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LTS > SEC Filings for LTS > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for LADENBURG THALMANN FINANCIAL SERVICES INC

Form 10-Q for LADENBURG THALMANN FINANCIAL SERVICES INC


8-Nov-2012

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are engaged in independent brokerage and advisory services, investment banking, equity research, institutional sales and trading, asset management services and trust services through our principal subsidiaries, Securities America, Inc. (collectively with related companies, "Securities America"), Triad Advisors, Inc. ("Triad"), Investacorp, Inc. (collectively with related companies, "Investacorp"), Ladenburg Thalmann & Co. Inc. ("Ladenburg"), Ladenburg Thalmann Asset Management Inc. ("LTAM") and Premier Trust, Inc. ("Premier Trust"). We are committed to establishing a significant presence in the financial services industry by meeting the varying investment needs of our clients.

Through our acquisitions of Securities America in November 2011, Triad in August 2008 and Investacorp in October 2007, we have established a leadership position in the independent broker-dealer industry. During the past decade, this has been one of the fastest growing segments of the financial services industry. With approximately 2,700 financial advisors located in 50 states, we have become one of the approximately 10 largest independent broker-dealer networks. We believe that we have the opportunity through acquisitions, recruiting and internal growth to continue expanding our market share in this segment over the next several years. Since 2007, our plan has been to marry the more stable and recurring revenue and cash flows of the independent broker-dealer business with Ladenburg's traditional investment banking, capital markets, institutional equity and related businesses. Ladenburg's businesses are generally more volatile and subject to the cycles of the capital markets than our independent broker-dealer subsidiaries, but historically have enjoyed strong operating margins in good market conditions. Our goal has been to build sufficient scale in our independent brokerage business, with the accompanying more steady cash flows it can produce, so regardless of capital market conditions, we as a firm can generate significant operating cash to create value for our shareholders.

The appealing growth profile of the independent brokerage and advisory business has been a key factor in setting our strategic path. The independent brokerage channel has expanded significantly over the past decade, driven in large part by demographic trends, including the aging of America, the retirement of the baby boomer generation and the rollover of retirement assets from corporate 401(k) and other pension plans to individual IRA accounts. The increasing responsibility of individuals to plan for their own retirement has created demand for the financial advice provided by financial advisors in the independent channel, who are not tied to a particular firm's proprietary products. These developments have been occurring against a backdrop of the steady migration of client assets and advisors from the wirehouse, insurance and bank channels to the independent channel.

Each of our independent broker-dealers operates separately under its own management team, which reflects our recognition that each firm has its own unique culture and strengths. We believe this is an important part of the glue that helps bind the advisors to the firm. At the same time, we have taken advantage of the scale we have created across the multiple firms by spreading costs in areas that are not directly visible to the advisors and their clients, such as technology, accounting and other back office functions. Our acquisition of Securities America has provided opportunities that have added value to our existing businesses. We have rolled out Securities America's industry best practice development and coaching tools to our other advisors, while at a firm-wide level we expect to benefit from adding its management expertise and systems to strengthen risk management and financial reporting. In turn, Securities America's advisors have gained additional resources to enhance their practices, including access to Ladenburg's proprietary research and investment banking, Premier Trust's trust services and LTAM's wealth management solutions.

Ladenburg is a full service broker-dealer that has been a member of the New York Stock Exchange since 1879. It provides its services principally for middle market and emerging growth companies and high net worth individuals through a coordinated effort among corporate finance, capital markets, asset management, brokerage and trading professionals.

LTAM is a registered investment advisor. LTAM offers various asset management products utilized by Ladenburg and Premier Trust's clients as well as clients of our independent financial advisors.

Premier Trust, a Nevada trust company, provides administration of personal trusts and retirement accounts, estate and financial planning, wealth management and custody services. We acquired Premier Trust in September 2010 to differentiate ourselves from the competition and to provide our network of independent financial advisors with access to a broad array of trust services. This was an important strategic step in our efforts to increase the products and services we offer clients through our independent broker-dealer platform.

Each of Ladenburg, Securities America, Investacorp and Triad is subject to regulation by, among others, the Securities and Exchange Commission ("SEC"), the Financial Industry Regulatory Authority ("FINRA"), and the Municipal Securities Rulemaking Board and is a member of the Securities Investor Protection Corporation. Securities America is also subject to regulation by the Commodities Futures Trading Commission and the National Futures Association. Premier Trust is subject to regulation by the Nevada Department of Business and Industry Financial Institutions Division.

Recent Developments

In 2009 and 2011, the primary clearing firm of our subsidiaries, National Financial Services LLC ("NFS"), a Fidelity Investments company, provided us with forgivable loans, the proceeds of which were used to help fund our growth strategy. Under the terms of the loans, on an annual basis commencing November 2012, based on our subsidiaries continuing to clear with NFS and, in the case of one of the loans, meeting certain annual clearing revenue targets, a portion of the principal amount of the loans and related interest are forgiven. In November 2012, approximately $3,929 aggregate principal amount of the loans was forgiven together with related interest, and we anticipate that we will recognize an increase in pre-tax income for the fourth quarter of 2012 of approximately $3,500, net of compensation expense, resulting from the forgiveness.

Acquisition Strategy

We continue to explore opportunities to grow our businesses, including through potential acquisitions of other securities and investment banking firms, both domestically and internationally. These acquisitions may involve payments of material amounts of cash, the incurrence of material amounts of debt, which may increase our leverage, or the issuance of significant amounts of our equity securities, which may be dilutive to our existing shareholders. We cannot assure you that we will be able to complete any such potential acquisitions on acceptable terms or at all or, if we do, that any acquired business will be profitable. We also may not be able to integrate successfully acquired businesses into our existing business and operations.

Critical Accounting Policies

There have been no material changes from the critical accounting policies set forth in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our annual report on Form 10-K for the year ended December 31, 2011, as amended. Please refer to those sections for disclosures regarding the critical accounting policies related to our business.

Results of Operations

(in thousands, except share and per share data)

The following discussion provides an assessment of our results of operations, capital resources and liquidity and should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this report. The unaudited condensed consolidated financial statements include our accounts and the accounts of Ladenburg, Securities America (since November 4, 2011), Investacorp, Triad, Premier and our other subsidiaries.

                                           Three months ended             Nine months ended
                                              September 30,                  September 30,
                                           2012            2011           2012           2011
Total revenues                          $   159,834     $   48,898     $  477,934     $  166,331
Total expenses                              166,372         51,684        497,984        167,841
Pre-tax loss                                 (5,629 )       (2,786 )      (12,939 )       (1,510 )
Net loss                                     (6,037 )       (3,070 )      (13,999 )       (2,461 )

Reconciliation of EBITDA, as
adjusted, to net loss:
EBITDA, as adjusted                     $     6,308     $      287     $   19,262     $    7,053
Add:
Interest income                                  47             (3 )          140             27
Change in fair value of contingent
consideration                                   909              -          7,111              -
Less:
Interest expense                             (6,148 )         (820 )      (18,400 )       (2,468 )
Income tax expense                             (408 )         (284 )       (1,060 )         (951 )
Depreciation and amortization                (3,979 )         (862 )      (12,112 )       (2,650 )
Non-cash compensation                        (1,054 )         (688 )       (3,645 )       (2,772 )
Acquisition related expense                       -           (700 )            -           (700 )
Amortization of retention loans              (1,712 )            -         (5,295 )            -
Net loss                                $    (6,037 )   $   (3,070 )   $  (13,999 )   $   (2,461 )


Earnings before interest, taxes, depreciation and amortization, or EBITDA, adjusted for change in fair value of contingent consideration, amortization of retention loans made in connection with the Securities America acquisition, non-cash compensation expense, and interest expense is a key metric we use in evaluating our financial performance. EBITDA, as adjusted, is considered a non-GAAP financial measure as defined by Regulation G promulgated by the SEC under the Securities Act of 1933, as amended. We consider EBITDA, as adjusted, important in evaluating our financial performance on a consistent basis across various periods. Due to the significance of non-cash and non-recurring items, EBITDA, as adjusted, enables our board of directors and management to monitor and evaluate the business on a consistent basis. We use EBITDA, as adjusted, as a primary measure, among others, to analyze and evaluate financial and strategic planning decisions regarding future operating investments and potential acquisitions. We believe that EBITDA, as adjusted, eliminates items that are not indicative of our core operating performance, such as change in fair value of contingent consideration and amortization of retention loans made in connection with the Securities America acquisition, or do not involve a cash outlay, such as stock-related compensation. The presentation of EBITDA, as adjusted, should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items or by non-cash items, such as non-cash 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, pre-tax income, net income and cash flows from operating activities.

Third quarter 2012 EBITDA, as adjusted, was $6,308, an increase of $6,021 from third quarter 2011 EBITDA, as adjusted, of $287, primarily because of increased revenue for the 2012 period resulting from the Securities America acquisition. For the nine months ended September 30, 2012, EBITDA, as adjusted, was $19,262, an increase of $12,209 from EBITDA, as adjusted, of $7,053 for the nine months ended September 30, 2011, primarily because of increased revenues in the 2012 period resulting from the Securities America acquisition.

Segment Description

We have two operating segments:

Independent brokerage and advisory services - includes the broker-dealer and investment advisory services provided by Securities America, Investacorp and Triad to their independent contractor financial advisors and wealth management services provided by Premier Trust; and

Ladenburg - includes the investment banking, sales and trading and asset management services and investment activities conducted by Ladenburg and LTAM.

                                            Three months ended             Nine months ended
                                              September 30,                  September 30,
                                           2012            2011           2012           2011
Revenues:
Independent brokerage and advisory
services (1)                            $   149,201     $   40,339     $  442,993     $  129,577
Ladenburg                                    10,560          6,872         34,758         35,323
Corporate                                        73          1,687            183          1,431
Total revenues                          $   159,834     $   48,898     $  477,934     $  166,331

Pre-tax (loss) income:
Independent brokerage and advisory
services (1) (2)                        $    (2,226 )   $    1,283     $   (3,738 )   $    4,346
Ladenburg                                      (358 )       (2,498 )         (301 )         (396 )
Corporate (3)                                (3,045 )       (1,571 )       (8,900 )       (5,460 )
Total pre-tax                           $    (5,629 )   $   (2,786 )   $  (12,939 )   $   (1,510 )

(1) Amounts for 2012 include Securities America which was acquired on November 4, 2011.

(2) Includes income of $909 and $7,111 from change in the fair value of contingent consideration related to Securities America acquisition for the three and nine months ended September 30, 2012, respectively.

(3) Includes interest on revolving credit and forgivable loan notes, compensation, professional fees and other general and administrative expenses.

Three months ended September 30, 2012 versus three months ended September 30, 2011

For the quarter ended September 30, 2012, we had a net loss of $6,037 as compared to a net loss of $3,070 for the quarter ended September 30, 2011. This change was primarily due to increased interest, depreciation and amortization expenses and non-cash compensation expense in the 2012 period arising from the Securities America acquisition as described below, partially offset by a decrease in fair value of contingent consideration related to the Securities America acquisition. The 2012 period included $6,148 of interest expense, $3,979 of depreciation and amortization expense and $1,054 of non-cash compensation expense as compared to $820 of interest expense, $862 of depreciation and amortization expense and $688 of non-cash compensation expense in the 2011 period.

Our total revenues for the three months ended September 30, 2012 increased $110,936 (227%) from the 2011 period, primarily due to the Securities America acquisition. Third quarter 2012 revenues included increased commissions of $54,775, advisory fees of $43,689, service fees and other income of $8,093, investment banking revenue of $2,631, interest and dividends of $1,191 and principal transactions of $557. Revenues for the third quarter of 2012 include $98,680 from Securities America. Excluding Securities America, revenues in our independent brokerage and advisory services segment increased $10,182 (25%) from the 2011 period, primarily due to improved market conditions, recruitment of higher-producing advisors and increased advisory assets under management.

Our total expenses for the three months ended September 30, 2012 increased by $114,688 (222%) from the 2011 period, primarily as a result of an increase in commissions and fees expense of $87,892, compensation and benefits expense of $7,797, interest expense of $5,328, other expense of $6,489, depreciation and amortization of $3,117 and amortization of retention loans made in connection with the Securities America acquisition of $1,712. 2012 expenses included $104,373 from Securities America.

The $54,775 (212%) increase in commission revenue for the three months ended September 30, 2012 as compared to the 2011 period was primarily attributable to $49,181 from the addition of Securities America. Commission revenue in the 2012 period also increased due to higher sales of alternative investments and higher commission trails earned due to improved market conditions. Excluding Securities America, commission revenue in our independent brokerage and advisory services segment increased $4,385 (19%) from the 2011 period.

The $43,689 (292%) increase in advisory fee revenue for the three months ended September 30, 2012 as compared to the 2011 period was primarily due to $39,573 from the addition of Securities America and a 15% increase in average assets under management at LTAM, Triad and Investacorp. Advisory fee revenue for a particular quarter is primarily affected by the level of advisory assets and market fluctuations. For the three months ended September 30, 2012, we experienced an increase in net new advisory assets resulting from strong new business development and a shift by our existing advisors toward more advisory business. We expect asset management revenue to increase in the near term due to newly-added advisory assets and the continued shift by our advisors to the advisory business.

The $2,631 (75%) increase in investment banking revenue for the three months ended September 30, 2012 was primarily due to an increased level of capital raising activity in the third quarter of 2012 due to improved market conditions. We derived investment banking revenue for the three months ended September 30, 2012 from Ladenburg's capital raising activities, including underwritten public offerings and private placements, and strategic advisory services. Revenue from capital raising activities was $5,763 for the 2012 period, as compared to $3,240 for the 2011 period. Strategic advisory services revenue was $377 for the 2012 period as compared to $269 for the 2011 period.

The $1,191 (916%) increase in interest and dividends revenue for the three months ended September 30, 2012 as compared to the 2011 period was primarily due to $1,157 earned at Securities America. We expect increased interest and dividends revenue in 2012 as compared to 2011 due to the addition of Securities America.

The $8,093 (162%) increase in service fees and other income for the three months ended September 30, 2012 as compared to 2011 was primarily attributable to $8,763 of service fees and other income earned by Securities America, which included marketing allowances received from product sponsors programs and administrative service fees. Excluding Securities America, service fees and other income increased in our independent brokerage and advisory services segment primarily due to marketing allowances received from product sponsors of direct investment programs of $353 and increased conference revenue of $912. This was partially offset by decreased other income in our corporate segment. This decrease was primarily due to income of $1,879 representing principal and interest forgiven on a loan with NFS in the 2011 period (commencing in 2012 the annual forgiveness date for such loan was reset to November due to the Securities America acquisition) and $287 received in settlement of a claim by Ladenburg against a former broker in the 2011 period. We expect service fees and other income to increase in the fourth quarter of 2012 due to forgiveness of principal and interest on the NFS forgivable loans.

The $87,892 (282%) increase in commissions and fees expense for the three months ended September 30, 2012 as compared to the 2011 period was directly correlated to the increase in commissions and advisory fees revenue in our independent brokerage and advisory services segment, including $79,456 from the addition of Securities America. Commissions and fees expense comprises compensation payments earned by the registered representatives who serve as independent contractors in our independent brokerage and advisory services segment. These payments to the independent contractor registered representatives are calculated based on a percentage of revenues generated by such persons and vary by product. Accordingly, when the independent contractor registered representatives increase their business, both our revenues and expenses increase as our representatives earn additional compensation based on the revenue produced.

The $7,797 (72%) increase in compensation and benefits expense for the three months ended September 30, 2012 as compared to 2011 was primarily due to a $6,721 increase from the addition of Securities America, and a $1,490 increase in compensation at our Ladenburg segment, partially offset by a decrease in our corporate segment of $581. Ladenburg compensation and benefits expense includes commissions earned by registered representatives. These earnings are calculated based on a percentage of revenues generated by such persons. Excluding Securities America, compensation and benefits in our independent brokerage and advisory services segment increased $165.

The $366 (53%) increase in non-cash compensation expense for the three months ended September 30, 2012 as compared to the 2011 period was primarily attributable to an increase of $211 from stock option grants to Securities America employees and financial advisors and $361 from stock options granted after September 30, 2011, partially offset by a decrease of $180 from stock option grants that fully vested after September 30, 2011.

The $479 (25%) increase in brokerage, communication and clearance fees expense for the three months ended September 30, 2012 as compared to the 2011 period was primarily due to a $522 increase from the addition of Securities America and an increase of $19 in our Ladenburg and corporate segments. Excluding Securities America, brokerage, communications and clearance fees in our independent brokerage and advisory services segment decreased $62. Clearing expense for the 2012 period at Ladenburg and Securities America was reduced by clearing expense credits provided by our primary clearing firm.

The $832 (103%) increase in rent and occupancy, net of sublease revenue for the three months ended September 30, 2012 as compared to the 2011 period was primarily attributable to an $893 increase from the addition of Securities America, partially offset by a decrease of $79 at our Ladenburg segment.

The $1,376 (179%) increase in professional services expense for the three months ended September 30, 2012 was primarily due to additional expense from Securities America of $1,246. Professional services expense includes legal, audit, tax and consulting expense.

The $5,328 (650%) increase in interest expense for the three months ended September 30, 2012 as compared to the 2011 period resulted from increased average debt balances following the Securities America acquisition and increased average interest rates. An average debt balance of approximately $208,625 was outstanding for the third quarter of 2012, as compared to an average outstanding debt balance of approximately $30,662 for the 2011 period. The average interest rate was 11.7% for the third quarter of 2012 as compared to 10.8% for the 2011 period.

The $3,117 (362%) increase in depreciation and amortization expense for the three months ended September 30, 2012 as compared to 2011 was primarily due to an additional $854 of depreciation and amortization of Securities America fixed assets and additional expense of $2,291, which is attributed to the amortization of intangible assets acquired in the Securities America acquisition.

The $1,712 in amortization of retention loans expense for the three months ended September 30, 2012 relates to the amortization of retention loans made to Securities America financial advisors in connection with the acquisition. There were no such amounts in the prior-year period because the Securities America acquisition was completed in November 2011.

The $6,489 (213%) increase in other expense for the three months ended September 30, 2012 as compared to 2011 was primarily attributable to the addition of $5,531 in other expense from Securities America, which consisted of forgiveness of financial advisor loans, insurance, travel and other office expenses. Excluding Securities America, the increase in other expense was attributable to a $711 increase in conference and related expenses, as a result of a subsidiary's 2012 conference being held in the third quarter instead of the second quarter, a $112 increase in travel, meals and entertainment, and a $131 increase in insurance expense.

The $909 decrease in fair value of contingent consideration for the three months ended September 30, 2012 was due to decreases in projected revenues at Securities America based on actual revenues achieved by Securities America for the nine months ended September 30, 2012.

We incurred income tax expense of $408 for the three months ended September 30, 2012 as compared to $284 for the 2011 period. After consideration of all the evidence, both positive and negative, management has determined that a valuation allowance at September 30, 2012 was necessary to fully offset the deferred tax assets based on the likelihood of future realization. The effective tax rate for the 2012 period differed from the federal statutory tax rate of 34%, primarily as a result of the change in fair value of contingent consideration not subject to income tax and the increase in the deferred tax asset valuation allowance, which offsets the tax benefit attributable to the pre-tax loss as adjusted for permanent differences. The income tax rate for the 2011 period did not bear a customary relationship to the effective rate, primarily as a result of the increase in the valuation allowance.

Nine months ended September 30, 2012 versus nine months ended September 30, 2011

Our net loss for the nine months ended September 30, 2012 was $13,999 as compared to a net loss of $2,461 for the nine months ended September 30, 2011. The increase in net loss of $11,538 was primarily due to increased interest, depreciation and amortization expenses and non-cash compensation expense for the 2012 period arising from the Securities America acquisition as described below, partially offset by a decrease in fair value of contingent consideration. The 2012 period included $18,400 of interest expense, $12,112 of depreciation and amortization expense and $3,645 of non-cash compensation expense as compared to $2,468 of interest expense, $2,650 of depreciation and amortization expense and $2,772 of non-cash compensation expense for the 2011 period.

Our total revenues for the nine months ended September 30, 2012 increased $311,603 (187%) from the 2011 period, primarily due to the Securities America acquisition, increased commissions of $159,255, advisory fees of $123,187 and other income of $27,731, partially offset by decreased investment banking revenue of $2,330. 2012 revenues include $296,826 from Securities America. Excluding Securities America, revenues in our independent brokerage and advisory services segment increased $16,589 (13%) from the 2011 period, primarily due to improved market conditions, recruitment of higher-producing advisors and increased advisory assets under management.

Our total expenses for the nine months ended September 30, 2012 increased by $330,143 (197%) from the 2011 period, primarily as a result of an increase in commissions and fees expense of $250,972, compensation and benefits expense of $21,778, other expense of $19,363, interest expense of $15,932, depreciation and amortization expense of $9,462 and amortization of retention loans made in connection with the Securities America acquisition of $5,295. 2012 expenses include $313,578 from Securities America.

The $159,255 (188%) increase in commissions revenue for the nine months ended . . .

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