LPL Financial Holdings Inc.
LPL Investment Holdings Inc. (Form: 8-K, Received: 04/25/2011 16:06:45)
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
April 25, 2011
Date of report (date of earliest event reported)
LPL Investment Holdings Inc.
(Exact name of registrant as specified in its charter)
         
Delaware   001-34963   20-3717839
(State or other jurisdictions of
incorporation or organization)
  (Commission File Number)   (I.R.S. Employer Identification
Nos.)
One Beacon Street
Boston MA 02108

(Address of principal executive offices) (Zip Code)
(617) 423-3644
(Registrant’s telephone number, including area code)
N/A
(Former Name or Former Address, if Changed since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrants under any of the following provisions:
o   Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
 
o   Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
 
o   Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
 
o   Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 
 

 


 

Item 2.02 Results of Operations and Financial Condition
     On April 25, 2011, LPL Investment Holdings Inc. issued a press release announcing its financial results for the quarter ended March 31, 2011. A copy of the press release is furnished with this Form 8-K and attached hereto as Exhibit 99.1.
     Exhibit 99.1 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities under that Section and shall not be deemed to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Exchange Act.
Item 9.01 Financial Statements and Exhibits
  (d)   Exhibits
 
  99.1   Press Release dated April 25, 2011 (“LPL Financial Announces First Quarter 2011 Financial Results”)

 


 

SIGNATURE
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 hereunto duly authorized.
         
  LPL INVESTMENT HOLDINGS INC.
 
 
  By:   /s/ Robert J. Moore    
    Name:   Robert J. Moore   
    Title:   Chief Financial Officer   
 
Dated: April 25, 2011

 

Exhibit 99.1
(LPL LOGO)
LPL Financial Announces First Quarter 2011 Financial Results
Net Revenues Up 18%, Advisory and Brokerage Assets Top $330 Billion
Boston, MA — April 25, 2011 — LPL Investment Holdings Inc. (NASDAQ: LPLA) (the “Company”), parent company of LPL Financial LLC (“LPL Financial”), announced today first quarter net income of $49.0 million, or $0.43 per diluted share, up $23.4 million or 91.7% compared to first quarter 2010 net income of $25.6 million, or $0.25 per diluted share. Adjusted EBITDA for the quarter was $124.3 million, up 17.9% from $105.5 million in the year-ago quarter. Adjusted Earnings, which exclude certain non-cash charges and other adjustments, were $59.4 million, or $0.52 per diluted share, up $18.3 million or 44.5% compared to $41.1 million, or $0.42 per diluted share, in the first quarter of 2010. A reconciliation of these non-GAAP measures to GAAP measures, along with an explanation of these metrics, is provided below.
“We began the year with solid results, driven primarily by the increased activity of our advisors,” said Mark Casady, LPL Financial chairman and CEO. “Improving investor sentiment and market conditions provided a strong backdrop for our advisors to grow their businesses. To help our financial advisors capitalize on this opportunity, we have continued to expand and enhance our investment platforms and practice management tools and programs. The launch of a fee-based variable annuity option in the first quarter is a powerful example of our ability to leverage our relationships with leading product manufacturers to create an innovative offering allowing advisors to deliver active portfolio management efficiently while maintaining the income protection features of variable annuity products. Additionally, resources such as our new client relationship management tool from Salesforce.com and our portfolio rebalancing solution, which enables advisors to more efficiently rebalance multiple accounts, are helping our advisors to increase their productivity and spend more time and effort on growing their businesses.”
During the quarter, assets under custody in the Company’s advisory platform reached $99.7 billion. Among the drivers of this growth was the continued success of the Company’s Hybrid RIA offering, as well as several important investments made in 2010 to enhance the advisory platforms. These enhancements include the introduction of third-party exchange traded funds to the Model Wealth Portfolios, creating a unique offering that provides advisors with access to multiple strategists in a centrally managed fee-based asset allocation platform that gives them more choice and flexibility in managing client accounts.
Robert Moore, chief financial officer, said, “Our first-quarter financial results reflected strong performance across all of our business units highlighted by strong underlying investment activity. The significant growth in total advisory and brokerage assets, as well as increased attachment revenues helped drive double-digit growth in net revenues. We also achieved double-digit growth in Adjusted Earnings per share, reflecting continued focus on disciplined expense management and the benefits of our scale in propelling cost-reduction initiatives.
Moore added, “The increase in operating expenses over the first-quarter 2010 was largely due to lower than normal spending in the year-ago quarter, combined with incremental costs in the current period arising from more robust levels of new business development and costs associated with our advisor recognition conferences. Core run-rate expenses are on track given the growth in our business and increased level of advisor activity.”
Casady concluded, “Looking ahead, our business development teams continue to attract new financial advisors who are

 


 

seeking industry-leading support to build successful practices. At the same time, we are exploring opportunities to extend our capabilities in areas of growing advisor and consumer demand, including expanded fee-based platforms, insurance, retirement services, healthcare and development of new programs in our institutional services. We will continue to use our capital wisely to invest in capabilities that assist our customers in building their businesses. The recent announcement of our intent to acquire Concord Wealth Management is a great example of this.”
Operational Highlights
  Net revenue for the first quarter of 2011 increased 17.5% to $873.9 million from $743.4 million in the first quarter of 2010. Key drivers of this growth include:
    Advisory assets in the Company’s fee-based platforms were $99.7 billion at March 31, 2011, up 23.1% from $81.0 billion at March 31, 2010, and outpacing the S&P 500, which increased 13.4% from March 31, 2010.
 
    Net new advisory assets were $3.7 billion during the three months ended March 31, 2011 compared to $1.4 billion for the three months ended March 31, 2010, primarily as a result of strong new business development in 2010 and mix shift toward more advisory business.
 
    Asset-based fees increased by 25.7% due to growth in record-keeping, omnibus processing, and other administrative fees.
 
    Double-digit commission and high single-digit transaction-fee growth reflects improving advisor confidence in the outlook for equity markets.
  Total advisory and brokerage assets hit a record level of $330.1 billion as of March 31, 2011, up 16.0% compared to $284.6 billion as of March 31, 2010.
 
  Assets under custody in the LPL Financial Hybrid RIA platform, which provides integrated fee- and commission-based capabilities for independent advisors, grew to $15.5 billion as of March 31, 2011, and encompassed 115 RIA firms, compared to $8.4 billion and 96 RIA firms as of March 31, 2010. The strong growth in the firm’s RIA business over the last several years makes LPL Financial one of the largest RIA custodians in the industry.
 
  Revenues generated from the Company’s cash sweep programs increased by $5.6 million, or 21.5%, to $31.7 million in the first quarter of 2011 compared to $26.1 million in the prior-year period. The increase in revenues was driven by growth in assets in the Company’s cash sweep programs, which averaged $18.9 billion for the first quarter of 2011 compared to $18.4 billion in the year-ago quarter, as well as an increase in the effective federal funds rate, which averaged 0.15% for the first quarter of 2011 compared to 0.13% for the same period in the prior year.
 
  Nearly 70% of the increase in commissions revenue is from increased sales activity, with the remainder due to increases in market levels and prior sales of investments that pay trail commissions. During the first quarter of 2011, sales activities have recovered to levels attained prior to the market’s steep declines in late 2008 and early 2009. The increase in sales activity and in our overall number of advisors have also increased our volume-related-expenses primarily in hiring staff in trading, account and advisor support areas and in statement and confirmation production costs.
 
  Interest expense for the first quarter of 2011 declined $6.2 million compared to the first quarter of 2010, largely as the result of debt refinancing in the second quarter of 2010, which included a redemption of the Company’s senior unsecured subordinated notes. At current interest rates, the Company expects annual interest savings of approximately $20.0 million.
 
  The Company added 528 net new advisors during the twelve months ending March 31, 2011. Additionally, according to available industry data, more new advisors from business development and acquisitions became affiliated with LPL Financial during 2010 than with any other broker-dealer in the U.S.
 
  On March 14, the Company announced its plans to consolidate UVEST Financial Services Group, Inc. (“UVEST”) onto its self-clearing platform. The Company acquired UVEST as a wholly owned subsidiary in 2007. The consolidation,

2


 

    which is expected to commence in June and to be completed by the end of this year, underscores the commitment of LPL Financial to the financial institution channel and creates a unified platform for continued future growth in this space. Through this integration, bank- and credit union-based advisors and investment program managers currently served by UVEST will benefit from operational and service efficiencies in addition to enhanced functionality through the LPL Financial BranchNet technology platform.
 
  On April 20, the Company announced its intent to acquire Concord Capital Partners and certain of its subsidiaries (“Concord Wealth Management”). Concord Wealth Management is an industry leader in providing technology and open architecture investment management solutions for trust departments of financial institutions. Concord Wealth Management has over $10.0 billion in assets under administration. Through this acquisition, LPL Financial will have the ability to support both the trust and brokerage business lines of current and prospective financial institutions. It will also create new expansion opportunities such as giving the Company the ability to custody personal trust assets within banks across the country.
 
  During the first quarter, the Company announced the launch of its new fee-based variable annuity platform, which allows LPL Financial advisors to manage their variable annuity sub-account assets within a fee-based relationship and on a discretionary basis. This structure empowers advisors to deliver active portfolio management efficiently while maintaining the income protection features of variable annuity products. This innovative platform is unique because it is the only non-commissioned variable annuity platform that allows product selection from multiple providers and was built in partnership with Allianz Life, AXA Equitable, Lincoln Financial Group, Prudential Annuities, and SunLife Financial.
 
  In March, the Company hosted annual conferences for its top-producing independent and financial institution-based advisors, attracting more than 1,000 attendees who represented 51% of overall production. At the conference, the top producing advisors were recognized for achieving success during 2010 and were offered additional sessions on how to further grow their businesses, improve productivity and enhance advisory-based practices.
Conference Call
The Company will hold a conference call to discuss results at 5 p.m. EST on April 25, 2011. The conference call can be accessed by dialing 877-677-9122 (domestic) or 708-290-1401 (international) and entering passcode 57079228.
The conference call will also be webcast simultaneously on the Investor Relations section of Company’s website (www.lpl.com), where a replay of the call will also be available following the live webcast. A telephonic replay will be available one hour after the call and can be accessed by dialing 800-642-1687 (domestic) or 706-645-9291 (international) and entering passcode 57079228. The telephonic replay will be available until 11:59 pm on May 9, 2011.

3


 

Financial Highlights and Key Metrics
(Dollars in thousands except per share data and where noted)
                         
    Three Months Ended March 31,
    2011   2010   Change
Financial Highlights (unaudited)
                       
Net Revenue
  $ 873,869     $ 743,406       17.5 %
Net Income
  $ 48,999     $ 25,554       91.7 %
Adjusted Earnings (1)
  $ 59,373     $ 41,099       44.5 %
Earnings Per Share (diluted)
  $ 0.43     $ 0.25       72.0 %
Adjusted Earnings Per Share (1)
  $ 0.52     $ 0.42       23.8 %
Adjusted EBITDA (1)
  $ 124,331     $ 105,457       17.9 %
                         
    As of March 31,
    2011   2010   Change
Metric Highlights
                       
Advisors (2)
    12,554       12,026       4.4 %
Advisory and Brokerage Assets (3) (billions)
  $ 330.1     $ 284.6       16.0 %
Advisory Assets Under Management (4) (billions)
  $ 99.7     $ 81.0       23.1 %
Net New Advisory Assets (5) (billions)
  $ 3.7     $ 1.4       164.3 %
Insured Cash Account Balances (4) (billions)
  $ 12.3     $ 11.4       7.9 %
Money Market Account Balances (4) (billions)
  $ 6.9     $ 6.7       3.0 %
 
(1)   Adjusted EBITDA, Adjusted Earnings, and Adjusted Earnings per share have limitations as analytical tools and should not be considered in isolation or as substitutes for analysis of the Company’s results as reported under GAAP. Some of these limitations are:
    Adjusted EBITDA, Adjusted Earnings, and Adjusted Earnings per share do not reflect all cash expenditures, future requirements for capital expenditures, or contractual commitments;
 
    Adjusted EBITDA, Adjusted Earnings, and Adjusted Earnings per share do not reflect changes in, or cash requirements for, working capital needs; and
 
    Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on debt.

4


 

    The reconciliation from net income to Adjusted EBITDA and Adjusted Earnings for the periods presented is as follows (in thousands):
                 
    Three Months Ended  
    March 31,  
    2011     2010  
    (unaudited)  
Net income
  $ 48,999     $ 25,554  
Interest expense
    18,172       24,336  
Income tax expense
    32,559       19,162  
Amortization of purchased intangible assets and software (a)
    9,537       14,111  
Depreciation and amortization of all other fixed assets
    8,628       11,479  
 
           
EBITDA
    117,895       94,642  
 
           
EBITDA Adjustments:
               
Share-based compensation expense (b)
    3,860       2,536  
Acquisition and integration related expenses (c)
    1,416       140  
Restructuring and conversion costs (d)
    835       7,979  
Debt amendment and extinguishment costs (e)
          121  
Equity issuance and related offering costs
    292        
Other (f)
    33       39  
 
           
Total EBITDA Adjustments
    6,436       10,815  
 
           
Adjusted EBITDA
  $ 124,331     $ 105,457  
 
           
 
Net income
  $ 48,999     $ 25,554  
After-Tax:
               
EBITDA Adjustments (g)
               
Share-based compensation expense (h)
    2,901       2,010  
Acquisition and integration related expenses
    874       85  
Restructuring and conversion costs
    515       4,823  
Debt amendment and extinguishment costs
          73  
Equity issuance and related offering costs
    180        
Other
    20       24  
 
           
Total EBITDA Adjustments
    4,490       7,015  
 
           
Amortization of purchased intangible assets and software (g)
    5,884       8,530  
 
           
Adjusted Earnings
  $ 59,373     $ 41,099  
 
           
Adjusted Earnings per share (i)
  $ 0.52     $ 0.42  
Weighted average shares outstanding — diluted (j)
    113,196       98,945  
 
(a)   Represents amortization of intangible assets and software as a result of the Company’s purchase accounting adjustments from its 2005 merger transaction, as well as various acquisitions.
 
(b)   Represents share-based compensation related to vested stock options awarded to employees and non-executive directors based on the grant date fair value under the Black-Scholes valuation model.
 
(c)   Represents acquisition and integration costs resulting from certain of the Company’s acquisitions.
 
(d)   Represents organizational restructuring charges and conversion and other related costs incurred resulting from the 2009 consolidation of Associated Securities Corp., Inc., Mutual Service Corporation and Waterstone Financial Group,

5


 

    Inc. (together, the “Affiliated Entities”) and the 2011 consolidation of UVEST.
 
(e)   Represents debt amendment costs incurred in 2010 for amending and restating the credit agreement to establish a new term loan tranche and to extend the maturity of an existing tranche on the senior credit facilities.
 
(f)   Represents excise and other taxes.
 
(g)   EBITDA Adjustments and amortization of purchased intangible assets and software have been tax effected using a federal rate of 35% and the applicable effective state rate, which was 3.30% for the three month period ended March 31, 2011 and 4.55% for the corresponding period in 2010, net of the federal tax benefit. In April 2010, a step up in basis of $89.1 million for internally developed software that was established at the time of the 2005 merger transaction became fully amortized, resulting in lower balances of intangible assets that are amortized.
 
(h)   Represents the after-tax expense of non-qualified stock options in which the Company receives a tax deduction upon exercise, and the full expense impact of incentive stock options granted to employees that have vested and qualify for preferential tax treatment and conversely, the Company does not receive a tax deduction. Share-based compensation for vesting of incentive stock options was $1.4 million and $1.2 million, respectively, for the three months ending March 31, 2011 and 2010.
 
(i)   Represents Adjusted Earnings divided by weighted average number of shares outstanding on a fully diluted basis. Set forth is a reconciliation of earnings per share on a fully diluted basis as calculated in accordance with GAAP to Adjusted Earnings per share:
                 
    For the Three  
    Months Ended  
    March 31,  
    2011     2010  
    (unaudited)  
Earnings per share — diluted
  $ 0.43     $ 0.25  
Adjustment for allocation of undistributed earnings to stock units
          0.01  
After-Tax:
               
EBITDA Adjustments per share
    0.04       0.07  
Amortization of purchased intangible assets and software per share
    0.05       0.09  
 
           
Adjusted Earnings per share
  $ 0.52     $ 0.42  
 
           
 
(j)   Weighted average shares outstanding on a fully diluted basis increased from 98.9 million shares as of March 31, 2010 to 113.2 million shares as of March 31, 2011, due to the successful completion of our IPO in the fourth quarter of 2010. The increase is attributed to the release of the restriction on approximately 7.4 million shares of common stock upon closing of our IPO, the issuance of approximately 1.5 million shares of common stock by the Company pursuant to the over-allotment option granted to the underwriters in connection with the IPO, and shares that were issued upon exercise of options by selling stockholders in connection with the IPO, net of any shares retired to satisfy the exercise price in a cashless exercise.
    The following table reflects pro-forma Adjusted Earnings per share and growth in pro-forma Adjusted Earnings per share, assuming the number of weighted average shares outstanding on a fully diluted basis as of March 31, 2011 was also outstanding as of March 31, 2010:
                         
    For the Three        
    Months Ended        
    March 31,        
    2011     2010     % Change  
    (unaudited)          
Adjusted Earnings
  $ 59,373     $ 41,099          
Weighted average shares outstanding—diluted as of March 31, 2011
    113,196       113,196          
 
                   
Pro-forma Adjusted Earnings per share
  $ 0.52     $ 0.36       44.4 %
 
                   
 
(2)   Advisors are defined as those independent financial advisors and financial advisors at financial institutions who are licensed to do business with the Company’s broker-dealer subsidiaries.

6


 

(3)   Advisory and brokerage assets are comprised of assets that are custodied, networked, and non-networked and reflect market movement in addition to new assets, inclusive of new business development and net of attrition.
 
(4)   Advisory assets under management, insured cash account balances and money market account balances are components of advisory and brokerage assets.
 
(5)   Represents net new advisory assets that are custodied in the Company’s fee-based advisory platforms.
Non-GAAP Financial Measures
Adjusted Earnings represent net income before: (a) share-based compensation expense, (b) amortization of intangible assets and software, a component of depreciation and amortization, resulting from previous acquisitions, (c) debt amendment and extinguishment costs (d) restructuring and conversion costs and (e) equity issuance and related offering costs. Reconciling items are tax effected using the income tax rates in effect for the applicable period, adjusted for any potentially non-deductible amounts. Adjusted Earnings per share represents Adjusted Earnings divided by weighted average outstanding shares on a fully diluted basis. The Company prepared Adjusted Earnings and Adjusted Earnings per share to eliminate the effects of items that it does not consider indicative of its core operating performance. The Company believes this measure provides investors with greater transparency by helping illustrate the underlying financial and business trends relating to results of operations and financial condition and comparability between current and prior periods. Adjusted Earnings and Adjusted Earnings per share are not measures of the Company’s financial performance under GAAP and should not be considered as an alternative to net income or earnings per share or any other performance measure derived in accordance with GAAP, or as an alternative to cash flows from operating activities as a measure of profitability or liquidity.
Adjusted EBITDA is defined as EBITDA (net income plus interest expense, income tax expense, depreciation and amortization), further adjusted to exclude certain non-cash charges and other adjustments set forth in the table above. The Company presents Adjusted EBITDA because the Company considers it a useful financial metric in assessing the Company’s operating performance from period to period by excluding certain items that the Company believes are not representative of its core business, such as certain material non-cash items and other adjustments that are outside the control of management. Adjusted EBITDA is not a measure of the Company’s financial performance under GAAP and should not be considered as an alternative to net income or any other performance measure derived in accordance with GAAP, or as an alternative to cash flows from operating activities as a measure of profitability or liquidity. In addition, Adjusted EBITDA can differ significantly from company to company depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments.
Forward-Looking Statements
This press release may contain forward-looking statements (regarding the Company’s future financial condition, results of operations, business strategy and financial needs, and other similar matters) that involve risks and uncertainties. Forward-looking statements can be identified by words such as “anticipates,” “expects,” “believes,” “plans,” “predicts,” and similar terms. Forward-looking statements are not guarantees of future performance and actual results may differ significantly from the results discussed in the forward-looking statements. Important factors that may cause such differences include, but are not limited to, changes in general economic and financial market conditions, fluctuations in the value of assets under management, effects of competition in the financial services industry, changes in the number of the Company’s financial advisors and institutions and their ability to effectively market financial products and services, the effect of current, pending and future legislation, regulation and regulatory actions, and other factors set forth in the Company’s Annual Report on Form 10-K for the period ended December 31, 2010, which is available on www.lpl.com and www.sec.gov .
About LPL Financial LPL Financial, a wholly owned subsidiary of LPL Investment Holdings Inc., is an independent broker-dealer. LPL Financial and its affiliates offer proprietary technology, comprehensive clearing and compliance services, practice management programs and training, and independent research to over 12,500 financial advisors and over 750 financial institutions. Additionally, LPL Financial supports over 4,000 financial advisors who are affiliated and licensed with insurance companies with customized clearing, advisory platforms and technology solutions. LPL Financial and its affiliates have

7


 

over 2,600 employees with employees and offices in Boston, Charlotte, and San Diego. For more information, please visit www.lpl.com .
Member FINRA/SIPC
# # #
LPLA-F
     
Media Relations
  Investor Relations
Joseph Kuo
  Mark Barnett
LPL Financial
  LPL Financial
Phone: 704-733-3931
  Phone: 617-897-4574
Email: media.inquiries@lpl.com
  Email: investor.relations@lpl.com

8


 

LPL Investment Holdings Inc.
Condensed Consolidated Statements of Operations
(Dollars in thousands except per share data and where noted)
(Unaudited)
                         
    Three Months Ended        
    March 31,     %  
    2011     2010     Change  
Revenues
                       
Commissions
  $ 451,877     $ 388,972       16.2 %
Advisory fees
    244,087       206,330       18.3 %
Asset-based fees
    89,823       71,450       25.7 %
Transaction and other fees
    73,749       67,363       9.5 %
Other
    14,333       9,291       54.3 %
 
                 
Net revenues
    873,869       743,406       17.5 %
 
                 
Expenses
                       
Production
    604,327       513,202       17.8 %
Compensation and benefits
    84,142       73,575       14.4 %
General and administrative
    64,282       53,237       20.7 %
Depreciation and amortization
    18,165       25,590       (29.0 )%
Restructuring charges
    537       3,949       (86.4 )%
Other
    2,686       4,801       (44.1 )%
 
                 
Total operating expenses
    774,139       674,354       14.8 %
 
                 
Non-operating interest expense
    18,172       24,336       (25.3) %
 
                 
Total expenses
    792,311       698,690       13.4 %
 
                 
Income before provision for income taxes
    81,558       44,716       82.4 %
Provision for income taxes
    32,559       19,162       69.9 %
 
                 
Net income
  $ 48,999     $ 25,554       91.7 %
 
                 
Earnings per share
                       
Basic
  $ 0.44     $ 0.29       51.7 %
Diluted
  $ 0.43     $ 0.25       72.0 %

9


 

LPL Investment Holdings Inc.
Financial Highlights
(Dollars in thousands, unless otherwise noted)
(Unaudited)
                                         
    Three Month Quarterly Results  
    Q1 2011     Q4 2010     Q3 2010     Q2 2010     Q1 2010  
REVENUES
                                       
Commissions
  $ 451,877     $ 426,397     $ 385,273     $ 420,169     $ 388,972  
Advisory fees
    244,087       226,407       212,344       215,146       206,330  
Asset-based fees
    89,823       87,020       81,599       77,436       71,450  
Transaction and other fees
    73,749       68,410       70,243       68,132       67,363  
Other
    14,333       11,721       10,505       9,278       9,291  
 
                             
Net revenues
    873,869       819,955       759,964       790,161       743,406  
 
                             
EXPENSES
                                       
Production (1)(5)
    604,327       802,167       525,628       556,538       513,202  
Compensation and benefits
    84,142       85,632       74,627       74,822       73,575  
General and administrative
    64,282       56,430       68,798       54,550       53,237  
Depreciation and amortization
    18,165       18,565       19,772       22,110       25,590  
Restructuring charges
    537       3,488       1,863       4,622       3,949  
Other (2)
    2,686       23,001       3,753       3,229       4,801  
 
                             
Total operating expenses (2)
    774,139       989,283       694,441       715,871       674,354  
 
                             
Non-operating interest expense
    18,172       18,877       19,511       27,683       24,336  
Loss on extinguishment of debt
                      37,979        
 
                             
Total expenses
    792,311       1,008,160       713,952       781,533       698,690  
 
                             
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES
    81,558       (188,205 )     46,012       8,628       44,716  
PROVISION (BENEFIT) FOR INCOME TAXES (3)
    32,559       (71,645 )     19,868       628       19,162  
 
                             
NET INCOME (LOSS)
  $ 48,999     $ (116,560 )   $ 26,144     $ 8,000     $ 25,554  
 
                             
EARNINGS (LOSS) PER SHARE
                                       
Basic
  $ 0.44     $ (1.20 )   $ 0.30     $ 0.09     $ 0.29  
Diluted
  $ 0.43     $ (1.20 )   $ 0.26     $ 0.08     $ 0.25  
FINANCIAL CONDITION
                                       
Total Cash & Cash Equivalents
  $ 596,584     $ 419,208     $ 442,547     $ 402,741     $ 324,761  
Total Assets
  $ 3,694,264     $ 3,646,167     $ 3,364,896     $ 3,315,310     $ 3,343,286  
Total Debt (4)
  $ 1,343,146     $ 1,386,639     $ 1,390,132     $ 1,393,625     $ 1,407,117  
Stockholders’ Equity
  $ 1,265,916     $ 1,173,755     $ 927,335     $ 897,863     $ 883,157  
KEY METRICS
                                       
Advisors
    12,554       12,444       12,017       12,066       12,026  
Production Payout (5)
    85.4 %     87.5 %     86.6 %     86.1 %     84.8 %
Advisory and Brokerage Assets (billions)
  $ 330.1     $ 315.6     $ 293.3     $ 276.9     $ 284.6  
Advisory Assets Under Management (billions)
  $ 99.7     $ 93.0     $ 86.2     $ 78.9     $ 81.0  
Insured Cash Account Balances (6) (billions)
  $ 12.3     $ 12.2     $ 11.7     $ 11.8     $ 11.4  
Money Market Account Balances (6) (billions)
  $ 6.9     $ 6.9     $ 6.9     $ 7.2     $ 6.7  
Adjusted EBITDA (7)
  $ 124,331     $ 99,159     $ 98,633     $ 109,864     $ 105,457  
Adjusted Earnings (7)
  $ 59,373     $ 44,677     $ 40,526     $ 46,418     $ 41,099  
Adjusted Earnings per share (7)
  $ 0.52     $ 0.42     $ 0.41     $ 0.47     $ 0.42  
 
(1)   Upon closing of the Company’s IPO in the fourth quarter of 2010, the restriction on approximately 7.4 million shares of common stock issued to advisors under the Fifth Amended and Restated 2000 Stock Bonus Plan was released. Accordingly, the Company recorded a share-based compensation charge of $222.0 million in the fourth quarter of 2010, representing the offering price of $30.00 per share multiplied by 7.4 million shares. This charge has been classified as production expense in the Company’s consolidated statements of operations.
 
(2)   Certain reclassifications have been made to previously reported amounts to make them consistent with the current period presentation.

10


 

(3)   The Company reported a low effective income tax rate for the three months ended June 30, 2010, due to a favorable state apportionment ruling covering the current and previous years and due to the revision of certain settlement contingencies for prior periods. The ruling resulted in a reduction of 27.8% and the revision to settlement contingencies resulted in a reduction of 9.6%, respectively, to the Company’s effective income tax rate.
 
(4)   Represents borrowings on the Company’s senior secured credit facility, senior unsecured subordinated notes, revolving line of credit and bank loans payable.
 
(5)   Production expense is comprised of commission and advisory fees and brokerage, clearing and exchange fees. Production payout excludes brokerage, clearing and exchange fees and is calculated as commission and advisory fees divided by commission and advisory revenues. The production payout for the three months ended December 31, 2010 excludes $222.0 million of production expense resulting from a share-based compensation charge taken at the time of the IPO.
 
(6)   Represents insured cash and money market account balances as of each reporting period.
 
(7)   The reconciliation from net (loss) income to Adjusted EBITDA and Adjusted Earnings for the periods presented is as follows (in thousands):
                                         
    Q1     Q4     Q3     Q2     Q1  
    2011     2010     2010     2010     2010  
                    (unaudited)                  
 
                                       
Net income (loss)
  $ 48,999     $ (116,560 )   $ 26,144     $ 8,000     $ 25,554  
Interest expense
    18,172       18,877       19,511       27,683       24,336  
Income tax expense (benefit)
    32,559       (71,645 )     19,868       628       19,162  
Amortization of purchased intangible assets and software (a)
    9,537       9,257       9,352       10,938       14,111  
Depreciation and amortization of all other fixed assets
    8,628       9,308       10,420       11,172       11,479  
 
                             
EBITDA
    117,895       (150,763 )     85,295       58,421       94,642  
EBITDA Adjustments:
                                       
Share-based compensation expense (b)
    3,860       2,801       2,853       2,239       2,536  
Acquisition and integration related expenses (c)
    1,416       2,784       6,268       3,377       140  
Restructuring and conversion costs (d)
    835       6,122       3,115       5,619       7,979  
Debt amendment and extinguishment costs (e)
                28       38,484       121  
Equity issuance and offering related costs (f)
    292       238,177       1,038       1,687        
Other (g)
    33       38       36       37       39  
 
                             
Total EBITDA Adjustments
    6,436       249,922       13,338       51,443       10,815  
 
                             
Adjusted EBITDA
  $ 124,331     $ 99,159     $ 98,633     $ 109,864     $ 105,457  
 
                             
 
   
Net income (loss)
  $ 48,999     $ (116,560 )   $ 26,144     $ 8,000     $ 25,554  
After-Tax:
                                       
EBITDA Adjustments (h)
                                       
Share-based compensation expense (i)
    2,901       2,263       2,257       1,870       2,010  
Acquisition and integration related expenses
    874       1,692       3,809       2,052       85  
Restructuring and conversion costs
    515       3,721       1,918       3,415       4,823  
Debt amendment and extinguishment costs
                17       23,387       73  
Equity issuance and offering related costs (j)
    180       147,912       631       1,025        
Other
    20       23       22       22       24  
 
                             
Total EBITDA Adjustments
    4,490       155,611       8,654       31,771       7,015  
 
                             
Amortization of purchased intangible assets and software (h)(i)
    5,884       5,626       5,728       6,647       8,530  
 
                             
Adjusted Earnings
  $ 59,373     $ 44,677     $ 40,526     $ 46,418     $ 41,099  
 
                             
Adjusted Earnings per share (k)
  $ 0.52     $ 0.42     $ 0.41     $ 0.47     $ 0.42  
Weighted average shares outstanding — diluted
    113,196       105,873       99,612       99,487       98,945  
 
(a)   Represents amortization of intangible assets and software as a result of the Company’s purchase accounting adjustments from its 2005 merger transaction, as well as various acquisitions.
 
(b)   Represents share-based compensation for stock options awarded to employees and non-executive directors based

11


 

    on the grant date fair value under the Black-Scholes valuation model.
 
(c)   Represents acquisition and integration costs resulting from certain of the Company’s acquisitions. Included in the three months ended September 30, 2010, are expenditures for certain legal settlements that have not been resolved with the indemnifying party.
 
(d)   Represents organizational restructuring charges and conversion and other related costs incurred resulting from the 2009 consolidation of the Affiliated Entities and the 2011 consolidation of UVEST.
 
(e)   Represents debt amendment costs incurred in 2010 for amending and restating the credit agreement to establish a new term loan tranche and to extend the maturity of an existing tranche on the senior credit facilities, and debt extinguishment costs to redeem the subordinated notes, as well as certain professional fees incurred.
 
(f)   Represents equity issuance and related offering costs. Upon closing of the offering, the restriction on approximately 7.4 million shares of common stock issued to advisors under the Company’s Fifth Amended and Restated 2000 Stock Bonus Plan was released. Accordingly, the Company recorded a share-based compensation charge of $222.0 million, representing the initial public offering price of $30.00 per share multiplied by 7.4 million shares.
 
(g)   Represents excise and other taxes.
 
(h)   EBITDA Adjustments and amortization of purchased intangible assets, a component of depreciation and amortization, have been tax effected using a federal rate of 35% and the applicable effective state rate, which ranged from 3.30% to 4.55%, net of the federal tax benefit.
 
(i)   Represents the after-tax expense of non-qualified stock options in which the Company receives a tax deduction upon exercise, and the full expense impact of incentive stock options granted to employees that have vested and qualify for preferential tax treatment and conversely, the Company does not receive a tax deduction. Share-based compensation for vesting of incentive stock options was $1.4 million, $1.4 million, $1.3 million, $1.3 million, and $1.2 million for the three months ended March 31, 2011, December 31, 2010, September 30, 2010, June 30, 2010, and March 31, 2010, respectively.
 
(j)   Represents the after-tax expense of equity issuance and related offering costs in which the Company receives a tax deduction, as well as the full expense impact of $8.1 million of offering costs incurred in the fourth quarter of 2010 in which the Company does not receive a tax deduction.
 
(k)   Set forth is a reconciliation of (loss) earnings per share on a fully diluted basis as calculated in accordance with GAAP to Adjusted Earnings per share:
                                         
    Q1     Q4     Q3     Q2     Q1  
    2011     2010     2010     2010     2010  
                    (unaudited)                  
 
                                       
Earnings (loss) per share — diluted
  $ 0.43     $ (1.20 )   $ 0.26     $ 0.08     $ 0.25  
Adjustment to include dilutive shares, not included in GAAP loss per share
          0.10                    
Adjustment for allocation of undistributed earnings to stock units
                            0.01  
After-Tax:
                                       
EBITDA Adjustments per share
    0.04       1.47       0.09       0.32       0.07  
Amortization of purchased intangible assets per share
    0.05       0.05       0.06       0.07       0.09  
 
                             
Adjusted Earnings per share
  $ 0.52     $ 0.42     $ 0.41     $ 0.47     $ 0.42  
 
                             

12