RCS Capital Corp - FORM 10-Q

Attached files

file	filename
EX-32 - SECTION 1350 CERTIFICATIONS - RCS Capital Corp	rcap-2015331x10qex32.htm
EX-31.1 - CERTIFICATION OF THE PRINCIPAL EXECUTIVE OFFICER OF THE COMPANY - RCS Capital Corp	rcap-2015331x10qex311.htm
EX-10.1 - THIRD AMENDMENT TO THE SVCS AGMT BETWEEN ARC AND RCSAS DATED FEBRUARY 4, 2015 - RCS Capital Corp	exhibit101thirdamendmentserv.htm
EXCEL - IDEA: XBRL DOCUMENT - RCS Capital Corp	Financial_Report.xls
EX-31.2 - CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER OF THE COMPANY - RCS Capital Corp	rcap-2015331x10qex312.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2015



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-35924

RCS Capital Corporation

(Exact name of registrant as specified in its charter)



Delaware		38-3894716
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
405 Park Avenue, 14^th Floor New York, New York		10022
(Address of Principal Executive Office)		(Zip Code)

(866) 904-2988

(Registrant’s Telephone Number, Including Area Code)

Not applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer o		Accelerated filer x
Non-accelerated filer o	(Do not check if a smaller reporting company)	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of outstanding shares of the registrant’s Class A common stock and Class B common stock on May 8, 2015 was 77,181,855 shares and one share, respectively.

RCS Capital Corporation and Subsidiaries

Index to Consolidated Financial Statements

Form 10-Q

March 31, 2015



	Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of March 31, 2015 (unaudited) and December 31, 2014	1
Consolidated Statements of Operations for the Three Months Ended March 31, 2015 and 2014 (unaudited)	2
Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2015 and 2014 (unaudited)	3
Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2015 and 2014 (unaudited)	4
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014 (unaudited)	5
Notes to Consolidated Financial Statements (unaudited)	6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	49
Item 3. Quantitative and Qualitative Disclosures About Market Risk	68
Item 4. Controls and Procedures	69
PART II — OTHER INFORMATION	71
Item 1. Legal Proceedings	71
Item 1A. Risk Factors	71
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds of Registered Securities	71
Item 3. Defaults Upon Senior Securities	72
Item 4. Mine Safety Disclosures	72
Item 5. Other Information	72
Item 6. Exhibits	72
SIGNATURES	73

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

RCS CAPITAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Financial Condition

(Dollars in thousands, except shares and par value amounts)



	March 31, 2015			December 31, 2014
	(Unaudited)
Assets
Cash and cash equivalents	$	170,232		$	199,435
Cash and securities segregated under federal and other regulations	19,051			19,030
Available-for-sale securities	2,791			11,473
Trading securities	14,085			10,242
Accounts receivable:
Due from related parties	34,168			31,580
Due from non-related parties	154,711			141,309
Prepaid expenses and other assets	89,250			85,674
Property and equipment (net of accumulated depreciation of $7,645 and $5,488, respectively)	26,892			24,746
Deferred compensation plan investments	85,551			83,456
Notes receivable (net of allowance of $894 and $914, respectively)	72,760			68,989
Deferred financing fees	26,283			27,808
Intangible assets (net of accumulated amortization of $95,311 and $68,106, respectively)	1,250,155			1,243,525
Goodwill	577,742			519,361
Total assets	$	2,523,671		$	2,466,628

Liabilities, Mezzanine Equity and Stockholders’ Equity
Payable to customers	$	22,199		$	13,832
Commissions payable	115,345			102,056
Accrued expenses and accounts payable:
Due to related parties	3,249			2,479
Due to non-related parties	84,753			93,898
Derivative contracts	64,361			81,032
Other liabilities	47,142			37,036
Deferred compensation plan accrued liabilities	86,619			84,963
Net deferred tax liability	269,259			266,202
Contingent and deferred consideration	159,681			145,430
Long-term debt	814,987			804,411
Total liabilities	1,667,595			1,631,339

Commitments and contingencies — See Note 16 for more information.	—			—

Mezzanine Equity
11% Series B Preferred Stock $0.001 par value, 100,000,000 shares authorized, 5,800,000 issued and outstanding as of March 31, 2015, and December 31, 2014	147,849			146,700
7% Series C Convertible Preferred Stock $0.001 par value, 100,000,000 shares authorized, 4,400,000 issued and outstanding as of March 31, 2015, and December 31, 2014	111,912			111,288

Stockholders’ Equity
Class A common stock, $0.001 par value, 100,000,000 shares authorized, 77,159,269 issued and outstanding as of March 31, 2015, and 100,000,000 shares authorized, 70,571,540 issued and outstanding as of December 31, 2014	77			71
Class B common stock, $0.001 par value, 100,000,000 shares authorized, 1 issued and outstanding as of March 31, 2015, and December 31, 2014	—			—
Additional paid-in capital	757,250			723,113
Accumulated other comprehensive income (loss)	132			(120		)
Retained deficit	(193,959		)	(179,804		)
Total stockholders’ equity	563,500			543,260
Non-controlling interests	32,815			34,041
Total liabilities, mezzanine and equity	$	2,523,671		$	2,466,628

See Notes to Consolidated Financial Statements.

RCS CAPITAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)

(Dollars in thousands, except per share data)



	Three Months Ended March 31,
	2015			2014
Revenues:
Retail commissions	$	278,068		$	47,889
Selling commissions:
Related party products	44,483			92,420
Non-related party products	13,293			157
Dealer manager fees:
Related party products	20,940			44,438
Non-related party products	5,980			72
Investment banking fees (related party products)	5,414			31,732
Advisory and asset-based fees (non-related party)	157,265			31,711
Transfer agency revenue (related party products)	4,266			3,386
Services revenue:
Related party products	6,763			8,100
Non-related party products	2,872			81
Reimbursable expenses:
Related party products	335			6,033
Non-related party products	154			30
Investment fee revenue	12,166			—
Transaction fees	47,987			6,581
Other revenue	25,598			738
Total revenues	625,584			273,368

Expenses:
Retail commissions and advisory	385,877			68,470
Wholesale commissions:
Related party products	28,143			86,996
Non-related party products	12,684			157
Wholesale reallowance:
Related party products	4,479			12,821
Non-related party products	2,190			29
Investment fee expense	6,886			—
Internal commissions, payroll and benefits	82,276			43,359
Conferences and seminars	8,870			6,996
Travel	4,043			2,492
Marketing and advertising	4,166			3,074
Professional fees	12,083			4,600
Data processing	10,446			3,777
Quarterly fee (related party)	—			1,782
Acquisition-related costs	2,456			6,717
Interest expense	18,442			231
Occupancy	7,744			3,039
Depreciation and amortization	29,350			2,017
Clearing and exchange fees	10,178			1,988
Outperformance bonus (related party)	—			7,150
Other expenses	17,691			2,621
Total expenses	648,004			258,316
Income (loss) before taxes	(22,420		)	15,052
Provision (benefit) for (from) income taxes	(7,039		)	2,903
Net (loss) income	(15,381		)	12,149
Less: net income (loss) attributable to non-controlling interests	(1,226		)	8,864
Less: preferred dividends	6,601			—
Net (loss) income attributable to Class A common stockholders	$	(20,756	)	$	3,285

Per Share Data
Net (loss) income per share attributable to Class A common stockholders (Note 14)
Basic	$	(0.29	)	$	0.11
Diluted	$	(0.47	)	$	0.11

Weighted-average basic shares	71,129,912			26,831,762
Weighted-average diluted shares	85,554,546			28,156,762
Cash dividend declared per common share	$	—		$	0.18

See Notes to Consolidated Financial Statements.

RCS CAPITAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

(Dollars in thousands)



	Three Months Ended March 31,
	2015			2014
Net income (loss)	$	(15,381	)	$	12,149
Other comprehensive loss, net of tax:
Unrealized gain on available-for-sale securities, net of tax	252			416
Total other comprehensive loss, net of tax	252			416
Total comprehensive income (loss)	(15,129		)	12,565
Less: Net comprehensive income (loss) attributable to non-controlling interests	(1,226		)	9,319
Less: preferred dividends and deemed dividends	6,601			—
Net comprehensive income (loss) attributable to RCS Capital Corporation	$	(20,504	)	$	3,246

See Notes to Consolidated Financial Statements.

RCS CAPITAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

(Dollars in thousands, except share amounts)



	Class A common stock				Class B common stock
	Number of Shares		Par Value		Number of Shares		Par Value			Additional Paid-In Capital				Retained Earnings (Deficit)			Accumulated Other Comprehensive Gain (Loss)			Total Stockholders’ Equity			Non-Controlling Interests			Stockholders’ Equity and Non-controlling Interest
Balance, December 31, 2013	13,764,929		$	14	24,000,000		$	24		$	180,528			$	1,164		$	(46	)	$	181,684		$	34,670		$	216,354
Equity-based compensation (OPP)	—		—		—		—			—				—			—			—			210			210
Unrealized gain on available for sale securities, net of tax	—		—		—		—			—				—			47			47			455			502
Net income	—		—		—		—			—				917			—			917			8,840			9,757
Balance, February 10, 2014	13,764,929		14		24,000,000		24			180,528				2,081			1			182,648			44,175			226,823

Exchange Transactions	23,999,999		24		(23,999,999	)	(24		)	44,676			(a)	—			—			44,676			(43,473		)	1,203
Equity-based compensation (OPP)	—		—		—		—			—				—			—			—			6,940			6,940
Issuance of restricted stock awards	1,817,238		2		—		—			8,259				(5,291		)	—			2,970			—			2,970
Unrealized loss on available-for-sale securities, net of tax	—		—		—		—			—				—			(86		)	(86		)	—			(86		)
Dividends declared on LTIP units	—		—		—		—			—				—			—			—			(24		)	(24		)
Net income	—		—		—		—			—				2,368			—			2,368			24			2,392
Dividend equivalents on restricted stock, net of tax	—		—		—		—			(327		)		—			—			(327		)	—			(327		)
Dividends declared on Class A common stock	—		—		—		—			(4,770		)		—			—			(4,770		)	—			(4,770		)
Balance March 31, 2014	39,582,166		$	40	1		$	—		$	228,366			$	(842	)	$	(85	)	$	227,479		$	7,642		$	235,121

Balance, December 31, 2014	70,571,540		$	71	1		$	—		$	723,113			$	(179,804	)	$	(120	)	$	543,260		$	34,041		$	577,301
Retirement of shares	(161	)	—		—		—			—				—			—			—			—			—
Preferred stock conversion^(b)	2,042,022		2		—		—			(2		)		—			—			—			—			—
First Allied restricted stock plan issuance	69,427		—		—		—			1,283				—			—			1,283			—			1,283
Issuance of restricted stock awards and warrants	1,244,670		1		—		—			3,609				—			—			3,610			—			3,610
Shares issued in connection with the settling of contingent consideration due to the JP Turner acquisition	245,813		—		—		—			2,730				—			—			2,730			—			2,730
Shares issued in connection with the VSR acquisition	2,436,429		2		—		—			26,772				—			—			26,774			—			26,774
Shares issued in connection with the Girard acquisition	549,529		1		—		—			6,346				—			—			6,347			—			6,347
Unrealized gain on available-for-sale securities, net of tax	—		—		—		—			—				—			252			252			—			252
Net loss	—		—		—		—			(6,601		)		(14,155		)	—			(20,756		)	(1,226		)	(21,982		)
Balance, March 31, 2015	77,159,269		$	77	1		$	—		$	757,250			$	(193,959	)	$	132		$	563,500		$	32,815		$	596,315

_____________________

(a)Includes deferred tax impact of $1.2 million due to the exchange of Class B units in the Company’s operating subsidiaries for shares of Class A common stock.

(b) Represents shares of Class A common stock issued on February 23, 2015 on account of shares of Series A preferred stock submitted for conversion on December 12, 2014.

See Notes to Consolidated Financial Statements.

RCS CAPITAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in thousands)



	Three Months Ended March 31,
	2015			2014
Cash flows from operating activities:
Net (loss) income	$	(15,381	)	$	12,149
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	2,145			249
Amortization	27,205			1,768
Equity-based compensation	4,892			10,120
Deferred income taxes	(8,936		)	(854		)
Loss on the sale of available-for-sale securities	368			91
Change in contingent and deferred consideration	3,656			7
Gain on derivative contracts	(23,427		)	—
Deferred compensation plan investments, net	(439		)	—
Forgiveness of notes receivable	2,208			590
Change in fair value of trading securities	335			(590		)
Deferred financing fees amortization	3,044			—
Other	(41		)	—
Increase (decrease) resulting from changes in:
Cash and securities segregated under federal and other regulations	(21		)	—
Trading securities	2,472			(215		)
Accounts receivable:
Due from related parties	(2,588		)	31,656
Due from non-related parties	(11,554		)	1,244
Prepaid expenses and other assets	(1,727		)	325
Notes receivable	(5,959		)	(2,797		)
Payable to customers	8,367			—
Commissions payable	13,050			791
Accrued expenses and accounts payable:
Due to related parties	770			(2,400		)
Due to non-related parties	(15,091		)	4,996
Other liabilities	5,235			3,627
Payment of contingent consideration in excess of acquisition date fair value	(2,680		)	—
Net cash (used in) provided by operating activities	(14,097		)	60,757

Cash flows from investing activities:
Purchases of available-for-sale securities	(26		)	(137		)
Proceeds from the sale of available-for-sale securities	8,780			3,000
Purchase of property and equipment	(3,634		)	(177		)
Payment for SK Research — intangible assets and property and equipment	—			(10,092		)
Payment for VSR acquisition, net of cash acquired	(19,077		)	—
Payment for Girard acquisition, net of cash acquired	(9,107		)	—
Net cash used in investing activities	(23,064		)	(7,406		)

Cash flows from financing activities:
Proceeds from the issuance of first lien revolving facility and term loans, respectively	23,000			248
Payments on long-term debt	(7,188		)	(800		)
Payment of contingent and deferred consideration	(7,854		)	(85		)
Dividends paid	—			(450		)
Deferred offering costs and financing fees	—			(3,028		)
Net cash provided by (used in) financing activities	7,958			(4,115		)

Net (decrease) increase in cash	(29,203		)	49,236
Cash and cash equivalents, beginning of period	199,435			70,059
Cash and cash equivalents, end of period	$	170,232		$	119,295

See Notes to Consolidated Financial Statements.

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

1. Organization and Description of the Company

Formation

RCS Capital Corporation (“we”, “us”, “our company” or the “Company”) is a holding company incorporated under the laws of the State of Delaware on December 27, 2012, originally named 405 Holding Corporation. On February 19, 2013, 405 Holding Corporation changed its name to RCS Capital Corporation. The Company was initially formed to hold Realty Capital Securities, LLC (“Realty Capital Securities”), RCS Advisory Services, LLC (“RCS Advisory”) and American National Stock Transfer, LLC (“ANST” and together with Realty Capital Securities and RCS Advisory, the “Original Operating Subsidiaries”) and to grow business lines under the Original Operating Subsidiaries.

During the year ended December 31, 2014, the Company entered into a series of restructuring transactions beginning in February and ending in December (the “2014 Restructuring Transactions”) designed to help simplify the Company’s capital structure. As a result of the completion of the 2014 Restructuring Transactions, the non-controlling interests in the Original Operating Subsidiaries and RCS Capital Holdings, LLC (“RCS Holdings”), an intermediate holding company formed to own the Original Operating Subsidiaries in connection with the 2014 Restructuring Transactions, were eliminated. Pursuant to the 2014 Restructuring Transactions, (i) the Company formed RCS Holdings, (ii) all of the Class B Units in each of the Original Operating Subsidiaries (each, an “Original Operating Subsidiaries Unit”), which had been held by RCAP Holdings, LLC (“RCAP Holdings”) were exchanged for shares of Class A common stock of the Company, par value $0.001 per share (“Class A common stock”), or canceled, (iii) all but one share of the Class B common stock of the Company, par value $0.001 per share (“Class B common stock”), was canceled, (iv) RCS Capital Management, LLC (“RCS Capital Management”), the Company’s external services provider, contributed to RCS Holdings all of its LTIP Units in the Original Operating Subsidiaries in exchange for LTIP Units in RCS Holdings, (v) a portion of the LTIP Units in RCS Holdings, all of which were held by the individual members (the “Members”) of RCS Capital Management, who were also members of RCAP Holdings, were determined by the board of directors to be earned in April 2014 and the balance of the LTIP Units in RCS Holdings not earned at that date were terminated, and (vi) all of the Class C Units in RCS Holdings held by the Members, which were received upon automatic conversion of the LTIP Units in RCS Holdings due to their early vesting on December 31, 2014, were exchanged for shares of Class A common stock.

During the year ended December 31, 2014, the Company also completed a public offering and a concurrent private offering of Class A common stock and issued long-term debt and preferred stock. This allowed the Company to undertake a series of acquisitions, which are described in Note 2, aimed at diversifying the Company’s revenue stream. The Company is now engaged in the Independent Retail Advice; Wholesale Distribution; Investment Banking, Capital Markets and Transaction Management Services; Investment Management and Investment Research businesses.

2. Recent Acquisitions

Recent Acquisitions

During the year ended December 31, 2014, the Company completed the acquisitions of Cetera Financial Holdings, Inc. (“Cetera”), Summit Financial Services Group, Inc. (“Summit”), J.P. Turner & Company, LLC and J.P. Turner & Company Capital Management, LLC (together, “J.P. Turner”), Hatteras Funds Group (“Hatteras”), First Allied Holdings Inc. (“First Allied”), Investors Capital Holdings, Ltd. (“ICH”), Validus/Strategic Capital Partners, LLC (“StratCap”), Trupoly, LLC (“Trupoly”) and a controlling interest in Docupace Technologies, LLC (“Docupace”) and during the three months ended March 31, 2015, the Company completed the acquisitions of VSR Group, Inc. (“VSR”) and Girard Securities, Inc. (“Girard”) (collectively, the “recent acquisitions”). The recent acquisitions were made in order for the Company to diversify its revenue stream. The resulting goodwill associated with the recent acquisitions is made up of synergies related to higher strategic partner revenues as well as expense synergies associated with back office management, technology efficiencies, savings from the renegotiation of the Company’s clearing contracts, the elimination of duplicative public company expenses and other factors. All of the recent acquisitions have been accounted for using the purchase method of accounting except for the First Allied acquisition.

The First Allied acquisition, which closed on June 30, 2014, was accounted for at historical cost in a manner similar to a pooling-of-interest accounting because First Allied and the Company were under the common control of RCAP Holdings at the time of the acquisition of First Allied by RCAP Holdings. Our financial statements as of and for the three months ended March 31, 2014 have been recast to reflect the results of operations and financial position of First Allied as if we had acquired it on September 25, 2013, the date that First Allied was acquired by RCAP Holdings.

The Company’s results of operations only include the results of operations of Cetera, Summit, J.P. Turner, Hatteras, ICH, StratCap, Trupoly, Docupace, VSR and Girard beginning on the date of each respective acquisition.

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

Details of each recent acquisition are as follows:

Cetera Financial Holdings

On April 29, 2014, the Company completed the acquisition of Cetera. The purchase price was $1.15 billion (subject to certain adjustments), and the Company paid $1.13 billion in cash after adjustments. Cetera is a financial services holding company formed in 2010 that provides independent broker-dealer services and investment advisory services through four distinct independent broker-dealer platforms: Cetera Advisors, Cetera Advisor Networks, Cetera Investment Services and Cetera Financial Specialists. The acquisition, including related costs, was financed with a $575.0 million senior secured first lien term loan, a $150.0 million senior secured second lien term loan (together, with a $25.0 million senior secured first lien revolving credit facility, the “Bank Facilities”), the issuance of $120.0 million (aggregate principal amount) of 5.0% Senior Convertible Notes due 2021 (the “convertible notes”) and $270.0 million (aggregate stated liquidation value) of 7.0% Series A Convertible Preferred Stock, $0.001 par value per share (“Series A Preferred Stock”), as described in further detail in Notes 8 and 10, and cash on hand.

The assignment of the total consideration for the Cetera acquisition as of the date of the acquisition was as follows (in thousands):



Cash and cash equivalents	$	241,641
Cash and segregated securities	7,999
Trading securities	741
Receivables	49,443
Property and equipment	17,735
Prepaid expenses	15,083
Deferred compensation plan investments	76,010
Notes receivable	38,805
Other assets	37,096
Accounts payable	(94,074		)
Accrued expenses	(32,421		)
Other liabilities	(112,977		)
Deferred compensation plan accrued liabilities	(75,294		)
Total fair value excluding goodwill and intangible assets	169,787
Goodwill	292,165
Intangible assets	944,542
Deferred tax liability	(273,752		)
Total consideration	$	1,132,742

During the three months ended March 31, 2015, Cetera’s goodwill increased $1.9 million due to additional information with respect to the deferred tax position as of the acquisition date.

As of March 31, 2015, approximately $8.1 million of the goodwill from Cetera’s historic pre-acquisition goodwill is deductible for income tax purposes.

The total Cetera consideration consisted of the following (in thousands):



Contractual purchase price	$	1,150,000
Purchase price adjustments	17,258
Total consideration	$	1,132,742

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

The Company’s supplemental pro forma results of operations for Cetera for the three months ended March 31, 2014 are as follows (in millions):



	Three Months Ended March 31,
	2014
Total revenues	$	295.1
Loss before taxes	(6.1		)

The supplemental pro forma results of operations for the three months ended March 31, 2014 include adjustments which reflect a full three months of amortization of intangible assets in connection with the closing of the acquisition of Cetera on April 29, 2014. In addition, the Company recorded pro forma adjustments to eliminate intercompany revenues and expenses. For the three months ended March 31, 2014, the Company adjusted the pro forma results to exclude acquisition-related expenses of $3.3 million based on the assumption that this acquisition was completed on January 1, 2013. Acquisition-related costs are costs incurred by the acquiree to engage in a business combination. Such costs may include accounting fees, valuation fees, consulting fees and legal fees.

Summit Financial Services Group

On June 11, 2014, the Company completed the acquisition of Summit. Summit was a publicly traded company that had financial advisors providing securities brokerage and investment retail advice in the United States with its common stock listed on the OTC Markets Group, Inc. under the symbol “SFNS.”

Pursuant to the merger agreement, each share of Summit common stock issued and outstanding immediately prior to the effective time of the merger was converted into the right to receive $1.588 in merger consideration, which consisted of cash and Class A common stock. Summit shareholders who received merger consideration were also entitled to receive the pro rata portion of certain tax refunds generated after the closing of the merger as a result of certain net operating losses incurred by Summit in 2014 and which were not acquired by the Company pursuant to the merger agreement. The aggregate amount of these refunds is currently estimated to be approximately $2.5 million, or approximately $0.06 per share of Summit common stock, and will be paid (without interest) no later than June 30, 2015.

As consideration in the merger, the Company issued 498,884 shares of Class A common stock pursuant to a registration statement on Form S-4 and paid consideration in cash of $38.6 million, which does not include cash distributed by Summit to its shareholders. The aggregate cash consideration paid was $46.7 million which is inclusive of the cash distributed by Summit.

The assignment of the total consideration for the Summit acquisition as of the date of the acquisition was as follows (in thousands):



Cash and cash equivalents	$	13,353
Receivables	3,147
Property and equipment	362
Prepaid expenses	1,531
Notes receivable	1,092
Other assets	2,366
Accounts payable	(9,973		)
Accrued expenses	(3,100		)
Total fair value excluding goodwill and intangible assets	8,778
Goodwill	23,891
Intangible assets	31,240
Deferred tax liability	(6,751		)
Total consideration	$	57,158

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

As of March 31, 2015, approximately $0.1 million of the goodwill from Summit’s historic pre-acquisition goodwill is deductible for income tax purposes.

The total Summit consideration consisted of the following (in thousands):



Cash paid by the Company	$	46,727
Stock issued by the Company	10,431
Total consideration	$	57,158

The Company’s supplemental pro forma results of operations for Summit for the three months ended March 31, 2014 are as follows (in millions):



	Three Months Ended March 31,
	2014
Total revenues	$	24.8
Income before taxes	0.4

The supplemental pro forma results of operations for the three months ended March 31, 2014 include adjustments which reflect a full three months of amortization of intangible assets. In addition, the Company recorded pro forma adjustments to eliminate intercompany revenues and expenses. For the three months ended March 31, 2014, the Company adjusted the pro forma results to exclude acquisition-related expenses of $0.4 million based on the assumption that this acquisition was completed on January 1, 2013. Acquisition-related costs are costs incurred by the acquiree to engage in a business combination. Such costs may include accounting fees, valuation fees, consulting fees and legal fees.

J.P. Turner & Company

On June 12, 2014, the Company completed the acquisition of J.P. Turner for cash in the aggregate amount of $12.8 million, subject to post-closing adjustments, plus 239,362 shares of Class A common stock in a private placement offering exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”). J.P. Turner is a retail broker-dealer and investment adviser which also offers a variety of other services, including investment banking.

Pursuant to the purchase agreement, on June 12, 2015 (the one-year anniversary of the closing date of the J.P. Turner acquisition), the Company agreed to an additional aggregate cash payment of $7.6 million to the sellers and issue to the sellers an aggregate number of shares of Class A common stock equal to (i) $3.2 million divided by (ii) the average of the per share closing price of Class A common stock for the five trading days ending on the trading day immediately prior to June 12, 2015.

Pursuant to the purchase agreement, the Company also agreed to make earn-out payments to the sellers with respect to each of the fiscal years ending December 31, 2014, December 31, 2015 and December 31, 2016, based on the achievement of certain agreed-upon revenue or earnings before interest, taxes and depreciation and amortization (“EBITDA”) performance targets in those years (subject to an annual combined minimum performance hurdle of 8.0% and an annual dollar cap of $2.5 million). Each earn-out payment, if any, was to be made by the Company 50% in cash and 50% in the form of Class A common stock (unless the sellers elect to receive a greater amount of Class A common stock). On the date of the acquisition, the Company recorded liabilities for contingent consideration and deferred payments, at fair value, of $4.5 million and $10.6 million, respectively.

On March 4, 2015, the Company amended its agreement with the sellers of J.P. Turner to settle the remaining consideration. As part of the amendment, the Company paid aggregate consideration of $9.1 million, which consisted of $6.4 million in cash and 245,813 shares of Class A common stock, or an aggregate value of $2.7 million based on $11.106 per share, the average of the per share closing price of Class A common stock for the five trading days prior to March 4, 2015. In addition, the Company recorded new deferred consideration of $4.8 million payable six months from the settlement date which will be paid 50% in cash and 50% in shares of Class A common stock. The Company also settled its receivable in respect of an indemnification claim of $1.8 million as part of the amendment which resulted in a gain of $1.2 million for the three months ended March 31, 2015 which was reflected as a reduction in other expenses in the statement of operations.

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

The assignment of the total consideration for the J.P. Turner acquisition as of the date of the acquisition was as follows (in thousands):



Cash and cash equivalents	$	10,171
Receivables	712
Property and equipment	232
Prepaid expenses	892
Notes receivable	1,660
Other assets	2,171
Accounts payable	(1,710		)
Accrued expenses	(8,543		)
Other liabilities	(656		)
Total fair value excluding goodwill and intangible assets	4,929
Goodwill	13,579
Intangible assets	14,200
Total consideration	$	32,708

As of March 31, 2015, approximately $4.1 million of the goodwill from the J.P. Turner acquisition is deductible for income tax purposes.

The total J.P. Turner consideration consisted of the following (in thousands):



Cash paid by the Company	$	12,786
Stock issued by the Company	4,860
Contingent consideration	4,500
Deferred consideration	10,562
Total consideration	$	32,708

The Company’s supplemental pro forma results of operations with J.P. Turner for the three months ended March 31, 2014 are as follows (in millions):



	Three Months Ended March 31,
	2014
Total revenues	$	15.0
Income before taxes	0.7

The supplemental pro forma results of operations include adjustments which reflect a full three months of amortization of intangible assets. In addition, the Company recorded pro forma adjustments to eliminate intercompany revenues and expenses.

Hatteras Funds Group

On June 30, 2014, the Company completed the purchase of substantially all the assets related to the business and operations of Hatteras and assumed certain liabilities of Hatteras. Hatteras was a private company, and it is the sponsor of, investment advisor to and distributor for the Hatteras Funds complex, a family of alternative investment funds registered as investment companies with the SEC.

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

Pursuant to the purchase agreement, the aggregate initial purchase price was $40.0 million (subject to certain adjustments for net working capital, net assets under management and consolidated pre-tax net income) payable as follows: (A) 75.0% was paid on the closing date of the Hatteras acquisition; (B) 7.5% will be payable on June 30, 2015, the first anniversary of the closing date of the Hatteras acquisition; (C) 7.5% will be payable on June 30, 2016, the second anniversary of the closing date of the Hatteras acquisition; and (D) 10.0% will be payable on June 30, 2017, the third anniversary of the closing date of the Hatteras acquisition. Additionally, pursuant to the purchase agreement, the Company will pay additional consideration calculated and payable based on the consolidated pre-tax net operating income generated by the businesses of Hatteras in the fiscal years ending December 31, 2016 and December 31, 2018. On the date of the acquisition, the Company recorded liabilities for contingent consideration and deferred payments, at fair value, of $24.9 million and $9.4 million, respectively. As of March 31, 2015, the fair value of the contingent consideration was $29.5 million. The change in the fair value of the contingent consideration was recorded in other expenses on the consolidated statement of operations. The fair value was determined by an independent third-party valuation firm using projected pre-tax net income and discounted cash flow analysis which was reviewed by the Company.

The assignment of the total consideration for the Hatteras acquisition as of the date of the acquisition was as follows (in thousands):



Cash and cash equivalents	$	805
Receivables	7,747
Property and equipment	192
Prepaid expenses	326
Other assets	120
Accounts payable	(3,721		)
Accrued expenses	(5,277		)
Total fair value excluding goodwill and intangible assets	192
Goodwill	15,348
Intangible assets	48,770
Total consideration	$	64,310

As of March 31, 2015, the goodwill from the Hatteras acquisition is not deductible for income tax purposes.

The total Hatteras consideration consisted of the following (in thousands):



Cash paid by the Company	$	30,000
Contingent consideration	24,880
Deferred consideration	9,430
Total consideration	$	64,310

The contingent and deferred consideration in the table above represents the fair value which includes discounting for the time value of money. The estimated range of undiscounted outcomes of the contingent consideration as of March 31, 2015 was as follows (in thousands):



	Low Case		High Case
Estimated contingent consideration amount	$	14,716	$	94,454

The Company’s supplemental pro forma results of operations for Hatteras for the three months ended March 31, 2014 are as follows (in millions):



	Three Months Ended March 31,
	2014
Total revenues	$	14.0
Income before taxes	1.2

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

The supplemental pro forma results of operations for the three months ended March 31, 2014 include adjustments which reflect a full three months of amortization of intangible assets. In addition, the Company recorded pro forma adjustments to eliminate intercompany revenues and expenses. For the three months ended March 31, 2014, the Company adjusted the pro forma results to exclude acquisition-related expenses of $0.4 million based on the assumption that this acquisition was completed on January 1, 2013. Acquisition-related costs are costs incurred by the acquiree to engage in a business combination. Such costs may include accounting fees, valuation fees, consulting fees and legal fees.

First Allied Holdings

On June 30, 2014, RCAP Holdings contributed all its equity interests in First Allied to the Company. As consideration for the contribution, 11,264,929 shares of Class A common stock were issued to RCAP Holdings in a private placement offering exempt from registration under the Securities Act. First Allied is an independent broker-dealer with financial advisors in branch offices across the United States. First Allied was acquired by RCAP Holdings through a merger transaction on September 25, 2013 for an effective cost of $177.0 million, consisting of $145.0 million in merger consideration (including exchangeable notes issued by RCAP Holdings in the initial aggregate principal amount of $26.0 million (the “First Allied notes”)) paid to the former owners of First Allied and $32.0 million in bank indebtedness of First Allied outstanding immediately following consummation of the merger.

The number of shares issued as consideration was determined based on a value of $207.5 million for the equity of First Allied and the one-day volume weighted average price (“VWAP”) of Class A common stock on January 15, 2014, the day prior to the announcement of the signing of the Cetera merger agreement. The value of $207.5 million for the equity of First Allied established by the Company’s board of directors in January 2014 was determined as the effective cost to RCAP Holdings for First Allied of $177.0 million (consisting of $145.0 million in merger consideration (including First Allied notes) paid by RCAP Holdings to the former owners of First Allied and $32.0 million in bank indebtedness of First Allied outstanding immediately following consummation of the merger), minus indebtedness (net of cash) of First Allied of $7.0 million plus a carrying cost of $37.5 million. The value of the shares of Class A common stock issued by the Company as consideration in the First Allied acquisition was $239.2 million, based on the closing price for Class A common stock of $21.23 per share on June 30, 2014, the date of the consummation of the contribution. Accordingly, the effective cost to the Company for the First Allied acquisition was $271.2 million (including $32.0 million of First Allied indebtedness), which is $94.2 million more than the effective cost to RCAP Holdings for First Allied on September 25, 2013 under the terms of the original First Allied merger agreement. As of September 25, 2013, the date of common control, the Company recorded $137.2 million of net assets related to First Allied as a result of the contribution.

In addition, following consummation of the contribution, $32.0 million of First Allied indebtedness was outstanding. On July 28, 2014, the First Allied outstanding indebtedness was repaid by the Company as required by the terms of the Bank Facilities, which the Company entered into in connection with the acquisition of Cetera on April 29, 2014.

As of March 31, 2015, approximately $7.6 million of the goodwill from First Allied’s historic pre-acquisition goodwill was deductible for income tax purposes.

Investors Capital Holdings

On July 11, 2014, the Company completed the acquisition of ICH. ICH was a publicly traded company with its common stock listed on the NYSE MKT under the symbol “ICH”. ICH provides broker-dealer services to investors in support of trading and investment in securities, alternative investments and variable life insurance as well as investment advisory and asset management services.

The aggregate consideration was $52.5 million. The Company issued 2,027,966 shares of Class A common stock (2,029,261 shares issued on July 11, 2014, of which 1,295 shares were subsequently canceled on October 6, 2014 as an adjustment to the final consideration) pursuant to a registration statement on Form S-4 and paid aggregate consideration in cash of $8.4 million.

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

The assignment of the total consideration for the ICH acquisition as of the date of the acquisition was as follows (in thousands):



Cash and cash equivalents	$	6,881
Short term investments and securities owned	499
Receivables	7,500
Property and equipment	275
Notes receivable	1,875
Deferred compensation	2,250
Deferred tax asset	2,613
Other assets	1,055
Accounts payable and accrued expenses	(1,945		)
Other liabilities	(7,593		)
Notes payable and long-term debt	(2,918		)
Non-qualified deferred compensation	(2,611		)
Total fair value excluding goodwill, intangible assets, and deferred tax liability	7,881
Goodwill	26,680
Intangible assets	30,100
Deferred tax liability	(12,152		)
Total consideration	$	52,509

As of March 31, 2015, the goodwill from the ICH acquisition is not deductible for income tax purposes.

The total ICH consideration consisted of the following (in thousands):



Cash paid by the Company	$	8,412
Stock issued by the Company	44,097
Total consideration	$	52,509

The Company’s supplemental pro forma results of operations for ICH for the three months ended March 31, 2014 are as follows (in millions):



	Three Months Ended March 31,
	2014
Total revenues	$	22.4
Loss before taxes	(1.6		)

Validus/Strategic Capital Partners

On August 29, 2014, the Company completed the acquisition of StratCap. StratCap, through its subsidiaries, is a wholesale distributor of alternative investment programs. StratCap’s subsidiaries distribute a platform of offerings consisting of two non-traded REITs, a non-traded business development company (“BDC”) and two public, non-traded limited liability companies. StratCap holds minority interests in four of the investment programs that it distributes, and is a joint venture partner along with the sponsor to the fifth investment program.

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

The aggregate consideration paid on the date of the acquisition was $77.5 million. The Company issued 464,317 shares of Class A common stock in a private placement offering exempt from registration under the Securities Act and $67.5 million paid in cash. Additionally, the Company paid $10.0 million in cash on December 1, 2014 and will pay earn-out payments in 2015 and 2016 based on the achievement of certain agreed-upon EBITDA performance targets. On the date of the acquisition, the Company recorded liabilities for contingent consideration and deferred payments, at fair value, of $67.3 million and $10.0 million, respectively. As of March 31, 2015, the fair value of the contingent consideration was $71.7 million. The change in the fair value of the contingent consideration was recorded in other expenses on the consolidated statements of operations. The fair value was determined by an independent third-party valuation firm using projected pre-tax net income and discounted cash flow analysis which was reviewed by the Company.

The assignment of the total consideration for the StratCap acquisition as of the date of the acquisition was as follows (in thousands):



Cash and cash equivalents	$	4,522
Short term investments and securities owned	2,239
Receivables	4,858
Property and equipment	96
Prepaid expenses and other assets	629
Accounts payable	(706		)
Accrued expenses	(201		)
Other liabilities	(908		)
Total fair value excluding goodwill and intangible assets	10,529
Goodwill	22,871
Intangible assets	121,380
Total consideration	$	154,780

As of March 31, 2015, the goodwill from the StratCap acquisition is not deductible for income tax purposes.

The total StratCap consideration consisted of the following (in thousands):



Cash paid by the Company	$	67,510
Stock issued by the Company	10,000
Contingent consideration	67,300
Deferred consideration	9,970
Total consideration	$	154,780



	Low Case		High Case
Estimated contingent consideration amount	$	70,840	$	125,920

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

The Company’s supplemental pro forma results of operations for StratCap for the three months ended March 31, 2014 are as follows (in millions):



	Three Months Ended March 31,
	2014
Total revenues	$	38.8
Loss before taxes	(1.5		)

The supplemental pro forma results of operations include adjustments which reflect a full three months of amortization of intangible assets.

Trupoly

On July 21, 2014, the Company announced that it is establishing a crowdfunding investment platform which it has rebranded under the name, “DirectVest.” In connection with this initiative, the Company acquired substantially all the assets of New York based Trupoly, a white-label investor relationship management portal, which will be integrated into the Company’s new crowdfunding investment platform. The assets of Trupoly primarily consist of intangible assets related to existing technology and a non-compete agreement.

On the closing date of the Trupoly acquisition, the Company issued shares of Class A common stock in a private placement offering exempt from registration under the Securities Act and paid the remaining consideration in cash. The Company will also pay 50.0% of the deferred consideration in shares of Class A common stock and 50.0% in cash on July 21, 2015, the one-year anniversary of the closing date.

As of March 31, 2015, approximately $0.7 million of the goodwill from the Trupoly acquisition is deductible for income tax purposes.

Docupace

On November 21, 2014, the Company completed the acquisition of a controlling financial interest in Docupace, a provider of integrated, electronic processing technologies and systems for financial institutions and wealth management firms.

The aggregate consideration on the date of the acquisition was $35.4 million, including $0.3 million of accrued interest on the deferred payment. On the closing date, the Company paid cash consideration of $18.8 million to the seller of Docupace and acquired a 51.0% ownership interest.

In addition, the Company made a $4.0 million capital contribution, which increased its total ownership interest to 53.525%. Subject to certain covenants in the operating agreement and if needed to achieve the strategic goals of Docupace’s business as determined by the board of directors, the Company may be required by Docupace’s management to make additional capital contributions of $28.0 million and $20.0 million in cash during the years ended December 31, 2015 and 2016, respectively. The Company expects to pay post-closing consideration of $16.6 million in cash, Class A common stock or a combination thereof. The Company and the sellers have agreed to a delay in the settlement of the contingent payment that was due on February 20, 2015, pending resolution of certain matters under discussion.

The total fair value of Docupace on the date of the acquisition subsequent to the capital contribution was $73.6 million. The fair value of the non-controlling interest as of the date of the acquisition was $34.2 million. The fair value of the non-controlling interest was determined based on the fair value of the controlling interest held by the Company grossed-up to 100% value in order to derive a per-share price to be applied to the non-controlling shares. This method assumes that the non-controlling shareholder will participate equally with the controlling shareholder in the economic benefits of the post combination entity.

Based on preliminary estimates, approximately $23.9 million of the goodwill from the Docupace acquisition is deductible for income tax purposes as of March 31, 2015.

VSR

On March 11, 2015, the Company completed the acquisition of VSR.

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

The aggregate consideration was $71.2 million (subject to certain adjustments detailed below). At the closing, the Company issued 2,436,429 shares of Class A common stock in a private placement with an aggregate value of $26.8 million, based on $10.989 per share, the VWAP of Class A common stock for the ten trading days ending March 9, 2015, and paid aggregate consideration in cash of $26.8 million. In addition, the Company will pay deferred consideration of $9.5 million, which will increase or decrease by the amount by which total revenue, adjusted EBITDA, group capital, net capital, indebtedness and certain transaction expenses, each as measured at the closing date (the “Adjustment Amounts”) is greater than or less than their respective target amounts. The deferred consideration will be paid upon resolution of a final settlement statement specifying the Adjustment Amounts initially delivered by the Company to the sellers no later than 120 days after the closing date. Also, the Company will pay deferred consideration of $8.1 million (payable 50% in cash and 50% in shares of Class A common stock) no later than 20 days after the second anniversary of the closing date, subject to reduction for amounts paid by the Company in connection with certain claims for which the sellers have agreed to indemnify the Company pursuant to the purchase agreement.

Girard

On March 18, 2015 (the “Girard Closing Date”), the Company completed the acquisition of Girard.

The aggregate consideration was $28.8 million (subject to certain adjustments below), which is inclusive of the preliminary estimate of amounts payable on the first, second and third anniversaries of the Girard Closing Date pursuant to an advisor recruiting plan (the “Girard Recruiting and Retention Payments”) and the deferred consideration. The Company issued 549,529 shares of Class A common stock in a private placement with an aggregate value of $6.3 million, based on $11.549 per share, the VWAP of Class A common stock for the ten trading days ending March 17, 2015 (such price, the “Girard Closing Date VWAP”), and paid aggregate consideration in cash of $14.5 million. In addition, pursuant to the purchase agreement, within 20 days after the 15th-month anniversary of the Girard Closing Date, the Company will issue the number of shares of Class A common stock equivalent to $2.4 million divided by the Girard Closing Day VWAP, subject to reduction for amounts paid by the Company in connection with certain losses for which the sellers have agreed to indemnify the Company pursuant to the purchase agreement. The preliminary fair value as of the Girard Closing Date of the Girard Recruiting and Retention Payment is $5.6 million and it is payable 60% in cash and 40% in shares of Class A common stock. The Girard Recruiting and Retention payments will increase or decrease based on the amount of gross dealer concessions generated by Girard’s financial advisors for the twelve-month period prior to each anniversary.

Consolidated pro forma results

The Company’s supplemental pro forma results of operations, which include the Original Operating Subsidiaries, Cetera, Summit, J.P. Turner, Hatteras, First Allied, ICH and StratCap for the three months ended March 31, 2014, are as follows (in millions):



	Three Months Ended March 31,
	2014
Total revenues	$	683.9
Loss before taxes	(0.6		)
Benefit from income taxes⁽¹⁾	(0.3		)
Net loss	(0.3		)
Less: income attributable to non-controlling interest	8.9
Less: preferred dividends	4.7
Net loss attributable to Class A common stockholders	$	(13.9	)

________________________

(1) Reflects pro forma adjustment to record the income tax provision based on the assumed 40% tax rate.

The consolidated supplemental pro forma results of operations do not include pro forma results for Trupoly, Docupace, VSR and Girard as they would have had an immaterial impact. The consolidated supplemental pro forma results of operations include adjustments which reflect a full three months of amortization of intangible assets and interest expense. In addition, the Company recorded pro forma adjustments to eliminate intercompany revenues and expenses. For the three months ended March 31, 2014, the Company adjusted the pro forma results to exclude acquisition-related expenses of $11.1 million based on the assumption that these transactions were completed on January 1, 2013. Acquisition-related costs are costs incurred by the acquiree or the Company to engage in a business combination. Such costs may include accounting fees, valuation fees, consulting fees and legal fees.

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

3. Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of the Company, Realty Capital Securities, RCS Advisory, ANST, SK Research, LLC (“SK Research”), Cetera, Summit, J.P. Turner, Hatteras, ICH, StratCap, Trupoly, Docupace, VSR and Girard for the periods since acquisition and of First Allied for the periods since it was under the control of RCAP Holdings. All significant intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and Regulation S-X. The information furnished includes all adjustments and accruals of a normal recurring nature, which, in the opinion of management, are necessary for a fair statement of results.

The condensed consolidated financial statements are unaudited and should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2014. The statement of financial condition as of December 31, 2014 was derived from audited financial statements but does not include all disclosures required by U.S. GAAP.

The Company’s acquisition of First Allied was accounted for at historical cost in a manner similar to a pooling-of-interest accounting because First Allied and the Company were under the common control of RCAP Holdings at the time of the acquisition of First Allied by RCAP Holdings. Our financial statements as of and for the three months ended March 31, 2014 have been recast to reflect the results of operations and financial position of First Allied as if we had acquired it on September 25, 2013, the date that First Allied was acquired by RCAP Holdings. The acquisition of First Allied by RCAP Holdings was accounted for by RCAP Holdings using the purchase method of accounting; therefore, the purchase price was allocated to First Allied’s assets and liabilities at fair value and any excess purchase price was then attributed to intangible assets and goodwill. When the Company acquired First Allied from RCAP Holdings, no additional intangible assets or goodwill was recorded.

Reclassifications

Certain reclassifications have been made to the prior period financial statement presentation to conform to the current period presentation primarily as a result of the need to harmonize the financial statements of the Company with those of the entities acquired during 2014.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates, and these differences could be material.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”) to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards. For public entities, the amendments are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. In April 2015, the FASB proposed to defer the effective date of ASU 2014-09. If the changes to the proposed ASU are ratified, the standard will be effective for public entities for annual reporting periods beginning after December 31, 2017. The Company is still evaluating the impact of ASU 2014-09.

In November 2014, the FASB issued Accounting Standards Update 2014-16, “Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity” (“ASU 2014-16”), which requires an entity to determine the nature of the host contract by considering the economic characteristics and risks of the entire hybrid financial instrument, including the embedded derivative feature that is being evaluated for separate accounting from the host contract, when evaluating whether the host contract is more akin to debt or equity. The amendments in ASU 2014-16 did not change the current criteria in U.S. GAAP for determining when separation of certain embedded derivative features in a hybrid financial instrument is required but rather clarified how U.S. GAAP should be interpreted in concluding on the nature of the host contract. The Company adopted ASU 2014-16 during the fourth quarter of 2014. The adoption of ASU 2014-16 did not have an impact on the Company’s previously reported financial condition or results of operations.

In February 2015, the FASB issued Accounting Standards Update 2015-02, “Amendments to the Consolidation Analysis” (“ASU 2015-02”). The new guidance applies to entities in all industries and amends the current consolidation guidance. The amendments are effective for fiscal years beginning after December 15, 2016 and for interim periods within fiscal periods beginning after December 15, 2017. Early application is permitted. The Company is still evaluating the impact of ASU 2015-02.

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

In April 2015, the FASB issued Accounting Standards Update 2015-03, “Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”). The key provisions of ASU 2015-03 are a) that debt issuance costs be reported on the statement of financial condition as a reduction in the liability for long-term debt rather than as an asset and b) that the amortization of debt issuance costs be reported as interest expense. For public companies, ASU 2015-03 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. A reporting entity will apply ASU 2015-03 retrospectively to all prior periods. The Company is still evaluating the impact of ASU 2015-03.

In May 2015, the FASB issued Accounting Standards Update 2015-07, “Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)” (“ASU 2015-07”). ASU 2015-07 removes the requirement to categorize investments within the fair value hierarchy for which their fair value is measured at net asset value using the practical expedient. ASU 2015-07 also removes the requirement to make certain disclosures for investments that are eligible to be measured at fair value using the net asset value practical expedient. Instead, those disclosures would be limited to investments for which the entity has elected to estimate the fair value using that practical expedient. For public companies, the final consensus will be effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. Early adoption is permitted. A reporting entity will apply the final consensus retrospectively. While the Company is still evaluating the impact of ASU 2015-07, it will not have an impact on the Company’s financial condition, results of operations or cash flows because the update only affects disclosure requirements. ASU 2015-07 is not expected to have a significant impact on the Company’s fair value disclosures as the Company currently has few investments for which their fair values are determined using net asset value.

4. Fair Value Disclosures

The Company determines fair value based on quoted prices when available or through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment. U.S. GAAP defines three levels of inputs that may be used to measure fair value:

Level 1 - Quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to access at the measurement date

Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the entire contractual term of the asset or liability

Level 3 - Unobservable inputs that reflect the entity’s own assumptions about the data inputs that market participants would use in the pricing of the asset or liability and are consequently not based on market activity

The determination of where an asset or liability falls in the hierarchy requires significant judgment and considers factors specific to the asset or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is the most significant to the fair value measurement in its entirety.

A review of the fair value hierarchy classification is conducted on a quarterly basis. Changes in the type of inputs may result in a reclassification for certain assets. The Company assumes all transfers occur at the beginning of the quarterly reporting period in which they occur. For the three months ended March 31, 2015 and for the year ended December 31, 2014 there were no transfers in or out of Level 3.

Cash equivalents include money market mutual fund instruments, which are short term in nature with readily determinable values derived from active markets. Mutual funds, substantially all deferred compensation plan investments and publicly traded securities with sufficient trading volume are fair valued by management using quoted prices for identical instruments in active markets. Accordingly, these securities are primarily classified within Level 1. Government bonds, U.S. Treasury securities, corporate bonds, certificates of deposit and mutual funds are fair valued by management using references to prices for similar instruments, quoted prices or recent transactions in less active markets and these securities are primarily classified within Level 2. The Company’s free-standing and embedded derivative contracts are not traded on an exchange. Consequently, the fair value was determined by a third-party valuation company and reviewed by the Company. A binomial lattice model was used to derive the fair value for the embedded derivatives related to the Series C preferred stock while the embedded derivatives related to the convertible notes and the put/call were based on a Monte Carlo simulation that incorporates assumptions including duration, probability of redemption, the volatility of the market price of Class A common stock, the risk free rate of interest and the discount rate. The derivative contracts are classified as Level 3 in the Company’s fair value hierarchy.

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

The fair value of the Company’s investments in private equity funds is based on the net asset value (“NAV”) as a practical expedient since there is no readily available market. Adjustments to the NAV would be considered if it was probable that the private equity funds would be sold at a value materially different than the reported NAV. The private equity funds do not have notice periods, or restrictions on redemptions. The private equity funds primarily invest in nonpublic companies and other private equity funds, and distributions from will be received as the underlying investments of the funds are liquidated. The Company also holds an investment in a REIT whose fair value is based on NAV. Given the use of unobservable inputs used in the valuation, investments in private equity funds and the REIT are classified as Level 3 in the Company’s fair value hierarchy.

Pursuant to the terms of the related purchase agreements, the Company is obligated to pay contingent consideration to the sellers of Hatteras, StratCap and Girard and contingent consideration related to acquisitions made by First Allied prior to its acquisition by RCAP Holdings in September 2013. During the three months ended March 31, 2015, the Company settled the contingent consideration related to the J.P. Turner acquisition and substantially all of the contingent consideration related to acquisitions made by First Allied prior to its acquisition by RCAP Holdings in September 2013. As of March 31, 2015, the Company estimated the fair value of future payments of contingent consideration to be $107.2 million. See Note 2 for more information. As of December 31, 2014, the Company had an estimated $107.3 million in contingent consideration.

The Company estimated the fair value of the contingent consideration at the close of the transactions using discounted cash flows. The fair value of the contingent consideration was based on financial forecasts determined by management that included assumptions about growth in assets under administration, assets under management, earnings, financial advisor retention and discount rates. The financial targets are sensitive to financial advisor retention, market fluctuations and the ability of financial advisors to grow their businesses. The Company evaluates the actual progress toward achieving the financial targets quarterly and adjusts the estimated fair value of the contingent consideration based on the probability of achievement, with any changes in fair value recognized in earnings. Given the significant unobservable inputs used in the valuation the contingent consideration is classified as Level 3 in the Company’s fair value hierarchy.

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

The Company’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis by product category as of March 31, 2015 are as follows (in thousands):



	Level 1		Level 2		Level 3			Total
Assets:
Cash equivalents - money market funds	$	71,900	$	—	$	—		$	71,900
Available-for-sale securities:
Mutual funds	2,791		—		—			2,791
Total available-for-sale	2,791		—		—			2,791
Trading securities:
Equity securities	462		—		—			462
Mutual funds	9,830		523		—			10,353
Certificate of deposits	—		2,632		—			2,632
U.S. government bonds	2		9		—			11
State and municipal bonds	—		47		—			47
Corporate bonds	9		51		—			60
Other	51		—		469			520
Total trading securities	10,354		3,262		469			14,085
Deferred compensation plan investments:
Money market fund	4,971		—		—			4,971
International global funds	18,765		—		—			18,765
U.S. equity funds	48,706		—		—			48,706
U.S. fixed-income funds	10,188		—		—			10,188
Mutual funds	—		2,921		—			2,921
Total deferred compensation plan investments	82,630		2,921		—			85,551
Prepaid expenses and other assets⁽¹⁾	—		—		5,047			5,047
Total	$	167,675	$	6,183	$	5,516		$	179,374

Liabilities:
Derivative contracts	$	—	$	—	$	79,481	⁽²⁾	$	79,481
Other liabilities:
Equity securities	114		—		—			114
Mutual funds and unit investment trusts	25		—		—			25
State and municipal government obligations	—		208		—			208
Certificate of deposit	42		—		—			42
Contingent consideration	—		—		107,228		⁽³⁾	107,228
Total	$	181	$	208	$	186,709		$	187,098

_____________________

(1) Primarily represents investments in REITs, oil and gas interests and other illiquid investments.

(2) Includes $15.1 million of derivatives classified in long-term debt.

(3) Excludes deferred payments, which are measured at fair value on a non-recurring basis.

During the three months ended March 31, 2015, the Company transferred $0.2 million of municipal government bonds out of Level 1 to Level 2 of the fair value hierarchy due to pricing inputs becoming less observable.

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

The Company’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis by product category as of December 31, 2014 are as follows (in thousands):



	Level 1		Level 2		Level 3			Total
Assets:
Cash equivalents - money market funds	$	82,973	$	—	$	—		$	82,973
Available-for-sale securities:
Mutual funds	11,473		—		—			11,473
Total available-for-sale	11,473		—		—			11,473
Trading securities:
Equity securities	262		—		—			262
Mutual funds	9,457		—		—			9,457
U.S. government bonds	2		10		—			12
Other	41		—		470			511
Total trading securities	9,762		10		470			10,242
Deferred compensation plan investments:
Money market fund	6,246		—		—			6,246
International global funds	17,722		—		—			17,722
U.S. equity funds	46,999		—		—			46,999
U.S. fixed-income funds	9,787		—		—			9,787
Mutual funds	—		2,702		—			2,702
Total deferred compensation plan investments	80,754		2,702		—			83,456
Prepaid expenses and other assets - oil and gas interests	—		—		151			151
Total	$	184,962	$	2,712	$	621		$	188,295

Liabilities:
Derivative contracts	$	—	$	—	$	102,908	⁽¹⁾	$	102,908
Other liabilities:
Equity securities	161		—		—			161
Mutual funds and unit investment trusts	4		—		—			4
State and municipal government obligations	222		—		—			222
Contingent consideration	—		—		107,278		⁽²⁾	107,278
Total	$	387	$	—	$	210,186		$	210,573

_____________________

(1) Includes $21.9 million of derivatives classified in long-term debt.

(2) Excludes deferred payments, which are measured at fair value on a non-recurring basis.

The following table presents changes during the three months ended March 31, 2015 in Level 3 assets and liabilities measured at fair value on a recurring basis, and the realized and unrealized gains and losses related to the Level 3 assets and liabilities in the statement of financial condition as of March 31, 2015 (in thousands):



	Fair value as of December 31, 2014		Net realized and unrealized gains/(losses)			Purchases		Issuances		Sales			Settlements		Fair value as of March 31, 2015
Assets:
Trading securities- other	$	470	$	(1	)	$	—	$	—	$	—		$	—	$	469
Prepaid expenses and other assets - oil and gas interests	151		(29		)	—		—		(7		)	—		115
Prepaid expenses and other assets - REIT and other illiquid investments	—		—			4,932		—		—			—		4,932
Total	$	621	$	(30	)	$	4,932	$	—	$	(7	)	$	—	$	5,516



	Fair value as of December 31, 2014		Net realized and unrealized (gains)/losses			Purchases		Issuances		Sales		Settlements			Fair value as of March 31, 2015
Liabilities:
Derivative contracts	$	102,908	$	(23,427	)	$	—	$	—	$	—	$	—		$	79,481
Contingent consideration	107,278		4,270			—		5,594		—		(9,914		)	107,228
Total	$	210,186	$	(19,157	)	$	—	$	5,594	$	—	$	(9,914	)	$	186,709

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

The Company acquired approximately $4.9 million of financial instruments as part of the VSR transaction, which the Company classified as Level 3 in the fair value hierarchy due to a lack of an active market and infrequent observable inputs.

The following table presents changes during the three months ended March 31, 2014 in Level 3 liabilities measured at fair value on a recurring basis, and the realized and unrealized gains and losses related to the Level 3 liabilities in the statement of financial condition as of March 31, 2014 (in thousands):



	Fair value as of December 31, 2013		Net realized and unrealized (gains)/losses		Purchases		Settlements			Fair value as of March 31, 2014
Liabilities:
Contingent consideration	$	2,180	$	7	$	—	$	(85	)	$	2,102
Total	$	2,180	$	7	$	—	$	(85	)	$	2,102

The realized and unrealized gains and losses on derivative contracts and contingent consideration are included in other revenues and other expenses, respectively, in the consolidated statements of operations.

The change in unrealized gain relating to Level 3 assets and liabilities held as of March 31, 2015 was $18.6 million. The change in unrealized gain relating to Level 3 assets and liabilities held as of December 31, 2014 was $9.9 million.

The following table presents information about the significant unobservable inputs used for recurring fair value measurements for certain Level 3 instruments as of March 31, 2015 (dollars in thousands):



	Fair value		Valuation technique	Unobservable inputs
Assets:
Trading securities- other- private equity fund	$	112	Net asset value (NAV)	Net asset value (NAV)
Trading securities- other- REIT	$	357	Net asset value (NAV)	Net asset value (NAV)
Prepaid expenses and other assets - oil and gas interests	$	115	Discounted cash flows	10% discount rate
Prepaid expenses and other assets - REITs and other illiquid investments	$	4,932	Sponsorship valuation	Third party valuation from sponsors

Liabilities:
Derivative contracts	$	79,481	Monte Carlo & binomial lattice (Series C)	Inputs for convertible notes, Series B and Series C preferred stock respectively: - Duration: 6.6 years, 7.7 years, 7.7 years - Volatility: 30.0%, N/A, 30.0% - Risk free rate of interest: 1.7%, 1.8%, 1.8% - Discount rate: 13.7%, 15.8%, 15.8% - Dividend assumptions: N/A, 12.5% (through June 30, 2016; subsequently reverts to 11%), 8.0% (through June 30, 2016; subsequently reverts to 7%) Inputs for the put option: - Volatility: 30.0% - Exercise date: June 10, 2033 - Risk free rate: 2.3%
Contingent consideration - Hatteras	$	29,500	Discounted cash flow	- Projected earnings: $10.5 million to $23.0 million, December 31, 2016 and 2018, respectively. - Projected earn-out: $11.4 million to $18.1 million, December 31, 2016 and 2018, respectively. - Discounted rates based on the estimated weighted average cost of capital (WACC): 0.5 to 0.7
Contingent consideration - StratCap	$	71,700	Discounted cash flow	- Projected earn-out payments: EBITDA multiples for 2015 and 2016. - Present value factor: 0.68 to 0.83 - Probability adjustments: 25.0%, 50.0% and 25.0% for Low Case, Base Case and High Case, respectively.
Contingent consideration - First Allied and Cetera	$	434	Discounted cash flow	- Revenue achievement - WACC 20%
Contingent consideration - Girard	$	5,594	Discounted cash flow	- Projected gross dealer concessions (GDC): a) Retention payments: 5.0% of retained advisors' GDC (0.0%, if GDC is less than $36.4 million); payable on the first and second anniversary of the closing date b) Recruiting payments: 5.0% of new advisors' GDC less forgivable loans and other payouts; payable on the second anniversary and third anniversary of the closing date

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

The following table presents information about the significant unobservable inputs used for recurring fair value measurements for certain Level 3 instruments as of December 31, 2014 (dollars in thousands):



	Fair value		Valuation technique	Unobservable inputs
Assets:
Trading securities- other- private equity fund	$	113	Net asset value (NAV)	Net asset value (NAV)
Trading securities- other- REIT	$	357	Net asset value (NAV)	Net asset value (NAV)
Prepaid expenses and other assets - oil and gas interests	$	151	Discounted cash flows	10% discount rate

Liabilities:
Derivative contracts	$	102,908	Monte Carlo & binomial lattice (Series C)	Inputs for convertible notes, Series B and Series C preferred stock respectively: - Duration: 6.8 years, 8.0 years, 8.0 years - Volatility: 30.0%, N/A, 30.0% - Risk free rate of interest: 1.95%, 2.1%, 2.1% - Discount rate: 12.95%, 15.1%, 15.1% - Dividend assumptions: N/A, 12.5% (through June 30, 2016; subsequently reverts to 11%), 8.0% (through June 30, 2016; subsequently reverts to 7%) Inputs for the put option: - Volatility: 30.0% - Exercise date: June 10, 2033 - Risk free rate: 2.4%
Contingent consideration - J.P. Turner	$	6,200	Discounted cash flow	- Probability exceeding percentage threshold: 99.7% to 100.0% - Present value factor: 0.71 to 0.95 - Time until payments: 0.4 years to 2.4 years
Contingent consideration - Hatteras	$	28,310	Discounted cash flow	- Projected earnings: $11.0 million to $17.3 million, December 31, 2016 and 2018, respectively - Discounted rates based on the estimated weighted average cost of capital (WACC): 0.50 to 0.70
Contingent consideration - StratCap	$	68,200	Discounted cash flow	- Projected earn-out payments: EBITDA multiples for 2015 and 2016. - Present value factor: 0.65 to 0.79 - Probability adjustments: 25.0%, 50.0% and 25.0% for Low Case, Base Case and High Case, respectively.
Contingent consideration - First Allied and Cetera	$	4,568	Discounted cash flow	- Revenue achievement - WACC 20%

The following table presents information related to the Company’s investments that calculate NAV per share as of March 31, 2015. For these investments, which are measured at fair value on a recurring basis, the Company used the NAV per share as a practical expedient to measure fair value (in thousands):



	Investment Category Includes	Fair Value Using Net Asset Value Per Share		Unfunded Commitments
Trading securities- other- private equity fund	Investments in private equity funds	$	112	$	7
Trading securities- other- REIT	Investment in a REIT	357		—

The following table presents information about the carrying values and fair values by fair value hierarchy for financial instruments that are not measured at fair value on a recurring basis where the ending balance was carried at amortized cost as of March 31, 2015.



			Fair Value
	Carrying value		Level 1		Level 2		Level 3
Convertible notes	$	62,786	$	—	$	—	$	76,260
Series B Preferred Stock	147,849		—		—		116,392
Series C Preferred Stock	111,912		—		—		118,995
First lien term facility	548,819		—		—		547,239
Second lien term facility	147,962		—		—		148,125
Promissory note (legal settlement)	15,300		—		15,300		—
Subordinated borrowings	2,000		—		—		2,000
First lien revolving facility	23,000		—		—		23,000
Total	$	1,059,628	$	—	$	15,300	$	1,032,011

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015



			Fair Value
	Carrying value		Level 1		Level 2		Level 3
Convertible notes	$	61,632	$	—	$	—	$	78,005
Series B Preferred Stock	146,700		—		—		117,367
Series C Preferred Stock	111,288		—		—		136,242
First lien term facility	555,700		—		—		530,491
Second lien term facility	147,903		—		—		142,500
Promissory note (legal settlement)	15,300		—		15,300		—
Subordinated borrowings	2,000		—		—		2,000
Total	$	1,040,523	$	—	$	15,300	$	1,006,605

The fair value of the convertible notes, the Company’s 11% Series B Preferred Stock, $0.001 par value per share (“Series B Preferred Stock”) and the Company’s 7% Series C Convertible Preferred Stock, $0.001 par value per share (“Series C Preferred Stock”) were determined by an independent valuation company and reviewed by the Company. The fair value of the convertible notes, the Series B Preferred Stock and the Series C Preferred Stock as of March 31, 2015 was determined using inputs such as conversion price, conversion period, equity volatility, risk-free rate, credit spread, and discount rate. The convertible notes, the Series B Preferred Stock and the Series C Preferred Stock are classified as Level 3 in the Company’s fair value hierarchy. The fair value of the Company’s first and second lien term debt facilities were determined based upon indicative market data obtained from a third party that makes markets in these financial instruments. As of March 31, 2015, the first and second lien term debt facilities and the senior secured first lien revolving credit facility were classified as Level 3 of the fair value hierarchy due to a lack of adequate observable market activity related to these financial instruments. The promissory note, which was entered into in the fourth quarter of 2014 between the Company and American Realty Capital Properties, Inc. (“ARCP”), has been classified as Level 2 in the Company’s fair value hierarchy.

The carrying value of accounts receivable and notes receivable approximates the fair value as they have limited credit risk and short-term maturities. Therefore, customer and notes receivables are classified as Level 2 in the non-recurring fair value hierarchy.

Goodwill and intangible assets established upon each acquisition were fair valued and were classified as Level 3 in the non-recurring fair value hierarchy. See Note 7 for more information.

5. Available-for-Sale Securities

The following table presents information about the Company’s available-for-sale securities for the three months ended March 31, 2015 (in thousands):



			For the three months ended March 31, 2015
	Fair value at December 31, 2014		Purchases⁽¹⁾		Sales			Realized Gains/ (Losses)			Unrealized Gains/ (Losses)		Fair value at March 31, 2015		Cost
Mutual funds	$	11,473	$	26	$	(8,780	)	$	(368	)	$	440	$	2,791	$	2,561

_____________________

(1) Includes $0.03 million of purchases under dividend reinvestment programs.

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

The following table presents information about the Company’s available-for-sale securities for the three months ended March 31, 2014 (amounts in thousands):



			For the three months ended March 31, 2014
	Fair value at December 31, 2013		Purchases⁽¹⁾		Sales			Realized Gains/ (Losses)			Unrealized Gains/ (Losses)		Fair value at March 31, 2014		Cost
Mutual funds	$	8,528	$	137	$	(3,000	)	$	(91	)	$	744	$	6,318	$	6,084

_____________________

(1) Includes $0.14 million of purchases under dividend reinvestment programs.

The Company’s basis on which the cost of security sold or the amount reclassified out of accumulated other comprehensive income into earnings is determined using specific identification. The Company did not recognize any other-than-temporary impairments for the three months ended March 31, 2015 and March 31, 2014.

6. Accounts and Notes Receivable

Accounts Receivable

The Company’s accounts receivable consist of the following as of March 31, 2015 and December 31, 2014:



	March 31, 2015		December 31, 2014
Fees and commissions receivable	$	96,167	$	86,193
Reimbursable expenses receivable	23,829		20,922
Receivable from customers	16,626		17,224
Investment banking fees receivable	11,284		12,430
Receivables from brokers, dealers, clearing organizations and other	37,017		33,865
Due from RCAP Holdings and other related parties	3,956		2,255
Total	$	188,879	$	172,889

Notes Receivable

The Company loans money to certain of its financial advisors under two types of promissory note agreements, which bear interest at various rates and have various maturities. Such agreements include forgivable notes and payback notes. Management establishes an allowance that it believes is sufficient to cover any probable losses. When establishing this allowance, management considers a number of factors, including its ability to collect from the financial advisor and the Company’s historical experience in collecting on such transactions.

Payback notes are promissory notes extended primarily to financial advisors with the obligation to pay back the principal and accrued interest.

The forgivable notes contain provisions for forgiveness of principal and accrued interest if the financial advisor meets specified revenue production levels or length of service. The forgiveness determination is made at specified intervals that coincide with scheduled principal and interest payments. The Company amortizes the principal balance of the forgivable notes along with accrued interest as commission expense ratably over the contractual term of the notes. In the event the financial advisor does not meet the specified production level, the scheduled principal and interest are due. The Company intends to hold the notes for the term of the agreements.

The Company monitors its outstanding notes on a monthly basis to identify potential credit loss and impairment. Notes receivable are considered impaired when, based upon current information and events, management estimates it is probable that the Company will be unable to collect amounts due according to the terms of the promissory note. Criteria used to determine if impairment exists include, but are not limited to: historical payment and collection experience of the individual loan, historical production levels, the probability of default on the loan, status of the representative’s affiliation agreement with the Company, and, or any regulatory or legal action related to the representative.

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

The Company’s notes receivable for the three months ended March 31, 2015 and the year ended December 31, 2014, were as follows (in thousands):



	March 31, 2015									December 31, 2014
	Forgivable loans			Payback loans			Total			Forgivable loans			Payback loans			Total
Beginning balance	$	23,075		$	45,914		$	68,989		$	11,104		$	2,166		$	13,270
Originated and acquired loans	2,297			4,861			7,158			16,747			52,200			68,947
Collections	(414		)	(1,936		)	(2,350		)	(1,672		)	(8,805		)	(10,477		)
Forgiveness	(2,254		)	—			(2,254		)	(8,329		)	298			(8,031		)
Accretion	1,131			66			1,197			5,368			402			5,770
Allowance	47			(27		)	20			(143		)	(347		)	(490		)
Ending balance	$	23,882		$	48,878		$	72,760		$	23,075		$	45,914		$	68,989

The following table presents the Company’s allowance for uncollectible amounts due from financial advisors for the three months ended March 31, 2015 and the year ended December 31, 2014 (in thousands):



	March 31, 2015									December 31, 2014
	Forgivable loans			Payback loans			Total			Forgivable loans			Payback loans			Total
Beginning balance	$	511		$	403		$	914		$	368		$	56		$	424
Provision for bad debt	2			45			47			327			735			1,062
Charge off - net of recoveries	(49		)	(18		)	(67		)	(184		)	(388		)	(572		)
Total change	(47		)	27			(20		)	143			347			490
Ending balance	$	464		$	430		$	894		$	511		$	403		$	914

There was no change in the allowance for uncollectable amounts due from financial advisors for the three months ended March 31, 2014.

7. Goodwill and Intangible Assets

Goodwill

Goodwill associated with each acquisition is allocated to the segments, based on how the Company manages its segments. The following table presents the goodwill by segment (in thousands):



	March 31, 2015		December 31, 2014
Independent Retail Advice	$	492,779	$	434,398
Wholesale Distribution	22,871		22,871
Investment Management	15,348		15,348
Investment Banking and Capital Markets	45,989		45,989
Corporate and Other	755		755
Total goodwill	$	577,742	$	519,361

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

The following table presents the carrying amount of goodwill as of March 31, 2015 by acquisition (in thousands):



Total goodwill, as of December 31, 2013	$	79,986
Cetera acquisition	290,262
Summit acquisition	23,891
J.P. Turner acquisition	13,579
Hatteras acquisition	15,348
ICH acquisition	26,680
StratCap acquisition	22,871
Trupoly acquisition	755
Docupace acquisition (preliminary)	45,989
Total goodwill, as of December 31, 2014	$	519,361
VSR acquisition (preliminary)	36,562
Girard acquisition (preliminary)	19,916
Cetera acquisition (see Note 2)	1,903
Total goodwill, as of March 31, 2015	$	577,742

Intangible Assets

The components of intangible assets as of March 31, 2015 are as follows (dollars in thousands):



	Weighted-Average Life Remaining (in years)	Gross Carrying Value		Accumulated Amortization		Net Carrying Value
Finite-lived intangible assets:
Financial advisor relationships	13	$	1,053,156	$	70,782	$	982,374
Sponsor relationships	8	113,000		7,325		105,675
Trade names	29	65,192		2,272		62,920
Investment management agreements	12	47,390		2,950		44,440
Customer relationships	11	20,686		1,947		18,739
Internally developed software and technologies	6	22,542		1,869		20,673
Intellectual property	8	10,642		1,143		9,499
Non-competition agreements	3	9,648		6,973		2,675
Distribution networks	39	3,210		50		3,160
Total finite-lived intangible assets		$	1,345,466	$	95,311	$	1,250,155

The components of intangible assets as of December 31, 2014 are as follows (dollars in thousands):



	Weighted-Average Life Remaining (in years)	Gross Carrying Value		Accumulated Amortization		Net Carrying Value
Finite-lived intangible assets:
Financial advisor relationships	13	$	1,019,353	$	52,070	$	967,283
Sponsor relationships	9	113,000		4,186		108,814
Trade names	29	65,192		1,638		63,554
Investment management agreements	12	47,390		1,966		45,424
Customer relationships	11	20,686		1,473		19,213
Internally developed software and technologies	7	22,510		779		21,731
Intellectual property	9	10,642		849		9,793
Non-competition agreements	2	9,648		5,136		4,512
Distribution networks	40	3,210		9		3,201
Total finite-lived intangible assets		$	1,311,631	$	68,106	$	1,243,525

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

Total amortization expense for finite-lived intangible assets was $27.2 million for the three months ended March 31, 2015. Total amortization expense for finite-lived intangible assets was $1.8 million for the three months ended March 31, 2014. Future amortization expense is estimated as follows (in thousands):



	Twelve Months Ended March 31,
2016	$	104,253
2017	103,164
2018	103,065
2019	102,894
2020	101,252
Thereafter	735,527
Total	$	1,250,155

Goodwill and intangible assets established upon each acquisition were fair valued and were classified as Level 3 in the non-recurring fair value hierarchy. A substantial portion of the goodwill and intangible assets relate to acquisitions that closed during 2014 or in the first three months of 2015. The results of these acquisitions are broadly consistent with their original expectations. As a result, the carrying value of goodwill and intangible assets as of March 31, 2015 closely approximates fair value. Unobservable inputs considered in determining fair value at the acquisition date include the estimate and probability of future revenues attributable to financial advisors and retention rates which were used to derive economic cash flows that are present valued at an appropriate rate of return over their respective useful lives.

8. Long-Term Debt

Concurrently with the closing of the Cetera acquisition on April 29, 2014, the Company entered into the Bank Facilities: a $575.0 million senior secured first lien term loan facility, a $150.0 million senior secured second lien term loan facility and a $25.0 million senior secured first lien revolving credit facility. During the three months ended March 31, 2015, the Company repaid $7.2 million of the senior secured first lien term loan facility as a regularly scheduled principal repayment.

The proceeds of the term facilities were used by the Company to pay a portion of the consideration paid in the Cetera acquisition, to refinance certain existing indebtedness and to pay related fees and expenses. The proceeds of the senior secured first lien revolving credit facility are expected to be used for permitted capital expenditures, to provide for the ongoing working capital requirements and for general corporate purposes.

As of March 31, 2015, $23.0 million was outstanding under the senior secured first lien revolving credit facility (not including a backstop letter of credit). The senior secured first lien revolving credit facility has an interest rate equal to the prime rate plus 4.50% per annum, which may be reduced to 4.25% if the First Lien Leverage Ratio (as defined in the Bank Facilities) is less than or equal to 1.25 to 1.00, and the principal balance outstanding of the senior secured first lien revolving credit facility matures on April 29, 2017. On July 21, 2014, the Company utilized $1.1 million from the senior secured first lien revolving credit facility in the form of a backstop letter of credit. As of December 31, 2014, no amounts were outstanding under the senior secured first lien revolving facility (other than the backstop letter of credit).

On April 29, 2014, the Company also issued $120.0 million aggregate principal amount of convertible notes in a private placement. The convertible notes are senior unsecured obligations that are effectively subordinate to the Bank Facilities, which are secured facilities, and any refinancing thereof. The convertible notes are convertible in $1,000 increments at the option of the holder, to the extent permitted by the Bank Facilities, into shares of Class A common stock, at a conversion price equal to $21.18 per share of Class A common stock, which conversion price is subject to anti-dilution adjustments upon the occurrence of certain events and transactions.

The Company assumed $2.0 million in subordinated debt when it acquired ICH. The subordinated borrowings are covered by an agreement with ICH’s clearing firm approved by FINRA on March 8, 2013 and are thus available for computing net capital under the SEC’s uniform net capital rule. To the extent that such borrowings are required for ICH’s continued compliance with minimum net capital requirements, they may not be repaid. The subordinated borrowings mature on March 8, 2016.

On December 4, 2014, the Company issued a $15.3 million two-year promissory note bearing interest at a rate of 8% per annum pursuant to the terms of a litigation settlement. The principal amount of the promissory note is due in three payments of $7.7 million, $3.8 million and $3.8 million on March 31, 2016, September 30, 2016 and March 31, 2017, respectively. See Note 16 for more information.

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

The following table presents the Company’s long-term borrowings as of March 31, 2015 and December 31, 2014 and their contractual interest rates (dollars in thousands):



	March 31, 2015			December 31, 2014
	Balance		Interest Rate	Balance		Interest Rate
First lien term facility	$	548,819	6.50%	$	555,700	6.50%
Second lien term facility	147,962		10.50%	147,903		10.50%
Convertible notes⁽¹⁾	77,906		5.00%	83,508		5.00%
First lien revolving facility	23,000		7.75%	—		—%
Promissory note	15,300		8.00%	15,300		8.00%
Subordinated borrowings	2,000		8.25%	2,000		8.25%
Total borrowings	814,987			804,411
Less: Current portion of borrowings	60,504			43,891
Total long-term debt, net of current portion	$	754,483		$	760,520

_____________________

(1) The Company’s convertible notes balance includes the fair value of the compound derivative of $15.1 million and $21.9 million as of March 31, 2015 and December 31, 2014, respectively.

The following table presents the contractual maturities of long-term debt, net of the current portion as of March 31, 2015 (in thousands):



	Twelve Months Ended March 31,
2017	$	65,150
2018	109,252
2019	352,189
2020	—
Thereafter	270,000
Long-term portion of the original issue discount	(57,228		)
Fair value of embedded derivative	15,120
Total long-term debt, net of current portion	$	754,483

The following table presents the scheduled contractual maturities of the current portion of long-term debt as of March 31, 2015 (in thousands):



June 30, 2015	$	14,375
September 30, 2015	14,375
December 31, 2015	14,375
March 31, 2016	24,025
Short-term portion of the original issue discount	(6,646		)
Total current portion of long-term debt	$	60,504

On January 9, 2015, the Company issued a letter of credit in the amount of $0.1 million on behalf of First Allied. The letter of credit was issued to the lessor on a lease entered into by First Allied.

9. Derivative Contracts

During the second quarter of 2014, the Company entered into a series of contemporaneous transactions that qualify as derivative contracts or include derivative contracts. These derivative contracts include a put/call agreement, which is a free-standing derivative contract, and embedded derivative contracts related to the Company’s issuance of convertible notes and Series A Preferred Stock (“hybrid instruments”).

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

The embedded derivative contracts’ features require separate accounting as derivative instruments; therefore, the issuance proceeds for the convertible note and Series A Preferred Stock were first allocated to the fair value of the put/call agreement and then, on a relative fair value basis, to the hybrid instruments. The proceeds allocated to each hybrid instrument were then attributed between the host contract and the embedded derivative contracts. These derivative contracts are carried at their fair value with changes in fair value reflected in other revenues in the consolidated statements of operations.

On November 18, 2014 and December 12, 2014, a portion of the Series A Preferred Stock was submitted for conversion, and on December 10, 2014, December 19, 2014 and February 23, 2015, shares of Class A common stock were issued on account of such conversions. Accordingly, the bifurcated derivatives associated with the converted Series A Preferred Stock were adjusted to their fair value on the date of each submission for conversion, with the changes in fair value reflected in other revenues in the consolidated statements of operations. The bifurcated derivatives associated with the converted Series A Preferred Stock were then written off against additional paid-in capital.

On December 19, 2014, the remaining Series A Preferred Stock was exchanged for Series B Preferred Stock and Series C Preferred Stock. Accordingly, the bifurcated derivatives associated with the remaining Series A Preferred Stock were adjusted to their fair value as measured on the date of the exchange, with the change in fair value reflected in other revenues in the consolidated statements of operations. The remaining bifurcated derivatives associated with the Series A Preferred Stock, which were exchanged, were written off against additional paid-in capital.

The Series B Preferred Stock and Series C Preferred Stock also have embedded derivative contracts features that require separate accounting as derivative instruments. These derivative contracts are carried at their fair value with changes in fair value reflected in other revenues in the consolidated statements of operations.

Put/Call

On April 29, 2014, the Company entered into a put/call agreement with affiliates of Luxor Capital Group LP (collectively with its affiliates, “Luxor”), which was amended on December 19, 2014 in connection with the exchange of Series A Preferred Stock for Series B Preferred Stock and Series C Preferred Stock. Under this agreement, subject to certain conditions, (i) the Company has the right to repurchase Luxor’s interest in RCS Capital Management, which is currently 19.46% (the “Luxor percentage interest”) from Luxor in exchange for its fair market value (as determined by the Company and Luxor pursuant to the agreement) in shares of Class A common stock (or, at the Company’s option, a cash equivalent); and (ii) Luxor has the right to require the Company to purchase the Luxor percentage interest in exchange for a number of shares of Class A common stock (or, at the Company’s option, a cash equivalent) that is equal to 15.00% multiplied by the Luxor percentage interest multiplied by the then outstanding number of shares of Class A common stock (assuming the conversion immediately prior thereto of the then outstanding convertible notes and Series C Preferred Stock).

The put/call agreement also provides that the Members may elect to purchase all the Luxor percentage interest offered to the Company for an amount equal to the value of the Class A common stock required to be delivered by the Company for cash, shares of Class A common stock or a combination thereof. If the Company is prohibited by the Bank Facilities from purchasing the Luxor percentage interest, the Members will be required to purchase the Luxor percentage interest under the same terms. As of March 31, 2015 and December 31, 2014, the fair value of the put right was approximately $11.3 million and $11.6 million, respectively, and was recorded in derivative contracts in the consolidated statements of financial condition. As of March 31, 2015, the call right did not have any value. The Company recorded a gain of approximately $0.3 million for the three months ended March 31, 2015 related to the put right in other revenues in the consolidated statements of operations.

Embedded derivatives related to the preferred stock and convertible notes

The Series B Preferred Stock is not convertible but includes an option for the Company to call the instrument in connection with a consolidation or merger of our company with one or more entities that are not its affiliates which results in a Change of Control (as defined in the Series B COD) and as a result of which the Company is not the surviving entity that is considered an embedded derivative that is not clearly and closely related to the host instrument. As a result, this feature must be bifurcated and accounted for as a separate compound derivative. As of the issuance date, December 31, 2014 and March 31, 2015, the compound derivative had no value.

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

The Series C Preferred Stock is convertible, at the option of the holder, into shares of Class A common stock. The convertible features and other features are considered embedded derivatives that are not clearly and closely related to the host instrument. As a result, these features must be bifurcated and accounted for as a separate compound derivative. As of March 31, 2015 and December 31, 2014, the fair value of the compound derivative was approximately $53.0 million and $69.4 million, respectively, and was recorded in derivative contracts in the consolidated statements of financial condition. The Company adjusts the carrying value of the compound derivative to fair value at each reporting date, or the date of conversion, and recognizes the change in fair value in the consolidated statements of operations. The Company recorded a gain of approximately $16.3 million for the three months ended March 31, 2015 in other revenues in the consolidated statements of operations as a result of the change in fair value of the derivatives embedded in the Series C Preferred Stock.

The Company’s convertible notes are convertible, at the option of the holders of the Company’s convertible notes, into shares of Class A common stock. The convertible feature and other features are considered embedded derivatives that are not clearly and closely related to the host instrument. As a result, these features must be bifurcated and accounted for as a separate compound derivative. As of March 31, 2015 and December 31, 2014, the fair value of the compound derivative was approximately $15.1 million and $21.9 million, respectively, and was recorded in long-term debt in the consolidated statements of financial condition. The Company adjusts the carrying value of the compound derivative to fair value at each reporting date, or the date of conversion, and recognizes the change in fair value in the statements of operations. The Company recorded a gain of approximately $6.8 million for the three months ended March 31, 2015 in other revenues in the consolidated statements of operations as a result of the change in fair value of the derivatives embedded in the convertible notes.

10. Preferred Stock

Series A Preferred Stock. On April 29, 2014, the Company issued 14,657,980 shares of Series A Preferred Stock to affiliates of Luxor in a private placement. The shares of Series A Preferred Stock were entitled to a dividend of 7% of the liquidation preference in cash and a dividend of 8% of the liquidation preference if a quarterly dividend was not paid in cash on the dividend payment date. The shares of Series A Preferred Stock were convertible, at the option of the holders of the Series A Preferred Stock, into shares of Class A common stock, at the lower of (i) a 2% discount to VWAP of Class A common stock for the ten trading days prior to the date of the holder’s election to convert; (ii) a 2% discount to the closing price of Class A common stock on the date of the holder’s election to convert; and (iii) $20.26, the fixed conversion price. If both the one-day VWAP and the daily closing price of Class A common stock for the prior 30 consecutive trading days exceeded 2.5 times the fixed conversion price, or $50.65, and at least $10.0 million of Class A common stock was traded each day for 30 consecutive days at any time after the first two years from the issuance date of the Series A Preferred Stock, then the Company may have required the holders to convert the Series A Preferred Stock into shares of Class A common stock at the same price as set forth above. Accrued and unpaid dividends on the Series A Preferred Stock were also entitled to the same liquidation preference and were convertible into additional shares of Class A common stock on the same terms as actual shares of Series A Preferred Stock.

Exchange and Conversion of Outstanding Series A Preferred Stock. During the period April 29, 2014 through December 19, 2014, Luxor elected to convert 3,073,553 shares of Series A Preferred Stock into 5,405,601 shares of Class A common stock. On December 19, 2014 the Company exchanged the remaining 11,584,427 shares of Series A Preferred Stock for 5,800,000 shares of Series B Preferred Stock and 4,400,000 shares of Series C Preferred Stock. $3.0 million of accrued and unpaid dividends on Series A Preferred Stock through December 12, 2014, the date of submission for conversion, were proportionately added to the amount of dividends due on the Series B Preferred Stock and the Series C Preferred Stock on January 12, 2015, the first dividend payment date.

Series B Preferred Stock. On December 19, 2014, the Company issued 5,800,000 of Series B Preferred Stock to affiliates of Luxor. If paid in cash, dividends on shares of Series B Preferred Stock accrue quarterly at 11.00% per annum of the liquidation preference. To the extent a quarterly dividend is not paid in cash on the applicable dividend payment date, then such dividend not paid in cash for such period will accrue at 12.50% per annum of the liquidation preference.

The initial liquidation preference of shares of Series B Preferred Stock was $25.00 per share. Any dividends that are not paid in cash on an applicable dividend payment date are automatically added to the aggregate liquidation preference on such applicable dividend payment date.

The holders of Series B Preferred Stock have no conversion rights.

At any time prior to June 12, 2016, the Company has the right to redeem all (and not less than all) of the outstanding shares of Series B Preferred Stock for cash at a redemption price equal to the aggregate liquidation preference plus accrued and unpaid dividends from the date immediately following the immediately preceding dividend payment date to the date of redemption.

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

Starting on December 12, 2022, the Company will have a right to redeem, and holders of shares of Series B Preferred Stock will have a right to cause the Company to redeem, all or a part of the outstanding shares of Series B Preferred Stock for cash at a redemption price equal to the aggregate liquidation preference plus accrued and unpaid dividends from the date immediately following the immediately preceding dividend payment date to the date of redemption. If any redemption by the Company would result in less than $35.0 million in aggregate liquidation preference of Series B Preferred Stock remaining outstanding, then the Company will be required to redeem all (and not less than all) of the outstanding shares of Series B Preferred Stock.

The shares of Series B Preferred Stock are also redeemable in connection with a consolidation or merger of the Company with one or more entities that are not its affiliates which results in a change of control and as a result of which the Company is not the surviving entity.

The Series B Preferred Stock ranks pari passu with the Series C Preferred Stock.

In the event of (A) a dissolution or winding up of our company, whether voluntary or involuntary, (B) a consolidation or merger of the Company with and into one or more entities which are not our affiliates which results in a change of control, or (C) a sale or transfer of all or substantially all of the Company’s assets other than to an affiliate of the Company, before any payment or distribution of the assets of the Company (whether capital or surplus) shall be made to or set apart for the holders of equity securities junior to the Series B Preferred Stock, the holders of shares of Series B Preferred Stock are entitled (subject to the redemption rights of such holders in connection with a consolidation or merger of the Company with one or more entities that are not its affiliates which results in a change of control and as a result of which our company is not the surviving entity) to receive an amount equal to the liquidation preference plus an amount equal to all accrued and unpaid dividends from the date immediately following the immediately preceding dividend payment date to the date of the final distribution to such holder.

The terms of the Series B Preferred Stock set forth in the related certificate of designation include voting rights relating to the issuance of additional preferred securities, amending the provisions of the related certificate of designation, affiliate transactions and the incurrence of indebtedness.

During the three months ended March 31, 2015 and the date of issuance to December 31, 2014, the Company accrued $4.1 million and $0.8 million, respectively, in dividends on its Series B Preferred Stock. On April 10, 2015 and January 12, 2015, the liquidation preference of the Series B Preferred Stock was increased by $4.6 million and $2.8 million, respectively, to reflect the accrued and unpaid dividends. The increase on January 12, 2015 included the portion of the accrued and unpaid dividends of $3.0 million on the Series A Preferred Stock allocated to the Series B Preferred Stock. Since the quarterly dividends were not paid in cash on the dividend payment dates, the 12.5% dividend rate was applicable.

The following table presents the change in the carrying value of the Series B Preferred Stock during three months ended March 31, 2015 (in thousands):



Balance, December 31, 2014 (includes $1,700 of accrued and unpaid dividends on the Series A Preferred Stock allocated to the Series B Preferred Stock on the date of issuance)	$	146,700
Dividends paid-in-kind	1,149
Balance, March 31, 2015	$	147,849

Series C Preferred Stock. On December 19, 2014, the Company issued 4,400,000 of Series C Preferred Stock to affiliates of Luxor. If paid in cash, dividends on shares of Series C Preferred Stock accrue quarterly at 7.00% per annum of the liquidation preference. To the extent a quarterly dividend is not paid in cash on the applicable dividend payment date, then such dividend not paid in cash for such period will accrue at 8.00% per annum of the liquidation preference.

The initial liquidation preference of shares of Series C Preferred Stock was $25.00 per share. Any dividends that are not paid in cash on an applicable dividend payment date are automatically added to the aggregate liquidation preference on such applicable dividend payment date.

The shares of Series C Preferred Stock are convertible, at the option of the holders of the Series C Preferred Stock, into shares of Class A common stock, at $13.00, which conversion price is subject to anti-dilution adjustments upon the occurrence of certain events and transactions. If both the one-day VWAP and the daily closing price of Class A common stock for the prior 30 consecutive trading days exceeds $50.66 and at least $10.0 million of Class A common stock is traded each day for 30 consecutive days at any time after the first two years from the issuance date of the Series C Preferred Stock, then the Company may require the holders to convert the Series C Preferred Stock into shares of Class A common stock at the same price as set forth above.

The following limitations on the ownership of Class A common stock are contained in the certificate of designation related to the Series C Preferred Stock.

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

At any time when a holder of Series C Preferred Stock then beneficially owns 9.9% or less, but greater than 4.9%, of the shares of Class A common stock outstanding, in no event will such holder be allowed to accept shares of Class A common stock issuable upon conversion of Series C Preferred Stock that, when taken together with the shares of Class A common stock otherwise beneficially owned, collectively exceeds 9.9% of the shares of Class A common stock outstanding on the trading day immediately preceding the election to convert such Series C Preferred Stock. This ownership limitation can be waived by any holder of Series C Preferred Stock on 65 days prior written notice to the Company.

At any time when a holder of Series C Preferred Stock then beneficially owns 4.9% or less of the shares of Class A common stock outstanding, in no event will such holder be allowed to accept shares of Class A common stock obtained upon conversion of Series C Preferred Stock that, when taken together with the shares of Class A common stock otherwise held, collectively exceeds 4.9% of the shares of Class A common stock outstanding on the trading day immediately preceding the election to convert such Series C Preferred Stock. This ownership limitation can be waived by any holder of Series C Preferred Stock on 65 days prior written notice to the Company.

In no event will a holder of Series C Preferred Stock be allowed to accept shares of Class A common stock issuable upon conversion of Series C Preferred Stock that would result in that holder owning an aggregate number of shares of Class A common stock, when taken together with any other shares of Class A common stock then held by such holder and persons aggregated with such holder under the rules of the FINRA, in excess of 24.9% of the shares of Class A common stock outstanding on the trading day immediately preceding the election to convert such Series C Preferred Stock, unless such ownership of shares of Class A common stock in excess of 24.9% is duly approved in advance by FINRA.

The ownership limitations described above are identical to the limitations contained in the indenture governing the convertible notes and the put/call agreement governing Luxor’s right to exchange its membership interest in RCS Capital Management for shares of Class A common stock.

Starting on December 12, 2022, the Company will have a right to redeem, and holders of shares of Series C Preferred Stock will have a right to cause the Company to redeem, all or a part of the outstanding shares of Series C Preferred Stock for cash at a redemption price equal to the aggregate liquidation preference plus accrued and unpaid dividends from the date immediately following the immediately preceding dividend payment date to the date of redemption. If any redemption by the Company would result in less than $35.0 million in aggregate liquidation preference of Series C Preferred Stock remaining outstanding, then the Company will be required to redeem all (and not less than all) of the outstanding shares of Series C Preferred Stock.

The shares of Series C Preferred Stock are also redeemable in connection with a consolidation or merger of the Company with one or more entities that are not its affiliates which results in a change of control and as a result of which the Company is not the surviving entity.

The Series C Preferred Stock ranks pari passu with the Series B Preferred Stock.

In the event of (A) a dissolution or winding up of our company, whether voluntary or involuntary, (B) a consolidation or merger of the Company with and into one or more entities which are not our affiliates which results in a change of control, or (C) a sale or transfer of all or substantially all the Company’s assets other than to an affiliate of the Company, before any payment or distribution of the assets of the Company (whether capital or surplus) shall be made to or set apart for the holders of equity securities junior to the Series C Preferred Stock, the holders of shares of Series C Preferred Stock are entitled (subject to the redemption rights of such holders in connection with a consolidation or merger of the Company with one or more entities that are not its affiliates which results in a change of control and as a result of which our company is not the surviving entity) to receive an amount equal to the greater of: (i) the liquidation preference plus an amount equal to all accrued and unpaid dividends from the date immediately following the immediately preceding dividend payment date to the date of the final distribution to such holder; and (ii) an amount per share of Series C Preferred Stock equal to the amount or consideration which would have been payable had each share of Series C Preferred Stock been converted into shares of Class A common stock.

The terms of the Series C Preferred Stock set forth in the related certificate of designation include voting rights relating to the issuance of additional preferred securities, amending the provisions of the related certificate of designation, affiliate transactions and the incurrence of indebtedness.

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

During the three months ended March 31, 2015 and the date of issuance to December 31, 2014, the Company accrued $2.0 million and $0.4 million, respectively, in dividends on its Series C Preferred Stock. Any dividends that are not paid in cash on an applicable dividend payment date are automatically added to the aggregate liquidation preference on such applicable dividend payment date. Accordingly, on April 10, 2015 and January 12, 2015, the liquidation preference of the Series C Preferred Stock was increased by $2.2 million and $1.9 million, respectively, to reflect the accrued and unpaid dividends. The increase on January 12, 2015 included the portion of the accrued and unpaid dividends of $3.0 million on the Series A Preferred Stock allocated to the Series C Preferred Stock. Since the quarterly dividends were not paid in cash on the dividend payment dates, the 8% dividend rate was applicable.

The following table presents the change in the carrying value of the Series C Preferred Stock during three months ended March 31, 2015 (in thousands):



Balance, December 31, 2014 (includes $1,288 of accrued and unpaid dividends on the Series A Preferred Stock allocated to the Series C Preferred Stock on the date of issuance)	$	111,288
Dividends paid-in-kind	624
Balance, March 31, 2015	$	111,912

11. Stockholders’ Equity

As of March 31, 2015, the Company had the following classes of common stock and non-controlling interests:

Class A common stock. Class A common stock entitles holders to one vote per share and economic rights (including rights to dividends, if any, and distributions upon liquidation). Holders of Class A common stock hold a portion of the voting rights of the Company.

On February 11, 2014, as part of the 2014 Restructuring Transactions and pursuant to an existing exchange agreement, RCAP Holdings exchanged 23,999,999 Original Operating Subsidiaries Units for 23,999,999 shares of Class A common stock.

During the three months ended March 31, 2015 and March 31, 2014, the Company granted 1,314,097 and 1,817,238 shares, net of forfeited and retired grants, of its Class A common stock in the form of restricted stock awards under the RCAP Equity Plan (as defined below) and FA RSU Plan (as defined below). See Note 12 for more information.

On February 23, 2015, the Company issued 2,042,022 shares of its Class A common stock pursuant to the conversion of a portion of the Company’s outstanding Series A Preferred Stock. See Note 10 for more information.

In March 2015, the Company amended its agreement with J.P. Turner to settle the remaining contingent and deferred consideration for the J.P. Turner acquisition and issued 245,813 shares of Class A common stock. During the three months ended March 31, 2015, the Class A common stock issued as consideration in connection with the acquisitions of VSR and Girard was 2,436,429 shares and 549,529 shares, respectively. See Note 2 for more information.

On March 20, 2014, the Company’s board of directors authorized, and the Company declared, a cash dividend for the first quarter of 2014 for its Class A common stock. The cash dividend was paid on April 10, 2014 to record holders of Class A common stock at the close of business on March 31, 2014 in an amount equal to $0.18 per share.

Class B common stock. As of March 31, 2015, RCAP Holdings owns the sole outstanding share of Class B common stock, which entitles it to one vote more than 50% of the voting rights of the Company, and thereby controls the Company. Holders of Class B common stock have no economic rights (including no rights to dividends and distributions upon liquidation).

Docupace non-controlling interest. The non-controlling shareholder of Docupace participates equally with the Company in the economic benefits of the post combination entity. Accordingly, the Company included the appropriate portion of Docupace’s net assets and operating loss that it does not own in non-controlling interests on the consolidated statement of financial condition and the consolidated statements of operations, respectively. See Note 2 for more information.

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

12. Equity-Based Compensation

RCAP Equity Plan

The RCAP Equity Plan provides for the grant of stock options, stock appreciation rights, restricted shares of Class A common stock, restricted stock units, dividend equivalent rights and other stock-based awards (which may include grants of shares of Class A common stock in payment of the amounts due under a plan or arrangement sponsored or maintained by the Company or an affiliate) to individuals who are, as of the date of grant, non-executive directors, officers and other employees of the Company or its affiliates, to certain advisors or consultants of the Company or any of its affiliates who are providing services to the Company or the affiliate, or, subject the Services Agreement (as defined below) remaining in effect on the date of grant, to RCS Capital Management, an entity under common control with RCAP Holdings, and individuals who are, as of the date of grant, employees, officers or directors of RCS Capital Management or one of its affiliates.

The following table details the restricted shares activity during the three months ended March 31, 2015:



	Shares of Restricted Common Stock	Weighted-Average Issue Price		Aggregate Value (in thousands)		Weighted-Average Vesting Period Remaining (years)
Nonvested, December 31, 2014	2,276,713	$	34.86	$	79,375	3.09
Granted	1,652,082	11.25		18,586		4.16
Less: vested	335,918	32.05		10,766		N/A
Less: forfeited	199,989	38.92		7,784		N/A
Less: retired	207,423	32.57		6,756		N/A
Nonvested, March 31, 2015	3,185,465	$	22.81	$	72,655	3.54

During the three months ended March 31, 2015 and March 31, 2014, the Company recorded $3.9 million and $0.4 million, respectively, of stock-based compensation expenses pursuant to the RCAP Equity Plan which is included in internal commissions, payroll and benefits expense in the consolidated statements of operations.

Restricted Stock Awards Granted by an Entity that was Previously a Related Party

An entity that was previously a related party also granted restricted stock awards (of the related party’s stock) to certain employees of the Company for services provided by Company employees on behalf of such related party. During the three months ended March 31, 2015 and March 31, 2014, the Company recorded $0.4 million and $2.3 million, respectively, of stock-based compensation expenses derived from these grants which are included in internal commissions, payroll and benefits expense in the consolidated statements of operations.

The following table details the restricted shares activity related to restricted stock awards of an entity that was previously a related party granted to RCAP employees during the three months ended March 31, 2015:



	Shares of Restricted Common Stock of a Related Party	Weighted-Average Fair Value Per Share		Aggregate Value (in thousands)		Weighted-Average Vesting Period Remaining (years)
Nonvested, December 31, 2014	368,625	$	9.05	$	3,335	2.83
Granted	—	—		—		—
Less: vested	86,992	9.87		859		N/A
Less: forfeited	—	—		—		N/A
Nonvested, March 31, 2015	281,633	$	9.85	$	2,774	2.58

FA RSU Plan

Restricted units were issued to certain employees under the First Allied Holdings 2013 Restricted Unit Plan (the “FA RSU Plan”) to provide for the grant of phantom stock in connection with the acquisition of First Allied by RCAP Holdings. During the three months ended March 31, 2015, the company issued 69,427 shares to settle a portion of the restricted units issued under the FA RSU Plan. During the three months ended March 31, 2015 and March 31, 2014, the Company recorded $0.4 million and $0.7 million, respectively, of stock-based compensation pursuant to the FA RSU Plan which is included in internal commissions, payroll and benefits expense in the consolidated statements of operations. As of March 31, 2015, 161,680 nonvested restricted units were outstanding under the FA RSU Plan.

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

2014 Stock Purchase Program

Select employees, financial advisors and executive officers of the Company and its affiliates and of certain subsidiaries of the Company were eligible to participate in the 2014 Stock Purchase Program pursuant to which participants purchased shares of Class A common stock and were automatically granted one warrant to purchase one share of Class A common stock for each three shares purchased, at an exercise price equal to the purchase price per share purchased.

The following table details the warrant activity during the three months ended March 31, 2015:



	Warrants	Weighted-Average Fair Value Per Warrant		Aggregate Value (in thousands)		Weighted-Average Vesting Period Remaining (years)
Nonvested, December 31, 2014	395,417	$	3.42	$	1,352	2.85
Issued	—	—		—		—
Less: vested	—	—		—		N/A
Less: forfeited	—	—		—		N/A
Nonvested, March 31, 2015	395,417	$	3.42	$	1,352	2.60

For the three months ended March 31, 2015, the Company recorded $0.1 million to internal commissions, payroll and benefits in the consolidated statements of operations for expenses derived from the 2014 Stock Purchase Program. The Company did not incur expenses pursuant to the 2014 Stock Purchase Program during the three months ended March 31, 2014.

13. Income Taxes

As of March 31, 2015 and December 31, 2014, the Company had a net deferred tax liability of $269.3 million and $266.2 million, respectively, primarily related to intangible assets as a result of the purchase price accounting from the recent acquisitions.

For the three months ended March 31, 2015, the effective tax rate was 31.40%.

The Company believes that, as of March 31, 2015, it had no material uncertain tax positions. Interest and penalties relating to unrecognized tax expenses (benefits) are recognized in income tax expense, when applicable. There was no liability for interest or penalties accrued as of March 31, 2015.

The Company files tax returns in the U.S. federal and various state jurisdictions. The Company will be open to audit under the statute of limitations by the Internal Revenue Service for its 2011 to 2014 tax years. The Company or its subsidiaries’ state income tax returns will be open to audit under the statute of limitations for 2010 to 2014.

14. Earnings Per Share

The Company computes earnings per share using the two-class method which requires that all earnings be allocated to each class of common stock and any participating securities. LTIP Units, nonvested restricted shares of Class A common stock, shares issuable under the second and third tranches of the FA RSU Plan, Series B Preferred Stock and Series C Preferred Stock, each of which contains non-forfeitable rights to dividends, are considered participating securities. Other potentially dilutive common shares including incremental restricted shares and warrants as calculated under the treasury stock method, shares issuable under the terms of Luxor’s put option under the put/call agreement as calculated under the if-converted method, shares issuable under the terms of the convertible notes, and Series C Preferred Stock as calculated under the if-converted method and shares contingently issuable as consideration for certain recent acquisitions are considered when calculating diluted EPS.

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

The following tables present the calculation of basic and diluted earnings per share for the three months ended March 31, 2015 and 2014 (in thousands, except share and per share data):



	Three Months Ended March 31, 2015
	Income (Numerator)			Weighted Average Shares (Denominator)⁽²⁾	Per Share Amount
Net loss attributable to Class A common stockholders⁽¹⁾	$	(20,756	)	71,129,912	$	(0.29	)
Basic earnings:
Net loss attributable to Class A common stockholders	$	(20,756	)	71,129,912	$	(0.29	)
Effect of dilutive securities:
Series C Preferred Stock⁽³⁾	(14,183		)	8,758,912	(0.15		)
Convertible notes⁽⁴⁾	(4,935		)	5,665,722	(0.03		)
Diluted earnings:
Net loss attributable to Class A common stockholders	$	(39,874	)	85,554,546	$	(0.47	)

_____________________

(1) Included in net loss attributable to Class A common stock are dividends of $4.1 million accrued in respect of the Series B Preferred Stock stockholders, $2.0 million accrued in respect of the Series C Preferred Stock stockholders and increases to the dividends accrued during the three months ended December 31, 2014 since the quarterly dividends were not paid in cash on the dividend payment dates. See Note 10 for more information.

(2) 2,042,022 shares of Class A common stock issued on February 23, 2015 pursuant to the submission for conversion of Series A preferred stock on December 12, 2014 are included in the weighted average shares outstanding assuming issuance on the date of submission for conversion.

(3) Income attributable to the Series C Preferred Stock for the three months ended March 31, 2015 includes $16.3 million recorded in other revenues in the consolidated statements of operations as a result of the change in fair value of the derivatives embedded in the Series C Preferred Stock and $2.2 million recorded in preferred dividends in the consolidated statements of operations.

(4) Income attributable to the convertible notes for the three months ended March 31, 2015 includes $6.8 million recorded in other revenues in the consolidated statements of operations as a result of the change in fair value of the derivatives embedded in the convertible notes and $1.8 million recorded in interest expense in the consolidated statements of operations. The interest expense included in the income attributable to convertible notes was adjusted using the Company’s effective tax rate.



	Three Months Ended March 31, 2014
	Income (Numerator)			Weighted Average Shares (Denominator)⁽¹⁾	Per Share Amount
Net income attributable to Class A common stockholders	$	3,285		26,831,762	0.12
Allocation of earnings to participating securities:
Allocation of earnings to RSU holders	(327		)	—	(0.01		)
Basic earnings:
Net income attributable to Class A common stockholders	$	2,958		26,831,762	$	0.11
Effect of dilutive securities:
Shares issuable to LTIP unit holders	24			1,325,000	—
Diluted earnings:
Net income attributable to Class A common stockholders	$	2,982		28,156,762	$	0.11

_____________________

(1) Basic and diluted earnings per share for the three months ended March 31, 2014 were calculated assuming that the 11,264,929 shares issued on June 30, 2014 in connection to the closing of the First Allied acquisition were outstanding for the entire period.

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

For the three months ended March 31, 2015, the Company excluded the incremental restricted shares, shares issuable under the terms of Luxor’s put option, the second and third tranches of the FA RSU plan, shares contingently issuable as consideration for certain recent acquisitions and outstanding warrants issued under the 2014 Stock Purchase Program from the calculation of diluted earnings per share as the effects were antidilutive. For the three months ended March 31, 2014 the Company excluded shares of Class B common stock from the calculation of diluted earnings per share as the effect was antidilutive.

15. Off-Balance Sheet Risk and Concentrations

The Company is engaged in various trading, brokerage activities and capital raising with counterparties primarily including broker-dealers, banks, direct investment programs and other financial institutions. In the event counterparties do not fulfill their obligations, the Company may be exposed to risk. The risk of default depends on the creditworthiness of the counterparty. It is the Company’s policy to review, as necessary, the credit standing of each counterparty.

The Company’s customer activities involve the execution, settlement, and financing of various securities transactions. These activities are transacted on either a cash or margin basis. In margin transactions, the Company extends credit to the customer, subject to various regulatory and internal margin requirements, collateralized by cash and securities in the customer’s account. In connection with these activities, the Company executes and clears customer transactions involving the sale of securities not yet purchased and the writing of options contracts. Such transactions may expose the Company to off-balance sheet risk in the event that margin requirements are not sufficient to fully cover losses that customers incur or counterparties are unable to meet the terms of the contracted obligations. In the event counterparties do not fulfill their obligations, the Company may be exposed to risk. The risk of default depends on the creditworthiness of the counterparty or issuer of the instrument. It is the Company’s policy to review, as necessary, the credit standing of each counterparty with which it conducts business.

In the event a customer or broker fails to satisfy its obligations, the Company may be required to purchase or sell financial instruments at prevailing market prices in order to fulfill the customer’s obligations. The Company seeks to control the risk associated with its customer activities by requiring customers to maintain margin collateral in compliance with various regulatory and internal guidelines. The Company monitors required margin levels daily and, pursuant to such guidelines, requires customers to deposit additional collateral or reduce positions, when necessary.

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents. The Company maintains its cash and temporary cash investments in bank deposit and other accounts, the balances of which, at times, may exceed federally insured limits. Exposure to credit risk is reduced by maintaining the Company’s banking and brokerage relationships with high credit quality financial institutions.

The Company holds securities that can potentially subject the Company to market risk. The amount of potential gain or loss depends on the securities performance and overall market activity. The Company monitors its securities positions on a monthly basis to evaluate its positions, and, if applicable, may elect to sell all or a portion to limit the loss.

As of March 31, 2015 and December 31, 2014, the Company had no significant accounts receivable concentrations with any of its counterparties.

16. Commitments and Contingencies

Leases — The Company leases certain facilities and equipment under various operating leases. These leases are generally subject to scheduled base rent and maintenance cost increases, which are recognized on a straight-line basis over the period of the leases. Total rent expense for all operating leases was approximately $3.2 million and $1.1 million for the three months ended March 31, 2015 and 2014, respectively. The following table shows the future annual minimum rental payments due (in thousands):



	Twelve Months Ended March 31,
2016	$	11,910
2017	10,591
2018	9,027
2019	7,468
2020	6,629
Thereafter	21,953
Total	$	67,578

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

Service contracts — The Company has contracted with third parties to perform back-office processing services. The following table shows the future annual minimum payments due (in thousands):



	Twelve Months Ended March 31,
2016	$	10,386
2017	9,210
2018	6,567
2019	6,567
2020	6,567
Thereafter	2,336
Total	$	41,633

Lines of credit — As of March 31, 2015, the Company had three lines of credit. The first line of credit pursuant to the Bank Facilities is for $25.0 million, and as of March 31, 2015, $23.0 million was outstanding. The second line of credit, which was acquired in the Cetera acquisition, is for $50.0 million with no maturity date and as of March 31, 2015, no amount was outstanding. The third line of credit, which was acquired in the ICH acquisition, is for $1.0 million with no maturity date and as of March 31, 2015, no amount was outstanding. See Note 8 for more information.

Private equity commitment — As of March 31, 2015, the Company had a commitment to invest up to $0.01 million in private equity funds.

Legal proceedings related to business operations — The Company and its subsidiaries are involved in legal proceedings from time to time arising out of their business operations and other matters, including arbitrations and lawsuits involving private claimants, and subpoenas, investigations and other actions by government authorities and self-regulatory organizations. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases in which claimants seek substantial or indeterminate damages, the Company cannot estimate what the possible loss or range of loss related to such matters will be. The Company recognizes a liability with regard to a legal proceeding when it believes it is probable a liability has occurred and the amount can be reasonably estimated. If some amount within a range of loss appears at the time to be a better estimate than any other amount within the range, the Company accrues that amount. When no amount within the range is a better estimate than any other amount, however, the Company accrues the minimum amount in the range. The Company maintains insurance coverage, including general liability, directors and officers, errors and omissions, excess entity errors and omissions and fidelity bond insurance. The Company records legal reserves and related insurance recoveries on a gross basis. As of March 31, 2015, the Company recorded legal reserves related to several matters of $9.1 million in other liabilities in the consolidated statement of financial condition.

Defense costs with regard to legal proceedings are expensed as incurred and classified as professional services within the consolidated statements of operations. When there is indemnification or insurance, the Company may engage in defense or settlement and subsequently seek reimbursement for such matters.

There are several cases that are “reasonably possible” but for which we cannot provide a reasonable estimate. These generally are arbitrations or other matters brought against various broker-dealers now owned by the Company.

ARCP Litigation

On September 30, 2014, the Company entered into a definitive agreement to acquire Cole Capital Partners LLC and Cole Capital Advisors, Inc. (“Cole Capital “) from ARC Properties Operating Partnership, L.P. (“ARCP OP”), a subsidiary and the operating partnership of ARCP for $700.0 million plus contingent consideration. Cole Capital is the private capital management business of ARCP, which includes a broker-dealer, wholesale distribution, and a non-traded REIT sponsor and advisory businesses.

The definitive agreement provided that the acquisition of Cole Capital would be consummated in two closings.

At the first closing (the “First Closing”) on October 22, 2014, subsidiaries of the Company entered into interim sub-advisory arrangements with the current advisors (which are subsidiaries of ARCP) of the five non-traded REITs sponsored and advised by Cole Capital.

In addition, Realty Capital Securities entered into wholesaling agreements whereby a subsidiary of Cole Capital engaged Realty Capital Securities as its distribution agent for the three non-traded REITs for which it then served as “dealer-manager.” Realty Capital Securities was entitled to receive a sourcing fee on sales through dealers it sourced.

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

The Company paid a portion of the purchase price equal to $10.0 million at the First Closing. The balance of the consideration would have been paid and Cole Capital would have been acquired by the Company at a second closing, which did not occur.

On October 29, 2014, ARCP announced that its audit committee had concluded that the previously issued financial statements and other financial information contained in certain public filings should no longer be relied upon. ARCP reported that this conclusion was based on the preliminary findings of an investigation conducted by ARCP’s audit committee which concluded that certain accounting errors were made by ARCP personnel that were not corrected after being discovered, resulting in an overstatement of adjusted funds from operations and an understatement of ARCP’s net loss for the three and six months ended June 30, 2014. ARCP also announced the resignation of its chief accounting officer and its chief financial officer, who is a member of RCAP Holdings and AR Capital, LLC, and served as the Company’s chief financial officer until December 2013. This individual also served as a member of the board of directors of the Company until July 2014 and had also served as an executive and director of non-traded REITs sponsored by AR Capital, LLC. This individual does not have a role in the management of the Company’s business. Although ARCP was previously sponsored by an entity under common control with RCAP Holdings and was advised by such entity until January 2014, ARCP is a separate company that is no longer sponsored or advised by an entity under common control with RCAP Holdings.

On November 3, 2014, the Company announced that it had terminated the previously disclosed definitive agreement to acquire Cole Capital from ARCP OP. Also on November 3, 2014, ARCP issued a press release asserting that, in its view, the Company had no basis to terminate the agreement and that the Company’s termination of the agreement was itself breach of the agreement. On November 11, 2014, ARCP filed suit for specific performance, injunctive relief and other relief against the Company in the Court of Chancery of the State of Delaware, (the “ARCP Action”) and, on November 12, 2014, ARCP issued a press release asserting that the Company’s termination of the agreement constituted a breach of contract.

On December 4, 2014, the Company entered into a binding term sheet with ARCP to settle the ARCP Action. Pursuant to the terms of the settlement, the Company paid ARCP a negotiated break-up fee consisting of a cash payment of $32.7 million and a $15.3 million, two-year promissory note bearing interest at a rate of 8% per annum, and ARCP dismissed with prejudice its lawsuit against the Company and, accordingly, the acquisition of Cole Capital did not proceed. The promissory note is recorded in long-term debt on the consolidated statements of financial condition, and the principal amount of the promissory note is due in three payments of $7.7 million, $3.8 million and $3.8 million on March 31, 2016, September 30, 2016 and March 31, 2017, respectively. The Company and ARCP also agreed, among other things, that ARCP would keep the $10.0 million payment delivered by RCS Capital in connection with the First Closing and the Company would release ARCP from its obligation to pay $2.0 million in respect of structuring services provided by Realty Capital Securities in connection with ARCP’s May 2014 equity offering. As part of the binding term sheet, we agreed with ARCP to work together in good faith to terminate any remaining transactions, and this process is ongoing.

Summit Litigation

Summit, its board of directors, the Company and a wholly owned subsidiary formed by our company in connection with the Summit acquisition are named as defendants in two purported class action lawsuits (now consolidated and amended) filed by alleged Summit shareholders on November 27, 2013 and December 12, 2013 in Palm Beach County, Florida challenging the Summit acquisition. These lawsuits alleged, among other things, that: (i) each member of Summit’s board of directors breached his fiduciary duties to Summit and its shareholders in authorizing the Summit acquisition; (ii) the Summit acquisition did not maximize value to Summit shareholders; and (iii) we and our acquisition subsidiary aided and abetted the breaches of fiduciary duty allegedly committed by the members of Summit’s board of directors. On May 9, 2014, the plaintiff shareholders moved for leave to file an amended complaint under seal. The amended complaint asserted claims similar to those in the original complaint, added allegations relating to the amendment of the Summit merger agreement on March 17, 2014, and also challenged the adequacy of the disclosures in the registration statement related to the issuance of shares of our Class A common stock as consideration in the Summit acquisition, the background of the transaction, the fairness opinion issued to the Summit special committee, and Summit’s financial projections. The consolidated lawsuits sought class-action certification, equitable relief, including an injunction against consummation of the Summit acquisition on the agreed-upon terms, and damages.

On May 27, 2014, the parties to the consolidated action entered into a Memorandum of Understanding setting forth their agreement in principle to settle the consolidated action and, on September 15, 2014, the parties signed a stipulation of settlement and the Company recorded a provision, for its portion of the negotiated attorney’s fees payment. The same day, plaintiffs filed a motion seeking preliminary approval of the settlement and, on October 6, 2014, the Court entered the preliminary approval order. The Final Judgment and Order of Dismissal were issued by the Court on January 9, 2015.

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

American Realty Capital Healthcare Trust Litigation

In connection with the proposed acquisition by Ventas, Inc. (“Ventas”) of all the outstanding stock of American Realty Capital Healthcare Trust, Inc. (“ARCH”), purported shareholders of ARCH have filed multiple class action lawsuits in the Circuit Court for Baltimore City, Maryland and other jurisdictions. Two of these actions named Realty Capital Securities among others, as a defendant. The actions are: Shine v. American Realty Capital Healthcare Trust, Inc. et al filed June 13, 2014 and Abbassi, et al. v. American Realty Capital Healthcare Trust, Inc. et al. filed July 9, 2014. The actions also assert derivative claims on behalf of ARCH against Realty Capital Securities. On October 10, 2014, lead plaintiffs in the Maryland state court action filed a “Consolidated Amended Derivative and Direct Class Action Complaint,” asserting direct and derivative claims of aiding and abetting a breach of fiduciary duty against multiple defendants, including Realty Capital Securities, arising from their roles providing services to ARCH in connection with the proposed acquisition of ARCH by Ventas and seek (i) to enjoin the proposed acquisition and (ii) recover damages if the proposed acquisition is completed. A similar shareholder action, Rosenzweig v. American Realty Capital Healthcare Trust, Inc. et al, 1:14-cv-02019-GLR, was filed in federal court for the District of Maryland.

On January 2, 2015 and January 5, 2015, the parties to the consolidated state court action and the Rosenzweig action executed separate memoranda of understanding regarding settlement of all claims asserted on behalf of each alleged class of ARCH stockholders in each case. In connection with the settlement contemplated by that memoranda of understanding, each action and all claims asserted therein will be dismissed, subject to approval by each applicable court. Pursuant to the executed memoranda of understanding, ARCH made certain additional disclosures related to the Ventas transaction. The memoranda of understanding further contemplate that the parties will enter into a stipulation of settlement, which will be subject to customary conditions, upon the conclusion of confirmatory discovery and court approval following notice to ARCH’s stockholders. If the parties enter into a stipulation of settlement, a hearing will be scheduled at which the court will consider the fairness, reasonableness and adequacy of the settlement. There can be no assurance that the parties will ultimately enter into a stipulation of settlement, that the applicable court will approve any proposed settlement, or that any eventual settlement will be under the same terms as those contemplated by the memorandum of understanding.

The Company believes that such lawsuits are without merit, but the ultimate outcome of the matter cannot be predicted with certainty. Neither the outcome of the lawsuits nor an estimate of a probable loss or any reasonable possible losses is determinable at this time. No provisions for any losses related to the lawsuits have been recorded in the accompanying consolidated financial statements for the year ended December 31, 2014. An adverse judgment for monetary damages could have a material adverse effect on the operations and liquidity of the Company. All defendants have stated in court filings that they believe that the claims are without merit and are defending against them vigorously.

RCAP Shareholder Class Action Litigation

On or about December 29, 2014, a securities law class action lawsuit was filed in federal court in the Southern District of New York (Weston v. RCS Capital Corporation et al, 14 CV 10136) against the Company and certain former or current officers and directors of the Company. The lawsuit asserts the Company and the individual defendants violated Section 10(b) and 20(a) of the Securities Exchange Act of 1934 by making materially false and misleading public statements pertaining to the Company’s financial position and future business and acquisition prospects. Specifically, plaintiffs allege that defendants made false and/or misleading statements and/or failed to disclose that: (i) the financial statements of ARCP were material false and misleading as a result of accounting errors that were disclosed by ARCP on October 29, 2014; (ii) the Company’s announced acquisition of Cole Capital Partners LLC and Cole Capital Advisors was at serious risk due to the accounting issues at ARCP; and (iii) the Company’s revenue stream from its relationship with ARCP was in jeopardy as a result of the accounting issues at ARCP announced on October 1, 2014. There have not been any other material court filings involving the Company.

The Company believes the Weston complaint is without merit and intends to vigorously defend itself against its allegations.

ARCP Shareholder Class Action Litigation

The Company was named as a defendant in a consolidated federal securities law class action (Teachers Insurance and Annuity Association of America, et al. v. American Realty Capital Properties, Inc. et al, Civ. A. 15-cv-00421) filed in federal court in New York on January 21, 2015 brought on behalf of all persons who purchased or otherwise acquired securities of ARCP between May 6, 2013 and October 29, 2014, including ARCP common stock, preferred stock and debt securities. The lawsuit’s claims, premised on Sections 11, 12 and 15 of the Securities Act of 1933 and Sections 14(a), 10(b) and 20(a) of the Securities Exchange Act of 1934, allege generally that defendants issued or assisted in the issuance of false and misleading statements to the investing public, including in registration statements, prospectuses, proxies and other public statements and press releases, concerning ARCP’s financial results as part of a scheme to artificially inflate the value of ARCP’s securities.

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

More specifically, the complaint alleges that the Company is a “control person” of ARCP under the securities laws and thus plaintiffs seek to hold the Company responsible for the alleged misstatements of ARCP and its officers and directors. The Company is also alleged to be a “structuring advisor” to ARCP. Realty Capital Securities, LLC, a subsidiary of the Company is named as a defendant based on its role as a co-manager of ARCP’s July 2013 convertible notes offering.

On April 17, 2015, plaintiffs filed an amended complaint, which, like the original complaint, alleges that the Company is a “control person” of ARCP under the securities laws. The amended complaint also names Realty Capital Securities as a defendant based on its role as a co-manager of ARCP’s July 2013 convertible notes offering.

The Company believes the amended complaint is without merit and intends to vigorously defend itself against the allegations contained in the complaint.

Massachusetts Securities Division Subpoenas

On November 7, 2014 and December 19, 2014, Realty Capital Securities received subpoenas from the Massachusetts Secretary of the Commonwealth, Securities Division (the “Division”), requiring the production of certain documents and other materials, dated from January 1, 2014 to the present, relating to sales by Realty Capital Securities of certain non-traded REITs and similar products sponsored, co-sponsored or advised by AR Capital, LLC and the organizational structure of Realty Capital Securities. Realty Capital Securities has complied with the subpoenas.

On December 19, 2014, the Company received a subpoena from the Division, requiring the production of certain documents and other materials, dated from January 1, 2014 to the present, relating the Company’s organizational structure. The Company has complied with the subpoena.

On March 2, 2015 Realty Capital Securities received a subpoena from the Division seeking minor additional information concerning certain former employees. Realty Capital Securities complied with the subpoena on March 2, 2015.

Other matters

Since the disclosure of accounting issues at ARCP in October 2014, the Company and certain of its subsidiaries, including Realty Capital Securities, have received requests for information and subpoenas from various state and federal agencies as well as self-regulatory organizations, including the SEC, Massachusetts Securities Division and FINRA. The Company and its subsidiaries are cooperating with all of the regulatory inquiries and producing documents in response to formal and informal requests.

17. Net Capital Requirements

The Company’s broker-dealers are subject to the SEC Uniform Net Capital Rule 15c3-1. SEC Uniform Net Capital Rule 15c3-1 requires the maintenance of the greater of the minimum dollar amount of net capital required, which is based on the nature of the broker-dealer’s business, or 1/15^th of the aggregate indebtedness, as defined, and requires that the ratio of aggregate indebtedness to net capital, both as defined, not exceed 15 to 1. Certain of the Company’s broker-dealers have elected to use the alternative method of computing net capital which requires the maintenance of minimum net capital of the greater of $250,000 or 2% of aggregate debit items. The table below provides the net capital requirements for each of the Company’s broker-dealers as of March 31, 2015 and December 31, 2014 (in thousands, except ratios and percentages).



	March 31, 2015		December 31, 2014
Realty Capital Securities:
Net capital	$	8,532	$	18,770
Required net capital	1,313		1,174
Net capital in excess of required net capital	$	7,219	$	17,596
Aggregate indebtedness to net capital ratio	2.31 to 1		0.94 to 1
First Allied Securities, Inc. (alternative method):
Net capital	$	4,005	$	3,431
Required net capital	250		250
Net capital in excess of required net capital	$	3,755	$	3,181
Net capital as a percentage of aggregate debit items evaluation	in compliance⁽¹⁾		in compliance⁽¹⁾

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015



	March 31, 2015			December 31, 2014
Legend Equities Corporation:
Net capital	$	2,967		$	2,067
Required net capital	160			187
Net capital in excess of required net capital	$	2,807		$	1,880
Aggregate indebtedness to net capital ratio	0.81 to 1			1.36 to 1
Cetera Advisor Networks LLC (alternative method):
Net capital	$	11,481		$	13,785
Required net capital	250			250
Net capital in excess of required net capital	$	11,231		$	13,535
Net capital as a percentage of aggregate debit items	in compliance⁽¹⁾			in compliance⁽¹⁾
Cetera Advisors LLC (alternative method):
Net capital	$	6,548		$	9,294
Required net capital	250			250
Net capital in excess of required net capital	$	6,298		$	9,044
Net capital as a percentage of aggregate debit items	in compliance⁽¹⁾			in compliance⁽¹⁾
Cetera Financial Specialists LLC (alternative method):
Net capital	$	4,193		$	5,018
Required net capital	250			250
Net capital in excess of required net capital	$	3,943		$	4,768
Net capital as a percentage of aggregate debit items	in compliance⁽¹⁾			in compliance⁽¹⁾
Cetera Investment Services LLC (alternative method):
Net capital	$	13,718		$	17,190
Required net capital	250			250
Net capital in excess of required net capital	$	13,468		$	16,940
Net capital as a percentage of aggregate debit items	121%			192%
Hatteras Capital Distributors, LLC:
Net capital	$	2,318		$	2,145
Required net capital	5			5
Net capital in excess of required net capital	$	2,313		$	2,140
Aggregate indebtedness to net capital ratio	0.03 to 1			0.02 to 1
J.P. Turner & Company LLC (alternative method)⁽²⁾:
Net capital	$	(882	)	$	3,379
Required net capital	250			442
Net capital in excess of required net capital	$	(1,132	)	$	2,937
Aggregate indebtedness to net capital ratio	not in compliance⁽³⁾			1.96 to 1
Summit Brokerage Services, Inc.:
Net capital	$	6,875		$	5,878
Required net capital	411			506
Net capital in excess of required net capital	$	6,464		$	5,372
Aggregate indebtedness to net capital ratio	0.90 to 1			1.29 to 1

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015



	March 31, 2015		December 31, 2014
Investors Capital Corporation (alternative method):
Net capital	$	3,384	$	3,817
Required net capital	250		250
Net capital in excess of required net capital	$	3,134	$	3,567
Net capital as a percentage of aggregate debit items	in compliance⁽¹⁾		in compliance⁽¹⁾
Advisor Direct, Inc.:
Net capital	$	23	$	12
Required net capital	5		5
Net capital in excess of required net capital	$	18	$	7
Aggregate indebtedness to net capital ratio	3.17 to 1		5.67 to 1
SC Distributors LLC (alternative method):
Net capital	$	680	$	2,004
Required net capital	250		250
Net capital in excess of required net capital	$	430	$	1,754
Net capital as a percentage of aggregate debit items	in compliance⁽¹⁾		in compliance⁽¹⁾
VSR Financial Services, Inc.⁽⁴⁾:
Net capital	$	4,151
Required net capital	436
Net capital in excess of required net capital	$	3,715
Aggregate indebtedness to net capital ratio	1.57 to 1
Girard Securities, Inc.⁽⁴⁾:
Net capital	$	2,086
Required net capital	362
Net capital in excess of required net capital	$	1,724
Aggregate indebtedness to net capital ratio	2.60 to 1

_____________________

(1) The entity was determined to be in compliance as of the date stated as its net capital was in excess of the minimum $250,000.

(2) The entity changed its computation of net capital to the alternative method during the three months ended March 31, 2015.

(3) During March 2015 J.P. Turner & Company LLC was not compliant with its net capital requirement and received a capital contribution of $4.0 million from the Company during April 2015 to become compliant.

(4) The entity was not under the control of the Company as of December 31, 2014.

18. Related Party Transactions

A significant portion of the Company’s revenues relate to fees earned from transactions with or on behalf of AR Capital, LLC and its affiliates or related parties as well as certain transactions that are co-sponsored by an affiliate or related party of ARC Capital LLC, including investment banking fees, services fees, transfer agent fees and wholesale broker-dealer commissions and concessions, in the ordinary course of its trade or business. During the three months ended March 31, 2015 and 2014, the Company earned revenues of $82.2 million and $186.1 million, respectively, from related party transactions. As of March 31, 2015 and December 31, 2014, the receivables for such revenues were $34.2 million and $31.6 million, respectively.

Pursuant to a shared services agreement, beginning on January 1, 2013, AR Capital, LLC charges the Company for the services of information technology, human resources, accounting services and office services and facilities. For these services, the Company incurred expenses of $1.0 million and $1.4 million for the three months ended March 31, 2015 and 2014, respectively. As of March 31, 2015 and December 31, 2014, the payables for such expenses were $0.4 million and $0.5 million, respectively.

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

The Company incurs expenses directly for certain services. The Company either allocates certain of these expenses to its operating subsidiaries or causes RCAP Holdings to pay its portion based on RCAP Holdings’ ownership interest. Expenses that are directly attributable to a specific subsidiary are allocated to the appropriate subsidiary at 100%. Expenses that are not specific to a subsidiary are allocated on a reasonable basis, as determined by the Company its sole discretion. Interest expense on the Company’s long-term debt, share-based compensation related to the Company’s board of directors, expenses related to the 2013 Manager Multi-Year Outperformance Agreement entered into between the Company and RCS Capital Management (the “OPP”), changes in the fair value of the Company’s derivative contracts and acquisition-related expenses are not allocated to the subsidiaries. The intercompany receivables and payables for the allocated expenses are eliminated in consolidation and are settled quarterly. During the three months ended March 31, 2015 and 2014, the Company’s operating subsidiaries incurred $3.7 million and $1.9 million, respectively, related to such expenses. There were no expenses payable by RCAP Holdings as of March 31, 2015 and December 31, 2014.

As of March 31, 2015 and December 31, 2014, the Members owned 39.64% and 43.34%, respectively, of Class A common stock outstanding primarily obtained as a result of the 2014 Restructuring Transactions and the contribution of First Allied. From time to time, RCAP Holdings, or the Members, may purchase shares of Class A common stock in the secondary market.

In March 2014, Realty Capital Securities leased a lodging facility in Newport, Rhode Island from a related party, ARC HTNEWRI001, LLC. Realty Capital Securities also entered into an agreement with another affiliate, Crestline Hotels and Resorts, LLC (“Crestline”) to manage and operate the lodging facility. Crestline remits the lodging facility’s revenue to the Company, net of the fees from Crestline. During the three months ended March 31, 2015 and 2014, the Company incurred $0.03 million and $0.01 million, respectively, in rent expense in connection with this lease. The Company did not earn any revenue from the Crestline agreement during the three months ended March 31, 2015 and 2014.

Services Agreement (formerly the Management Agreement). The Company pays RCS Capital Management a quarterly fee in an amount equal to 10% of its aggregate pre-tax U.S. GAAP net income, not including the quarterly fee, calculated and payable quarterly in arrears, subject to its aggregate U.S. GAAP net income being positive for the current and three preceding calendar quarters. The Company also pays RCS Capital Management an incentive fee, calculated and payable quarterly in arrears, that is based on the Company’s earnings and stock price.

The Company did not incur a quarterly fee for the three months ended March 31, 2015. The quarterly fee earned by RCS Capital Management for the three months ended March 31, 2014 was $1.8 million which is the expense recorded by the Company. The Company did not have a payable related to the quarterly fee as of March 31, 2015 or December 31, 2014.

The Company did not incur an incentive fee for the three months ended March 31, 2015 or March 31, 2014. The Company did not have a payable related to the incentive fee as of March 31, 2015 or December 31, 2014.

Amended and Restated 2013 Manager Multi-Year Outperformance Agreement. The Company entered into the OPP, as of June 10, 2013, with the Original Operating Subsidiaries and RCS Capital Management. The OPP provided a performance-based bonus award to RCS Capital Management intended to further align RCS Capital Management’s interests with those of the Company and its stockholders.

In April 2014, the OPP was amended to provide that the first valuation date would be April 28, 2014 and that any LTIP Units in RCS Holdings not earned as of such date were forfeited without payment of any compensation. The Company’s board of directors determined that as of such valuation date, 310,947 LTIP Units in RCS Holdings were earned (the “Earned LTIP Units”) and 1,014,053 LTIP Units in RCS Holdings were forfeited. Following this amendment, no additional LTIP Units could be earned under the OPP.

On December 31, 2014, the Company, RCS Capital Management, and RCS Holdings, entered into another amendment to the OPP, which provided for the early vesting of the Earned LTIP Units such that all the Earned LTIP Units became fully vested on December 31, 2014.

For the three months ended and March 31, 2014, the Company recognized $7.2 million for the award under the OPP. Prior to December 31, 2014, the award under the OPP was included in the consolidated statements of operations, with an offset recorded to non-controlling interest.

Mutual Funds. As of March 31, 2015 and December 31, 2014, the Company had investments in mutual funds of $10.6 million and $19.0 million, respectively, that are advised by related parties. During the three months ended March 31, 2015 and 2014, the Company recognized losses of $0.03 million and gains of $0.7 million, respectively, relating to these investments which are recorded in other revenue in the consolidated statements of operations.

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

19. Employee Benefits

401(k) and Health and Welfare Benefit Plan for Employees - The Company has several 401(k) and health and welfare defined contribution plans which have various eligibility standards, vesting requirements, and guidelines for matching. For the three months ended March 31, 2015 and 2014, the Company recorded expenses of $4.7 million and $1.8 million, respectively, in the consolidated statements of operations in internal commissions, payroll and benefits.

Deferred Compensation Plans for Financial Advisors - The Company offers a plan to certain of its financial advisors which allows them to defer a portion of their compensation which earns a rate of return based on the financial advisor’s selection of investments. In order to economically hedge this exposure, the Company invests in money market, international, U.S. equity and U.S. fixed income funds. The liability to the financial advisor is recorded in deferred compensation plan accrued liabilities and the related economic hedges are recorded in deferred compensation plan investments in the consolidated statement of financial condition.

For the three months ended March 31, 2015 the Company recorded expenses of $1.7 million in the consolidated statements of operations in internal commissions, payroll and benefits. For the three months ended March 31, 2015, the Company recorded revenue of $1.7 million from the economic hedges in the consolidated statements of operations in other revenue. For the three months ended March 31, 2014, the Company did not record any revenues or expenses related to this deferred compensation plan because the plan relates to one of the recent acquisitions and, therefore, those results are not included in the Company’s results prior to the acquisition date.

Additionally, the Company offers a deferred compensation plan in connection with a Rabbi Trust Agreement to certain of its financial advisors. For this plan, the Company recorded expenses of $0.2 million for the three months ended March 31, 2015 in the consolidated statements of operations in internal commissions, payroll and benefits. For the three months ended March 31, 2014, the Company did not record any revenues or expenses related to this deferred compensation plan because the plan relates to one of the recent acquisitions and, therefore, those results are not included in the Company’s results prior to the acquisition date.

20. Segment Reporting

The Company operates through its operating subsidiaries in six principal segments: Independent Retail Advice; Wholesale Distribution; Investment Banking, Capital Markets and Transaction Management Services; Investment Management; Investment Research; and Corporate and Other.

The Independent Retail Advice segment offers financial advice and investment solutions to investors through the broad network of financial advisors. Cetera, Summit, J.P. Turner, First Allied, ICH, VSR and Girard operate as independent subsidiaries under their own brand and management.

The Wholesale Distribution segment includes the Company’s alternative investment program activities and Realty Capital Securities’ operations as the distributor or dealer manager consisting of nine public, non-traded REITs, two public, non-traded BDCs and an oil and gas program. Proprietary programs are sponsored directly or indirectly by AR Capital, LLC, an affiliate. Realty Capital Securities distributes these securities through selling groups comprised of FINRA member broker-dealers located throughout the United States. The Wholesale Distribution segment also includes StratCap, which through its broker-dealer subsidiary, distributes a platform of offerings consisting of two non-traded REITS, a non-traded BDC and two public, non-traded limited liability companies through a selling group comprised of FINRA member broker-dealers and RIAs.

The Investment Banking, Capital Markets and Transaction Management Services segment provides comprehensive strategic advisory, transaction management and transfer agency services focused on direct investment programs, particularly non-traded REITs through RCS Advisory, ANST and the investment banking division of Realty Capital Securities. These strategic advisory services include mergers and acquisitions advisory, capital markets activities, registration management, and other transaction support services. This segment also includes the results from the Company’s majority interest in Docupace, a provider of integrated, electronic processing technologies and systems for financial institutions and wealth management firms.

The Investment Management segment provides investment advisory, distribution and other services to the Hatteras family of mutual funds and other registered investment products.

The Investment Research segment provides focused research, consulting, training and education, and due diligence on traditional and non-traditional investment products through SK Research.

Corporate and Other primarily includes interest expense on the Company’s long-term debt, share-based compensation related to the Company’s board of directors, expenses related to the OPP, changes in the fair value of the Company’s derivative contracts, certain acquisition-related expenses, certain public company expenses and the results of operations for the Company’s crowdfunding platform and Trupoly.

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

The reportable business segment information is prepared using the following methodologies:


•	Net revenues and expenses directly associated with each reportable business segment are included in determining earnings before taxes.


•	Net revenues and expenses not directly associated with specific reportable business segments are allocated based on the most relevant measures applicable, including each reportable business segment’s net revenues, time spent and other factors.

Reportable business segment assets include an allocation of indirect corporate assets that have been fully allocated to the Company’s reportable business segments, generally based on each reportable business segment’s capital utilization.

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

The following table presents the Company’s net revenues, expenses and income before taxes by segment for the three months ended March 31, 2015 and 2014 (in thousands):



	Three Months Ended
	March 31,
	2015			2014
Independent retail advice⁽¹⁾:
Revenues	$	503,559		$	92,758
Expenses	503,474			93,606
Income (loss)	$	85		$	(848	)
Wholesale distribution:
Revenues	$	89,145		$	139,110
Expenses	105,846			142,635
Loss	$	(16,701	)	$	(3,525	)
Investment banking, capital markets and transaction management services:
Revenues	$	18,812		$	48,544
Expenses	14,805			22,226
Income	$	4,007		$	26,318
Investment management⁽²⁾:
Revenues	$	13,380		$	—
Expenses	13,158			—
Income	$	222		$	—
Investment research:
Revenues	$	1,183		$	—
Expenses	3,147			444
Loss	$	(1,964	)	$	(444	)
Corporate and other:
Revenues	$	23,033		$	—
Expenses	31,102			6,449
Loss	$	(8,069	)	$	(6,449	)

Revenue reconciliation
Total revenues for reportable segments	$	649,112		$	280,412
Less: intercompany revenues	23,528			7,044
Total revenues	$	625,584		$	273,368

Income reconciliation
Total income (loss) before taxes for reportable segments	$	(22,420	)	$	15,052
Reconciling items	—			—
Income (loss) before income taxes	$	(22,420	)	$	15,052

_____________________

(1) Includes First Allied’s operating results from September 25, 2013, the date First Allied was acquired by RCAP Holdings.

(2) Did not begin operations until the acquisition of Hatteras in June 2014.

RCS Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2015

The following table presents the Company’s total assets by segment as of March 31, 2015 and 2014 (in thousands):



	March 31, 2015		December 31, 2014
Segment assets:
Independent retail advice	$	2,100,475	$	1,980,614
Wholesale distribution	182,749		192,669
Investment banking, capital markets and transaction management services	110,729		116,980
Investment management	72,817		79,343
Investment research	12,304		12,291
Corporate and other⁽¹⁾	59,439		112,423
Total assets for reportable segments	$	2,538,513	$	2,494,320

Assets reconciliation:
Total assets for reportable segments	$	2,538,513	$	2,494,320
Less: intercompany eliminations	14,842		27,692
Total consolidated assets	$	2,523,671	$	2,466,628

_____________________

(1) Excludes amounts related to investment in subsidiaries.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This report contains or incorporates by reference “forward-looking statements” within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act. Forward-looking statements include statements about our future and statements that are not historical facts. These forward-looking statements are usually preceded by the words “believe,” “intend,” “may,” “will,” “should,” or similar expressions. Forward-looking statements may contain expectations regarding revenues, earnings, and other results, and may include statements of future performance, plans and objectives. Forward-looking statements also include statements pertaining to our strategies for future development of our business and products. Forward-looking statements represent only our belief regarding future events, many of which by their nature are inherently uncertain. It is possible that the actual results may differ, possibly materially, from the anticipated results indicated in these forward-looking statements. Information regarding important factors that could cause actual results to differ, perhaps materially, from those in our forward-looking statements is contained in this report and other documents we file. You should read and interpret any forward-looking statement together with these documents, including the following:


•	the description of our business and risk factors contained in our Annual Report on Form 10-K/A dated April 12, 2015;


•	the discussion of our analysis of financial condition and results of operations contained in this report under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations”;


•	the notes to the unaudited consolidated financial statements contained in this report; and


•	cautionary statements we make in our public documents, reports and announcements.

Any forward-looking statement speaks only as of the date on which that statement is made. We will not update any forward-looking statement to reflect events or circumstances that occur after the date on which the statement is made, except as required by applicable law.

Executive Summary

We are an integrated financial services company principally focused on retail investors. We are engaged in the following businesses: the provision of retail advice through independent channel broker-dealers and registered investment advisers, wholesale distribution, investment banking, capital markets, investment management and investment research.

RCS Capital Corporation and Subsidiaries

March 31, 2015

Our Business

We operate through our operating subsidiaries in six principal segments: Independent Retail Advice; Wholesale Distribution; Investment Banking, Capital Markets and Transaction Management Services; Investment Management; Investment Research; and Corporate and Other.

The results of operations of Cetera, Summit, J.P. Turner, Hatteras, ICH, StratCap, Trupoly, Docupace, VSR and Girard are included in our results of operations from their dates of acquisition. Our acquisition of First Allied was accounted for at historical cost in a manner similar to a pooling-of-interest accounting because we and First Allied were under the common control of RCAP Holdings at the time of the acquisition of First Allied by RCAP Holdings. Our financial statements as of and for the three months ended March 31, 2014 have been recast to reflect the results of operations and financial position of First Allied as if we had acquired it on September 25, 2013, the date that First Allied was acquired by RCAP Holdings.

Independent Retail Advice

Our Independent Retail Advice business is conducted through a network of independent channel broker-dealers and registered investment advisers acquired during 2014 and 2015 (the “Retail Firms”), namely Cetera, First Allied, J.P. Turner, Summit, ICH, VSR and Girard, which operate collectively under the marketing brand of “Cetera Financial Group.” Each Retail Firm operates independently under its own brand and management, but with certain shared services with other Retail Firms.

Through financial advisors, the Retail Firms offer independent retail advice, financial products and investment solutions to “mass affluent” individuals and households, which we define as individuals and households with $100,000 to $1,000,000 of investable assets. Each of our Retail Firms provides independent groups of affiliated financial advisors or other financial professionals with the technology, infrastructure and other support and services they need to serve their clients. Each Retail Firm also provides its financial advisors with a wide array of practice development and operational support services that we believe help those financial advisors launch new relationships and strengthen existing ones.

As of March 31, 2015, our Retail Firms serve approximately 2.5 million client accounts with $240.3 billion in assets under administration through approximately 9,500 financial advisors.

Wholesale Distribution

Since its inception in 2007, Realty Capital Securities has focused on providing financial products and investment solutions through its wholesale distribution of non-traded REITs, BDCs and other direct investment programs sponsored, co-sponsored or advised by our affiliate, AR Capital, LLC (“American Realty Capital”). In August 2014, we acquired StratCap, which was engaged in a similar business not involving American Realty Capital.

The offerings distributed by Realty Capital Securities and StratCap are direct investment programs and registered investment companies registered with the SEC, which, as of March 31, 2015, consisted of 10 public, non-traded REITs, three public, non-traded BDCs, four mutual funds, two closed-end interval funds, an oil and gas program and two public, non-traded limited liability companies.

We believe that the combination of Realty Capital Securities and StratCap constitute the leading multi-product distribution platform of direct investment program offerings to independent broker-dealers and the retail financial advisor community as measured by total equity capital raised and number of direct investment programs distributed, according to Robert A. Stanger & Co. As of March 31, 2015, Realty Capital Securities and StratCap were distributing a total of 16 public non-listed direct investment program offerings effective with the SEC and none of their competitors was distributing more than three.

All of the results of operations of Hatteras, including the results of the wholesale distribution of registered investment companies by Hatteras are included in our Investment Management segment.

Investment Banking, Capital Markets and Transaction Management Services

Operating under the name RCS Capital, Realty Capital Securities and RCS Advisory provide direct investment programs, primarily publicly registered non-traded REITs and BDCs as well as open- and closed-end mutual funds sponsored, co-sponsored or advised by American Realty Capital and distributed by Realty Capital Securities, with strategic advisory and capital markets services including mergers and acquisitions, capital markets activities, registration management, and other transaction support services. ANST acts as registrar, provides record-keeping services and executes the transfer, issuance and cancellation of shares or other securities in connection with offerings conducted by issuers sponsored directly or indirectly by American Realty Capital. Docupace became a part of our Investment Banking, Capital Markets and Transaction Management Services division when we completed the acquisition of a majority interest in Docupace in November 2014.

RCS Capital Corporation and Subsidiaries

March 31, 2015

Investment Management

Our Investment Management segment consists of Hatteras. Hatteras provides investment advisory and distribution to the Hatteras family of registered investment company funds, which is focused on liquid alternatives. The Hatteras family of funds includes retail funds (both open- and closed-end) with approximately $2.2 billion in assets under management as of March 31, 2015.

Investment Research

In March 2014, we launched SK Research. SK Research provides due diligence on traditional and non-traditional investment products to Cetera Financial Group. SK Research also provides focused research, consulting, training and education to Cetera Financial Group, which we believe enhances the financial advice our financial advisors can provide to their clients. SK Research also provides due diligence services in connection with direct investment programs, including direct investment programs sponsored, co-sponsored or advised by American Realty Capital, to other broker-dealers and registered investment adviser firms, as well as individual registered representatives and investment adviser representatives.

Corporate and Other

Corporate and other primarily includes interest expense on our long-term debt, share-based compensation related to our board of directors and expenses related to the OPP, changes in the fair value of our derivative contracts, certain acquisition-related expenses, certain public company expenses and the results of our crowdfunding investment platform which we have recently rebranded under the name “DirectVest.”

Critical Accounting Policies and Estimates

Set forth below is a summary of the critical accounting policies and significant accounting estimates that management believes are important to the preparation of our consolidated financial statements or are essential to understanding of our financial position and results of operations. These significant accounting policies and estimates include:

Revenue and expense recognition for selling commissions and dealer manager fees and the related expenses

We, through certain of our broker-dealer subsidiaries, receive selling commissions and dealer manager fees from related party and non-related party issuers for their wholesale distribution efforts. The commission and dealer manager fee rates are established jointly in a single contract negotiated with each individual issuer. We generally receive commissions of up to 7.0% of gross offering proceeds for funds raised by direct investment programs through the participating independent broker-dealer channel, all of which are reallowed as commissions, and 4.0% in connection with sales of open-end and closed-end mutual funds sold by Realty Capital Securities in accordance with industry practices. Commission percentages are generally established in the issuers’ offering documents leaving us no discretion as to the payment of commissions. Commission revenues and related expenses are recorded on a trade date basis as securities transactions occur.

We, serving as a dealer manager, receive fees and compensation in connection with the wholesale distribution of registered non-traded securities. We contract directly with independent broker-dealers and registered investment advisers (“RIAs”) to solicit share subscriptions. The non-traded securities are offered on a “best efforts” basis and we are not obligated to underwrite or purchase any shares for our own account. We generally receive up to 3.0% of the gross proceeds from the sale of common stock as a dealer manager fee and also receive fees from the sale of common stock through RIAs. We have sole discretion as to reallowance of dealer manager fees to participating broker-dealers, based on such factors as the volume of shares sold and marketing support incurred by respective participating broker-dealers as compared to those of other participating broker-dealers. Dealer manager fees and reallowances are recorded on a trade date basis as securities transactions occur.

We contract directly with broker-dealers and RIAs to solicit subscriptions to shares of registered investment company funds. The funds are offered on a “best efforts” basis and we are not obligated to underwrite or purchase any shares of the funds for our own account. We generally receive up to 50 basis points of the gross proceeds from the shares of the fund and also may receive fees from the shares of the funds from broker-dealers and RIAs.

We analyze our contractual arrangements to determine whether to report revenue on a gross basis or a net basis. The analysis considers multiple indicators regarding the services provided to our customers and the services received from our distributors. The goal of the analysis is to determine if we are the primary obligor in the arrangement. After weighing many indicators, including our position as the exclusive distributor or dealer manager primarily responsible for the distribution of our customers’ shares, our discretion in supplier selection, that our distributors bear no credit risk and that the commission and dealer manager fee rates are agreed to with each participating broker-dealer, we concluded that the gross basis of accounting for its commission and fee revenues is appropriate.

RCS Capital Corporation and Subsidiaries

March 31, 2015

Investment banking advisory services

We, through our investment banking and capital markets division, receive fees and compensation for providing investment banking, capital markets and related advisory services. Such fees are charged based on agreements entered into with related party and non-related party public and private issuers of securities and their sponsors and advisors, on a negotiated basis. Fees and expenses that are unpaid are recorded in accounts receivable in the statement of financial condition. Investment banking agreements either have a fixed fee or a percentage of the total deal value which are typically contingent upon the consummation of the transaction; these agreements may also include a minimum fee that will be paid even in the event the transaction is not consummated provided that services have been rendered. Income from investment banking agreements is generally recognized upon consummation of the transaction. However, in certain cases, we recognize income from investment banking agreements prior to the consummation of the transaction if services have been rendered and there are no substantive remaining contingencies as of the reporting date. Income from certain investment banking agreements is recorded as deferred revenue as part of other liabilities in the statement of financial condition and is recognized over the remaining life of the offering. These fees are typically a fixed dollar amount.

Internal commissions, payroll and benefits expenses

Included in internal commissions, payroll and benefits in the consolidated statements of operations is performance-based compensation including cash and shared-based compensation. The determination of performance-based compensation involves a high degree of judgment by management and takes into account our actual operating performance, conditions in our industry and other macroeconomic factors. It is possible that revisions to our estimate of performance-based compensation could affect our results of operations in any reporting period.

Presentation of certain expenses net versus gross

We consider the nature of certain cash consideration received from a vendor in determining whether the consideration is payment for assets or services delivered to the vendor or is reimbursement of costs incurred by the customer. If the cash consideration represents payments for assets or services delivered to the vendor and the vendor receives an identifiable benefit in exchange for the consideration, the consideration is characterized as revenue. To meet that condition, the identified benefit must be sufficiently separable from the customer’s purchase of the vendor’s products such that the customer would have entered into an exchange transaction with a party other than the vendor in order to provide that benefit, and the customer can reasonably estimate the fair value of the benefit provided. If the cash consideration represents a reimbursement of specific, incremental, identifiable cost incurred by the customer in selling the vendor’s products or services, the cash consideration shall be characterized as a reduction of that cost.

Our broker-dealer subsidiaries partner with a number of vendors to enable their registered representatives to access important technological tools and platforms, data feeds and subscriptions that will enable them to better serve their clients. In addition, the broker-dealers are required to maintain adequate insurance coverage to operate and conduct business. These fees are recognized as consideration for assets or services delivered to the registered representatives. Consideration received for other regulatory fees and clearing costs represent reimbursement of costs incurred by the broker-dealers and is characterized as a reduction of those costs.

The determination of the gross versus net treatment involves a high degree of judgment by management. While the ultimate conclusion does not have an impact on our net income, it is possible that changes in our conclusions could affect our revenues and expenses in any reporting period.

Income taxes

We are subject to the income tax laws of the U.S. and those state and local jurisdictions in which we conduct business. These laws can be complex and subject to interpretation. To prepare the consolidated financial statements we may make assumptions or use judgment when interpreting these income tax laws which could impact the provision for income taxes as well as the deferred tax assets and liabilities.

Our provision for income taxes includes current and deferred taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax basis. We recognize deferred income tax assets if, in management’s judgment, it is more likely than not that they will be realized. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. This determination is based upon a review of all available evidence, both positive and negative, including our earnings history, the timing, character and amount of future earnings potential, the reversal of taxable temporary differences and the tax planning strategies available. As of both March 31, 2015 and December 31, 2014, we recorded a valuation allowance of $0.3 million, related to state net operating losses.

RCS Capital Corporation and Subsidiaries

March 31, 2015

Our net deferred tax liability is subject to changes in tax laws, assumptions, estimates or methods used in the accounting for income taxes, that if significantly negative or unfavorable, could have a material adverse effect on amounts or timing of realization or settlement. Such effects could result in a material acceleration of income taxes currently payable or valuation charges for realization uncertainties, which could have a material adverse effect on our future financial condition or results of operations.

We have a tax receivable agreement with RCAP Holdings. This agreement requires us to pay RCAP Holdings if certain reductions in tax liabilities occur. Due to the uncertainty surrounding these taxable events, management must use assumptions and estimates in determining if a liability is necessary. See Note 18 of our consolidated financial statements for more information. It is possible that changes in our assumptions regarding these taxable events could affect our results of operations in any reporting period. As of March 31, 2015, there was no impact to our financial statements from the tax receivable agreement.

Acquisition accounting/intangible asset valuation and goodwill impairment/contingent and deferred consideration

We acquired Cetera, Summit, J.P. Turner, Hatteras, First Allied, ICH, StratCap, Trupoly and Docupace during 2014 and acquired VSR and Girard during the three months ended March 31, 2015.

Accounting for acquisitions, the related valuation of intangible assets and goodwill impairment are critical accounting policies involving significant estimates. We test our goodwill balances at least annually as of October 31, or more frequently if there are indicators of impairment testing using the fair value approach at the reporting unit level. Testing for goodwill impairment involves the use of significant estimates and judgment to determine the fair value of the reporting units that may include the use of discounted future cash flows, projected earnings and peer group analysis. With respect to the First Allied acquisition, the contribution has been accounted for at historical cost rather than the purchase method because First Allied and our company were under the common control of RCAP Holdings at the time of the acquisition of First Allied by RCAP Holdings.

In connection with certain of our recent acquisitions, the purchase price includes contingent consideration, also referred to as earn-outs, and deferred payments, which represent future payments of cash or equity interests to the former owners of the businesses acquired. These earn-outs and deferred payments are recorded at fair value in the consolidated statements of financial condition. Earn-outs are subsequently remeasured each reporting period. The discount on the deferred payments is accreted into earnings. The fair value of the earn-outs and deferred payments are determined by the use of third-party valuation firms that use internally developed proprietary models using various input parameters which is then reviewed by us.

Fair Value

The fair value of the majority of our financial instruments, except for our derivative contracts, is based on quoted market prices in active markets or observable market parameters, or is derived from such prices or parameters. These instruments include government and agency securities, listed equities, mutual funds, certificates of deposit, money market funds and corporate debt.

In addition, we hold financial instruments for which no market prices are available, and which have reduced or no price transparency. For these instruments the determination of fair value requires subjective assessment and varying degrees of judgment depending on the risks affecting the specific instrument. In such circumstances, valuation is determined based on management’s best estimate of fair value. These instruments include certain derivatives and other long-term investments. The fair values for our derivatives are determined by a third-party valuation firm that uses internally developed proprietary models using various input parameters which is then reviewed by us.

Litigation Contingencies

We and our subsidiaries are involved in legal proceedings from time to time arising out of our business operations, including arbitrations and lawsuits involving private claimants, and subpoenas, investigations and other actions by government authorities and self-regulatory organizations. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases in which claimants seek substantial or indeterminate damages, we cannot estimate what the possible loss or range of loss related to such matters will be. We recognize a liability with regard to a legal proceeding when we believe it is probable a liability has occurred and the amount can be reasonably estimated. If some amount within a range of loss appears at the time to be a better estimate than any other amount within the range, we accrue that amount. When no amount within the range is a better estimate than any other amount, however, we accrue the minimum amount in the range. We maintain insurance coverage, including general liability, errors and omissions, excess entity errors and omissions and fidelity bond insurance. When there is indemnification or insurance, we may engage in defense or settlement discussions and subsequently seek reimbursement for such matters. We record legal reserves and related insurance recoveries on a gross basis.

Defense costs with regard to legal proceedings are expensed as incurred and classified as professional fees in the consolidated statements of operations.

RCS Capital Corporation and Subsidiaries

March 31, 2015

Results of Operations

The following table provides an overview of our consolidated results of operations for the three months ended March 31, 2015 and March 31, 2014 (dollars in thousands):



	Three Months Ended
	March 31,
	2015			2014		% Change
Revenues	$	625,584		$	273,368	129	%
Expenses	648,004			258,316		151	%
Income (loss) before taxes	(22,420		)	15,052		(249	)%
Provision (benefit) for (from) income taxes	(7,039		)	2,903		(342	)%
Net (loss) income	$	(15,381	)	$	12,149	(227	)%

Basic (loss) earnings per share⁽¹⁾	$	(0.29	)	$	0.11	(364	)%
Diluted (loss) earnings per share⁽¹⁾	$	(0.47	)	$	0.11	(527	)%

EBITDA (Non-GAAP)⁽²⁾	$	25,372		$	17,300	47	%
Adjusted EBITDA (Non-GAAP)⁽²⁾	$	28,368		$	37,967	(25	)%

Adjusted net income (Non-GAAP)⁽²⁾	$	13,880		$	30,597	(55	)%
Adjusted net income per adjusted share (Non-GAAP)⁽²⁾	$	0.20		$	0.81	(75	)%

_____________________

(1) See Note 14 to our consolidated financial statements for more information on our calculation.

(2) See “Non-GAAP Measures” for more information on our calculation.

We recorded a net loss of $15.4 million for the three months ended March 31, 2015, or $0.47 loss per diluted share, compared to net income of $12.1 million for the three months ended March 31, 2014, or $0.11 per diluted share, primarily as a result of higher interest expense reflecting our incurrence of long-term debt during April 2014, an increase in amortization expense on the intangible assets from the recent acquisitions, a decline in investment banking revenues and losses from our wholesale distribution business which is further explained below, partially offset by gains on our derivative contracts.

The adjusted net income for the three months ended March 31, 2015 totaled $13.9 million, or $0.20 per adjusted share, versus adjusted net income of $30.6 million, or $0.81 per adjusted share, for the three months ended March 31, 2014 primarily as a result of the change in net income which is discussed above.

Our results of operations only include the results of operations of Cetera, Summit, J.P. Turner, Hatteras, ICH, StratCap, Trupoly, Docupace, VSR and Girard beginning on the date of each company’s acquisition. Accordingly, the results of operations of Cetera, Summit, J.P. Turner, Hatteras, ICH, StratCap, Docupace for the entire three months ended March 31, 2015 and the results of VSR and Girard beginning on March 11, 2015 and March 18, 2015 respectively were included for the three months ended March 31, 2015, while none of the results of the businesses acquired in the recent acquisitions, except for First Allied’s results, were included for the three months ended March 31, 2014.

In addition, our acquisition of First Allied was accounted for at historical cost in a manner similar to a pooling-of-interest accounting because we and First Allied were under the common control of RCAP Holdings at the time of the acquisition of First Allied by RCAP Holdings. Our financial statements as of and for the three months ended March 31, 2014 have been recast to reflect the results of operations and financial position of First Allied as if we had acquired it on September 25, 2013, the date that First Allied was acquired by RCAP Holdings.

RCS Capital Corporation and Subsidiaries

March 31, 2015

As a result of the announcement concerning certain accounting errors by ARCP, a number of broker-dealer firms that had been participating in the distribution of offerings of public, non-traded REITs sponsored directly or indirectly by American Realty Capital that are distributed by us have temporarily suspended their participation in the distribution of those offerings and such suspensions have adversely impacted equity capital raised. Although certain of these broker-dealer firms have reinstated their participation in the distribution of our offerings, we cannot predict the length of time these temporary suspensions will continue, whether all such participating broker-dealers will reinstate their participation in the distribution of our offerings or whether there will be additional suspensions.

Subsequent to the ARCP announcement, average monthly equity capital raised by direct investment programs distributed by us for the period from November 2014 through March 2015 was 57.6% less than the average monthly equity capital raised by direct investment programs distributed by us during the same months during the preceding year and 64.9% less than the average monthly sales during the five months (June 2014 to October 2014) preceding the ARCP announcement. While monthly equity capital raised has increased subsequent to the month after the announcement, equity capital raised subsequent to the announcement has declined in comparison to prior periods. Although the amount of the decline may have been affected by factors in addition to the ARCP announcement, such as absence of liquidity events and the stages of the offerings of individual direct investment programs, the ARCP announcement has had a material adverse effect on equity capital raised by direct investment programs distributed by us during this period, and, accordingly, has had an adverse impact on our results of operations for period subsequent to the ARCP announcement.

Revenues for the three months ended March 31, 2015 increased $352.2 million, or 129%, to $625.6 million, as compared to $273.4 million for the three months ended March 31, 2014 primarily due to:

(i)

$421.7 million in increased revenue related to the inclusion of the results of operations of Cetera, Summit, J.P. Turner, Hatteras, ICH, StratCap, Docupace, VSR and Girard (beginning on March 11, 2015 and March 18, 2015, respectively, the date of each company’s acquisition, for VSR and Girard) for the three months ended March 31, 2015 and none of the results of the businesses we acquired in the recent acquisitions, except for First Allied’s results, were included for the three months ended March 31, 2014;


(ii)	$23.4 million in gains during the three months ended March 31, 2015 related to changes in the fair value of our derivative contracts;


(iii)	partially offset by a $69.3 million decrease in revenues from Realty Capital Securities’ wholesale distribution business due to a decrease in equity capital raised by direct investment program offerings distributed by Realty Capital Securities from $1.6 billion for the three months ended March 31, 2014 to $1.0 billion for the three months ended March 31, 2015; and


(iv)	$29.7 million in decreased revenues in Investment Banking, Capital Markets and Transaction Management Services due to a decrease in the size of capital markets, mergers and acquisition transactions and strategic advisory transactions for the three months ended March 31, 2015 compared to the three months March 31, 2014.

Expenses for the three months ended March 31, 2015 increased $389.7 million, or 151%, to $648.0 million, as compared to $258.3 million for the three months ended March 31, 2014 primarily due to:

(i)

$428.0 million in increased expenses related to the inclusion of the results of operations of Cetera, Summit, J.P. Turner, Hatteras, ICH, StratCap, Docupace, VSR and Girard, including $25.0 million relating to the amortization of intangible assets, for the three months ended March 31, 2015 (none of the results of the businesses we acquired in the recent acquisitions, except for First Allied’s results were included for the three months ended March 31, 2014);


(i)	$24.7 million in increased expenses in Corporate and Other reflecting our incurrence of interest expense on our long-term debt during the second quarter of 2014 and higher share-based compensation related to our board of directors, expenses related to the OPP, certain acquisition-related expenses and certain public company expenses;


(ii)	partially offset by a $58.7 million decrease in the selling expense portion of expenses from Realty Capital Securities’ wholesale distribution business, which decreased in tandem with the decrease in revenues; and


(i)	$7.4 million in decreased expenses in Investment Banking, Capital Markets and Transaction Management Services due to higher acquisition-related expenses and quarterly fees during the three months ended March 31, 2014 as compared to no quarterly fees during the three months ended March 31, 2015.

We expect to incur higher professional fees, interest expense and intangible asset amortization in connection with the recent acquisitions and we may incur losses in future periods because of the level of amortization of intangible assets acquired and new interest expense as a result of debt incurred in connection with the recent acquisitions.

RCS Capital Corporation and Subsidiaries

March 31, 2015

Independent Retail Advice

The following table provides an overview of the results of operations of our Independent Retail Advice business (dollars in thousands):



	Three Months Ended
	March 31,
	2015		2014			% Change
Revenues	$	503,559	$	92,758		443	%
Expenses	503,474		93,606			438	%
Income (loss)	$	85	$	(848	)	110	%

Following the completion of the Cetera, Summit, J.P. Turner, First Allied and ICH acquisitions during 2014 and the completion of the acquisitions of VSR and Girard in 2015, we are engaged in the Independent Retail Advice business. Our results include the results of operations of Cetera, Summit, J.P. Turner, ICH, VSR and Girard beginning on the date of each company’s acquisition and the inclusion of First Allied’s results for the entire three months ended March 31, 2015 and March 31, 2014. There are no comparable results for the three months ended March 31, 2014 as none of the results of the businesses we acquired in the recent acquisitions results, except for First Allied’s results, were included for the three months ended March 31, 2014.

In managing our Independent Retail Advice business, we are focused on increasing assets under management, recruiting new advisors with gross dealer concessions greater than financial advisors who are terminated or leave, improving financial advisors’ productivity in terms of both number of client accounts and commission and fee revenues and achieving cost savings through synergies. We expect the results of our Independent Retail Advice business to benefit during 2015 from the recognition of synergies related to higher strategic partner revenues as well as expense synergies associated with back office, technology and clearing efficiencies, the elimination of duplicative public company expenses and other factors.

Revenues - Revenues for the three months ended March 31, 2015 were $503.6 million and primarily included commissions on securities transactions which are driven by trading volumes, advisory fees which are based on the value of our clients’ portfolios, asset-based fees and other revenues and transaction fees.

Expenses - Expenses for the three months ended March 31, 2015 were $503.5 million and primarily included commission expenses which are correlated to the volume of revenues in a given period, employee compensation expenses and amortization of intangible assets.

Our results for the three months ended March 31, 2015 include the results of operations of Cetera, Summit, J.P. Turner, First Allied and ICH for the entire three months and results of operations beginning on the date of acquisition for VSR and Girard. Our pro forma results include the results of operations for material acquisitions, which include Cetera, Summit, J.P. Turner, First Allied and ICH for the entire three months ended March 31, 2014 as if they were completed on January 1, 2013. Revenues for the Independent Retail Advice business were $503.6 million for the three months ended March 31, 2015, as compared to pro forma revenues of $464.3 million for the three months ended March 31, 2014, an increase of $39.3 million. For the three months ended March 31, 2015, basic expenses, inclusive of acquisition related costs, increased at a slightly lower rate resulting in a $11.0 million increase in pre-tax net income as compared to the three months ended March 31, 2014. Pre-tax net income for the Independent Retail Advice business was $0.1 million for the three months ended March 31, 2015, as compared to a pro forma pre-tax net loss of $10.9 million for the three months ended March 31, 2014 reflecting higher commissions and asset-based fees, net of the related commission expenses.

RCS Capital Corporation and Subsidiaries

March 31, 2015

Wholesale Distribution

The following table provides an overview of the results of operations of our Wholesale Distribution business (dollars in thousands):



	Three Months Ended
	March 31,
	2015			2014			% Change
Revenues	$	89,145		$	139,110		(36	)%
Expenses	105,846			142,635			(26	)%
Loss	$	(16,701	)	$	(3,525	)	(374	)%

Revenues - Our Wholesale Distribution results include the results of operations of StratCap beginning on August 29, 2014, the date of the acquisition. All of the results of operations of Hatteras, including the results of the wholesale distribution of registered investment companies by Hatteras are included in our Investment Management segment. Wholesale Distribution revenues are primarily driven by the amount of equity capital raised by the selling of direct investment programs distributed by us through sales of shares in such direct investment programs by broker-dealers with whom we have a dealer manager relationship. The offerings we have distributed have limited durations and different closing dates, which can cause fluctuations in equity capital raised from quarter to quarter. The rate of equity capital raised generally increases, in some cases very sharply, over the life of an offering so that an increase in equity capital raised would be expected when an offering is in the mid to latter stages of its lifecycle.

Revenues for the three months ended March 31, 2015, decreased $50.0 million, or 36%, to $89.1 million, compared to $139.1 million for the three months ended March 31, 2014. The decrease was primarily due to a decrease in equity capital raised due to the reasons explained in greater detail below. These decreases were partially offset by a $22.1 million increase in revenues due to the inclusion of revenues from StratCap during the months ended March 31, 2015. StratCap was acquired on August 29, 2014 and its results are therefore not included in results of the Wholesale Distribution for the three months ended March 31, 2014. Equity capital raised by direct investment program offerings distributed by us decreased from $1.6 billion for the three months ended March 31, 2014 (which includes equity capital raised by Realty Capital Securities during the three months ended March 31, 2014) to $1.0 billion for the three months ended March 31, 2015 (which includes $216 million of equity capital raised by StratCap during the three months ended March 31, 2015).

The decrease in revenues and equity capital raised was due to:

(i)

As a result of the announcement concerning certain accounting errors by ARCP on October 29, 2014, a number of broker-dealer firms that had been participating in the distribution of offerings of public, non-traded REITs sponsored directly or indirectly by American Realty Capital temporarily suspended their participation in the distribution of those offerings. The impact of the ARCP announcement, including these temporary suspensions, had an adverse effect on our ability to raise equity capital and as a result, generate wholesale revenues during the three months ended March 31, 2015.

(ii)

Two offerings closed during the latter part of 2014 and contributed to a sharp increase in equity capital raised during the three months ended March 31, 2014. While we have seen an increase in equity capital raised on the three offerings that are expected to close later in 2015 as compared to the three months ended December 31, 2014, the increase in equity capital raised during the three months ended March 31, 2015 for these offerings has been less robust than what we have historically experienced. These offerings typically have an increase in equity capital raised when they are in the later stages of their lifecycle, so the number of offerings closing during a period contributes significantly to the amount of equity capital raised during that period. Although the closed offerings were replaced by second-generation offerings, the normal process of building the selling group at the outset of any offering results in lower initial sales relative to the later stages of an offering’s life.

During the three months ended March 31, 2015, we had related party commissions and dealer manager fees of $44.5 million and $20.9 million, respectively, as compared to $92.4 million and $44.4 million, respectively during the three months ended March 31, 2014. During the three months ended March 31, 2015, we had non-related party commissions and dealer manager fees of $13.3 million and $6.0 million, respectively, as compared to $0.2 million and $0.1 million, respectively during the three months ended March 31, 2014. The increase in non-related party commissions and dealer manager fees for the three months ended March 31, 2015, as compared to the three months ended March 31, 2014 reflected the inclusion of the results of StratCap during the three months ended March 31, 2015.

Expenses - Expenses related to the activities of serving as dealer manager are correlated to the volume of revenues in a given period. Corresponding general and administrative expenses generally remain relatively constant compared to revenues.

RCS Capital Corporation and Subsidiaries

March 31, 2015

For the three months ended March 31, 2015, expenses decreased $36.8 million, or 26%, to $105.8 million compared to $142.6 million for the three months ended March 31, 2014 as the selling expense portion of expenses decreased in tandem with the decrease in revenues while non-selling expenses were approximately the same for both periods except for the $24.8 million increase in expenses related to the inclusion of StratCap in our results for the three months ended March 31, 2015.

During the three months ended March 31, 2015, we had related party wholesale commissions and reallowance expenses of $28.1 million and $4.5 million, respectively, as compared to $87.0 million and $12.8 million, respectively, during the three months ended March 31, 2014. During the three months ended March 31, 2015, we had non-related party wholesale commissions and reallowance expenses of $12.7 million and $2.2 million, respectively, as compared to $0.2 million and $0.03 million, respectively during the three months ended March 31, 2014. The increase in non-related party wholesale commissions and reallowance expenses for the three months ended March 31, 2015, as compared to the three months ended March 31, 2014, reflected the inclusion of the results of StratCap.

Investment Banking, Capital Markets and Transaction Management Services

The following table provides an overview of the results of operations of our Investment Banking, Capital Markets and Transaction Management Services business (dollars in thousands):



	Three Months Ended
	March 31,
	2015		2014		% Change
Revenues	$	18,812	$	48,544	(61	)%
Expenses	14,805		22,226		(33	)%
Income	$	4,007	$	26,318	(85	)%

Revenues - Investment Banking, Capital Markets and Transaction Management Services revenues primarily consist of fees earned from capital markets and financial advisory services for offerings and liquidity events of direct investment programs sponsored, co-sponsored, or advised by American Realty Capital and its affiliates and other investment banking and financial advisory services for companies which were sponsored, co-sponsored or advised by American Realty Capital and its affiliates. We also may earn fees from capital markets and financial advisory services for offerings and liquidity events of direct investment programs sponsored, co-sponsored or advised by StratCap. Services revenues and reimbursable expense revenues are earned from transaction management services and revenues are earned as a result of the service fees charged by our transfer agent to the various REITs and other issuers for which it serves as transfer agent that are based on transactions or number of active accounts (new account setup, account maintenance and closed accounts), or service level driven (in-bound and out-bound telephone calls).

Revenues for the three months ended March 31, 2015 were $18.8 million, a decrease of 61% compared to the three months ended March 31, 2014 primarily reflecting $28.4 million earned as advisor in the merger of ARCP and Cole Real Estate Investments, Inc. during the three months ended March 31, 2014. Transaction management revenues were also lower primarily due to decreases in reimbursable expense revenues attributable to decreased mergers and acquisitions activity and liquidity events from affiliate-sponsored REITs. Revenues from transfer agency services were relatively flat.

Expenses - Investment Banking, Capital Markets and Transaction Management Services expenses primarily consisted of personnel costs and the costs of a third-party system and service provider under a third-party services agreement, whereby ANST pays a vendor for its efforts in providing certain transfer agency related services, including information warehousing.

Expenses for the three months ended March 31, 2015, were $14.8 million, a decrease of 33% compared to the three months ended March 31, 2014. The decrease for the period reflects higher costs related to the recent acquisitions and higher quarterly fees during the three months ended March 31, 2014.

RCS Capital Corporation and Subsidiaries

March 31, 2015

Investment Management

Following the completion of the Hatteras acquisition on June 30, 2014, we are now engaged in the investment management business. The following table provides an overview of the results of operations of our Investment Management business (dollars in thousands):



	Three Months Ended
	March 31,
	2015		2014		% Change
Revenues	$	13,380	$	—	—
Expenses	13,158		—		—
Income	$	222	$	—	—

The results of operations of Hatteras did not have an impact on our results for the period prior to its acquisition on June 30, 2014.

As of March 31, 2015, Hatteras had $2.2 billion in assets under management, a decrease from $2.5 billion in assets under management as of December 31, 2014 reflecting redemptions. We expect management fees and servicing fees to continue to increase or decrease proportionately with levels of assets under management.

Revenues - Revenues for the three months ended March 31, 2015 were $13.4 million and primarily included management fees, servicing fees and incentive fees from the investment companies for which we served as the investment adviser. Management fees and servicing fees are driven by the level of net assets of the funds under management.

Expenses - Expenses for the three months ended March 31, 2015 were $13.2 million and primarily included fund expenses, service fees and management fees as well as employee compensation expenses and benefits expenses and amortization of intangible assets.

Our results for the three months ended March 31, 2015 include the results of operations of Hatteras for the entire three months of operations. Our pro forma results include the results of operations of Hatteras for the entire three months ended March 31, 2014 as if the acquisition of Hatteras was completed on January 1, 2013. Revenues for the Investment Management business were $13.4 million for the three months ended March 31, 2015, as compared to pro forma revenues of $14.0 million for the three months ended March 31, 2014, a decrease of $0.6 million. Pre-tax net income was $0.2 million for the three months ended March 31, 2015, as compared to pro forma pre-tax net income of $0.8 million for the three months ended March 31, 2014 reflecting lower investment fee revenues.

Investment Research

The following table provides an overview of the results of operations of our Investment Research business (dollars in thousands):



	Three Months Ended
	March 31,
	2015			2014			% Change
Revenues	$	1,183		$	—		—
Expenses	3,147			444			609	%
Loss	$	(1,964	)	$	(444	)	(342	)%

Revenues - Investment Research had revenues of $1.2 million for the three months ended March 31, 2015, reflecting fees earned from due diligence performed on non-traded REITs and BDCs. The increase reflects the fact that Investment Research did not begin operations until March 2014.

Expenses - Expenses for the three months ended March 31, 2015 were $3.1 million, which primarily represented personnel costs and amortization of intellectual property. The increase reflects an increase in personnel costs and the fact that Investment Research did not begin operations until March 2014.

RCS Capital Corporation and Subsidiaries

March 31, 2015

Corporate and Other

The following table provides an overview of the results of operations of our Corporate and Other (dollars in thousands):



	Three Months Ended
	March 31,
	2015			2014			% Change
Revenues	$	23,033		$	—		—
Expenses	31,102			6,449			382	%
Loss	$	(8,069	)	$	(6,449	)	(25	)%

Revenues - Corporate and Other had revenues of $23.0 million for the three months ended March 31, 2015 primarily reflecting changes in the fair value of our derivative contracts.

Expenses - Corporate and Other expenses primarily included interest expense on our long-term debt, share-based compensation related to our board of directors, expenses related to the OPP, certain acquisition-related expenses and certain public company expenses. Corporate and Other expenses were $31.1 million for the three months ended March 31, 2015, an increase of 382% reflecting our incurrence of long-term debt during April 2014, expenses related to the recent acquisitions and our initiation of share-based compensation to our board of directors during 2014 partially offset by lower OPP-related expenses.

Income Taxes

We recorded an income tax benefit of $7.0 million for the three months ended March 31, 2015 and income tax expense of $2.9 million for the period ended March 31, 2014. The effective tax rates for the three months ended March 31, 2015 and 2014 were 31.40% and 19.29%, respectively. For the three months ended March 31, 2015, our effective tax rate was less than the U.S. federal statutory rate due to gains on our derivative contracts which are excluded from the computation of income taxes and certain transaction costs that are not subject to income tax.

The change in the effective tax rate for the three months ended March 31, 2015 as compared to the three months ended March 31, 2014 was also due to gains on our derivative contracts which are excluded from the computation of income taxes and certain transaction costs that are not subject to income tax as well as the fact that pre-tax income for the period ended March 31, 2014 included non-controlling interest of 90.6% of the Original Operating Subsidiaries, with the remaining 9.4% of the income taxable to us. On February 11, 2014, that non-controlling interest ceased to exist with respect to Class B common stock, other than a de minimis interest related to the sole outstanding share of Class B common stock, and, with respect to LTIP Units earned during 2014, on December 31, 2014, when the LTIP Units that had been earned were exchanged for shares of Class A common stock. See “—Non-Controlling Interest.”

As of March 31, 2015, we had a net deferred tax liability of $269.3 million. This net deferred tax liability will likely reverse in future years as the intangible assets are amortized for book purposes and could negatively impact cash flows from operations in the years in which reversal occurs which would result in higher taxable income. Changes in tax laws, assumptions, estimates or methods used in the accounting for income taxes, if significantly negative or unfavorable, could have a material adverse effect on amounts or timing of realization or settlement. Such effects could result in a material acceleration of income taxes currently payable or valuation charges for realization uncertainties, which could have a material adverse effect on our future financial condition or results of operations.

Non-Controlling Interest

Prior to February 11, 2014, we had a controlling interest and 9.4% of the economic interest in each of the Original Operating Subsidiaries, and, as a result, our financial statements include the consolidated financial results of the Original Operating Subsidiaries, but we were required to present the 90.6% we did not own (the non-controlling interest) in our consolidated financial statements. We engaged in the 2014 Restructuring Transactions to, among other things, eliminate this non-controlling interest.

On February 11, 2014, this non-controlling interest ceased to exist (other than a de minimis interest related to the sole outstanding share of Class B common stock and LTIP Units) when RCAP Holdings exchanged all its Class B common stock and Original Operating Subsidiaries Units except for one share of Class B common stock and one Original Operating Subsidiaries Unit for a total of 23,999,999 shares of our Class A common stock. In connection with this exchange, RCS Capital Management contributed to RCS Holdings an aggregate of 3,975,000 LTIP Units in the Original Operating Subsidiaries (all of the 1,325,000 LTIP Units in each Original Operating Subsidiary) in exchange for 1,325,000 LTIP Units in RCS Holdings. LTIP Units in RCS Holdings are structured as a profits interest in RCS Holdings with all the rights, privileges and obligations associated with Class A Units in RCS Holdings, subject to certain exceptions, and do not have any voting rights and therefore are classified as non-controlling interest.

RCS Capital Corporation and Subsidiaries

March 31, 2015

Pursuant to our certificate of incorporation then in effect, a share of Class B common stock could not be transferred, except in connection with an exchange of an Original Operating Subsidiaries Unit for a share of our Class A common stock pursuant to an existing exchange agreement. Further, an Original Operating Subsidiaries Unit could not be exchanged for a share of our Class A common stock under the exchange agreement without the corresponding share of our Class B common stock being delivered together at the time of exchange, at which time, such Class B common stock would be automatically canceled.

Accordingly, concurrently with the exchange of Original Operating Subsidiary Units described above all but one of the outstanding shares of Class B common stock, all of which were held by RCAP Holdings, were canceled.

In July 2014, following receipt of stockholder approval, we amended our certificate of incorporation, and, in August 2014, we amended the exchange agreement. Following these amendments, corresponding shares of Class B common stock were no longer required to be cancelled in connection with any exchange of Original Operating Subsidiaries Units for shares of Class A common stock. Subsequently, the remaining Original Operating Subsidiaries Unit owned by RCAP Holdings was exchanged for one share of Class A common stock, which was not issued as RCAP Holdings waived the right to receive it.

As a result we no longer have a non-controlling interest related to Original Operating Subsidiaries Units.

In April 2014, our board of directors determined that 310,947 LTIP Units in RCS Holdings were earned and 1,014,053 LTIP Units in RCS Holdings were forfeited. Following this amendment, no additional LTIP Units may be earned under the OPP. Concurrently, RCS Capital Management distributed all of the 310,947 LTIP Units that were earned to the Members pro rata in accordance with their respective percentage interests in RCS Capital Management as of immediately prior to the acquisition by Luxor of an interest in RCS Capital Management.

On December 31, 2014, we, RCS Capital Management, and RCS Holdings entered into another amendment to the OPP, which provided for the early vesting of all of the LTIP Units.

Under the terms of the limited liability company agreement of RCS Holdings, LTIP Units in RCS Holdings automatically converted, upon vesting and after achieving economic equivalence with Class A Units in RCS Holdings (which had already been achieved), into Class C Units in RCS Holdings on a one-for-one basis. Accordingly, the Earned LTIP Units held by the Members automatically converted into Class C Units in RCS Holdings. Under the terms of the limited liability company agreement of RCS Holdings, a holder of Class C Units in RCS Holdings had the right to elect to convert Class C Units in RCS Holdings, on a one-for-one basis, into shares of Class A common stock, or, at our option, a cash equivalent.

In connection with this amendment of the OPP, we also entered into a redemption and exchange agreement with RCS Holdings and the Members, pursuant to which the Members exchanged their Class C Units in RCS Holdings on a one-for-one basis for 310,947 shares of Class A common stock and all applicable notice and deliver waiting and notice periods were waived.

As a result we no longer have a non-controlling interest related to LTIP Units.

On November 21, 2014, we completed the acquisition of 53.525% ownership interest in Docupace. We reflect the portion of Docupace that we do not own as a non-controlling interest.

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.

RCS Capital Corporation and Subsidiaries

March 31, 2015

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-related expenses (including integration-related employee compensation and related costs), amortization of capitalized advisor costs, change in contingent and deferred consideration 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 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 attributable to us (GAAP) to our EBITDA (Non-GAAP) and adjusted EBITDA (Non-GAAP) for the three months ended March 31, 2015 and 2014 (in thousands):



	Three Months Ended March 31,
	2015			2014
Net (loss) income (GAAP)	$	(15,381	)	$	12,149
Add back: Provision (benefit) for income taxes	(7,039		)	2,903
Add back: Depreciation and amortization expense	29,350			2,017
Add back: Interest expense	18,442			231
EBITDA (Non-GAAP)	25,372			17,300
Add back: Non-cash equity compensation	4,847			4,026
Add back: Acquisition-related expenses⁽¹⁾	7,259			6,963
Add back: Amortization of capitalized advisor compensation	3,323			590
Add back: Change in contingent and deferred consideration	3,656			7
Add back: Change in the fair value of embedded derivative contracts	(23,427		)	—
Add back: Other⁽²⁾	7,338			9,081
Adjusted EBITDA (Non-GAAP)	$	28,368		$	37,967

________________

(1) Includes integration-related employee compensation and related costs.

(2) Comprised primarily of professional fees that are outside the normal course of our operations and start-up costs related to the development of new businesses for the three months ended March 31, 2015 and the OPP bonus the three months ended March 31, 2014.

RCS Capital Corporation and Subsidiaries

March 31, 2015

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 months ended March 31, 2015 and 2014 (in thousands):



	Three Months Ended March 31,
	2015			2014
Net income (loss) (GAAP)	$	(15,381	)	$	12,149
Adjusted net income adjustments:
Add back: Non-cash equity compensation	3,325			3,249
Add back: Acquisition-related expenses⁽¹⁾	4,980			5,620
Add back: Amortization of capitalized advisor compensation	2,280			476
Add back: Change in contingent and deferred consideration	2,508			6
Add back: Change in the fair value of embedded derivative contracts	(16,071		)	—
Add back: Other⁽²⁾	5,034			7,329
Total adjusted net income adjustments	2,056			16,680
Amortization of intangible assets⁽³⁾	27,205			1,768
Adjusted net income (Non-GAAP)	$	13,880		$	30,597
Adjusted net income per adjusted share (Non-GAAP)	$	0.20		$	0.81
Adjusted share reconciliation:
Weighted-average basic shares (GAAP)	71,129,912			26,831,762
Weighted average of Class B common stock (January 1 to February 10, 2014)	—			10,933,334
Total adjusted weighted-average shares (GAAP and Non-GAAP, respectively)	71,129,912			37,765,096
Effective tax rate used in the reconciliation of net income (loss) to adjusted net income	31.40		%	19.29		%

________________

(1) Includes integration-related employee compensation and related costs.

(3) 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 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 and our Series C 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 and the Series C COD, as LTM, or last twelve months, Adjusted EBITDA.

RCS Capital Corporation and Subsidiaries

March 31, 2015

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 and the Series C COD. LTM Adjusted EBITDA is similar to EBITDA, subject to certain additional adjustments, including further 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, such as the adjustment made to add back integration related expenses.

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.

Liquidity and Capital Resources

Currently, our principal use of existing funds and any funds raised in the future is to expand our lines of business through internal growth and by acquiring complementary businesses, including contingent and deferred consideration related to the recent acquisitions, as well as for the payment of operating expenses. We have agreed to make additional capital contributions to Docupace of up to $28.0 million in cash in 2015 and up to $20.0 million in cash in 2016 and may be required to pay contingent and/or deferred consideration based on the acquired companies’ meeting certain performance criteria with regard to certain of our other recent acquisitions. In addition, we and RCS Holdings are party to agreements which may require payment of quarterly fees and incentive fees to our service provider, RCS Capital Management.

Concurrently with the closing of the Cetera acquisition on April 29, 2014, we entered into the Bank Facilities, consisting of: (i) a $575.0 million senior secured first lien term loan facility, having a term of five years; (ii) a $150.0 million senior secured second lien term loan facility, having a term of seven years; and (iii) a $25.0 million senior secured first lien revolving credit facility having a term of three years (was not drawn down at closing). The proceeds to us from the Bank Facilities were $685.1 million after original issue discount and following the payment of fees and expenses due at closing. On July 21, 2014, we drew down $1.1 million in the form of a backstop letter of credit. On March 11, 2015, we drew down $23.0 million on the senior secured first lien revolving credit facility.

On the same day, also in connection with the closing of the Cetera acquisition, we issued $120.0 million (face amount) of 5% convertible notes at a price of $666.67 per $1,000 of par value and $270.0 million (aggregate liquidation preference) of 7% Series A convertible preferred stock, par value $0.001 per share (the “Series A convertible preferred stock”), issued at a price of 88.89% of the liquidation preference per share.

On December 12, 2014 we entered into a Securities Exchange Agreement with Luxor (the “Securities Exchange Agreement”) pursuant to which, on December 19, 2014, we exchanged the remaining 11,584,427 shares of Series A convertible preferred stock held by Luxor for 5,800,000 shares of Series B Preferred Stock and 4,400,000 shares of Series C preferred stock. $3.0 million of accrued and unpaid dividends on Series A convertible preferred stock through December 12, 2014, the date of their submission for conversion, were included proportionately as part of the first dividend payments accrued on the Series B Preferred Stock and the Series C Preferred Stock. See Note 10 of our consolidated financial statements for more information.

RCS Capital Corporation and Subsidiaries

March 31, 2015

In addition to the $25.0 million senior secured first lien revolving credit facility described above of which $23.0 million was outstanding as of March 31, 2015, Cetera had a line of credit for $50.0 million, with no maturity date and as of March 31, 2015 no amount was outstanding, and ICH had a line of credit for $1.0 million, with no maturity date and as of March 31, 2015 no amount was outstanding.

We expect to meet our future short-term operating liquidity requirements through cash on hand and net cash provided by our current operations. We expect that our operating subsidiaries will generate sufficient cash flow to cover operating expenses, the payment of interest on our indebtedness, and the quarterly fee and incentive fee to RCS Capital Management if such fees are earned.

In order to meet our future long-term liquidity requirements or to continue to pursue strategic acquisition opportunities, we expect to utilize cash on hand and cash generated from our current operations and we may issue equity securities and debt securities in both public and private offerings in the future. The issuance of these securities will depend on future market conditions, funding needs and other factors, and there can be no assurance that any such issuance will occur or be successful.

Regulated Subsidiaries

Our broker-dealers are subject to the SEC Uniform Net Capital Rule 15c3-1. SEC Uniform Net Capital Rule 15c3-1 requires the maintenance of the greater of the minimum dollar amount of net capital required, which is based on the nature of the broker-dealer’s business, or 1/15^th of aggregate indebtedness, as defined, and requires that the ratio of aggregate indebtedness to net capital, both as defined, not exceed 15 to 1. Certain of our broker-dealers have elected to use the alternative method of computing net capital which requires the maintenance of the greater of the minimum dollar amount of net capital required, which is based on the nature of the broker-dealer’s business, or 2% of aggregate debit items. As of and during the three months ended March 31, 2015 all our subsidiaries that were under our control were in compliance with their net capital requirements except J.P. Turner & Company LLC. J.P. Turner & Company LLC received a capital contribution from us of $4.0 million during April 2015 to become compliant with its net capital requirement. See Note 17 to our consolidated financial statements for more information.

Dividends

At the present time, we do not expect to pay quarterly dividends on our Class A common stock or on our Series B Preferred Stock and Series C Preferred Stock in the near term, as our ability to pay cash dividends is restricted due to negative covenants in the Bank Facilities.

During the three months ended March 31, 2015, we did not declare dividends on our Class A common stock. During the three months ended March 31, 2014, we declared $5.1 million in dividends and dividend equivalents on our Class A common stock.

During the three months ended March 31, 2015, we accrued $4.1 million and $2.0 million in dividends on our Series B Preferred Stock and Series C Preferred Stock, respectively, which were not paid in cash. Any dividends that are not paid in cash on an applicable dividend payment date are automatically added to the aggregate liquidation preference on such applicable dividend payment date. Accordingly, on April 10, 2015 and January 12, 2015, the liquidation preference of the Series B Preferred Stock increased by $4.6 million and $2.8 million, respectively, to reflect the accrued and unpaid dividends. On April 10, 2015 and January 12, 2015, we increased the liquidation preference of the Series C Preferred Stock by $2.2 million and $1.9 million, respectively, to reflect the accrued and unpaid dividends.

Cash Flows

We had cash balances of $170.2 million, $199.4 million and $119.3 million as of March 31, 2015, December 31, 2014 and March 31, 2014, respectively.

Net cash used in operating activities was $14.1 million for the three months ended March 31, 2015. Net cash provided by operating activities was $60.8 million for the three months ended March 31, 2014. The difference between the cash used in operating activities for the three months ended March 31, 2015, as compared to the cash provided by operating activities for the three months ended March 31, 2014 was primarily due to a) the change in net income (loss) and b) the timing of collections of receivable balances and the payment of payable balances at period-end. For Realty Capital Securities, commission and dealer manager fees receivable typically represent one day of fees earned from the distribution of related party and non-related party products. Payables to broker-dealers, however, can represent up to six days of commissions as payment is typically made on a weekly basis, while commissions, which are included in accrued expenses, are paid twice monthly.

Net cash used in investing activities was $23.1 million for the three months ended March 31, 2015. Net cash used in investing activities was $7.4 million for the three months ended March 31, 2014. The net cash used in investing activities for the three months ended March 31, 2015 was primarily a result of payments made for the recent acquisition partially offset by sale of available-for-sale securities. The investing activities for the three months ended March 31, 2014 included the purchase of intellectual property, property and equipment and sales of available-for-sale securities.

RCS Capital Corporation and Subsidiaries

March 31, 2015

Net cash provided by financing activities was $8.0 million for the three months ended March 31, 2015. Net cash used in financing activities was $4.1 million for the three months ended March 31, 2014. The financing activity for the three months ended March 31, 2015 was due to a $23.0 million drawdown on the senior secured first lien partially offset by $7.2 million and $7.9 million in regularly scheduled principal payments for long-term debt and contingent and deferred consideration, respectively.

We expect all current liquidity needs will be met with our available cash and other activities as described above.

Fair Value of Financial Instruments

We use fair value measurements to record certain financial assets and liabilities at fair value and to determine fair value disclosures. The determination of where an asset or liability falls within the fair value hierarchy requires significant judgment and considers factors specific to the asset or liability. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input.

Total Level 3 financial assets were $5.5 million and $0.6 million as of March 31, 2015 and as of December 31, 2014, respectively. Total Level 3 financial assets were not material to our total assets.

Total Level 3 financial liabilities were $186.7 million and $210.2 million as of March 31, 2015 and as of December 31, 2014, respectively. Total Level 3 financial liabilities were 11% and 13% of our total liabilities as of March 31, 2015 and as of December 31, 2014, respectively.

See Note 4 to the consolidated financial statements for further information about Level 3 financial assets and liabilities, including changes in Level 3 financial instruments.

Off-Balance Sheet Arrangements

During the second quarter of 2014, we entered into a series of contemporaneous transactions that qualify as derivative contracts or include derivative contracts. These derivative contracts include a put/call agreement, which is a free-standing derivative contract, and embedded derivative contracts related to our issuance of convertible notes and Series A convertible preferred stock (“hybrid instruments”).

The embedded derivative contracts’ features require separate accounting as derivative instruments; therefore, the issuance proceeds for the convertible note and Series A convertible preferred stock were first allocated to the fair value of the put/call agreement and then, on a relative fair value basis, to the hybrid instruments. The proceeds allocated to each hybrid instrument were then attributed between the host contract and the embedded derivative contracts. These derivative contracts are carried at their fair value with changes in fair value reflected in other revenues in the consolidated statements of operations.

On December 19, 2014, the remaining Series A convertible preferred stock was exchanged for Series B Preferred Stock and Series C Preferred Stock. Accordingly, the bifurcated derivatives associated with the remaining Series A convertible preferred stock were adjusted to their fair value as measured on the date of the exchange, with the change in fair value reflected in other revenues in the consolidated statements of operations. The remaining bifurcated derivatives associated with the Series A convertible preferred stock, which were exchanged, were written off against retained earnings.

The Series B Preferred Stock and Series C Preferred Stock issued on December 19, 2014 also have embedded derivative contracts features that require separate accounting as derivative instruments. These derivative contracts are carried at their fair value with changes in fair value reflected in other revenues in the consolidated statements of operations.

See Notes 4 and 9 to our consolidated financial statements for more information.

Contractual Obligations

We have certain contractual obligations that require us to make cash payments. As of March 31, 2015, these contractual obligations include deferred and contingent consideration related to recent acquisitions, borrowings in connection with the financing of the recent acquisitions as described below, various operating leases and contracts with third parties to perform back-office processing services.

RCS Capital Corporation and Subsidiaries

March 31, 2015

The following table presents our contractual obligations as of March 31, 2015:



	< 1 year		1-3 years		4-5 years		> 5 years		Total
Acquisition related	$	92,323	$	97,102	$	—	$	—	$	189,425
Long-term debt	67,150		174,402		352,189		270,000		863,741
Contractual interest payments	60,174		104,213		65,066		25,469		254,922
Operating leases	11,910		19,618		14,097		21,953		67,578
Other obligations	10,386		15,777		13,134		2,336		41,633
Total	$	241,943	$	411,112	$	444,486	$	319,758	$	1,417,299

The Bank Facilities

Concurrently with the closing of the Cetera acquisition on April 29, 2014, we entered into the Bank Facilities: (i) a $575.0 million senior secured first lien term loan facility, or the first lien term facility, having a term of five years; (ii) a $150.0 million senior secured second lien term loan facility, having a term of seven years, or the second lien term facility, and together with the first lien term facility, the term facilities; and (iii) a $25.0 million senior secured first lien revolving credit facility having a term of three years. During the three months ended March 31, 2015, we repaid $7.2 million of the senior secured first lien term loan facility as a regularly scheduled principal repayment. As of March 31, 2015, approximately $553.4 million was outstanding under the first lien term facility, approximately $150.0 million was outstanding under the second lien term facility and $23.0 million was outstanding under the senior secured first lien revolving credit facility (not including a backstop letter of credit). On July 21, 2014, we utilized $1.1 million from the senior secured first lien revolving credit facility in the form of a backstop letter of credit.

The first lien term facility included an original issue discount of 1.0% for gross proceeds to us upon incurrence of $569.3 million. The second lien term facility included an original issue discount of 1.5% for gross proceeds to us upon incurrence of $147.8 million.

The first lien term facility has an interest rate equal to LIBOR plus 5.50% per annum, the senior secured first lien revolving credit facility has an initial interest rate equal to LIBOR plus 4.50% per annum, which may be reduced to 4.25% if the First Lien Leverage Ratio (as defined in the Bank Facilities) is less than or equal to 1.25 to 1.00, and the second lien term facility has an interest rate equal to LIBOR plus 9.50% per annum. In the case of both term facilities and the senior secured first lien revolving credit facility, LIBOR can be no less than 1.00% per annum.

The Bank Facilities are subject to: (i) certain mandatory prepayment requirements, including asset sales, insurance/condemnation proceeds, incurrence of certain indebtedness, excess cash flow (as described in more detail below; (ii) certain agreed prepayment premiums; (iii) customary affirmative covenants; (iv) certain negative covenants, including limitations on incurrence of indebtedness, liens, investments, restricted payments), asset dispositions, acquisitions and transactions with affiliates; and (v) financial covenants of a maximum total leverage ratio, a minimum fixed charge coverage ratio and minimum regulatory net capital. As of March 31, 2015, we were in compliance with these covenants.

The Bank Facilities include the requirement to prepay the aggregate principal amount of the Bank Facilities in the amount of 50% of “Excess Cash Flow” (as defined in the Bank Facilities), subject to reduction based on the First Lien Leverage Ratio (as defined in the Bank Facilities).

Our obligations under the Bank Facilities are guaranteed, subject to certain other customary or agreed-upon exceptions, by RCS Capital Management, RCAP Holdings and each of our direct or indirect domestic subsidiaries that are not SEC-registered broker-dealers. We, together with the guarantors, have pledged substantially all our assets to secure the Bank Facilities, subject to certain exceptions. Subsidiaries that have been acquired must become guarantors and pledge their assets no later than 60 days after such acquisition.

Luxor Arrangements

On April 29, 2014, we issued to Luxor $120.0 million (face amount) of 5% convertible notes, issued at a price of $666.67 per $1,000 of par value and $270.0 million (aggregate liquidation preference) of 7% Series A convertible preferred stock, issued at a price of 88.89% of the liquidation preference per share.

RCS Capital Corporation and Subsidiaries

March 31, 2015

On November 18, 2014 and December 12, 2014, a portion of the Series A convertible preferred stock was submitted for conversion, and on December 10, 2014, December 19, 2014 and February 23, 2015, shares of Class A common stock were issued on account of such conversions. On December 12, 2014 we entered into the Securities Exchange Agreement, pursuant to which we exchanged the remaining shares of Series A convertible preferred stock for shares of Series B Preferred Stock and shares of Series C Preferred Stock on December 19, 2014. Based on the redemption and conversion features of the Series B Preferred Stock and Series C Preferred Stock, we have classified the Series B Preferred Stock and Series C Preferred Stock as mezzanine equity on the statement of financial condition. The Series B Preferred Stock is not convertible. The Series C Preferred Stock is convertible, at the holder’s option, into shares of Class A common stock. See Notes 9 and 10 to our consolidated financial statements for more information.

Also on April 29, 2014, we entered into a put/call agreement with Luxor, which was amended on December 19, 2014 to reflect the issuance of the Series C Preferred Stock. Under this agreement, subject to certain conditions, (i) we have the right to repurchase Luxor’s 19.46% interest in RCS Capital Management (the “Luxor percentage interest”) from Luxor in exchange for its fair market value (as determined by us and Luxor pursuant to the agreement) in shares of Class A common stock (or, at our option, a cash equivalent); and (ii) Luxor has the right to require us to purchase the Luxor percentage interest in exchange for a number of shares of Class A common stock (or, at our option, a cash equivalent) that is equal to 15.00% multiplied by the Luxor percentage interest multiplied by the then outstanding number of shares of Class A common stock (assuming the conversion immediately prior thereto of the then outstanding convertible notes and Series C Preferred Stock).

The put/call agreement also provides that the members of RCS Capital Management (who are also the members of RCAP Holdings, American Realty Capital and RCS Holdings) may elect to purchase all the Luxor percentage interest offered to us for an amount equal to the value of the Class A common stock required to be delivered by us for cash, shares of Class A common stock or a combination thereof. If we are prohibited by the Bank Facilities from purchasing the Luxor percentage interest, the members of RCS Capital Management will be required to purchase the Luxor percentage interest under the same terms.

In connection with securities issuances and arrangements described above, we agreed to file with the SEC a continuously effective resale registration statement with respect to certain securities owned and beneficially owned by Luxor that were acquired in April 2014 or June 2014 by July 1, 2014. A Registration Statement on Form S-3 (File No. 333-197148) in fulfillment of this obligation was filed with the SEC on July 1, 2014 and became effective on July 16, 2014. In connection with the issuance of the Series B Preferred Stock and the Series C Preferred Stock pursuant to the Securities Exchange Agreement, the Company agreed to file with the SEC a continuously effective resale registration statement by February 2, 2015. A Registration Statement on Form S-3 (File No. 333- 201763) in fulfillment of this obligation was filed with the SEC on January 30, 2015 and became effective on February 12, 2015.

Recently Issued Accounting Pronouncements

See Note 3 to the consolidated financial statements for further information about recently issued accounting pronouncements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market Risk

Market risk represents the risk of loss that may result from the change in value of a financial instrument due to fluctuations in its market price. A significant portion of our exposure to market risk is directly related to our reliance on the direct investment program industry.

We also offer a plan to certain of our financial advisors which allows them to defer a portion of their compensation which earns a rate of return based on the financial advisor’s selection of investments. In order to economically hedge this exposure, we invest in money market, international, U.S. equity and U.S. fixed income funds. While these investments are exposed to interest rate, credit spread and equity price risk, we have an offsetting liability to the employee which is recorded in deferred compensation plan accrued liabilities.

We have research models that are used to develop client portfolios. We purchase positions to track the actual performance of these portfolios that are exposed to interest rate, credit spread and equity price risk. The size and number of such portfolios is limited.

We have entered into a put/call agreement and we have embedded derivatives related to our convertible notes and preferred stock that are subject to market risk.

Our broker-dealer, RIA and investment management subsidiaries earn fees based on the levels of assets being managed. These fees can be subject to fluctuations due to changes in market risk.

RCS Capital Corporation and Subsidiaries

March 31, 2015

We have $14.1 million of trading securities on our balance sheet in connection with our customer facilitation activities. Included in trading securities are $0.5 million of equity securities and $10.4 million of mutual funds that may expose us to market risk. A 10% decrease in market value would result in losses of $1.1 million on trading securities related to holdings in equity securities and mutual funds.

We have $2.8 million of available-for-sale securities on our balance sheet in connection with investing activities. Our available-for-sale securities consist entirely of mutual funds that may expose us to market risk. A 10% decrease in market value would result in unrealized losses of $0.3 million on available-for-sale securities.

Interest Rate Risk

As with other yield-oriented securities, shares of direct investment programs are impacted by their level of distributions to their investors. The distribution rate is often used by investors to compare and rank similar yield-oriented securities for investment decision-making purposes. Therefore, changes in interest rates, either positive or negative, may affect the level of distributions that direct investment programs may make and influence the decisions of investors who are considering investing in their common stock. A rising interest rate environment could have an adverse impact on the common stock price of direct investment programs, their ability to issue additional equity and the cost to them of any such issuance or incurrence. Because we rely on the direct investment program industry, any macroeconomic conditions affecting the industry adversely may negatively impact our results of operations and the price of your shares of Class A common stock.

Concurrently with the closing of the Cetera acquisition on April 29, 2014, we entered into the Bank Facilities. The Bank Facilities consist of: (i) a $575.0 million senior secured first lien term loan facility, having a term of five years; (ii) a $150.0 million senior secured second lien term loan facility, having a term of seven years; and (iii) a $25.0 million senior secured first lien revolving credit facility having a term of three years.

The first lien term facility has an interest rate equal to LIBOR plus 5.50% per annum, the senior secured first lien revolving credit facility has an interest rate equal to the prime rate plus 4.50% per annum, which may be reduced to 4.25% if the First Lien Leverage Ratio (as defined in the Bank Facilities) is less than or equal to 1.25 to 1.00, and the second lien term facility has an interest rate equal to LIBOR plus 9.5% annum. In the case of both term facilities, LIBOR can be no less than 1% per annum. A rising interest rate could have an adverse impact as our interest rate could increase.

The following table presents the impact of increases to LIBOR (in thousands):



	Principal Balance		Annual Impact of an Interest Rate Increase of
	as of March 31, 2015		10 Basis Points⁽¹⁾		50 Basis Points⁽¹⁾		100 Basis Points
First lien term facility	$	553,438	$	—	$	—	$	975
Second lien term facility	150,000		—		—		264
First lien revolving facility	23,000		23		115		230
Total	$	726,438	$	23	$	115	$	1,469

_____________________

(1) This increase does not result in LIBOR rising above 1%. The interest rates on the first lien term facility and second lien term facility will not change until LIBOR rises above 1%.

Credit Risk

Credit risk is the risk of loss due to a failure to meet the terms of a contractual obligation. We are exposed to credit risk if our clients fail to fulfill their obligations. We also are exposed to credit risk in connection with transactions executed with clients on margin. To mitigate this risk, we obtain collateral; however, if the levels of collateral are insufficient we could be subject to credit risk. We also are exposed to credit risk from notes receivable from certain of our financial advisors.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

In accordance with Rules 13a-15(b) and 15d-15(b) of the Exchange Act, we, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q and determined that the disclosure controls and procedures are effective.

RCS Capital Corporation and Subsidiaries

March 31, 2015

Change in Internal Control over Financial Reporting

During the three months ended March 31, 2015, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

RCS Capital Corporation and Subsidiaries

March 31, 2015

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

The information contained in Note 16 of our notes to the consolidated financial statements included in this Quarterly Report on Form 10-Q is incorporated by reference into this Item 1. Except as set forth therein, as of the end of the period covered by this Quarterly Report on Form 10-Q, we are not a party to, and none of our subsidiaries are subject to, any material pending legal proceedings.

Item 1A. Risk Factors

We are including the following revised risk factor, which should be read in conjunction with our description of risk factors provided in Part I, Item 1A of our Annual Report on Form 10-K/A for the year ended December 31, 2014 which was filed on April 2, 2015.

Extensive or frequent changes in regulations could adversely affect our business.

The financial services industry is subject to extensive and frequently changing regulatory requirements under federal and state laws and regulations and self-regulatory organization (“SRO”) rules. Such regulation continues to grow more extensive and complex, and regulatory proceedings continue to become more frequent and sanctions more severe. The SEC, FINRA, the Municipal Securities Rulemaking Board (“MSRB”), national securities exchanges and other governmental authorities and SROs continue to propose new regulatory initiatives which may result in the adoption of new or revised regulations, as well as changes to interpretations of existing regulations. We may be adversely affected by new regulations, changes in regulatory interpretations, or more rigorous enforcement of applicable regulations, any of which could limit our business activities, increase our costs, adversely affect our results of operations and financial condition and harm our reputation.

Regulatory changes that may have an adverse impact on our business include potential new regulations resulting from the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”). These may include the development of alternative standards of conduct for broker-dealers and investment advisers when providing personalized investment advice about securities to retail investors, including the imposition of a fiduciary standard on broker-dealers. The SEC is also considering the potential harmonization of certain other aspects of the regulation of broker-dealers and investment advisers. Additionally, in April 2015 the Department of Labor (the “DOL”) proposed regulations under the Employee Retirement Income Security Act (“ERISA”) to expand the scope of those who become fiduciaries to capture more of the current services of 401(k) and IRA providers and, among other things, could affect our advisors’ ability to receive certain fees or commissions from investments in such retirement plans, unless an exemption is available. The proposed regulations are subject to a 75-day public comment period, future public hearings and potential modifications before the final regulations, if any, are adopted. The adoption of any such SEC or DOL regulations could require changes to certain business practices and require us to invest significant management attention and resources to evaluate and make necessary changes, which could impact our business and financial results.

Additionally, the SEC has approved amendments to the FINRA and NASD rules that address values of certain direct investment programs referred to as direct participation programs (“DPPs”) and unlisted REIT securities. The amendments, which will become effective in 2016, modify the requirements for inclusion of per share estimated values of DPP and REIT securities in customer account statements and make corresponding changes to the requirements applicable to participation by broker-dealers in public offerings of DPP and REIT securities. These rule amendments may result in changes to the values of DPP and REIT securities which appear on customer account statements. If investors or financial advisors react negatively to the new disclosure regime, the demand for these products could be reduced, which could harm our results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds of Registered Securities

On March 4, 2015, the Company settled the remaining contingent and deferred acquisition related to its acquisition of J.P. Turner & Company, LLC and J.P. Turner & Company Capital Management, LLC. As part of the consideration paid to the sellers, all of whom were accredited investors, on the date of the settlement, the Company issued 245,813 shares of Class A common stock. The shares of Class A common stock were offered and sold pursuant to an exemption from the registration requirements of the Securities Act pursuant to Section 4(a)(2) of the Securities Act and Rule 506 promulgated thereunder.

On March 11, 2015, the Company completed the acquisition of VSR Group, Inc. As part of the aggregate consideration paid to the sellers, all of whom were accredited investors, on the date of the acquisition, the Company issued 2,436,429 shares of Class A common stock. The shares of Class A common stock were offered and sold pursuant to an exemption from the registration requirements of the Securities Act pursuant to Section 4(a)(2) of the Securities Act and Rule 506 promulgated thereunder.

RCS Capital Corporation and Subsidiaries

March 31, 2015

On March 18, 2015, the Company completed the acquisition of Girard Securities, Inc. As part of the aggregate consideration paid to the sellers, all of whom were accredited investors, on the date of the acquisition, the Company issued 549,529 shares of Class A common stock. The shares of Class A common stock were offered and sold pursuant to an exemption from the registration requirements of the Securities Act pursuant to Section 4(a)(2) of the Securities Act and Rule 506 promulgated thereunder.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

The exhibits listed on the Exhibit Index (following the signatures section of this report) are included, or incorporated by reference, in this Quarterly Report on Form 10-Q.

RCS Capital Corporation and Subsidiaries

March 31, 2015

Signatures

Pursuant to the requirements 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.



		RCS Capital Corporation

Date:	May 11, 2015	By:	/s/ EDWARD M. WEIL, JR.
			Edward M. Weil, Jr.
			Chief Executive Officer and Director
			(Principal Executive Officer)

Date:	May 11, 2015	By:	/s/ BRIAN D. JONES
			Brian D. Jones
			Chief Financial Officer and Director
			(Principal Financial and Accounting Officer)

RCS Capital Corporation and Subsidiaries

March 31, 2015

Exhibits

The following exhibits are included in the Form 10-Q for the quarter ended March 31, 2015 (and are numbered in accordance with Item 601 of Regulation S-K).



Exhibit No.		Description
4.1⁽¹⁾		Third Supplemental Indenture dated as of January 30, 2015 to the Indenture, dated as of April 29, 2014, by and between RCS Capital Corporation and Wilmington Trust, National Association.
10.1		Third Amendment, dated as of February 4, 2015, to the Services Agreement by and among AR Capital, LLC and RCS Advisory Services, LLC, dated as of June 10, 2013.
31.1		Certification of the Principal Executive Officer of RCS Capital Corporation pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of the Principal Financial Officer of RCS Capital Corporation pursuant to Securities Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32		Written statements of the Principal Executive Officer and Principal Financial Officer of RCS Capital Corporation pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101		XBRL (eXtensible Business Reporting Language). The following materials from RCS Capital Corporation’s Quarterly Report on Form 10-Q for the three months ended March 31, 2015, formatted in XBRL: (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statement of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated Financial Statements. As provided in Rule 406T of Regulation S-T, this information in furnished and not filed for purpose of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934

_____________________

(1) Incorporated by reference to RCS Capital Corporation’s Current Report of Form 8-K filed with the SEC on February 4, 2015.

RCS Capital Corp - FORM 10-Q - May 11, 2015

Attached files

RCS Capital Corp Reports