LADENBURG THALMANN
FINANCIAL SERVICES INC.
ANNUAL REPORT FOR YEAR
ENDED DECEMBER 31, 2018
April 26, 2019
Dear Fellow Shareholder:
2018 was a year of strong performance for Ladenburg in financial, operational and strategic terms, as we
broadened and deepened our position as a leader in the independent retail financial advice space, while continuing to
generate robust results from our capital markets and investment banking business.
Ladenburg’s revenues for the year increased 9.7% from the prior year period to $1.4 billion, the majority of which
originated from our independent advisory and brokerage (IAB) segment.
These numbers not only underscore ongoing favorable market conditions – including the positive effects of a
higher interest rate environment – but more importantly, spotlight the strength of our long-term strategy, and its focus on
profitably growing our independent advisory and brokerage (IAB)-related businesses.
2018 Financial Performance Summary Highlights
Our robust financial performance for 2018 encompasses the following summary highlights:
● Revenues were $1.4 billion, an increase of 9.7% from the prior year.
● 2018 net income was $33.8 million and EBITDA, as adjusted, was $100.4 million.
● Revenues for our IAB segment increased 1.8% compared to the prior year to $1.16 billion, including
advisory fees, trailing commissions, interest income and service fees, compared to $1.14 billion in IAB
segment revenues from 2017.
● Total client assets of $158.6 billion at December 31, 2018, including advisory assets under management
of $72.8 billion.
● Recurring revenue of 77.3% for fiscal 2018 in our IAB segment.
● Ladenburg Thalmann Asset Management (LTAM) – our internal wealth management division that
supports our IAB segment’s financial advisors and their clients – ended 2018 with approximately $2.5
billion of assets under management.
● Complementing the robust performance of our IAB segment, our investment banking group turned in
solid results as well, with revenue from capital raising activities increasing nearly 30% from the prior
year.
Record Total Revenue ($ in Millions) (1)
$1,268
$1,107
$1,520
$1,391
Record Net Income (Loss) Attributable to
the Company ($ in Millions)
$34
$8
2016
2017
2018
($22)
2016
2017
2018
1
Record EBITDA, As Adjusted ($ in Millions) (2)
$100
$56
$36
2016
2017
2018
(1) Revenue data for 2018 reflects both as reported and pre-ASC 606 adjustment values (as depicted above
).
Please refer to the reconciliation schedules for ASC 606 adjustments in our SEC filings. See Note 2,
“Summary of Significant Accounting Policies” and Note 4, “Revenue from Contracts with Customers,” to
the consolidated financial statements included in our Annual Report on Form 10-K for the year ended
December 31, 2018 (the “10-K”).
(2) EBITDA, as adjusted, is a non-GAAP financial measure, as defined on page 36 of our 10-K. Please refer
to the 10-K for a reconciliation of net income (loss) attributable to the Company as reported to EBITDA,
as adjusted.
Ladenburg’s Independent Advisory and Brokerage (IAB) Segment
Going beyond financial performance numbers, we are excited about the strategic and operating success of our
independent advisory and brokerage (IAB) segment. This segment encompasses our five firms that collectively support
over 4,400 financial advisors across the country, including Securities America, Triad Advisors, Investacorp, KMS
Financial Services and Securities Service Network.
Our focus on our IAB segment reflects Ladenburg’s passionate belief in the power of objective and professional
guidance, delivered by trusted financial advisors, to help many thousands of individuals, families and business owners
reach their life goals.
We are proud of the role we play in delivering access to professional advice and planning to individuals and
households with $100,000 to $2,000,000 in net investible assets. This is an underserved retail investor segment, estimated
by third-party industry experts to represent an asset base of roughly $17 trillion. Equally important, it is a population
segment that encompasses members of the Millennial, Gen X and Baby Boomer generations, many of whom are
experiencing significant life inflection points, and who increasingly recognize the value of professional financial advice.
With this context in mind, our IAB segment’s continued success has been built on four unique strengths of
Ladenburg:
● First, we translate our intellectual and financial capital, technology and other resources into platforms
and tools that directly support the success of our financial advisors. This core strength makes
Ladenburg a top destination for experienced and successful advisors seeking to deliver a personalized,
planning-based service experience to individuals, families and business owners.
● Second, we are a leading innovator of the network model in the independent financial advice
space. We support a true multi-brand structure that embraces distinct advisor service cultures, while also
delivering on the enterprise-level stability, security and business growth tools that independent advisors
demand in a rapidly consolidating landscape. All of this enables us to appeal to the widest possible range
of advisor preferences and needs in recruiting and retaining successful and experienced financial advisors
to each of our IAB firms.
● Third, we invest in visionary innovation that directly benefits our financial advisors. We do so by
recognizing social, cultural and economic trends that can fundamentally transform the delivery and
consumption of financial advice, while also identifying early-stage technology firms with tools we can
adapt for our financial advisors that place them nicely ahead of the curve in capturing major new
opportunities arising from these trends. This marks a clear departure from the way innovation is
frequently viewed in the narrow context of incremental improvements to daily-use technologies.
2
● Our culture of authentic collaboration inspires different firms, teams and individuals to come together
proactively and capture growth opportunities while solving challenges. We leverage the diversity of
best practices and thought leadership that exists across each corner of our organization to the advantage
of the financial advisors we serve.
Reflecting these core strengths, our key business highlights for our IAB segment for 2018 include the following:
● The enterprise-level platforms and functions we rolled out last year are now fully operational and
driving significant value-add. Our new enterprise-level due diligence platform has been delivering
scalable due diligence solutions to our financial advisors, significantly supplementing existing IAB
resources. Similarly, our Ladenburg Innovation Lab, which serves as the primary vehicle for our
commitment to visionary innovation, has already established a recurring and highly collaborative
innovation investing process that involves growth-oriented financial advisors, leaders across our
organization and members of the early-stage technology start-up and venture capital communities.
● We continue to invest in existing enterprise-level functions to deliver additional resources to support
the growth and success of our financial advisors. We continued to expand Ladenburg Practice
Management, which partners closely with our IAB subsidiaries and their advisors to identify and roll-
out strategies, tools and platforms that enable our advisors to operate more effectively their businesses
and distinguish their value proposition.
● Our Ladenburg Advantage platform continues to serve as a key differentiator for our company. We
made enhancements to our Ladenburg Advantage platform, which delivers a differentiated set of
resources and services available through our various affiliated companies that are strategically adjacent
to the work our financial advisors do. The platform encompasses Ladenburg’s proprietary research,
investment banking and capital markets services, fixed income trading and syndicate products, Highland
Capital’s insurance and annuity expertise, Premier Trust’s trust services and Ladenburg Thalmann Asset
Management’s turnkey asset management solutions.
In 2018, we generated significant momentum in building out the product, consulting and marketing
capabilities of Highland Capital, our insurance and annuity distribution subsidiary. This reflects the
growing importance of providing high-touch consultative support for financial advisors in this
increasingly crucial area of financial planning solutions for an aging population. This effort included
Highland Capital’s acquisition of the distribution business of Kestler Financial Group, as well as key
assets of Four Seasons Financial Group, both longstanding insurance and annuity industry leaders.
● We have integrated planning, platforms and expertise throughout Ladenburg to support the launch
and consolidation of advisor-facing events that can accelerate the success of our IABs and financial
advisors. In 2018, we hosted our second annual Ladenburg Advisory Symposium, designed to provide
our financial advisors with the resources and expertise they need to grow their fee-based advisory work,
with attendance and positive attendee feedback once again significantly exceeding expectations.
Leveraging our approach to the Ladenburg Advisory Symposium as a blueprint for organizing other
enterprise-level events, we are now well-positioned to deliver successful and effective national
conferences that consolidate national conference activities that previously existed across each of our five
firms. Most importantly, we look forward to delivering a consolidated national conference experience
that drives significantly enhanced professional development and learning experiences for our advisors,
as well as networking, practice acquisition and succession planning opportunities, while providing
measurable value for our strategic partners.
As we move forward, we will continue to focus on multiple opportunities to significantly accelerate our growth
on an organic basis. From intensifying our ongoing advisor recruiting efforts across each of our firms, to maximizing
advisor retention, to identifying opportunities to enhance the financial advisor service experience, Ladenburg’s IAB
segment is well-positioned for future success.
We also intend to take an opportunistic approach in seeking to identify potential acquisitions of firms that would
be a strong fit with our existing IABs, as well as other businesses that offer a unique advisor-facing solution set or service
that can further create value for the financial advisors we support, and by extension, Ladenburg’s shareholders.
Ladenburg’s Investment Banking & Capital Markets Business
Revenues from our investment banking & capital markets segment for 2018 increased by 17% to $78.1 million,
compared to $66.7 million in 2017. The segment’s success was driven by the nearly 30% increase in revenue from capital
raising activities for small and mid-cap public companies.
3
Our investment bankers remain focused on healthcare and biotechnology companies, as well as the energy and
technology sectors. Consistent with our long-term strategy of seeking to mobilize our distribution network, we are also
focused on yield-oriented equities that are attractive to both institutional and individual investors.
In 2018, our investment bank participated in 82 underwritten offerings that raised an aggregate of approximately
$6.1 billion. Our investment bank also placed 15 registered direct and PIPE offerings, which raised an aggregate of
approximately $334 million.
Quarterly Cash Dividend, Management and Board of Directors Update
We were pleased to increase our quarterly cash dividend on our common stock to $0.05 per share in 2018, while
continuing to invest in our business. Cash dividends of $8.8 million were paid to common shareholders in 2018.
Since the beginning of 2018, we made some key additions to strengthen our management team. Erinn Ford joined
us as President of KMS Financial Services in February 2018 and recently assumed the additional position of CEO. Erinn,
who is one of the most visible leaders in the retail financial advice space, especially in the Pacific Northwest where KMS
is based, brought to us her extensive experience as a senior executive in our industry. We were also pleased to announce
in April 2019 that veteran industry operations and technology leader David Ballard has joined us at our parent company as
Senior Vice President, Enterprise Services.
Additionally, we updated our Board composition in 2018 and early 2019. I was privileged to take on the role of
Board Chairman, in tandem with my ongoing position as President and CEO of Ladenburg, while Adam Malamed, our
EVP and Chief Operating Officer, also joined the Board as a fellow member. We were also pleased to welcome to our
Board both Glenn C. Davis – a veteran CPA and strategic consultant with senior experience across firms such as
CohnReznick LLP and Coopers & Lybrand – as well as Michael Liebowitz, President and CEO of Harbor Group
Consulting, an insurance advisory firm.
At the same time, the Ladenburg Board and executive team extends our deepest sympathies to the friends and
family of Jeffrey S. Podell, a long-serving member of our Board who passed away in August 2018. We will miss the
expertise Jeff brought to our Board, and we are grateful for his many contributions to the Company.
While our Board membership has been updated, as major shareholders in Ladenburg, the interests of our Board
directors and our senior leadership team remain directly aligned with our shareholders, and we all remain completely
focused on the creation of long-term value for our shareholders as our foremost priority.
Ladenburg’s Commitment to Corporate Citizenship
Ladenburg has a deep and longstanding commitment to good corporate citizenship, even as we remain focused
on creating long-term shareholder value through profitable growth across our business segments.
We believe our company’s position as a leader in the independent retail financial advice space imparts on us a
unique responsibility for driving broader changes that benefit both the financial advisor community, as well as individuals
and households who deserve access to high quality, professional financial guidance to meet their life goals.
In keeping with this sense of responsibility and our passion for supporting the financial advice profession,
Ladenburg was proud to form the Ladenburg Institute of Women & Finance (LIWF) in 2012, which today is a leading
force in supporting the inclusion and business success of female financial advisors and executives in our industry.
In 2018, we were proud to convene our seventh annual Ladenburg Institute of Women & Finance Symposium, an
invitation-only event that brings together leading women advisors from Ladenburg’s independent advisory and brokerage
firms to share insights on how female advisors in particular can best position themselves for professional success with
respect to ongoing shifts in client expectations, demographics and technology. In addition, the 2018 Symposium celebrated
the success of Ladenburg’s IAB subsidiaries in bolstering the ranks of women advisors in the profession. In June 2018,
Financial Planning magazine recognized that 28% of advisors affiliated with both Securities America and Triad Advisors
are female, while women make up 22% of KMS’s advisors. Separately, a May 2018 article in Investment News recognized
Securities America for increasing the firm’s proportion of women advisors as a percentage of total advisors by 1.3% from
the previous year
On a closely related note, our LIFT Mentoring Program of LIWF continues to play an instrumental role as it
advances into its sixth year since inception in helping younger female advisors in the Ladenburg community benefit from
the guidance and insights of more experienced female advisors.
4
In July 2018, Jim Nagengast, the President and CEO of Securities America, our largest IAB firm, was elected to
a large firm seat on the FINRA Board of Governors, where he helps oversee the organization dedicated to investor
protections and market integrity. We thank Jim for his commitment to our industry and recognize the high respect that he
and Securities America are held in by our peer firms.
Additionally, Ladenburg continues to work closely with the Financial Services Institute (FSI), the industry’s
leading association of independent firms and advisors. Our company’s focus in this regard is to promote broad access to
competent and affordable financial advice, products and services, together with a well-functioning regulatory environment
for independent financial services firms, their advisors and their clients. Ladenburg’s executives are active volunteer
members of FSI’s Board of Directors, as well as the organization’s various advocacy and action committees.
2019 Outlook
I am pleased to have this opportunity to share our 2018 performance summary and highlights, communicating to
you all in my first annual shareholder letter as Chairman of the Board. My role as Chairman of the Board is new, but the
dedication that I share with my fellow Board members and colleagues on Ladenburg’s executive leadership team to creating
sustained, long-term value for our shareholders remains a constant part of our vision, planning and execution with all that
we do.
As we advance into 2019, we are confident that our growth prospects for this year and beyond are bright. We have
carefully built the groundwork needed to position ourselves for continued industry leadership and success, and we expect
the forward momentum we have created to continue at a healthy clip.
On behalf of the Board of Directors and the management team, we extend our gratitude to all of who have
contributed to our company’s success. We thank you for your continued support and your ongoing confidence in
Ladenburg.
Sincerely,
Richard J. Lampen
Chairman, President & CEO
5
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2018
Commission File Number 1-15799
LADENBURG THALMANN FINANCIAL SERVICES INC.
(Exact Name Of Registrant As Specified In Its Charter)
Florida
(State or other jurisdiction of
incorporation or organization)
4400 Biscayne Boulevard, 12th Floor
Miami, Florida
(Address of principal executive offices)
65-0701248
(I.R.S. Employer
Identification Number)
33137
(Zip Code)
(305) 572-4100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $.0001 per share
8.00% Series A Cumulative Redeemable Preferred Stock,
Liquidation Preference $25.00 per share
6.50% Senior Notes due 2027
7% Senior Notes due 2028
7.25% Senior Notes due 2028
Name of each exchange on which registered
NYSE American
NYSE American
NYSE American
NYSE American
NYSE American
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 (cid:133) No (cid:59)
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 (cid:133)
No (cid:59)
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:59) No (cid:133)
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes (cid:59) No (cid:133)
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:59)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer (cid:133)
Emerging growth company (cid:133)
Accelerated filer (cid:59)
Non-accelerated filer (cid:133)
Smaller reporting company (cid:133)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:133) No (cid:59)
As of June 30, 2018 (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 American on that date) held by non-affiliates of the registrant was approximately
$345,613,777.
As of March 12, 2019, there were 148,700,382 shares of the registrant’s common stock outstanding.
Documents Incorporated by Reference:
Part III (Items 10, 11, 12, 13 and 14) of this Annual Report on Form 10-K is incorporated by reference from the definitive Proxy Statement
for the 2019 Annual Meeting of Shareholders or in an amendment to this Annual Report on Form 10-K 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.
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LADENBURG THALMANN FINANCIAL SERVICES INC.
Form 10-K
TABLE OF CONTENTS
Page
1
13
27
27
27
27
28
29
29
46
46
46
46
48
49
49
49
49
49
50
54
55
PART 1
Item 1.
Business ................................................................................................................................................
Item 1A. Risk Factors ..........................................................................................................................................
Item 1B. Unresolved Staff Comments .................................................................................................................
Properties ..............................................................................................................................................
Item 2.
Legal Proceedings .................................................................................................................................
Item 3.
Item 4.
Mine Safety Disclosures .......................................................................................................................
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities ...................................................................................................................................
Selected Financial Data .........................................................................................................................
Item 6.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations ................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ..............................................................
Financial Statements and Supplementary Data .....................................................................................
Item 8.
Item 9.
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 ....................................................................
Executive Compensation .......................................................................................................................
Item 11.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Item 12.
Matters ..................................................................................................................................................
Certain Relationships and Related Transactions, and Director Independence ......................................
Principal Accountant Fees and Services ...............................................................................................
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Exhibits and Financial Statement Schedules .........................................................................................
Form 10-K Summary ............................................................................................................................
SIGNATURES ......................................................................................................................................
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ITEM 1. BUSINESS.
PART I
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 advisory and brokerage services, asset
management services, investment research, investment banking, institutional sales and trading, wholesale life insurance
and annuity brokerage and trust services through our principal subsidiaries, Securities America, Triad Advisors (“Triad”),
Securities Service Network (“SSN”), Investacorp, KMS Financial Services (“KMS”), Ladenburg Thalmann & Co.
(“Ladenburg”), Ladenburg Thalmann Asset Management (“LTAM”), Premier Trust, and Highland Capital Brokerage
(“Highland”) . 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 advisory and brokerage services industry. During the past decade, this has been one
of the fastest growing segments of the financial services industry. With approximately 4,400 financial advisors located in
50 states, we have become one of the largest independent advisory and brokerage services networks. We believe that we
have the opportunity through internal growth, recruiting, and acquisitions 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 advisory and brokerage business with Ladenburg’s traditional investment banking, capital
markets, institutional sales and trading and related businesses.
Ladenburg’s legacy investment banking business is generally more volatile and subject to the cycles of the equity
capital markets than our independent advisory and brokerage subsidiaries, but historically has enjoyed strong operating
margins in periods of good market conditions. Our goal has been to build sufficient scale in our independent advisory and
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 advisory and brokerage business has been a key factor in setting
our strategic path. The independent channel plays an important role in providing independent retail advice, financial
planning and investment solutions to “Main Street” Americans - “mass affluent” households and individuals, which we
define as individuals and households with $100,000 to $1,500,000 in investible assets. We believe that this market is
underserved by the wirehouse and regional brokerage firms. As of December 31, 2018, our independent advisory and
brokerage business served clients with $156 billion in assets under administration through our approximately 4,400
financial advisors.
The independent advisory and 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 (“IRAs”). The
increasing responsibility of individuals to plan for their own retirement has created demand for the financial advice
provided by financial advisors in the independent channel, who are not tied to a particular firm’s proprietary products.
These developments have been occurring against a backdrop of the steady migration of client assets and advisors from the
wirehouse, insurance and bank channels to the independent channel.
We operate each of our independent advisory and brokerage firms separately under their own management teams
in a network model, which reflects our recognition that each company 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, insurance, procurement 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 advisory and brokerage 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 and annuity solutions and
LTAM’s wealth management solutions.
1
Ladenburg is a full service registered broker-dealer that has been a member of the New York Stock Exchange
(“NYSE”) since 1879. It 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, 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.
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 to provide our network of
independent financial advisors with access to a broad array of trust services. This, together with our Highland acquisition,
were important strategic steps in our efforts to meaningfully differentiate our independent advisory and brokerage platform
by the breadth of the resources and services we offer to our advisors.
Highland is a leading independent insurance brokerage firm 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. Highland also provides marketing strategies, product
expertise, and back-office processing for fixed and equity-indexed annuities.
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 (“MSRB”) and is a member of the Securities Investor Protection Corporation
(“SIPC”). 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 Section 16(a) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), and any amendments to those filings, are available,
free of charge, on our website, www.ladenburg.com, as soon as reasonably practicable after we electronically file or furnish
such material with the SEC. We do not intend for information contained in our website, or those of our subsidiaries, to be
a part of this annual report on Form 10-K. In February 2004, our board of directors adopted a code of ethics that applies to
our directors, officers and employees as well as those of our subsidiaries. We will provide to any person, without charge,
a copy of our code of ethics. Requests for copies of our code of ethics should be sent in writing to Ladenburg Thalmann
Financial Services Inc., 4400 Biscayne Blvd., 12th Floor, Miami, FL 33137, Attn: Secretary. Our code of ethics is also
available, free of charge, on our website. Any amendments to or waivers from a provision of this code of ethics will be
posted on our website.
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 advisory and brokerage services segment, (ii) the
Ladenburg segment and (iii) the insurance brokerage segment. The independent advisory and brokerage services segment
includes the investment advisory and brokerage services provided by our independent advisory and brokerage 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, and provides marketing strategies, product expertise, and back-office
processing for fixed and equity-indexed annuities. See Note 20, “Segment Information,” to the consolidated financial
statements included in Part II, Item 8 of this annual report on Form 10-K for information regarding revenue, income (loss)
before income taxes, EBITDA, as adjusted, identifiable assets, depreciation and amortization, interest, capital expenditures,
and non-cash compensation for our three operating segments.
Independent Advisory and Brokerage Services Segment
Overview
Securities America, Triad, SSN, Investacorp and KMS are independent broker-dealers and registered investment
advisors, whose independent contractor financial advisors offer advisory and securities brokerage services to their clients,
which may include advisor managed accounts, general securities such as equities, fixed income and options, as well as
packaged products such as mutual funds and variable and fixed annuities. Revenues generated by our independent advisory
and brokerage services segment represented approximately 83%, 90% and 91% of our total revenues for 2018, 2017 and
2016, 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 advisory and brokerage firm. 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 advisory and brokerage firms 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 advisory services and securities brokerage transactions conducted through our
brokerage firms accrue to our brokerage firms. 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 approximately 90%. 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 advisory and brokerage model permits our independent advisory and brokerage 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 advisory and
brokerage firms. These professionals then offer financial products and services to their clients through an independent
advisory and brokerage firm and earn commissions and fees for these transactions and services. These financial advisors
have the ability to structure their own practices and to focus in different areas of the investment business, subject to
supervisory procedures as well as compliance with all applicable regulatory requirements.
Many independent financial advisors provide financial planning services to their clients, wherein the financial
advisor evaluates a client’s financial needs and objectives, develops a detailed plan, and then implements the plan with the
client’s approval. When the implementation of such objectives involves the purchase or sale of securities (including the
placement of assets within a managed account), such transactions may be effected through a brokerage firm, for which
such brokerage firm 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.
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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 brokerage firms 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 1A. “Risk Factors - Risks Relating to our Business” below. Our investment advisory
representatives conduct their business either through our corporate registered investment advisors (“RIA”) or through
separate entities (“Hybrid RIAs”). Hybrid RIAs operate under the Investment Advisers Act of 1940, as amended (the
“Advisers Act”), or their respective states’ investment advisory license rules. Advisory assets for Hybrid RIAs are generally
held in custody at various third-party custodial firms and we collect certain administrative fees for value-added services
provided. Advisors associated with Hybrid RIAs generally carry their brokerage license with one of our independent
brokerage firms.
Many of our independent financial advisors are also authorized agents of insurance companies. Our independent
advisory and brokerage firms 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 Advisory and Brokerage Services Business
We focus on growing our independent advisory and brokerage services business, including the number of financial
advisors, revenues and client assets as described below:
● 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 the “Ladenburg Advantage” — access to Ladenburg’s wealth management division, capital
markets products, investment banking services, proprietary investment research and fixed income trading
desk, Highland’s insurance solutions and annuity marketing strategies, product expertise and back-office
processing for fixed and equity-indexed annuities, and Premier Trust’s trust services and planning
capabilities.
● Provide technological solutions to independent financial advisors and home-office employees. We
believe that it is imperative that our independent advisory and brokerage firms possess state-of-the-art
technology so their employees and independent financial advisors can effectively transact, facilitate, measure
and record business activity in a timely, accurate and efficient manner. By continuing our commitment to
provide a highly capable technology platform to process business, we believe our independent advisory and
brokerage firms can achieve economies of scale and potentially reduce the need to hire additional back-office
personnel. We continue to automate time-consuming processes to assist our advisors in their efforts to
improve efficiency and accuracy.
● Assist financial advisors to expand their business. Our independent advisory and brokerage firms are
aligned with their financial advisors in seeking to increase their revenues and improve efficiency. Each of
our independent advisory and brokerage firms 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 advisory and brokerage firms also focus on improving back-office
support to allow financial advisors more time to focus on serving their clients, rather than attending to
administrative matters.
● Build recurring revenue. We have recognized the trend toward increased investment advisory business and
are focused on providing fee-based investment advisory services, which may better suit certain clients. While
these fee-based accounts generate substantially lower first year revenue than accounts invested in most
commission-based products, the recurring nature of these fees provides a platform that generates recurring
revenue.
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● Expand our financial advisor base through recruiting and acquisitions. Each of our independent
advisory and brokerage firms actively recruits experienced financial professionals. These efforts are
supported by advertising, targeted direct mail and outbound telemarketing. Our independent firms’
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. Securities America has developed strong expertise in transitioning large groups of financial
advisors by acquiring certain assets and/or negotiating exclusive recruiting deals with small advisory and
brokerage firms. Securities America has completed 11 such deals since 2008, and has developed detailed
processes, led by a cross-departmental team of more than 25 people, to transition such groups effectively.
We anticipate there will continue to be opportunities to acquire groups of financial advisors through
transactions of this type, or otherwise, as increasing compliance costs disproportionately impact smaller
brokerage firms and the level of services and resources they can provide to their advisors.
● Acquire independent advisory and brokerage firms and complementary businesses. We also may
pursue the acquisition of other independent advisory and brokerage firms and other complementary
businesses. 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 advisory and brokerage firms provides full support services to its financial advisors,
including: access to stock, bond, exchange-traded fund (“ETF”) and options execution; products such as insurance, mutual
funds, alternative investments such as non-traded real estate investment trusts, unit trusts and fixed and variable annuities;
and research, compliance, supervision, accounting and related services.
An increasing number of clients are electing asset-based advisory fee platforms rather than the traditional
commission schedule. Accordingly, our independent advisory and brokerage firms derive a majority of their revenue from
advisory fees, rather than commissions charged on variable annuity, mutual fund, equity and fixed income transactions.
Asset Management Business
Our independent advisory and brokerage firms 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 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 $1.2 billion in assets under administration at December 31, 2018. 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 Thalmann Asset Management
LTAM is a registered investment advisor, which provides access to:
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expert wealth management advice;
● market analysis;
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due diligence;
fund selection and asset allocation; and
diversification strategies.
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LTAM offers various asset management products utilized by Ladenburg clients, as well as clients of our
independent brokerage firms’ financial advisors and clients of Premier Trust. 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, 2018, LTAM had approximately $2.5 billion of assets under management and more than 15,700
client accounts.
Ladenburg Asset Management Program
The Ladenburg Asset Management Program (“LAMP”) provides centralized management of mutual fund and
exchange-traded fund portfolios based on asset allocation models. Features of the program include active rebalancing at
the asset class and security level, low minimum account size, risk analysis, customized investment policy statements and
comprehensive performance reporting.
Investment Consulting Services
LTAM’s Investment Consulting Services (“ICS”) provides clients with access to professional money managers
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.
Fund Management
Alternative Strategies Fund
LTAM has created a closed-end interval fund, the Alternative Strategies Fund, which 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.
Ladenburg Funds
LTAM is the investment adviser to five funds collectively called the Ladenburg Funds. The five Ladenburg Funds
are the Ladenburg Income Fund, the Ladenburg Income & Growth Fund, the Ladenburg Growth & Income Fund, the
Ladenburg Growth Fund, and the Ladenburg Aggressive Growth Fund.
Each of the Ladenburg Funds is an open end fund of funds that primarily invests in a combination of equity, fixed
income and alternative strategy ETFs, exchange-traded notes (“ETNs”) and mutual funds. The Ladenburg Funds employ
the same investment strategies and features as the ones LTAM employs in managing separate client accounts in LAMP.
Private Investment Management
The Private Investment Management program allows internal managers, for an annual asset-based fee, to provide
portfolio services to clients on a discretionary basis with specific styles of investing.
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 ETFs 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.
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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 brokerage
subsidiaries.
Ladenburg Thalmann & Co.
Ladenburg is a full-service brokerage firm that provides investment research, investment banking and sales and
trading to its corporate and institutional clients and high net-worth individuals.
Investment Research
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 198 companies and closed-end
funds. Our research department specializes in small- to mid-cap companies in the energy exploration and production,
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
subsidiaries.
Our research department:
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reviews and analyzes general market conditions and industry groups;
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issues written reports on companies;
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furnishes information to retail and institutional customers; and
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responds to inquiries from customers and advisors.
Investment Banking Activities
Ladenburg’s investment banking professionals provide corporate finance and strategic and financial advisory
services to public and private companies, primarily those companies with market capitalizations below $500 million, which
we refer to as middle-market companies.
Ladenburg provides these middle-market companies with capital raising and strategic advisory services
throughout their growth cycles. Ladenburg offers its clients a high level of attention from senior personnel and has designed
its organizational structure so that the investment bankers who are responsible for securing and maintaining client
relationships also actively participate in providing all related transaction execution services to those clients. Ladenburg’s
16 investment banking professionals serve clients nationwide and worldwide.
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Corporate Finance
Ladenburg’s corporate finance group provides capital origination services and merger and acquisition advice
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, CMPOs (confidentially marketed
public 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 CMPO, 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 2018, we participated in 82 underwritten offerings that raised an
aggregate of approximately $6.1 billion. In 2018, Ladenburg placed 15 registered direct and PIPE offerings, which raised
an aggregate of approximately $334 million for clients in the health-care, biotechnology, energy and other industries. Since
2016, Ladenburg has participated as a manager in 271 offerings, which raised over $21.7 billion.
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 yield-oriented equity 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 2016, Ladenburg has participated as a manager in 99 offerings of these products, which raised over $9 billion.
Similarly, Ladenburg also has dedicated investment bankers focused on healthcare and biotechnology companies
as well as the energy and technology sectors. From 2016 through 2018, Ladenburg participated as a manager in 92 offerings
in the healthcare and biotechnology sectors, which raised over $4.1 billion.
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, acquisitions, leveraged buyouts and
restructurings, going-private transactions and certain other market activities.
Sales and Trading
Ladenburg’s private client services and institutional sales departments charge commissions to their individual and
institutional clients for executing securities trading orders.
Ladenburg’s sales and trading operation distributes our investment 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.
Ladenburg’s fixed income trading desk, Ladenburg Fixed Income (LFIX), works with our financial advisors to
develop fixed income solutions for clients based on individualized client needs. We believe LFIX strengthens the value
proposition of our brokerage 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.
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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 investment research staff to provide
insight and differentiated investment advice to institutional clients nationwide.
We believe that our investment 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 investment 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.
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 Fidelity Clearing & Custody Solutions (“Fidelity”), a Fidelity Investments®
company, as its clearing agent on a fully disclosed basis. Each of Securities America and SSN use the services of Fidelity
and Pershing LLC (“Pershing”), a subsidiary of the Bank of New York Mellon Corporation, as its clearing agents 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 Fidelity 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
The insurance brokerage segment includes the wholesale insurance brokerage and annuity marketing 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 which provides marketing strategies, product expertise, and back-
office processing for fixed and equity-indexed annuities.
Highland operates through a brokerage general agency model that provides brokers, 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.
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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 and low interest rates, as well as downturns or recessions in the United States or global
economies. These downturns may cause investor concern, which may result 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 brokerage firms, investment advisors, discount brokers, brokerage
subsidiaries of major commercial bank holding companies, insurance companies and other companies offering financial
services in the United States, globally, and through the Internet. Many of our competitors have significantly greater
financial, technical, marketing and other resources than we do. Also, many firms offer discount brokerage services and
generally effect transactions at substantially lower commission rates on an “execution only” basis, without offering other
services such as financial planning, investment recommendations and research. Moreover, there is substantial commission
discounting by full-service brokerage firms competing for institutional and retail brokerage business.
A growing number of brokerage firms offer online trading and web-based financial services, usually with lower
levels of service, which has further intensified the competition for retail brokerage customers. Our brokerage 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. Our brokerage subsidiaries also provide access to a proprietary
online wealth management tool.
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
The securities industry, including our business, is subject to extensive regulation by the SEC, state securities
regulators and other governmental regulatory authorities. We are also regulated by industry self-regulatory organizations,
including FINRA and the MSRB. The principal purpose of these regulations is the protection of customers and the securities
markets. The SEC is the federal agency charged with the administration of the federal securities laws. Much of the
regulation of broker-dealers, however, has been delegated to self-regulatory organizations, principally FINRA. These self-
regulatory organizations adopt rules, subject to approval by the SEC, which govern their members and they 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:
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sales methods and supervision;
trading practices among broker-dealers;
use and safekeeping of customers’ funds and securities;
capital structure of securities firms;
record keeping;
conduct of directors, officers and employees; and
advertising, including regulations related to telephone solicitation.
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As registered investment advisors under the Investment Advisers Act of 1940, as amended (the “Advisers Act”),
our investment advisory subsidiaries are subject to the regulations under both the Advisers Act and certain state securities
laws and regulations. Such requirements relate to, among other things:
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limitations on the ability of investment advisors to charge clients performance-based or non-refundable fees;
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record-keeping and reporting requirements;
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disclosure requirements;
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limitations on principal transactions between an advisor or its affiliates and advisory clients; and
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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 (“DOL”), 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. In April 2018, the SEC proposed Regulation Best Interest which, among other things, would require broker-
dealers to act in the best interest of retail customers when making a recommendation concerning a securities transaction or
investment strategy involving securities, and to identify, disclose and mitigate or eliminate material conflicts of interest
arising from financial incentives associated with such recommendations. If the SEC’s Regulation Best Interest is adopted
as currently drafted, our broker-dealer subsidiaries may be required to adopt new policies and procedures that would include
enhanced suitability review, and provide additional disclosures to clients under a prescribed Form CRS, more specific fee
disclosures and a more comprehensive disclosure of material conflicts of interest.
In addition, under Regulation Best Interest, our broker-dealer subsidiaries would be required to identify, disclose
and mitigate or eliminate material conflicts of interest related to financial incentives associated with investment
recommendations. Because of uncertainty as to the language, degree and timing of Regulation Best Interest, if and when it
is adopted, it may affect our business in ways that cannot now be anticipated and may further impact the products and
services offered by our financial advisors. If Regulation Best Interest takes effect in 2019 as drafted, it may negatively
impact our results of operations, including the impact of increased legal, compliance, information technology and other
costs. Also, we may face enhanced legal risks in connection with compliance with Regulation Best Interest.
In addition, a number of states are in varying stages of adopting and implementing laws and regulations that would
impose a fiduciary duty on broker dealers and investment advisers under state law. If any or all of the state fiduciary duty
laws or regulations take effect in 2019, they may also negatively impact our results of operations, including increased legal,
compliance, information technology and other costs, as well as increased legal risks.
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. As a result of the 2010 Dodd-
Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), our financial advisors may in the future
become subject to a fiduciary standard of conduct in connection with their broker-dealer activities that is no less stringent
than what is currently applied to investment advisers under the Advisers Act. We continue to see enhanced legislative and
regulatory interest regarding retirement investing and financial advisors, including proposed rules, regulatory priorities or
general discussion around transparency and disclosure in advisor compensation and recruiting, identifying and managing
conflicts of interest and enhanced data collection.
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.
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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 be subject to periodic audits 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 30% of our total assets at December 31, 2018 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.
Each of Securities America, Triad, Investacorp, KMS, SSN and Ladenburg has elected to compute its net capital
under the alternative method allowed by the Net Capital Rule and at December 31, 2018, each, excluding Ladenburg, had
a $250,000 minimum net capital requirement. Ladenburg as a market maker, had a $256,000 minimum net capital
requirement. At December 31, 2018, Securities America had regulatory net capital of approximately $9,164,000, Triad had
regulatory net capital of approximately $8,739,000, Investacorp had regulatory net capital of approximately $9,486,000,
KMS had regulatory net capital of approximately $7,379,000, SSN had regulatory net capital of approximately $8,934,000
and Ladenburg had regulatory net capital of approximately $25,073,000.
Each of Securities America, Triad, Investacorp, KMS, SSN and Ladenburg claim exemptions from the provisions
of the SEC’s Rule 15c3-3 pursuant to paragraphs (k)(2)(i) and (k)(2)(ii) as they clear their customer transactions through
a clearing broker on a fully disclosed basis.
Also, funds invested as equity capital may not be withdrawn, nor may any unsecured advances or loans be made
to any stockholder of a registered broker-dealer, if, after giving effect to the withdrawal, advance or loan and to any other
withdrawal, advance or loan as well as to any scheduled payments of subordinated debt 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, 2018, Premier Trust had stockholder’s
equity of approximately $3,422,000, including at least $250,000 in cash.
12
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. 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 a clearing broker to supplement
Ladenburg’s capital to allow it to facilitate underwriting transactions.
Personnel
At December 31, 2018, we had 1,512 full-time employees. No employees are covered by a collective bargaining
agreement. We consider our relationship with our employees to be good.
ITEM 1A. RISK FACTORS.
You should carefully consider all of the risks described below regarding our company. Our business, financial
condition or results of operations 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 or our financial advisors, 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 in the past and may again
be impacted in the future. As a financial services firm, changes in the financial markets or economic conditions in the
United States and elsewhere in the world could materially adversely affect our business in many ways, including the
following:
●
●
●
a market downturn could lead to a decline in the volume of transactions executed for customers and,
therefore, to a decline in the revenues we receive from commissions and spreads;
low interest rates adversely impact service fee revenues received from our clearing firms and other cash
sweep programs;
adverse changes in the market could lead to a reduction in revenues from asset management fees. Even in
the absence of a market downturn, below-market investment performance by portfolio managers could
reduce asset management revenues and assets under management and result in reputational damage that
might make it more difficult to attract new investors;
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●
●
●
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.
We have incurred, and may again incur, losses.
We incurred losses in 2018, 2017, 2016 and in various prior years, some of which were significant. We cannot
assure you that we will achieve profitability or have positive cash flow on either a quarterly or annual basis. If we are
unable to achieve and sustain our profitability, it would have a material adverse effect on our business and results of
operations.
We have a significant amount of debt and preferred stock outstanding, which limits cash flow available for operations
and may impair our ability to obtain additional financing.
As of December 31, 2018, our total debt was approximately $254 million and we had 17,012,075 shares of Series
A Preferred Stock outstanding with a liquidation preference of approximately $425 million. Our substantial amount of
indebtedness and preferred stock outstanding:
●
●
requires us to dedicate a substantial portion of cash flows from operations to the payment of debt service and
dividends, resulting in less cash available for operations and other purposes; and
limits our ability to obtain additional financing for working capital, regulatory capital requirements,
acquisitions or general corporate purposes.
Our substantial indebtedness also 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 depend on our ability to attract and retain 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, training and retaining our financial
advisors. The loss of a key financial advisor, trading or 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.
Further, if we fail to replace our advisors who retire or fail to assist our retiring advisors with transitioning their
practices to existing advisors, or if advisor migration away from wire houses and to independent channels decreases or
slows, our business may suffer.
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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:
●
recommending transactions that are not suitable for the client or in the client’s best interests;
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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;
●
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;
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engaging in improper transactions with 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. Also, our failure to properly investigate new
and existing financial advisors may subject us to additional risks and liabilities.
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, we face additional risk management challenges because many of our independent
financial advisors work in small, decentralized offices.
We seek to monitor and control our risk exposure through a variety of separate but complementary financial,
credit, operational and legal reporting systems. Nonetheless, the effectiveness of our ability to manage risk exposure can
never be completely or accurately predicted or fully assured. For example, unexpectedly large or rapid movements or
disruptions in one or more markets or other unforeseen developments can have a material adverse effect on our results of
operations and financial condition, regardless of our risk management policies and procedures.
15
Poor performance of the investment products and services recommended or sold to our clients or competitive pressures
on pricing of such products and services may have a material adverse effect on our business.
Our advisors’ clients control their assets maintained with us. These clients can terminate their relationships, 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, competitive pricing 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. Competitive pricing,
including from robo-advisors and higher deposit rates on cash deposits, could adversely impact our business. 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 independent advisory and brokerage 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. e 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, cyberattacks, 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 clients’ confidential information or other sensitive information. The increased use of mobile and cloud
technologies can heighten these and other operational risks. Also, even if we and our advisors comply with 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 cyberattack.
16
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 expend significant additional resources to modify our protective measures, to investigate
and remediate 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.
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 in legal claims,
regulatory scrutiny and liability, reputational damage, 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 adoption and maintenance of appropriate security measures. We also may be subject to litigation and 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.
We rely on clearing brokers and the termination of our clearing agreements could disrupt our business.
Each of Triad, Investacorp, KMS, and Ladenburg uses one principal clearing broker to process securities
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 its clearing broker for the orderly processing of transactions. By engaging the processing services of a clearing
firm, each of our broker-dealer subsidiaries is exempt from some capital reserve requirements and other regulatory
requirements imposed by federal and state securities laws. If these clearing agreements were terminated for any reason, we
would be forced to find alternative clearing arrangements.
We cannot assure you that we would be able to find alternative clearing arrangements on acceptable terms to us
or at all. Also, the loss of a clearing firm could hamper the ability of our subsidiaries to recruit and retain their respective
independent financial advisors.
Our business depends on commissions and fees generated from the distribution of financial products, and adverse
changes in the structure or amount of fees or marketing allowances paid by the sponsors of these products could
materially adversely affect our cash flows, revenues and results of operations.
We generate an important portion of our revenues from commissions and fees related to the distribution of
financial products, such as mutual funds and variable and fixed 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.
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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. The DOL, which promulgates rules
related to retirement plans, has implemented rules that restrict commissions and fees on qualified retirement accounts,
including IRAs, which had a negative effect on our financial results. Any further reduction or restructuring of Rule 12b-1
distribution fees could have a material adverse effect on our results of operations. In February 2018, the SEC announced a
Share Class Selection Disclosure Initiative, which demonstrates the increased focus on these fees. Further, as a result of
increased regulatory focus on minimizing cost differences among mutual fund share classes offered to clients, certain of
our subsidiaries have, and may, rebate certain fees to clients and could be subject to additional regulatory actions.
Decreases in client assets or assets under management may decrease our revenues.
The results of operations of our independent advisory and brokerage 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 interest rate changes, reductions in cash balances in our cash sweep programs, or the termination of our
cash sweep agreements could affect our profitability and financial condition.
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 programs are negatively
impacted by periods of low interest rates and by clients moving assets out of our cash sweep programs. Revenue from our
cash sweep programs also depends on our ability to manage the terms of both our agreements with banks participating in
our programs and program fees and interest rates payable to clients.
If our contracts with participants in cash sweep programs are terminated or expire, 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 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.
A loss of our sponsorship and marketing relationships with financial product manufacturers could harm our
relationship with our advisors and affect our financial condition.
We have sponsorship and marketing agreements with certain product manufacturers, including manufacturers of
mutual funds, ETFs, and fixed and variable annuity products. If these manufacturers do not renew or decide to terminate
these agreements, our ability to serve our advisors and our profitability may be adversely affected.
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 a 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.
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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:
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trading counterparties;
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customers;
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clearing agents;
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other broker-dealers;
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exchanges;
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clearing houses; and
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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:
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holding securities of third parties;
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executing securities trades that fail to settle at the required time due to non-delivery by the counterparty or
systems failure by clearing agents, exchanges, clearing houses or other financial intermediaries; and
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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.
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. Our liability for significant and successful errors and omissions claims may materially and negatively
affect our results of operations.
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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:
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the volatility of domestic and international financial, bond and stock markets;
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extensive governmental regulation;
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litigation;
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intense competition;
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poor performance of investment products our advisors recommend or sell;
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substantial fluctuations in the volume and price level of securities; and
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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 supervise, breach of fiduciary duty,
employee errors, intentional misconduct, unauthorized transactions, improper recruiting activity, and failures in the
processing of securities transactions. These types of claims expose us to the risk of significant loss. Also, an underwriter,
such as Ladenburg, is exposed to substantial liability under federal and state securities laws, other federal and state laws,
and court decisions, including decisions about underwriters’ liability and limitations on indemnification of underwriters by
issuers.
For example, a firm that acts as an underwriter may be held liable for material misstatements or omissions of fact
in a prospectus used in connection with the securities being offered or for statements made by its securities analysts or
other personnel. Therefore, Ladenburg’s activities may subject it to the risk of significant legal liabilities to its clients and
aggrieved third parties, including stockholders of its clients who could bring securities class actions against Ladenburg. As
a result, Ladenburg may incur significant legal and other expenses in defending against litigation and may be required to
pay substantial damages for settlements and adverse judgments. Ladenburg’s underwriting activities often involve offerings
of the securities of smaller companies, which may involve a higher degree of risk and are more volatile than the securities
of more established companies. In comparison with more established companies, smaller companies are also more likely
to be the subject of securities class actions, to carry directors and officers liability insurance policies with lower limits or
not at all, and to become insolvent. Each of these factors increases the likelihood that an underwriter of a smaller company’s
securities will be required to contribute to an adverse judgment or settlement of a securities lawsuit.
20
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:
●
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 been delegated to self-regulatory organizations, principally
FINRA. FINRA adopts rules, subject to SEC approval, that govern broker-dealers and conducts periodic examinations of
firms’ operations.
If we are found to have violated any applicable regulation, formal administrative or judicial proceedings may be
initiated against us that may result in:
●
censure;
●
fines;
●
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.
21
Certain of our subsidiaries have been subject to some of the penalties listed above. 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.
Also, as another example, a number of states have adopted data breach protection laws that seek to protect
individuals’ personal identifying information (“PII”). These laws impose obligations that may require us to expend
additional resources to ensure that we comply, which may vary from state to state. In addition, we may be subject to
potential liability to individuals and to the states if we or advisors fail to take sufficient steps to protect PII and/or fail to
make the required notifications or implement other required measures.
FINRA has identified rollovers of client assets from group retirement plans to IRAs as an area of increased
scrutiny. FINRA has announced that its periodic regulatory 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. Qualified accounts, specifically IRAs, make up a significant portion of our client assets.
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 by the SEC is uncertain and may require us to expend
resources to ensure that we and our financial advisors comply with the new standards.
In April 2018, the SEC proposed Regulation Best Interest concerning the standards of conduct for broker dealers
and investment advisers when dealing with retail investors. The proposals would establish a best interest standard of
conduct for broker-dealers recommending a securities transaction or investment strategy to retail customers, including a
requirement that the broker-dealer not place its interests ahead of retail customers’ interests, and to identify, disclose and
mitigate or eliminate material conflicts of interest arising from financial incentives associated with such recommendations.
Broker-dealers and investment advisers would be required to provide retail investors with a brief form summarizing the
firms’ relationship with the investor. Also, broker-dealers and their associated persons would be restricted in the use of the
terms “advisor” or “adviser.” Because of uncertainty as to the language, degree and timing of Regulation Best Interest, if
and when it is adopted, it may affect our business in ways that cannot now be anticipated and may further impact the
products and services offered by our financial advisors. If the new rules take effect they may impact how we receive fees,
how we compensate our registered representatives, how we attract and retain registered representatives, and how we design
investments and services. Implementation may affect our results, including increased expenditures on legal, compliance,
information technology and other costs. Also, we may face enhanced legal risks in connection with compliance with
Regulation Best Interest.
22
Legislative, judicial or regulatory changes to the classification of independent contractors could increase our operating
expenses.
From time to time, various legislative or regulatory proposals are introduced at the federal or state levels to change
the status of independent contractors’ classification to employees for either employment tax purposes (withholding, social
security, Medicare and unemployment taxes) or other benefits available to employees. Currently, most individuals are
classified as employees or independent contractors for employment tax purposes based on 20 “common law” factors, rather
than any definition found in the Internal Revenue Code or Internal Revenue Service (“IRS”) regulations. Each of Securities
America, 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 firms’ 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.
Our broker-dealer subsidiaries are subject to the SEC’s Net Capital Rule, which requires the maintenance of
minimum net capital. Also, 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, 2018, each of our broker-dealer subsidiaries exceeded
its minimum net capital requirement and Premier Trust exceeded its minimum stockholder’s equity requirement. The Net
Capital Rule is designed to measure the general financial integrity and liquidity of a broker-dealer. In computing net capital,
various adjustments are made to net worth which exclude assets not readily convertible into cash.
The regulations also require that certain assets, such as a broker-dealer’s position in securities, be valued in a
conservative manner to avoid inflation of the broker-dealer’s net capital. The Net Capital Rule requires a broker-dealer to
maintain a minimum level of net capital. The particular levels vary depending upon the nature of the activity undertaken
by a firm. Compliance with the Net Capital Rule limits those operations of broker-dealers which require the intensive use
of their capital, such as underwriting commitments and principal trading activities. The rule also limits the ability of
securities firms to pay dividends or make payments on certain indebtedness such as subordinated debt as it matures. A
significant operating loss or any charge against net capital could adversely affect the ability of a broker-dealer to expand
or, depending on the magnitude of the loss or charge, maintain its then present level of business. FINRA may enter the
offices of a broker-dealer at any time, without notice, and calculate the firm’s net capital. If the calculation reveals a net
capital deficiency, FINRA may immediately restrict or suspend some or all of the broker-dealer’s activities, including its
ability to make markets. Our broker-dealer subsidiaries may not be able to maintain adequate net capital, or their net capital
may fall below requirements established by the SEC and subject us to disciplinary action in the form of fines, censure,
suspension, expulsion or the termination of business altogether.
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 operations.
Furthermore, we may not be able to retain all of the employees or financial advisors 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.
23
We face numerous risks and uncertainties as we expand our business.
We expect the growth of our business to come primarily from organic growth, recruiting 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 Securities
The price of our common stock, Series A Preferred Stock, 6.5% senior notes due 2027 (“6.5% Senior Notes”), 7% senior
notes due 2028 (“7% Senior Notes”) and 7.25% senior notes due 2028 (“7.25% Senior Notes”) may fluctuate
significantly, and this may make it difficult for you to resell the shares of our stock or notes at prices you find attractive.
The trading price of our common stock, as reported by the NYSE American, has ranged from a low of $2.15 to a
high of $3.84 per share for the 52 week period ended December 31, 2018. The trading price of our Series A Preferred
Stock, as reported by the NYSE American, has ranged from a low of $19.43 to a high of $25.95 per share for the 52 week
period ended December 31, 2018. The trading price of our 6.5% Senior Notes, as reported by the NYSE American, has
ranged from a low of $19.73 to a high of $27.67 for the 52-week period ended December 31, 2018. The trading price of
our 7% Senior Notes, as reported by the NYSE American, has ranged from a low of $20.03 to a high of $25.00 for the 31-
week period ended December 31, 2018. The trading price of our 7.25% Senior Notes, as reported by the NYSE American,
has ranged from a low of $20.61 to a high of $25.18 for the 19-week period ended December 31, 2018. We expect that the
market price of our securities will continue to fluctuate significantly.
The market price of our stock and senior notes may fluctuate in response to numerous factors, many of which are
beyond our control. These factors include:
● variations in quarterly operating results;
● general economic and business conditions, including conditions in the securities brokerage and
investment banking markets;
● prevailing interest rates, increases in which may have an adverse effect on the market price of the Series
A Preferred Stock and senior notes;
●
●
trading prices of similar securities, including, but not limited to, any additional securities of ours that
become listed for trading in the future;
the annual yield from dividends on the Series A Preferred Stock and interest on the senior notes as
compared to yields on other comparable 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;
●
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;
● our level of indebtedness;
●
legislation or regulatory policies, practices or actions;
●
changes in financial estimates by securities analysts; and
●
fluctuations in stock market prices and volume.
24
Any one of these factors could have an adverse effect on the market price of our common stock, Series A Preferred
Stock or senior notes. 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.
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
and interest on our senior notes.
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.
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, 2018, we had outstanding 146,535,796 shares of common stock, options and warrants to
purchase a total of 20,847,039 shares of common stock and 17,012,075 shares of our Series A Preferred Stock. We are
authorized to issue up to 1,000,000,000 shares of common stock and 50,000,000 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 warrants, our
other shareholders may be significantly diluted, which means that they would own a smaller percentage of our company.
We may issue preferred stock with preferential rights that may adversely affect your rights.
The rights of our shareholders will be subject to and may be adversely affected by the rights of holders of any
preferred stock that we may issue in the future. Our articles of incorporation authorize our board of directors to issue up to
50,000,000 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 may not continue to pay cash dividends on our common stock.
Although we have declared dividends on our common stock in the past, any future declarations of quarterly
dividends are subject to the determination and discretion of our board of directors. Accordingly, if no such future dividends
are declared, 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, our obligation to pay dividends on our Series A Preferred Stock, servicing of our
indebtedness and any covenants contained in our outstanding debt agreements may restrict our ability to pay dividends on
our common stock.
25
Market interest rates may materially and adversely affect the value of the Series A Preferred Stock and our senior notes.
One of the factors that influences the price of the Series A Preferred Stock and the senior notes is the yield on
these securities as a percentage of the market price relative to market interest rates. An increase in market interest rates,
which are currently at low levels relative to historical rates, may lead prospective purchasers of the Series A Preferred
Stock and our senior notes to expect a higher yield (and higher market interest rates would likely increase our borrowing
costs). Thus, higher market interest rates could cause the market price of the Series A Preferred Stock and the senior notes
to materially decrease.
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 our securities may be limited and the market value of our
securities 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 American. 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 American, it is possible that our Series A Preferred Stock and senior
notes may be delisted from the NYSE American as well. Accordingly, if our common stock is delisted from the NYSE
American, the ability to transfer or sell shares of our common stock, Series A Preferred Stock and senior notes may be
limited and the market value of our common stock, Series A Preferred Stock and senior notes will likely be materially
adversely affected.
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.
Changes in our credit rating, or the credit rating of our senior notes, could adversely affect the market price or liquidity
of our senior notes.
Credit rating agencies continually revise their ratings for the companies that they follow, including us. Such ratings
are based on a number of factors, including financial strength, as well as factors not entirely within our control, such as
conditions affecting the financial services industry generally. Our 6.5% Senior Notes, 7% Senior Notes and 7.25% Senior
Notes are rated only by one rating agency, Egan-Jones Ratings Co.
26
A downgrade, suspension or withdrawal in our rating or the rating of our senior notes, or the anticipation of such
a change, including any announcement that our rating is under further review for a downgrade, could have an adverse effect
on the price of the senior notes. More generally, a negative change or anticipated negative change in our rating could
increase our borrowing costs and limit our access to the capital markets. We cannot be sure our credit rating agency will
maintain its initial rating on our senior notes.
Our credit rating may not reflect all risks of an investment in our senior notes.
Our credit rating is an assessment by a rating agency of our ability to pay our debts when due. The credit rating
may not reflect the potential impact of risks related to structure, market or other factors related to the value of our senior
notes. A credit rating is not a recommendation to buy, sell or hold any security, and may be revised or withdrawn at any
time by the issuing organization in its sole discretion.
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 14,050 square feet of office space. We renewed our lease effective March 2018 and it now
expires in February 2023.
Ladenburg entered into a sublease for space at 277 Park Avenue, 26th floor, New York, New York 10017 in
December 2016, where it subleases approximately 23,000 square feet of office space commencing February 1, 2017
through January 20, 2021. Ladenburg also operates branch offices in leased office space. Such branch offices are located
in Melville and Westhampton Beach, New York; Miami, Naples, and Boca Raton, Florida; Boston, Massachusetts;
Calabasas and Irvine, California; Minneapolis, Minnesota; Stamford, Connecticut, and Dallas, Texas.
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 advisory and brokerage services segment is
listed below:
Subsidiary
Location
Securities America ....... La Vista, NE
Triad ............................. Norcross, GA
SSN .............................. Knoxville, TN
Investacorp ................... Miami, FL
KMS ............................. Seattle, WA
Premier Trust ................ Las Vegas, NV
Approximate
Square
Footage
Lease
Expiration
Date
81,424 January 2030
21,835 February 2025
15,000 March 2020 (1)
11,475 September 2020
8,575 September 2024
14,455 September 2019
(1) The lessor is Cogdill Capital LLC, an entity of which SSN’s CFO and CEO are members.
Highland’s principal executive offices, which are used for our insurance brokerage segment, are located in
Birmingham, Alabama, where it leases approximately 15,300 square feet under a lease that expires in April 2021. Highland
also maintains regional offices in leased office space at various locations in the U.S.
We believe that our existing properties are adequate for the current operating requirements of our business and
that additional space will be available as needed.
ITEM 3.
LEGAL PROCEEDINGS.
The information under the heading “Litigation and Regulatory Matters” contained in Note 14 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.
27
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
PART II
(Dollars in thousands, except share and per share amounts)
Our common stock trades on the NYSE American under the symbol “LTS.”
Our Series A Preferred Stock trades on the NYSE American under the symbol “LTS PrA.”
Holders
At March 8, 2019, there were approximately 3,050 record holders of our common stock.
Common Stock Dividends
In September 2017, we began payment of a quarterly cash dividend on its common stock of $0.01 per outstanding
share. On August 2, 2018, the quarterly cash dividend per outstanding share was increased to $0.0125. 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, our obligation to pay dividends on our Series A
Preferred Stock, servicing of our indebtedness and any covenants contained in our outstanding debt agreements may 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 2018.
Period
October 1 to October 31, 2018 ..........
November 1 to November 30, 2018 ..
December 1 to December 31, 2018 ...
Total ..................................................
Total Number
of Shares
Purchased
2,757,548 $
671,973
51,297,451 (2)
54,726,972 $
Average
Price Paid
per Share
2.60
2.84
2.50
2.51
Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs
2,484,282
671,973
195,907
3,352,162
Maximum
Number of
Shares that
May Yet Be
Purchased
Under the
Plans or
Programs(1)
3,183,775
2,511,802
2,315,895
(1) In March 2007, October 2011, November 2014 and November 2016, our board of directors authorized in the aggregate
the repurchase of up to 27,500,000 shares of our common stock from time to time on the open market or in privately
negotiated transactions depending on market conditions. As of December 31, 2018, 25,184,105 shares had been
repurchased for $66,116 under the program and 2,315,895 shares remain available for purchase under the program.
(2) On December 24, 2018, we entered into an agreement with our former principal shareholder, Phillip Frost, M.D., and
an entity affiliated with Dr. Frost, Frost Nevada Investments Trust, pursuant to which the company agreed to
repurchase 50,900,000 shares of our common stock directly from the sellers in a private transaction at a price of $2.50
per share. We funded this share repurchase with $50,900 in cash on hand and by issuing $76,350 aggregate principal
amount of 7.25% senior notes due 2028 to the sellers.
Beginning in the fourth quarter of 2015, we adopted a Rule 10b5-1 trading plan to permit the repurchase of
common stock pursuant to the existing stock repurchase program during certain restricted trading periods. We may execute
similar Rule 10b5-1 plans periodically in the future.
28
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:
2018 (1)
Year Ended December 31,
2016
(In thousands, except share and per share amounts)
2015
2017
Operating Results:
Total revenues ........................................... $ 1,391,136 $ 1,268,152 $ 1,106,953 $ 1,152,118 $
Total expenses .......................................... 1,343,733 1,266,991 1,119,023 1,163,868
Income (loss) before item shown below ...
(11,750 )
Change in fair value of contingent
(12,070 )
47,403
1,161
2014
921,253 (2)
911,259
9,994
0.09
0.08
consideration ..........................................
Income (loss) before income taxes ...........
Net income (loss) ......................................
Per common and equivalent share:
(Loss) income per common share - basic.. $
(Loss) income per common share -
(238 )
47,165
33,786
19
1,180
7,682
(216 )
(12,286 )
(22,311 )
55
(11,695 )
(11,213 )
12
10,006
33,352
(0.00 ) $
(0.13 ) $
(0.29 ) $
(0.21 ) $
diluted .................................................... $
(0.00 ) $
(0.13 ) $
(0.29 ) $
(0.21 ) $
Cash dividend declared per common
0.05 $
0.02 $
share ....................................................... $
—
Basic weighted average common shares ... 194,562,916 193,064,550 182,987,850 183,660,993 182,768,494
Diluted weighted average common shares 194,562,916 193,064,550 182,987,850 183,660,993 206,512,437
Balance Sheet Data:
Total assets ............................................... $
Total liabilities ..........................................
Shareholders’ equity .................................
Other Data:
Book value per common share .................. $
546,003 $
183,502
362,474
632,025 $
261,634
370,379
574,105 $
198,074
376,002
740,904 $
487,727
253,126
510,758
174,287
336,460
1.87 $
2.06 $
1.87 $
1.73 $
— $
— $
1.82
(1) As a result of adopting ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” effective January
1, 2018, we amended our accounting policies on the recognition and presentation of certain revenues and related
expenses, which may affect the comparability of such information and the related analysis.
(2) Includes $26,164 of revenue from Highland (acquired July 31, 2014) and $19,840 of revenue from KMS (acquired
October 15, 2014).
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 advisory and brokerage services, asset
management services, investment research, investment banking, institutional sales and trading, wholesale life insurance
and annuity 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.
Through our acquisitions of Securities America, Triad, SSN, Investacorp and KMS, we have established a
leadership position in the independent advisory and brokerage services industry. During the past decade, this has been one
of the fastest growing segments of the financial services industry. With approximately 4,400 financial advisors located in
50 states, we have become one of the largest independent advisory and brokerage services networks. We believe that we
have the opportunity through internal growth, recruiting and acquisitions 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 advisory and brokerage business with Ladenburg’s traditional investment banking, capital
markets, institutional sales and trading and related businesses.
29
We have three operating segments: (i) the independent advisory and brokerage services segment, (ii) the
Ladenburg segment and (iii) the insurance brokerage segment. The independent advisory and brokerage services segment
includes the investment advisory and brokerage services provided by our independent advisory and brokerage 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 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 which provides marketing strategies, product expertise,
and back-office processing for fixed and equity-indexed annuities.
Recent Developments
Common Stock Repurchases
On December 24, 2018, we entered into an agreement (the “Repurchase Agreement”) with our former principal
shareholder, Phillip Frost, M.D., and an entity affiliated with Dr. Frost, Frost Nevada Investments Trust (together with Dr.
Frost, the “Sellers”), under which we repurchased 50,900,000 shares of our common stock from the Sellers (the “Share
Repurchase”) in a private transaction at a price of $2.50 per share. We funded the Share Repurchase with $50,900 in cash
on hand and by issuing $76,350 aggregate principal amount of 7.25% senior notes due 2028 to the Sellers (the “Frost
Notes”). In addition, under the Repurchase Agreement, options to purchase 3,610,000 shares of our common stock held by
Dr. Frost were cancelled in exchange for $3,000 in cash.
Including the Share Repurchase, we repurchased and retired an aggregate of 57,475,374 shares of our common
stock during the year ended December 31, 2018 for $139,835, including 5,833,890 shares repurchased under our stock
repurchase program, representing an average price per share of $2.43.
Acquisition of Kestler Financial Group, Inc.
In August 2018, an affiliate of Highland purchased certain assets of the insurance distribution business operated
by Kestler Financial Group, Inc. (“KFG”), an independent insurance and annuity distribution company, located in
Leesburg, Virginia. This asset purchase was deemed to be an asset acquisition. Under the terms of an asset purchase
agreement, an affiliate of Highland purchased certain KFG assets, including the rights to the “Kestler Financial Group”
name and brand. In October 2018, Securities America purchased certain assets of the brokerage business operated by KFG.
The consideration for the KFG insurance distribution transaction was $7,926, consisting of cash of $1,683 paid at
closing, a $165 cash payment to be made on the first anniversary of the closing date, a promissory note in the original
principal amount of $5,450 and contingent consideration having a fair value of $619, for which a liability was recognized
based on the estimated acquisition-date fair value of the potential earn-out and additional liabilities of $9.
The consideration for the KFG brokerage business transaction was $1,167, consisting of cash of $537 paid at
closing (including $271 of reimbursable expenses), a $266 cash payment to be made on each anniversary of the closing
date for the next three years having a fair value of $630 and contingent consideration having a fair value of $0.
The purchase price for the KFG transaction was allocated $7,083 to identifiable intangibles and other assets and
$2,010 to goodwill.
Highland Acquisition - Four Seasons
In November 2018, Highland purchased certain assets of Four Seasons Financial Group, Inc. (“FSFG”), a
wholesale insurance distribution business located in Marlton, New Jersey. The consideration for the FSFG transaction was
$2,345, consisting of cash of $450 paid upon closing, a $450 cash payment to be made on each anniversary of the closing
date for the next two years, promissory notes in the original principal amount of $372 and contingent consideration having
a fair value of $622. In addition, Highland may be required to deliver, during the five years following the closing date, an
annual payment to FSFG based on the adjusted net revenue of the business acquired by Highland.
Securities America -Term Loan
On February 6, 2019, Securities America Financial Corporation entered into an amendment to its loan agreement
with a third-party financial institution to provide for a term loan in the aggregate principal amount of $7,000, with interest
accruing at the rate of 5.52%. Securities America began monthly payments of principal and interest under the term loan in
the amount of $212 on March 6, 2019. The term loan matures on February 6, 2022.
30
Common Stock Dividend
During the last two quarters of 2018, we paid a quarterly dividend of $0.0125 per share on our outstanding
common stock, as compared to $0.01 per share in each of the first two quarters in 2018. For the year ended December 31,
2018, we paid aggregate dividends of $8,794. Also, our board of directors has declared a common stock dividend of
$0.0125 per share payable in March 2019.
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.
During the three years ended December 31, 2018, we incurred $5,823 of acquisition indebtedness, related to the
acquisitions in 2018 of certain assets of KFG and FSFG as described above. As of December 31, 2018, $5,763 of this
acquisition-related indebtedness was outstanding.
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.
Revenue Recognition. We have updated our revenue recognition policies in conjunction with our adoption of
Accounting Standards Update (“ASU”) ASU 2014-09, Revenue from Contracts with Customers and all related
amendments (“ASC 606”). We adopted ASC 606 effective January 1, 2018, using the modified retrospective method by
recognizing the cumulative effect of initially applying ASC 606 as an adjustment to the opening balance of shareholders’
equity and other affected accounts at January 1, 2018. Therefore, the comparative information has not been adjusted and
continues to be reported under the accounting standards in effect for prior periods.
The adoption of ASC 606, among other things, impacts the recognition of revenue in both our independent
advisory and brokerage services and insurance brokerage segments.
Certain independent financial advisors conduct their advisory business through their own registered investment
advisory (“RIA”) firm, or Hybrid RIA, rather than using one of our corporate RIA subsidiaries. Historically, we have
generally recognized advisory fee revenue on a gross basis based on the fees charged by the RIAs to their clients.
Commencing in 2018, with the adoption of ASC 606, we no longer recognize revenue on a gross basis where the clients’
assets are held by these independent entities, or Hybrid RIAs, which has primary client fiduciary duty under the Investment
Advisors Act. In those circumstances, we now recognize the associated advisory revenues on a net basis (after deducting
the advisor’s compensation). We also collect certain administrative fees for value-added services provided to Hybrid RIAs.
Accordingly, our reported advisory revenue and the independent advisor’s compensation in our independent advisory and
brokerage services segment are materially lower in 2018 as compared to the prior year periods as a result of the adoption
of ASC 606, and that reported advisory revenue growth may lag behind the overall growth rate of advisory assets.
At our insurance brokerage segment, the adoption of ASC 606 resulted in a material increase in reported insurance
commission revenues. Historically, commissions on insurance policies were recognized on a gross or net basis based on
how the commissions were received from the insurance carrier. Where the carrier paid us the full commission, and we
remitted to the independent producer its portion of the commission, the gross amount of the commission was recognized
by us. However, as was more frequently the case, where the carrier paid the independent producer directly and remitted to
us only our portion of the commission, we recorded the commission revenue on a net basis (after giving effect to the
payment to the producer). With the adoption of ASC 606, we report all insurance commission revenue on a gross basis,
regardless of the method of payment by the carrier.
31
Revenue from contracts with customers is recognized when, or as, we satisfy our performance obligations by
transferring promised goods or services to customers. A good or service is transferred to a customer when, or as, the
customer obtains control of that good or service. A performance obligation may be satisfied over time or at a point in time.
Revenue from a performance obligation satisfied at a point in time is recognized at the point in time that we determine the
customer obtains control over the promised good or service. The amount of revenue recognized reflects the consideration
to which we expect to be entitled in exchange for those promised goods or services.
Our net income as reported is greater than the net income amounts without the adoption of ASC 606 due to the
following: 1) the timing of revenue recognized for commissions on future renewals of insurance policies sold is accelerated,
as these future commissions represent variable consideration and are required to be estimated, 2) certain costs to obtain a
contract with a customer are now capitalized and have historically been recorded as a period expense, and 3) forgivable
loans to independent financial advisors are now amortized over the expected useful lives of their relationship period with
our subsidiaries; previously these loans were amortized based on their legal terms.
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 $8, $17 and $57 for the years ended December 31, 2018, 2017 and
2016, respectively.
Customer Claims, Litigation and Regulatory Matters. In the ordinary course of business, our operating
subsidiaries have been and are the subject of numerous civil actions and arbitrations arising out of customer complaints
relating to their activities as a broker-dealer or investment adviser, 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
$9,869 at December 31, 2018 and $6,902 at December 31, 2017 for potential losses. See Note 14, “Commitments and
Contingencies,” to the consolidated financial statements included in Part II, Item 8 of this annual report on Form 10-K.
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 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.
32
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 liability as of December 31, 2018, which consists principally of the tax benefit of net operating
loss carryforwards, compensation charges related to equity instruments and deferred compensation liabilities, offset by
deferred revenue, intangible assets and goodwill, amounted to $14,068. Each reporting period, we assess the realizability
of our deferred tax assets to determine if the deductible temporary differences will be utilized on a more-likely-than-not
basis. In making this determination, we assess all available positive and negative evidence to determine if our existing
deferred tax assets are realizable on a more-likely-than-not basis. Significant weight is given to positive and negative
evidence that is objectively verifiable. We considered the reversal of existing taxable temporary differences, projected
future taxable income, tax planning strategies and recent financial operating results. The ultimate realization of a deferred
tax asset is ultimately dependent on our generation of sufficient taxable income within the available net operating loss
carryforward periods to utilize the deductible temporary differences. Based on the reversal pattern of existing taxable
temporary difference coupled with objective evidence of cumulative earnings in recent years, the Company concluded that
its deferred tax assets are realizable on a more-likely-than-not basis with the exception of certain separate state net operating
loss carryforwards. See Note 12, “Income Taxes,” to the consolidated financial statements included in Part II, Item 8 of
this annual report on Form 10-K.
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 cost is recognized as compensation expense over
the service period, which would normally be the vesting period of the options. Compensation expense for share-based
awards granted to independent contractors is measured at their vesting date fair value. The compensation expense
recognized each period is based on the awards’ estimated value at the most recent reporting date.
Intangible Assets. We amortize intangible assets over their estimated useful lives generally on a straight-line basis.
Intangible assets subject to amortization are tested for recoverability whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. We assess the recoverability of our intangible assets by determining
whether the unamortized balance can be recovered over the assets’ remaining life through undiscounted forecasted cash
flows. If undiscounted forecasted cash flows indicate that the unamortized amounts will not be recovered, an adjustment
will be made to reduce such amounts to an amount consistent with forecasted future cash flows discounted at a rate
commensurate with the risk associated with achieving future discounted cash flows. Future cash flows are based on trends
of historical performance and our estimate of future performances, giving consideration to existing and anticipated
competitive and economic conditions.
Goodwill. Goodwill is not subject to amortization and is tested for impairment annually or more frequently if
events or changes in circumstances indicate that the asset may be impaired.
The impairment test consists of a comparison of the fair value of the reporting unit with its carrying amount. Fair
value is typically based upon future cash flows discounted at a rate commensurate with the risk involved or market based
comparables. If the carrying amount of the reporting unit exceeds its fair value then an analysis will be performed to
compare the implied fair value of goodwill with the carrying amount of goodwill. An impairment loss will be recognized
in an amount equal to excess of the carrying amount over the implied fair value. After an impairment loss is recognized,
the adjusted carrying amount of goodwill is its new accounting basis. 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.
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. The consolidated financial statements include our accounts and the accounts of our subsidiaries.
The presentation of revenue and certain related accounts for 2018 reflect the adoption of ASC 606, which may affect the
comparability of such information and the related analysis.
33
The following table includes a reconciliation of net income (loss) attributable to the Company as reported to
EBITDA, as adjusted:
Total revenues ................................................................. $
Total expenses .................................................................
Income (loss) before income taxes ..................................
Net income (loss) attributable to the Company ...............
Reconciliation of net income (loss) attributable to the
Company to EBITDA, as adjusted:
Year Ended December 31,
2017
1,268,152 $
1,266,991
1,180
7,697
2018
1,391,136 $
1,343,733
47,165
33,758
2016
1,106,953
1,119,023
(12,286 )
(22,269 )
Net income (loss) attributable to the Company ...............
33,758
7,697
(22,269 )
Less:
Interest income ................................................................
Change in fair value of contingent consideration ............
(2,504)
238
(506 )
(19 )
Add:
Interest expense ...............................................................
Income tax expense (benefit) ..........................................
Depreciation and amortization ........................................
Non-cash compensation expense ....................................
Amortization of retention and forgivable loans ..............
Amortization of contract acquisition costs (4) ................
Financial advisor recruiting expense ...............................
Acquisition-related expense ............................................
Other ...............................................................................
EBITDA, as adjusted ...................................................... $
10,796
13,379
24,039
5,882
417
9,671
370
1,010
3,392(1)
100,448 $
2,710
(6,502 )
28,835
5,539
7,396
—
5,721
3,469
1,661 (2)
56,001 $
(672 )
216
4,262
10,025
28,334
5,311
5,472
—
1,882
1,357
1,853 (3)
35,771
(1) Includes loss on severance costs of $481, excise and franchise tax expense of $629, compensation expense that may
be paid in stock of $535 and non-recurring expenses related to a block repurchase of our common stock and other
legal matters of $1,747.
(2) Includes loss on severance costs of $525, excise and franchise tax expense of $594 and compensation expense that
may be paid in stock of $559.
(3) Includes loss on severance costs of $755, excise and franchise tax expense of $508 and compensation expense that
may be paid in stock of $586.
(4) See Note 4, “Revenue from Contracts with Customers” to our consolidated financial statements included in Part II,
Item 8 of this annual report on Form 10-K.
Earnings before interest, taxes, depreciation and amortization, or EBITDA, as adjusted for acquisition-related
expense, amortization of retention and forgivable loans, amortization of contract acquisition costs, change in fair value of
contingent consideration related to acquisitions, non-cash compensation expense, financial advisor recruiting expense and
other expense, which includes excise and franchise tax expense, severance cost and compensation expense that may be
paid in stock, 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 acquisition-related expense, amortization of retention and forgivable loans, amortization of contract acquisition
costs, and financial advisor recruiting 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 (loss) before income
taxes, net income (loss) and cash flows provided by (used in) operating activities.
EBITDA, as adjusted, for the fiscal year ended December 31, 2018 was $100,448, an increase of $44,447 (79%),
from EBITDA, as adjusted, of $56,001 for the fiscal year ended December 31, 2017. This increase was primarily due to an
increase in EBITDA, as adjusted, in the independent advisory and brokerage services segment. Our independent advisory
and brokerage services segment experienced an increase in EBITDA, as adjusted, of $38,655 (65%) on increased revenue
of $20,663 (2%). EBITDA, as adjusted, in our Ladenburg segment increased by $4,851 (60%) on increased revenue of
$11,414 (17%). EBITDA, as adjusted, in our insurance brokerage segment increased by $1,468 (54%) on increased revenue
of $89,995 (158%), due in part to the change in accounting for revenues under ASC 606.
34
Segment Description
We have three operating segments. The independent advisory and brokerage services segment includes the
investment advisory and brokerage services provided by our independent advisory and brokerage 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, and which provides marketing strategies, product expertise, and back-
office processing for fixed and equity-indexed annuities.
Year Ended December 31,
2017
2016
2018
Revenues:
Independent advisory and brokerage services .............. $
Ladenburg ....................................................................
Insurance Brokerage ....................................................
Corporate ......................................................................
Total revenues .......................................................... $
1,161,043 $
78,094
147,127
4,872
1,391,136 $
1,140,380 $
66,680
57,132
3,960
1,268,152 $
1,003,282
49,425
50,483
3,763
1,106,953
Income (loss) before income taxes:
Independent advisory and brokerage services .............. $
Ladenburg ....................................................................
Insurance Brokerage ....................................................
Corporate (1) ..................................................................
Total income (loss) before income taxes ................. $
62,748 $
11,464
1,983
(29,030 )
47,165 $
EBITDA, as adjusted (2)
Independent advisory and brokerage services .............. $
Ladenburg ....................................................................
Insurance Brokerage ....................................................
Corporate ......................................................................
Total EBITDA, as adjusted ...................................... $
98,411 $
12,966
4,166
(15,095 )
100,448 $
19,858 $
6,346
(5,338 )
(19,686 )
1,180 $
59,756 $
8,115
2,698
(14,568 )
56,001 $
15,071
(3,674 )
(6,074 )
(17,609 )
(12,286 )
47,977
(1,676 )
2,255
(12,785 )
35,771
Includes interest expense, compensation, professional fees and other general administrative expenses related to
the Corporate segment.
(1) See Note 20, “Segment Information,” to the consolidated financial statements included in Part II, Item 8 of this annual
report on Form 10-K for a reconciliation of income (loss) before income taxes to EBITDA, as adjusted.
Year ended December 31, 2018 compared to year ended December 31, 2017
For the fiscal year ended December 31, 2018, we had net income attributable to the Company of $33,758 as
compared to net income attributable to the Company of $7,697 for the fiscal year ended December 31, 2017. The increase
in net income attributable to the Company was primarily due to an increase in revenue of $122,984 (10%), partially offset
by a $76,742 (6%) increase in total expenses.
Our total revenues for 2018 increased by $122,984 (10%) from 2017, resulting primarily from increases in
commissions of $160,303, investment banking revenue of $9,803, interest and dividends of $2,421, service fees of $34,100
and other income of $4,049, partially offset by a decrease in advisory fees of $86,507 due to the change in accounting for
revenues under ASC 606, and a decrease in principal transactions of $1,185. Our independent advisory and brokerage
services segment revenues increased by $20,663 (2%) from 2017 mainly driven by increases in commissions, service fees
and other income. This was partially offset by decreases in advisory fees due to the change in accounting for revenues
under ASC 606. Our Ladenburg segment revenues increased by $11,414 (17%) from 2017 as a result of higher investment
banking revenue primarily due to an increase in equity capital raising as compared to 2017. Our insurance brokerage
segment revenues increased by $89,995 (158%) in 2018 as compared to the prior year primarily due to the change in
accounting for insurance commissions revenue under ASC 606.
35
Our total expenses for 2018 increased by $76,742 (6%) from 2017, primarily driven by increases of $82,653
(133%) in our insurance brokerage segment, $10,256 (43%) in our corporate segment and $6,296 (10%) in our Ladenburg
segment, partially offset by a decrease of $22,463 (2%) in our independent advisory and brokerage services segment.
Expenses for 2018 included increases in commissions and fees expense of $48,166, compensation and benefits expense of
$22,701, amortization of contract acquisition costs of $9,671, interest expense of $8,086, professional services expense of
$2,339 and other expense of $1,085, partially offset by decreases in amortization of retention and forgivable loans of
$6,979, depreciation and amortization expense of $4,796, acquisition-related expense of $2,459 and brokerage,
communication and clearance fee expense of $2,036.
The $160,303 (30%) increase in commissions revenue for 2018 as compared to 2017 was primarily attributable
to an increase in sales of variable annuity, mutual fund, fixed annuity, insurance, fixed income and equity products, and
the impact of the adoption of ASC 606. Our independent advisory and brokerage services segment commissions revenue
increased by $69,987 (15%) resulting from increased sales of variable annuity, mutual fund, fixed annuity, insurance, fixed
income and equity products during 2018. Our insurance brokerage segment commissions revenue increased by $89,936
(165%) in 2018 as compared to the prior year primarily due to the change in accounting for revenues under ASC 606. See
Note 4, “Revenue from Contracts with Customers,” to the consolidated financial statements included in Part II, Item 8 of
this annual report on Form 10-K.
The $86,507 (15%) decrease in advisory fees revenue in 2018 as compared to 2017 was primarily attributable to
a $86,837 decrease in our independent advisory and brokerage services segment, due to the change in accounting for
revenues under ASC 606. Beginning in 2018, we no longer recognize advisory revenue on a gross basis when the client’s
assets are held at a Hybrid RIA. We now recognize these revenues on a net basis (after deducting the advisor’s
compensation), but also record administrative services provided to Hybrid RIAs. Advisory fee revenue for a particular
period is primarily affected by the level of average advisory assets during the period and market conditions. Advisory fees
generally are billed to clients in advance on a quarterly or a monthly basis, and are recognized as revenue ratably during
the quarter. Total advisory assets under management at December 31, 2018 were approximately $72,800,000 as compared
to $72,600,000 at December 31, 2017. Total advisory assets under management at January 31, 2019 increased to
approximately $76,700,000, primarily due to the increase in the equity markets during January 2019. We expect that future
advisory revenue growth may lag behind the growth rate of advisory assets due to the adoption of ASC 606.
The $9,803 (21%) increase in investment banking revenue for 2018 as compared to 2017 was primarily driven by
a $11,600 increase in capital raising revenue offset by a $1,797 decrease in strategic advisory services revenue. 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 $50,603 for the fiscal year ended
December 31, 2018 as compared to $39,003 for the prior year, resulting from a significant increase in equity capital raising
for small and mid-cap public companies. Strategic advisory services revenue was $5,653 for 2018 as compared to $7,450
for 2017.
The $1,185 (138%) decrease in principal transactions revenue in 2018 as compared to 2017 was primarily
attributable to our Ladenburg segment, which had a decrease of $1,361 (163%) due to a decline in the market value of
firm’s investments.
The $2,421 (95%) increase in interest and dividends revenue for 2018 as compared to 2017 was primarily
attributable to the corporate segment driven by higher cash balances and interest rates in the 2018 period.
The $34,100 (40%) increase in service fees in 2018 as compared to 2017 was primarily driven by an increase of
$33,510 in our independent advisory and brokerage services segment. The total increase was primarily due to increases in
cash sweep revenue of $32,690, other advisor and client fees of $1,920, and advisor affiliation fees of $1,665, partially
offset by a $2,156 decrease in trading services and fees.
Service fees revenue from our cash sweep programs was $54,819 for 2018 as compared to $22,129 in the
comparable 2017 period, reflecting the impact of increases in the target rate for the federal funds effective rate and the
implementation of new cash sweep programs during 2018. Future levels of service fees revenue are dependent upon
changes in prevailing interest rates and cash assets levels. At December 31, 2018, client assets included cash balances of
approximately $5,204,000, including approximately $4,838,000 participating in our cash sweep programs. We
implemented a new cash sweep program in the first quarter of 2018 for eligible advised IRA accounts, which we expect
will result in increases in service fees revenue in future periods assuming constant asset levels. See Item 1A. “Risk Factors
- Risk Factors Relating to Our Business - Significant interest rate changes or the termination of our cash sweep agreements
could affect our profitability and financial condition” above in this annual report on Form 10-K.
36
The $4,049 (11%) increase in other income in 2018 as compared to 2017 was primarily driven by an increase of
$4,024 in our independent advisory and brokerage services segment. The increase in other income in 2018 was primarily
due to increases in growth incentive credits from one of our clearing firms of $3,056, marketing services and product
incentives of $2,967 and conference revenue of $1,779, partially offset by a decrease in deferred compensation investment
revenue of $3,252, miscellaneous revenue of $444 and forgiveness of debt of $215.
The $48,166 (5%) increase in commissions and fees expense for 2018 as compared to 2017 was primarily due to
the increase in commissions expense of $83,821 in our insurance brokerage segment, primarily due to the adoption of ASC
606, partially offset by a decrease in our independent advisory and brokerage services segment of $35,468, primarily due
to the adoption of ASC 606. Commissions and fees expense is comprised of compensation earned by the registered
representatives who serve as independent contractors in our independent advisory and brokerage services segment and
insurance agents who serve as independent contractors in our insurance brokerage segment. These payments to the
independent contractor registered representatives and insurance agents are calculated based on a percentage of revenues
generated by such persons and vary by product. Accordingly, when our independent contractor registered representatives
and insurance agents increase their business, both our revenues and expenses increase because our representatives and
agents earn higher compensation based on the higher revenues produced.
The $22,701 (13%) increase in compensation and benefits expense for 2018 as compared to 2017 was attributable
to an increase of $14,121 in our independent advisory and brokerage services segment, as headcount grew 13% from the
prior year, an increase of $3,368 in our insurance brokerage segment due to an increase in revenue, an increase of $2,967
in our Ladenburg segment due to increases in incentive compensation and an increase of $2,245 in our corporate segment
due to increases in headcount and incentive compensation.
The $343 (6%) increase in non-cash compensation expense for 2018 as compared to 2017 was primarily
attributable to an increase in our independent advisory and brokerage services segment of $185 and our corporate segment
of $152.
The $2,036 (11%) decrease in brokerage, communication and clearance fees expense for 2018 as compared to
2017 was driven by a decrease of $2,175 in our independent advisory and brokerage services segment. This decrease in
expense resulted from increased levels of clearing credits during 2018 and included new annual business credits received
during the extension of the term of our clearing agreements with one of or clearing firms entered into in May 2018. We
expect that brokerage, communications and clearance fee expense will benefit in future periods from these credits.
The $621 (7%) increase in rent and occupancy expense, net of sublease revenue, for 2018 as compared to 2017
was attributable to an increase of $872 in our independent advisory and brokerage services segment and an increase of
$111 in our insurance brokerage segment due to rent increases, partially offset by a decrease of $379 in our Ladenburg
segment. We expect that rent and occupancy expense will increase in future periods upon the completion of the construction
of a new headquarters building for Securities America, which is currently estimated to occur in 2020.
The $2,339 (12%) increase in professional services expense for 2018 as compared to 2017 was primarily
attributable to an increase of $3,778 in our Ladenburg segment due to the change in accounting for underwriting expenses
under ASC 606 and an increase in our corporate segment of $2,234, primarily due to expense associated with the Share
Repurchase from Dr. Frost and an affiliated entity and related matters, partially offset by a decrease in professional services
expense at our independent advisory and brokerage services segment of $3,488.
The $8,086 (298%) increase in interest expense for 2018 as compared to 2017 resulted from a increased average
debt balance and higher interest rates. Our average outstanding debt balance was approximately $145,107 for 2018, as
compared to $35,416 for 2017. The average interest rate was 6.6% for 2018 as compared to 6% for 2017. Our outstanding
debt balance as of December 31, 2018 primarily included $185,328 of indebtedness due to the issuance of our senior notes
(excluding the Frost Notes), $76,350 of Frost Notes issued in connection with the Share Repurchase, and $5,763 of
indebtedness incurred in connection with asset acquisitions in our insurance brokerage segment. We expect higher interest
expense in 2019 due to our issuances of senior notes in 2018.
The $4,796 (17%) decrease in depreciation and amortization expense for 2018 as compared to 2017 was mainly
due to a decrease of $5,695 in our insurance brokerage segment due to the reclassification of the renewal intangible for
insurance commissions to other receivables based on the adoption of ASC 606. The decrease was partially offset by an
increase of $948 in our independent advisory and brokerage services segment.
The $2,459 (71%) decrease in acquisition-related expense for 2018 as compared to 2017 was due to a $2,556
decrease in acquisition-related expense in our independent advisory and brokerage services segment in 2018, which
occurred because the 2017 period included the recruitment of large groups of advisors.
37
The $6,979 (94%) decrease in amortization of retention and forgivable loans for 2018 as compared to 2017 was
driven by the reclassification of notes receivable to contract acquisition costs due to the adoption of ASC 606. See Note 4,
“Revenue from Contracts with Customers,” to the consolidated financial statements included in Part II, Item 8 of this
annual report on Form 10-K.
The $9,671 increase in amortization of contract acquisition costs for 2018 as compared to the 2017 period was
due to the change in accounting for revenues under ASC 606 related to costs to obtain a contract with a customer.
The $1,085 (2%) increase in other expense in 2018 as compared to 2017 was primarily driven by increases at our
independent advisory and brokerage services segment of $2,658 and our insurance brokerage segment of $1,610. Our
corporate and Ladenburg segment experienced decreases in other expense of $2,730 and $453, respectively, in 2018. The
total increase in other expense in 2018 was attributable to increases in software and equipment expense of $2,184,
conference expense of $2,023, travel and entertainment expense of $1,322, dues, licenses and registrations of $824,
advertising of $506, office expense of $502 and education and seminars expense of $307, partially offset by decreases in
deferred compensation plan expense of $3,260, legal settlement expense of $2,895 and bad debt expenses of $946.
We had an income tax expense of $13,379 in 2018 as compared to an income tax benefit of $6,502 in 2017. See
Note 12, “Income Taxes,” to the consolidated financial statements included in Part II, Item 8 of this annual report on Form
10-K.
Year ended December 31, 2017 compared to year ended December 31, 2016
For the fiscal year ended December 31, 2017, we had net income attributable to the Company of $7,697 as
compared to net loss attributable to the Company of $22,269 for the fiscal year ended December 31, 2016, primarily due
to an increase in revenue of $161,199 and a $16,527 decrease in income tax expense. The revenue increase of $161,199
(15%) was partially offset by a $147,968 (13%) increase in total expenses.
Total revenues for 2017 increased by $161,199 (15%) from 2016. Total revenues for 2017 were primarily
impacted by increases in advisory fees of $96,794, commissions of $26,005, investment banking revenue of $21,000,
service fees of $13,815 and other income of $3,808. Our independent advisory and brokerage services segment revenues
increased by $137,098 (14%) from 2016 mainly driven by an increase in advisory fees, commissions, service fees and other
income.
Our Ladenburg segment revenues increased by $17,255 (35%) from 2016 as a result of higher investment banking
revenue due to an increase in equity capital raising and financial advisory services as compared to 2016. Our insurance
brokerage segment revenues increased by $6,649 (13%) in 2017 as compared to the prior year, primarily driven by
increased commissions from institutional accounts.
Total expenses for 2017 increased by $147,968 (13%) from 2016, primarily due to an increase in revenue. The
increase in commission and fees expense is directly correlated with the increase in advisory fees and commissions revenue
in our independent advisory and brokerage services segment.
Total expenses for 2017 included increases in commissions and fees expense of $110,430, compensation and
benefits expense of $18,752, other expense of $8,023, professional services expense of $5,462, brokerage, communication
and clearance fee expense of $2,405, acquisition-related expense of $2,112, amortization of retention and forgivable loans
of $1,924, depreciation and amortization expense of $501 and non-cash compensation of $228. This increase was partially
offset by a decrease in interest expense of $1,552 and rent and occupancy expense, net of sublease revenue, of $317.
The $26,005 (5%) increase in commissions revenue for 2017 as compared to 2016 was primarily attributable to
an increase in sales of variable annuities and mutual fund products, partially offset by lower sales of alternative investments.
Our independent advisory and brokerage services segment commissions revenue increased by $22,573 (5%) in 2017 from
2016. Our Ladenburg segment commissions revenue decreased by $3,200 (22%) due to a decrease in salespersons and our
insurance brokerage segment commissions revenue increased by $6,632 (14%) in 2017 as compared to the prior year.
The $96,794 (21%) increase in advisory fees revenue in 2017 as compared to 2016 was primarily attributable to
a $97,573 increase in our independent advisory and brokerage services segment, due to improved market conditions and
higher average advisory assets, partly offset by a decrease of $803 in our Ladenburg segment. Advisory fee revenue for a
particular period is primarily affected by the level of advisory assets and market conditions. As of December 31, 2017, our
advisory assets increased by 26% as compared to December 31, 2016. Total advisory assets under management at
December 31, 2017 were approximately $72,600,000 as compared to $57,800,000 at December 31, 2016.
38
The $21,000 (83%) increase in investment banking revenue for 2017 as compared to 2016 was primarily driven
by a $17,967 increase in capital raising revenue and a $3,033 increase in strategic advisory services revenue. 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 $39,003 for the fiscal year ended
December 31, 2017 as compared to $21,036 for the prior year, resulting from a significant increase in equity capital raising
for small and mid-cap public companies. Strategic advisory services revenue was $7,450 for 2017 as compared to $4,417
for 2016.
The $106 (14%) increase in principal transactions revenue in 2017 as compared to 2016 was driven by our
independent advisory and brokerage services segment which increased by $174, due to an increase in the market value of
the firm’s investments and gains incurred upon liquidation of other investments, offset by a decrease in our Ladenburg
segment of $68.
The $329 (11%) decrease in interest and dividends revenue for 2017 as compared to 2016 was driven by a decrease
of $1,459 in the independent segment partially offset by an increase of $1,161 in our Ladenburg segment.
The $13,815 (19%) increase in service fees in 2017 as compared to 2016 was primarily due to an increase of
$13,815 in our independent advisory and brokerage services segment. The total increase was primarily due to increased
revenue from our cash sweep programs. Interest revenue from our cash sweep programs was $22,129 for the year ended
December 31, 2017, as compared to $7,985 for the prior year, reflecting the impact of increases in the target rate for the
federal funds effective rate and the implementation of new cash sweep programs. Future levels of interest and dividend
revenue are dependent upon changes in prevailing interest rates and asset levels. We implemented new cash sweep
programs in the first quarter of 2018 for eligible advised IRA accounts. At December 31, 2017, cash balances included in
client assets were approximately $4,468,000, including approximately $4,138,000 participating in our cash sweep
programs.
The $3,808 increase in other income in 2017 as compared to 2016 was primarily due to increases in conference
revenue of $4,160 and deferred compensation investment revenue of $1,676, partially offset by a decrease in marketing
services and product incentives of $1,403 and miscellaneous revenue of $616.
The $110,430 (14%) increase in commissions and fees expense for 2017 as compared to 2016 was directly
correlated with the increase in advisory fees and commissions revenue in our independent advisory and brokerage services
segment. Commissions and fees expense comprises compensation earned by the registered representatives who serve as
independent contractors in our independent advisory and brokerage 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 our independent contractor registered representatives increase their business, both our
revenues and expenses increase because our representatives earn higher compensation based on the higher revenues
produced.
The $18,752 (12%) increase in compensation and benefits expense for 2017 as compared to 2016 was attributable
to an increase of $6,918 in our independent advisory and brokerage services segment, as headcount grew 8% from the prior
year, and an increase of $8,103 in our Ladenburg segment due to higher revenues. Compensation and benefits expense in
our insurance brokerage segment and corporate segment increased by $1,456 and $2,275, respectively, due to business
expansion.
The $228 (4%) increase in non-cash compensation expense for 2017 as compared to 2016 was primarily
attributable to an increase in our corporate segment of $173 and our Ladenburg segment of $92.
The $2,405 (15%) increase in brokerage, communication and clearance fees expense for 2017 as compared to
2016 was driven by an increase of $2,769 in our independent advisory and brokerage services segment due to decreased
levels of clearing credits in the 2017 period. This was partially offset by a decrease of $497 in our Ladenburg segment due
to lower transaction-based revenues as compared to the prior-year period.
The $317 (3%) decrease in rent and occupancy expense, net of sublease revenue, for 2017 as compared to 2016
was attributable to decreases of $69 in our independent advisory and brokerage services segment, $293 in our Ladenburg
segment and $8 in our insurance brokerage segment, partly offset by an increase of $53 in our corporate segment.
The $5,462 (39%) increase in professional services expense for 2017 as compared to 2016 was attributable to
increases at our independent advisory and brokerage services segment of $5,538, our corporate segment of $264 and our
insurance brokerage segment of $54, mainly driven by higher recruiting fees at Securities America, increased legal fees
and independent contractor expenses, partly offset by a decrease in our Ladenburg segment of $394.
39
The $1,552 (36%) decrease in interest expense for 2017 as compared to 2016 resulted from a decreased average
debt balance and lower interest rates. Our average outstanding debt balance was approximately $35,416 for 2017, as
compared to $48,025 for 2016. The average interest rate was 6.0% for 2017 as compared to 7.2% for 2016. Our outstanding
debt balance as of December 31, 2017 included $6,738, $2,055 and $6,400 of indebtedness incurred in connection with the
Highland, KMS and SSN acquisitions, respectively.
The $501 (2%) increase in depreciation and amortization expense for 2017 as compared to 2016 was mainly due
to an increase of $1,049 in our independent advisory and brokerage services segment, partially offset by a decrease of $198
in our Ladenburg segment and $320 in our insurance brokerage segment.
The $2,112 (156%) increase in acquisition-related expense for 2017 as compared to 2016 was due to higher
expenses in our independent advisory and brokerage services segment of $2,112 related to recruitment of large groups of
advisors in 2017.
The $1,924 (35%) increase in amortization of retention and forgivable loans for 2017 as compared to 2016 was
driven by increased loan balances at our independent advisory and brokerage services segment.
The $8,023 (13%) increase in other expense in 2017 as compared to 2016 was primarily driven by increases at
our independent advisory and brokerage services segment of $7,793.
The total increase in other expense was attributable to increases in legal settlement and in bad debt expenses of
$1,613, deferred compensation plan expense of $1,399, financial advisor recruiting expenses of $1,051, other expense
$1,000, office expense of $624, conference expense of $582, software and equipment expense of $518, travel and
entertainment expense of $431, licenses and registrations of $257, stock and bond error of $112, firm insurance of $95 and
charitable contribution expense of $67. Our Ladenburg segment experienced an increase of $635 in other expense and
other expense in our insurance brokerage segment increased by $306, partially offset by a decrease at our Corporate
segment of $712.
We had an income tax benefit of $6,502 in 2017 as compared to an income tax expense of $10,025 in 2016. See
Note 12, “Income Taxes,” to the consolidated financial statements included in Part II, Item 8 of this annual report on Form
10-K.
Liquidity and Capital Resources
Approximately 30% and 36% of our total assets at December 31, 2018 and December 31, 2017, 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.
Below is a summary of changes in our cash flow (in thousands):
Net cash provided by (used in):
Operating activities ............................................ $
Investing activities..............................................
Financing activities ............................................
Net increase (decrease) in cash and cash
equivalents ........................................................... $
Cash and cash equivalents, beginning of period.....
Cash and cash equivalents, end of period ............... $
Year Ended December 31,
2017
2018
2016
63,372 $
(17,808 )
(29,146 )
16,418 $
172,863
189,281 $
16,215 $
(10,075 )
66,782
72,922 $
99,941
172,863 $
14,246
(11,229 )
(22,764 )
(19,747 )
119,688
99,941
40
Cash provided by operating activities for 2018 was $63,372, which primarily consisted of our net income of
$33,786 adjusted for non-cash expenses, increases in commissions and fees payable, accounts payable and accrued
liabilities, accrued compensation and decreases in receivables from clearing brokers, partially offset by increases in contract
acquisition costs, other receivables, securities owned and other assets. Cash provided by operating activities for 2017 was
$16,215, which primarily consisted of our net income of $7,682 adjusted for non-cash expenses, increases in accrued
compensation, and increases in commissions and fees payable, partially offset by increases in notes receivable from
financial advisors, increases in receivables from clearing brokers, increases in other receivables, increases from cash
surrender value of life insurance and increases from receivables from other broker-dealers. During 2017, we experienced
a significant growth in the level of recruitment of independent financial advisors, and our subsidiaries issued approximately
$27,000 of notes receivable to newly-recruited financial advisors to assist in the transition process. At December 31, 2017,
we had committed to fund, primarily in the first quarter of 2018, approximately an additional $13,000 of notes receivable
to newly-recruited financial advisors. These notes are generally forgivable over a five-to-seven year period subject to
certain restrictions.
Investing activities used $17,808 in 2018, primarily due to the purchase of furniture, equipment and leasehold
improvements of $14,502 and the net cash paid for the KFG and FSFG acquisitions of $3,300. Investing activities used
$10,075 in 2017, primarily due to the purchase of furniture, equipment and leasehold improvements of $9,896.
Financing activities used $29,146 in 2018, primarily due to repurchases of common stock of $69,746, the payment
of $34,031 in dividends on our Series A Preferred Stock, $21,943 in repayments of outstanding indebtedness, and the
payment of $8,794 in dividends on our common stock, partially offset by the issuance of senior notes of $104,375 and the
issuance of common stock upon option exercises and under our employee stock purchase plan of $4,266. The debt payments
of $21,943 included a $6,400 repayment of outstanding notes related to the SSN acquisition and a $2,055 repayment of
outstanding notes related to the KMS acquisition, and $6,690 in bank loans and revolver payments. Financing activities
provided $66,782 in 2017, primarily due to the issuance of our 6.5% Senior Notes due November 2027, which raised
$73,197, the issuance of Series A Preferred Stock under an “at the market” offering, which raised $28,095, the issuance of
common stock upon option exercises and under our employee stock purchase plan, which generated $9,066 and borrowings
under a term loan of $8,000, partially offset by payment of $32,482 in dividends on our Series A Preferred Stock, payment
of $3,880 in dividends on our common stock, $9,031 in payments of outstanding indebtedness, and $5,293 used for
common stock repurchases. The debt payments of $9,031 included a $5,021 repayment of outstanding notes related to the
SSN acquisition and a $2,018 repayment of outstanding notes related to the KMS acquisition, and $1,992 in bank loans
and revolver payments.
Operating Capital Requirements
Each of Securities America, Triad, Investacorp, KMS, SSN 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, 2018, the regulatory net capital of each of our broker-dealer subsidiaries was as follows: Securities America $9,164,
Triad $8,739, Investacorp $9,486, KMS $7,379, SSN $8,934 and Ladenburg $25,073. Failure to maintain the required net
capital may subject our broker-dealer subsidiaries to suspension or expulsion by FINRA, the SEC and other regulatory
bodies and ultimately may require their liquidation. The Net Capital Rule also prohibits the payment of dividends,
redemption of stock and prepayment or payment of principal of subordinated indebtedness if net capital, after giving effect
to the payment, redemption or prepayment, would be less than specified percentages of the minimum net capital
requirement.
Compliance with the Net Capital Rule could limit Ladenburg’s operations that require the intensive use of capital,
such as underwriting and trading activities, and also could restrict our ability to withdraw capital from our subsidiaries,
which in turn, could limit our ability to pay dividends and repay debt.
See Item 1A. “Risk Factors — Risk Factors Relating to the Regulatory Environment — 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, 2018, Premier Trust had stockholders’ equity of $3,422,
including at least $250 in cash.
Sources of Liquidity
Our primary sources of liquidity include cash flows from operations and sales of securities in public or private
transactions. We believe that we have adequate cash and regulatory capital to fund our current level of operating activities
through at least March 2020.
41
In June 2018, we entered into an equity distribution agreement under which we may sell up to 6,832,841 shares
of our Series A Preferred Stock in an “at the market” offering under Rule 415 under the Securities Act. This equity
distribution agreement replaced our previous equity distribution agreement pursuant to which we could sell up to 8,000,000
shares of our Series A Preferred Stock. During 2018, we did not sell any shares of Series A Preferred Stock pursuant to the
“at the market” offering. At December 31, 2018, we had 6,832,841 shares of Series A Preferred Stock remaining available
for sale under such equity distribution agreement. From January 1, 2019 through March 12, 2019, we sold an additional
287,230 shares of Series A Preferred Stock for gross proceeds of $6,881 pursuant to the “at the market” offering.
On November 21, 2017, we sold $72,500 principal amount of our 6.5% Senior Notes. Interest on the 6.5% Senior
Notes accrues from November 21, 2017 and is paid quarterly in arrears on March 31, June 30, September 30 and December
31 of each year. We may redeem the 6.5% Senior Notes in whole or in part on or after November 30, 2020, at our option,
at a redemption price equal to 100% of their principal amount, plus accrued and unpaid interest. During the fourth quarter
of 2017, the underwriters exercised their option to purchase an additional $4,069 principal amount of 6.5% Senior Notes.
In connection with the offering of 6.5% Senior Notes, certain persons who were members of management and our Board
of Directors at such time purchased $10,400 of the 6.5% Senior Notes offered by us. The offering resulted in total gross
proceeds of $76,569, before deducting the underwriting discount paid to unaffiliated underwriters and offering expenses
aggregating $3,313. In February 2018, we entered into a note distribution agreement under which we may sell up to $25,000
of our 6.5% Senior Notes from time to time in an “at the market” offering. During 2018, we sold $6,240 principal amount
of 6.5% Senior Notes pursuant to the “at the market” offering for net proceeds of $6,058.
On May 22, 2018, we sold $40,000 principal amount of our 7% Senior Notes pursuant to an underwritten offering.
Interest on the 7% Senior Notes accrues from May 30, 2018 and is paid quarterly in arrears on March 31, June 30,
September 30 and December 31 of each year. We may redeem the 7% Senior Notes in whole or in part on or after May 31,
2021, at our option, at a redemption price equal to 100% of their principal amount, plus accrued and unpaid interest. During
the second quarter of 2018, the underwriters exercised their option to purchase an additional $1,412 principal amount of
7% Senior Notes. The offering resulted in total gross proceeds of $41,412, before deducting (i) the underwriting discount
paid to unaffiliated underwriters and offering expenses aggregating $2,020 and (ii) $1,622 of 7% Senior Notes repurchased
by Ladenburg. In June 2018, we entered into a note distribution agreement under which we may sell up to $25,000 of
additional 7% Senior Notes from time to time in an “at the market” offering. In 2018, we sold $2,729 principal amount of
7% Senior Notes pursuant to the “at the market” offering for net proceeds of $2,682.
On August 9, 2018, we sold $60,000 principal amount of our 7.25% Senior Notes pursuant to an underwritten
offering. Interest on the 7.25% Senior Notes accrues from August 16, 2018 and is paid quarterly in arrears on March 31,
June 30, September 30 and December 31 of each year. We may redeem the 7.25% Senior Notes in whole or in part on or
after September 30, 2021 at our option, at a redemption price equal to 100% of their principal amount, plus accrued and
unpaid interest. The offering resulted in total gross proceeds of $60,000, before deducting the underwriting discount paid
to unaffiliated underwriters and offering expenses aggregating $2,135.
Pursuant to a letter agreement (the “Letter Agreement”), dated as of December 24, 2018, by and between the
Company and Frost Gamma Investments Trust (“Frost Gamma”), an entity affiliated with Dr. Frost, our former principal
shareholder, the Company’s $40,000 revolving credit agreement (the “Credit Agreement”), dated as of November 8, 2017,
by and between the Company and Frost Gamma, was terminated effective as of December 24, 2018. At the time of its
termination, no outstanding amounts were owed by the Company under the Credit Agreement and no early termination
penalties were incurred by the Company in connection with the termination.
We believe our existing assets and cash flows from operations will provide adequate funds for continuing
operations at current activity levels and for payment of our obligations, including outstanding indebtedness and the
dividends on our outstanding Series A Preferred Stock. We were in compliance with all covenants in our debt agreements
as of December 31, 2018.
Debt
On November 4, 2011, National Financial Services LLC (“NFS”), which is now known as Fidelity Clearing &
Custody Solutions (“Fidelity”), 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 accrued at the average annual Federal Funds
effective rate plus 6% per annum, subject to the maximum rate of 11% per annum. If Securities America met certain annual
clearing revenue targets set forth in the loan agreement, the principal balance of the loan was forgiven in seven equal yearly
installments of $2,143 through November 2018. Interest payments due with respect to each such year were forgiven if the
annual clearing revenue targets was met. We expensed interest under this loan agreement until such time as such interest
was forgiven. Securities America met the annual clearing revenue target for the periods ending November 4, 2012, 2013,
2014, 2015, 2016 and 2017 resulting in the forgiveness of $2,143 of the aggregate principal amount of the loan in November
of each period. Upon meeting annual revenue targets, principal and interest, respectively, of $2,143 and $295 in 2017 and
$2,143 and $408 in 2016 were forgiven and included in other income. In May 2018, five of our broker-dealer subsidiaries
entered into a six-year extension of their clearing agreements with NFS. In connection with the extensions, we entered into
a termination of the NFS forgivable loan agreement whereby the remaining balance of the principal and interest of $2,143
and $79, respectively, on the loan was forgiven. This amount was included in other income in 2018.
42
On July 31, 2014, we acquired HCHC Holdings, Inc. (“HCHC”), the parent company of Highland. At December
31, 2017, approximately $6,738 of HCHC Acquisition Inc.’s (as successor in interest to HCHC) 10% promissory notes due
February 26, 2019 remained outstanding. Accrued interest on the promissory notes was payable quarterly. In July 2018,
HCHC prepaid the promissory notes, including accrued interest.
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 was subject to certain transfer restrictions. The notes were unsecured
and bore interest at 1.84% per annum and were payable in 16 equal quarterly installments. In July 2018, we prepaid the
promissory notes, including accrued interest.
On January 2, 2015, we acquired SSN and issued $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 were
secured by a pledge of the shares of SSN and RCC pursuant to a stock pledge agreement. In July 2018, we prepaid the
promissory notes, including accrued interest.
On November 6, 2013, Securities America entered into a loan agreement (the “SA Loan Agreement”) with a third-
party financial institution for (i) a term loan in the aggregate principal amount of approximately $1,709 and (ii) a revolving
credit facility. The term loan bore interest at 5.5%, and was re-paid in full in May 2017. Revolving loans bear interest at
5.5% per annum over a 5-year term. At December 31, 2018 and 2017, respectively, $89 and $216 were outstanding under
the revolving credit facility. On April 21, 2017, the SA Loan Agreement was amended to modify the interest rate for new
revolving loans to prime plus 2.25%. The SA Loan Agreement was also amended to provide for an additional term loan in
the aggregate principal amount of $8,000, subject to certain conditions. This $8,000 term loan bore interest at 5.75% with
a maturity date of May 1, 2020. In July 2018, Securities America prepaid the term loan, including accrued interest. On
February 6, 2019, the SA Loan Agreement was amended to provide for a new term loan in the aggregate principal amount
of $7,000, with interest at the rate of 5.52% per annum. Securities America began monthly payments of principal and
interest under the new term loan in the amount of $212, on March 6, 2019. The term loan matures on February 6, 2022.
The loans are collateralized by Securities America’s assets. The SA Loan Agreement contains certain affirmative and
negative covenants, including covenants regarding Securities America’s client asset levels and number of financial
advisors.
On August 31, 2018, as part of the consideration paid for the acquisition of KFG, an affiliate of Highland issued
a promissory note (the “KFG Note”) to the former shareholders of KFG in the aggregate principal amount of $5,450,
bearing interest at 4.00% per annum and payable in equal monthly installments beginning on September 15, 2018, with the
final installment being due on November 15, 2036. The KFG Note may be prepaid in full or in part at any time without
premium or penalty. The KFG Note contains customary events of default, which if uncured, entitle the holder to accelerate
the due date of the unpaid principal amount of, and all accrued and unpaid interest on, the KFG Note. Total interest expense
on the KFG Note was $73 for the period ended December 31, 2018.
In November 2018, as part of the consideration paid for the acquisition of FSFG, Highland issued two promissory
notes in the amounts of $169 and $203, bearing interest at 3.99% and 4.75%, per annum, respectively. and payable in equal
monthly installments. The notes mature on October 1, 2021 and January 15, 2024, respectively.
In December 2018, as part of the consideration paid for the Share Repurchase of 50.9 million shares of our
common stock, we issued $76.35 million aggregate principal amount of 7.25% Senior Notes due 2028 (the “Frost Notes”)
to the Sellers. The Frost Notes are senior unsecured obligations of the Company and rank equally in right of payment with
all of the Company’s existing and future senior unsecured and unsubordinated indebtedness. The Frost Notes are effectively
subordinated in right of payment to all of the Company’s existing and future secured indebtedness and structurally
subordinated to all existing and future indebtedness of the Company’s subsidiaries. The Frost Notes bear interest from
December 24, 2018 at the rate of 7.25% per annum, payable quarterly in arrears on March 31, June 30, September 30 and
December 31 of each year, commencing on March 31, 2019, and at maturity. The Frost Notes mature on September 30,
2028. The Company may, at its option, at any time and from time to time, on or after September 30, 2021, redeem the Frost
Notes, in whole or in part, at a redemption price equal to 100% of the outstanding principal amount thereof plus accrued
and unpaid interest to, but excluding, the date fixed for redemption. On and after any redemption date, interest will cease
to accrue on the redeemed Frost Notes. The Frost Notes contain registration and exchange rights that require the Company,
at the written request of the Sellers, to use commercially reasonable efforts to issue in exchange for the Frost Notes a new
series of notes under the Company’s existing Indenture, dated as of November 21, 2017, as amended and supplemented
from time to time, on substantially the same terms as the Company’s outstanding 7.25% Senior Notes due 2028, which
have substantially the same terms as the Frost Notes.
43
Stock Repurchases
In March 2007, October 2011, November 2014 and November 2016, our board of directors authorized in the
aggregate the repurchase of up to 27,500,000 shares of our common stock from time to time on the open market or in
privately negotiated transactions depending on market conditions. Since inception through December 31, 2018, 25,184,105
shares of common stock have been repurchased for $66,116 under the program, including 5,833,890 shares repurchased
for $16,705 in 2018. On December 24, 2018, we entered into the Repurchase Agreement with our former principal
shareholder, Dr. Frost, and an affiliated entity, under which we repurchased 50,900,000 shares of our common stock in a
private transaction at a price of $2.50 per share. We funded this share repurchase with $50,900 in cash on hand and by
issuing $76,350 aggregate principal amount of Frost Notes to the Sellers.
In the fourth quarter of 2015, we adopted a Rule 10b5-1 trading plan, and may adopt similar plans periodically in
the future, to permit the repurchase of common stock pursuant to the existing stock repurchase program during certain
restricted trading periods.
Lease Agreements
At December 31, 2018, we were obligated under several non-cancelable lease agreements for office space, which
provide for future minimum lease payments aggregating approximately $67,690 through January 2032, exclusive of
escalation charges.
In connection with a new office lease dated March 28, 2016, Securities America has exercised an option to lease
additional office space, which has not been constructed, for 12 years and would require the payment of an estimated average
annual rent of $2,000, subject to certain adjustments. We currently expect that this lease would commence in 2020 upon
the completion of the construction.
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.
See Note 15, “Off-Balance-Sheet Risk and Concentration of Credit Risk,” to the consolidated financial statements
included in Part II, Item 8 of this annual report on Form 10-K.
Contractual Obligations
The table below summarizes information about our contractual obligations as of December 31, 2018 and the effect
these obligations are expected to have on our liquidity and cash flow in the future years.
Payments Due By Period
Total
Less than 1
year
1 – 3 years 4 – 5 years
After 5
years
92
67,690 $
21,546
Operating leases(1) ...................................... $
Deferred compensation plan(2) ...................
Notes payable under subsidiary’s revolver
with bank (3) ...............................................
Note payable under subsidiary’s term loan
with bank (4) ...............................................
Notes payable to Kestler Financial
Group’s former shareholders (5) .................
Notes payable to Four Seasons Financial
Group’s former shareholders (6) .................
1,292
6.5% Senior Notes (7) .................................
130,805
7% Senior Notes (8) ....................................
70,547
7.25% Senior Notes (9) ...............................
102,413
7.25% Phillip Frost Note (10) ......................
8,534
7.25% Frost Nevada Trust Note (11) ...........
121,786
Total ........................................................... $ 540,859 $
7,620
8,534
8,341 $
3,851
16,084 $
2,813
11,980 $
1,325
31,285
13,557
77
15
—
2,117
5,080
423
—
—
854
1,377
845
5,458
554
5,383
2,976
4,350
362
5,173
34,038 $
647
10,765
5,953
8,700
725
10,346
62,505 $
3
88
103,892
10,765
55,665
5,953
80,663
8,700
6,722
725
10,346
95,921
51,150 $ 393,166
44
(1) Includes lease obligation of approximately $24,000 related to a twelve-year lease for a new office building to be built
for Securities America. This lease obligation commences upon the completion of the construction of such building,
which is currently estimated to occur in 2020. See Note 14, “Commitments and Contingencies,” to the consolidated
financial statements included in Part II, Item 8 of this annual report on Form 10-K.
(2) See Note 11, “Deferred Compensation Plan,” to the consolidated financial statements included in Part II, Item 8 of this
annual report on Form 10-K.
(3) Notes bear interest at 5.5% per annum and are payable in 58 and 60 monthly installments. See Note 13, “Notes
Payable,” to the consolidated financial statements included in Part II, Item 8 of this annual report on Form 10-K.
(4) On February 6, 2019, Securities America Financial Corporation entered into an amendment to its loan agreement with
a third-party financial institution to provide for a term loan in the aggregate principal amount of $7,000. Note bears
interest at 5.52% per annum and is payable in 36 monthly installments. See Note 13, “Notes Payable,” to the
consolidated financial statements included in Part II, Item 8 of this annual report on Form 10-K.
(5) Notes bear interest at 4% per annum and mature on November 15, 2036. Includes annual cash payments to be made
on each anniversary of the closing date for the next three years. See Note 13, “Notes Payable,” to the consolidated
financial statements included in Part II, Item 8 of this annual report on Form 10-K.
(6) Notes bear interest at 3.99% and 4.75% per annum and mature on October 1, 2021 and January 15, 2024, respectively.
Includes annual cash payments to be made on each anniversary of the closing date for the next two years. See Note
13, “Notes Payable,” to the consolidated financial statements included in Part II, Item 8 of this annual report on Form
10-K.
(7) Senior notes bear interest at 6.5% per annum and mature on November 30, 2027. Interest will be paid quarterly in
arrears. See Note 13, “Notes Payable,” to the consolidated financial statements included in Part II, Item 8 of this annual
report on Form 10-K.
(8) Senior notes bear interest at 7% per annum and mature on May 31, 2028. Interest will be paid quarterly in arrears. See
Note 13, “Notes Payable,” to the consolidated financial statements included in Part II, Item 8 of this annual report on
Form 10-K.
(9) Senior notes bear interest at 7.25% per annum and mature on September 30, 2028. Interest will be paid quarterly in
arrears. See Note 13, “Notes Payable,” to the consolidated financial statements included in Part II, Item 8 of this annual
report on Form 10-K.
(10) Note bears interest at 7.25% per annum and matures on September 30, 2028. Interest will be paid quarterly in arrears.
See Note 13, “Notes Payable,” to the consolidated financial statements included in Part II, Item 8 of this annual report
on Form 10-K.
(11) Note bears interest at 7.25% per annum and matures on September 30, 2028. Interest will be paid quarterly in arrears.
See Note 13, “Notes Payable,” to the consolidated financial statements included in Part II, Item 8 of this annual report
on Form 10-K.
Market Risk
Market risk generally represents the risk of loss that may result from the potential change in the value of a financial
instrument as a result of fluctuations in interest and currency exchange rates, equity and commodity prices, changes in the
implied volatility of interest rates, foreign exchange rates, equity and commodity prices and also changes in the credit
ratings of either the issuer or its related country of origin. Market risk is inherent to both derivative and non-derivative
financial instruments, and accordingly, the scope of our market risk management procedures extends beyond derivatives
to include all market risk sensitive financial instruments.
Current and proposed underwriting, corporate finance, merchant banking and other commitments are subject to
due diligence reviews by our senior management, as well as professionals in the appropriate business and support units
involved. Credit risk related to various financing activities is reduced by the industry practice of obtaining and maintaining
collateral. We monitor our exposure to counter-party risk through the use of credit exposure information, the monitoring
of collateral values and the establishment of credit limits.
Interest Rate Risk
We offer our advisors and their clients cash sweep vehicles that are interest rate sensitive. Clients earn interest on
balances in cash sweep accounts, and we earn service fee revenue. Our fees from our cash sweep programs are sensitive to
prevailing interest rates. We attempt to mitigate interest rate risk and strive to create a net interest margin that is relatively
stable and predictable over a wide range of interest rates by structuring the mix of funds indexed to the effective federal
funds rate and term swap rates. Changes in interest rates and fees and our hedge profile for our cash sweep programs are
monitored by our FDIC Sweep Steering Committee. In addition, an analysis of our service fee revenue from our cash sweep
programs based on various changes in interest rates is periodically presented to our Board of Directors.
45
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 captions “Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Market Risk” and “Management’s Discussion and Analysis of Financial Condition and Results
of Operations — Interest Rate Risk” is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the Consolidated Financial Statements and Notes thereto, together with the report thereon of EisnerAmper
LLP dated March 14, 2019, beginning on page F-1 of this report which are incorporated by reference in this Item 8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Exchange Act) are our
controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that
we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods
specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under
the Exchange Act is accumulated and communicated to our management, including our principal executive officer and
principal financial officer, as appropriate, to allow timely decisions regarding disclosure.
Under the supervision and with the participation of our management, including our principal executive officer and
principal financial officer, we evaluated the effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report, and, based on that evaluation, our principal executive officer and principal financial officer
have concluded that these controls and procedures were effective as of such date.
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:
46
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of our assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures
are being made only in accordance with authorizations of our management and directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on the financial statements.
In connection with this annual report on Form 10-K, our chief executive officer and chief financial officer
evaluated, with the participation of our management, the effectiveness of our internal control over financial reporting as of
the end of the period covered by this report. Based on management’s evaluation, our chief executive officer and chief
financial officer each concluded that our internal control over financial reporting was effective as of December 31, 2018.
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, 2018 as stated in its report
which is included herein.
Changes in Internal Control Over Financial Reporting
Except as set forth, below, there were no changes in our internal control over financial reporting during the quarter
ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
For the year ended December 31, 2018, we implemented new controls which enabled us to prepare our financial
statements under ASC 606 on a modified retrospective basis effective January 1, 2018.
Changes were made to the relevant business processes and the related control activities, including information
systems, in order to monitor and maintain appropriate controls over financial reporting.
47
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Ladenburg Thalmann Financial Services Inc.
Opinion on Internal Control over Financial Reporting
We have audited Ladenburg Thalmann Financial Services Inc.’s (the “Company”) internal control over financial
reporting as of December 31, 2018, based on criteria established in the Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018,
based on criteria established in the 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) (“PCAOB”), the consolidated statements of financial condition of Ladenburg Thalmann Financial Services
Inc. as of December 31, 2018 and 2017, 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, 2018, and the related notes and
our report dated March 14, 2019 expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on
the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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 of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
An entity’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. An entity’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 entity; (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 entity are being made only in accordance with authorizations of
management and directors of the entity; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the entity’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.
/s/ EisnerAmper LLP
EISNERAMPER LLP
New York, New York
March 14, 2019
ITEM 9B. OTHER INFORMATION.
None.
48
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
This information will be contained in our definitive proxy statement for our 2019 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 2019 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 2019 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 2019 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 2019 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.
49
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)(1): Index to 2018 Consolidated Financial Statements
PART IV
The consolidated financial statements and the notes thereto, together with the report thereon of EisnerAmper LLP
dated March 14, 2019, 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.
Incorporated By
Reference from
Document
No. in
Document
FF
2.1
(a)(3): Exhibits Filed
The following exhibits are filed as part of this annual report on Form 10-K.
EXHIBIT INDEX
Exhibit No.
Description
2.1
Asset Purchase Agreement, dated as of August 31, 2018, by and among
Kestler Financial Group, Inc., Jason A. Kestler and Ladenburg
Thalmann Annuity Insurance Services LLC.
2.2
Stock Purchase Agreement, dated August 16, 2011, by and between the
Company and Ameriprise Financial, Inc.
3.1
Articles of Incorporation.
3.2
Articles of Amendment to the Articles of Incorporation, dated August
24, 1999.
3.3
Articles of Amendment to the Articles of Incorporation, dated April 3,
2006.
3.4
Articles of Amendment to the Articles of Incorporation, dated May 9,
2013.
3.5
Articles of Amendment to the Articles of Incorporation, dated May 21,
2013.
3.6
Articles of Amendment to the Articles of Incorporation, dated June 20,
2013.
3.7
Articles of Amendment to the Articles of Incorporation, dated June 9,
2014.
3.8
Articles of Amendment to the Articles of Incorporation, dated June 25,
2014.
3.9
Articles of Amendment to the Articles of Incorporation, dated
November 20, 2014.
K
A
B
C
N
O
P
Q
S
T
3.10
Articles of Amendment to the Articles of Incorporation, dated May 20,
W
2015.
50
2.1
3.1
3.2
3.1
3.1
3.6
3.1
3.1
3.1
3.1
3.1
Incorporated By
Reference from
Document
No. in
Document
Exhibit No.
Description
3.11
Articles of Amendment to the Articles of Incorporation, dated May 18,
2016.
3.12
Articles of Amendment to the Articles of Incorporation, dated May 18,
2017.
3.13
Amended and Restated Bylaws.
4.1
Form of common stock certificate.
4.2
Specimen 8.00% Series A Cumulative Redeemable Preferred Stock
Certificate.
Y
Z
D
A
O
4.3
Indenture, dated as of November 21, 2017, between the Company and
BB
U.S. Bank National Association, as Trustee.
4.4
First Supplemental Indenture, dated as of November 21, 2017, between
BB
the Company and U.S. Bank National Association, as Trustee.
4.5
Form of 6.50% Senior Note due 2027 (included as Exhibit A to Exhibit
BB
4.6 above).
4.6
Promissory Note, dated as of August 31, 2018, issued by Ladenburg
Thalmann Annuity Insurance Services LLC to Kestler Financial Group,
Inc.
FF
4.7
Second Supplemental Indenture, dated as of May 30, 2018, between the
GG
Company and U.S. Bank National Association, as Trustee.
4.8
Form of 7.00% Senior Note due 2028 (included as Exhibit A to Exhibit
GG
4.7 above).
4.9
Third Supplemental Indenture, dated as of August 16, 2018, between the
HH
Company and U.S. Bank National Association, as Trustee.
4.10
Form of 7.25% Senior Note due 2028 (included as Exhibit A to Exhibit
HH
4.9 above).
4.11
Form of 7.25% Senior Note due 2028 issued to Phillip Frost, M.D. and
Frost Nevada Investments Trust.
10.1
Amended and Restated 1999 Performance Equity Plan.*
10.2
Ladenburg Thalmann Financial Services Inc. Amended and Restated
2009 Incentive Compensation Plan.*
10.3
Ladenburg Thalmann Financial Services Inc. Amended and Restated
Qualified Employee Stock Purchase Plan.*
10.4
Office Lease dated March 30, 2007 between Ladenburg Thalmann &
Co., Inc. and Frost Real Estate Holdings, LLC.
10.5
Amendment and Lease Extension Agreement, dated as of March 8,
2013, between Ladenburg Thalmann & Co. Inc. and Frost Real Estate
Holdings, LLC.
II
E
R
F
G
M
51
3.1
3.1
3.2
4.1
4.1
4.1
4.2
4.2
4.1
4.1
4.2
4.1
4.2
4.1
4.1
Exhibit A
Appendix A
10.1
10.1
Exhibit No.
Description
10.6
3rd Amendment and Lease Extension Agreement, dated as of March 1,
2018, between Ladenburg Thalmann & Co. Inc. and Frost Real Estate
Holdings, LLC.
Incorporated By
Reference from
Document
No. in
Document
EE
10.1
10.7
Letter Agreement, dated February 26, 2014, between the Company and
Vector Group Ltd.
10.8
Employment Agreement, dated as of January 20, 2015, between the
Company and Mark Zeitchick.*
10.9
Employment Agreement, dated as of January 20, 2015, between the
Company and Richard Lampen.*
10.10
Employment Letter, dated as of January 30, 2013, by and between the
Company and Joseph Giovanniello, Jr. *
10.11
Employment Letter, dated as of February 8, 2008, between the Company
and Brett Kaufman.*
H
U
U
L
I
10.12
Employment Agreement, dated as of January 16, 2018, between the
CC
Company and Adam Malamed.*
10.13
Lease, dated as of August 13, 2010, between Investacorp Group, Inc.
J
and Frost Real Estate Holdings, LLC.
10.14
10.15
Credit Agreement, dated as of November 8, 2017, by and between the
Company and Frost Gamma Investments Trust, including the form of
note thereto.
Equity Distribution Agreement, dated May 22, 2017, between the
Company and Jefferies LLC, as representative of the Sales Agents listed
on Schedule I thereto.
10.16
Form of Restricted Stock Award Agreement.*
Amendment and Lease Extension Agreement, dated as of February 22,
2016, between Investacorp Group, Inc. and Frost Real Estate Holdings,
LLC.
AA
Z
V
X
10.17
10.18
10.1
10.2
10.1
10.1
10.1
10.1
10.1
10.1
1.1
10.4
10.1
Note Distribution Agreement, dated as of February 15, 2018, between
the Company and Ladenburg Thalmann & Co. Inc., as representative of
the agents named therein.
DD
1.1
10.19
Forgivable Loan Termination Agreement, dated as of May 8, 2018,
JJ
10.4
between the Company and National Financial Services LLC.
10.20
10.21
Equity Distribution Agreement, dated June 11, 2018, between the
Company, Ladenburg Thalmann & Co. Inc. and Barrington Research
Associates, Inc.
KK
1.1
Note Distribution Agreement, dated as of June 22, 2018, between the
Company and Ladenburg Thalmann & Co. Inc., as representative of the
sales agents named therein.
LL
1.1
10.22
Agreement, dated December 24, 2018, by and among the Company,
Phillip Frost M.D. and Frost Nevada Investments Trust.
10.23
Letter Agreement, dated December 24, 2018, by and between the
Company and Frost Gamma Investments Trust.
II
II
10.1
10.2
52
Exhibit No.
Description
21
List of Subsidiaries
23.1
Consent of EisnerAmper LLP
24
Power of Attorney
31.1
31.2
32.1
32.2
Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
Certification of Chief Financial Officer, Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
Certification of Chief Financial Officer, Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
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.
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.
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 February 26, 2014 and filed with the SEC on February 28, 2014.
Current report on Form 8-K, dated March 27, 2008 and filed with the SEC on March 28, 2008.
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 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.
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 November 21, 2014 and filed with the SEC on November 21, 2014.
Current report on Form 8-K, dated January 20, 2015 and filed with the SEC on January 23, 2015.
G.
H.
I.
J.
K.
L.
M.
N.
O.
P.
Q.
R.
S.
T.
U.
53
Quarterly report on Form 10-Q for the quarter ended March 31, 2015.
V.
Current report on Form 8-K, dated May 22, 2015 and filed with the SEC on May 22, 2015.
W.
Current report on Form 8-K, dated February 22, 2016 and filed with the SEC on February 26, 2016.
X.
Current report on Form 8-K, dated May 18, 2016 and filed with the SEC on May 20, 2016.
Y.
Z.
Current report on Form 8-K, dated May 22, 2017 and filed with the SEC on May 22, 2017.
AA. Current report on Form 8-K, dated November 8, 2017 and filed with the SEC on November 9, 2017.
BB. Current report on Form 8-K, dated November 21, 2017 and filed with the SEC on November 21, 2017.
CC. Current report on Form 8-K, dated January 16, 2018 and filed with the SEC on January 22, 2018.
DD. Current report on Form 8-K, dated February 15, 2018 and filed with the SEC on February 16, 2018.
EE. Current report on Form 8-K, dated February 28, 2018 and filed with the SEC on March 6, 2018.
FF. Current report on Form 8-K, dated August 31, 2018 and filed with the SEC on September 7, 2018.
GG. Current report on Form 8-K, dated May 30, 2018 and filed with the SEC on May 30, 2018.
HH. Current report on Form 8-K, dated August 16, 2018 and filed with the SEC on August 16, 2018.
II.
JJ.
KK. Current report on Form 8-K, dated June 8, 2018 and filed with the SEC on June 12, 2018.
LL. Current report on Form 8-K, dated June 22, 2018 and filed with the SEC on June 22, 2018.
Current report on Form 8-K, dated December 24, 2018 and filed with the SEC on December 26, 2018.
Quarterly report on Form 10-Q for the quarter ended March 31, 2018.
ITEM 16. FORM 10-K SUMMARY.
None.
54
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
LADENBURG THALMANN FINANCIAL SERVICES INC.
(Registrant)
Dated: March 15, 2019
/s/ Brett H. Kaufman
By:
Name: Brett H. Kaufman
Title: Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
55
POWER OF ATTORNEY
The undersigned directors and officers of Ladenburg Thalmann Financial Services Inc. hereby constitute and
appoint Brett H. Kaufman, Richard J. Lampen and Mark Zeitchick, and each of them, with full power to act without the
other and with full power of substitution and resubstitution, our true and lawful attorneys-in-fact with full power to execute
in our name and behalf in the capacities indicated below, this annual report on Form 10-K and any and all amendments
thereto and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and
Exchange Commission, and hereby ratify and confirm all that such attorneys-in-fact, or any of them, or their substitutes
shall lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the
following persons on behalf of the registrant and in the capacities indicated on March 15, 2019.
Signatures
/s/ Richard J. Lampen
Richard J. Lampen
/s/ Brett H. Kaufman
Brett H. Kaufman
/s/ Henry C. Beinstein
Henry C. Beinstein
/s/ Glenn C. Davis
Glenn C. Davis
/s/ Brian S. Genson
Brian S. Genson
/s/ Dr. Richard M. Krasno
Dr. Richard M. Krasno
/s/ Michael S. Liebowitz
Michael S. Liebowitz
/s/ Howard M. Lorber
Howard M. Lorber
/s/ Adam Malamed
Adam Malamed
/s/ Jacqueline M. Simkin
Jacqueline M. Simkin
/s/ Mark Zeitchick
Mark Zeitchick
Title
Chairman, President and Chief Executive Officer
(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
56
LADENBURG THALMANN FINANCIAL SERVICES INC.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2018
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, 2018 and 2017 ......................................
Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016 ....................
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2018,
2017 and 2016 .................................................................................................................................................
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016 ...................
Notes to the Consolidated Financial Statements ................................................................................................
Page
F-2
F-3
F-4
F-5
F-8
F-10
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Ladenburg Thalmann Financial Services Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of Ladenburg Thalmann
Financial Services Inc. (the “Company”) as of December 31, 2018 and 2017, 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, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial
statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31,
2018 and 2017, and the consolidated results of its operations and its cash flows for each of the years in the three-year period
ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2018, based on
criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”), and our report dated March 14, 2019 expressed an unqualified
opinion.
Change in Accounting Principle
As discussed in Note 4 to the financial statements, the Company has changed its method of accounting for Revenue
in 2018 due to the adoption of Accounting Standards Codification Topic 606, Revenue from Contracts with Customers.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express
an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide
a reasonable basis for our opinion.
We have served as the Company’s auditor since 2002.
EISNERAMPER LLP
New York, New York
March 14, 2019
F-2
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands, except share and per share amounts)
December 31,
2018
2017
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 ............................................................................................................
Contract acquisition costs, net ...........................................................................
Cash surrender value of life insurance ...............................................................
Income taxes receivable .....................................................................................
Other assets ........................................................................................................
182,693 $
10,923
24,068
7,078
5,809
133,242
29,994
6,588
73,064
126,079
80,726
11,406
2,156
47,078
172,103
3,881
48,543
2,822
47,369
60,707
23,621
760
103,611
124,210
—
12,711
—
31,687
Total assets .................................................................................................... $
740,904 $
632,025
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 unamortized discount of $6,372 and $424 in 2018 and
2017, respectively, and net of debt issuance costs of $7,086 and $3,412 in
2018 and 2017 respectively. ...........................................................................
Total liabilities ...............................................................................................
2,575 $
39,192
105,306
48,813
2,956
14,068
20,622
123
231
33,343
67,221
40,478
2,151
2,968
18,161
232
254,072
487,727
96,849
261,634
Commitments and contingencies (Note 14)
Shareholders’ equity:
Preferred stock, $.0001 par value; authorized 50,000,000 shares: 8% Series A
cumulative redeemable preferred stock; designated 23,844,916 shares in
2018 and 2017; shares issued and outstanding 17,012,075 in 2018 and
2017 (liquidation preference $425,302 in 2018 and 2017) .............................
Common stock, $.0001 par value; authorized 1,000,000,000 shares in 2018
and 2017; shares issued and outstanding, 146,535,796 in 2018 and
198,583,941 in 2017 .......................................................................................
Additional paid-in capital ..................................................................................
Accumulated deficit ...........................................................................................
2
2
14
344,356
(91,246)
20
520,135
(149,778 )
Total shareholders’ equity of the Company ...................................................
253,126
370,379
Noncontrolling interest ......................................................................................
51
12
Total shareholders’ equity .............................................................................
253,177
370,391
Total liabilities and shareholders’ equity ....................................................... $
740,904 $
632,025
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 ................................................................................
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 expenses .....................................................
Amortization of retention and forgivable loans .........................
Amortization of contract acquisition costs.................................
Other ..........................................................................................
Total expenses .......................................................................
Income (loss) before item shown below ....................................
Change in fair value of contingent consideration ......................
Income (loss) before income taxes ............................................
Income tax expense (benefit) .....................................................
Net income (loss) .......................................................................
Net income (loss) attributable to noncontrolling interest ...........
Net income (loss) attributable to the Company ......................... $
Dividends declared on preferred stock ......................................
Net loss available to common shareholders ............................... $
Net loss per share available to common shareholders
Year Ended December 31,
2017
2016
2018
696,331 $
474,423
56,256
(328 )
4,971
119,430
40,053
1,391,136
976,596
194,045
5,882
16,088
9,977
21,927
10,796
24,039
1,010
417
9,671
73,285
1,343,733
47,403
(238 )
47,165
13,379
33,786
28
33,758 $
(34,031 )
(273 ) $
536,028 $
560,930
46,453
857
2,550
85,330
36,004
1,268,152
928,430
171,344
5,539
18,124
9,356
19,588
2,710
28,835
3,469
7,396
—
72,200
1,266,991
1,161
19
1,180
(6,502 )
7,682
(15 )
7,697 $
(32,482 )
(24,785 ) $
510,023
464,136
25,453
751
2,879
71,515
32,196
1,106,953
818,000
152,592
5,311
15,719
9,673
14,126
4,262
28,334
1,357
5,472
—
64,177
1,119,023
(12,070 )
(216 )
(12,286 )
10,025
(22,311 )
(42 )
(22,269 )
(30,438 )
(52,707 )
(basic) ..................................................................................... $
(0.00 ) $
(0.13 ) $
(0.29 )
Net loss per share available to common shareholders
(diluted) ................................................................................... $
(0.00 ) $
(0.13 ) $
(0.29 )
Weighted average common shares used in computation of
per share data:
Basic ...................................................................................... 194,562,916 193,064,550 182,987,850
Diluted ................................................................................... 194,562,916 193,064,550 182,987,850
See accompanying notes.
F-4
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS’ EQUITY
(in thousands, except share amounts)
Preferred Stock
Shares
Amount Shares
Amount Capital Deficit
Common Stock
Additional
Paid-in Accumulated Noncontrolling
Balance - December 31, 2015 ................... 14,683,021 $ 1 182,338,038 $ 19 $ 511,138 $
Issuance of common stock under
—
—
210,330
—
481
employee stock purchase plan ...............
Exercise of stock options, net of
1,129,195 shares tendered in payment
of exercise price .....................................
Exercise of warrants, net of 846,789
shares tendered in payment of exercise
price .......................................................
Stock-based compensation to consultants
and independent financial advisors .......
Stock-based compensation to
employees ..............................................
Issuance of restricted stock .......................
Repurchase and retirement of common
stock, including 901,691 shares
surrendered for tax withholding
of $2,038 ................................................
Third party investment in noncontrolling
interest ....................................................
Preferred stock issued, net of
underwriting discount and expense of
$723 ....................................................... 1,161,895
Preferred stock dividends declared and
—
paid .......................................................
Net loss ......................................................
—
Balance - December 31, 2016 ................... 15,844,916 $
—
— 3,920,950
—
2,580
—
—
—
—
—
—
— 12,389,544
—
17,976
—
—
—
—
— 1,331,000
—
—
—
50
5,261
—
— (6,132,124 )
—
(14,749 )
—
—
—
—
—
—
—
27,580
(135,156 ) $
—
—
—
—
—
—
—
—
—
Interest
Total
29 $376,031
—
481
— 2,580
— 17,976
—
50
— 5,261
—
—
— (14,749 )
40
40
— 27,580
— (30,438 )
(42 ) (22,311 )
27 $362,501
—
—
—
—
1 194,057,738 $
(30,438 )
—
—
—
19 $ 519,879 $
—
(22,269 )
(157,425 ) $
F-5
Issuance of common stock under
employee stock purchase plan ...............
Exercise of stock options, net of
1,715,019 shares tendered in payment
of exercise price .....................................
Exercise of warrants ..................................
Stock-based compensation to consultants
and independent financial advisors .......
Stock-based compensation to employees ..
Issuance of restricted stock .......................
Restricted stock forfeitures .......................
Repurchase and retirement of common
stock, including 218,587 shares
surrendered for taxes and expenses and
19,658 shares tendered in payment of
exercise price .........................................
Repurchase of option award for cash ........
Preferred stock issued, net of
Preferred stock dividends declared and
paid .......................................................
Commons stock dividends declared and
paid .......................................................
Cumulative effect of adoption of ASU
2016-09 (Note 1) ....................................
Net income.................................................
underwriting discount and expense of
$958 ....................................................... 1,167,159
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS’ EQUITY - (Continued)
(in thousands, except share amounts)
Preferred Stock
Shares Amount Shares Amount Capital Deficit
Common Stock
Interest
Total
Additional
Paid-in Accumulated Noncontrolling
—
— 167,016
—
420
—
—
420
—
—
—
—
—
—
4,826
3,820
57
5,482
—
—
—
—
(5,293 )
(850 )
— 28,095
— (32,482 )
—
(3,880 )
(15 )
13
7,682
—
—
—
—
—
—
— 2,661,647
— 2,000,000
—
—
—
—
— 1,791,000
(5,000 )
—
1
—
—
—
—
—
4,825
3,820
57
5,482
—
—
—
—
— (2,088,460 )
—
—
—
—
(5,293 )
(850 )
1
—
—
—
—
—
—
28,094
—
(32,482 )
—
(3,880 )
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
63
—
(50)
7,697
F-6
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS’ EQUITY - (Continued)
(in thousands, except share amounts)
Preferred Stock
Shares
Common Stock
Additional
Paid-in Accumulated Noncontrolling
Amount Shares
Amount Capital Deficit
Interest
Total
2 198,583,941 $ 20 $ 520,135 $ (149,778) $
12 $ 370,391
11 24,785
23 $ 395,176
—
453
—
3,813
—
—
—
—
34
5,848
—
—
— (139,835 )
(3,000 )
—
—
(273 )
— (34,031 )
—
(8,794 )
28 33,786
51 $ 253,177
Balance - December 31, 2017 ................... 17,012,075 $
Cumulative effect of adoption of ASC
606 (See Note 4) ....................................
Balance - January 1, 2018 ......................... 17,012,075 $
Issuance of common stock under
employee stock purchase plan ...............
—
2 198,583,941 $
20 $ 520,135 $
—
161,968
—
453
Exercise of stock options (net of
1,194,324 shares tendered in payment
of exercise price) ....................................
Stock-based compensation granted to
consultants and independent financial
advisors ..................................................
Stock-based compensation to
employees ..............................................
Issuance of restricted stock .......................
Restricted stock forfeitures .......................
Repurchase and retirement of common
stock, including 522,190 shares
surrendered for tax withholdings and
19,294 shares tendered in payment of
exercise price .........................................
Repurchase of option award for cash ........
Preferred stock issued, net of
underwriting discount and expense of
$273
Preferred stock dividends declared and
paid .......................................................
—
— 3,199,511
—
3,813
—
—
—
—
—
—
—
—
—
—
—
—
— 2,172,000
(106,250 )
—
—
—
—
—
34
5,848
—
—
— (57,475,374 )
—
—
(6 ) (139,829)
(3,000)
—
—
—
—
—
—
(273)
—
(34,031)
24,774
(125,004) $
—
—
—
—
—
—
—
—
—
—
Commons stock dividends declared and
—
paid .......................................................
Net income.................................................
—
Balance - December 31, 2018 ................... 17,012,075 $
—
—
—
—
2 146,535,796 $
(8,794)
—
—
—
14 $ 344,356 $
—
33,758
(91,246) $
See accompanying notes.
F-7
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2017
2018
2016
33,786 $
7,682 $
(22,311 )
Cash flows from operating activities:
Net income (loss) ............................................................................. $
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 .....................................................
Depreciation and other amortization ................................................
Amortization of debt discount ..........................................................
Amortization of debt issue cost ........................................................
Amortization of retention and forgivable loans ................................
Amortization of contract acquisition costs .......................................
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
improvements, net .........................................................................
(Increase) decrease in operating assets:
Securities owned, at fair value ..........................................................
Receivables from clearing brokers ...................................................
Receivables from other broker-dealers .............................................
Other receivables, net .......................................................................
Contract acquisition costs, net ..........................................................
Notes receivable from financial advisors, net ...................................
Cash surrender value of life insurance .............................................
Income taxes receivable ...................................................................
Other assets ......................................................................................
Increase (decrease) in operating liabilities:
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 Kestler Financial Group, net of cash received ..........
Acquisition of Four Seasons Financial Group, net of cash
received .........................................................................................
Other business acquisitions ..............................................................
Purchases of fixed assets ..................................................................
Purchase of intangible assets ............................................................
Net cash used in investing activities ..............................................
F-8
216
213
20,703
7,631
620
253
5,472
—
9,096
—
43
(408 )
(2,143 )
5,311
1
536
2,974
1,297
(6,070 )
—
(11,116 )
(963 )
—
1,191
144
(2,816 )
(177 )
599
36
3,914
14,246
238
805
15,578
8,461
432
591
417
9,671
8,130
541
—
(79 )
(2,143 )
5,882
(19 )
387
21,327
7,508
449
41
7,396
—
(7,662 )
—
24
(295 )
(2,143 )
5,539
26
21
(338 )
(7,051 )
(1,969 )
(6,073 )
—
(21,563 )
(2,501 )
—
219
(151 )
7,044
222
6,627
914
580
16,215
(7,042 )
24,475
(4,256 )
(13,886 )
(29,057 )
577
1,305
(2,156 )
(15,366 )
2,344
5,959
(30 )
8,690
2,461
7,018
63,372
(2,850 )
(450 )
—
(14,502 )
(6 )
(17,808 )
—
—
—
(179 )
(9,896 )
—
(10,075 )
—
(4,097 )
(7,132 )
—
(11,229 )
LADENBURG THALMANN FINANCIAL SERVICES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)
(in thousands)
Cash flows from financing activities:
Issuance of Series A preferred stock ................................................
Issuance of common stock ...............................................................
Series A preferred stock dividends paid ...........................................
Common stock dividends paid .........................................................
Repurchases and retirement of common stock .................................
Repurchase of stock option award for cash ......................................
Additional issuance costs related to SSN notes ................................
Issuance of senior notes ....................................................................
Borrowings on term loan ..................................................................
Principal repayments on notes payable.............................................
Principal repayments under a revolving credit facility, net ..............
Bank loan and revolver repayments .................................................
Third party investment in subsidiary ................................................
Net cash (used in) provided by financing activities ......................
Net increase (decrease) in cash and cash equivalents .......................
Cash and cash equivalents including restricted cash,
beginning of period .....................................................................
Cash and equivalents at end of period: .............................................
Cash and cash equivalents ................................................................ $
Restricted cash .................................................................................
Cash and cash equivalents including restricted cash, end of
(273 )
4,266
(34,031 )
(8,794 )
(69,746 )
(3,000 )
—
104,375
—
(15,253 )
—
(6,690 )
—
(29,146 )
16,418
28,095
9,066
(32,482 )
(3,880 )
(5,293 )
(850 )
(40 )
73,197
8,000
(7,039 )
—
(1,992 )
—
66,782
72,922
27,580
3,061
(30,438 )
—
(14,749 )
—
—
—
—
(7,516 )
(114 )
(628 )
40
(22,764 )
(19,747 )
172,863
99,941
119,688
182,693 $
6,588
172,103 $
760
98,930
1,011
period ........................................................................................... $
189,281 $
172,863 $
99,941
Supplemental cash flow information:
Interest paid ...................................................................................... $
Taxes paid ........................................................................................
9,870 $
6,956
1,974 $
1,487
3,523
1,036
Acquisition of Wall Street Financial Group:
Assets acquired ................................................................................. $
Payable to seller ...............................................................................
Net cash paid in acquisition .............................................................. $
Acquisition of Foothill Securities Inc.:
Assets acquired ................................................................................. $
Payable to seller ...............................................................................
Net cash paid in acquisition .............................................................. $
Acquisition of Kestler Financial Group:
Assets acquired ................................................................................. $
Liabilities assumed ...........................................................................
Net assets acquired ...........................................................................
Promissory note ................................................................................
Net cash paid in acquisition .............................................................. $
Acquisition of Four Seasons Financial Group:
Assets acquired ................................................................................. $
Liabilities assumed ...........................................................................
Net assets acquired ...........................................................................
Promissory note ................................................................................
Net cash paid in acquisition .............................................................. $
Non-cash financing activities:
— $
—
— $
— $
—
— $
9,093 $
(793 )
8,300
(5,450 )
2,850 $
2,345 $
(1,523 )
822
(372 )
450 $
— $
—
— $
— $
(179 )
(179 ) $
— $
—
—
—
— $
— $
—
—
—
— $
Issuance of 7.25% notes for repurchase of common stock ............... $
Cancellation of promissory notes as consideration for exercise
76,350 $
— $
3,468
(2,276 )
1,192
5,571
(2,666 )
2,905
—
—
—
—
—
—
—
—
—
—
—
price of warrants ............................................................................ $
— $
— $
17,976
See accompanying notes.
F-9
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 (“Securities America”), Triad Advisors (“Triad”), Securities Service Network
(“SSN”), Investacorp (“Investacorp”), KMS Financial Services (“KMS”), Ladenburg Thalmann & Co. (“Ladenburg”),
Ladenburg Thalmann Asset Management (“LTAM”), Premier Trust (“Premier Trust”), and Highland Capital
Brokerage (“Highland”).
Securities America, Triad, Investacorp, KMS and SSN are registered investment advisors and broker-dealers that serve
the independent financial advisor community. The independent financial advisors of these independent advisory and
brokerage firms 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 the Company’s independent 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. Highland also provides marketing strategies, product expertise,
and back-office processing for fixed and equity-indexed annuities.
Securities America’s, Triad’s, Investacorp’s, KMS’, SSN’s 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 Securities
and Exchange Commission (“SEC”), the Financial Industry Regulatory Authority (“FINRA”) and the Municipal
Securities Rulemaking Board. Each entity is a member of the Securities Investor Protection Corporation. 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.
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.
Certain amounts in the prior period financial statements were reclassified to conform with the current period financial
statement presentation.
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 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 a maturity of three months or less when acquired
to be cash equivalents. Cash equivalents at December 31, 2018 and 2017 consist of money market funds which are
carried at fair value of $122,210 and $30,030, respectively. Fair value is based on quoted prices in active markets
(Level 1).
F-10
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share and per share amounts)
Revenue Recognition
Commissions revenue results from transactions in equity securities, mutual funds, variable annuities 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 commission 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 carriers are based on a percentage of the
premium that the insurance carrier 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
considered variable consideration and, at the time of the initial sale of a policy, the Company must estimate the variable
consideration (future renewal commissions) and determine the transaction price as the undiscounted sum of expected
future renewal commissions to be received from the insurance carriers. Therefore, the transaction price includes the
first-year fixed commission and the variable consideration for the trailing commissions.
Advisory fee revenue represents fees charged by registered investment advisors to their clients based upon the value
of client assets under management. Advisory fees are recorded as earned over time as the services are performed. 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 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, fees earned for arranging the cash sweep
programs between the customers and third-party banks, conference revenues and also marketing allowances earned
from product sponsor programs. All such amounts are recorded as earned.
F-11
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share and per share amounts)
As a result of adopting ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” effective January
1, 2018, the Company amended its accounting policies on the recognition and presentation of certain revenues and
related expenses. See heading “New Accounting Standards Adopted” in Note 2 and Note 4 for further information.
Fixed Assets
Fixed assets are carried at cost net of accumulated depreciation and amortization. Depreciation is provided by the
straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized on a
straight-line basis over the lease term, or their estimated useful lives, whichever is shorter.
Share-Based Compensation
The Company measures the cost of employee, officer and director services received in exchange for an award of equity
instruments, including stock options 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 prior to vesting is based on the awards’ estimated value
at the most recent reporting date.
Intangible Assets
Intangible assets are amortized over their estimated useful lives, generally on a straight-line basis. Intangible assets
subject to amortization are tested for recoverability whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. The Company assesses the recoverability of its intangible assets by
determining whether the unamortized balance can be recovered over the assets’ remaining life through undiscounted
forecasted cash flows.
If undiscounted forecasted cash flows indicate that the unamortized amounts will not be recovered, an adjustment will
be made to reduce such amounts to fair value determined based on forecasted future cash flows discounted at a rate
commensurate with the risk associated with achieving such cash flows. Future cash flows are based on trends of
historical performance and the Company’s estimate of future performance, giving consideration to existing and
anticipated competitive and economic conditions. See Note 8.
Goodwill
Goodwill, which was recorded in connection with acquisitions of subsidiaries (see Notes 3 and 9), is not subject to
amortization and is tested for impairment annually, or more frequently if events or changes in circumstances indicate
that the asset may be impaired. The impairment test consists of a comparison of the fair value of the reporting unit
with its carrying amount. Fair value is typically based upon forecasted future cash flows discounted at a rate
commensurate with the risk involved or market based comparables. If the carrying amount of the reporting unit exceeds
its fair value then an analysis will be performed to compare the implied fair value of goodwill with the carrying amount
of goodwill. An impairment loss will be recognized in an amount equal to the excess of the carrying amount over the
implied fair value. After an impairment loss is recognized, the adjusted carrying amount of goodwill is its new
accounting basis. 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.
New Accounting Standards Adopted
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), 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. The new guidance outlines a
single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and
supersedes most current revenue recognition guidance issued by the FASB, including industry specific guidance. ASU
2014-09 also requires new qualitative and quantitative disclosures, including disaggregation of revenues and
descriptions of performance obligations.
F-12
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share and per share amounts)
On January 1, 2018, the Company adopted ASU 2014-09 and all related amendments (“ASC 606”) and applied its
provisions to all uncompleted contracts using the modified retrospective method. The Company recognized the
cumulative effect of initially applying ASC 606 as an adjustment to increase the opening balance of retained earnings
by $24,774. The comparative information for prior periods has not been adjusted and continues to be reported under
the accounting standards in effect for those periods. See Note 4 for further information.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities, which amends the guidance in U.S. GAAP on the
classification and measurement of financial instruments. Changes to the current guidance primarily affect the
accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure
requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance
assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities.
The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon
adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at
the beginning of the first reporting period in which the guidance is effective. On January 1, 2018, the Company adopted
ASU 2016-01. The adoption of ASU 2016-01 was effective January 1, 2018 and did not have any impact on the
Company’s consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230). ASU 2016-18 provides
guidance on the classification of restricted cash to be included with cash and cash equivalents when reconciling the
beginning of period and end of period total amounts on the statement of cash flows. This pronouncement is effective
for reporting periods beginning after December 15, 2017 using a retrospective adoption method. The adoption of ASU
2016-18, effective January 1, 2018, did not have any impact on the Company’s consolidated financial statements.
Accounting Standards Issued, But Not Yet Effective
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the existing guidance for
lease accounting, Leases (Topic 840). ASU 2016-02 requires lessees to recognize leases on their balance sheets, and
leaves lessor accounting largely unchanged. The amendments in this ASU are effective for fiscal years beginning after
December 15, 2018 and interim periods within those fiscal years. Early application is permitted for all entities. The
Company adopted the provisions of this guidance on January 1, 2019 using an optional transition method with a
cumulative effect adjustment to the beginning balance of retained earnings in the period of adoption without restating
the 2018 and 2017 financial statements for comparable amounts. The Company’s current lease arrangements expire
through 2032.
The Company will elect to utilize the transition package of practical expedients permitted within the new standard,
which among other things, allows the Company to carryforward the historical lease classification. The Company will
make an accounting policy election that will keep leases with an initial term of 12 months or less off the Company’s
Consolidated Statements of Financial Condition and will result in recognizing those lease payments in the
Consolidated Statements of Operations on a straight-line basis over the lease term.
On adoption, the Company currently expects to recognize right-of-use assets and corresponding lease liabilities
ranging from approximately $35,000 to $40,000 on the Company’s consolidated statements of financial condition for
its leases, with terms greater than twelve months. Adoption of the standard will not materially impact the Company’s
Consolidated Statements of Operations or Consolidated Statements of Cash Flows.
The Company does not believe the new standard will have a material impact on its liquidity and does not believe it
will have an impact on the Company’s debt-covenant compliance under its current debt agreements. These
expectations may change as the Company’s assessment is finalized.
The Company is in the process of evaluating changes to its business processes, systems and controls needed to support
recognition and disclosure under the new standard. Further, the Company is continuing to assess any incremental
disclosures that will be required in the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments. This ASU amends the requirement on the measurement and recognition of
expected credit losses for financial assets held. The ASU is effective for annual periods beginning after December 15,
2019 and interim periods within those annual periods. Early adoption is permitted, but not earlier than annual and
interim periods beginning after December 15, 2018. This amendment should be applied on a modified retrospective
basis with a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption. The
Company is in the process of assessing the impact of this ASU on its consolidated financial statements
F-13
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share and per share amounts)
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the
Test for Goodwill Impairment, an amendment to simplify the subsequent quantitative measurement of goodwill by
eliminating step two from the goodwill impairment test. As amended, an entity will recognize an impairment charge
for the amount by which the carrying amount of a reporting unit exceeds its fair value, not to exceed the total amount
of goodwill allocated to the reporting unit. An entity still has the option to perform the qualitative test for a reporting
unit to determine if the quantitative impairment test is necessary. This amendment is effective for annual or interim
goodwill impairment tests in fiscal years beginning after December 15, 2019 and applies prospectively. Early adoption
is permitted, including in an interim period, for impairment tests performed after January 1, 2017. The Company has
not elected to early adopt ASU 2017-04. The adoption of this guidance is not expected to have a material impact on
the Company’s consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation: Improvements to Nonemployee
Share-Based Payment Accounting, which simplifies the accounting for share-based payments granted to
nonemployees by aligning the accounting with the requirements for employee share-based compensation. ASU 2018-
07 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018,
with early adoption permitted. The Company has assessed the impact that the adoption of ASU 2018-07 is not material
to its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework -
Changes to the Disclosure Requirements for Fair Value Measurements. This ASU eliminates, adds and modifies
certain disclosure requirements for fair value measurements. The update eliminates the requirement to disclose the
amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, and introduces a
requirement to disclose the range and weighted average used to develop significant unobservable inputs for Level 3
fair value measurements. This guidance will be effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2019. The Company plans to adopt this new accounting standard on January 1, 2020.
Adoption is not expected to have a material impact on the Company’s consolidated financial statements and related
disclosures.
3. Acquisitions
Wall Street Financial Group
In September 2016, Securities America Financial Corporation (“SAFC”), which is the parent of Securities America,
purchased certain assets of Wall Street Financial Group, Inc. (“Wall Street”), which was deemed to be a business
acquisition. Relationships with certain registered representatives and investment advisor representatives including
their client accounts were acquired. The consideration for the transaction was $3,468, consisting of cash of $1,192 and
contingent consideration having a fair value of $2,276, for which a liability was recognized based on the estimated
acquisition-date fair value of the potential earn-out.
The liability was valued using a Monte Carlo simulation based option pricing model. The fair value measurement of
the earn-out, which relates to the three-year period following closing, is based on unobservable inputs (Level 3) and
reflects the Company’s own assumptions. The purchase price was allocated as follows: $3,070 to identifiable
intangibles and $398 to goodwill.
Foothill Securities, Inc.
In December 2016, SAFC purchased certain assets of Foothill Securities, Inc. (“Foothill”), which was deemed to be a
business acquisition. Relationships with certain registered representatives and investment advisor representatives
including their client accounts were acquired. The consideration for the transaction was $5,571, consisting of cash of
$2,905 and contingent consideration having a fair value of $2,666, for which a liability was recognized based on the
estimated acquisition-date fair value of the potential earn-out.
The liability was valued using a Monte Carlo simulation based option pricing model. The fair value measurement of
the earn-out, which relates to the three-year period following closing, is based on unobservable inputs (Level 3) and
reflects the Company’s own assumptions. The purchase price was allocated as follows: $4,640 to identifiable
intangibles and $931 to goodwill.
F-14
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share and per share amounts)
Kestler Financial Group, Inc.
In August 2018, an affiliate of Highland purchased certain assets of the insurance distribution business operated by
Kestler Financial Group, Inc. (“KFG”), an independent insurance and annuity distribution company, located in
Leesburg, Virginia. This asset purchase was deemed to be an asset acquisition. Under the terms of an asset purchase
agreement, an affiliate of Highland purchased certain KFG assets, including the rights to the “Kestler Financial
Group” name and brand. In October 2018, Securities America purchased certain assets of the brokerage business
operated by KFG.
The consideration for the KFG insurance distribution transaction was $7,926, consisting of cash of $1,683 paid at
closing, a $165 cash payment to be made on the first anniversary of the closing date, a promissory note in the original
principal amount of $5,450, contingent consideration having a fair value of $619 for which a liability was recognized
based on estimated acquisition-date fair value of the potential earn-out and additional liabilities of $9.
The consideration for the KFG brokerage business transaction, which closed in October 2018, was $1,167, consisting
of cash of $537 paid at closing (including $271 of reimbursable expenses), a $266 cash payment to be made on each
anniversary of the closing date for the next three years having a fair value of $630 and contingent consideration
having a fair value of $0.
The liability was valued using an income-based approach of the earn-out’s probability-weighted expected payout
using three earn-out scenarios. The measurement of the earn-out, which relates to a five year period, is based on
unobservable inputs (Level 3) and reflects the Company’s own assumptions. The purchase price for the KFG
transaction was allocated $7,083 to identifiable intangibles and other assets and $2,010 to goodwill.
Four Seasons Financial Group, Inc.
In November 2018, Highland purchased certain assets of Four Seasons Financial Group, Inc. (“FSFG”), a wholesale
insurance distribution business located in Marlton, New Jersey. The consideration for the FSFG transaction was
$2,345, consisting of cash of $450 paid at closing, a $450 cash payment to be made on each anniversary of the
closing date for the two years after closing, promissory notes in the original principal amount of $372 and contingent
consideration having a fair value of $622.
The liability was valued using an income-based approach of the earn-out’s probability-weighted expected payout
using four earn-out scenarios. The measurement of the earn-out, which relates to a five year period, is based on
unobservable inputs (Level 3) and reflects the Company’s own assumptions. The purchase price for the FSFG
transaction was allocated (preliminary) $1,945 to identifiable intangibles and other assets and $400 to goodwill.
Results of operations relating to KFG, FSFG, Wall Street and Foothill which are included in the accompanying
consolidated statements of operations from their respective date of acquisition, were not material. Also, based on
materiality, pro-forma results were not presented.
4. Revenue from Contracts with Customers
The Company adopted ASC 606, effective January 1, 2018, using the modified retrospective method by recognizing
the cumulative effect of initially applying ASC 606 as an adjustment to the opening balance of shareholders’ equity
and other affected accounts at January 1, 2018. Therefore, the comparative information has not been adjusted and
continues to be reported under the accounting standards in effect for prior periods.
Performance Obligations
Revenue from contracts with customers is recognized when, or as, the Company satisfies its performance obligations
by transferring promised goods or services to customers. A good or service is transferred to a customer when, or as,
the customer obtains control of that good or service. A performance obligation may be satisfied over time or at a point
in time. Revenue from a performance obligation satisfied at a point in time is recognized at the point in time that the
Company determines the customer obtains control over the promised good or service. The amount of revenue
recognized reflects the consideration to which the Company expects to be entitled in exchange for those promised
goods or services. Revenues are also analyzed to determine whether the Company acts as the principal (i.e. reports
revenue on a gross basis) or agent (i.e. reports revenue on a net basis) in the arrangement with the customer. Principal
or agent designations depend primarily on the control an entity has over the product or service before control is
transferred to a customer. The indicators of which party exercises control include primary responsibility over
performance obligations, inventory risk before the good or service is transferred and discretion in establishing the
price.
F-15
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share and per share amounts)
The following provides detailed information on the recognition of the Company’s revenue from contracts with
customers:
Broker-Dealer Commissions
The Company’s broker-dealer subsidiaries earn commissions by executing client transactions in stocks, mutual funds,
variable annuities and other financial products and services as well as from trailing commissions which are variable.
Commissions revenue is recognized at the point of sale on the trade date when the performance obligation is satisfied.
Commissions revenue is paid on settlement date, which is generally two business days after trade date for equities
securities and corporate bond transactions and one business day for government securities and commodities
transactions. The Company records a receivable on the trade date and receives a payment on settlement date. For
trailing commissions, the performance obligation is satisfied at the time of the execution of the investments but the
amount to be received for trailing commissions is uncertain, as it is dependent on the value of the investments at future
points in time as well as the length of time the investor holds the investments, both of which are highly susceptible to
variable factors outside the Company’s influence. The Company does not believe that it can overcome this constraint
until the market value of the investment and the investor activities are known, which are usually monthly or quarterly.
The Company’s Consolidated Statements of Operations reflects trailing commissions for services performed and
performance obligations satisfied in previous periods and are recognized in the period that the constraint is overcome,
when clients’ investment holdings and their market values become known.
The Company’s broker-dealer subsidiaries act as principal in satisfying the performance obligations that generate
commissions revenue and maintain relationships with the product sponsors. The Company’s independent financial
advisors assist the Company in performing its obligations. Accordingly, broker-dealer commissions revenue are
presented on a gross basis.
Insurance Commissions
The Company’s performance obligation with respect to each contract with its customer, the insurance carriers, is the
sale of the insurance policies to clients. Insurance commissions revenue is received from insurance carriers and
includes an initial up-front (first year) commission as well as annual trailing commission payments for each policy
renewal. Commissions on insurance renewal premiums are considered variable consideration.
ASC 606 requires that, at the time of the initial sale of a policy, the Company must estimate the variable consideration
(future renewal commissions) and determine the transaction price as the undiscounted sum of expected future renewal
commissions to be received from the insurance carriers.
Therefore, the transaction price includes the first-year fixed commission and the variable consideration for the trailing
commissions, estimated using the expected value method and a portfolio approach. Previously, the Company
recognized trailing commissions as payment was received. The Company also estimates a reduction of the transaction
price for possible future chargebacks from the carriers. The Company acts as principal in its relationship with the
insurance carriers and receives commissions revenue for the sale of insurance products for the insurance carriers. The
Company’s financial advisors assist the Company in performing its obligations and act as an agent for the Company.
Accordingly, the Company presents the first-year and trailing commissions revenue on a gross basis when each policy
is bound as an enforceable contract. Previously, the Company presented revenue on a gross or net basis depending on
how payment was received.
Advisory Fees
Advisory fee revenue represents fees charged by registered investment advisors (“RIAs”) to their clients based upon
the value of client assets under management (“AUM”). The Company records fees charged to clients as advisory fees
where the Company considers itself to be the primary RIA. The Company determined that the primary RIA firm is the
principal in providing advisory services to clients and will therefore recognize the corresponding advisory fee revenues
on a gross basis when the advisory services are conducted using the Company’s corporate RIA platform.
As a result, the portion of the advisory fees paid to the client’s independent financial advisor are classified as
commissions and fees expense in the consolidated statements of operations.
F-16
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share and per share amounts)
Certain independent financial advisors conduct their advisory business through their own RIA firm, rather than using
one of the Company’s corporate RIA subsidiaries. These independent entities, or Hybrid RIAs, engage the Company
for clearing, regulatory and custody services, as well as for access to investment advisory platforms. The advisory fee
revenue generated by these Hybrid RIAs is earned by the independent financial advisors, and is not included in the
Company’s advisory fee revenues. However, the Company charges separate fees to Hybrid RIAs for technology,
custody and administrative services based on the AUM within the client’s accounts. These fees are recognized on a
net basis and classified as advisory fees in the consolidated statements of operations. Historically, the Company has
generally recognized advisory fee revenue on a gross basis based on the fees charged by the independent financial
advisors to their clients. Accordingly, the Company’s reported advisory revenue and the independent financial
advisors’ compensation in the Company’s independent advisory and brokerage services segment is materially lower
in 2018 as compared to the prior-year periods and reported advisory revenue growth may lag behind the overall growth
rate of advisory assets.
Investment Banking
Investment banking revenues consist of underwriting revenue, strategic advisory revenue and private placement fees.
Underwriting
The performance obligation is the consummation of the sale of securities for each contract with a customer. The
transaction price includes fixed management fees and is recognized as revenue when the performance obligation is
satisfied, generally the trade date. Where Ladenburg is the lead underwriter, revenue and expenses will be first
allocated to other members of a syndicate because Ladenburg is acting as an agent for the syndicate. Accordingly, the
Company records revenue on a net basis. When Ladenburg is not the lead underwriter, Ladenburg will recognize its
share of revenue and expenses on a gross basis, because Ladenburg is acting as the principal. Under accounting
standards in effect for prior periods, the Company recognized all underwriting revenue on a net basis.
Strategic Advisory Services
Performance obligations in these arrangements vary dependent on the contract, but are typically satisfied upon
completion of the arrangement. Transaction fees may include retainer, management, and/or success fees, which are
recognized upon completion of a deal. Under the accounting standards in effect for prior periods, retainer fees were
deferred and amortized over the estimated duration of the engagement.
Ladenburg controls the service as it is transferred to the customer, and is therefore acting as a principal. Accordingly,
the Company records revenues and out-of-pocket reimbursements on a gross basis, consistent with practice under the
accounting standards in effect for those periods, except for out-of-pocket reimbursements previously presented on a
net basis.
Private Placement
The performance obligation is the consummation of the sale of securities for each contract with a customer. The
transaction price includes fixed management fees and is recognized as revenue when the performance obligation is
satisfied, generally the trade date. Ladenburg controls the service as it is transferred to the customer, and is therefore
acting as a principal.
Accordingly, the Company records revenues and out-of-pocket reimbursements on a gross basis, consistent with
practice under the accounting standards in effect for those periods, except for out-of-pocket reimbursements previously
presented on a net basis.
Service Fees
Service fees primarily include (1) amounts charged to independent financial advisors for securities trades and for
providing administrative and compliance services; and (2) fees earned for arranging the cash sweep programs between
the customers and the third-party banks, in which customers’ cash deposits in their brokerage accounts at the
customers’ direction are swept into interest-bearing FDIC-insured deposit accounts at various third-party banks.
The service fees charged to independent financial advisors are recognized when the Company satisfies its performance
obligations. Transaction revenues for the processing of securities trades are recognized at the point-in-time that a
transaction is executed, which is generally the trade date. Fees charged to advisors for providing administrative and
compliance services are either recognized at a point-in-time to over time depending on whether the service is provided
at an identifiable point-in-time or if the service is provided continually over the the year. The cash sweep fees are
earned and recognized over the period of the clients’ participation in these programs.
F-17
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share and per share amounts)
Other Income
The Company receives fees from product sponsors, primarily mutual fund and annuity companies, for marketing
support and sales force education and training efforts. Compensation for these performance obligations is generally
calculated as a fixed fee, or as a percentage of the average annual amount of product sponsor assets held in advisors’
clients’ accounts, or as a percentage of new sales, or a combination. As the value of product sponsor assets held in
advisor’s clients’ accounts is susceptible to unpredictable market changes, this revenue includes variable consideration
and is constrained until the date that the fees are determinable. The Company is the principal in these arrangements as
it is responsible for and determines the level of servicing and marketing support it provides to the product sponsors.
In addition, the Company hosts certain advisor conferences that serve as training, education, sales, and marketing
events, for which a fee may be charged for attendance to advisors and product sponsors. Recognition is at a point-in-
time when the conference is held and the Company satisfies its performance obligations.
Disaggregation of Revenue
In the following table, revenue is disaggregated by service line and segment:
Independent
Advisory
and
Brokerage
Services
For the Twelve Months Ended
December 31, 2018
540,523 $
Commissions .............................. $
467,044
Advisory fees ..............................
947
Investment banking ....................
22
Principal transactions .................
2,566
Interest and dividends .................
116,047
Service fees ................................
Other income ..............................
33,894
Total revenues ............................ $ 1,161,043 $
Ladenburg
Insurance
Brokerage Corporate
Total
11,468 $
7,170
56,163
(524)
839
2,495
483
78,094 $
144,340 $
—
—
—
—
—
2,787
147,127 $
696,331
— $
474,423
209
56,256
(854 )
(328 )
174
4,971
1,566
119,430
888
2,889
40,053
4,872 $ 1,391,136
Contract Balances
For each of its insurance policies, the Company receives an initial up-front (first year) commission as well as annual
trailing commission payments for each policy renewal. The Company will incur commission expenses related to the
trailing commission payments for each policy renewal as well. The timing of revenue recognition, cash collections,
and commission expense on the insurance policies results in contract assets and contract liabilities.
The following table provides information about contract assets and contract liabilities from contracts with customers.
Estimated trailing commissions are included in other receivables, net while estimated expenses on trailing
commissions are included in commissions and fees payable on the consolidated statements of financial condition:
As of December 31,
2018
As of January 1, 2018
( Adoption Date)
Contract assets - Insurance trailing commissions ......... $
Contract liabilities - Insurance trailing commissions ....
64,300 $
31,854
58,786
29,395
Performance obligations related to insurance brokerage revenue are considered satisfied when the sale of the initial
insurance policies are completed, including expected future trailing commissions due to the Company each year upon
customer renewals of the policies sold. Upon receipt of the annual trailing commission, the Company pays a
corresponding commission expense. Based on historical data, customer renewal periods are estimated at approximately
eight years from the sale of the initial policy.
Increases to the contract asset were a result of $28,640 in estimated trailing commissions from new policies during the
year ended December 31, 2018, respectively, while decreases were driven by $23,126 in actual commissions received
during the period ended December 31, 2018, respectively. Increases to the contract liability were a result of $14,320
in estimated commission expense from new policies during the period ended December 31, 2018, respectively, while
decreases were driven by $11,861 in actual commissions paid during the period ended December 31, 2018,
respectively.
F-18
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share and per share amounts)
Costs to Obtain a Contract with a Customer
The Company capitalizes the incremental costs of obtaining a contract with a customer (independent financial advisor)
if the costs (1) relate directly to an existing contract or anticipated contract, (2) generate or enhance resources that will
be used to satisfy performance obligations in the future, and (3) are expected to be recovered. These costs are included
in contract acquisition costs, net in the consolidated statements of financial condition and will be amortized over the
estimated customer relationship period.
The Company uses an amortization method that is consistent with the pattern of transfer of goods or services to its
customers. Any costs that are not incremental costs of obtaining a contract with a customer, such as costs of
onboarding, training and support of independent financial advisors, would not qualify for capitalization.
The Company pays fees to third-party recruiters and bonuses to employees for recruiting independent financial
advisors, and thereby bring their customers’ accounts to the Company, which generates ongoing advisory fee revenue,
commissions revenue, and monthly service fee revenue to the Company.
An additional cost to obtain an independent financial advisor may include forgivable loans. Forgivable loans take
many forms, but they are differentiated by the fact that at inception the loan is intended to be forgiven over time by
the Company. The loans are given as an inducement to attract independent financial advisors to become affiliated with
the Company’s independent advisory and brokerage subsidiaries. Each of the Company’s independent advisory and
brokerage subsidiaries may offer new independent financial advisors a forgivable loan as part of his/her affiliation
offer letter. These amounts are paid upfront and are capitalized, then amortized over the expected useful lives of the
independent financial advisor’s relationship period with the independent advisory and brokerage firm.
The balance of contract acquisition costs, net, was $80,726 as of December 31, 2018, an increase of $19,386 compared
to the adoption date of January 1, 2018. Amortization on these contract acquisition costs was $9,671 during the twelve
months ended December 31, 2018. There were no impairments or changes to underlying assumptions related to
contract acquisition costs, net, for the period.
Transaction Price Allocated to Remaining Performance Obligation
Contract liabilities represent accrued commission expense associated with the accrued insurance trailing commission
contract assets. The Company does not have any contract liabilities representing revenues that will be recognized in
future periods upon the satisfaction of any remaining performance obligations.
Practical Expedients
The following practical expedients available under the modified retrospective method were applied upon adoption of
ASC 606:
● The Company applied the practical expedient outlined under ASC 606-10-65-1(h), and did not restate contracts
that were completed contracts as of the date of initial application, i.e. January 1, 2018.
● The Company applied the practical expedient outlined under ASC 606-10-65-1(f)(4) and did not separately
evaluate the effects of contract modifications. Instead, we reflect the aggregate effect of all the modifications that
occurred before the initial application date, i.e. January 1, 2018.
● The Company applied the practical expedient outlined under ASC 606-10-10-4 that allows for the accounting for
incremental costs of obtaining contracts at a portfolio level in order to determine the amortization period.
● The Company applied the practical expedient outlined under ASC 340-40-25-4 and did not capitalize the
incremental costs to obtain a contract if the amortization period for the asset is one year or less.
Impacts on Financial Statements on January 1, 2018
The following table summarizes the impacts of ASC 606 adoption on the Company’s consolidated statement of
financial condition as of January 1, 2018.
The Company adjusted notes receivable from financial advisors, net by reclassifying all of its forgivable loans to
contract acquisition costs, net in the consolidated statements of financial position. Previously, forgivable loans were
amortized based on their legal terms, typically forgiven over periods ranging from 3 to 5 years as long as the associated
independent financial advisor remained in compliance with the terms of the forgivable loan. Under ASC 606, the
acquisition costs, net are amortized over the expected useful lives of the independent financial advisors’ relationship
period with the Company.
F-19
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share and per share amounts)
The Company adjusted intangible assets, net by eliminating a portion of net intangible asset that was created through
the Company’s acquisition of Highland in 2014. ASC 606 requires that, at the time of the initial sale of a policy, the
Company must estimate the variable consideration (future renewal commissions) and determine the transaction price
as the undiscounted sum of expected future renewal commissions to be received from the insurance carriers. As such,
the Company accelerated the revenues recognized under its insurance policies and recorded an increase to other
receivables, net that was offset by the partial elimination of the net intangible asset and an increase to commissions
and fees payable.
During the fourth quarter of 2018, the Company determined that the deferred tax liability recorded on adoption of
ASC606 with respect to Highland was overstated, and the Company made an additional retained earnings adjustment
of $665 to correct this item.
Consolidated Statement of Financial Condition
As Reported
December 31,
2017
(Audited)
Adjustments
Investment
Banking
Insurance
Renewals
Costs to obtain
or fulfill a contract
Adjusted
January 1,
2018
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 ............................................
Contract acquisition costs, net ............
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 .....................................
Total liabilities ................................... $
Commitments and contingencies
Shareholders’ equity:
Preferred stock ...................................
Common stock ...................................
Additional paid-in capital ...................
Accumulated deficit ...........................
Total shareholders’ equity of the
Company .........................................
Noncontrolling interest .......................
Total shareholders’ equity ..................
Total liabilities and shareholders’
172,103 $
3,881
48,543
2,822
47,369
60,707
23,621
760
103,611
124,210
—
12,711
31,687
632,025 $
231 $
33,343
67,221
40,478
2,151
2,968
18,161
232
96,849
261,634 $
2
20
520,135
(149,778 )
370,379
12
370,391
— $
—
—
—
—
(137 )
—
—
—
—
—
—
25
(112 ) $
— $
(110 )
—
(104 )
—
28
—
—
—
(186 ) $
—
—
—
74
74
—
74
— $
—
—
—
—
58,786
—
—
(23,645 )
—
—
—
—
35,141 $
— $
—
29,395
—
—
1,462
—
—
—
30,857 $
—
—
—
4,284
4,284
—
4,284
— $
—
172,103
3,881
—
48,543
—
2,822
(40,566 )
—
—
—
—
—
61,340
—
—
20,774 $
— $
—
—
(1,133 )
—
1,480
—
—
—
347 $
—
—
—
20,416
20,416
11
20,427
6,803
119,356
23,621
760
79,966
124,210
61,340
12,711
31,712
687,828
231
33,233
96,616
39,241
2,151
5,938
18,161
232
96,849
292,652
2
20
520,135
(125,004 )
395,153
23
395,176
equity .............................................. $
632,025 $
(112 ) $
35,141 $
20,774 $
687,828
F-20
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share and per share amounts)
Impacts on Financial Statements at December 31, 2018
The following tables compare the reported consolidated statement of financial condition and statements of operations
as of and for the twelve months ending December 31, 2018, to the pro-forma amounts had the previous accounting
standards been in effect.
During the twelve months ended December 31, 2018, the Company’s net income as reported is greater than the net
income amounts without the adoption of ASC 606 due to the following: 1) the timing of revenue recognized for
commissions on future renewals of insurance policies sold is accelerated, as these future commissions represent
variable consideration and are required to be estimated, 2) certain costs to obtain a contract with a customer are now
capitalized and have historically been recorded as a period expense, and 3) forgivable loans to independent financial
advisors are now amortized over the expected useful lives of their relationship period with the Company’s subsidiaries;
previously these loans were amortized based on their legal terms.
Consolidated Statement of Financial Condition
As of December 31, 2018
As Reported
Balances without
the adoption of
ASC 606
Effects of Change
Higher/(Lower)
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..............................................................
Contract acquisition costs, net .............................
Cash surrender value of life insurance ................
Income taxes receivable ......................................
Other assets .........................................................
Total assets .......................................................... $
LIABILITIES AND SHAREHOLDERS’
EQUITY
Securities sold, but not yet purchased, at market
value ................................................................. $
Accrued compensation ........................................
Commissions and fees payable ............................
Accounts payable and accrued liabilities .............
Deferred rent .......................................................
Deferred income taxes .........................................
Deferred compensation liability ..........................
Accrued interest ..................................................
Notes payable ......................................................
Total liabilities .................................................... $
Commitments and contingencies
Shareholders’ equity:
Preferred stock ....................................................
Common stock ....................................................
Additional paid-in capital ....................................
Accumulated deficit ............................................
182,693 $
10,923
24,068
7,078
5,809
133,242
29,994
6,588
73,064
126,079
80,726
11,406
2,156
47,078
740,904 $
2,575 $
39,192
105,306
48,813
2,956
14,068
20,622
123
254,072
487,727 $
182,693 $
10,923
24,068
7,078
57,417
69,209
29,994
6,588
91,454
126,079
—
11,406
—
46,578
663,487 $
2,575 $
39,257
73,452
41,026
2,956
9,742
20,622
123
254,072
443,825 $
2
14
344,356
(91,246 )
2
14
344,356
(124,750 )
Total shareholders’ equity of the Company .........
253,126
219,622
Noncontrolling interest ........................................
51
40
Total shareholders’ equity ...................................
253,177
219,662
Total liabilities and shareholders’ equity ............. $
740,904 $
663,487 $
F-21
—
—
—
—
(51,608 )
64,033
—
—
(18,390 )
—
80,726
—
2,156
500
77,417
—
(65 )
31,854
7,787
—
4,326
—
—
—
43,902
—
—
—
33,504
33,504
11
33,515
77,417
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share and per share amounts)
Consolidated Statement of Operations
Twelve Months Ended December 31,
2018
As Reported
Amounts without
the adoption of
ASC 606
Effects of
Change
Higher/(Lower)
Revenues:
Commissions ............................................... $
Advisory fees ...............................................
Investment banking .....................................
Principal transactions ..................................
Interest and dividends ..................................
Service fees .................................................
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 expenses .......................
Amortization of retention and forgivable
loans .........................................................
Amortization of contract acquisition costs ..
Other ............................................................
Total expenses .............................................
Income before item shown below ................
Change in fair value of contingent
consideration ...............................................
Income before income taxes ........................
Income tax expense .....................................
Net income ..................................................
Net income attributable to noncontrolling
interest ......................................................
Net income attributable to the Company ..... $
Dividends declared on preferred stock ........
Net loss available to common shareholders $
Net loss per share available to common
shareholders (basic) .................................. $
Net loss per share available to common
696,331 $
474,423
56,256
(328 )
4,971
119,430
40,053
1,391,136
976,596
194,045
5,882
609,400 $
695,094
51,335
(346 )
4,964
119,430
40,147
1,520,024
1,113,389
195,433
5,882
16,088
15,525
9,977
21,927
10,796
24,039
1,010
417
9,671
73,285
1,343,733
47,403
(238 )
47,165
13,379
33,786
28
33,758 $
(34,031 )
(273 ) $
9,977
20,022
10,756
29,294
1,010
13,890
—
73,805
1,488,983
31,041
(238 )
30,803
5,745
25,058
28
25,030 $
(34,031 )
(9,001 ) $
(0.00 ) $
(0.05 ) $
shareholders (diluted) ............................... $
(0.00 ) $
(0.05 ) $
Weighted average common shares used in
computation of per share data: ..................
Basic ........................................................
Diluted .....................................................
194,562,916
194,562,916
194,562,916
194,562,916
86,931
(220,671 )
4,921
18
7
—
(94 )
(128,888 )
(136,793 )
(1,388 )
—
563
—
1,905
40
(5,255 )
—
(13,473 )
9,671
(520 )
(145,250 )
16,362
—
16,362
7,634
8,728
—
8,728
—
8,728
0.05
0.05
—
—
F-22
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share and per share amounts)
5. Fair Value of Assets and Liabilities
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:
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.
The following tables present the carrying values and estimated fair values at December 31, 2018 and December 31,
2017 of financial assets and liabilities, excluding financial instruments that are carried at fair value on a recurring
basis, and information is provided on their classification within the fair value hierarchy. Such instruments are carried
at amounts that approximate fair value due to their short-term nature and generally negligible credit risk.
December 31, 2018
Carrying
Value
Level 1
Level 2
Total
Estimated
Fair Value
Assets
Cash and cash equivalents ................................ $
Receivables from clearing brokers ...................
Receivables from other broker-dealers ............
Notes receivables, net (1) ..................................
Other receivables, net .......................................
$
182,693 $
24,068
7,078
5,809
133,242
352,890 $
182,693 $
—
—
—
—
182,693 $
— $
24,068
7,078
5,809
133,242
170,197 $
Liabilities
Accrued compensation ..................................... $
Commissions and fees payable ........................
Accounts payable and accrued liabilities (2) .....
Accrued interest ...............................................
Notes payable, net (3) ........................................
$
39,192 $
105,306
46,583
123
254,072
445,276 $
— $
—
—
—
—
— $
39,192 $
105,306
46,583
123
266,844
458,048 $
182,693
24,068
7,078
5,809
133,242
352,890
39,192
105,306
46,583
123
266,844
458,048
(1) Carrying value approximates fair value, which is determined based on a valuation technique to convert future cash
payments or forgiveness transactions to a single discounted preset value amount.
(2) Excludes contingent consideration liabilities of $2,230.
(3) Estimated fair value based on then current rates at which similar amounts of debt could be borrowed.
F-23
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share and per share amounts)
December 31, 2017
Carrying
Value
Level 1
Level 2
Total
Estimated
Fair Value
Assets
Cash and cash equivalents ........................................ $
Receivables from clearing brokers ...........................
Receivables from other broker-dealers .....................
Notes receivables, net (1) ..........................................
Other receivables, net ...............................................
$
Liabilities
Accrued compensation ............................................. $
Commissions and fees payable ................................
Accounts payable and accrued liabilities (2) .............
Accrued interest .......................................................
Notes payable, net (3) ................................................
$
172,103 $
48,543
2,822
47,369
60,707
331,544 $
33,343 $
67,221
38,374
232
96,849
236,019 $
172,103 $
—
—
—
—
172,103 $
— $
—
—
—
—
— $
— $
48,543
2,822
47,369
60,707
159,441 $
33,343 $
67,221
38,374
232
99,129
238,299 $
172,103
48,543
2,822
47,369
60,707
331,544
33,343
67,221
38,374
232
99,129
238,299
(1) Carrying value approximates fair value, which is determined based on a valuation technique to convert future cash
payments or forgiveness transactions to a single discounted preset value amount.
(2) Excludes contingent consideration liabilities of $2,104.
(3) Estimated fair value based on then current rates at which similar amounts of debt could be borrowed.
The following tables present the financial assets and liabilities measured at fair value on a recurring basis at December
31, 2018 and December 31, 2017:
December 31, 2018
Carrying
Value
Level 1
Level 2
Level 3
Total
Estimated
Fair Value
Assets
Certificates of deposit ..................................... $
Debt securities .................................................
U.S. Treasury notes .........................................
Common stock and warrants ...........................
Total ................................................................ $
Liabilities
Contingent consideration payable ................... $
Debt securities .................................................
U.S. Treasury notes .........................................
Common stock and warrants ...........................
Total ................................................................ $
426 $
1,447
794
8,256
10,923 $
2,230 $
196
—
2,379
4,805 $
426 $
—
—
7,070
7,496 $
— $
—
—
2,379
2,379 $
— $
1,447
794
1,186
3,427 $
— $
—
—
—
— $
426
1,447
794
8,256
10,923
— $
196
—
—
196 $
2,230 $
—
—
—
2,230 $
2,230
196
—
2,379
4,805
December 31, 2017
Carrying
Value
Level 1
Level 2
Level 3
Total
Estimated
Fair Value
Assets
Certificates of deposit ..................................... $
Debt securities .................................................
U.S. Treasury notes .........................................
Common stock and warrants ...........................
Total ................................................................ $
Liabilities
Contingent consideration payable ................... $
Debt securities .................................................
U.S. Treasury notes .........................................
Common stock ................................................
Total ................................................................ $
568 $
—
—
765
1,333 $
— $
1,918
—
630
2,548 $
— $
—
—
—
— $
— $
—
—
80
80 $
— $
151
—
—
151 $
2,104 $
—
—
—
2,104 $
568
1,918
—
1,395
3,881
2,104
151
—
80
2,335
568 $
1,918
—
1,395
3,881 $
2,104 $
151
—
80
2,335 $
F-24
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share and per share amounts)
As of December 31, 2018 and December 31, 2017, approximately $9,763 and $3,265, 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.
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 of December 31, 2018 and
December 31, 2017, the fair values of the warrants were $1,052 and $475, 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.
Set forth below are changes in the carrying value of contingent consideration related to acquisitions, which is included
in accounts payable and accrued liabilities:
Fair value of contingent consideration as of December 31, 2015 ..................................
Payments ........................................................................................................................
Change in fair value of contingent consideration ...........................................................
Fair value of contingent consideration in connection with 2016 acquisitions ................
Fair value of contingent consideration as of December 31, 2016 ..................................
Payments ........................................................................................................................
Change in fair value of contingent consideration ...........................................................
Fair value of contingent consideration as of December 31, 2017 ..................................
Payments ........................................................................................................................
Change in fair value of contingent consideration ...........................................................
Fair value of contingent consideration in connection with KFG and FSFG acquisitions
Fair value of contingent consideration as of December 31, 2018 ..................................
$
$
2,813
(827 )
216
4,942
7,144
(5,021 )
(19 )
2,104
(1,353 )
238
1,241
2,230
6. 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, KMS, SSN and Ladenburg
has elected to compute its net capital under the alternative method allowed by this rule, and, at December 31, 2018,
each, excluding Ladenburg, had a $250 minimum net capital requirement. Ladenburg, as a market maker, had $256.
At December 31, 2018, Securities America had regulatory net capital of $9,164, Triad had regulatory net capital of
$8,739, Investacorp had regulatory net capital of $9,486, KMS had regulatory net capital of $7,379, SSN had
regulatory net capital of $8,934 and Ladenburg had regulatory net capital of $25,073.
Each of Securities America, Triad, Investacorp, KMS, SSN and Ladenburg claim exemptions from the provisions of
the SEC’s Rule 15c3-3 pursuant to paragraphs (k)(2)(i) and (k)(2)(ii) as they clear their customer transactions through
correspondent brokers on a fully disclosed basis.
Premier Trust, chartered by the state of Nevada, is subject to regulation by the Nevada Department of Business and
Industry Financial Institutions Division. Under Nevada law, Premier Trust must maintain minimum stockholders’
equity of at least $1,000, including at least $250 in cash. At December 31, 2018, Premier Trust had stockholders’
equity of $3,422, including at least $250 in cash.
F-25
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share and per share amounts)
7. 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 .............................................................................
Software ..................................................................................................
Other .......................................................................................................
Less: accumulated depreciation and amortization ..................................
Total ........................................................................................................ $
December 31,
2018
2017
4,727 $
22,850
4,618
33,207
5,836
71,238
(41,244 )
29,994 $
4,112
18,604
3,816
25,115
5,003
56,650
(33,029 )
23,621
8.
Intangible Assets
At December 31, 2018 and 2017, intangible assets subject to amortization consisted of the following:
Weighted-
Average
Estimated
Useful Life
(years)
7.9
Technology ......................................
Relationships with financial
December 31, 2018
December 31, 2017
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
$
25,563 $
22,187 $
25,563 $
Accumulated
Amortization
19,020
advisors .........................................
14.3
7
Vendor relationships ........................
3.8
Covenants not-to-compete ...............
8.3
Customer accounts ...........................
Trade names .....................................
7.7
Renewal revenue (1) .......................... —
Relationships with investment
banking clients ..............................
Leases ...............................................
Referral agreement ...........................
Other ................................................
Total .............................................
4
6
6.6
6
$
126,122
3,613
6,964
2,029
16,916
—
2,586
861
124
67
184,845 $
59,584
3,613
6,258
2,029
14,472
—
117,995
3,613
6,421
2,029
16,910
41,381
2,586
861
124
67
111,781 $
2,586
861
124
67
217,550 $
49,925
3,613
5,732
2,029
12,245
17,737
2,586
861
124
67
113,939
(1) Due to the adoption of ASC 606 on January 1, 2018, the Company eliminated the renewal revenue intangible
asset, net, that was created through the Company’s acquisition of Highland in 2014. See Note 4 for further
information.
Aggregate amortization expense amounted to $15,578, $21,327 and $20,703 for the years ended December 31, 2018,
2017 and 2016, respectively. The weighted-average amortization period for total amortizable intangibles at December
31, 2018 is 9.84 years. Estimated amortization expense for each of the five succeeding years and thereafter is as
follows:
2019 ............................................................................................................. $
2020 .............................................................................................................
2021 .............................................................................................................
2022 .............................................................................................................
2023 .............................................................................................................
Thereafter ....................................................................................................
$
13,071
11,466
6,628
6,554
6,217
29,128
73,064
F-26
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share and per share amounts)
9. Goodwill
Changes to the carrying amount of goodwill during the years ended December 31, 2018 and 2017 are as follows:
Independent
Advisory and
Brokerage
Services
Ladenburg
Insurance
Brokerage
Total
Balance as of December 31, 2016 ...................... $
Correction related to Foothill acquisition
purchase price allocation (1) .............................
Balance as of December 31, 2017 ...................... $
Benefit applied to reduce goodwill .....................
Business acquisitions ..........................................
Balance as of December 31, 2018 ...................... $
301 $
111,031 $
12,699 $
124,031
—
301 $
—
—
301 $
179
111,210 $
(541 )
246
110,915 $
—
12,699 $
—
2,164
14,863 $
179
124,210
(541 )
2,410
126,079
(1) During 2017, Securities America corrected the allocation of purchase price related to the Foothill acquisition,
which resulted in an increase in goodwill and related increase in contingent deferred liability.
The annual impairment tests performed at December 31, 2018 and 2017, based on quantitative 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. For 2018, the carrying amount of goodwill was reduced by $541
representing federal tax benefit realized for the excess of tax deductible goodwill over goodwill recognized for
reporting purposes with respect to the Company’s subsidiaries.
10. Notes Receivable from Financial Advisors
From time to time, the Company’s subsidiaries may make loans to their financial advisors. These loans are primarily
given to newly-recruited advisors to assist in the transition process. The notes receivable balance is comprised of
unsecured non-interest-bearing and interest-bearing loans (interest of up to 10.0%) to the financial advisors. These
notes have various schedules for repayment or forgiveness and mature at various dates through 2025.
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, 2018 and 2017, the allowance amounted to $1,528 and
$1,208, respectively.
Due to the adoption of ASC 606 on January 1, 2018, the Company reclassified notes receivable balances on forgivable
loans of $40,566 to contract acquisition costs, net in the consolidated statements of financial condition. See Note 4 for
further information.
11. Deferred Compensation Plan
Securities America has a deferred compensation plan which allowed certain members of management and qualified
financial advisors to defer a portion of their compensation and commissions. Participants were able to elect various
distribution options, but must be a plan participant for five years before any distributions can be made.
Securities America has purchased variable life insurance contracts with cash surrender values that are designed to
replicate the gains and losses of the deferred compensation liability and are held in a consolidated Rabbi Trust. The
cash surrender values of the life insurance contracts held in the Rabbi Trust are intended to informally fund a portion
of the deferred compensation liability. Securities America is the owner and beneficiary of these policies, for which the
aggregated cash surrender value totaled $11,406 and $12,711 as of December 31, 2018 and 2017, respectively. The
deferred compensation liability of $20,622 and $18,161 as of December 31, 2018 and 2017, 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-27
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share and per share amounts)
12. Income Taxes
The provision for income taxes for 2018, 2017 and 2016 consisted of the following:
2018:
Current .................................................................. $
Deferred ................................................................
$
2017:
Current .................................................................. $
Deferred ................................................................
$
2016:
Current .................................................................. $
Deferred ................................................................
$
Federal
State and
Local
Total
2,933 $
8,329
11,262 $
364 $
(7,695)
(7,331) $
— $
8,992
8,992 $
1,776 $
341
2,117 $
807 $
22
829 $
929 $
104
1,033 $
4,709
8,670
13,379
1,171
(7,673)
(6,502)
929
9,096
10,025
The difference between the income taxes expected at the U.S. federal statutory income tax rate of 21% for 2018 and
35% for 2017 and 2016 and the reported income tax expense (benefit) is summarized as follows:
Income (loss) before income taxes ....................... $
Expense (benefit) under statutory U.S. tax rates ...
Increase (decrease) in taxes resulting from:
(Decrease) increase in valuation allowance ..........
Nondeductible items .............................................
State taxes, net of federal benefit ..........................
Impact of tax reform .............................................
Other, net ..............................................................
Income tax expense (benefit) ................................ $
2018
2017
2016
47,165 $
9,905
(66 )
1,867
1,625
—
48
13,379 $
1,180 $
413
(12,286)
(4,300)
(11,261 )
4,475
431
(660 )
100
(6,502 ) $
12,540
1,323
671
—
(209)
10,025
On December 22, 2017, the U.S. government enacted comprehensive tax reform commonly referred to as the Tax Cuts
and Jobs Act (“TCJA”). Under GAAP, the effects of changes in tax rates and laws are recognized in the period which
the new legislation is enacted. The TCJA made broad and complex changes to the U.S. tax code, including, but not
limited to: (1) a reduction the U.S. federal corporate tax rate from 35% to 21%; (2) changes to the rules related to uses
and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017; (3) bonus
depreciation will allow for full expensing of qualified property; (4) created a new limitation on deductible interest
expense; (5) eliminated the corporate alternative minimum tax; (6) allows for unused alternative minimum tax credit
carryovers to be refunded over a period of time or available to offset any future federal tax liabilities; (7) further limits
deductibility of executive compensation under IRC §162(m); and (8) created new tax rules related to taxation of foreign
operations.
In response to the TCJA, the SEC staff issued SAB 118, which provided guidance on accounting for the tax effects of
TCJA. The purpose of SAB 118 was to address any uncertainty or diversity of view in applying ASC 740 in the
reporting period in which the TCJA was enacted. Also, SAB 118 provides a measurement period that should not extend
beyond one year from the TCJA enactment date for companies to complete the accounting under ASC 740. For the
year ended December 31, 2017, the Company recorded a provisional decrease in our deferred tax assets and liabilities
of $3.4 million as part of 2017 income tax provision in accordance with SAB 118. During the year ended December
31, 2018, the Company finalized the accounting for the tax effects of TCJA with no material changes to the provisional
estimate recorded in prior periods.
F-28
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share and per share amounts)
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.
Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2018 and December
31, 2017 are as follows:
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 .................................................................................
Contract acquisition costs ..........................................................
Deferred revenues ......................................................................
Goodwill ....................................................................................
Total deferred liabilities .............................................................
Net deferred tax liability ............................................................ $
2018
2017
2,938 $
—
4,731
9,370
5,164
780
22,983
(1,863)
21,120
(6,081)
(4,160)
(7,108)
(8,576)
(9,263)
(35,188)
(14,068) $
8,642
440
4,105
10,877
4,492
514
29,070
(5,520 )
23,550
(4,707 )
(13,589 )
—
—
(8,222 )
(26,518 )
(2,968 )
At December 31, 2018, the Company had an Alabama state net operating loss carryforward of approximately $30,468
expiring between 2023 and 2029; a Florida state net operating loss carryforward of approximately $1,837 expiring
between 2031 and 2036; a New York state net operating loss carryforward of approximately $5,640 expiring in 2036;
and a New York City net operating loss carryforward of approximately $4,648 expiring in 2036.
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. As of December 31, 2018, goodwill was reduced by $541 as
the excess benefit was fully realized.
In assessing the Company’s ability to recover its deferred tax assets, the Company evaluated whether it is more likely
than not that some portion or the entire deferred tax asset will be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income in those periods in which temporary differences
become deductible and/or net operating losses can be utilized. The Company considered all positive and negative
evidence when determining the amount of the net deferred tax assets that are more likely than not to be realized. This
evidence includes, but is not limited to, historical earnings, scheduled reversal of taxable temporary differences, tax
planning strategies and projected future taxable income. Based on the reversal pattern of existing taxable temporary
difference coupled with objective evidence of cumulative earnings in recent years, the Company concluded that its
deferred tax assets are realizable on a more-likely-than-not basis with the exception of certain separate state net
operating loss carryforwards.
During 2018, the Company’s valuation allowance decreased by approximately $3.7 million, of which $3.6 million was
reflected as a retained earnings adjustment in connection with adoption of ASC 606.
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 unrecognized state tax benefits as of December 31, 2018 and December 31,
2017. The Company has elected to classify interest and penalties that would accrue with respect to income taxes as
interest and other expense, respectively.
F-29
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share and per share amounts)
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Balance at January 1, ............................................ $
Increases in tax positions for prior years ..............
Increases in tax positions for current years ..........
Balance at December 31, ...................................... $
526 $
—
97
623 $
503
(33 )
56
526
2018
2017
Of the amounts reflected in the above table at December 31, 2018, the entire amount would reduce the Company’s
annual effective tax rate if recognized. As of December 31, 2018, the Company accrued interest and penalties of
approximately $227. As of December 31, 2018, the Company does not anticipate a significant change in unrecognized
tax benefits within 12 months of the reporting date.
The Company files income tax returns in the United States and various state jurisdictions. The Company’s tax years
2012 through 2018 remain open to examination by most taxing authorities.
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 2018 Ameriprise received cash settlements for final resolution of the 2008 through 2010 IRS
audits. In the third quarter of 2018, Ameriprise reached an agreement with IRS appeals to resolve the 2012 and 2013
audits. Accordingly, Ameriprise’s IRS audits are effectively settled through 2013. Ameriprise has also disclosed that
its state income tax returns are currently under examination by various jurisdictions for years ranging from 2009
through 2017.
13. Notes Payable
Notes payable consisted of the following:
Notes payable to clearing firm under forgivable loans ................................. $
Notes payable under subsidiary’s term loan with bank ................................
Note payable under subsidiary’s revolver with bank ....................................
Notes payable by subsidiary to certain former shareholders of Highland ....
Notes payable to KMS’s former shareholders, net of $98 of unamortized
discount in 2017 ........................................................................................
Notes payable to SSN’s former shareholders, net of $326 unamortized
discount in 2017 ........................................................................................
Notes payable to Kestler Financial Group’s former shareholders ................
Notes payable to Four Seasons Financial Group’s former
shareholders...............................................................................................
6.5% Senior Notes, net of $67 and $0 of unamortized discount in 2018
and 2017, respectively ...............................................................................
7% Senior Notes, net of $45 of unamortized discount in 2018 ....................
7.25% Senior Notes ......................................................................................
7.25% Frost Notes, net of $6,261 of unamortized discount in 2018 .............
Less: Unamortized debt issuance costs ........................................................
Total ............................................................................................................. $
Revolving Credit Agreement
December 31,
2018
2017
— $
—
89
—
—
—
5,399
364
82,742
42,475
60,000
70,089
(7,086 )
254,072 $
2,143
6,563
216
6,738
1,958
6,074
—
—
76,569
—
—
(3,412 )
96,849
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 former chairman of the board and former principal shareholder. Borrowings
of up to $40,000 were permitted under the Frost Gamma credit agreement and bore interest at a rate of 11% per annum,
payable quarterly. On December 24, 2018, the $40,000 revolving credit agreement was terminated by agreement of
the Company and Frost Gamma effective as of that date. At the time of its termination, no outstanding amounts were
owed by the Company and no early termination penalties were incurred in connection with the termination. The
Company borrowed and repaid $25,000 in November 2016. Interest expense amounted to $0, $0 and $113 in 2018,
2017 and 2016, respectively.
F-30
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share and per share amounts)
In connection with the revolving credit agreement, Frost Gamma received a warrant to purchase 2,000,000 shares of
LTS common stock. The warrant was exercised on October 19, 2017 at an exercise price of $1.91 per share. The
warrant, which was classified as debt issue cost, was valued at $3,200 based on the Black-Scholes option pricing
model, and was amortized under the straight-line method over the remaining term of the revolving credit agreement.
NFS Forgivable Loan
On November 4, 2011, National Financial Services LLC (“NFS”), which is now known as Fidelity Clearing & Custody
Solutions (“Fidelity”), a Fidelity Investments® company, provided the Company with a seven-year, $15,000
forgivable loan. The Company used the proceeds to fund expenses related to the Securities America acquisition.
Interest on the loan accrued at the average annual Federal Funds effective rate plus 6% per annum, subject to the
maximum rate of 11% per annum. Since Securities America met certain annual clearing revenue targets set forth in
the loan agreement, the principal balance of the loan was 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. The Company expensed interest under this loan agreement until such time as such interest
was forgiven. Securities America met the annual clearing revenue target for the period ending November 4, 2012,
2013, 2014, 2015, 2016 and 2017 resulting in the forgiveness of $2,143 of the aggregate principal amount of the loan
in November of each period. Upon meeting annual revenue targets, principal and interest, respectively, of $2,143 and
$295 in 2017 and $2,143 and $408 in 2016 were forgiven and included in other income. In May 2018, five of our
broker-dealer subsidiaries entered into a six-year extension of their clearing agreements with NFS.
In connection with the extension, the Company entered into a termination of the NFS forgivable loan agreement
whereby the remaining balance of the principal and interest, $2,143 and $79, respectively, on the loan was forgiven.
This amount was included in other income in 2018.
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 was payable quarterly
at 11% per annum. The remaining balance of the loan, together with accrued and unpaid interest thereon, was paid on
November 10, 2016. 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 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 was amortized over the term of the notes by the interest method.
On October 26, 2016, holders of the remaining unexercised warrants to purchase an aggregate of 10,699,999 shares of
the Company’s common stock exercised such warrants in full. Each holder paid the exercise price by cancellation of
indebtedness represented by the remaining balance of the promissory note held by such lender. Accordingly,
promissory notes with an aggregate remaining outstanding balance of $17,976 were canceled and no indebtedness
related to the November 2011 Loan remained outstanding.
Interest paid under the November 2011 Loan to Frost Nevada Investments Trust, an affiliate of the Company’s former
chairman and former principal shareholder, and Vector Group Ltd (“Vector”) amounted to $1,779 and $198,
respectively in 2016.
Bank Loans - Securities America
On November 6, 2013, SAFC entered into a loan agreement (the “SA Loan Agreement”) with a third-party financial
institution for (i) a term loan in the aggregate principal amount of approximately $1,709 and (ii) a revolving credit
facility. The term loan bore interest at 5.5%, and was re-paid in full in May 2017. Revolving loans bear interest at
5.5% per annum over a 5-year term. At December 31, 2018 and 2017, $89 and $216, respectively, were outstanding
under the revolving credit facility. On April 21, 2017, the SA Loan Agreement was amended to modify the interest
rate for new revolving loans to prime plus 2.25%. As of December 31, 2018, SAFC had $1,000 of availability under
the revolving credit facility. This loan agreement also provided for an additional term loan in the aggregate principal
amount of $8,000, subject to certain conditions. This second term loan bore interest at 5.75%, with a maturity date of
May 1, 2020. The loans are collateralized by the assets of SAFC and Securities America Advisors, Inc. The term loan
was paid in full in July 2018.
F-31
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share and per share amounts)
On February 6, 2019, SAFC entered into a loan agreement with a third-party financial institution for a term loan in the
aggregate principal amount of $7,000, with interest at the rate of 5.52%. Securities America began monthly payments
of principal and interest in the amount of $212, on March 6, 2019. The term loan matures on February 6, 2022.
Promissory Notes - Highland
As of December 31, 2017, HCHC Acquisition, as successor in interest to Highland’s parent, had outstanding $6,738
of its 10% promissory notes due February 26, 2019. In July 2018, HCHC Acquisition prepaid the promissory notes,
including accrued interest.
Promissory Notes - KMS
On October 15, 2014, as part of the consideration paid for the acquisition of KMS, the Company issued four-year
promissory notes to the former shareholders of KMS in the aggregate principal amount of $8,000, bearing interest at
1.84% per annum and payable in equal quarterly installments of principal and interest, which were valued at $7,508
based on an imputed interest rate of 5.5%. The remaining balances under the notes were prepaid in July 2018. The
carrying value of the notes at December 31, 2017, net of $98 unamortized discount, amounted to $1,958.
Promissory Notes - SSN
On January 2, 2015, as part of the consideration paid for the acquisition of SSN, the Company issued four-year
promissory notes to the former shareholders of SSN in the aggregate principal amount of $20,000, bearing interest at
1.74% per annum and payable in equal quarterly installments of principal and interest, which were valued at $18,697
based on an imputed interest rate of 5.1%. The remaining balances under the notes were prepaid in July 2018. The
carrying value of the notes at December 31, 2017, net of $326 of unamortized discount, amounted to the $6,074.
Senior Notes
On November 21, 2017, the Company sold $72,500 principal amount of its 6.5% senior notes due November 2027
(the “6.5% Senior Notes”). Interest on the 6.5% Senior Notes accrues from November 21, 2017 and is paid quarterly
in arrears on March 31, June 30, September 30 and December 31 of each year. The Company may redeem the 6.5%
Senior Notes in whole or in part on or after November 30, 2020, at its option, at a redemption price equal to 100% of
their principal amount, plus accrued and unpaid interest. On December 12, 2017, the underwriters exercised their
option to purchase an additional $4,069 principal amount of the 6.5% Senior Notes, which resulted in total gross
proceeds of $76,569, before deducting the underwriting discount paid to unaffiliated underwriters and offering
expenses aggregating $3,313, including $1,187 of brokerage commissions earned by employees of Ladenburg, which
served as the lead underwriter in the offering. In connection with the offering of Notes, certain members of the
Company’s management and Board of Directors purchased $10,400 of the Notes offered by the Company. In February
2018, the Company entered into a note distribution agreement under which the Company may sell up to $25,000
principal amount of additional 6.5% Senior Notes from time to time in an “at the market” offering in accordance with
Rule 415 under the Securities Act. Ladenburg is acting as the representative of the agents named in the note distribution
agreement in the “at the market” offering and may receive commissions of up to 2% of gross sales. During the 12
months ended December 31, 2018, the Company sold $6,240 principal amount of 6.5% Senior Notes pursuant to the
“at the market” offering.
On May 22, 2018, the Company sold $40,000 principal amount of its 7% senior notes due May 2028 (the “7% Senior
Notes”) pursuant to an underwritten offering. Interest on the 7% Senior Notes accrues from May 30, 2018 and is paid
quarterly in arrears on March 31, June 30, September 30 and December 31 of each year. The Company may redeem
the 7% Senior Notes in whole or in part on or after May 31, 2021, at its option, at a redemption price equal to 100%
of their principal amount, plus accrued and unpaid interest. On June 22, 2018, the underwriters exercised their option
to purchase an additional $1,412 principal amount of the 7% Senior Notes, which resulted in total gross proceeds of
$41,412, before deducting the underwriting discount paid to unaffiliated underwriters and offering expenses
aggregating $2,139, including $464 of brokerage commissions earned by employees of Ladenburg, which served as
the lead underwriter in the offering. In June 2018, the Company entered into a note distribution agreement under which
the Company may sell up to $25,000 principal amount of additional 7% Senior Notes from time to time in an “at the
market” offering. Ladenburg is acting as the representative of the agents named in the note distribution agreement in
the “at the market” offering and may receive commissions of up to 2% of gross sales. During the twelve months ended
December 31, 2018, the Company sold $2,729 principal amount of 7% Senior Notes pursuant to the “at the market”
offering. At December 31, 2018, Ladenburg held $1,622 of 7% Senior Notes which are not included in notes payable.
F-32
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share and per share amounts)
On August 9, 2018, the Company sold $60,000 principal amount of its 7.25% senior notes due September 2028 (the
“7.25% Senior Notes”) pursuant to an underwritten offering. Interest on the 7.25% Senior Notes accrues from August
16, 2018 and is paid quarterly in arrears on March 31, June 30, September 30 and December 31 of each year. The
Company may redeem the 7.25% Senior Notes in whole or in part on or after September 30, 2021 at its option, at a
redemption price equal to 100% of their principal amount, plus accrued and unpaid interest. The offering resulted in
total gross proceeds of $60,000, before deducting the underwriting discount paid to unaffiliated underwriters and
offering expenses aggregating $2,190, including $120 of brokerage commissions earned by employees of Ladenburg,
which served as one of the five underwriters in the offering.
Promissory Note - KFG
On August 31, 2018, as part of the consideration paid for the acquisition of KFG, the Company issued a promissory
note (the “KFG Note”) to the former shareholders of KFG in the aggregate principal amount of $5,450, bearing interest
at 4.00% per annum and payable in equal monthly installments beginning on September 15, 2018, with the final
installment being due and payable on or before November 15, 2036. The KFG Note may be prepaid in full or in part
at any time without premium or penalty. The KFG Note contains customary events of default, which if uncured, entitle
the holder to accelerate the due date of the unpaid principal amount of, and all accrued and unpaid interest on, the KFG
Note. Total interest expense on the KFG Note was $73 for the year ended December 31, 2018.
Promissory Note - FSFG
On November 1, 2018, as part of the consideration paid for the acquisition of FSFG, the Company issued two
promissory notes (the “FSFG Notes”) to the former shareholders of FSFG in the aggregate principal amount of $372,
one bearing interest at 3.99% per annum and payable in equal monthly installments beginning on November 1, 2018,
with the final installment being due and payable on or before October 1, 2021 and the other bearing interest at 4.75%
per annum and payable in equal monthly installments beginning on November 15, 2018, with the final installment
being due and payable on or before January 15, 2024. The FSFG Notes may be prepaid in full or in part at any time
without premium or penalty. The FSFG Notes contains customary events of default, which if uncured, entitle the
holder to accelerate the due date of the unpaid principal amount of, and all accrued and unpaid interest on, the FSFG
Notes. Total interest expense on the FSFG Notes was $2 for the year ended December 31, 2018.
Promissory Notes - Frost
On December 24, 2018, the Company entered into an agreement (the “Repurchase Agreement”) with its former
principal shareholder, Phillip Frost, M.D., and an entity affiliated with Dr. Frost, Frost Nevada Investments Trust
(together with Dr. Frost, the “Sellers”), pursuant to which the Company agreed to repurchase 50,900,000 shares of its
common stock directly from the Sellers (the “Share Repurchase”) in a private transaction at a price of $2.50 per share.
The Company funded the Share Repurchase with $50,900 in cash on hand and by issuing $76,350 on aggregate
principal amount of 7.25% Senior Notes due 2028 (the “Frost Notes”) to the Sellers. In addition, pursuant to the
Repurchase Agreement, options to purchase 3,610,000 shares of the Common Stock held by Dr. Frost were cancelled
in exchange for $3,000 in cash.
The Frost Notes are senior unsecured obligations of the Company and rank equally in right of payment with all of the
Company’s existing and future senior unsecured and unsubordinated indebtedness. The Frost Notes are effectively
subordinated in right of payment to all of the Company’s existing and future secured indebtedness and structurally
subordinated to all existing and future indebtedness of the Company’s subsidiaries. The Frost Notes bear interest from
December 24, 2018 at the rate of 7.25% per annum, payable quarterly in arrears on March 31, June 30, September 30
and December 31 of each year, commencing on March 31, 2019, and at maturity. The Frost Notes mature on September
30, 2028. Total interest expense related to the Frost Notes was $123 for the year ending December 31, 2018.
The Company may, at its option, at any time and from time to time, on or after September 30, 2021, redeem the Frost
Notes, in whole or in part, at a redemption price equal to 100% of the outstanding principal amount thereof plus
accrued and unpaid interest to, but excluding, the date fixed for redemption. On and after any redemption date, interest
will cease to accrue on the redeemed Frost Notes.
F-33
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share and per share amounts)
14. 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 January 2032. 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 August 2020. As of December 31, 2018, minimum
lease payments (net of lease abatement and exclusive of escalation charges) and sublease rentals are as follows:
Year Ending December 31,
2019 ................................................. $
2020(1) ..............................................
2021(1) ..............................................
2022(1) ..............................................
2023(1) ..............................................
Thereafter(1) .....................................
Total (1) ............................................ $
Lease
Commitments
Sublease Rentals
Net
8,341 $
8,902
7,182
6,558
5,423
31,284
67,690 $
41 $
28
—
—
—
—
69 $
8,300
8,874
7,182
6,558
5,423
31,284
67,621
(1) In connection with a new office lease entered into in March 2016, Securities America has exercised an option to
lease additional office space, which is under construction, for 12 years and would require the payment of an
estimated average annual rent of $2,000, subject to certain adjustments. The Company currently expects that this
lease would commence in 2020 upon the completion of the construction. Such estimated rent amounts are included
in the lease commitment table above.
Deferred rent of $2,956 and $2,151 at December 31, 2018 and 2017, 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 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, and the underwriters of ARCP’s May 2014 $1,656,000 common stock offering
(“May 2014 Offering”) and three prior note offerings. The complaints have been consolidated. Ladenburg was named
as a defendant as one of 17 underwriters of the May 2014 Offering and as one of eight underwriters of ARCP’s July
2013 offering of $300,000 in convertible notes. The complaint alleges, among other things, that the offering materials
were misleading based on financial reporting of expenses, improperly-calculated AFFO (adjusted funds from
operations), and false and misleading Sarbanes-Oxley certifications, including statements as to ARCP’s internal
controls, and that the underwriters are liable for violations of federal securities laws. The plaintiffs seek an unspecified
amount of compensatory damages, as well as other relief. In June 2016, the court denied the underwriters’ motions to
dismiss the complaint. In August 2017, the court granted the plaintiffs’ motion for class certification. Ladenburg
intends to vigorously defend against these claims.
In November 2015, two purported class action complaints were filed in state court in Tennessee against Miller Energy
Resources, Inc. (“Miller”), officers, directors, auditors and nine firms that underwrote six securities offerings in 2013
and 2014, which offerings raised approximately $151,000. Ladenburg was one of the underwriters of two of the
offerings. The complaints allege, among other things, that the offering materials were misleading based on the
purportedly overstated valuation of certain assets, and that the underwriters are liable for violations of federal securities
laws. The plaintiffs seek an unspecified amount of compensatory damages, as well as other relief. In December 2015
the defendants removed the complaints to the U.S. District Court for the Eastern District of Tennessee; in November
2016, the cases were consolidated. In August 2017, the court granted in part and denied in part the underwriters’
motion to dismiss the complaint. The plaintiffs’ motions for class certification and to remand the case to state court
are pending. Ladenburg intends to vigorously defend against these claims.
F-34
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share and per share amounts)
In January 2016, an amended complaint was filed in the U.S. District Court for the Southern District of Texas against
Plains All American Pipeline, L.P. and related entities as well as their officers and directors. The amended complaint
added Ladenburg and other underwriters of securities offerings in 2013 and 2014 that in the aggregate raised
approximately $2,900,000 as defendants to the purported class action. Ladenburg was one of the underwriters of the
October 2013 initial public offering. The complaint alleged, among other things, that the offering materials were
misleading based on representations concerning the maintenance and integrity of the issuer’s pipelines, and that the
underwriters are liable for violations of federal securities laws. In April 2018, the court granted the defendants’ motions
to dismiss the second amended complaint with prejudice and entered final judgment for the defendants. In May 2018
the plaintiffs filed a notice of appeal of the dismissal order. If the plaintiffs’ appeal is successful, Ladenburg intends
to vigorously defend against these claims.
During the period from May 2016 to July 2017, five arbitration claims were filed against Ladenburg by former
customers concerning purported unauthorized trading, excessive trading and mishandling of their accounts by a former
Ladenburg registered representative, and asserting compensatory damages in excess of $5,400. In July, October and
December 2017, and in July 2018, settlements were reached resolving all the claims; the amount paid by Ladenburg
in connection with these settlements was not material.
SEC examination reports provided to Triad and Securities America Advisors, Inc. in May and August 2016,
respectively, asserted that the firms had acted inconsistently with their fiduciary duties (including the requirement to
seek best execution) in recommending and selecting mutual fund share classes that paid 12b-1 fees where lower cost
share classes also were available in those same funds. The SEC also asserted that the firms’ disclosures of potential
conflicts of interest and compensation related to the mutual fund share classes that paid 12b-1 fees were insufficient.
Triad has revised its disclosures and completed restitution to its affected clients in 2016. On April 6, 2018, the SEC
issued an order against Securities America Advisors on consent that includes a cease and desist order and imposes
remedial sanctions of disgorgement, prejudgment interest, and a fine; the combined total amount is $5,828, which has
previously been reserved. In October 2018, Securities America Advisors received approval of its plan for distribution
of the funds. Securities America Advisors is paying out the funds pursuant to the terms of the order.
In February 2018, the SEC announced a Share Class Selection Disclosure Initiative (“Initiative”) to encourage
registered investment advisory firms to self-report failures to disclose conflicts of interest to clients concerning the
selection of mutual fund share classes that paid fees pursuant to Rule 12b-1 of the Investment Company Act of 1940
for the period 2014-2016. Under the Initiative, the SEC requires self-reporting firms, among other things, to disgorge
to clients the 12b-1 fees received during the relevant period when lower-cost share classes were available. Three of
the Company’s investment advisory subsidiaries determined to self-report under the Initiative. On March 11, 2019,
the SEC issued orders on consent against SSN Advisory, Inc. and Investacorp Advisory Services, Inc. that include
cease and desist orders and impose remedial sanctions of disgorgement and prejudgment interest; the combined total
amount is $2,149, which has previously been reserved.
Two arbitration claims were filed against Securities America in June and September 2018, and one complaint was
filed in the United States District Court for the Southern District of New York in February 2019, by a total of 14
customers asserting that a former registered representative of Securities America defrauded them through, among other
things, the use of improper wire transfers and false account documents. The customers asserted, among other claims,
claims for fraud, negligence, §10(b) violations, failure to supervise, respondeat superior, breach of fiduciary and other
duties. In November and December 2018, settlements were reached resolving the two arbitration claims; the amounts
paid in connection with those two claims were not material. Securities America is reviewing the circumstances of the
complaint, which asserts a total of $18,000 in compensatory damages, as it seeks to resolve the matter.
In the ordinary course of business, in addition to the above disclosed matters, the Company’s subsidiaries are
defendants in other litigation, arbitration and regulatory proceedings and may be subject to unasserted claims 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.
The Company had accrued liabilities in the amount of approximately $9,869 at December 31, 2018 and $6,902 at
December 31, 2017 for certain pending matters which are included in accounts payable and accrued liabilities.
Amounts accrued are based on judgment and currently available information and involve a variety of factors, including,
but not limited to, the type and nature of the litigation, claim or proceeding, the progress of the matter, advice of
counsel, available defenses, potential recoveries from other parties, experience in similar cases of proceedings, as well
as assessment of matters, including settlements, involving other defendants in similar or related cases or proceedings.
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.
F-35
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share and per share amounts)
15. Off-Balance-Sheet Risk and Concentration of Credit Risk
Securities America, Triad, Investacorp, KMS, SSN and Ladenburg do not carry accounts for customers or perform
custodial functions related to customers’ securities. They introduce all of their customer transactions, which are not
reflected in these financial statements, to clearing brokers, which maintain cash and the 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, SSN and Ladenburg has
agreed to indemnify its clearing brokers for any resulting losses. Each of Securities America, Triad, Investacorp, KMS,
SSN 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, SSN and Ladenburg securities
transactions are provided by two clearing brokers. At December 31, 2018 and December 31, 2017, amounts due from
these clearing brokers were $24,068 and $48,543, respectively, which represents a substantial concentration of credit
risk should these clearing brokers be unable to fulfill their obligations.
In the normal course of business, Securities America, Triad, Investacorp, KMS, SSN and Ladenburg may enter into
transactions in financial instruments with off-balance sheet risk. As of December 31, 2018 and December 31, 2017,
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.
16. Shareholders’ Equity
Repurchase Program
In March 2007, October 2011, November 2014 and November 2016, the Company’s board of directors authorized in
the aggregate the repurchase of up to 27,500,000 shares of the Company’s common stock from time to time on the
open market or in privately negotiated transactions, depending on market conditions.
Since inception through December 31, 2018, 25,184,105 shares of common stock have been repurchased for $66,116
under the program, including 5,833,890 shares repurchased for $16,705 in 2018 and 1,850,215 shares repurchased for
$4,721 in 2017. As of December 31, 2018, 2,315,895 shares remained available for purchase under the program.
Warrants
As of December 31, 2018, there were no outstanding warrants to acquire the Company’s common stock.
In 2017, 2,000,000 warrants were exercised to purchase 2,000,000 shares of the Company’s common stock. The
intrinsic value on the date of exercise was $1,830. In 2016, 13,236,333 warrants were exercised to purchase 12,389,544
shares of the Company’s common stock, net of 846,789 shares tendered in payment of the exercise price. The intrinsic
value on the date of exercise was $9,320.
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”). 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 and to increase the authorized number of shares of common
stock from 600,000,000 to 800,000,000. In May 2015, the Company filed an amendment to the Company’s Articles
of Incorporation to designate an additional 3,000,000 shares as Series A cumulative redeemable preferred stock
(“Series A Preferred Stock”). On May 18, 2016, the Company’s shareholders approved an amendment to the
Company’s Articles of Incorporation to increase the number of shares of preferred stock authorized from 25,000,000
to 50,000,000 and to increase the number of shares of common stock authorized from 800,000,000 to 1,000,000,000.
F-36
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share and per share amounts)
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 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 June 24, 2013, June 13, 2014, November 21, 2014, May 22, 2015 and May 22, 2017, the Company entered into
Equity Distribution Agreements under which it could sell up to an aggregate of 15,000,000 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, 2017 and 2016, the Company sold 1,167,159
and 1,161,895 shares of Series A Preferred Stock, respectively, pursuant to the “at the market” offerings, which
provided total gross proceeds to the Company of $29,052 and $28,303, respectively, before deducting commissions
paid to unaffiliated sales agents and offering expenses aggregating $958 and $723 , respectively.
For the years ended December 31, 2018, 2017 and 2016, the Company paid dividends of $34,031, $32,482 and
$30,438, respectively, on its outstanding Series A Preferred Stock based on a monthly dividend of approximately
$0.1667 per share.
In September 2017, the Company began a quarterly cash dividend on its common stock. During the last two quarters
of 2018, the Company paid a quarterly dividend of $0.0125 per share on its outstanding common stock, as compared
to $0.01 per share in each of the first two quarters in 2018. For the years ended December 31, 2018 and 2017, the
Company paid aggregate dividends of $8,794 and $3,880. Also, the Company’s board of directors has declared a
common stock dividend of $0.0125 per share payable in March 2019.
F-37
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share and per share amounts)
17. Per Share Data
Basic net income (loss) per common 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 unvested restricted stock is included in diluted earnings
per share utilizing the treasury stock method. A reconciliation of basic and diluted common shares use in the
computation of per share data is as follows:
Year Ended December 31,
2017
2018
2016
Basic weighted-average common shares outstanding
- basic .......................................................................
194,562,916
193,064,550
182,987,850
Effect of dilutive securities:
Options to purchase common stock ........................
Restricted shares .....................................................
Dilutive potential common shares ...............................
—
—
—
—
—
—
—
—
—
Weighted average common shares outstanding and
dilutive potential common shares ................................
194,562,916
193,064,550
182,987,850
During 2018, 2017 and 2016, options, warrants and restricted stock to purchase 25,107,164, 32,501,007 and
41,191,772 common shares, respectively, were not included in the computation of diluted income (loss) per share as
the effect would be anti-dilutive.
18. 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 2018, 161,968 shares of LTS common
stock were issued to employees under this plan, at prices ranging from $2.21 to $3.23; during 2017, 167,016 shares of
LTS common stock were issued to employees under this plan, at prices ranging from $2.32 to $3.00 and during 2016,
210,330 shares of LTS common stock were issued to employees under this plan, at prices ranging from $2.19 to $2.38.
These share issuances resulted in a capital contribution of $453, $420 and, $481 for 2018, 2017 and 2016, respectively.
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, 2018, 16,721,103 and 7,412,868 shares of common stock were available for issuance
under the 2009 Plan and the 1999 Plan, respectively.
F-38
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share and per share amounts)
A summary of the status of the 1999 Plan at December 31, 2018 and changes during the year ended December 31,
2018 are presented below:
Options outstanding, December 31, 2017 .........
Exercised ...........................................................
Forfeited ............................................................
Expired ..............................................................
Options outstanding, December 31, 2018 .........
Options exercisable, December 31, 2018 ..........
Shares
8,632,000 $
(3,127,000 )
(1,620,000 )
(30,000 )
3,855,000 $
3,855,000 $
Weighted-
Average
Remaining
Contractual
Term
(Years)
Aggregate
Intrinsic
Value
Weighted-
Average
Exercise
Price
1.36
1.70
1.04
2.69
1.20
1.20
1.52 $
1.52 $
4,551
4,551
A summary of the status of the 2009 Plan at December 31, 2018 and changes during the year ended December 31,
2018 are presented below:
Weighted-
Average
Remaining
Contractual
Term
(Years)
Weighted-
Average
Exercise
Price
Aggregate
Intrinsic
Value
Shares
Options outstanding, December 31, 2017 ........ 20,488,860 $
(1,266,837 )
Exercised ..........................................................
Forfeited ...........................................................
(2,229,983 )
Options outstanding, December 31, 2018 ........ 16,992,040 $
Options exercisable, December 31, 2018 ......... 16,338,290 $
2.28
1.63
2.75
2.26
2.22
3.94 $
3.83 $
7,749
7,749
Restricted Stock Awards
A summary of the restricted stock awards at December 31, 2018 and changes during the year ended December 31,
2018 is presented below:
Restricted
Stock
Weighted-
Average Grant
Date Fair Value
Per Share
Nonvested at December 31, 2017 ............................................
Issued during 2018 ..................................................................
Vested during 2018 .................................................................
Forfeited during 2018 ..............................................................
Nonvested at December 31, 2018 ............................................
3,380,145 $
2,172,000
(1,185,770 )
(106,250 )
4,260,125 $
2.60
3.24
2.75
3.11
2.87
Restricted stock awards issued in 2018 vest in four equal annual installments.
As of December 31, 2018, there was $7,931 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 and
restricted stock, which on a weighted-average basis is approximately 2.46 years.
The total intrinsic value of options exercised during the years ended December 31, 2018, 2017 and 2016 amounted to
$6,171, $3,992 and $6,556, respectively. The fair value of restricted stock vesting in 2018 and 2017 was $3,256 and
$1,944, respectively.
F-39
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share and per share amounts)
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. 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, 2018, 2017 and 2016, non-cash compensation expense relating to share-based
awards granted to employees, consultants and advisors amounted to $5,882, $5,539 and $5,311, respectively.
19. 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 controlling managing member of APA, the
financial statements of APA are included in the Company’s consolidated financial statements and amounts attributable
to the 20% unaffiliated investor are recorded as a noncontrolling interest.
20. Segment Information
The Company has three operating segments. The independent advisory and brokerage services segment includes the
investment advisory and broker-dealer services provided by the Company’s independent advisory and brokerage
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, 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, and an affiliate of Highland, which
provides marketing strategies, product expertise, and back-office processing for fixed and equity-indexed annuities.
Earnings before interest, taxes, depreciation and amortization, or EBITDA, as adjusted for acquisition-related expense,
amortization of retention and forgivable loans, amortization of contract acquisition costs, change in fair value of
contingent consideration related to acquisitions, non-cash compensation expense, financial advisor recruiting expense
and other expense, which includes excise and franchise tax expense, severance cost and compensation expense that
may be paid in stock, 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 acquisition-related expense,
amortization of retention and forgivable loans, amortization of contract acquisition costs and financial advisor
recruiting expenses or do not involve a cash outlay, such as stock-related compensation, which is expected to remain
a key element in our long-term incentive compensation program. EBITDA, as adjusted, should be considered in
addition to, rather than as a substitute for, income (loss) before income taxes, net income (loss) and cash flows provided
by (used in) operating activities.
F-40
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share and per share amounts)
Segment information for the years ended December 31, 2018, 2017 and 2016 is as follows:
Independent
Advisory and
Brokerage
Services
Ladenburg
Insurance
Brokerage
Corporate
Total
2018
Revenues .............................................. $
Income (loss) before income taxes .......
EBITDA, as adjusted (2) .......................
Identifiable assets .................................
Depreciation and amortization .............
Interest .................................................
Capital expenditures .............................
Non-cash compensation .......................
2017
Revenues .............................................. $
Income (loss) before income taxes .......
EBITDA, as adjusted (2) .......................
Identifiable assets .................................
Depreciation and amortization .............
Interest .................................................
Capital expenditures .............................
Non-cash compensation .......................
2016
Revenues .............................................. $
Income (loss) before income taxes .......
EBITDA, as adjusted (2) .......................
Identifiable assets .................................
Depreciation and amortization .............
Interest .................................................
Capital expenditures .............................
Non-cash compensation .......................
1,161,043 $
62,748
98,411
515,720
22,403
905
13,787
1,220
1,140,380 $
19,858
59,756
443,670
21,455
1,157
8,923
1,035
1,003,282 $
15,071
47,977
423,288
20,406
2,828
6,784
1,010
78,094 $
11,464
12,966
59,798
471
62
351
705
66,680 $
6,346
8,115
43,148
505
—
753
629
49,425 $
(3,674 )
(1,676 )
38,665
703
4
139
537
147,127 $
1,983
4,166
97,708
1,146
472
244
113
57,132 $
(5,338 )
2,698
47,166
6,841
683
216
183
50,483 $
(6,074 )
2,255
54,166
7,161
682
209
245
4,872
$
(29,030 )(1)
(15,095 )
67,678
19
9,357
120
3,844
3,960
$
(19,686 )(1)
(14,568 )
98,041
34
870
4
3,692
1,391,136
47,165
100,448
740,904
24,039
10,796
14,502
5,882
1,268,152
1,180
56,001
632,025
28,835
2,710
9,896
5,539
3,763
$
(17,609 )(1)
(12,785 )
29,884
64
748
—
3,519
1,106,953
(12,286 )
35,771
546,003
28,334
4,262
7,132
5,311
(1) Includes interest on revolving credit and forgivable loan notes, compensation, professional fees and other general and
administrative expenses related to the Corporate segment.
(2) The following table reconciles income (loss) before income taxes to EBITDA, as adjusted, for the years ended December
31, 2018, 2017 and 2016:
Income (loss) before income taxes ...................................... $
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 .....................
Amortization of contract acquisition costs (6) ........................
Financial advisor recruiting expense .....................................
Acquisition-related expense ..................................................
Loss attributable to noncontrolling interest ...........................
Other .....................................................................................
EBITDA, as adjusted ............................................................ $
EBITDA, as adjusted
Independent Advisory and Brokerage Services ..................... $
Ladenburg .............................................................................
Insurance Brokerage..............................................................
Corporate ..............................................................................
Total segments .................................................................. $
F-41
2018
Year Ended December 31,
2017
2016
47,165 $
1,180 $
(12,286 )
(2,504 )
238
—
10,796
24,039
5,882
417
9,671
370
1,010
(28 )
3,392 (3)
100,448 $
98,411 $
12,966
4,166
(15,095 )
100,448 $
(506 )
(19 )
—
2,710
28,835
5,539
7,396
—
5,721
3,469
15
1,661 (4)
56,001 $
59,756 $
8,115
2,698
(14,568 )
56,001 $
(672 )
216
—
4,262
28,334
5,311
5,472
—
1,882
1,357
42
1,853 (5)
35,771
47,977
(1,676 )
2,255
(12,785 )
35,771
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share and per share amounts)
(3) Includes loss on severance costs of $481, excise and franchise tax expense of $629, compensation expense that
may be paid in stock of $535 and non-recurring expenses related to a block repurchase of our common stock and
other legal matters of $1,747.
(4) Includes loss on severance costs of $525, excise and franchise tax expense of $594 and compensation expense
that may be paid in stock of $559.
(5) Includes loss on severance costs of $755, excise and franchise tax expense of $508 and compensation expense
that may be paid in stock of $586.
(6) See Note 4 for further information.
21. Related Party Transactions
Effective October 2015, Investacorp’s lease with Frost Real Estate Holdings, LLC (“FREH”), an entity affiliated with
the Company’s former chairman of the board and former principal shareholder, in an office building in Miami, Florida,
was renewed and now expires in September 2020. The lease provides for aggregate payments during the five-year
term of approximately $2,420 and minimum annual payments of $484. Rent expense under such lease amounted to
$522, $506 and $522 in 2018, 2017 and 2016, respectively.
Ladenburg’s principal executive offices are located in the same office building in Miami, Florida, where approximately
14,050 square feet of office space is leased from FREH. Ladenburg’s lease was renewed effective March 2018 and
now expires in February 2023 with two optional five-year extensions. The lease provides for aggregate payments
during the remaining term of approximately $2,301 and minimum annual payment of $460. Rent expense under such
lease amounted to $565, $565, and $706 in 2018, 2017 and 2016, respectively.
The Company is a party to an agreement with 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. Various executive officers and directors of Vector
serve as members of the board of directors of the Company, and Vector owned approximately 10.37% of the
Company’s common stock at December 31, 2018. In consideration for such services, the Company agreed to pay
Vector an annual management fee plus reimbursement of expenses and to indemnify Vector. The agreement is
terminable by either party upon 30 days’ prior written notice. The Company paid Vector $850 in 2018, 2017 and 2016
under the agreement and will pay Vector at a rate of $850 per year in 2019.
In 2015, the Company entered into a Consulting Services Agreement with Nextt Advisors Inc., a corporation owned
solely by the son-in-law (the “Consultant”) of the Company’s Chairman, President and Chief Executive Officer.
Pursuant to the agreement, the Company paid the Consultant $200 in 2017 and $186 in 2016. Effective January 1,
2018, the consulting agreement was terminated and the consultant became an employee of the Company.
SSN has an operating lease for office facilities with Cogdill Capital LLC, an entity in which SSN’s Chief Executive
Officer and Chief Financial Officer are members and own a minority percentage of such entity, which expires in March
2020. Rent expense under such lease amounted to $293 in 2018, $285 in 2017 and $276 in 2016.
The Company is a party to an agreement with Castle Brands Inc. (“Castle”) under which the Company provides certain
administrative, legal and financial services to Castle. The Company’s Chairman, President and Chief Executive
Officer, who is also a director of the Company, is also the President and Chief Executive Officer and a director of
Castle. Various Company directors serve as directors of Castle. The Company received $233 in 2018, $260 in 2017
and $173 in 2016 under this agreement.
In connection with the offering of Notes, as more fully described in Note 13, certain members of management and the
Board of Directors of the Company and the former chairman of the board and principal shareholder purchased $10,400
of the 6.5% Senior Notes offered by the Company. See also Note 13 for information regarding other loan transactions
involving related parties.
In 2018, Ladenburg acted as underwriter in two offerings of the Company’s senior notes for an amount of $693.
Ladenburg holds $1,622 of 7% Senior Notes of the Company and received interest payments of $66 in 2018.
In January 2019, Michael Liebowitz joined the board of directors of the Company. Mr. Liebowitz is President and
CEO of Harbor Group, and owned 50% of the equity interests in Harbor Group until the sale of Harbor Group in
September 2018.
F-42
LADENBURG THALMANN FINANCIAL SERVICES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except share and per share amounts)
During the year ended December 31, 2018, Harbor Group was paid by unaffiliated insurance carriers approximately
$884 in brokerage commissions for placing policies covering the Company and its subsidiaries. Mr. Liebowitz did not
receive any direct compensation from the Company during the year ended December 31, 2018.
22. Quarterly Financial Data (Unaudited)
2018:
Revenues .......................................................... $
Expenses (1) ......................................................
Income before item shown below ....................
Change in fair value of contingent
consideration ....................................................
Income before income taxes ............................ $
Net income ....................................................... $
Income attributable to noncontrolling interest .
Net income attributable to the Company .......... $
Dividends declared on preferred stock .............
Net (loss) income available to common
1st
2nd
3rd
4th
Quarters
329,384 $
321,687
7,697
357,756 $
343,822
13,934
348,875 $
336,164
12,711
355,121
342,060
13,061
(61)
7,636 $
5,464 $
(1)
5,463 $
(8,508)
(50 )
13,884 $
9,310 $
(8 )
9,302 $
(8,508 )
(54 )
12,657 $
9,450 $
(13 )
9,437 $
(8,507 )
(73 )
12,988
9,562
(6 )
9,556
(8,508 )
1,048
shareholders .................................................. $
Basic (loss) income per common share (2) ........ $
0.01
Diluted (loss) income per common share (2) ..... $
0.01
Basic weighted average common shares .......... 195,898,794 196,557,837 196,381,910 189,463,849
Diluted weighted average common shares ....... 195,898,794 209,855,936 208,387,236 198,743,096
(3,045) $
(0.02) $
(0.02) $
794 $
0.00 $
0.00 $
930 $
0.00 $
0.00 $
(1) Includes a $1,494, $1,568, $1,380 and $1,440 charge for non-cash compensation in the first, second, third and
fourth quarters of 2018, respectively.
(2) Due to rounding, the sum of the quarters’ basic and diluted loss per common share do not equal the full fiscal year
amount.
2017:
Revenues .......................................................... $
Expenses (1) ......................................................
(Loss) income before item shown below .........
Change in fair value of contingent
consideration .................................................
(Loss) income before income taxes .................. $
Net (loss) income ............................................. $
Loss (income) attributable to noncontrolling
1st
2nd
3rd
4th
Quarters
290,291 $
294,961
(4,670 )
311,536 $
310,286
1,250
322,309 $
317,649
4,660
344,016
344,095
(79 )
152
(4,518 ) $
(3,679 ) $
(63)
1,187 $
1,325 $
(3 )
4,657 $
3,402 $
(67 )
(146 )
6,634
10
interest ...........................................................
6,644
Net (loss) income attributable to the Company $
(8,456 )
Dividends declared on preferred stock .............
(1,812 )
Net loss available to common shareholders ..... $
Basic loss per common share (2) ....................... $
(0.01 )
Diluted loss per common share (2) .................... $
(0.01 )
Basic weighted average common shares .......... 192,270,615 192,304,828 192,912,643 194,749,001
Diluted weighted average common shares ....... 192,270,615 192,304,828 192,912,643 194,749,001
5
(3,674 ) $
(7,924 )
(11,598 ) $
(0.06 ) $
(0.06 ) $
3
1,328 $
(7,953)
(6,625) $
(0.03) $
(0.03) $
(3 )
3,399 $
(8,149 )
(4,750 ) $
(0.02 ) $
(0.02 ) $
(1) Includes a $1,429, $1,378, $1,341 and $1,391 charge for non-cash compensation in the first, second, third and
fourth quarters of 2017, respectively.
(2) Due to rounding, the sum of the quarters’ basic and diluted loss per common share do not equal the full fiscal year
amount.
F-43
Stock Price Performance Graph
The graph below compares the cumulative total return of our common stock for the five-year period ending December 31,
2018 with the cumulative total return of companies comprising the NYSE American Composite Index and a customized
peer group composed of ten companies (“Peer Group”). Our Peer Group consists of B. Riley Financial Inc., Cowen Inc.,
Greenhill & Co., Inc., INTL FCStone Inc., Investment Technology Group, Inc., JMP Group LLC, LPL Financial Holdings
Inc., Oppenheimer Holdings Inc., Piper Jaffray Companies and Raymond James Financial Inc.
The graph plots the growth in value of an initial investment of $100 in each of our common stock, the NYSE American
Composite Index and the Peer Group and assumes reinvestment of all dividends, if any. We began paying quarterly
dividends on our common stock in September 2017 and, therefore, the cumulative total return calculation for our common
stock after September 2017 is based on both stock price appreciation and reinvestment of dividends.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Ladenburg Thalmann Financial Services Inc., the NYSE American Index,
and a Peer Group
$160
$140
$120
$100
$80
$60
$40
$20
$0
12/13
12/14
12/15
12/16
12/17
12/18
Ladenburg Thalmann Financial Services Inc.
NYSE American
Peer Group
*$100 invested on 12/31/13 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
12/13 12/14 12/15 12/16 12/17 12/18
Ladenburg Thalmann Financial Services Inc. ..... 100.00 126.20 88.18 77.96 101.68 76.08
NYSE American ................................................. 100.00 101.45 72.08 86.50 85.89 75.60
Peer Group .......................................................... 100.00 104.58 100.72 114.20 148.17 137.71
LADENBURG THALMANN FINANCIAL SERVICES INC.
CORPORATE INFORMATION
BOARD OF DIRECTORS
Henry C. Beinstein
Partner, Gagnon Securities LLC
Glenn C. Davis
Senior Advisor, Kaufman Rossin
Brian S. Genson
President, Pole Position Investments
Dr. Richard M. Krasno
Lead Independent Director, Ladenburg
Thalmann Financial Services Inc.
Richard J. Lampen
President and Chief Executive Officer,
Ladenburg Thalmann Financial
Services Inc.
Michael S. Liebowitz
President and Chief Executive Officer,
Harbor Group Consulting
Howard M. Lorber
President and Chief Executive Officer,
Vector Group Ltd.
Adam Malamed
Executive Vice President and Chief
Operating Officer, Ladenburg
Thalmann Financial Services Inc.
Jacqueline M. Simkin
President, Simkin Management Inc.
Mark Zeitchick
Executive Vice President, Ladenburg
Thalmann Financial Services Inc.
OFFICERS
Richard J. Lampen
Chairman of the Board, President and
Chief Executive Officer
Howard M. Lorber
Vice Chairman of the Board
Mark Zeitchick
Executive Vice President
Adam Malamed
Executive Vice President and Chief
Operating Offıcer
David Ballard
Senior Vice President - Enterprise
Services
John Blood
Senior Vice President - Advisory
Services & Solutions
Joseph Giovanniello
Senior Vice President − Corporate and
Regulatory Affairs and Secretary
Doreen Griffith
Senior Vice President, Chief
Information Officer
Brian L. Heller
Senior Vice President − Business
and Legal Affairs
Kirk Hulett
Senior Vice President - Organizational
& Practice Development
Brett H. Kaufman
Senior Vice President and
Chief Financial Offıcer
Paul Lofties
Senior Vice President, Wealth
Management
Carly P. Maher
Senior Vice President, Enterprise
Initiatives
George Oka
Senior Vice President, Head of
Corporate Development
Doug Baxley
Vice President, Retirement and
Fiduciary Services
Bradley H. Brodie
Vice President − Legal Affairs
Diane M. Chillemi
Vice President − Accounting
and Finance
Thayer Gallison
Vice President, Due Diligence Officer
Dan Sachar
Vice President, Enterprise Innovation
Craig A. Timm
Vice President − Business Risk
Management and Chief Risk Offıcer
OFFICERS OF
SUBSIDIARIES
Ladenburg Thalmann & Co. Inc.
Peter H. Blum
Co-Chief Executive Offıcer
David Rosenberg
Co-Chief Executive Offıcer
Ladenburg Thalmann Asset
Management Inc.
Philip Blancato
President
Investacorp, Inc.
Patrick Farrell
Chief Executive Offıcer
Triad Advisors, LLC
Jeffrey L. Rosenthal
Chief Executive Offıcer
Premier Trust, Inc.
Mark Dreschler
Chief Executive Offıcer
Securities America, Inc.
James Nagengast
Chief Executive Offıcer
Highland Capital Brokerage, Inc.
Jim Gelder
Chief Executive Offıcer
KMS Financial Services, Inc.
Erinn Ford
Chief Executive Offıcer
Securities Service Network, LLC
Wade Wilkinson
Chief Executive Offıcer
COMMON AND PREFERRED STOCK
Our Common Stock and 8% Series A Cumulative Redeemable
Preferred Stock trade on the NYSE American 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 ir.stockpr.com/ladenburg/proxy-statements
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
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.
277 Park Avenue, 26th Floor
New York, NY 10172
212.409.2000
Ladenburg Thalmann Asset
Management Inc.
277 Park Avenue, 26th Floor
New York, NY 10172
212.409.2000
Investacorp, Inc.
4400 Biscayne Boulevard, 11th Floor
Miami, FL 33137
305.557.3000
Triad Advisors, LLC
5155 Peachtree Parkway
Suite 3220
Norcross, GA 30092
770.840.0363
Premier Trust, Inc.
4465 S. Jones Blvd.
Las Vegas, NV 89103
702.507.0750
Securities America, Inc.
12325 Port Grace Blvd.
La Vista, NE 68128
402.399.9111
Highland Capital Brokerage, Inc.
3535 Grandview Parkway
Suite 600
Birmingham, AL 35243
205.263.4400
KMS Financial Services, Inc.
2001 Sixth Avenue
Suite 2801
Seattle, WA 98121
206.441.2885
Securities Service Network, LLC
9729 Cogdill Road
Suite 301
Knoxville, TN 37932
865.777.4677
REGISTRAR AND TRANSFER AGENT
American Stock Transfer &
Trust Company
59 Maiden Lane
New York, NY 10038
800.937.5449
www.amstock.com