advisory Services(5) Ladenburg Insurance Brokerage(7) Corporate Total $816,581 10,520 50,596 $73,298 14,846 16,174 $26,164 (841) 2,315 $ 5,210 (14,519)(3) (7,907) $921,253 10,006 61,178 $723,246(1) 4,850 52,549 $69,603(1) 11,689 13,188(4) — — — $ 267(2) (14,135)(3) (8,534)(4) $793,116 2,404 57,203 $598,851 (6,087) 35,890 $45,701 65 1,829 $ — — — $ 5,559 (8,870)(3) (1,891) $650,111 (14,892) 35,828 (1) (2) (3) (4) Includes brokerage commissions of $4,240 and $908 in the Ladenburg and Independent brokerage and advisory services segments, respectively, related to the sale of our Series A Preferred Stock (eliminated in consolidation). Includes the elimination of $5,148 of revenue referred to in footnote (1). Includes interest on revolving credit and forgivable loan notes, compensation, professional fees and other general and administrative expenses. Includes the elimination of $2,545, consisting of $5,148 of revenue, net of employee brokerage commission expenses of $2,603 charged to additional paid-in capital related to sale of our Series A Preferred Stock. Includes KMS from October 15, 2014. (5) (6) See Note 19 to our consolidated ﬁnancial statements for a reconciliation of EBITDA, as adjusted to income (loss) before income taxes. Includes Highland from July 31, 2014. (7) Year ended December 31, 2014 compared to year ended December 31, 2013 For the ﬁscal year ended December 31, 2014, we had net income attributable to the company of $33,433 as compared to a net loss attributable to the company of $454 for the ﬁscal year ended December 31, 2013. The change was driven by a 16% increase in revenues in 2014, which was partially offset by a 15% increase in expenses, including acquisition-related expense of $2,342, and a $23,346 income tax beneﬁt primarily resulting from the Highland and KMS acquisitions. Interest expense decreased by $8,448 in 2014 and loss on extinguishment of debt decreased by $3,999 primarily due to repayment of indebtedness in 2013. 2014 results included $6,990 of interest expense, $18,397 of depreciation and amortization expense and $10,541 of non-cash compensation expense, as compared to $15,438 of interest expense, $15,315 of depreciation and amortization expense and $6,766 of non-cash compensation expense in 2013. Our 2014 total revenues increased by $128,137 (16%) from 2013, in part due to the addition of $26,164 and $19,840 in revenues from Highland and KMS, respectively. 2014 total revenues (including Highland and KMS since their dates of acquisition) included increases in advisory fees of $69,194, commissions of $51,320, investment banking revenue of $5,007 and service fees and other income of $3,949, partially offset by decreases in principal transactions of $729 and interest and dividends of $604. Revenues increased in each of our operating segments. Our independent brokerage and advisory services segment revenues increased $93,335 (13%) from 2013, primarily due to improved market conditions, successful recruitment of additional advisors, increased advisory assets under management and the addition of KMS. Our Ladenburg segment revenues increased $3,695 (5%) from 2013 also due to improved market conditions and an increase in institutional sales personnel. 36 Our 2014 total expenses increased by $120,668 (15%) from 2013, in part due to the addition of $27,005 and $19,294 from Highland and KMS, respectively. 2014 total expenses (including Highland and KMS since their dates of acquisition) also increased as a result of an increase in commissions and fees expense of $88,557, compensation and beneﬁts expense of $24,885, brokerage, communication and clearance fees expense of $6,286, depreciation and amortization expense of $3,082, acquisition-related expense of $2,342, professional services expense of $1,878, other expenses of $2,062 and rent and occupancy expense, net of sublease revenue of $751, which were partially offset by decreases in interest expense of $8,448 and in loss on extinguishment of debt of $3,999 due to the prepayment of indebtedness in 2013 and 2014. The $51,320 (13%) increase in commissions revenue for 2014 as compared to 2013 was primarily attributable to the acquisitions of Highland and KMS, which added $25,622 and $9,124, respectively, in commissions revenue during 2014. Our independent brokerage and advisory services segment experienced an increase in commissions revenue of $25,188 (7%) in 2014. This increase resulted primarily from increased mutual fund and variable annuity sales during 2014, partially offset by lower sales of alternative investment products. Ladenburg segment commissions revenue also increased $510 (3%) in 2014 from 2013. The $69,194 (25%) increase in advisory fees revenue in 2014 as compared to 2013 was primarily due to an increase in advisory fee revenue in our independent brokerage and advisory services segment of $67,188 (25%), which includes $10,046 in advisory fees revenue from the addition of KMS. Average advisory assets under management on a consolidated basis increased by 9% at December 31, 2014 as compared to December 31, 2013. Advisory revenue for a particular period is primarily affected by the level of advisory assets and market ﬂuctuations. For 2014, we experienced an increase in net new advisory assets resulting from strong new business development, improved market conditions and the KMS acquisition. Assuming continued favorable market conditions, 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 $5,007 (12%) increase in investment banking revenue for 2014 as compared to 2013 was primarily due to an increase in capital raising activities. Capital raising revenue increased $5,662 (14%), while strategic advisory services revenue decreased $655 (33%) in 2014. 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 $45,692 for 2014 as compared to $40,030 for 2013, primarily due to an increase in capital raising activities for healthcare and biotechnology companies and offerings of yield-oriented equities. Strategic advisory services revenue was $1,306 for 2014 as compared to $1,961 for 2013. The $729 (27%) decrease in principal transactions revenue in 2014 as compared to 2013 was primarily attributable to our Ladenburg segment, which had a decrease of $434 (17%) due to a decline in the value of the ﬁrm’s investments. The $604 (9%) decrease in interest and dividends revenue for 2014 as compared to 2013 was primarily due to lower revenue from our cash sweep program. Future levels of interest and dividend revenue are dependent upon changes in prevailing interest rates and asset levels. We received enhanced revenue during 2014 and 2013 under our cash sweep program. These beneﬁts expired in the fourth quarter of 2014. We expect to implement a new cash sweep program in the second quarter of 2015 that will apply initially to cash balances at four of our broker-dealer subsidiaries. We expect that interest and dividends revenue will decrease in the ﬁrst quarter of 2015 due to the expiration of our prior program under which we received enhanced revenue. See ‘‘Item 1A. — Signiﬁcant interest rate changes and the termination of our cash sweep agreement could affect our proﬁtability and ﬁnancial condition.’’ The $3,949 (5%) increase in service fees and other income in 2014 as compared to 2013 was primarily attributable to increases at our independent brokerage and advisory services segment in miscellaneous trading services revenue of $2,596, trading-related fees of $1,207 and conference revenue of $221, offset by a decrease in sponsor revenues of $335 associated with lower sales of alternative investment products. Highland and KMS service fees and other income in 2014 was $543 and $667, respectively. 37 The $88,557 (15%) increase in commissions and fees expense for 2014 as compared to 2013 was directly correlated to the increase in commissions and advisory fees revenue in our independent brokerage and advisory services segment and the increase in commissions revenue in our insurance brokerage segment. Commissions and fees expense in our independent brokerage and advisory services and insurance brokerage segments comprises compensation payments earned. These payments are calculated based on a percentage of revenues generated and vary by product. Accordingly, when sales increase, both our revenues and expenses increase as we pay additional compensation based on the revenue produced. The addition of Highland and KMS in 2014 increased commissions and fees expense by $6,099 and $17,509, respectively. The $24,885 (26%) increase in compensation and beneﬁts expense for 2014 as compared to 2013 was primarily attributable to the addition of $13,389 in compensation and beneﬁts expense from Highland, and an increase of $6,982 in the independent brokerage and advisory services segment due to new technology and operations personnel and the addition of KMS. Our corporate and Ladenburg segments had increases in compensation expense of $3,300 and $1,304, respectively, as a result of increased revenues and proﬁtability. The $3,775 (56%) increase in non-cash compensation expense for 2014 as compared to 2013 was primarily attributable to an increase of $3,062 relating to stock option grants to Securities America ﬁnancial advisors in connection with the 2011 acquisition. The increase in the price of our common stock and the decrease in the expected forfeitures for these grants contributed to the increase in our non-cash compensation expense. The $6,286 (54%) increase in brokerage, communication and clearance fees expense for 2014 as compared to 2013 was primarily due to an increase of $5,478 in our independent brokerage and advisory services segment. Clearance fee expense in 2013 was reduced by clearance expense credits of $4,204 provided by our primary clearing ﬁrm. These clearance expense credits expired in the fourth quarter of 2013. As a result, we expect brokerage, communication and clearance fees expense to increase in future periods as compared to 2013 levels. Also, our Ladenburg segment incurred increases of $459 due to the addition of institutional salespersons and increased transaction volume. Highland added additional expense of $329 during 2014. The $751 (12%) increase in rent and occupancy, net of sublease revenue for 2014 as compared to 2013 was primarily attributable to $761 from the addition of Highland and an increase of $78 in our independent brokerage and advisory services segment, partially offset by a decrease of $109 in the Ladenburg segment due the relocation of Ladenburg’s New York office. We expect rent and occupancy, net of sublease revenue to increase in 2015 from 2014 levels due to the addition of Highland, KMS and SSN. The $1,878 (20%) increase in professional services expense for 2014 as compared to 2013 was primarily attributable to increases in our independent brokerage and advisory services segment of $915, our corporate segment of $799 and $488 due to the addition of Highland in 2014, partially offset by a decrease in our Ladenburg segment of $324. The $8,448 (55%) decrease in interest expense for 2014 as compared to 2013 resulted from decreased average debt balances and decreased average interest rates. An average debt balance of approximately $63,704 was outstanding for 2014, as compared to an average debt balance outstanding of approximately $138,691 for 2013. The average interest rate was 9.2% for 2014 as compared to 10.5% for 2013. For the twelve months ended December 31, 2014, our average debt balance declined due to the prepayment of $20,022 of our 11% notes due 2016, which were used to ﬁnance our 2011 acquisition of Securities America, offset by an increase of $15,600 of debt in connection with the Highland and KMS acquisitions. In January 2015, we incurred $20,000 of debt in connection with the SSN acquisition, which bears interest at an annual rate of 1.74%. In February 2015, we prepaid an additional $11,852 of our 11% notes due 2016. We expect reduced interest expense in 2015 as compared to 2014 due to lower average interest rates. The $3,082 (20%) increase in depreciation and amortization expense for 2014 as compared to 2013 was primarily due to $2,743 of additional depreciation and amortization expense from the Highland acquisition during 2014. Our independent brokerage and advisory services segment had an of $502 in 2014, partially offset by a decrease of $126 in our Ladenburg segment. 38 The $548 in extinguishment of debt expense for 2014 relates to the prepayment in 2014 of our 11% notes due 2016. In 2013, the extinguishment of debt expense was $4,547. We expect to incur additional extinguishment of debt expense in 2015 due to the prepayment of $11,852 of our 11% notes due 2016 in February 2015. The $2,062 (5%) increase in other expense in 2014 as compared to 2013 was primarily attributable to $2,783 and $497 from Highland and KMS, respectively. Our independent brokerage and advisory services segment experienced decreases in deferred compensation plan expense of $817 and bad debt, errors and settlement expense of $2,121, offset by increases in license and registration expense of $1,118, travel, meals and entertainment of $636 and insurance expense of $889 in 2014 as compared to 2013. Our Ladenburg segment experienced a decrease in bad debt, errors and settlement expense of $1,077 in 2014, partially offset by an increase in travel, meals and entertainment expense of $356. We had an income tax beneﬁt of $23,346 in 2014 as compared to an income tax expense of $2,926 in 2013. After consideration of all the evidence, both positive and negative, management has determined that a valuation allowance release at December 31, 2014 was necessary based on the likelihood of future realization. The income tax rates for 2014 and 2013 did not bear a customary relationship to effective tax rates, primarily as a result of a tax provision related to amortization of goodwill for tax purposes and the change in the valuation allowance against the net deferred tax asset. Year ended December 31, 2013 compared to year ended December 31, 2012 For the ﬁscal year ended December 31, 2013, we had a net loss attributable to the company of $454 as compared to a net loss of $16,354 for the ﬁscal year ended December 31, 2012. The change was primarily due to a 22% increase in revenues, which was partially offset by an 18% increase in expenses, including a loss on extinguishment of debt of $4,547 and a $1,464 increase in income tax expense. Interest expense also decreased by $9,103. 2013 results included $15,438 of interest expense, $15,315 of depreciation and amortization expense and $6,766 of non-cash compensation expense as compared to $24,541 of interest expense, $16,061 of depreciation and amortization expense and $4,744 of non-cash compensation expense in 2012. Our total revenues for 2013 increased $143,005 (22%) from 2012. Revenues for 2013 included increased commissions of $68,282, advisory fees of $40,346, service fees and other income of $15,876, investment banking revenue of $12,713, principal transactions of $3,748, and interest and dividends of $2,040. Revenues increased in both of our operating segments. Our independent brokerage and advisory services segment revenues increased $124,395 (21%) from 2012, primarily due to improved market conditions, recruitment of higher-producing advisors and increased advisory assets under management. Our Ladenburg segment revenues increased $23,902 (52%) from 2012 primarily due to increased activity in our capital markets business and our 2013 Series A Preferred Stock offering, in which Ladenburg served as an underwriter. However, our Corporate segment revenues decreased $5,292 in the twelve months ended December 31, 2013 as a result of eliminating $5,148 of revenue related to this offering. Our total expenses for 2013 increased by $118,477 (18%) from 2012, primarily as a result of an increase in commissions and fees expense of $96,517, compensation and beneﬁts expense of $15,195, other expenses of $7,986, loss on extinguishment of debt expense of $4,547, brokerage, communication and clearance fees expense of $1,675 and professional services expense of $815, which were partially offset by decreases in interest expense of $9,103 due to the prepayment of indebtedness with proceeds from the offerings of our Series A Preferred Stock, rent and occupancy expense, net of sublease revenue of $311 and depreciation and amortization expense of $746. The $68,282 (21%) increase in commissions revenue in 2013 as compared to 2012 was primarily attributable to higher revenue in our independent brokerage and advisory services segment, which increased $66,416 (21%). The increase in commission revenue resulted primarily from increased sales of alternative investments, mutual funds and variable annuities during 2013 and increased commission trails. Ladenburg segment commission revenue also increased $1,867 (12%) in 2013 from 2012. 39 The $40,346 (17%) increase in advisory fees revenue in 2013 as compared to 2012 was primarily due to an increase in advisory fee revenue in our independent brokerage and advisory services segment of $38,829 (17%). Average advisory assets under management on a consolidated basis increased by 25% at December 31, 2013 as compared to December 31, 2012. Advisory revenue for a particular period is primarily affected by the level of advisory assets and market ﬂuctuations. For 2013, we experienced an increase in net new advisory assets resulting from strong new business development and improved market conditions. The $12,713 (43%) increase in investment banking revenue for 2013 as compared to 2012 was primarily due to an increase in capital raising activities. Capital raising revenue increased $11,936 (42%), while strategic advisory services revenue increased $776 (66%) in 2013. 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 $40,030 for 2013 as compared to $28,094 for 2012, primarily due to an increase in capital raising activities for healthcare and biotechnology companies and offerings of yield-oriented equities. Strategic advisory services revenue was $1,961 for 2013 as compared to $1,184 for 2012. The $3,748 (347%) increase in principal transactions revenue in 2013 as compared to 2012 was primarily attributable to our Ladenburg segment, which had an increase of $3,580 (334%), due to growth in the value of the ﬁrm’s investments of $1,338 and ﬁxed income trading of $1,980. We established a ﬁxed income trading desk at our Ladenburg subsidiary in November 2012 to serve our ﬁnancial advisors and their customers. The $2,040 (43%) increase in interest and dividends revenue for 2013 as compared to 2012 was primarily due to a cash sweep program rebate from our primary clearing ﬁrm. Future levels of interest and dividend revenue are dependent upon changes levels. See ‘‘Item 1A. — Signiﬁcant interest rate changes and the expiration of our cash sweep agreement could affect our proﬁtability and ﬁnancial condition.’’ in prevailing interest rates and asset The $15,876 (28%) increase in service fees and other income in 2013 as compared to 2012 was primarily attributable to increases at our independent brokerage and advisory services segment in sponsor revenues of $7,367, miscellaneous trading services revenue of $5,326, trading-related fees of $2,493 and conference revenue of $298. Also, we received $553 in settlement of a claim at Securities America during 2013. The $96,517 (20%) increase in commissions and fees expense for 2013 as compared to 2012 was directly correlated to the increase in commissions and advisory fees revenue in our independent brokerage and advisory services segment. 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 $15,195 (19%) increase in compensation and beneﬁts expense for 2013 as compared to 2012 was primarily due to an increase of $9,305 in compensation expense in the Ladenburg segment, of which $7,918 was directly related to the increase in revenues. Our independent brokerage and advisory services and corporate segments had increases in compensation expense of $5,890 as a result of increased revenues and proﬁtability. The $2,022 (43%) increase in non-cash compensation expense for 2013 as compared to 2012 was primarily attributable to an increase of $1,975 from stock option grants to Securities America ﬁnancial advisors in connection with the 2011 acquisition. The increase in the price of our common stock and the decrease in the expected forfeitures for these grants contributed to the increase in our non-cash compensation expense. The $1,675 (17%) increase in brokerage, communication and clearance fees expense for 2013 as compared to 2012 was primarily due to an increase of $1,189 in our independent brokerage and advisory services segment. Also, Ladenburg experienced increases in trading systems and news and quote services expense of $444 in 2013 due to the addition of institutional salespersons and its ﬁxed income trading desk. 40 Clearing expense for the 2013 period at Ladenburg and Securities America was reduced by clearing expense credits provided by our primary clearing ﬁrm, which primarily expired in the fourth quarter of 2013. The $311 (5%) decrease in rent and occupancy, net of sublease revenue for 2013 as compared to 2012 was primarily attributable to a decrease of $493 in our independent brokerage and advisory services segment due to the closing of four Securities America locations. The $815 (10%) increase in professional services expense for 2013 as compared to 2012 was primarily attributable to a $363 increase in professional services expense in our Ladenburg segment and a $355 increase in professional services expense in our corporate segment. The $9,103 (37%) decrease in interest expense for 2013 as compared to 2012 resulted from decreased average debt balances and decreased average interest rates. An average debt balance of approximately $138,691 was outstanding for the 2013 period, as compared to an average debt balance outstanding of approximately $209,066 for the 2012 period. The average interest rate was 10.5% for the 2013 period as compared to 10.7% for the 2012 period. The twelve months ended December 31, 2013 average loan balance declined as a result of the prepayment of $136,350 of debt during 2013 with a portion of the proceeds from our offerings of Series A Preferred Stock, which we expect will signiﬁcantly reduce interest expense in future periods. We intend to continue to prepay this indebtedness with future proceeds, if any, from our at-the-market offering of Series A Preferred Stock and cash ﬂows from operations. The $746 (5%) decrease in depreciation and amortization expense for 2013 as compared to 2012 was primarily due to a $683 decrease in depreciation and amortization in our independent brokerage and advisory services segment. Depreciable assets added in 2007 for Securities America’s data center were fully depreciated and not present in the 2013 period. Also, the twelve months ended December 31, 2012 period included the write-off of other depreciable assets as a result of the consolidation of certain investment advisory subsidiaries of Securities America. The $4,547 in extinguishment of debt expense for 2013 relates to the prepayment in 2013 of a substantial portion of our 11% notes due 2016, which were used to ﬁnance our 2011 acquisition of Securities America. The $7,986 (24%) increase in other expense in 2013 as compared to 2012 was primarily attributable to our independent brokerage and advisory services segment which had increases in bad debt, errors and settlement expense of $2,417, other office expenses of $1,356, license and registration expense of $1,074, conference expense of $602, travel, meals and entertainment of $308 and deferred compensation plan expense of $275, partially offset by decreases in advertising expense of $268 and insurance expense of $223. Also, our Ladenburg segment had increases in errors and settlement expense of $978, expenses associated with the relocation of Ladenburg’s New York office of $386 and other office expenses of $753 in 2013. We had an income tax expense of $2,926 in 2013 as compared to an income tax expense of $1,462 in 2012. After consideration of all the evidence, both positive and negative, management has determined that a valuation allowance at December 31, 2013 was necessary to fully offset the deferred tax assets based on the likelihood of future realization. The income tax rates for 2013 and 2012 did not bear a customary relationship to effective tax rates, primarily as a result of a tax provision related to amortization of goodwill for tax purposes and the change in the valuation allowance against the net deferred tax asset. Liquidity and Capital Resources Approximately 29% and 25% of our total assets at December 31, 2014 and December 31, 2013, respectively, consisted of cash and cash equivalents, securities owned and receivables from clearing brokers and other broker-dealers, all of which ﬂuctuate, depending upon the levels of customer business and trading 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. 41 Below is a summary of changes in our cash ﬂow (in thousands): Year Ended December 31, 2013 2012 2014 Net cash provided by (used in): Operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investing activities Financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase in cash and cash equivalents . . . . . . . . . . . . Cash and cash equivalents, beginning of period . . . . . . . . . Cash and cash equivalents, end of period . . . . . . . . . . . . . $ 26,855 $ (16,613) 42,516 $ 52,758 50,329 $103,087 $20,874 $ (7,023) 1,044 $14,895 35,434 $50,329 $ 7,648 $ (5,930) 2,119 $ 3,837 31,597 $35,434 Cash provided by operating activities for 2014 was $26,855, which primarily consisted of our net income of $33,352, adjusted for non-cash expenses including deferred income tax beneﬁt, increases in commissions and fees payable and cash surrender value of life insurance, partially offset by decreases in accounts payable and accrued liabilities, deferred compensation liability, accrued compensation, as well as increases in receivables from clearing brokers, other receivables, net, securities owned, at fair value and other assets. In 2013, cash provided by operating activities was $20,874 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 an increase 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 $16,613 for 2014, primarily due to the purchase of furniture, equipment and leasehold improvements and $9,266 related to the acquisitions of KMS and Highland, and the asset acquisition by Securities America. In 2013, investing activities used $7,023, primarily due to the purchase of furniture, equipment and leasehold improvements. to a credit agreement Financing activities provided $42,516 for 2014, primarily due to $108,617 from the issuance of the Series A Preferred Stock under our ‘‘at the market’’ offering and $3,282 from the issuance of common stock upon option exercises and under our employee stock purchase plan, partially offset by $42,369 in payments relating to outstanding indebtedness, including a $21,834 repayment of indebtedness by certain of Highland’s in connection with the Highland acquisition and a $20,022 subsidiaries pursuant repayment of outstanding notes related to the Securities America acquisition, payment of $17,244 of dividends on our Series A Preferred Stock and $9,535 of common stock repurchases. Financing activities provided $1,044 for 2013, primarily due to the issuance of the Series A Preferred Stock and the issuance of common stock upon warrant and option exercises and under our employee stock purchase plan and third party investment in a noncontrolling interest, partially offset by loan repayments of outstanding notes related to the Securities America acquisition, repayment of the outstanding balance on our revolving credit agreement, payment of dividends on our Series A Preferred Stock and common stock repurchases. Operating Capital Requirements (as calculated under 15c3-1(a)(4), minimum capital Each of Securities America, Triad, SSN, Investacorp, KMS and Ladenburg is subject to a minimum net capital requirement. Therefore, they are subject to certain restrictions on the use of capital and their related liquidity. At December 31, 2014, each of Securities America, Triad and Investacorp was subject to a $250 minimum net capital requirement, SSN was subject to a $319 minimum net capital requirement, KMS was subject to a $559 minimum net capital requirement and Ladenburg was subject to a $253 minimum net capital requirement for market makers). At December 31, 2014, Securities America’s regulatory net capital was $5,396, Triad’s regulatory net capital was $6,025, Investacorp’s regulatory net capital was $5,176, SSN’s regulatory net capital was $3,878, KMS’ regulatory net capital was $3,075 and Ladenburg’s regulatory net capital was $20,506. 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 requirement 42 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, 2014, Premier Trust had stockholders’ equity of $1,366, including at least $250 in cash. Sources of Liquidity Our primary sources of liquidity include cash ﬂows from operations, sales of securities in public or private transactions and borrowings under our $40,000 revolving credit agreement with an affiliate of Dr. Phillip Frost, our chairman and principal shareholder. On May 24, 2013, we completed a public offering of 4,600,000 shares of Series A Preferred Stock for gross proceeeds of $115,000. On May 31, 2013, we completed the offering of an additional 690,000 shares of Series A Preferred Stock pursuant to the full exercise of the over-allotment option granted to the underwriters in connection with the offering. The exercise of the option, which resulted in additional gross proceeds of $17,250, brought the total gross proceeds from the offering to $132,250, before deducting the underwriting discount paid to unaffiliated underwriters and offering expenses aggregating $5,972, including $2,603 of brokerage commissions earned by employees of Ladenburg, which served as an underwriter in the offering. On June 24, 2013, June 13, 2014 and November 21, 2014, we entered into Equity Distribution Agreements under which we may sell up to an aggregate of 9,000,000 shares of our Series A Preferred Stock from time to time in ‘‘at the market’’ offerings under Rule 415 under the Securities Act of 1933, as amended (the ‘‘Securities Act’’). During the years ended December 31, 2014 and 2013, we sold 4,906,734 and 899,497 shares of Series A Preferred Stock, respectively, pursuant to the ‘‘at the market’’ offerings, which provided total gross proceeds to us of $111,148 and $22,062, respectively, before deducting commissions paid to unaffiliated sales agents and offering expenses aggregating $2,531 and $411, respectively. We used the net proceeds from the Series A Preferred Stock offerings in the years ended December 31, 2014 and 2013, respectively (see Note 15), to prepay $20,022 and $110,850 principal amount of the $160,700 aggregate principal amount of our 11% notes due 2016, which were used to ﬁnance our 2011 acquisition of Securities America, and to repay the outstanding borrowings (approximately $39,300) under our $40,000 revolving credit agreement in 2013. As a result of such repayment, $40,000 became available for borrowing under such revolving credit agreement. Borrowings under the $40,000 revolving credit agreement bear interest at a rate of 11% per annum, payable quarterly. We had no outstanding balance under the revolving credit agreement at December 31, 2014 or December 31, 2013. We may repay or re-borrow amounts under our revolving credit facility at any time prior to the August 25, 2016 maturity date without penalty. We believe our existing assets, sales of securities, including possible sales of Series A Preferred Stock under our ‘‘at the market’’ offering, and funds available under our $40,000 revolving credit facility will provide adequate funds for continuing operations at current activity levels. Debt 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, we may 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, 2014 have been paid in cash. 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 43 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. During the twelve months ended December 31, 2014, we prepaid $20,022 of the November 2011 loan with proceeds from the Series A Preferred Stock offerings. These prepayments included the installments of the notes that would have been due on December 31, 2015 and December 31, 2016. In February, 2015, we repaid an additional $11,852 of the November 2011 loan. 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 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. the terms of 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 periods ending November 4, 2014, 2013 and 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. In connection with the entering into the 2011 forgivable loan, we and NFS amended the terms of the 2009 forgivable loan made by NFS to us such that the then 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. 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 2014 for the 2009 and 2011 forgivable loans. Accordingly, we recognized income in 2014 of $3,929 and $839 from the forgiveness of principal and interest, respectively, and the outstanding balances under the 2009 and 2011 forgivable loans were reduced to an aggregate of $10,356. We recognized income in 2013 of $3,929 and $1,067 from the forgiveness of principal and interest, respectively. In November 2011, as part of the amendment of Ladenburg’s clearing agreement with NFS, NFS agreed to provide an annual credit of $1,000 to Ladenburg for a ﬁve-year period. Ladenburg received such credits in November 2012, November 2013 and November 2014. 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. 44 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, is payable quarterly and matures in September 2015. The outstanding balance of this note at December 31, 2014 was $200. On November 6, 2013, our subsidiary, Securities America Financial Corporation, which is the parent of Securities America, entered into a loan agreement with a third-party ﬁnancial institution for a term loan in the aggregate principal amount of approximately $1.7 million. The term loan bears interest at 5.5%, has a 54-month term and is secured by Securities America’s non-forgivable ﬁnancial advisor note portfolio. Pursuant to this loan agreement, up to $1,500 aggregate principal amount of additional loans is available, subject to certain conditions. Any additional loans would bear interest at 5.5% per annum. At December 31, 2014, $1,406 was outstanding under this loan. On July 31, 2014, we acquired HCHC Holdings, Inc. (‘‘HCHC’’), the parent company of Highland. Under the terms of the merger agreement, all outstanding shares of HCHC common stock were converted into the right to receive $3,613 in cash and 2,540,762 shares of our common stock, which are subject to certain transfer restrictions. Also, we caused all indebtedness owed by certain HCHC subsidiaries under a credit agreement (in the amount of $21,834) to be repaid. Approximately $7,000 of HCHC Acquisition Inc.’s (as successor in interest to HCHC) 10% promissory notes due February 26, 2019 remain outstanding. Accrued interest on the promissory notes is payable quarterly. The promissory notes may be prepaid, except that if the promissory notes are prepaid in full prior to August 26, 2016, the holders of the promissory notes are entitled to receive the total amount of interest that would otherwise have been payable through August 26, 2016, less any interest already paid. Payment of the principal and all accrued and unpaid interest under the promissory notes may be accelerated upon the occurrence of customary events of default, including the failure to make payments when due and the commencement of bankruptcy or similar proceedings. We used approximately $25,400 of cash to ﬁnance the Highland acquisition. On October 15, 2014, we acquired all of the issued and outstanding capital stock of KMS. At the closing of the acquisition, we paid approximately $24,000, consisting of $11,000 in cash, $8,000 principal amount of promissory notes, and 1,440,922 shares of our common stock, which are subject to certain transfer restrictions. The notes are unsecured and bear interest at 1.84% per annum and are payable in 16 equal quarterly installments. The notes may be prepaid in full or in part at any time without premium or penalty. The holders may accelerate the notes upon certain customary events of default. On January 2, 2015, we acquired all of the issued and outstanding capital stock of SSN and RCC. At the closing of the acquisition, we paid approximately $45,000, consisting of $25,000 principal amount of secured short-term promissory notes, which bore interest at 0.41% per annum and were paid in full on the business day following the closing date, and $20,000 principal amount of secured four-year promissory notes, bearing interest at 1.74% per annum and payable in equal quarterly installments of principal and interest. The notes may be prepaid in full or in part at any time without premium or penalty. The holders may accelerate the notes upon certain customary events of default. The notes are secured by a pledge of the shares of SSN and RCC purchased in the acquisition pursuant to a stock pledge agreement. We are currently in compliance with all debt covenants in our debt agreements. Stock Repurchases 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 our stock repurchase program to permit the purchase of up to an additional 5,000,000 shares. In November 2014, our board approved a further amendment to our stock repurchase program to permit the repurchase of an additional 10,000,000 shares of common stock. As of December 31, 2014, 14,096,152 shares had been repurchased for $23,334 under the program, including 2,846,395 shares in 2014. On August 15, 2013, we purchased 3,000,000 shares of our common stock at a price of $1.67 per share in a privately-negotiated transaction, which was not made pursuant to our stock repurchase program. 45 Lease Agreements At December 31, 2014, we were obligated under several non-cancelable lease agreements for office space, which provide for future minimum lease payments aggregating approximately $25,920 through 2021, exclusive of escalation charges. We have subleased vacant space under subleases which entitle us to receive rents aggregating approximately $2,063 principally in 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’’. Off-Balance Sheet Arrangements Each of our broker-dealer subsidiaries, 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 any of our broker-dealer subsidiaries 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. Contractual Obligations The table below summarizes information about our contractual obligations as of December 31, 2014 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) . . . . . $ 36,690 Revolving credit agreement with affiliate of our Total Payments Due By Period 1 − 3 years $33,409 Less than 1 year $ 3,281 4 − 5 years After 5 years $ — $ — principal shareholder(2) . . . . . . . . . . . . . . . . . . . . . — — — — Notes payable to clearing ﬁrm under forgivable loans(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,755 2,401 652 8,702 — — Note payable to a subsidiary of Premier Trust’s former shareholder(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating leases(5) . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred compensation plan(6) . . . . . . . . . . . . . . . . . . Note payable to bank − Securities America(7) . . . . . . . . Notes payable to Highland’s former shareholders(8) . . . Notes payable to KMS’ former shareholders(9) . . . . . . . Total 205 25,920 17,640 1,589 9,722 8,957 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $112,478 205 9,479 925 545 682 2,105 $19,623 — 11,741 1,798 816 1,353 4,773 $54,542 — 2,821 2,699 228 7,687 2,079 $24,216 — 1,879 12,218 — — — $14,097 (1) Notes bear interest at 11% per annum and are payable quarterly. See Note 12 to our consolidated ﬁnancial statements. (2) The revolving credit agreement has an August 25, 2016 maturity date and bears interest at a rate of 11% 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 ($1,785 at December 31, 2014) bears interest at prime plus 2% per annum and the 2011 NFS forgivable loan ($8,571 at December 31, 2014) bears interest at federal funds rate plus installments if not forgiven. See Note 12 to our 6% per annum and is payable in seven annual 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 $2,063. See Note 13 to our consolidated ﬁnancial statements. (6) See Note 10 to our consolidated ﬁnancial statements. 46 (7) Note bears interest at 5.5% per annum and is payable in 54 monthly installments. See Note 12 to our consolidated ﬁnancial statements. (8) Notes bear interest at 10% per annum and are payable in 20 quarterly installments. See Note 12 to our consolidated ﬁnancial statements. (9) Notes bear interest at 1.84% per annum and are payable in 16 quarterly installments. See Note 12 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 sensitive ﬁnancial risk management procedures extends beyond derivatives to include all market instruments. Current and proposed underwriting, corporate ﬁnance, merchant banking and other commitments are subject to due diligence reviews by our senior management, as well as professionals in the appropriate business and support units involved. Credit risk related to various ﬁnancing activities is reduced by the industry practice of obtaining and maintaining collateral. We monitor our exposure to counterparty risk through the use of credit exposure information, the monitoring of collateral values and the establishment of credit limits. Special Note Regarding Forward-Looking Statements We and our representatives may from time to time make oral or written ‘‘forward-looking statements’’ within the meaning of the Private Securities Litigation Reform Act of 1995, including any statements that may be contained in the foregoing discussion in ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’, in this report and in other ﬁlings with the Securities and Exchange Commission and in our reports to shareholders, which reﬂect our expectations or beliefs with respect to future events and ﬁnancial performance. These forward-looking statements are subject to certain risks and uncertainties and, in connection with the ‘‘safe-harbor’’ provisions of the Private Securities Litigation Reform Act, we have identiﬁed under ‘‘Risk Factors’’ in Item 1A above, important factors that could cause actual results to differ materially from those contained in any forward-looking statement made by or on behalf of us. Results actually achieved may differ materially from expected results included in these forward-looking statements as a result of these or other factors. Due to such uncertainties and risks, readers are cautioned not to place undue reliance on such forward-looking statements, which speak only as of the date on which such statements are made. We do not undertake to update any forward-looking statement that may be made from time to time by or on behalf of us, except as may be required by law. 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. 47 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See the Consolidated Financial Statements and Notes thereto, thereon of EisnerAmper LLP dated March 16, 2015 beginning on page F-1 of this report which are incorporated by reference in this Item 8. together with the report ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 9A. CONTROLS AND PROCEDURES. Evaluation of Disclosure Controls and Procedures Disclosure controls and procedures (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. 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 (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. 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. 48 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. In making its assessment of changes in internal controls over ﬁnancial reporting as of December 31, 2014, we excluded Highland Capital Brokerage, Inc. and KMS Financial Services, Inc. because these operations were acquired in a business combination on July 31, 2014 and October 15, 2014, respectively. Highland’s operations represent approximately $68 million of our total assets at December 31, 2014 and approximately $26 million of our total revenues for the year ended December 31, 2014. KMS’ operations represent approximately $14 million of our total assets at December 31, 2014 and approximately $20 million of our total revenues for the year ended December 31, 2014. 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, 2014. 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, 2014 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, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over ﬁnancial reporting. 49 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders Ladenburg Thalmann Financial Services Inc. issued by the Committee of Sponsoring Organizations of We have audited the internal control over ﬁnancial reporting of Ladenburg Thalmann Financial Services Inc. and subsidiaries (the ‘‘Company’’) as of December 31, 2014, based on criteria established in Internal the Control — Integrated Framework (2013) Treadway Commission (‘‘COSO’’). As described in Management’s Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over ﬁnancial reporting (i) at KMS Financial Services, Inc., which was acquired October 15, 2014 and whose ﬁnancial statements constitute approximately $14 million of total assets and $20 million of total revenues of the consolidated ﬁnancial statement amounts as of and for the year ended December 31, 2014, and (ii) at Highland Capital Brokerage, Inc., which was acquired July 31, 2014 and whose ﬁnancial statements constitute approximately $68 million of total assets and $26 million of total revenues of the consolidated ﬁnancial statement amounts as of and for the year ended December 31, 2014. Accordingly, our audit did not include the internal control over ﬁnancial reporting of such entities. The Company’s management is responsible for maintaining effective internal control over ﬁnancial reporting and for its assessment of the effectiveness of internal control over ﬁnancial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. 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, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and 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, the Company maintained, in all material respects, effective internal control over ﬁnancial reporting as of December 31, 2014, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2014 consolidated ﬁnancial statements of Ladenburg Thalmann Financial Services Inc., and our report dated March 16, 2015 expressed an unqualiﬁed opinion thereon. /s/ EisnerAmper LLP New York, New York March 16, 2015 50 ITEM 9B. OTHER INFORMATION. None. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. This information will be contained in our deﬁnitive proxy statement for our 2015 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 or, alternatively, by amendment to this Form 10-K under cover of Form 10-K/A no later than the end of such 120 day period. ITEM 11. EXECUTIVE COMPENSATION. This information will be contained in our deﬁnitive proxy statement for our 2015 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 or, alternatively, by amendment to this Form 10-K under cover of Form 10-K/A no later than the end of such 120 day period. 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 2015 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 or, alternatively, by amendment to this Form 10-K under cover of Form 10-K/A no later than the end of such 120 day period. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. This information will be contained in our deﬁnitive proxy statement for our 2015 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 or, alternatively, by amendment to this Form 10-K under cover of Form 10-K/A no later than the end of such 120 day period. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. This information will be contained in our deﬁnitive proxy statement for our 2015 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 or, alternatively, by amendment to this Form 10-K under cover of Form 10-K/A no later than the end of such 120 day period. 51 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a)(1): Index to 2014 Consolidated Financial Statements PART IV The consolidated ﬁnancial statements and the notes thereto, together with the report thereon of EisnerAmper LLP dated March 16 2015, appear beginning on page F-1 of this report. (a)(2): Financial Statement Schedules Financial statement schedules not included in this report have been omitted because they are not applicable or the required information is shown in the consolidated ﬁnancial statements or the notes thereto. (a)(3): Exhibits Filed The following exhibits are ﬁled as part of this annual report on Form 10-K. EXHIBIT INDEX Exhibit No. 2.1 2.2 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 Description Stock Purchase Agreement, dated as of September 21, 2014, by and among the Company, Securities Service Network, Inc., Renaissance Capital Corporation and the shareholders of Securities Service Network, Inc. and Renaissance Capital Corporation. Asset Purchase Agreement, dated July 16, 2014, by and among Securities America Financial Corporation, Sunset Financial Services, Inc. and Kansas City Life Insurance Company (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.) 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. Articles of Amendment to the Articles of Incorporation, dated May 9, 2013. Articles of Amendment to the Articles of Incorporation, dated May 21, 2013. Articles of Amendment to the Articles of Incorporation, dated June 20, 2013. Articles of Amendment to the Articles of Incorporation, dated June 9, 2014. Articles of Amendment to the Articles of Incorporation, dated June 25, 2014. Articles of Amendment to the Articles of Incorporation, dated November 20, 2014. 3.10 Amended and Restated Bylaws. 4.1 4.2 Form of common stock certiﬁcate. Form of Promissory Note, dated as of November 4, 2011, issued under the November 4, 2011 Loan Agreement. 52 Incorporated By Reference from Document AA No. in Document 2.2 BB 2.1 A B C T U V W Y CC D A P 3.1 3.2 3.1 3.1 3.6 3.1 3.1 3.1 3.1 3.2 4.1 10.2 Exhibit No. 4.3 4.4 4.5 4.6 4.7 10.1 10.2 10.3 10.4 10.5 Description Form of Warrant, dated as of November 4, 2011, issued under the November 4, 2011 Loan Agreement. Specimen 8.00% Series A Cumulative Redeemable Preferred Stock Certiﬁcate. Form of Non-Negotiable Promissory Note, dated as of October 15, 2014, issued to the former shareholders of KMS Financial Services, Inc. Form of Non-Negotiable Promissory Note (Cap Note), dated as of January 2, 2015, issued to the former shareholders of Securities Service Network, Inc. and Renaissance Capital Corporation. Form of Non-Negotiable Promissory Note (Balance Note), dated as of January 2, 2015, issued to the former shareholders of Securities Service Network, Inc. and Renaissance Capital Corporation. Amended and Restated 1999 Performance Equity Plan.* Ladenburg Thalmann Financial Services Inc. Amended and Restated 2009 Incentive Compensation Plan.* Ladenburg Thalmann Financial Services Inc. Amended and Restated Qualiﬁed Employee Stock Purchase Plan.* Office Lease dated March 30, 2007 between Ladenburg Thalmann & Co., Inc. and Frost Real Estate Holdings, LLC. Amendment and Lease Extension Agreement, dated as of March 8, 2013, between Ladenburg Thalmann & Co. Inc. and Frost Real Estate Holdings, LLC. 10.6 Warrant issued to BroadWall Capital LLC. 10.7 10.8 Form of Stock Option Agreement issued to employees of BroadWall. Letter Agreement, dated February 26, 2014, between Ladenburg Thalmann Financial Services Inc. and Vector Group Ltd. 10.9 10.10 10.11 Form of Warrant issued to the stockholders of Telluride Holdings, Inc. Employment Agreement, dated as of January 20, 2015, between the Company and Mark Zeitchick.* Employment Agreement, dated as of January 20, 2015, between the Company and Richard Lampen.* 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 10.15 10.16 Employment Letter, dated as of January 30, 2013, by and between Ladenburg Thalmann Financial Services Inc. and Joseph Giovanniello, Jr. * Employment Letter dated as of February 8, 2008 between the Company and Brett Kaufman.* Stock Purchase Agreement, dated August 16, 2011, by and between the Company and Ameriprise Financial, Inc. Incorporated By Reference from Document No. in Document P U Z DD DD F X G H S I I J K EE EE E E R L O 4.1 4.1 4.1 4.1 4.2 4.1 Exhibit A Appendix A 10.1 10.1 10.1 10.2 10.1 10.2 10.2 10.1 10.2 10.3 10.1 10.1 2.1 53 Exhibit No. 10.17 10.18 Description Lease, dated as of August 13, 2010, between Investacorp Group, Inc. and Frost Real Estate Holdings, LLC. Employment Letter, dated as of December 15, 2011, between the Company and Adam Malamed.* 10.19 Credit Agreement, dated as of October 19, 2007, by and between the Company and Frost Gamma Investments Trust, including the form of note thereto. 10.20 Amendment No. 1 to Credit Agreement by and between the Company and Frost Nevada Investments Trust, as assignee, dated as of August 25, 2009. 10.21 Amendment No. 2 to Credit Agreement, dated August 16, 2011, by and between the Company and Frost Nevada Investments Trust. 10.22 10.23 10.24 10.25 10.26 10.27 12.1 21 23.1 24 31.1 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.) First Amendment, dated November 4, 2011, to Forgivable Loan Agreement between the Company and National Financial Services LLC. 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.) Loan Agreement, dated November 4, 2011, by and among the Company and the lenders party thereto. Equity Distribution Agreement, dated November 21, 2014, between the Company and Jefferies LLC, as representative of the Sales Agents listed on Schedule I thereto. Stock Pledge Agreement, dated as of January 2, 2015, between the Company and Wade Wilkinson and David Michael Coffey, as representatives of the former shareholders of Securities Service Network, Inc. and Renaissance Capital Corporation. Statement re: Computation of Ratios of Earnings to Fixed Charge, and Ratios of Earnings to Combined Fixed Charge and Preferred Stock Dividends* 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 Incorporated By Reference from Document N Q E M O M Q Q P CC No. in Document 10.1 10.27 4.1 4.2 10.1 4.1 10.32 10.33 10.1 1.1 DD 10.1 ** ** ** *** ** — — — — 54 Exhibit No. 31.2 32.1 32.2 Description Certiﬁcation of Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Certiﬁcation of Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Certiﬁcation of Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 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 Incorporated By Reference from Document No. in Document ** **** **** ** ** ** ** ** ** — — — — — — — — — Management Compensation Contract Filed herewith Contained on the signature page hereto * ** *** **** Furnished herewith A. B. C. D. E. F. G. Registration statement on Form SB-2 (File No. 333-31001). Annual report on Form 10-K for the year ended August 24, 1999. Quarterly report on Form 10-Q for the quarter ended June 30, 2006. Current report on Form 8-K, dated September 20, 2007 and ﬁled with the SEC on September 21, 2007. Current report on Form 8-K, dated October 19, 2007 and ﬁled with the SEC on October 22, 2007. Registration statement on Form S-8 (File No. 333-139254). Deﬁnitive proxy statement ﬁled with the SEC on August 27, 2012 relating to the annual meeting of shareholders held on September 28, 2012. Current report on Form 8-K, dated March 30, 2007 and ﬁled with the SEC on April 2, 2007. Current report on Form 8-K, dated September 11, 2006 and ﬁled with the SEC on September 12, 2006. Current report on Form 8-K, dated February 26, 2014 and ﬁled with the SEC on February 28, 2014. Current report on Form 8-K, dated August 31, 2006 and ﬁled with the SEC on September 7, 2006. Current report on Form 8-K, dated March 27, 2008 and ﬁled with the SEC on March 28, 2008. Quarterly report on Form 10-Q for the quarter ended September 30, 2009. Current report on Form 8-K, dated August 10, 2010 and ﬁled with the SEC on August 13, 2010. Current report on Form 8-K, dated August 16, 2011 and ﬁled with the SEC on August 18, 2011. Current report on Form 8-K, dated November 4, 2011 and ﬁled with the SEC on November 9, 2011. Annual report on Form 10-K, for the year ended December 31, 2011. Current Report on Form 8-K, dated January 30, 2013 and ﬁled with the SEC on February 4, 2013. Current Report on Form 8-K, dated March 8, 2013 and ﬁled with the SEC on March 8, 2013. Current Report on Form 8-K, dated May 9, 2013 and ﬁled with the SEC on May 15, 2013. Registration Statement on Form 8-A, ﬁled with the SEC on May 24, 2013. Current Report on Form 8-K, dated June 24, 2013 and ﬁled with the SEC on June 25, 2013. Current Report on Form 8-K, dated June 12, 2014 and ﬁled with the SEC on June 13, 2014. H. I. J. K. L. M. N. O. P. Q. R. S. T. U. V. W. 55 X. Deﬁnitive proxy statement ﬁled with the SEC on May 19, 2014 relating to the annual meeting of shareholders held on June 25, 2014. Current report on Form 8-K, dated June 25, 2014 and ﬁled with the SEC on June 27, 2014. Current Report on Form 8-K, dated October 15, 2014 and ﬁled with the SEC on October 16, 2014. Y. Z. AA. Quarterly Report on Form 10-Q for the quarter ended September 30, 2014. BB. Current Report on Form 8-K, dated November 14, 2014 and ﬁled with the SEC on November 20, 2014. Current Report on Form 8-K, dated November 21, 2014 and ﬁled with the SEC on November 21, 2014. CC. DD. Current Report on Form 8-K, dated January 2, 2015 and ﬁled with the SEC on January 6, 2015. EE. Current Report on Form 8-K, dated January 20, 2015 and ﬁled with the SEC on January 23, 2015. 56 Pursuant the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, SIGNATURES LADENBURG THALMANN FINANCIAL SERVICES INC. (Registrant) Dated: March 16, 2015 By: /s/ Brett H. Kaufman Name: Brett H. Kaufman Title: Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 57 POWER OF ATTORNEY the other and with full power of substitution and resubstitution, our 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 true and lawful attorneys-in-fact with full power to execute in our name and behalf in the capacities indicated below, this annual report on Form 10-K and any and all amendments thereto and to ﬁle the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, and hereby ratify and conﬁrm all that such attorneys-in-fact, or any of them, or their substitutes shall lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 16, 2015. 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 Title President, Chief Executive Officer and Director (Principal Executive Officer) Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) Director Director Director Director Director Director Director Director Director Director Director 58 LADENBURG THALMANN FINANCIAL SERVICES INC. FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2014 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, 2014 and 2013 . . . . . . . . . . . Consolidated Statements of Operations for the years ended December 31, 2014, 2013 and 2012 . . . Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2014, 2013 and 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012 . . . Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page F-2 F-3 F-4 F-5 F-6 F-8 F-1 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, 2014 and 2013, 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, 2014. 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, 2014 and 2013, and the consolidated results of its operations and its cash ﬂows for each of the years in the three-year period ended December 31, 2014, 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, 2014, based issued by the Committee of on criteria established in Internal Control-Integrated Framework (2013) Sponsoring Organizations of the Treadway Commission, and our report dated March 16, 2015 expressed an unqualiﬁed opinion on the Company’s internal control over ﬁnancial reporting. /s/ EisnerAmper LLP New York, New York March 16, 2015 F-2 LADENBURG THALMANN FINANCIAL SERVICES INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (in thousands, except share and per share amounts) December 31, 2014 2013 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 $1,093 and $1,618 unamortized discount in 2014 and $ 103,087 5,910 38,760 1,788 26,152 36,872 19,820 620 123,000 115,238 644 10,419 28,448 $ 510,758 $ 230 23,483 45,294 25,747 1,514 3,216 17,640 1,129 $ 50,329 4,789 31,391 2,126 31,751 21,687 15,866 570 76,251 90,501 1,069 12,370 22,120 $ 360,820 $ 83 20,098 32,800 19,846 1,871 7,499 19,056 1,506 2013, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,034 174,287 64,648 167,407 Commitments and contingencies (Note 13) Shareholders’ equity: Preferred stock, $.0001 par value; authorized 25,000,000 shares in 2014 and 2013: 8% Series A cumulative redeemable preferred stock; 14,290,000 and 8,290,000 shares authorized in 2014 and 2013, respectively; 11,096,231 and 6,189,497 shares issued and outstanding in 2014 and 2013, respectively (liquidation preference $277,406 in 2014 and $154,737 in 2013) . . . . . . . . . Common stock, $.0001 par value; authorized 800,000,000 and Additional paid-in capital Accumulated deﬁcit 600,000,000 shares in 2014 and 2013, respectively; shares issued and outstanding, 184,968,487 in 2014 and 181,433,815 in 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total shareholders’ equity of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . Noncontrolling interest 1 1 18 460,446 (124,005) 336,460 11 336,471 $ 510,758 18 350,780 (157,438) 193,361 52 193,413 $ 360,820 See accompanying notes. F-3 LADENBURG THALMANN FINANCIAL SERVICES INC. CONSOLIDATED STATEMENTS OF OPERATIONS (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 and forgivable loans . . . . . . . . . . . . . . . . . . . . . . . . Loss on extinguishment of debt Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) before item shown below . . . . . . . . . . . Change in fair value of contingent consideration . . . . . Income (loss) before income taxes . . . . . . . . . . . . . . . Income tax (beneﬁt) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income (loss) Net loss attributable to noncontrolling interest . . . . . . . Net income (loss) attributable to the Company . . . . . . . Dividends declared on preferred stock . . . . . . . . . . . . . Net income (loss) available to common shareholders . . . Net income (loss) per share available to common shareholders (basic) . . . . . . . . . . . . . . . . . . . . . . . Net income (loss) per share available to common shareholders (diluted) . . . . . . . . . . . . . . . . . . . . . . Weighted average common shares used in computation of per share data: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2014 Year Ended December 31, 2013 2012 $ $ $ $ $ 445,734 343,212 46,998 1,938 6,209 77,162 921,253 662,178 120,231 10,541 17,900 7,040 11,040 6,990 18,397 2,342 11,041 548 43,011 911,259 9,994 12 10,006 (23,346) 33,352 (81) 33,433 (17,244) 16,189 0.09 0.08 $ $ $ $ $ 394,414 274,018 41,991 2,667 6,813 73,213 793,116 573,621 95,346 6,766 11,614 6,289 9,162 15,438 15,315 — 11,544 4,547 40,949 790,591 2,525 (121) 2,404 2,926 (522) (68) (454) (6,911) (7,365) (0.04) (0.04) $ $ $ $ $ 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 — 11,664 — 32,963 672,114 (22,003) 7,111 (14,892) 1,462 (16,354) — (16,354) — (16,354) (0.09) (0.09) 182,768,494 206,512,437 182,295,476 182,295,476 183,572,582 183,572,582 See accompanying notes. F-4 LADENBURG THALMANN FINANCIAL SERVICES INC. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (in thousands, except share amounts) Balance, December 31, 2011 . . . . . . . . . . . . . . Issuance of common stock under employee stock purchase plan . . . . . . . . . . . . . . . . . . . . . . Exercise of stock options (net of 187,542 shares 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 . . . . . . . . . . . . . . Issuance of common stock under employee stock purchase plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercise of stock options Exercise of warrants, net of 224,601 shares tendered in payment of exercise price . . . . . . . . . . . . . Stock options granted to consultants and independent ﬁnancial advisors . . . . . . . . . . . . . . . . . . . . Stock-based compensation to employees . . . . . . . . Repurchase and retirement of common stock . . . . . Third party investment in subsidiary . . . . . . . . . . Preferred stock issued, net of underwriting discount and expenses of $6,383 . . . . . . . . . . . . . . . . Preferred stock dividends declared and paid . . . . . . Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . Balance, December 31, 2013 . . . . . . . . . . . . . . Issuance of common stock under employee stock purchase plan . . . . . . . . . . . . . . . . . . . . . . Exercise of stock options (net of 43,535 shares tendered in payment of exercise price) . . . . . . . . . . . . . . . . . . . . . . . . . . Exercise of warrants Stock options granted to consultants and independent ﬁnancial advisors . . . . . . . . . . . . . . . . . . . . Stock-based compensation to employees . . . . . . . . Issuance of restricted stock . . . . . . . . . . . . . . . Repurchase and retirement of common stock . . . . . Third party investment in noncontrolling interest . . . Common stock issued in Highland acquisition . . . . . . . . . . Common stock issued in KMS acquisition Preferred stock issued, net of underwriting discount Preferred Stock Common Stock Shares Amount Shares — $— 183,253,068 Amount $18 Additional Paid-in Capital $204,055 Accumulated Deﬁcit $(140,630) Noncontrolling Interest $ — Total $ 63,443 — — — — — — 98,513 693,958 358,500 — — — 138 319 338 — — — — — — — — — — — — — — (12,500) — — (912,667) — — — — — $18 — $— 183,478,872 — — — — — — — 6,189,497 — — 6,189,497 — — — — — — — — — — — — — — — — — 1 — — $ 1 — — — — — — — — — — 112,646 608,022 1,002,065 — — — — — — — (3,767,790) — — — — — — 181,433,815 89,581 2,282,060 13,333 — — — $18 — — — — — 14,409 — — — (2,846,395) — — — — 2,540,762 — 1,440,922 1,317 3,427 — (1,407) — $208,187 — — — — (16,354) $(156,984) 201 808 247 3,369 3,397 (6,446) — — — — — — — — 147,928 (6,911) — $350,780 — — (454) $(157,438) 291 2,969 22 6,440 4,099 2 (9,535) — 7,953 6,052 — — — — — — — — — — — — — — — — — — $ — — — — — — — 120 — — (68) $ 52 — — — — — — — 40 — — 138 319 338 1,317 3,427 — (1,407) (16,354) $ 51,221 201 808 247 3,369 3,397 (6,446) 120 147,929 (6,911) (522) $193,413 291 2,969 22 6,440 4,099 2 (9,535) 40 7,953 6,052 4,906,734 and expenses of $2,531 . . . . . . . . . . . . . . . . — Preferred stock dividends declared and paid . . . . . . Net income (loss) . . . . . . . . . . . . . . . . . . . . . — Balance, December 31, 2014 . . . . . . . . . . . . . . 11,096,231 — — — $ 1 — — — 184,968,487 — — — $18 108,617 (17,244) — $460,446 — — 33,433 $(124,005) — — (81) $ 11 108,617 (17,244) 33,352 $336,471 See accompanying notes. F-5 LADENBURG THALMANN FINANCIAL SERVICES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Cash ﬂows from operating activities: Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 33,352 $ (522) $(16,354) Year Ended December 31, 2013 2012 2014 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Change in fair value of contingent consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustment to deferred rent Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . Write-off of intangible asset . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and other amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss on extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . Amortization of debt discount Amortization of debt issue cost . . . . . . . . . . . . . . . . . . . . . . . Amortization of retention and forgivable loans . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . Loss on write-off of furniture, ﬁxtures and leasehold (12) (357) 14,056 — 4,341 548 501 393 11,041 (25,521) 68 98 (839) (3,929) 10,541 121 (106) 11,594 143 3,676 4,547 1,219 435 11,544 954 77 132 (1,067) (3,929) 6,766 (7,111) (356) 11,683 — 4,378 — 1,993 478 11,664 877 71 1,258 (1,365) (3,929) 4,744 improvements, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 430 7 (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 operating activities . . . . . . . . . . . . . . . Cash ﬂows from investing activities: Acquisition of Highland, net of cash received . . . . . . . . . . . . . . Acquisition of KMS, net of cash received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other business acquisitions Purchases of ﬁxed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sale of ﬁxed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (522) (5,907) 338 (7,014) (5,442) 1,951 (39) 147 (803) 102 8,272 (2,003) (6,515) 26,855 (3,353) (4,292) (1,621) (7,447) — (2,711) (14,418) 23 (1,153) (4,147) (1,163) (5,367) (209) 8,081 (2,397) 1,230 1,101 5,990 20,874 — — — (6,861) 88 (64) 1,426 (1,636) (1,661) (6,504) 954 (2,081) 214 1,518 1,680 5,679 (746) 831 7,648 — — (552) (5,477) — See accompanying notes. F-6 LADENBURG THALMANN FINANCIAL SERVICES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS − (Continued) (in thousands) Change in restricted assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Net cash used in investing activities . . . . . . . . . . . . . . . . . . . $ 100 — (16,613) $ (250) — (7,023) Year Ended December 31, 2013 2014 2012 $ — 99 (5,930) Cash ﬂows from ﬁnancing activities: Issuance of Series A preferred stock . . . . . . . . . . . . . . . . . . . . Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . Series A preferred stock dividends paid . . . . . . . . . . . . . . . . . . Repurchases of common stock . . . . . . . . . . . . . . . . . . . . . . . . Issuance of notes payable and warrants . . . . . . . . . . . . . . . . . . Principal (repayments) borrowings on notes payable including, in . . . . Principal repayments under revolving credit facility, net . . . . . . . Third party investment in subsidiary . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . 2014, repayment of $21,834 of Highland’s assumed debt 108,617 3,282 (17,244) (9,535) — (42,369) (275) 40 42,516 52,758 50,329 $103,087 147,929 1,256 (6,911) (6,446) 1,709 (111,113) (25,500) 120 1,044 14,895 35,434 $ 50,329 — 795 — (1,407) — 2,950 (219) — 2,119 3,837 31,597 $35,434 Supplemental cash ﬂow information: Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,920 $ 2,554 $ 16,034 544 $ $22,968 488 $ Acquisition of business: Assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value of contingent earnout Payable to seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash paid in acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition of Highland: Assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock issued in acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash paid in acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash acquired in acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash paid in acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition of KMS: Assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock issued in acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . Promissory note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash paid in acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash acquired in acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash paid in acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,380 — 4,380 — (2,759) $ 1,621 $ 65,882 (54,316) 11,566 (7,953) 3,613 (260) $ 3,353 $ 39,844 (15,284) 24,560 (6,052) (7,508) 11,000 (6,708) $ 4,292 — — — — — — — — — — — — — — — — — — — — — $ 1,364 — 1,364 (812) — 552 $ — — — — — — — — — — — — — — — See accompanying notes. F-7 LADENBURG THALMANN FINANCIAL SERVICES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 1. Description of Business Ladenburg Thalmann Financial Services Inc. (the ‘‘Company’’ or ‘‘LTS’’) is a holding company. Its principal operating subsidiaries are Securities America, Inc. (collectively with related companies, ‘‘Securities America’’), Triad Advisors, (collectively with related companies, Investacorp, ‘‘Investacorp’’), KMS Financial Services, Inc. (‘‘KMS’’), which the Company acquired in October 2014, Ladenburg Thalmann & Co. Inc. (‘‘Ladenburg’’), Ladenburg Thalmann Asset Management Inc. (‘‘LTAM’’), (‘‘Highland’’), which the Premier Trust, Company acquired in July 2014. (‘‘Premier Trust’’) and Highland Capital Brokerage, (‘‘Triad’’), Inc. Inc. Inc. Inc. Securities America, Triad, Investacorp and KMS are registered broker-dealers and investment advisors that serve the independent ﬁnancial advisor community. The independent ﬁnancial advisors of Securities America, Triad, Investacorp and KMS primarily serve retail clients. Such entities 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, Triad’s and Investacorp’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. Highland is an independent insurance broker that delivers life insurance, ﬁxed and equity indexed annuities and long-term care solutions to investment and insurance providers. Highland provides specialized point-of-sale support along with advanced marketing and estate and business planning techniques, delivering customized insurance solutions to both institutional clients and independent producers. the Securities and Exchange Commission (‘‘SEC’’), Securities America’s, Triad’s, Investacorp’s, KMS’ and Ladenburg’s customer transactions are cleared through clearing brokers on a fully-disclosed basis and such entities are subject to regulation by, among others, the Financial Industry Regulatory Authority (‘‘FINRA’’) and the Municipal Securities Rulemaking Board. Each entity is a member of the Securities Investor Protection Corporation. Securities America is also subject to regulation by the Commodities Futures to regulation by various Trading Commission and the National Futures Association. Highland is subject regulatory bodies, including state attorneys general and insurance departments. 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, except for one subsidiary organized in 2013, which is 80% owned, after elimination of all signiﬁcant intercompany balances and transactions. Use of Estimates The preparation of these consolidated ﬁnancial statements in conformity with accounting principles generally accepted in the United States of America (‘‘GAAP’’) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and F-8 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) liabilities at the date of the consolidated ﬁnancial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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, 2014 and 2013 consist of money market funds which are carried at fair value of $74,939 and $19,631, 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 and other ﬁnancial products and services. Most of the commission and advisory fee revenue generated by independent contractor ﬁnancial advisors is paid to the advisors as commissions and fees for initiating the transactions. Commission revenue is generated from front-end sales commissions that occur at the point of sale, as well as trailing commissions. Front-end sales commmission revenue and related clearing and other expenses on transactions introduced to its clearing broker are recognized on a trade date basis. Front-end sales commissions and related expenses on transactions initiated directly between the ﬁnancial advisors and product sponsors are recognized upon receipt of notiﬁcation from sponsors of the commission earned. Commission revenue also includes 12b-1 fees, and ﬁxed and variable product trailing fees, collectively considered as trailing fees, which are recurring in nature. These trailing fees are earned based on a percentage of the current market value of clients’ investment holdings in trail eligible assets. Because trail commission revenues are generally paid in arrears, management estimates commission revenues earned during each period. These estimates are based on a number of factors including investment holdings and the applicable commission rate and the amount of trail commission revenue received in prior periods. Estimates are subsequently adjusted to actual based on notiﬁcation from the sponsors of trail commissions earned. Commissions are also earned on the sale of insurance policies. Commissions are generally paid each year as long as the client continues to use the product. Commissions paid by insurance companies are based on a percentage of the premium that the insurance company charges to the policyholder. First-year commissions are calculated as a percentage of the ﬁrst twelve months’ premium on the policy and earned in the year that the policy is originated. In many cases, renewal commissions are received for a period following the ﬁrst year, if the policy remains in force. Insurance commissions are recognized as revenue when the following criteria are met: (1) the policy application and other carrier delivery requirements are substantially complete, (2) the premium is paid and (3) the insured party is contractually committed to the purchase of the insurance policy. Carrier delivery requirements may include additional supporting documentation, signed amendments and premium payments. Commissions earned on renewal premiums are generally recognized upon receipt from the carrier, since that is typically when notiﬁcation is ﬁrst received that such commissions have been earned. Advisory fee revenue represents 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. Incentive fees are also earned 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 F-9 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) 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 and other income principally includes amounts charged to independent ﬁnancial advisors for processing of securities trades and for providing administrative and compliance services and also includes marketing allowances earned from product sponsor programs. All such amounts are recorded as earned. Fixed Assets Fixed assets are carried at cost net of accumulated depreciation and amortization. Depreciation is provided by the straight-line method over the related assets. Leasehold the estimated useful improvements are amortized on a straight-line basis over the lease term, or their estimated useful lives, whichever is shorter. lives of 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 and restricted stock, 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 to amortization are tested for Intangible assets are amortized over their estimated useful lives, generally on a straight-line basis. recoverability whenever events or changes in Intangible assets subject the carrying amount may not be recoverable. The Company assesses the circumstances indicate that 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 F-10 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) 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. Accounting guidance on the testing of goodwill for impairment allows entities the option of performing a qualitative assessment to is necessary to perform such two-step impairment and whether it determine the likelihood of goodwill quantitative impairment test. Recently Adopted Accounting Pronouncements In July 2013, the Financial Accounting Standards Board (‘‘FASB’’) issued ASU 2013-11, Presentation of an Unrecognized Tax Beneﬁt When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The update requires the netting of unrecognized tax beneﬁts against a deferred tax asset for the loss or other carryforward that would apply in settlement of the uncertain tax positions. The Company adopted the amended accounting guidance effective as of January 1, 2014, which did not have any impact on the Company’s 2014 ﬁnancial statements. In April 2014, the FASB issued ASU 2014-08, which changes the requirements for reporting discontinued operations. A disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has, or will have, a major effect on an entity’s operations and ﬁnancial results. ASU 2014-08, which is to be applied prospectively to all new disposals of components and new classiﬁcations as held for sale, will become effective in annual periods beginning on or after December 15, 2014 and interim periods within those annual periods with early adoption allowed. The Company does not anticipate that the adoption of ASU 2014-08 will have a material impact on its ﬁnancial statements. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which completes the joint effort by the FASB and the International Accounting Standards Board to improve ﬁnancial reporting by creating common revenue recognition guidance for GAAP and the International Financial Reporting Standards. ASU 2014-09 will become effective for the Company for annual reporting periods beginning after December 15, 2016 with early adoption not permitted. The Company is currently evaluating the potential impact of ASU 2014-09 on its ﬁnancial statements. In June 2014, the FASB issued ASU 2014-12, Compensation-Stock Compensation (Topic 718), which requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. ASU 2014-12 will become effective for the Company for annual periods and interim periods beginning after December 15, 2015 and early adoption is permitted. The Company does not anticipate that the adoption of ASU 2014-08 will have a material impact on its ﬁnancial statements. 3. Acquisitions KMS On October 15, 2014, the Company acquired KMS, a Seattle-based independent broker-dealer and registered investment advisor, pursuant to a Stock Purchase Agreement, dated as of August 8, 2014, by and among the Company, KMS and the shareholders of KMS. Under the terms of the purchase agreement, on the closing date, the Company paid the KMS shareholders $24,560, consisting of $11,000 in cash, $8,000 principal amount of four-year promissory notes, bearing interest at 1.84% per annum and payable in equal quarterly installments of principal and interest (valued at $7,508 based on an imputed interest rate of 5.50%), and 1,440,922 shares of the Company’s common stock valued at $6,052 (based on the closing price at date of acquisition), which are subject to certain transfer in exchange for all of the issued and outstanding capital stock of KMS. The notes contain restrictions, F-11 LADENBURG THALMANN FINANCIAL SERVICES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 3. Acquisitions − (continued) customary events of default, which if uncured, entitle the holders to accelerate the due date of the unpaid principal amount of, and all accrued and unpaid interest on, the notes. Legal and other related acquisition costs of approximately $1,168 were incurred and charged to expense. The Company has done a valuation study to determine the acquisition-date fair value of assets acquired and liabilities assumed and related allocation of purchase price of KMS. The following table summarizes the fair value of assets acquired and liabilities assumed at the date of aquisition: Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities owned, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receivables from clearing broker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fixed assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Identiﬁable intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commissions and fees payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred compensation liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,708 599 1,462 2,101 192 150 10,859 13,269 4,504 39,844 (826) (2,772) (587) (600) (6,516) (3,983) (15,284) $ 24,560 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, 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 includes KMS’ strategic ﬁt with the company’s existing businesses, including the resulting synergies and economies of scale expected from the acquisition. Identiﬁable intangible assets as of the acquisition date consist of: Representative relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade names . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-compete agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . Total identiﬁable intangible assets $ 9,192 1,112 555 $10,859 Useful Life (years) 20 9 5 Fair value amounts (Level 3 inputs) were determined using an income approach for representative relationships and non-compete agreements and the relief from royalty method for trade names. F-12 LADENBURG THALMANN FINANCIAL SERVICES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 3. Acquisitions − (continued) Highland On July 31, 2014, the Company acquired HCHC Holdings, Inc. (‘‘HCHC’’), which is the parent company of Highland. Highland is an independent insurance broker that delivers life insurance, annuities and long-term care solutions to investment and insurance providers. Highland provides specialized point-of-sale support along with advanced marketing and estate and business planning techniques, delivering customized insurance solutions to both institutional clients and independent producers. Under the Agreement and Plan of Merger, dated July 31, 2014, by and among the Company, HCHC, HCHC Acquisition Inc. (‘‘HCHC Acquisition’’), a wholly-owned subsidiary of the Company, and the stockholders of HCHC, HCHC merged with and into HCHC Acquisition, with HCHC Acquisition remaining as the surviving corporation and a wholly-owned subsidiary of the Company. The Company paid the HCHC shareholders $11,566 consisting of $3,613 in cash and 2,540,762 shares of the Company’s common stock, which are subject to certain transfer restrictions, valued at $7,953 (based on the closing price at the date of the acquisition). Also, the Company caused all indebtedness owed by certain HCHC subsidiaries under a credit agreement (in the amount of $21,834) to be repaid. Legal and other acquisition related costs of approximately $566 were incurred and charged to expense. The Company has done a valuation study to determine the acquisition-date fair value of assets acquired and liabilities assumed and related allocation of purchase price of Highland. The following table summarizes the fair value of assets acquired and liabilities assumed at the date of acquisition: Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Identiﬁable intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commissions and fees payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes payable − current Notes payable − long term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred taxes payable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total purchase price $ 260 6,070 45,587 11,515 2,450 65,882 (1,450) (21,834) (7,000) (6,777) (17,255) (54,316) $ 11,566 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, which is non-deductible for income tax purposes, was assigned to the insurance brokerage include including the resulting synergies and segment. Factors that contributed to a purchase price resulting in the recognition of goodwill Highland’s strategic ﬁt with the Company’s existing businesses, economies of scale expected from the acquisition. F-13 LADENBURG THALMANN FINANCIAL SERVICES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 3. Acquisitions − (continued) Identiﬁable intangible assets as of the acquisition date consist of: Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Renewals revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade names . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-solicitation agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . Total identiﬁable intangible assets $ 949 39,503 2,864 2,271 $45,587 Useful Life (years) 4 8 9 3 Fair value amounts (Level 3 inputs) were determined using a cost approach for technology, an income approach for renewals revenue and non-solicitation agreements and the relief from royalty method for trade names. The accompanying condensed consolidated ﬁnancial statements include the results of operations of KMS and Highland from their dates of acquisition. The following unaudited pro forma information represents the Company’s consolidated results of operations as if the acquisitions of KMS and Highland had occurred at the beginning of 2013. The pro forma net loss reﬂects amortization of the amounts ascribed to identiﬁable intangible assets acquired in the acquisitions, elimination of Highland’s interest expense related to notes repaid at the date of acquisition and interest expense on notes issued in the KMS aquisition. In addition, $21,238 of non-recurring income tax beneﬁt resulting from the acquisitions has been eliminated from the pro forma results (Note 11). Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net loss available to common shareholders . . . . . . . . . . . . . . . Basic and diluted loss per share available to common Year Ended December 31, 2013 2014 936,785 $ 1,022,122 (5,475) 8,161 $ (12,386) (9,083) $ $ $ $ shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.05) $ (0.07) Weighted average common shares outstanding: Basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185,370,262(a) 186,277,160(a) (a) Includes 3,981,684 shares issued in connection with the acquisitions. The unaudited pro forma ﬁnancial intended to represent or be indicative of the Company’s consolidated results of operations that would have been reported had the acquisitions of Highland and KMS been completed as of the beginning of 2013, nor should it be taken as indicative of the Company’s future consolidated results of operations. information is not Combined revenues and net the period of acquisition through included in the accompanying statements of operations were $46,004 and $59, loss for Highland and KMS for December 31, 2014, respectively. 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 discounting to present value the earn-out’s probability F-14 LADENBURG THALMANN FINANCIAL SERVICES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 3. Acquisitions − (continued) weighted expected payout 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, proforma results were not presented. agreement, certain registered representatives In December 2014, Securities America purchased certain assets related to the broker-dealer business of Sunset Financial Services, Inc. from Kansas City Life Insurance Company that was deemed to be a business acquisition. According to the advisor representatives and their client accounts and all related goodwill were acquired. The consideration for the transaction was $4,380, consisting of cash of $1,621 and contingent consideration having a fair value of $2,759, 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 discounting to present value the earn-out’s probability weighted expected payout 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. The purchase price was allocated as follows: $4,359 to identiﬁable assets and $21 to goodwill. 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, proforma results were not presented. and investment Set forth below are changes in the carrying value of contingent consideration related to acquisitions included in accounts payable and accrued liabilities: Fair value of contingent consideration as of December 31, 2011 . . . . . . . . . . . . . . . . Change in fair value of contingent consideration related to 2011 acquisition . . . . . . . . Fair value of contingent consideration in connection with 2012 acquisition . . . . . . . . . Fair value of contingent consideration as of December 31, 2012 . . . . . . . . . . . . . . . . Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in fair value of contingent consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value of contingent consideration as of December 31, 2013 . . . . . . . . . . . . . . . . Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in fair value of contingent consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value of contingent consideration in connection with 2014 acquisition . . . . . . . . . Fair value of contingent consideration as of December 31, 2014 . . . . . . . . . . . . . . . . $ 7,111 (7,111) 812 812 (344) 121 589 (124) (12) 2,759 $ 3,212 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 in 2012. The estimated fair value of the earn-out related to the acquisition made in 2012 had an increase of $121 in the year ended December 31, 2013 and a decrease of $12 in the year ended December 31, 2014. F-15 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 The components of securities owned and securities sold, but not yet purchased as of December 31, 2014 and 2013 were as follows: Securities Owned Securities Sold, But Not Yet Purchased December 31, 2014 Certiﬁcates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. Treasury notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock and warrants Restricted common stock and warrants . . . . . . . . . . . . . . . . . . . . . Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total December 31, 2013 Certiﬁcates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. Treasury notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock and warrants Restricted common stock and warrants . . . . . . . . . . . . . . . . . . . . . Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total $ 465 1,526 102 1,981 875 961 $5,910 $ 24 1,402 1 689 725 1,948 $4,789 $ — (45) (151) (34) — — $(230) $ — (46) — (33) (4) — $ (83) As of December 31, 2014 and December 31, 2013, approximately $5,429 and $4,014, respectively, of securities owned were deposited with clearing brokers and may be sold or hypothecated by the clearing brokers pursuant to clearing agreements with such 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 or income 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: (cid:129) (cid:129) (cid:129) 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 which reﬂect the assumptions that the Company develops based on available information about what market participants would use in valuing the asset or liability. F-16 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 are carried at fair value and classiﬁed as follows: Securities owned, at fair value Certiﬁcates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt securities U.S. Treasury notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock and warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Securities sold, but not yet purchased, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt securities U.S. Treasury notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock and warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Securities owned, at fair value Certiﬁcates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt securities U.S. Treasury notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock and warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Securities sold, but not yet purchased, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt securities Common stock and warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Level 1 $ 465 December 31, 2014 Level 3 Level 2 $— $ — — — 1,526 — 102 — — 875 1,981 — 961 — $— $3,464 $2,446 Level 1 $ — 0 (34) $(34) Level 1 $ 24 — — 689 — $713 Level 1 $ — (33) $(33) December 31, 2014 Level 3 Level 2 $— $ (45) — (151) — — $— $(196) December 31, 2013 Level 3 Level 2 $— $ — — 1,402 — 1 — 725 — 1,948 $— $4,076 December 31, 2013 Level 3 Level 2 $— $(46) — (4) $— $(50) Total $ 465 1,526 102 2,856 961 $5,910 Total $ (45) (151) (34) $(230) Total $ 24 1,402 1 1,414 1,948 $4,789 Total $(46) (37) $(83) Debt securities and U.S. Treasury notes are valued based on recently executed transactions, market price quotations, and pricing models that factor in, as 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 values, the underlying securities market volatility, the terms of the warrants, exercise prices, and risk-free return rate. As the fair values of the warrants were $403 and $534, of December 31, 2014 and December 31, 2013, respectively, and are included in common stock and warrants (level 2) above. From time to time, Ladenburg receives common stock as compensation for investment banking services. These securities are restricted under applicable securities laws 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. Other investments consists principally of equity interests in non-traded Real Estate Investment Trusts, which are valued based on pricing available from buyers in the secondary market (see Note 13 — Litigation and Regulatory Matters). F-17 LADENBURG THALMANN FINANCIAL SERVICES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 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 Securities America, Triad, Investacorp and Ladenburg has elected to compute its net capital under the alternative method allowed by this rule, and, at December 31, 2014, each had a $250 minimum net capital requirement (except for Ladenburg, which had a minimum net capital requirement of $253, as calculated under 15c3-1(a)(4), minimum capital requirement for market makers). At December 31, 2014, Securities America had regulatory net capital of $5,396, Triad had regulatory net capital of $6,025, Investacorp had regulatory net capital of $5,176, and Ladenburg had regulatory net capital of $20,506. KMS has elected to compute its net capital under the basic method allowed by the Net Capital Rule and at December 31, 2014, it had net capital of $3,075 which was $2,516 in excess of its required net capital of $559 and had a net capital ratio of 2.7 to 1. Securities America, Triad, Investacorp, KMS and Ladenburg claim exemptions from the provisions of the transactions through to paragraph (k)(2)(ii) as they clear their customer SEC’s Rule 15c3-3 pursuant 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, 2014, Premier Trust had stockholders’ equity of $1,366, including at least $250 in cash. 6. Fixed Assets Components of ﬁxed assets, net included in the consolidated statements of ﬁnancial condition were as follows: Cost: Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Computer equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture and ﬁxtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Less: accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total December 31, 2014 2013 $ 4,153 12,466 2,691 13,886 33,196 (13,376) $ 19,820 $ 3,839 10,469 1,432 9,392 25,132 (9,266) $15,866 F-18 LADENBURG THALMANN FINANCIAL SERVICES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 7. Intangible Assets At December 31, 2014 and 2013, intangible assets subject to amortization consisted of the following: Estimated Useful Life (years) 1 & 7.7 Technology . . . . . . . . . . . . . . . . . . . . Relationships with ﬁnancial advisors . . . 20, 10.2 & 9.2 Vendor relationships . . . . . . . . . . . . . . Covenants not-to-compete . . . . . . . . . . Customer accounts . . . . . . . . . . . . . . . Renewal revenue . . . . . . . . . . . . . . . . . Trade names . . . . . . . . . . . . . . . . . . . . Relationships with investment banking 7 5 & 2.2 10 & 6.9 7.8 10, 7.2 & 9 clients . . . . . . . . . . . . . . . . . . . . . . Leases . . . . . . . . . . . . . . . . . . . . . . . . Referral agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Total . . . . . . . . . . . . . . . . . . . . . . . . . 4 6.4 6.6 6 December 31, 2014 December 31, 2013 Gross Carrying Amount $ 23,483 81,438 3,613 5,401 2,029 39,503 15,154 2,586 861 124 67 $174,259 Accumulated Amortization $ 9,223 23,704 3,458 2,100 1,516 5,563 2,099 2,586 861 81 67 $51,258 Gross Carrying Amount $ 21,422 68,688 3,613 1,773 2,029 — 12,290 2,586 861 124 67 $113,453 Accumulated Amortization $ 6,359 17,554 2,998 1,735 1,266 — 3,716 2,586 861 64 63 $37,202 Aggregate amortization expense amounted to $14,056, $11,594 and $11,683 for the years ended total December 31, 2014, 2013 and 2012, amortizable intangibles at December 31, 2014 is 8.22 years. Estimated amortization expense for each of the ﬁve succeeding years and thereafter is as follows: respectively. The weighted-average amortization period for 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 − 2027 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,509 18,311 17,834 17,204 13,778 37,364 $123,000 8. Goodwill Changes to the carrying amount of goodwill during the years ended December 31, 2014 and 2013 are as follows: Balance as of January 1, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . Beneﬁt applied to reduce goodwill Balance as of December 31, 2013 . . . . . . . . . . . Beneﬁt applied to reduce goodwill . . . . . . . . . . . Business acquisitions . . . . . . . . . . . . . . . . . . . . Balance as of December 31, 2014 . . . . . . . . . . . Independent Brokerage and Advisory Services $ 90,277 (77) $ 90,200 (68) 13,290 $103,422 Insurance Brokerage $ — — $ — — 11,515 $11,515 Ladenburg $301 — $301 — — $301 Total $ 90,578 (77) $ 90,501 (68) 24,805 $115,238 F-19 LADENBURG THALMANN FINANCIAL SERVICES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 8. Goodwill − (continued) The annual impairment tests performed at December 31, 2014 and 2013, based on quantitative and qualitative assessments, 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. In 2014 and 2013, the carrying amount of goodwill was reduced by $68 and $77, 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 advisors to assist in the transition process. In connection with the Securities America acquisiton in 2011, the Company made retention loans aggregating $20,000 to Securities America’s ﬁnancial comprised of unsecured non-interest-bearing and interest-bearing loans (interest of up 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, 2014 and 2013, the allowance amounted to $215 and $419, respectively. advisors. The notes receivable balance is The net carrying value of notes receivable, which are recorded at cost, as of December 31, 2014 and 2013 was $26,152 and $31,751, 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). 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 $10,419 and $12,370 as of December 31, 2014 and 2013, respectively. The deferred compensation liability of $17,640 and $19,056 as of December 31, 2014 and 2013, 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. F-20 LADENBURG THALMANN FINANCIAL SERVICES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 11. Income Taxes The Company ﬁles a consolidated federal income tax return and certain combined state and local income tax returns with its subsidiaries. Income taxes consist of the following: 2014: Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Beneﬁt applied to reduce goodwill 2013: Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Beneﬁt applied to reduce goodwill 2012: Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Beneﬁt applied to reduce goodwill Federal State and Local Total $ 947 (21,012) — $(20,065) $ 1,160 (4,509) 68 $(3,281) $ 2,107 (25,521) 68 $(23,346) $ 403 731 — $ 1,134 $ 1,492 223 77 $ 1,792 $ $ — $ 527 — 527 $ 514 350 71 935 $ 1,895 954 77 $ 2,926 $ 514 877 71 $ 1,462 The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate (35%) in 2014 and (34%) in 2013 and 2012 to income (loss) before income taxes as a result of the following differences: Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . . Expense (beneﬁt) under statutory U.S. tax rates . . . . . . . . . . . Increase (decrease) in taxes resulting from: (Decrease) increase in valuation allowance . . . . . . . . . . . . . . Change in fair value of contingent consideration, not taxable . . Other nondeductible items . . . . . . . . . . . . . . . . . . . . . . . . . State taxes, net of federal beneﬁt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . Income tax expense (beneﬁt) 2014 $ 10,006 3,502 2013 $2,404 817 2012 $(14,892) (5,063) (28,590) — 818 689 235 $(23,346) (272) 41 1,085 1,183 72 $2,926 8,500 (2,844) 346 340 183 $ 1,462 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. F-21 LADENBURG THALMANN FINANCIAL SERVICES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 11. Income Taxes − (continued) Deferred tax amounts are comprised of the following at December 31: Deferred tax assets (liabilities): Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . AMT credit carryforward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation and beneﬁts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred compensation liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred liabilities Net deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2014 2013* $ 19,593 1,045 2,111 16,592 6,421 867 46,629 — 46,629 (4,422) (37,859) (7,564) (49,845) $ (3,216) $ 25,353 706 3,104 13,666 6,937 701 50,467 (28,590) 21,877 (2,781) (20,206) (6,389) (29,376) $ (7,499) * Deferred tax assets net of deferred tax liabilities were decreased $7,801 with a corresponding decrease in the valuation allowance previously recorded. 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 provided a valuation allowance to fully offset deferred tax assets net of deferred tax liabilities other than that related to goodwill at December 31, 2013. As HCHC Acquisition and KMS 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 (see Note 3) are able to offset the reversal of the Company’s pre-existing deferred tax assets. Accordingly, the Company’s deferred tax valuation allowance at December 31, 2013 has been reduced to the extent of $21,238 of the deferred tax liability recorded in the acquisitions and recorded as a deferred tax beneﬁt in the 2014 consolidated statement of operations. In the fourth quarter of 2014, after utilizition of a portion of the Company’s net operating loss carryforward to offset taxable income for 2014 and a corresponding reversal of $5,760 of the valuation allowance, the remaining valuation allowance of $1,592 was reversed and recorded as a deferred tax beneﬁt in the 2014 consolidated statement of operations. Management’s decision for such reversal was based on income from operations in 2014 as well as reductions in interest expense due to the repayment of debt from proceeds of preferred stock and expectation of future taxable income, including future reversals of existing taxable temporary differences. Based on such available evidence, management concluded that it is more likely than not the Company’s deferred tax assets at December 31, 2014 would be realized and no valuation allowance was required. that At December 31, 2014, the Company and its subsidiaries had a consolidated net operating loss carryforward of approximately $62,000 for federal income tax purposes expiring in various years from 2021 F-22 LADENBURG THALMANN FINANCIAL SERVICES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 11. Income Taxes − (continued) through 2032. The annual utilization of the net operating loss carryforwards may be limited in future years due to the change in ownership provisions prescribed by Section 382 of the U.S. Internal Revenue Code. 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, 2014 includes $2,033 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, 2014. The Company has elected to classify interest and penalties that would accrue with respect to unrecognized tax beneﬁts as interest and other expense, respectively. The Company’s tax years 2011 through 2014 remain open to examination by most taxing authorities. Tax years in which the Company generated net operating loss carryforwards are subject to examination only with respect to such net operating loss carryforwards upon utilization in future years. Prior to being acquired by the Company in November 2011, Securities America was included in consolidated federal and state income tax returns ﬁled by its parent Ameriprise Financial, Inc. (‘‘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 in 2014 the IRS completed auditing its U.S. income tax returns for 2008 through 2011. However, the years remain open because of certain un-agreed upon issues. Ameriprise or certain of its subsidiaries’ state income tax returns are currently under examination by various jusrisdictions for years ranging from 1997 through 2011. 12. Notes Payable Notes payable consisted of the following: December 31, 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 $627 and $1,618 of unamortized discount in 2014 and 2013, respectively . . . . . . Note payable under subsidiary’s term loan with bank . . . . . . . . . . . . . . Notes payable by subsidiary to certain former shareholders of Highland . . Notes payable to KMS’ former shareholders, net of $466 of unamortized 2014 $10,356 200 29,201 1,406 6,737 discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total 7,534 600 $56,034 2013 $14,285 450 48,232 1,681 — — — $64,648 F-23 LADENBURG THALMANN FINANCIAL SERVICES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 12. Notes Payable − (continued) The Company estimates that the fair value of notes payable was $53,102 at December 31, 2014 and $60,182 at December 31, 2013 based on then current interest rates at which similar amounts of debt could currently be borrowed (Level 2 inputs). As of December 31, 2014, the Company was in compliance with all debt covenants in its debt agreements. Revolving Credit Agreement In 2007, the Company entered into a $40,000 revolving credit agreement with Frost Gamma Investments Trust (‘‘Frost Gamma’’), an affiliate of the Company’s chairman of the board and principal shareholder. Borrowings of up to $40,000 are permitted under the Frost Gamma credit agreement and bear interest at a rate of 11% per annum, payable quarterly. 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. In 2013, the Company used a portion of the net proceeds from the sale of Series A Preferred Stock to repay the outstanding balance (approximately $39,300) under the revolving credit agreement. At December 31, 2014 and 2013, the Company had no outstanding balance under the revolving credit agreement. Interest expense amounted to $364, $1,757 and $3,302 in 2014, 2013 and 2012, respectively. 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 prior to October, 19, 2017 at an exercise price of $1.91 per share. 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. NFS Forgivable Loans On November 4, 2011, the primary clearing ﬁrm of the Company’s subsidiaries, National Financial Services LLC (‘‘NFS’’), a Fidelity Investments(cid:4) 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. 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 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 the Company may have such principal forgiven in future years if Securities America exceeds subsequent annual clearing revenue targets. Upon meeting annual revenue targets, principal and interest, respectively, of $2,143 and $652 in 2014, $2,143 and $787 in 2013 and $2,143 and $919 in 2012, were forgiven and included in other income. is not forgiven, 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%. Upon meeting annual revenue targets, principal and interest, respectively, of $1,786 and $187 in 2014, $1,786 and $280 in 2013 and $1,786 and $446 in 2012, were forgiven and included in other income. The Company has expensed, and will continue to expense, interest under the loan agreements prior to forgiveness. F-24 LADENBURG THALMANN FINANCIAL SERVICES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 12. Notes Payable − (continued) The forgivable loan agreements contain 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 $49,771 at December 31, 2014. Premier Trust Note On September 1, 2010, as part of the consideration paid for Premier Trust, the Company issued a ﬁve-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 20 equal quarterly installments. 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 (the ‘‘November 2011 Loan’’), 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. The Company may elect to pay interest in kind with the consent of certain Lenders. The remaining 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. 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. The Lenders under the November 2011 Loan included 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. At December 31, 2014, the outstanding principal amounts loaned by Frost Nevada, Vector Group and the Company’s president and chief executive officer were $25,076, $2,786 and $10, respectively. F-25 LADENBURG THALMANN FINANCIAL SERVICES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 12. Notes Payable − (continued) Interest paid to Frost Nevada, Vector Group and the Company’s president and chief executive officer and director amounted to $4,334, $482 and $6 in 2014, $13,546, $1,323 and $15 in 2013 and $16,366, $1,499 and $19 in 2012, respectively. The Company used the net proceeds from the sale of Series A Preferred Stock in the years ended December 31, 2014 and 2013, respectively (see Note 15), to prepay $20,022 and $110,850 principal amount of the $160,700 aggregate principal amount of the November 2011 Loan. In connection with the prepayment, the Company recorded a loss on extinguishment of debt for the years ended December 31, 2014 and 2013 of $548 and $4,547, respectively, which included unamortized discounts and write-off of debt issue costs. In February 2015, the Company prepaid an additional $11,852 principal amount of the November 2011 Loan. Bank Term Loan — Securities America On November 6, 2013, Securities America Financial Corporation, which is the parent of Securities America, entered into a loan agreement with a third-party ﬁnancial institution for a term loan in the aggregate principal amount of approximately $1,709. The term loan bears interest at 5.5%, has a 54-month term and is collateralized by Securities America’s non-forgivable ﬁnancial advisor note portfolio. Pursuant to this loan to certain agreement, up to $1,500 aggregate principal amount of additional conditions. Any additional loans would bear interest at 5.5% per annum. At December 31, 2014 and 2013, respectively, $1,406 and $1,681 was outstanding under this loan. loans is available, subject The loan agreement contains certain affirmative and negative covenants, including covenants regarding Securities America’s client asset levels and number of ﬁnancial advisors. Promissory Notes — Highland As of July 31, 2014, the date of the Highland acquisition, Highland had $21,834 payable under a credit agreement that was repaid by the Company. As of December 31, 2014, HCHC Acquisition, as successor in interest to Highland’s parent, had outstanding $6,737 of its 10% promissory notes due February 26, 2019. Accrued interest on the promissory notes is payable quarterly. The promissory notes may be prepaid, except that if the promissory notes are prepaid in full prior to August 26, 2016, the holders of the promissory notes are entitled to receive the total amount of interest that would otherwise have been payable through August 26, 2016, less any interest already paid. Promissory Notes — KMS On November 15, 2014, as part of the consideration paid for the acquisition of KMS, the Company issued four-year promissory notes, bearing interest at 1.84% per annum and payable in equal quarterly installments of principal and interest, in the aggregate principal amount of $8,000 to the former shareholders of KMS. The carrying value of promissory notes at December 31, 2014, net of $466 unamortized discount, amounts to $7,534. Other KMS has a subordinated note payable to a current officer of KMS, in the amount of $600 payable in August 2016 plus monthly interest at prime plus one percent. The prime rate was 3.25 percent at December 31, 2014. Total interest paid on the note in 2014 was $26. The note is subordinated to present and future creditors of KMS. F-26 LADENBURG THALMANN FINANCIAL SERVICES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 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 April 2021. 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 February 2016. As of December 31, 2014, minimum lease payments (net of lease abatement and exclusive of escalation charges) and sublease rentals are as follows: Year Ending December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lease Commitments $ 9,479 6,501 5,240 1,726 1,095 1,879 $25,920 Sublease Rentals $2,059 4 — — — — $2,063 Net $ 7,420 6,497 5,240 1,726 1,095 1,879 $23,857 Deferred rent of $1,514 and $1,871 at December 31, 2014 and 2013, 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 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 50 ﬁrms, including two of the Company’s subsidiaries, and their purported parent corporations, alleging liability for purported fraud in the marketing and sale of DBSI securities. The plaintiff alleges, 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. On September 24, 2014, a Company subsidiary entered into a settlement agreement resolving all claims against it; the amount paid by such subsidiary in connection with the settlement was not material. Effective September 26, 2014, the case involving the remaining parties was transferred to the U.S. District Court for the District of Idaho. The remaining Company subsidiary’s motion to dismiss the complaint is currently pending. 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 (‘‘FriendFinder’’), various District of Florida (‘‘District Court’’) against FriendFinder Networks, individuals, and Ladenburg and another broker-dealer as underwriters for the May 11, 2011 FriendFinder initial public offering. On June 20, 2013, the plaintiff ﬁled its second amended complaint, alleging that the defendants, including Ladenburg, were liable for violations of federal securities laws. On March 18, 2014, the District Court dismissed the second amended complaint with prejudice. On October 24, 2014, the U.S. Court of Appeals for the Eleventh Circuit affirmed the dismissal of the second amended complaint. Inc. In December 2012, a purported class action suit was ﬁled in the Superior Court of California for San Mateo County against Worldwide Energy & Manufacturing, (‘‘WEMU’’), certain individuals, and Ladenburg as placement agent for a 2010 offering of WEMU securities. The complaint alleged that the defendants, including Ladenburg, were liable for violations of state securities laws. On August 11, 2014, the Inc. F-27 LADENBURG THALMANN FINANCIAL SERVICES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 13. Commitments and Contingencies − (continued) parties entered into a settlement agreement resolving all claims in the complaint, which is pending ﬁnal court approval, in exchange for Ladenburg’s payment of $1,325. Such amount was accrued at December 31, 2013 and paid in December 2014. In April 2013, a former client of Securities America ﬁled an arbitration claim against Securities America concerning the suitability of investments in three tenant-in-common interests purchased through Section 1031 tax-deferred exchanges; the claimant sought compensatory damages equal to the purported total investment loss of approximately $2,164 and other relief. On September 15, 2014, the parties entered into a settlement agreement resolving all claims; the amount paid in connection with the settlement was not material. During the period from June to November 2013, and in September 2014, seven former clients of Triad ﬁled arbitration claims concerning the suitability of investments in tenant-in-common interests purchased through Section 1031 tax-deferred exchanges. All but two of the claimants have entered into settlement agreements with Triad that resolved all of such claimants’ claims; the amounts paid by Triad in connection with the settlements were not material. The two remaining claims, which seek purported investment losses totaling $2,416, and other relief, are currently pending. The Company believes the claims are without merit and intends to vigorously defend against them. Commencing in October 2013, certain states have requested that Securities America provide information concerning the suitability of purchases of non-traded REIT securities by their residents. Securities America is complying with the requests. The Company currently is unable to determine the scope of any potential liability or whether and to what extent any of the states may seek to discipline Securities America. In January 2014, a client of a former Securities America representative requested that the arbitration panel add two Securities America affiliates to an arbitration claim concerning the suitability of a $15,000 life insurance policy, not sold through Securities America or its affiliates. The claim seeks $3,000 in compensatory to add the Securities America damages, and other relief. In June 2014, affiliates to the claim, subject to a tolling agreement. the client withdrew the request From April to September 2014, and in January 2015, eight arbitration claims were ﬁled on behalf of 46 individuals against Securities America and another brokerage ﬁrm concerning purported unauthorized trading and unsuitability of investments made on their behalf by a registered representative. Securities America believes that all or virtually all of issue occurred while the registered representative was affiliated with his prior brokerage ﬁrm. On October 17, 2014, the parties to one of the arbitration claims reached an agreement in principle to resolve all claims on behalf of 29 individuals; the amount to be paid in connection with that settlement is not material. The 17 claimants in the remaining seven arbitration claims are seeking reimbursement of investment losses that may exceed $4,500, and other relief. The Company believes the claims are without merit and intends to vigorously defend against them. the transactions at In December 2014 and January 2015, two purported class action suits were ﬁled in the U.S. District Court for the Southern District of New York against American Realty Capital Partners, Inc. (‘‘ARCP’’), certain affiliated entities and individuals, ARCP’s auditing ﬁrm, as well as the underwriters of ARCP’s May 21, 2014 offering of $1,656,000 common stock (‘‘May 21, 2014 Offering’’) and three prior notes offerings. The complaints have been consolidated. Ladenburg was named as a defendant as one of 17 underwriters of the May 21, 2014 Offering and as one of eight underwriters of ARCP’s July 13, 2013 offering of $330,000 in convertible notes. The complaints allege, among other things, the offering materials contained misrepresentations of ARCP’s adjusted funds from operations and the effectiveness of ARCP’s internal controls, and that the underwriters are liable for violations of federal securities laws. The Company believes the claims against Ladenburg are without merit and intends to vigorously defend against them. that F-28 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 the ordinary course of business, in addition to the above disclosed matters, the Company’s subsidiaries to unasserted claims are defendants in other litigation and arbitration proceedings and may be subject 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. When the Company believes that it is probable that a liability has been incurred and the amount of loss can be reasonably estimated (after giving effect to any expected insurance recovery), the Company accrues such amount. Upon ﬁnal resolution, amounts payable may differ materially from amounts accrued. The Company had accrued liabilities in the amount of approximately $359 at December 31, 2014 and $3,291 at December 31, 2013 for certain pending matters. For other pending matters, the Company was unable to estimate a range of possible loss; however, in the opinion of management, after consultation with counsel, the ultimate resolution of these matters is not expected to have a material adverse effect on the Company’s consolidated ﬁnancial position, results of operations or liquidity. 14. Off-Balance-Sheet Risk and Concentration of Credit Risk Securities America, Triad, Investacorp, KMS and Ladenburg do not carry accounts for customers or perform custodial functions related to customers’ securities. They introduce all of their customer transactions, to clearing brokers, which maintain cash and the which are not reﬂected in these ﬁnancial statements, customers’ accounts and clear 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 brokers, as each of Securities America, Triad, Investacorp, KMS and Ladenburg has agreed to indemnify its clearing brokers for any resulting losses. Each of Securities America, Triad, Investacorp, KMS and Ladenburg 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 Securities America, Triad, Investacorp, KMS and Ladenburg securities transactions are provided by two clearing brokers. At December 31, 2014 and December 31, 2013, amounts due from these clearing brokers were $38,760 and $31,391, respectively, which represents a substantial concentration of credit risk should these clearing brokers be unable to fulﬁll their obligations. instruments with off-balance sheet In the normal course of business, Securities America, Triad, Investacorp, KMS and Ladenburg may enter into transactions in ﬁnancial risk. As of December 31, 2014 and December 31, 2013, Securities America, Triad and Ladenburg 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, at the time of purchase, the market value of the securities has increased since the applicable date of sale. 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, to the repurchase depending on market conditions. In October 2011, program to permit the purchase of up to an additional 5,000,000 shares, and another amendment was made in the board approved an amendment F-29 LADENBURG THALMANN FINANCIAL SERVICES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 15. Shareholders’ Equity − (continued) November 2014 to permit the repurchase of an additional 10,000,000 shares. Since inception through December 31, 2014, 6,596,152 shares of common stock have been repurchased for $15,624 under the program, including 2,846,395 shares repurchased for $9,535 in 2014. On August 15, 2013, the Company purchased 3,000,000 shares of its common stock at a price of $1.67 per share, or a total cost of $5,010, in a privately-negotiated transaction, which was not made pursuant to its stock repurchase program. Warrants As of December 31, 2014, outstanding warrants to acquire the Company’s common stock were as follows: Expiration Date 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercise Price $0.94 0.96 0.68 1.68 1.91 Number of Shares 1,249,000 400,000 1,533,334 10,699,999 2,000,000 15,882,333 In 2014, warrants were exercised to purchase 13,333 shares of the Company’s common stock. The intrinsic value on the date of exercise was $23. In 2013, warrants were exercised to purchase 1,002,065 shares of the Company’s common stock, net of 224,601 shares tendered in payment of the exercise price. The intrinsic value on the date of exercise was $2,526. Capital Stock On May 21, 2013, the Company ﬁled Articles of Amendment with the Department of State of the State of Florida to designate 5,290,000 shares of the Company’s authorized preferred stock, par value $0.0001 per share, as shares of Series A Cumulative Redeemable Preferred Stock (the ‘‘Series A Preferred Stock’’) with the powers, designations, preferences and other rights as set forth therein (the ‘‘Articles of Amendment’’). The Articles of Amendment became effective on May 24, 2013. In addition, on June 24, 2013, the Company ﬁled a further amendment to designate an additional 3,000,000 preferred shares as Series A Preferred Stock. In 2014, the Company ﬁled articles of amendment to the Company’s Articles of Incorporation to designate an additional 6,000,000 shares as Series A Preferred Stock. The Articles of Amendment provide that the Company will pay monthly cumulative dividends on the Series A Preferred Stock, in arrears, on the 28th day of each month (provided that if any dividend payment date is not a business day, then the dividend which would otherwise have been payable on that dividend payment date may be paid on the next succeeding business day without adjustment in the amount of the dividend) from, and including, the date of original issuance of the Series A Preferred Stock at 8.00% of the $25.00 per share liquidation preference per annum (equivalent to $2.00 per annum per share). The Articles of Amendment further provide that dividends will be payable to holders of record as they appear in the stock records of the Company for the Series A Preferred Stock at the close of business on the applicable record date, which shall be the 15th day of each month, whether or not a business day, in which the applicable dividend payment date falls. The Series A Preferred Stock will not be redeemable before May 24, 2018, except upon the occurrence of a Change of Control (as deﬁned in the Articles of Amendment). On or after May 24, 2018, the Company may, at its option, redeem any or all of the shares of the Series A Preferred Stock at $25.00 per share plus any accumulated and unpaid dividends to, but not including, the redemption date. Also, upon the occurrence of a Change of Control, the Company may, at its option, redeem any or all of the shares of Series A Preferred F-30 LADENBURG THALMANN FINANCIAL SERVICES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 15. Shareholders’ Equity − (continued) Stock within 120 days after the ﬁrst date on which such Change of Control occurred at $25.00 per share plus any accumulated and unpaid dividends to, but not including, the redemption date. The Series A Preferred Stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and will remain outstanding indeﬁnitely unless repurchased or redeemed by the Company or converted into the Company’s common stock in connection with a Change of Control by the holders of Series A Preferred Stock. Upon the occurrence of a Change of Control, each holder of Series A Preferred Stock will have the right (subject to the Company’s election to redeem the Series A Preferred Stock in whole or in part, as described above, prior to the Change of Control Conversion Date (as deﬁned in the Articles of Amendment)) to convert some or all of the Series A Preferred Stock held by such holder on the Change of Control Conversion Date into a number of shares of the Company’s common stock per share of Series A Preferred Stock determined by formula, in each case, on the terms and subject to the conditions described in the Articles of Amendment, including provisions for the receipt, under speciﬁed circumstances, of alternative consideration as described in the Articles of Amendment. Except under limited circumstances, holders of the Series A Preferred Stock generally do not have any voting rights. On May 24, 2013, the Company completed a public offering of 4,600,000 shares of Series A Preferred Stock for gross proceeeds of $115,000. On May 31, 2013, the Company completed the offering of an additional 690,000 shares of Series A Preferred Stock pursuant to the full exercise of the over-allotment option granted to the underwriters in connection with the offering. The exercise of the option, which resulted in additional gross proceeds of $17,250, brought the total gross proceeds from the offering to $132,250, before deducting the underwriting discount paid to unaffiliated underwriters and offering expenses aggregating $5,972, including $2,603 of brokerage commissions earned by employees of Ladenburg, which served as an underwriter in the offering. On June 24, 2013, June 13, 2014 and November 21, 2014, the Company entered into Equity Distribution Agreements under which it may sell up to an aggregate of 9,000,000 shares of its Series A Preferred Stock from time to time in ‘‘at the market’’ offerings under Rule 415 under the Securities Act of 1933, as amended (the ‘‘Securities Act’’). During the years ended December 31, 2014 and 2013, the Company sold 4,906,734 and 899,497 shares of Series A Preferred Stock, respectively, pursuant to the ‘‘at the market’’ offerings, which provided total gross proceeds to the Company of $111,148 and $22,062, respectively, before deducting commissions paid to unaffiliated sales agents and offering expenses aggregating $2,531 and $411, respectively. Dividends of $17,244 and $6,911 were paid during the year ended December 31, 2014 and 2013, respectively, on the Series A Preferred Stock based on a monthly dividend of approximately $0.17 per share from the date of issuance of the Series A Preferred Stock. On June 25, 2014, the Company’s shareholders approved an amendment to the Company’s Articles of Incorporation to increase the authorized number of shares of common stock from 600,000,000 to 800,000,000. F-31 LADENBURG THALMANN FINANCIAL SERVICES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 16. Per Share Data Basic net income (loss) per share is computed by dividing net income (loss) attributable to the Company, decreased with respect to net income or increased with respect to net loss by dividends declared on preferred stock by 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 2014 utilizing the treasury stock method. The computations of basic and diluted per share data were as follows: Year Ended December 31, 2013 2014 . . . . . . . . . . . . . . . . . . . . . . . . . $ Net income (loss) Loss attributable to noncontrolling interest . . . . . . . . Net income (loss) attributable to the Company . . . . . . Dividends declared on preferred stock . . . . . . . . . . . Net income (loss) available to common shareholders . . $ 33,352 $ (81) 33,433 (17,244) 16,189 $ (522) $ (68) (454) (6,911) (7,365) $ 2012 (16,354) — (16,354) — (16,354) Weighted average common shares outstanding − basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182,768,494 182,295,476 183,572,582 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 − 15,411,800 8,331,539 604 23,743,943 — — — — — — — — dilutive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206,512,437 182,295,476 183,572,582 Net income (loss) per common share: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.09 $ 0.08 $ (0.04) $ (0.04) $ (0.09) (0.09) During 2014, 2013 and 2012, options, warrants and restricted stock to purchase 3,215,621, 55,398,631 and 54,837,515 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 2014, 89,581 shares of LTS common stock were issued to employees under this plan, at prices ranging from $2.87 to $4.03; during 2013, 112,646 shares of LTS common stock were issued to employees under this plan, at prices ranging from $1.57 to $2.97; and 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. These share issuances resulted in a capital contribution of $291, $201 and $138 for 2014, 2013 and 2012, respectively. F-32 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 1999 Plan provides for the granting of up to 25,000,000 awards with an annual limit on grants to any individual of 1,500,000. In 2014, the 2009 Plan was amended to provide for the granting of up to 45,000,000 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. 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, 2014, 22,929,061 and 1,194,854 shares of common stock were available for issuance under the 2009 Plan and the 1999 Plan, respectively. A summary of the status of the 1999 Plan at December 31, 2014 and changes during the years ended December 31, 2014, 2013 and 2012 are presented below: Options outstanding, December 31, 2011 . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . Options outstanding, December 31, 2012 . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . Options outstanding, December 31, 2013 . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . Options outstanding, December 31, 2014 . . . . Vested or expected to vest, December 31, Shares 17,765,468 500,000 (881,500) (35,000) (46,500) 17,302,468 (285,067) (30,000) (55,000) 16,932,401 (1,141,200) (5,200) 15,786,001 Weighted- Average Exercise Price $1.36 2.80 0.88 1.90 0.27 1.43 1.33 1.38 0.34 1.43 1.10 1.01 $1.46 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,784,184 Options exercisable, December 31, 2014 . . . . 15,154,750 $1.46 $1.44 Weighted- Average Remaining Contractual Term (Years) 6.0 Aggregate Intrinsic Value $19,977 5.3 4.4 3.6 3.6 3.5 4,475 28,748 $39,353 $39,350 $38,048 F-33 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 2009 Plan at December 31, 2014 and changes during the years ended December 31, 2014, 2013 and 2012 are presented below: Options outstanding, December 31, 2011 . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . Options outstanding, December 31, 2012 . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . Options outstanding, December 31, 2013 . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . Options outstanding, December 31, 2014 . . . . Vested or expected to vest, December 31, Shares 12,503,994 3,725,000 (291,279) 15,937,715 2,788,212 (272,955) (307,408) 18,145,564 3,641,212 (1,174,376) (233,201) 20,379,199 Weighted- Average Exercise Price 1.55 2.57 1.73 $1.78 1.41 1.39 1.51 $1.74 3.29 1.56 1.64 $2.03 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . Options exercisable, December 31, 2014 . . . . 20,218,120 10,892,035 $2.02 $1.69 Non-Plan Options Weighted- Average Remaining Contractual Term (Years) 9.6 Aggregate Intrinsic Value 11,651 8.7 $ 790 8.0 $25,285 7.4 7.4 6.9 $39,303 $39,030 $24,608 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, 2014 and changes during the years ended December 31, 2014, 2013 and 2012 are presented below: Options outstanding, December 31, 2011 and 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . Options outstanding, December 31, 2013 . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . Options outstanding, December 31, 2014 . . . . Shares 4,475,000 (50,000) 4,425,000 (10,000) 4,415,000 Vested or expected to vest, December 31, 2014 4,415,000 Options exercisable, December 31, 2014 . . . . 4,415,000 Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (Years) Aggregate Intrinsic Value $1.63 1.05 $1.63 1.05 $1.63 $1.63 $1.63 4.4 3.4 2.4 2.4 2.4 $ 516 $ 6,624 $10,224 $10,224 $10,224 F-34 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 grant date fair value of employee and director options granted during the years ended December 31, 2014, 2013 and 2012 was $1.85, $0.74 and $1.13, respectively. The fair value of each option award was estimated on the date of grant using the Black-Scholes option pricing model using the following weighted-average assumptions: Year Ended December 31, 2013 2012 2014 Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected life (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . —% 64.94% 2.02% 6.4 —% 65.66% 1.17% 6.2 —% 62.87% 1.00% 6.2 The weighted average expected life for the 2014, 2013 and 2012 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 in 2012, 2013 and 2014 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, 2014, there was $11,059 of total unrecognized compensation cost related to non-vested share-based compensation arrangements. This cost is expected to be recognized over the vesting periods of the options, which on a weighted-average basis is approximately 1.77 years. The total intrinsic value of options exercised during the years ended December 31, 2014, 2013 and 2012 amounted to $4,640,$957 and $1,267, 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. 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, 2014, 2013 and 2012, non-cash compensation expense relating to stock option agreements granted to employees, consultants and advisors amounted to $10,539, $6,766 and $4,690, 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 12,500 shares were forfeited. For the year ended December 31, 2012, the Company has recorded an expense of $54, associated with the grants. In December 2014, the Company granted and issued 14,409 restricted shares of the Company’s common stock to an employee pursuant to the 2009 Plan which will vest in equal amounts over three years beginning with October 15, 2015. For the year ended December 31, 2014, the Company has recorded an expense of $2. F-35 LADENBURG THALMANN FINANCIAL SERVICES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 18. Noncontrolling Interest During the quarter ended March 31, 2013, Arbor Point Advisors, LLC (‘‘APA’’), a newly-formed registered investment advisor, began operations. Investment advisory services of APA are provided through licensed and qualiﬁed individuals who are investment advisor representatives of APA. Securities America holds an 80% interest in APA and an unaffiliated entity owns a 20% interest. As Securities America is the the ﬁnancial statements of APA are included in the Company’s controlling managing member of APA, consolidated ﬁnancial statements and amounts attributable to the 20% unaffiliated investor are recorded as a noncontrolling interest. 19. Segment Information The Company has three operating segments. The independent brokerage and advisory services segment includes the broker-dealer and investment advisory services provided by Securities America, Triad, Investacorp and KMS to their independent contractor ﬁnancial advisors and wealth management services provided by includes the investment banking, sales and trading and asset Premier Trust. The Ladenburg segment management services and investment activities conducted by Ladenburg and LTAM. The insurance brokerage segment includes the wholesale insurance brokerage activities conducted by Highland, which delivers life insurance, ﬁxed and equity indexed annuities, as well as long-term care solutions to investment and insurance providers. and taxes, before interest, adjusted Earnings depreciation amortization, or EBITDA, for acquisition-related expense, amortization of retention and forgivable loans, change in fair value of contingent consideration related to acquisitions, loss on extinguishment of debt, non-cash compensation expense and ﬁnancial advisor acquisition 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 and forgivable loans and ﬁnancial advisor acquisition expenses 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, income before income taxes, net income and cash ﬂows from operating activities. F-36 LADENBURG THALMANN FINANCIAL SERVICES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 19. Segment Information − (continued) Segment information for the years ended December 31, 2014, 2013 and 2012 is as follows: 2014 Revenues . . . . . . . . . . . . . . . . . . . . Income (loss) before income taxes . . . EBITDA, as adjusted(5) . . . . . . . . . . . . . . . . . . . . . . . . Identiﬁable assets Depreciation and amortization . . . . . . Interest . . . . . . . . . . . . . . . . . . . . . . Capital expenditures . . . . . . . . . . . . . Non-cash compensation . . . . . . . . . . 2013 Revenues . . . . . . . . . . . . . . . . . . . . Income (loss) before income taxes . . . EBITDA, as adjusted(5) . . . . . . . . . . Identiﬁable assets . . . . . . . . . . . . . . Depreciation and amortization . . . . . . Interest . . . . . . . . . . . . . . . . . . . . . . Capital expenditures . . . . . . . . . . . . . Non-cash compensation . . . . . . . . . . 2012 Revenues . . . . . . . . . . . . . . . . . . . . Income (loss) before income taxes . . . EBITDA, as adjusted(5) . . . . . . . . . . . . . . . . . . . . . . . . Identiﬁable assets Depreciation and amortization . . . . . . Interest . . . . . . . . . . . . . . . . . . . . . . Capital expenditures . . . . . . . . . . . . . Non-cash compensation . . . . . . . . . . Independent Brokerage and Advisory Services $816,581 10,520 50,596 350,225 14,978 5,460 6,058 6,751 $723,246(2) 4,850 52,549 320,239 14,475 12,527 4,898 3,667 $598,851 (6,087) 35,890 318,005 15,158 19,803 5,356 1,640 Ladenburg Insurance Brokerage Corporate Total $73,298 14,846 16,174 39,845 665 67 1,002 612 $69,603 11,689 13,188 33,950 791 75 1,963 646 $45,701 65 1,829 17,636 835 79 115 850 $26,164 (841) 2,315 67,941 2,743 297 253 116 $ — — — — — — — — $ — — — — — — — — $ 5,210 (14,519)(1) (7,907) 52,747 11 1,166 134 3,062 $921,253 10,006 61,178 510,758 18,397 6,990 7,447 10,541 $ 267(3) (14,135)(1)(4) (8,534)(4) 6,631 49 2,836 — 2,453 $793,116 2,404 57,203 360,820 15,315 15,438 6,861 6,766 $ 5,559 (8,870)(1) (1,891) 2,488 68 4,659 6 2,254 $650,111 (14,892) 35,828 338,129 16,061 24,541 5,477 4,744 (1) (2) (3) (4) Includes interest on revolving credit and forgivable loan notes, compensation, professional fees and other general and administrative expenses. Includes brokerage commissions of $4,240 and $908 in the Ladenburg and Independent brokerage and advisory services segments, respectively, related to the sale of the Company’s Series A Preferred Stock (eliminated in consolidation). Includes the elimination of $5,148 of revenue referred to in footnote (2). revenue, net of employee brokerage Includes the elimination of $2,545, consisting of $5,148 of commission expenses of $2,603 charged to additional paid-in capital related to sale of the Company’s Series A Preferred Stock. F-37 LADENBURG THALMANN FINANCIAL SERVICES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 19. Segment Information − (continued) (5) The following table reconciles EBITDA, as adjusted, to income (loss) before income taxes for the years ended December 31, 2014, 2013 and 2012: EBITDA, as adjusted . . . . Independent Brokerage and Advisory Services Ladenburg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance Brokerage . . . . . . . . . . . . . . . . . . . . . . Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total segments . . . . . . . . . . . . . . . . . . . . . . . . Adjustments: Interest income . . . . . . . . . . . . . . . . . . . . . . . . . Change in fair value of contingent consideration . . . Loss on extinguishment of debt . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . Non-cash compensation expense . . . . . . . . . . . . . . Amortization of retention and forgivable loans . . . . Financial advisor acquisition expense . . . . . . . . . . Acquisition-related expense . . . . . . . . . . . . . . . . . . . . . . . . Loss attributable to noncontrolling interest . . . . . . . . . . . . Income (loss) before income taxes 2014 $ 50,596 16,174 2,315 (7,907) 61,178 Year Ended December 31, 2013 $ 52,549 13,188 — (8,534) 57,203* 2012 $ 35,890 1,829 — (1,891) 35,828* 245 12 (548) (6,990) (18,397) (10,541) (11,041) (1,489) (2,342) (81) $ 10,006 194 (121) (4,547) (15,438) (15,315) (6,766) (11,544) (1,194) — (68) $ 2,404 185 7,111 — (24,541) (16,061) (4,744) (11,664) (1,006) — — $(14,892) * Includes increases of $5,578 in 2013 and $5,324 in 2012 related to amortization of forgivable loans and ﬁnancial advisor acquisition expenses to conform to the 2014 presentation. 20. Related Party Transactions On August 13, 2010, Investacorp entered into a ﬁve-year lease with Frost Real Estate Holdings, LLC (‘‘FREH’’), an entity affiliated with the Company’s chairman of the board and principal shareholder, in an office building in Miami, Florida. 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 $315. Rent expense under such lease amounted to $351, $320 and $293 in 2014, 2013 and 2012, respectively. Ladenburg’s principal executive offices are located in the same office building in Miami, Florida, where the Company leases approximately 18,150 square feet of office space from FREH. Ladenburg’s lease was renewed in March 2013 and now expires in February 2018. The lease provides for aggregate payments during the ﬁve-year term of approximately $2,995 and minimum annual payments of $599. Rent expense under such lease amounted to $578, $572 and $560 in 2014, 2013 and 2012, respectively. 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 the 8.17% of the Company’s common stock at December 31, 2014. In consideration for such services, Company agreed to pay Vector an annual management fee plus reimbursement of expenses and to indemnify F-38 LADENBURG THALMANN FINANCIAL SERVICES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 20. Related Party Transactions − (continued) Vector. The agreement is terminable by either party upon 30 days’ prior written notice. The Company paid Vector $850 in 2014, $750 in 2013 and $750 in 2012 under the agreement and pays Vector at a rate of $850 per year in 2015. See Note 12 for information regarding loan transactions involving related parties. 21. Quarterly Financial Data (Unaudited) 2014: Revenues . . . . . . . . . . . . . . . . . . . . . . . Expenses(a) . . . . . . . . . . . . . . . . . . . . . . Income (loss) before item shown below . . . Change in fair value of contingent consideration . . . . . . . . . . . . . . . . . . . Income (loss) before income taxes . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . Loss attributable to noncontrolling interest . . Net income attributable to the company . . . Dividends declared on preferred stock . . . . . Net income (loss) available to common shareholders . . . . . . . . . . . . . . . . . . . . Basic income (loss) per common share(c) . . . Diluted income (loss) per common share . . . $ $ $ $ $ $ $ 1st 2nd 3rd 4th Quarters 211,818 206,973 4,845 12 4,857 4,264 21 4,285 (3,225) 1,060 0.01 0.01 $ $ $ $ $ $ $ 220,753 217,063 3,690 — 3,690 2,923 21 2,944 (3,710) (766) (0.00) (0.00) $ $ $ $ $ $ $ 223,732 224,303 (571) $ 264,950 262,920 2,030 — (571) $ 15,738(b)(d) $ 20 15,758(b)(d) $ (4,848) 10,910(b)(d) $ $ 0.06 0.05 $ — 2,030 10,427(b) 19 10,446(b) (5,461) 4,985(b) 0.03 0.02 Basic weighted average common shares . . . 181,502,068 181,739,505 182,988,516 Diluted weighted average common shares . . 202,332,855 181,739,505 210,535,372 184,805,171 210,297,301 (a) (b) Includes a $1,927, $2,083, $3,679 and $2,852 charge for non-cash compensation in the ﬁrst, second, third and fourth quarters of 2014 respectively. Includes deferred income tax beneﬁt from reversal of valuation allowance of $17,255, $0.08 per share diluted (3rd quarter) and $5,575, $0.03 per share diluted (4th quarter) (see Note 11). (c) Due to rounding, the sum of the quarters’ basic income (loss) per common share amounts do not equal the full ﬁscal year amount. (d) Reﬂects retrospective increase of $2,955 to reﬂect measurement period adjustments of preliminary allocations of the purchase price related to the Highland acquisition which were ﬁnalized in the fourth quarter of 2014. F-39 LADENBURG THALMANN FINANCIAL SERVICES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share and per share amounts) 21. Quarterly Financial Data (Unaudited) − (continued) 2013 Revenues . . . . . . . . . . . . . . . . . . . . . . . Expenses(a) . . . . . . . . . . . . . . . . . . . . . . Income (loss) before item shown below . . . Change in fair value of contingent consideration . . . . . . . . . . . . . . . . . . . Income (loss) before income taxes . . . . . . . Net income (loss) . . . . . . . . . . . . . . . . . . Loss attributable to noncontrolling interest . . Net income (loss) attributable to the company . . . . . . . . . . . . . . . . . . . . . . Dividend declared on preferred stock . . . . . Net income (loss) available to common shareholders . . . . . . . . . . . . . . . . . . . Basic and diluted income (loss) per common share . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ $ $ $ 1st 2nd 3rd 4th Quarters 187,305 186,682 623 23 646 123 13 136 — 136 0.00 $ $ $ $ $ $ 193,869 198,645 (4,776) (144) (4,920) (5,536) 13 (5,523) (1,028) (6,551) (0.04) $ $ $ $ $ $ 200,489 197,531 2,958 — 2,958 2,379 23 2,402 (2,879) (477) (0.00) $ $ $ $ $ $ 211,453 207,733 3,720 — 3,720 2,512 19 2,531 (3,004) (473) (0.00) Basic weighted average common share . . . . 183,459,124 183,488,108 181,759,305 Diluted weighted average common share . . . 188,458,448 183,488,108 181,759,305 180,513,628 180,513,628 (a) Includes a $1,413, $1,380, $1,647 and $2,326 charge for non-cash compensation in the ﬁrst, second, third and fourth quarters of 2013, respectively. 22. Subsequent Events Securities Service Network, Inc. Acquisition On January 2, 2015, the Company acquired all of the issued and outstanding capital stock of Securities Service Network, Inc. (‘‘SSN’’) and Renaissance Capital Corporation (‘‘RCC’’). SSN is a leading independent broker-dealer, registered investment advisor and insurance agency based in Knoxville, TN. At the closing of the acquisition, the Company paid approximately $45,000, consisting of $25,000 principal amount of secured short-term promissory notes, which bore interest at 0.41% per annum and were paid in full on the business day following the closing date, and $20,000 principal amount of secured four-year promissory notes, bearing interest at 1.74% per annum and payable in equal quarterly installments of principal and interest. The promissory notes are secured by a pledge of the shares of SSN and RCC pursuant to a stock pledge agreement. As the initial accounting for the business combination is incomplete at the time of issuance of these ﬁnancial statements, the allocation of the purchase price to assets acquired and liabilities assumed and certain pro-forma data have not been presented. Preferred Stock Offerings From January 1, 2015 through March 12, 2015, the Company sold 2,601,898 shares of Series A Preferred Stock pursuant to its ‘‘at the market’’ programs under Rule 415 under the Securities Act, which provided net proceeds to the Company of $61,241. See Note 15. F-40 Stock Price Performance Graph The graph below compares the cumulative total return of our common stock for the ﬁve-year period ending December 31, 2014 with the cumulative total return of companies comprising the NYSE MKT Composite Index and our peer group. The peer group consists of Calamos Asset Management Inc., Cowen Group, Inc., FBR & Co., GFI Group Inc., INTL FCStone Inc., Investment Technology Group, Inc., JMP Group Inc., LPL Financial Holdings Inc., Oppenheimer Holdings Inc., Piper Jaffray Companies, Raymond James Financial Inc. and SWS Group, Inc. Investors Capital Holdings, Ltd. was not included in the peer group as it was acquired by another company during 2014 and is no longer publicly traded. The graph plots the growth in value of an initial investment of $100 in each of our common stock, the NYSE MKT Composite Index and the peer group and assumes reinvestment of all dividends, if any. We have not paid any dividends on our common stock and, therefore, the cumulative total return calculation for our common stock is based solely on stock price appreciation. COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among Ladenburg Thalmann Financial Services Inc., the NYSE MKT Composite Index, and a Peer Group $700 $600 $500 $400 $300 $200 $100 $0 12/09 12/10 12/11 12/12 12/13 12/14 Ladenburg Thalmann Financial Services Inc NYSE MKT Composite Peer Group * $100 invested on 12/31/09 in stock or index, including reinvestment of dividends. Fiscal year ending December 31. Ladenburg Thalmann Financial Services Inc . . . . NYSE MKT Composite . . . . . . . . . . . . . . . . . . Peer Group . . . . . . . . . . . . . . . . . . . . . . . . . . 12/09 100.00 100.00 100.00 12/10 182.81 129.56 105.47 12/11 387.50 133.75 90.15 12/12 218.75 140.87 98.55 12/13 489.06 150.79 145.17 12/14 617.19 153.24 157.47 [This page intentionally left blank.] LADENBURG THALMANN FINANCIAL SERVICES INC. CORPORATE INFORMATION OFFICERS Phillip Frost, M.D. Chairman of the Board Howard M. Lorber Vice Chairman of the Board Richard J. Lampen President and Chief Executive Offıcer Mark Zeitchick Executive Vice President Adam Malamed Chief Operating Offıcer Brett H. Kaufman Senior Vice President and Chief Financial Offıcer Brian L. Heller Senior Vice President − Business and Legal Affairs Joseph Giovanniello, Jr. Senior Vice President − Corporate and Regulatory Affairs and Secretary Craig A. Timm Vice President − Business Risk Management and Chief Risk Offıcer Diane M. Chillemi Vice President − Accounting and Finance Bradley H. Brodie Vice President − Legal Affairs BOARD OF DIRECTORS Henry C. Beinstein Phillip Frost, M.D. Brian S. Genson Saul Gilinski Dmitry Kolosov Dr. Richard M. Krasno Richard J. Lampen Howard M. Lorber Jeffrey S. Podell Jacqueline M. Simkin Mark Zeitchick AUDITORS EisnerAmper LLP New York, NY CORPORATE HEADQUARTERS 4400 Biscayne Boulevard, 12th Floor Miami, FL 33137 212.409.2000 SUBSIDIARIES, LOCATIONS AND TELEPHONE NUMBERS Ladenburg Thalmann & Co. Inc. 570 Lexington Avenue, 11th Floor New York, NY 10022 212.409.2000 KMS Financial Services, Inc. 2001 Sixth Avenue Suite 2801 Seattle, WA 98121 206.441.2885 Mark Hamby Chief Executive Offıcer Peter H. Blum Co-Chief Executive Offıcer David Rosenberg Co-Chief Executive Offıcer Ladenburg Thalmann Asset Management Inc. 570 Lexington Avenue, 11th Floor New York, NY 10022 212.409.2000 Philip Blancato President Investacorp, Inc. 4400 Biscayne Boulevard, 11th Floor Miami, FL 33137 305.557.3000 Patrick Farrell Chief Executive Offıcer Securities Service Network, Inc. 9729 Cogdill Road Suite 301 Knoxville, TN 37932 865.777.4677 Wade Wilkinson Chief Executive Offıcer REGISTRAR AND TRANSFER AGENT American Stock Transfer & Trust Company 59 Maiden Lane New York, NY 10038 800.937.5449 www.amstock.com Triad Advisors, Inc. 5155 Peachtree Parkway Suite 3220 Norcross, GA 30092 770.840.0363 Mark Mettelman Chief Executive Offıcer Premier Trust, Inc. 4465 S. Jones Blvd. Las Vegas, NV 89103 702.507.0750 Mark Dreschler Chief Executive Offıcer Securities America, Inc. 12325 Port Grace Blvd. La Vista, NE 68128 402.399.9111 James Nagengast Chief Executive Offıcer Highland Capital Brokerage, Inc. 3535 Grandview Parkway Suite 600 Birmingham, AL 35243 205.263.4400 Jim Gelder Chief Executive Offıcer COMMON AND PREFERRED STOCK Our Common Stock and 8% Series A Cumulative Redeemable Preferred Stock trade on the NYSE MKT under the symbols LTS and LTS PrA, respectively. ANNUAL REPORT ON FORM 10-K Copies of our Annual Report on Form 10-K can be accessed via our website at www.ladenburg.com/proxy ADDITIONAL INFORMATION Copies of our ﬁlings with the U.S. Securities and Exchange Commission, and other information may be obtained at our website www.ladenburg.com or by contacting: Ladenburg Thalmann Financial Services Inc. 4400 Biscayne Boulevard, 12th Floor Miami, FL 33137 Attention: Investor Relations 212.409.2000

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