EXHIBIT 99.3
LADENBURG THALMANN FINANCIAL SERVICES INC.
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements are based on the historical financial statements of Ladenburg Thalmann Financial Services Inc. (“LTS”) and Kestler Financial Group, Inc. (“KFG”), after giving effect to the acquisition of KFG by LTS using the purchase method of accounting and applying the assumptions and adjustments described in the accompanying notes.
The unaudited pro forma combined condensed statements of operations for the six months ended June 30, 2018 and the twelve months ended December 31, 2017 are presented as if the acquisition had occurred on January 1, 2017. The unaudited pro forma combined condensed balance sheet is presented as if the acquisition had occurred on June 30, 2018. You should read this information in conjunction with the:
● | accompanying notes to the unaudited pro forma combined condensed financial statements; | |
● | separate unaudited historical financial statements of LTS as of, and for the six month period ended June 30, 2018, included in the LTS’ quarterly report on Form 10-Q for the three months ended June 30, 2018; | |
● | separate historical financial statements of LTS as of, and for the fiscal year ended December 31, 2017, included in LTS’ annual report on Form 10-K for the fiscal year ended December 31, 2017; and | |
● | separate historical financial statements of KFG as of June 30, 2018, for the six months ended June 30, 2018 and 2017and for the fiscal years ended December 31, 2017 and 2016 included in Items 99.1 and 99.2 of this report. |
The pro forma information presented is for illustrative purposes only and is not necessarily indicative of the financial position or results of operations that would have been realized if the acquisition had been completed on the dates indicated, nor is it indicative of future operating results or financial position. The pro forma adjustments are based upon available information and certain assumptions that LTS believes are reasonable.
The unaudited pro forma combined condensed financial statements do not include the effects of any operating efficiencies or cost savings expected from the acquisition.
The unaudited pro forma combined condensed balance sheet as of June 30, 2018 has been derived from:
● | the unaudited historical condensed consolidated balance sheet of LTS as of June 30, 2018; and | |
● | the unaudited historical balance sheet of KFG as of June 30, 2018. |
The unaudited pro forma combined condensed statement of operations for the six month period ended June 30, 2018 has been derived from:
● | the unaudited historical condensed consolidated statement of operations of LTS for the six month period ended June 30, 2018; and | |
● | the unaudited historical statement of operations of KFG for the six month period ended June 30, 2018. |
The unaudited pro forma combined condensed statement of operations for the twelve months ended December 31, 2017 has been derived from:
● | the audited historical consolidated statement of operations of LTS for the twelve months ended December 31, 2017; and | |
● | the audited historical statement of operations of KFG for the twelve months ended December 31, 2017. |
LADENBURG THALMANN FINANCIAL SERVICES INC.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
June 30, 2018
(In thousands, except share and per share amounts)
Historical | ||||||||||||||||||
Pro Forma | Pro Forma | |||||||||||||||||
LTS | KFG | Adjustments | Combined | |||||||||||||||
ASSETS | ||||||||||||||||||
Cash and cash equivalents | $ | 204,847 | $ | 442 | $ | (2,662 | ) | (e)(j) | $ | 202,627 | ||||||||
Securities owned, at fair value | 6,548 | — | — | 6,548 | ||||||||||||||
Receivables from clearing brokers | 45,013 | — | — | 45,013 | ||||||||||||||
Receivables from other broker-dealers | 2,520 | — | — | 2,520 | ||||||||||||||
Notes receivable from financial advisors, net | 5,893 | 5 | (5 | ) | (j) | 5,893 | ||||||||||||
Other receivables, net | 129,182 | 34 | (34 | ) | (j) | 129,182 | ||||||||||||
Fixed assets, net | 26,307 | 358 | (10 | ) | (j) | 26,655 | ||||||||||||
Restricted assets | 6,589 | — | — | 6,589 | ||||||||||||||
Intangible assets, net | 72,296 | — | 6,735 | (g) | 79,031 | |||||||||||||
Goodwill | 124,210 | — | 2,169 | (g) | 126,379 | |||||||||||||
Contract acquisition costs, net | 76,972 | — | — | 76,972 | ||||||||||||||
Cash surrender value of life insurance | 12,907 | — | — | 12,907 | ||||||||||||||
Deferred income taxes | - | — | — | - | ||||||||||||||
Other assets | 34,606 | 107 | (107 | ) | (j) | 34,606 | ||||||||||||
Total assets | $ | 747,890 | $ | 945 | $ | 6,087 | $ | 754,922 | ||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||
Securities sold, but not yet purchased, at market value | $ | 4,920 | $ | — | $ | — | $ | 4,920 | ||||||||||
Accrued compensation | 27,418 | 43 | (43 | ) | (j) | 27,418 | ||||||||||||
Commissions and fees payable | 105,194 | 70 | (70 | ) | (j) | 105,194 | ||||||||||||
Accounts payable and accrued liabilities | 54,169 | 169 | 1,413 | (h)(j) | 55,751 | |||||||||||||
Deferred rent | 2,772 | 401 | (401 | ) | (j) | 2,772 | ||||||||||||
Deferred income taxes | 6,558 | — | — | 6,558 | ||||||||||||||
Deferred compensation liability | 19,999 | — | — | 19,999 | ||||||||||||||
Accrued interest | 191 | — | — | 191 | ||||||||||||||
Notes payable, net | 136,171 | — | 5,450 | (h) | 141,621 | |||||||||||||
- | ||||||||||||||||||
Total liabilities | 357,392 | 683 | 6,349 | 364,424 | ||||||||||||||
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) | 2 | — | — | 2 | ||||||||||||||
Common stock, $.0001 par value; authorized 1,000,000,000 shares in 2018 and 2017; shares issued and outstanding, 201,271,034 in 2018 and 198,583,941 in 2017 | 20 | 1 | (1 | ) | (i) | 20 | ||||||||||||
Additional paid-in capital | 501,348 | 272 | (272 | ) | (i) | 501,348 | ||||||||||||
Retained earnings (accumulated deficit) | (110,904 | ) | (11 | ) | 11 | (i) | (110,904 | ) | ||||||||||
Total shareholders’ equity | 390,466 | 262 | (262 | ) | 390,466 | |||||||||||||
Noncontrolling interest | $ | 32 | $ | — | $ | — | $ | 32 | ||||||||||
Total liabilities and shareholders’ equity | $ | 747,890 | $ | 945 | $ | 6,087 | $ | 754,922 |
SEE NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
LADENBURG THALMANN FINANCIAL SERVICES INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
For the six months ended June 30, 2018
(In thousands, except share and per share amounts)
Historical | ||||||||||||||||||||
LTS | KFG | Pro Forma Adjustments | Pro Forma Combined | |||||||||||||||||
Revenues: | ||||||||||||||||||||
Commissions and fees | $ | 343,667 | $ | 9,825 | $ | — | $ | 353,492 | ||||||||||||
Advisory fees | 237,021 | — | — | 237,021 | ||||||||||||||||
Investment banking | 28,219 | — | — | 28,219 | ||||||||||||||||
Principal transactions | 400 | — | — | 400 | ||||||||||||||||
Interest and dividends | 1,867 | 1 | — | 1,868 | ||||||||||||||||
Service fees | 52,487 | 15 | — | 52,502 | ||||||||||||||||
Other income | 23,479 | 392 | — | 23,871 | ||||||||||||||||
Total revenues | 687,140 | 10,233 | — | 697,373 | ||||||||||||||||
Expenses: | ||||||||||||||||||||
Commissions and fees | 485,716 | 6,847 | — | 492,563 | ||||||||||||||||
Compensation and benefits | 95,822 | 1,715 | — | 97,537 | ||||||||||||||||
Non-cash compensation | 3,062 | — | — | 3,062 | ||||||||||||||||
Brokerage, communication and clearance fees | 8,260 | 22 | — | 8,282 | ||||||||||||||||
Rent and occupancy, net of sublease revenue | 4,880 | 146 | — | 5,026 | ||||||||||||||||
Professional services | 10,329 | 50 | — | 10,379 | ||||||||||||||||
Interest | 4,020 | 2 | 104 | (b) | 4,126 | |||||||||||||||
Depreciation and amortization | 11,571 | 24 | 518 | (c) | 12,113 | |||||||||||||||
Acquisition-related expense | 913 | — | — | 913 | ||||||||||||||||
Amortization of retention and forgivable loans | 183 | — | — | 183 | ||||||||||||||||
Amortization of financial acquisition costs | 4,571 | — | — | 4,571 | ||||||||||||||||
Other | 36,182 | 1,256 | — | 37,438 | ||||||||||||||||
Total expenses | 665,509 | 10,062 | 622 | 676,193 | ||||||||||||||||
Income (loss) before item shown below | 21,631 | 171 | (622 | ) | 21,180 | |||||||||||||||
Change in fair value of contingent consideration | (111 | ) | — | — | (111 | ) | ||||||||||||||
Income (loss) before income taxes | 21,250 | 171 | (622 | ) | 21,069 | |||||||||||||||
Income tax (benefit) expense | 6,746 | — | — | 6,746 | ||||||||||||||||
Net income (loss) | $ | 14,774 | $ | 171 | $ | (622 | ) | $ | 14,323 | |||||||||||
Net income attributable to noncontrolling interest | 9 | — | — | 9 | ||||||||||||||||
Net income (loss) attributable to the Company | 14,765 | 171 | (622 | ) | 14,314 | |||||||||||||||
Dividends declared on preferred stock | (17,016 | ) | — | — | (17,016 | ) | ||||||||||||||
Net income (loss) available to common shareholders | $ | (2,251 | ) | $ | 171 | $ | (622 | ) | $ | (2,702 | ) | |||||||||
Net loss per share available to common shareholders (basic and diluted) | $ | (0.01 | ) | $ | (0.01 | ) | ||||||||||||||
Weighted average common shares outstanding: | ||||||||||||||||||||
Basic and diluted | 196,230,136 | 196,230,136 |
SEE NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
LADENBURG THALMANN FINANCIAL SERVICES INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
For the twelve months ended December 31, 2017
(In thousands, except share and per share amounts)
Historical | ||||||||||||||||||
LTS | KFG | Pro Forma Adjustments | Pro Forma Combined | |||||||||||||||
Revenues: | ||||||||||||||||||
Commissions | $ | 536,028 | $ | 5,712 | $ | — | $ | 541,740 | ||||||||||
Advisory fees | 560,930 | — | — | 560,930 | ||||||||||||||
Investment banking | 46,453 | — | — | 46,453 | ||||||||||||||
Principal transactions | 857 | — | — | 857 | ||||||||||||||
Interest and dividends | 2,550 | 5 | — | 2,555 | ||||||||||||||
Service fees | 85,330 | — | 85,330 | |||||||||||||||
Other income | 36,004 | 792 | — | 36,796 | ||||||||||||||
Total revenues | 1,268,152 | 6,509 | — | 1,274,661 | ||||||||||||||
Expenses: | ||||||||||||||||||
Commissions and fees | 928,430 | 86 | — | 928,516 | ||||||||||||||
Compensation and benefits | 171,344 | 3,213 | — | 174,557 | ||||||||||||||
Non-cash compensation | 5,539 | — | — | 5,539 | ||||||||||||||
Brokerage, communication and clearance fees | 18,124 | 63 | — | 18,187 | ||||||||||||||
Rent and occupancy, net of sublease revenue | 9,356 | 189 | — | 9,545 | ||||||||||||||
Professional services | 19,588 | 72 | — | 19,660 | ||||||||||||||
Interest | 2,710 | 1 | 215 | (b) | 2,926 | |||||||||||||
Depreciation and amortization | 28,835 | 29 | 1028 | (c) | 29,892 | |||||||||||||
Acquisition-related expense | 3,469 | — | — | 3,469 | ||||||||||||||
Amortization of retention and forgivable loans | 7,396 | — | 7,396 | |||||||||||||||
Amortization of financial advisor acquisition costs | — | — | — | |||||||||||||||
Loss on extinguishment of debt | — | — | — | — | ||||||||||||||
Other | 72,200 | 1,512 | — | 73,712 | ||||||||||||||
Total expenses | 1,266,991 | 5,165 | 1,243 | 1,273,399 | ||||||||||||||
Income (loss) before item shown below | 1,161 | 1,344 | (1,243 | ) | 1,262 | |||||||||||||
Change in fair value of contingent consideration | 19 | — | — | 19 | ||||||||||||||
Income (loss) before income taxes | 1,180 | 1,344 | (1,243 | ) | 1,281 | |||||||||||||
Income tax expense (benefit) | (6,502 | ) | — | — | (6,502 | ) | ||||||||||||
Net income (loss) | $ | 7,682 | $ | 1,344 | $ | (1,243 | ) | $ | 7,783 | |||||||||
Net loss attributable to noncontrolling interest | (15 | ) | — | — | (15 | ) | ||||||||||||
Net income (loss) attributable to the Company | 7,697 | 1,344 | (1,243 | ) | 7,798 | |||||||||||||
Dividends declared on preferred stock | (32,482 | ) | — | — | (32,482 | ) | ||||||||||||
Net income (loss) available to common shareholders | $ | (24,785 | ) | $ | 1,344 | $ | (1,243 | ) | $ | (24,684 | ) | |||||||
Net loss per share available to common shareholders (basic and diluted) | $ | (0.13 | ) | $ | (0.13 | ) | ||||||||||||
Weighted average common shares outstanding: | ||||||||||||||||||
Basic and diluted | 193,064,550 | 193,064,550 |
SEE NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
(in thousands, except share amounts)
1. Basis of Presentation
In August 2018, LTAIS purchased certain assets of the insurance distribution business operated by Kestler Financial Group, Inc. (“KFG”), an independent insurance distribution company, located in Leesburg, Virginia. This asset purchase was deemed to be an asset acquisition. Under the terms of an asset purchase agreement, LTAIS purchased certain KFG assets, including the rights to the “Kestler Financial Group” name and brand, as part of an ongoing strategy for LTAIS to reinforce its position as a distributor of annuity solutions for independent financial advisors throughout the country. The acquisition is expected to generate important benefits for the Ladenburg insurance and annuity platform, which consists of LTAIS and Highland, a leading independent brokerage of life insurance solutions nationwide. In October 2018, Securities America purchased certain assets of the brokerage business operated by KFG.
The consideration for the KFG insurance distribution transaction was $7,917, 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 estimated acquisition-date fair value of the potential earn-out. The consideration for the KFG brokerage business transaction, which closed in October, was $1,335, 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 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 transactions was allocated (preliminary) $7,083 to identifiable intangibles and other assets and $2,169 to goodwill.
Purchase Price and Related Preliminary Allocation
The purchase price is as follows:
Cash paid | $ | 2,220 | ||
Promissory note, net of discount | 5,450 | |||
Additional deferred payments to selling shareholders made on the one, two and three year anniversary of close | 963 | |||
Contingent consideration | 619 | |||
$ | 9,252 |
The allocation of the purchase price to KFG’s tangible and intangible assets acquired and liabilities assumed was based on their estimated fair values. The valuation of these tangible and identifiable intangible assets and liabilities is preliminary and is subject to further management review and may change materially. The excess of the purchase price over the tangible and identifiable intangible assets acquired and liabilities assumed has been allocated to goodwill.
The following table summarizes the aggregate preliminary estimates of the fair values of identifiable assets acquired and liabilities assumed in the acquisition and the resulting goodwill as of June 30, 2018.
Net working capital and tangible assets | $ | 348 | ||
Identifiable intangible assets (a) | 6,735 | |||
Goodwill | 2,169 | |||
Total estimated purchase price | $ | 9,252 |
(a) | Identifiable intangible assets as of the acquisition date consist of: |
Estimated Useful Life (years) | ||||||||
Relationships with independent contractor financial advisors | 5,482 | 7.0 | ||||||
Relationships with independent contractor financial advisors | 922 | 10.0 | ||||||
Non-solicitation agreement | 331 | 3.0 | ||||||
Total identifiable intangible assets | $ | 6,735 |
2. Pro forma adjustments
The following pro forma adjustments are included in the unaudited pro forma combined condensed statements of operations and the unaudited pro forma combined condensed balance sheet:
(b) | To record interest expense on notes and amortization of debt discount entered into in connection with acquisition: |
Six months ended June 30, 2018 | Twelve months ended December 31, 2017 | |||||||
To record interest expense on note | $ | 104 | $ | 215 |
(c) | Adjustments to amortization and depreciation of purchased intangible assets and fixed assets: |
Six months ended June 30, 2018 | Twelve months ended December 31, 2017 | |||||||
Amortization of intangible assets | 493 | 986 | ||||||
Depreciation of fixed assets | 25 | 42 | ||||||
Total | $ | 518 | $ | 1,028 |
(e) | Adjustments to cash: |
As of June 30, 2018 | ||||
To record $2,220 cash paid in acquisition | $ | (2,220 | ) |
(g) | Adjustments to reflect allocation of purchase price: |
As of June 30, 2018 | ||||
Goodwill | $ | 2,001 | ||
Intangible Assets | 6,735 | |||
Total | $ | 8,736 |
(h) | To record note payable, additional payable to shareholders and contingent consideration in connection with acquisition: |
As of June 30, 2018 | ||||
To record 4% note, maturity date November 15, 2036, issued to selling shareholder | $ | 5,450 | ||
Additional deferred payments to selling shareholders made on the one, two and three year anniversary of close | 963 | |||
Contingent consideration | 619 | |||
Total | 7,032 |
(i) | Adjustments to shareholder’s equity: |
As of June 30, 2018 | ||||
To eliminate KFG stockholder’s equity | $ | (262 | ) |
(j) | Adjustments to reflect excluded balances: |
As of June 30, 2018 | ||||
Cash | $ | (442 | ) | |
Notes receivable from financial advisors, net | (5 | ) | ||
Other receivables, net | (34 | ) | ||
Fixed assets, net | (10 | ) | ||
Other assets | (107 | ) | ||
Accrued compensation | (43 | ) | ||
Commissions and fees payable | (70 | ) | ||
Accounts payable and accrued liabilities | (169 | ) | ||
Deferred rent | (401 | ) | ||
Total | $ | (1,281 | ) |