RCS Capital Corporation Unveils 3rd Quarter Results as Massachusetts Securities Regulator Alleges Fraud

Revenue (GAAP): $589.6 million for the quarter, or $540.9 million, excluding $48.7 million non-cash revenue from fair market value accounting of embedded derivatives in securities issues in conjunction with the Cetera financing (non-GAAP), down 3.3% over the year-ago quarter primarily due to decreased investment banking revenue, offset by higher retail ticket charges based on higher trading volumes.

Net Income/(Loss) (GAAP): ($266.5) million for the quarter, or ($3.52) per fully diluted share

Adjusted Net Income: $10.6 million for the quarter, or $0.10 per fully diluted share

Adjusted EBITDA: $22.9 million for the quarter

Retail Advice Assets Under Administration: Up 6% from the year-ago quarter to $224.8 billion

Retail Advice Assets Under Management: Up 13% from the year-ago quarter to $45.4 billion³

Retail Advisors: 9,476 independent retail financial advisors as of September 30, 2015 servicing more than 2.5 million clients

Retail Advisor Retention: 96.4% advisor retention for the quarter²

Retail Advisor Recruitment: 254 financial advisors recruited representing $23.6 million in trailing 12-month GDC; $6.7 million in net recruited GDC²; GDC from advisors recruited in the third quarter 40% higher than GDC of advisors who left the platform²

Net Debt: Net secured debt decreased by $8 million during the quarter as a result of decreased cash and increased principle amortization payment

Cash⁴: $173.5 million of cash and equivalents at the end of the third quarter, inclusive of regulatory capital

Previously Announced Business Updates and Strategic Initiatives

Sale of Wholesale Division: The previously announced sale of the wholesale distribution division and certain related entities to an affiliate of Apollo was amended by mutual agreement. As amended, the Company agreed to sell the wholesale distribution business, including Realty Capital Securities and Strategic Capital, to Apollo for $6 million in cash, subject to certain purchase price adjustments, of which $5.0 million is the purchase price for Strategic Capital, and retain the transfer agent and transaction management businesses

Liquidity: Completed $27 million issuance of new senior unsecured promissory notes to provide incremental liquidity; $12 million issued to an affiliate of American Realty Capital; $15 million issued to affiliates of Luxor Capital Group

Loan Modifications: Company and lenders agreed to certain modifications to its senior secured credit facilities to provide covenant relief, including permission for the issuance of the senior unsecured promissory notes to affiliates of American Realty Capital and Luxor Capital Group, among other things

Sale of Hatteras Funds: Company entered into a non-binding letter of intent to sell Hatteras Liquid Alternative Platform to the Hatteras Funds management group for $5.5 million and the extinguishment of earn outs and deferred payments worth up to $20.8 million

Board Changes: Company announced changes to the Board of Directors: Luxor’s Michael Conboy joins board and executive committee effective immediately; Apollo’s Marc Rowan and Anthony Civale resigned effective November 6, 2015

Voting Rights: Independent Board members of RCS Capital given Proxy to vote the Class B share and Series D-1 preferred shares in connection with certain strategic initiatives and the recapitalization process; Company given right to purchase the Class B share for $1 until July 31, 2016 upon repayment or exchange of the senior unsecured promissory note held by an affiliate of American Realty Capital and the release of certain affiliates of American Realty Capital from their obligations under the Company’s secured credit facilities

Strategic Initiatives: Engaged Lazard to assist in the exploration of options to raise additional capital and to make asset divestitures

Retail Advice

• 9,476 independent financial advisors servicing more than 2.5 million clients nationwide
• $224.8 billion Assets Under Administration, up 6% from the year-ago quarter
• $45.4 billion Assets Under Management, up 13% from the year-ago quarter³
• 96.4% annualized advisor retention for the third quarter²
• 254 financial advisors recruited representing $23.6 million in trailing 12-month gross GDC
• Net recruited GDC was $6.7 million, compared to $21.5 million in the prior quarter²
• GDC from advisors recruited in the third quarter 40% higher than GDC of advisors who left the platform²
• 64.7% recurring revenue; 32.6% fee-based revenue compared to 62.9% and 31.4% in the prior quarter, respectively

Retail Advice revenue for the third quarter was $503.5 million, essentially flat compared to the year-ago quarter (which did not include VSR and Girard) and down 4.8% compared to the prior quarter.

Adjusted EBITDA for the third quarter was $29.3 million, down 21.4% compared to the year-ago quarter and up 10.4% compared to the prior quarter. The quarter-over-quarter increase was primarily due to modestly higher asset based revenues including cash sweep and strategic partner revenues and lower conference expenses, offset by lower retail commission volumes.

Commission-Based revenue, which includes transactional commissions and trails, was $283.0 million for the third quarter, down 4.4% from the year ago quarter and down 6.7% from the prior quarter. The quarter-over-quarter decrease was primarily due to lower transaction volume, particularly within non-traded REITs, and other alternatives.

Advisory Fee and Services revenue, which includes client advisory fees and administrative fees, was $166.4 million for the third quarter, up 15.3% from the year-ago quarter and essentially flat from the prior quarter as advisory fees are generally billed in advance, reflecting asset levels at the beginning of the quarter.

Asset-Based Fee revenue, which includes strategic partner fees, cash sweep, and mutual fund networking fees, was $12.4 million for the third quarter, up 24.8% from the year-ago quarter and up 17.8% from the prior quarter, reflecting higher cash sweep and strategic partner asset-based revenues

Transaction-Based and Other revenue, was $41.7 million for the third quarter, down 23.2% from the year-ago quarter and down 14.5% from the prior quarter primarily due to a $6.2 million deferred compensation hedge adjustment. Excluding this adjustment, transaction-based and other revenues were down 1.6% from the prior quarter and down 13.6% from the year-ago quarter, which included a one-time accounting adjustment to move to a “gross” as opposed to “net” treatment for certain advisor fees.

Cetera Financial Group’s ending cash sweep balance for the third quarter was $8.4 billion, up 12% from the year-ago quarter and up 5% from the prior quarter.

“We believe Cetera Financial Group remains a strong franchise, and we are confident in our core business as we continue to see opportunities to gain market share and capitalize on the growing need for independent, high quality retail advice,” said R. Lawrence “Larry” Roth, Chief Executive Officer of Cetera Financial Group. “We have had continued success recruiting and retaining advisors as a result of the size, scale and resources we offer through our platform, and we remain optimistic on recruiting and advisor retention for the balance of 2015 as well as the coming year. Despite market headwinds, which included market volatility and a continuing low interest rate environment, we saw encouraging trends within the business as retention and net new asset trends remained strong. Moving forward, we are continuing to focus on driving growth in our advisory business, both through traditional and digital channels, particularly in response to pending industry reforms led by the Department of Labor. We expect to see continued earnings improvement within the Retail Advice division as our ongoing initiatives take hold while we continue to implement new cost management procedures to improve our bottom line performance.”

Wholesale Distribution

• $868 million of equity capital raised for the third quarter⁵
  • $756 million in non-traded direct investment sales;
  • $112 million in liquid alternatives sales, including Hatteras Funds and other income funds
• $3.5 billion equity capital raised year-to-date as of the end of October 2015⁵

Wholesale Distribution revenue for the third quarter was $21.6 million, on $756 million in total direct investment sales. Adjusted EBITDA for the third quarter was $1.8 million compared to $2.4 million in the year-ago-quarter and $0.7 million in the prior quarter, an improvement of $1.1 million over the prior quarter, primarily due to higher equity raised.⁶

Investment Banking and Capital Markets

(Note: Excludes results from Transfer Agency business which are included in Discontinued Operations for the third fiscal quarter; it is anticipated that results from the Transfer Agency business may not be accounted for as Discontinued Operations in future quarters in light of the amended and restated purchase agreement between the company and affiliates of Apollo)

Investment Banking and Capital Markets revenues were $9.2 million for the third quarter compared to $22.5 million for the year-ago quarter and $16.2 million in the prior quarter. Adjusted EBITDA for the third quarter was $0.1 million, compared to $14.6 million in the year-ago-quarter and $8.5 million in the prior quarter.

Performance within the Investment Banking and Capital Markets segment was as follows:

• Investment Banking revenue was $0.9 million for the third quarter versus $7.0 million in the prior quarter driven primarily by lower investment banking advisory services due to the listing of Global Net Lease on the New York Stock Exchange in the second quarter.
• Transaction Management revenue was $6.2 million for the third quarter versus $7.5 million in the prior quarter

Investment Management

• Investment platform manages ten open-end mutual funds and three closed-end funds as of the end of the third quarter
• Hatteras Funds Assets Under Management was $1.8 billion as of September 30, 2015, compared to $2.0 billion as of June 30, 2015

Investment Management Revenue and Adjusted EBITDA were $9.0 million and $0.1 million, respectively for the third quarter, compared to $17.0 million and $3.4 million for the year ago period and $12.3 million and $0.8 million for the prior quarter.

About RCS Capital

RCS Capital Corporation (RCAP) is a full-service investment firm expressly focused on the individual retail investor. With operating subsidiaries including retail advice services, wholesale distribution, investment banking, capital markets, investment research, investment management and crowdfunding, RCS Capital’s business is designed to capitalize, support, grow and maximize value for the investment programs it distributes and the independent advisors and clients it serves. Additional information about RCS Capital can be found on its website atwww.rcscapital.com. RCS Capital may disseminate information about itself, including the results of its operations and financial information, via social media platforms such as Facebook, LinkedIn and Twitter

Financial and Operating Highlights

Third quarter 2015 results shown below are on an actual basis. In addition, RCS Capital reports certain non-GAAP financial metrics, including pro forma Adjusted EBITDA and Adjusted Net Income. For reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures, please see the section and the accompanying tables titled, “Reconciliation of GAAP to Non-GAAP (“Adjusted”) Measures.” RCS Capital uses a 40% tax rate to estimate the tax impact in its earnings. RCS Capital believes Adjusted Net Income remains a useful indicator of its performance. Our non-GAAP financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures and should be read in conjunction with our consolidated financial statements prepared in accordance with GAAP. Our management regularly uses our supplemental non-GAAP financial measures internally to understand and manage our business and forecast future periods; as such, we believe it is useful for investors to understand the effects of these items on our results of operations.

Important Notice

The statements in this press release include statements regarding the intent, belief or current expectations of RCS Capital and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as “may,” “will,” “seeks,” “anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends,” “should,” “look forward” or similar expressions. The statements in this press release also include statements regarding the projections of RCS Capital that were based on estimates. These projections were not prepared in accordance with published guidelines of the SEC or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of financial projections. This information is not fact and should not be relied upon as being necessarily indicative of future results. The projections were prepared in good faith by management and are based on numerous assumptions that may prove to be wrong. The estimates also reflect assumptions as to certain business decisions that are subject to change. This press release also contains estimates and information concerning our industry, including market position, market size, and growth rates of the markets in which we participate, that are based on industry publications and reports. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to these projections. We have not independently verified the accuracy or completeness of the data contained in these industry publications and reports. Actual results may differ materially from those contemplated by such forward-looking statements and projections due to certain factors,  including RCS Capital’s ability to satisfy the NYSE minimum share price requirement and RCS Capital’s ability to successfully accomplish sufficient capital raising and asset divestitures to meet ongoing liquidity needs, and therefore the risk of continuing as a going concern. Additional factors that may affect future results are contained in RCS Capital’s filings with the Securities and Exchange Commission (the “SEC”), including its Annual Report on Form 10-K filed with the SEC on April 2, 2015, which are available at the SEC’s website at www.sec.gov. Further, forward-looking statements, estimates or projections speak only as of the date they are made, and RCS Capital undertakes no obligation to update or revise forward-looking statements or estimates to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law.

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP Measures

We use EBITDA, adjusted EBITDA and adjusted net income, which are non-GAAP measures, as supplemental measures of our performance that are not required by, or presented in accordance with GAAP. None of the non-GAAP measures should be considered as an alternative to any other performance measure derived in accordance with GAAP. We use EBITDA, adjusted EBITDA and adjusted net income as an integral part of our report and planning processes and as one of the primary measures to, among other things:

• monitor and evaluate the performance of our business operations;
• facilitate management’s internal comparisons of the historical operating performance of our business operations;
• facilitate management’s external comparisons of the results of our overall business to the historical operating performance of other companies that may have different capital structures and debt levels;
• analyze and evaluate financial and strategic planning decisions regarding future operating investments;
• provide useful information to investors regarding financial and business trends related to our results of operations; and
• plan for and prepare future annual operating budgets and determine appropriate levels of operating investments.

We define EBITDA as earnings before taxes, depreciation and amortization and interest. We define adjusted EBITDA as earnings before taxes, depreciation and amortization, interest, adjusted to exclude equity-based compensation, acquisition and related integration costs (including integration-related employee compensation and related costs), amortization of capitalized advisor costs, change in the fair value of contingent and deferred consideration, impairment charges for goodwill and intangible assets and other items.

We define adjusted net income as net income attributable to the Company (using the effective tax rate) and adjusted to exclude equity-based compensation, acquisition related expenses, amortization of capitalized advisor compensation, change in contingent and deferred consideration, amortization of intangible assets and other items.

We believe similarly titled, but not necessarily similarly comprised, measures are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry, many of which present EBITDA, adjusted EBITDA and adjusted net income and other similar metrics when reporting their financial results. Our presentation of EBITDA, adjusted EBITDA and adjusted net income should not be construed to imply that our future results will be unaffected by unusual or nonrecurring items.

The following table provides a reconciliation of net income (loss) attributable to us (GAAP) to our EBITDA (Non-GAAP) and adjusted EBITDA (Non-GAAP) for the three and nine months ended September 30, 2015 and 2014:

 

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(1) Includes compensation expense related to restricted stock and other equity grants, which are amortized over the vesting period.

(2) Includes accounting, legal, consulting and other professional fees incurred in connection with completed or terminated acquisitions and integration-related expenses, which include allocated compensation and related costs of officers and employees of the Company based on estimated time engaged in integration-related activities. Third party acquisition and integration-related expenses comprise $9.0 million and $23.7 million of the adjustment and allocated employee compensation and related costs comprise $0.1 million and $1.8 million of the adjustment in the three and nine months ended September 30, 2015, respectively. For the third and fourth quarters of quarters of 2014, third party acquisition and integration-related expenses comprise $3.7 million and $11.4 million of the adjustment and allocated employee compensation and related costs comprise $3.4 million and $1.8 million of the adjustment. Allocated employee compensation and related costs include employees that were employed prior to such acquisitions and we expect will continue their employment following the integration.

These officers and employees may continue in the employ of the Company after completion of the acquisition and integration-related activities, and their compensation and related costs generally were not affected by their acquisition and integration related activities. The Company believes that it was required to incur additional expenses by having third party professionals and service providers perform tasks on behalf of the Company that could not be performed by such officers and employees due to the fact they were actively involved in these acquisition and integration related activities.

(3) Consists of amortization of the principal amount of forgivable promissory notes from financial advisors.

(4) See Note 3 of our consolidated financial statements.

(5) See Note 10 of our consolidated financial statements.

(6) See Note 3 and 8 of our consolidated financial statements.

(7) Consists of fees for professional services that the Company believes are outside the normal course of business and not indicative of the Company’s ongoing operations, including legal costs for certain regulatory or internal examinations and investigations and certain litigations. The professional fees for the nine months ended September 30, 2015 also include matters relating to the Company’s retail business that arose in connection with activities of prior owners in which the Company no longer engages, which the Company believes are not part of its normal business operations, consisting of (i) $0.3 million for legal fees and losses relating to claims associated with sale by prior owners of interests in certain venture capital funds (an activity in which the Company is no longer engaged) and $1.6 million for losses from impermissible trading activities of one trader. For the third and fourth quarters of quarters of 2014, the Company included $3.0 million and $62.5 million, respectively, of professional fees that it believed were outside the normal course of business as part of Other.

(8) Includes for the three and nine months ended September 30, 2015, $0.0 million and $0.4 million, respectively, of fees payable to our independent auditors relating to the Company’s financial statements for 2014, which exceeded the original estimate. For the nine months ended September 30, 2015, Other also includes an additional $2.5 million of professional fees payable to our independent auditors for their year-end audit procedures resulting from complex accounting matters at the parent and additional substantive analyses, consultations and procedures at the parent and our broker-dealer subsidiaries related to financial reporting and Sarbanes-Oxley testing.

Also, includes $0.3 million of start-up costs for the three months ended September 30, 2015 and an additional $3.1 million for the nine months ended September 30, 2015 relating to the first quarter of 2015 relating to costs related to the development of new businesses ventures. These expenses consist of employee, travel and entertainment costs. For the third and fourth quarters of quarters of 2014, the Company included $2.0 million and $3.9 million, respectively, of start-up costs as part of Other.

Also includes for the nine months ended September 30, 2015, $0.1 million of costs incurred during the first quarter of 2015 for Sarbanes Oxley compliance relating to the establishment of systems required to meet certain Sarbanes Oxley requirements due to establishing systems for Sarbanes Oxley compliance with respect to acquired companies. The Company’s external Sarbanes Oxley accountants establish the fee attributable to Sarbanes Oxley compliance allocable to the Company and certain of its subsidiaries and the Company has estimated the percentage of such fees that relates to establishing the systems needed to satisfy Sarbanes Oxley requirements.

Includes for the three and nine months ended June 30, 2014, the OPP bonus.

In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items or other items discussed herein, some of which may be the same or different from those described above.

The following table provides a reconciliation of net income (loss) attributable to us (GAAP) to our adjusted net income (Non-GAAP) and adjusted earnings per share (Non-GAAP) for the three and nine months ended September 30, 2015 and 2014:

 

 

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(1-8) Refer to the footnotes under the EBITDA and adjusted EBITDA table.

(9) Amount is not tax effected.

The non-GAAP measures have limitations as analytical tools, and you should not consider any of these measures in isolation or as a substitute for analyses of our income or cash flows as reported under GAAP.

Some of these limitations are:

• they do not reflect our cash expenditures, or future requirements for capital expenditures, or contractual commitments;
• they do not reflect changes in, or cash requirements for, our working capital needs;
• they do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt; and
• depreciation and amortization and impairment charges are non-cash expense items that are reflected in our statements of cash flows.

In addition, other companies in our industry may calculate these measures differently than we do, limiting their usefulness as a comparative measure. We compensate for these limitations by relying primarily on our GAAP results and using the non-GAAP measures only for supplemental purposes. Please see our consolidated financial statements and the related notes thereto.

The Bank Facilities and our convertible notes include covenants and other provisions based on a definition of EBITDA, which we refer to as “Covenant EBITDA,” that differs from the definition of EBITDA described above. Furthermore, our Series B Preferred Stock, our Series C Preferred Stock and Series D Preferred Stock also include covenants and other provisions based on a definition of EBITDA that differs from both the definition of EBITDA described above and Covenant EBITDA, which is defined in the Series B COD, Series C COD, and Series D COD as LTM, or last twelve months, Adjusted EBITDA.

Covenant EBITDA is used, among other things, in calculating the Leverage Ratio, First Lien Leverage Ratio, Secured Leverage Ratio and Fixed Charge Covenant Ratio, as defined in the Bank Facilities, in calculating similar ratios in the indenture governing the convertible notes. These ratios are used under both agreements as part of covenants relating to, among other things, incurrence of debt and payment of dividends and distributions.

Covenant EBITDA is only generally comparable to EBITDA and adjusted EBITDA. Under the Bank Facilities and the indenture governing the convertible notes, Covenant EBITDA is similar to EBITDA, subject to certain additional adjustments, including further adjustments to add back (i) equity-based compensation and other non-cash charges and extraordinary, nonrecurring or unusual losses or expenses; (ii) fees and expenses incurred in connection with equity issuances and debt incurrences, and certain fees and expenses incurred in connection with the financing of the acquisition of Cetera, the acquisitions of Cetera, Hatteras, ICH, Summit and J.P. Turner and Permitted Acquisitions (as defined in the Bank Facilities), which, in the aggregate (other than fees and expenses for the financing of the acquisition of Cetera and the recent acquisitions to the extent scheduled), do not exceed 10% of Covenant EBITDA for the relevant period; (iii) certain projected net cost savings and synergies related to the acquisitions of Cetera, Hatteras, ICH, Summit and J.P. Turner and the financing of the acquisition of Cetera based on actions to be taken within 18 months; and (iv) projected net cost savings and synergies related to other acquisitions and asset sales permitted under the credit agreement based on actions to be taken within 12 months, which, in the aggregate and prior to giving effect to such net cost savings and synergies, do not exceed 10% of Covenant EBITDA for the four quarters preceding the relevant determination date. The adjustments made to EBITDA to derive adjusted EBITDA are similar to the adjustments made to EBITDA to derive Covenant EBITDA, but there are also differences that could lead the results to not be comparable under certain circumstances, such as the differences in adjustments made to add back acquisition related expenses.

In addition, LTM Adjusted EBITDA is used as part of the covenants relating to incurrence of debt in the Series B COD, the Series C COD and the Series D COD. LTM Adjusted EBITDA is similar to EBITDA, subject to certain differences in the adjustments, including adjustments for employee share-based compensation expense, acquisition and integration related expenses and equity issuance and related offering costs. The adjustments made to EBITDA to derive adjusted EBITDA are similar to the adjustments made to EBITDA to derive LTM Adjusted EBITDA, but there are also differences that could lead the results to not be comparable under certain circumstances.

We also use Core Earnings, a non-GAAP measure, to calculate the incentive fee payable to RCS Capital Management under our services agreement. While Core Earnings includes certain adjustments for non-cash items, it is based on after-tax GAAP net income and also includes adjustments for items such as unrealized gains or losses recorded for the period and the payment of incentive fees. Accordingly, Core Earnings is not comparable to EBITDA or adjusted EBITDA.

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