sv1za
As filed with the
Securities and Exchange Commission on July 9,
2010
Registration
No. 333-167325
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 2
to
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF
1933
LPL Investment Holdings
Inc.
(Exact name of registrant as
specified in its charter)
|
|
|
|
|
Delaware
|
|
6200
|
|
20-3717839
|
(State or other jurisdiction
of
incorporation or organization)
|
|
(Primary Standard Industrial
Classification Code Number)
|
|
(I.R.S. Employer
Identification No.)
|
One Beacon Street, Boston, MA 02108
(617) 423-3644
(Address, including zip code,
and telephone number, including area code, of registrants
principal executive offices)
Mark S. Casady
Stephanie L. Brown
LPL Investment Holdings Inc.
One Beacon Street, Boston, MA 02108
(617) 423-3644
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copies to:
|
|
|
Julie H. Jones, Esq.
Keith F. Higgins, Esq.
Ropes & Gray LLP
One International Place
Boston, MA 02110
Telephone
(617) 951-7000
Fax
(617) 951-7050
|
|
William F. Gorin, Esq.
Cleary Gottlieb Steen & Hamilton LLP
One Liberty Plaza
New York, NY 10006
Telephone (212) 225-2000
Fax (212) 225-3999
|
Approximate date of commencement of proposed sale to
public: As soon as practicable after this
Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, as amended (the
Securities Act), check the following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. 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. (Check one):
|
|
|
|
Large accelerated
filer o
|
Accelerated
filer o
|
Non-accelerated
filer þ
|
Smaller reporting
company o
|
(Do not check if a smaller reporting company)
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as
the Securities and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
The
information in this preliminary prospectus is not complete and
may be changed. These securities may not be sold until the
registration statement filed with the Securities and Exchange
Commission is effective. This preliminary prospectus is not an
offer to sell these securities and it is not soliciting an offer
to buy these securities in any jurisdiction where the offer or
sale is not permitted.
|
Subject to Completion. Dated
July 9, 2010.
Shares
Common Stock
This is an initial public offering of common stock of LPL
Investment Holdings Inc.
LPL Investment Holdings Inc. is
offering shares
to be sold in the offering. The selling stockholders identified
in this prospectus are offering an
additional shares.
LPL Investment Holdings Inc. will not receive any of the
proceeds from the sale of the shares being sold by the selling
stockholders.
Prior to this offering, there has been no public market for the
common stock. It is currently estimated that the initial public
offering price per share will be between
$ and
$ . LPL Investment Holdings Inc.
intends to list the common stock on the NASDAQ Global Select
Market under the symbol LPLA.
See Risk Factors on page 14 to read about
factors you should consider before buying shares of the common
stock.
Neither the Securities and Exchange Commission nor any other
regulatory body has approved or disapproved of these securities
or passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
|
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
Total
|
|
Initial public offering price
|
|
$
|
|
|
|
$
|
|
|
Underwriting discount
|
|
$
|
|
|
|
$
|
|
|
Proceeds, before expenses, to LPL Investment Holdings Inc.
|
|
$
|
|
|
|
$
|
|
|
Proceeds, before expenses, to the selling stockholders
|
|
$
|
|
|
|
$
|
|
|
To the extent the underwriters sell more
than shares
of common stock, the underwriters have the option to purchase up
to an
additional shares
from at
the initial public offering price less the underwriting discount.
The underwriters expect to deliver the shares against payment in
New York, New York
on ,
2010.
|
|
Goldman,
Sachs & Co. |
Morgan Stanley |
|
|
BofA
Merrill Lynch |
J.P. Morgan |
Prospectus
dated ,
2010.
TABLE OF
CONTENTS
We have not authorized anyone to provide any information or to
make any representations other than those contained in or
incorporated by reference into this prospectus or in any free
writing prospectuses we have prepared. We take no responsibility
for, and can provide no assurance as to the reliability of, any
other information that others may give you. This prospectus is
an offer to sell only the shares offered hereby, but only under
circumstances and in jurisdictions where it is lawful to do so.
The information contained in this prospectus is current only as
of its date.
i
MARKET, RANKING
AND OTHER INDUSTRY DATA
The data included in this prospectus regarding markets and
ranking, including the size of certain markets and our position
and the position of our competitors within these markets, are
based on reports of government agencies or published industry
sources and estimates based on our managements knowledge
and experience in the markets in which we operate. These
estimates have been based on information obtained from our trade
and business organizations and other contacts in the markets in
which we operate. We believe these estimates to be accurate as
of the date of this prospectus. However, this information may
prove to be inaccurate because of the method by which we
obtained some of the data for the estimates or because this
information cannot always be verified with complete certainty
due to the limits on the availability and reliability of raw
data, the voluntary nature of the data gathering process and
other limitations and uncertainties. As a result, you should be
aware that market, ranking and other similar industry data
included in this prospectus, and estimates and beliefs based on
that data, may not be reliable.
ii
PROSPECTUS
SUMMARY
This summary highlights information contained elsewhere or
incorporated by reference in this prospectus. This summary does
not contain all of the information you should consider before
investing in our common stock. You should read this entire
prospectus carefully, especially the Risk Factors
section of this prospectus and our consolidated financial
statements and related notes appearing at the end of this
prospectus, before making an investment decision. This summary
contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ significantly from
the results discussed in the forward-looking statements as a
result of certain factors, including those set forth in
Risk Factors and Special Note Regarding
Forward-Looking Statements.
We refer to Adjusted EBITDA, Adjusted Net Income and Adjusted
Net Income per share in this prospectus summary and elsewhere in
this prospectus. For the definitions of Adjusted EBITDA,
Adjusted Net Income and Adjusted Net Income per share, an
explanation of why we present these metrics and a description of
the limitations of these non-GAAP measures, as well as a
reconciliation to net income, see Managements
Discussion and Analysis of Financial Condition and Results of
Operations How We Evaluate Growth.
When we use the terms we, us,
our, LPL or the company, we
mean LPL Investment Holdings Inc., a Delaware corporation, and
its consolidated subsidiaries, including LPL Financial
Corporation (LPL Financial), taken as a whole, as
well as the predecessor entity LPL Holdings, Inc.
(predecessor), unless the context otherwise
indicates.
Overview
We provide an integrated platform of proprietary technology,
brokerage and investment advisory services to over 12,000
independent financial advisors and financial advisors at
financial institutions (our advisors) across the
country, enabling them to successfully service their retail
investors with unbiased, conflict-free financial advice. In
addition, we support over 4,000 financial advisors with
customized clearing, advisory platforms and technology
solutions. Our singular focus is to support our advisors with
the front, middle and back-office support they need to serve the
large and growing market for independent investment advice,
particularly in the mass affluent market (which we define as
investors with $100,000 $1,000,000 in investable
assets). We believe we are the only company that offers advisors
the unique combination of an integrated technology platform,
comprehensive self-clearing services and full open architecture
access to leading financial products, all delivered in an
environment unencumbered by conflicts from product
manufacturing, underwriting or market making.
For over 20 years we have served the independent advisor
market. We currently support the largest independent advisor
base and the fifth largest overall advisor base in the United
States. Through our advisors, we are also one of the largest
distributors of financial products in the United States. Our
scale is a substantial competitive advantage and enables us to
more effectively attract and retain advisors. Our unique model
allows us to invest more resources in our advisors, increasing
their revenues and creating a virtuous cycle of
growth. We are headquartered in Boston and currently have over
2,400 employees in our Boston, Charlotte and San Diego
locations.
Market
Opportunity and Industry Background
The market our advisors serve is significant and expanding.
According to the Federal Reserve, U.S. household and
non-profit organization financial assets totaled $45.1 trillion
as of December 31, 2009, up from $41.7 trillion at
December 31, 2008 and $38.9 trillion at December 31,
2004. In addition, according to Cerulli Associates, a research
and consulting firm specializing in the financial services
industry, $8.5 trillion of retail assets were professionally
managed as of December 31, 2008, up from $6.8 trillion as
of December 31, 2003. Finally, 58% of all
U.S. households utilized a financial advisor in 2008.
1
Cerulli Associates divides the retail advisor market into six
broad channels: the two independent channels that we serve
(independent and registered investment advisors
(RIAs)) and four employee model or captive channels
(insurance, wirehouse, regional and bank). During the period
from 2004 to 2008, the independent channels experienced
substantial growth on both an absolute and relative basis,
taking market share from the captive channels. According to
Cerulli Associates, the independent channels market share
by number of advisors increased from 40% in 2004 to 43% in 2008.
In 2008, over 132,000 independent financial advisors managed
$2.7 trillion in client assets, representing 33% of total
retail advisor client assets.
Cerulli Associates forecasts that total U.S. assets under
management will grow 29% from 2008 to 2012 due to factors such
as the retirement of the baby boomer generation as well as the
continued growth of individual retirement account rollovers.
During the same period, Cerulli Associates estimates that the
independent channels market share by number of advisors
will grow by seven percentage points to 50%, and market share by
client assets will grow six percentage points to 39%.
We believe there are several key factors driving the growth of
the independent channels. Investors in the mass affluent market,
and increasingly in the high net worth market, are seeking
unbiased, conflict-free advice. The number of advisors electing
to leave the large financial institutions to become independent
financial advisors has accelerated over the last several years
in part because of the ongoing consolidation among the captive
platforms, particularly among the wirehouses. Finally, many
advisors have entrepreneurial aspirations and are attracted to
the flexibility, control and compelling economics inherent in
the independent financial advisor model.
Our
Business
With our focus and scale, we are not only a beneficiary of the
secular shift among advisors toward independence, but an active
catalyst of this trend. Between 2004 and 2008, our number of
advisors increased at a compound annual growth rate
(CAGR) of 20%, while according to Cerulli
Associates, the total number of advisors across all channels
remained flat. We enable our advisors to provide their clients
with high quality independent financial advice and investment
solutions, and support our advisors in managing the complexity
of their businesses by providing a comprehensive integrated
platform of technology and clearing services. We provide these
services through an open architecture product platform with no
proprietary manufactured products, which enables an unbiased,
conflict-free environment. Our historical advisor growth rate
does not guarantee that we will attract advisors at comparable
rates in the future. For example, when comparing our number of
advisors as of March 31, 2010 to March 31, 2009, we
had a net decrease in advisors, and as of December 31, 2009
to December 31, 2008, we had relatively no change in our
number of advisors, in both cases due to the attrition of
advisors in connection with the consolidation of the operations
of certain of our previously acquired subsidiaries. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations How We Evaluate
Growth.
Our Financial
Advisors
For more than 20 years our Commitment Creed has been
ingrained in our culture and reflects our singular focus on the
advisors we serve. The size and growth of our business has
benefited from this focus. Our advisor base has grown from 3,596
advisors in 2000 to 12,026 as of March 31, 2010,
representing a CAGR in excess of 14%. Our historical advisor
growth rate does not guarantee that we will attract advisors at
comparable rates in the future.
Our advisor base includes independent financial advisors, RIAs
and advisors at small and mid-sized financial institutions.
Advisors that join us average over 15 years of industry
experience. This substantial industry experience allows us to
focus on enhancing our advisors businesses without the
need for basic training or subsidizing advisors that are new to
the industry. We are also rigorous in both our initial advisor
screening and diligence as well as our ongoing monitoring
through our internal risk management and compliance functions.
2
Our independent advisors join us from a broad range of firms
including wirehouses, regional and insurance
broker-dealers,
banks and other independent firms. Our flexible business
platform allows our advisors to choose the most appropriate
business model to support their clients, whether they conduct
brokerage business, offer brokerage and fee-based services on
our corporate RIA platforms or provide fee-based services
through their own RIAs.
Among our 12,000 advisors, we support over 2,400 advisors at
over 750 banks and credit unions. We believe these financial
institutions are drawn to our outsourcing solutions because we
provide the broad array of services advisors at these
institutions need to be successful, allowing these institutions
to focus their energy and capital on their core businesses.
We also provide support to over 4,000 additional financial
advisors who are affiliated and licensed with insurance
companies. These outsourcing arrangements provide customized
clearing, advisory platforms and technology solutions that
enable financial advisors at these insurance companies to
efficiently provide a breadth of services to their client base.
Our Service
Value Proposition
The core of our business is dedicated to meeting the evolving
needs of our advisors and providing the platform and tools to
grow and enhance the profitability of their businesses. We
support our advisors by providing front, middle and back-office
solutions through the four pillars of our distinct value
proposition:
|
|
|
|
|
Enabling Technology. We provide our
technology and service to advisors through BranchNet, our
proprietary, integrated technology platform that is server-based
and web-accessed. Using the BranchNet workstation, our advisors
effectively manage all critical aspects of their businesses
while remaining highly efficient and responsive to their
clients needs.
|
|
|
|
Comprehensive Clearing and Compliance
Services. We custody and clear the majority
of our advisors transactions, providing an enhanced
advisor experience and expedited processing capabilities. Our
self-clearing platform also enables us to serve a wider variety
of advisors, including RIAs and dually-registered advisors
(hybrid RIAs). We have made sizeable investments in
our compliance offering to fully integrate these tools into our
technology platform. Since 2000, our commitment of resources and
focus on compliance have enabled us to maintain one of the best
regulatory compliance records, based upon the number of
regulatory events reported in FINRAs BrokerCheck Reports,
among the five largest U.S. broker-dealers, ranked by
number of advisors.
|
|
|
|
Practice Management Programs and
Training. Our practice management programs
help our advisors enhance and grow their businesses. Because of
our scale, we are able to dedicate a large and experienced group
of professionals that work with our advisors to build and better
manage their business and client relationships through
one-on-one
consulting. In addition, we hold 140 conferences and group
training events annually for the benefit of our advisors.
|
|
|
|
Independent Research. Our research team
consists of over 25 professionals with an average of
12 years of industry experience, dedicated to providing
unbiased, conflict-free advice. We provide our advisors with
integrated access to comprehensive proprietary and third-party
independent research on mutual funds, separate accounts,
insurance and annuities, asset allocation strategies, financial
markets and the economy, among other areas.
|
Our Economic
Value Proposition
We offer a compelling economic value proposition that is a key
factor in our ability to attract and retain advisors. The
independent channels pay advisors a greater share of brokerage
commissions and advisory fees than the captive
channels generally
80-90%
compared to
30-50%.
Because of our scale and efficient operating model, we offer our
advisors the highest average payout ratios
3
among the five largest U.S. broker-dealers, ranked by
number of advisors, which we believe provides us with an
important competitive advantage. Throughout this prospectus, we
use payout ratio to refer to the portion of
advisor-generated revenues, consisting of commissions and
advisory fees, that we collect from advisors clients and
pay to advisors.
We believe our superior technology and service platforms enable
our advisors to operate their practices at a lower cost than
other independent advisors. As a result, we believe owners of
practices associated with us earn meaningfully more pre-tax
profit than owners of practices affiliated with other
independent brokerage firms. We attribute this difference in
profitability, in part, to lower fixed costs driven by the need
for fewer staff at our associated practices. Finally, as
business owners, independent advisors, unlike captive advisors,
also have the opportunity to build equity in their own
businesses.
Our Product
Access
We do not manufacture any financial products. Instead, we
provide our advisors open architecture access to a large variety
of commission, fee-based, cash and money market products and
services. Our platform provides access to over 8,500 financial
products, which are manufactured by over 400 product sponsors.
Our product diligence group pre-screens all new products.
As of March 31, 2010, advisory and brokerage assets totaled
$285 billion, of which $81 billion was in advisory
assets. In 2009, brokerage sales were over $28 billion,
including over $10 billion in mutual funds and
$14 billion in annuities. Advisory sales were
$23 billion, which consisted primarily of mutual funds. As
a result of this scale and significant distribution
capabilities, we can offer leading products and services with
attractive economics to our advisors.
Our Financial
Model
We have a proven track record of strong financial performance.
We have increased our annual Adjusted EBITDA for the past five
consecutive years with only one decline in annual revenue in
2009 in conjunction with the major market downturn. Our net
income over the same period has declined two times, in 2006 and
2008. We have experienced greater variability in our net income
primarily due to amortization of purchased assets and interest
expense from our senior secured credit facilities and
subordinated notes, both a result of our merger transaction in
2005 with the investment funds affiliated with Hellman &
Friedman LLC and TPG Capital (collectively the Majority
Holders), as well as expenses associated with our
acquisition integration and restructuring initiatives.
Since 2005, we have grown our net revenues at an 18% CAGR, our
net income at a 2% CAGR, our Adjusted EBITDA at a 17% CAGR and
our Adjusted Net Income at a 13% CAGR. See Selected
Consolidated Financial Data. Our historical growth rates
do not guarantee future results, levels of activity, performance
or achievements. See Special Note Regarding
Forward-Looking Statements. As we demonstrated during the
financial crisis of 2008 and 2009, our financial model has
inherent resilience, and our overall financial performance is a
function of the following favorable characteristics:
|
|
|
|
|
Diverse and Recurring Revenue. Our
revenue stems from diverse and recurring sources, including
commission and advisory fees, asset based fees, fees from
product manufacturers, recordkeeping and cash sweep balances.
Our recurring revenue is associated with asset balances and is
not based on transaction volumes or other activity-based fees.
Therefore, although the level of our revenue sources can be
impacted by external market conditions such as the economic
downturn experienced in 2008 and 2009, their recurring nature
provides a level of predictability. This is demonstrated by our
recurring revenues in 2009, 2008 and 2007, which were 57.3%,
58.5% and 57.1%, respectively, of our net revenues.
|
|
|
|
|
|
Variable Expenses. Our expenses are
predominantly variable. They consist primarily of payouts to
advisors, which are determined as a percentage of
advisor-generated revenue. This
|
4
|
|
|
|
|
percentage payout generally varies with advisor productivity,
which is correlated to market performance. Our general and
administrative expenses can be actively managed, as evidenced
during the recent financial crisis.
|
|
|
|
|
|
Low Capital Requirements. We do not
manufacture products, make markets, provide underwriting or
engage in mortgage lending. As a result, our cash flow is not
encumbered by capital intensive activities. In addition, we can
reinvest the substantial free cash flows that we generate in our
business.
|
Our Competitive
Strengths
|
|
|
|
|
Significant Scale and Market Leadership
Position. We are the established leader in
the independent advisor market, which is our core business
focus. Our scale enables us to benefit from the following
dynamics:
|
|
|
|
|
|
We actively reinvest in our comprehensive technology platform
and practice support, which further improves the productivity of
our advisors.
|
|
|
|
|
|
As one of the largest distributors of financial products in the
United States, we are able to obtain attractive economics from
product manufacturers.
|
|
|
|
Among the five largest U.S. broker-dealers by number of
advisors, we offer the highest average payout ratios to our
advisors.
|
The combination of our ability to reinvest in the business and
maintain highly competitive payout ratios allows us to attract
and retain advisors successfully. This, in turn, drives our
growth and leads to a virtuous cycle that reinforces
our established scale advantage.
|
|
|
|
|
Unique Value Proposition for Independent
Advisors. We believe we are the only company
that offers a conflict-free, open architecture and scalable
platform, which leads to greater economics for our advisors and
allows them to build equity in their businesses. This generates
a significant opportunity to attract and retain highly qualified
advisors who are seeking independence.
|
|
|
|
Unique Value Proposition for
Institutions. We provide solutions to
financial institutions, such as regional banks, credit unions
and insurers, who would otherwise find the technology,
infrastructure and regulatory requirements associated with
delivering financial advice to be cost-prohibitive.
|
|
|
|
Ability to Profitably Serve the Mass Affluent
Market. We have designed and integrated all
aspects of our platforms and services to profitably meet the
needs of advisors who serve the mass affluent market. We believe
there is an attractive opportunity in this market, in part
because wirehouses have not historically focused on the mass
affluent market. We believe our scale will sustain and
strengthen our competitive advantage in the mass affluent market.
|
|
|
|
Ability to Serve a Broad Range of Advisor
Models. As a result of our integrated
technology platform and the resulting flexibility, we are able
to attract and retain advisors from multiple channels, including
wirehouses, regional broker-dealers and other independent
broker-dealers. In addition, although we have grown through our
focus on the mass affluent market, the breadth of our platform
has facilitated growing penetration of the high net worth
market. As of March 31, 2010 our advisors supported
accounts with more than $1 million in assets that in the
aggregate represented $42.2 billion in advisory and
brokerage assets, or 15% of our total.
|
|
|
|
|
|
Experienced and Committed Senior Management
Team. We have an experienced and committed
senior management team that provides stable and long-standing
leadership for our business. The management team is aligned with
stockholders and holds significant equity ownership in the
company.
|
5
Risks That We
Face
Our business is subject to a number of risks of which you should
be aware before making an investment decision. These risks are
discussed more fully in the Risk Factors section of
this prospectus immediately following this prospectus summary.
These risks include the following:
|
|
|
|
|
We depend on our ability to attract and retain experienced
and productive advisors. We derive a large
portion of our revenues from commissions and fees generated by
our advisors. If we fail to attract new advisors or to retain
and motivate our current advisors, our business may suffer.
|
|
|
|
|
|
Our financial condition and results of operations may be
adversely affected by market fluctuations and other economic
factors. General economic and market factors
can affect our commission and fee revenue. Significant downturns
and volatility in equity and other financial markets have had
and could continue to have an adverse effect on our financial
condition and results of operations.
|
|
|
|
|
|
Regulatory developments and our failure to comply with
regulations could adversely affect our business by increasing
our costs and exposure to litigation, affecting our reputation
and making our business less profitable. Our
business is subject to extensive U.S. regulation and
supervision, including securities and investment advisory
services. Our ability to conduct business depends on our
compliance with these laws, rules and regulations, which is
largely dependent on our establishment and maintenance of
compliance systems and procedures.
|
|
|
|
|
|
We operate in an intensely competitive industry, which
could cause us to lose advisors and their assets, thereby
reducing our revenues and net income. We are
subject to competition in all aspects of our business, including
competition for our advisors and clients. If we fail to continue
to attract highly qualified advisors or advisors licensed with
us leave us to pursue other opportunities, or if current or
potential clients of our advisors decide to use one of our
competitors, we could face a significant decline in market
share, commission and fee revenues and net income.
|
|
|
|
|
|
We rely on technology in our business, and technology and
execution failures could subject us to losses, litigation and
regulatory actions. Our business relies
extensively on electronic data processing and communications
systems. Failure of our systems, which could result from events
beyond our control, or an inability to effectively upgrade those
systems or implement new technology-driven products or services,
could result in financial losses, liability to clients and
damage to our reputation.
|
|
|
|
|
|
Our indebtedness could adversely affect our financial
health and may limit our ability to use debt to fund future
capital needs. Our level of indebtedness
could increase our vulnerability to general adverse economic and
industry conditions, require us to dedicate a substantial
portion of our cash flow from operation to payments on our
indebtedness and may limit our flexibility in planning for
changes in our business and the industry in which we operate.
|
|
|
|
|
|
The Majority Holders will have the ability to control the
outcome of matters submitted for stockholder approval and may
have interests that differ from those of our other
stockholders. Due to their ownership of a
majority of our capital stock, the Majority Holders have
significant influence over corporate transactions and are able
to effectively control our decisions, regardless of whether or
not other stockholders believe that the transaction is in their
own best interests.
|
6
Our Sources of
Growth
We expect to increase our revenue and profitability by
benefiting from favorable industry trends and by executing
strategies to accelerate our growth beyond that of the broader
markets in which we operate.
Favorable
Industry Trends
|
|
|
|
|
Growth in Investable Assets. According
to Cerulli Associates, total assets under management in the
United States are anticipated to grow at 7% per year over the
next four years and retirement assets are expected to grow
8% from 2008 to 2014 (in part due to the retirement of the baby
boomer generation and the resulting assets which are projected
to flow out of retirement plans and into individual retirement
accounts). In addition, individual retirement account rollovers
are projected to almost double, growing from $3.6 trillion as of
2008 to $6.8 trillion by 2014.
|
|
|
|
Increasing Demand for Independent Financial
Advice. Retail investors, particularly in the
mass affluent market, are increasingly seeking financial advice
from independent sources.
|
|
|
|
Advisor Migration to Independence.
Independent channels are gaining market share from captive
channels. We believe that we are not just a beneficiary of this
secular shift, but an active catalyst in the movement to
independence.
|
|
|
|
Macroeconomic Trends. As the
macroeconomic environment continues to stabilize, we anticipate
an appreciation in asset prices and a rise in interest rates
from current, historically low levels. We expect that our
business will benefit from growth in advisory and brokerage
assets as well as increasing asset-based and cash sweep fees.
|
LPL-Specific
Growth Opportunities
|
|
|
|
|
Attracting New Advisors to our
Platform. We have only 3.8% market share of
the approximately 310,000 financial advisors in the United
States, according to Cerulli Associates, which provides us with
significant opportunity to attract new advisors.
|
|
|
|
Ramp-up of Newly-Attracted Advisors. We
predominately attract experienced advisors who have established
practices. In our experience, it takes an average of three
years for new advisors to re-establish their practices and
associated revenues. This seasoning process creates accelerated
growth of revenue from our new advisors.
|
|
|
|
Increasing Productivity of Existing Advisor
Base. The productivity of our advisors
increases over time as we enable them to add new clients, gain
shares of their clients investable assets, and expand
their existing practices with additional advisors. We
facilitate these productivity improvements by helping our
advisors better manage their practices in an increasingly
complex environment.
|
|
|
|
Our Business Model has Inherent Economies of
Scale. The largely fixed costs necessary to
support our advisors deliver higher marginal profitability as
our advisors client assets and our revenues grow.
Historically, this dynamic has been demonstrated through the
growth in our operating margins.
|
|
|
|
Opportunistic Pursuit of
Acquisitions. We have a proven history of
expanding our business through opportunistic acquisitions. In
the past six years, we have successfully completed four
transactions. Our scalable business model and operating platform
make us an attractive acquirer in a fragmented market.
|
7
Recent
Developments
On May 24, 2010, we entered into a Third Amended and
Restated Credit Agreement (our senior secured credit
agreement) with our subsidiary, LPL Holdings, Inc., the
lending institutions from time to time parties thereto, Morgan
Stanley Senior Funding, as Administrative Agent, and Morgan
Stanley & Co. Incorporated, as Collateral Agent, which
amended and restated our Second Amended and Restated Credit
Agreement, dated as of June 18, 2007.
We entered into the Third Amended and Restated Credit Agreement
to raise an additional $580.0 million to redeem our senior
unsecured subordinated notes due 2015. This transaction resulted
in the reduction in our overall weighted average cost of
interest. In addition, we extended the maturity of
$500.0 million of our original term loan tranche to 2015
(the remaining balance of $317.1 million will mature on the
original maturity date in 2013) and achieved greater
flexibility to pay down our indebtedness in the future without
penalty.
Our Corporate
Structure
LPL Investment Holdings Inc. is the parent company of our
collective businesses. Our address is One Beacon Street, Boston,
Massachusetts 02108. Our telephone number is
(617) 423-3644.
Our website address is www.lpl.com. Information contained in,
and that can be accessed through, our website is not
incorporated into and does not form a part of this prospectus.
On December 28, 2005, LPL Holdings, Inc., the predecessor,
and its subsidiaries were acquired through a merger transaction
by funds affiliated with the Majority Holders. Any activities
shown or described for periods prior to December 28, 2005
are those of the predecessor.
8
THE
OFFERING
|
|
|
Common stock we are offering |
|
shares |
|
Common stock selling stockholders are offering |
|
shares |
|
Common stock to be outstanding after this offering |
|
shares |
|
Option to purchase additional shares offered to underwriters |
|
shares |
|
|
|
Use of proceeds |
|
We estimate that the net proceeds from our sale of shares in
this offering will be approximately
$ million, or approximately
$ million if the underwriters
exercise their option to purchase additional shares in full. We
expect to use all of the net proceeds from this offering
received by us to repay a portion of the term loans under our
senior secured credit facilities. We will not receive any of the
proceeds from the sale of shares by the selling stockholders.
See Use of Proceeds. The selling stockholders also
include certain members of management. |
|
|
|
Risk factors |
|
You should read the Risk Factors section of this
prospectus beginning on page 14 for a discussion of factors
to consider carefully before deciding whether to purchase shares
of our common stock. |
|
|
|
Proposed NASDAQ Global Select Market symbol |
|
LPLA |
The number of shares of our common stock to be outstanding after
this offering is based on 94,241,567 shares of common stock
outstanding as of March 31, 2010 and excludes:
|
|
|
|
|
22,710,790 shares of common stock issuable upon the exercise of
options and warrants outstanding as of March 31, 2010, with
exercise prices ranging from $1.07 to $27.80 per share and a
weighted average exercise price of $7.00 per share (the
number, price and range of outstanding options and warrants will
be adjusted to reflect any exercise of options and warrants by
selling stockholders in connection with this offering);
|
|
|
|
2,823,452 stock units outstanding at March 31, 2010,
under our 2008 Nonqualified Deferred Compensation Plan, each
representing the right to receive one share of common stock at
the earliest of (a) a date in 2012 to be determined by the
board of directors; (b) a change in control of the company
or (c) death or disability of the holder and
|
|
|
|
3,108,907 additional shares of common stock as of March 31,
2010 reserved for future grants under our equity incentive plans.
|
Unless otherwise indicated, all information in this prospectus:
|
|
|
|
|
assumes the adoption of our amended and restated certificate of
incorporation (certificate of incorporation) and our
second amended and restated bylaws (bylaws), to be
effective upon the closing of this offering and
|
|
|
|
assumes no exercise by the underwriters of their option to
purchase up
to additional
shares of our common stock in this offering.
|
9
SUMMARY FINANCIAL
DATA
The following tables present a summary of our historical
financial information and operating data. You should read the
following summary in conjunction with Selected
Consolidated Financial Data, Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our consolidated financial statements and
related notes, all included elsewhere in this prospectus.
Historical dividends per share are presented as declared by the
predecessor under its capital structure at that time. Shares of
common stock of our predecessor are not equal to shares of
common stock under our current capital structure and are not
necessarily indicative of amounts that would have been received
per share of common stock under our current capital structure.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
For the Year Ended December 31,
|
|
|
|
Ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor(2)
|
|
|
|
2010(1)
|
|
|
2009(1)
|
|
|
2009(1)
|
|
|
2008(1)
|
|
|
2007(1)
|
|
|
2006
|
|
|
2005
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
Consolidated statements of income data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
743,406
|
|
|
$
|
642,978
|
|
|
$
|
2,749,505
|
|
|
$
|
3,116,349
|
|
|
$
|
2,716,574
|
|
|
$
|
1,739,635
|
|
|
$
|
1,406,320
|
|
Total expenses
|
|
|
698,690
|
|
|
|
616,193
|
|
|
|
2,676,938
|
|
|
|
3,023,584
|
|
|
|
2,608,741
|
|
|
|
1,684,769
|
|
|
|
1,290,570
|
|
Income from continuing operations before provision for income
taxes
|
|
|
44,716
|
|
|
|
26,785
|
|
|
|
72,567
|
|
|
|
92,765
|
|
|
|
107,833
|
|
|
|
54,866
|
|
|
|
115,750
|
|
Provision for income taxes
|
|
|
19,162
|
|
|
|
11,988
|
|
|
|
25,047
|
|
|
|
47,269
|
|
|
|
46,764
|
|
|
|
21,224
|
|
|
|
46,461
|
|
Income from continuing operations
|
|
|
25,554
|
|
|
|
14,797
|
|
|
|
47,520
|
|
|
|
45,496
|
|
|
|
61,069
|
|
|
|
33,642
|
|
|
|
69,289
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26,200
|
)
|
Net income
|
|
|
25,554
|
|
|
|
14,797
|
|
|
|
47,520
|
|
|
|
45,496
|
|
|
|
61,069
|
|
|
|
33,642
|
|
|
|
43,089
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.29
|
|
|
$
|
0.17
|
|
|
$
|
0.54
|
|
|
$
|
0.53
|
|
|
$
|
0.72
|
|
|
$
|
0.41
|
|
|
$
|
0.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.25
|
|
|
$
|
0.15
|
|
|
$
|
0.47
|
|
|
$
|
0.45
|
|
|
$
|
0.62
|
|
|
$
|
0.35
|
|
|
$
|
0.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income per share (unaudited)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
As of March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor(2)
|
|
|
|
2010(1)
|
|
|
2009(1)
|
|
|
2009(1)
|
|
|
2008(1)
|
|
|
2007(1)
|
|
|
2006
|
|
|
2005
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated statements of financial condition data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
324,761
|
|
|
$
|
319,394
|
|
|
$
|
378,594
|
|
|
$
|
219,239
|
|
|
$
|
188,003
|
|
|
$
|
245,163
|
|
|
$
|
134,592
|
|
Total assets
|
|
|
3,343,286
|
|
|
|
3,344,907
|
|
|
|
3,336,936
|
|
|
|
3,381,779
|
|
|
|
3,287,349
|
|
|
|
2,797,544
|
|
|
|
2,638,486
|
|
Total debt(4)
|
|
|
1,407,117
|
|
|
|
1,465,541
|
|
|
|
1,369,223
|
|
|
|
1,467,647
|
|
|
|
1,451,071
|
|
|
|
1,344,375
|
|
|
|
1,345,000
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Three
|
|
As of and for the Year Ended December 31,
|
|
|
Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
Predecessor(2)
|
|
|
2010(1)
|
|
2009(1)
|
|
2009(1)
|
|
2008(1)
|
|
2007(1)
|
|
2006
|
|
2005
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
Other financial and operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(5) (in thousands)
|
|
$
|
105,457
|
|
|
$
|
81,948
|
|
|
$
|
356,068
|
|
|
$
|
350,171
|
|
|
$
|
329,079
|
|
|
$
|
247,912
|
|
|
$
|
188,917
|
|
Adjusted Net Income(5) (in thousands)
|
|
$
|
41,099
|
|
|
$
|
25,311
|
|
|
$
|
129,556
|
|
|
$
|
108,863
|
|
|
$
|
107,404
|
|
|
$
|
65,372
|
|
|
$
|
78,278
|
|
Adjusted Net Income per share(5)
|
|
$
|
0.42
|
|
|
$
|
0.26
|
|
|
$
|
1.32
|
|
|
$
|
1.09
|
|
|
$
|
1.08
|
|
|
$
|
0.68
|
|
|
$
|
0.82
|
|
Number of advisors(6)
|
|
|
12,026
|
|
|
|
12,294
|
|
|
|
11,950
|
|
|
|
11,920
|
|
|
|
11,089
|
|
|
|
7,006
|
|
|
|
6,481
|
|
Advisory and brokerage assets(7) (in billions)
|
|
$
|
284.6
|
|
|
$
|
231.7
|
|
|
$
|
279.4
|
|
|
$
|
233.9
|
|
|
$
|
283.2
|
|
|
$
|
164.7
|
|
|
$
|
105.4
|
|
Advisory assets under management (in billions)
|
|
$
|
81.0
|
|
|
$
|
57.5
|
|
|
$
|
77.2
|
|
|
$
|
59.6
|
|
|
$
|
73.9
|
|
|
$
|
51.1
|
|
|
$
|
38.4
|
|
Insured cash account balances (in billions)
|
|
$
|
11.4
|
|
|
$
|
12.0
|
|
|
$
|
11.6
|
|
|
$
|
11.2
|
|
|
$
|
8.6
|
|
|
$
|
5.8
|
|
|
|
n/a
|
|
Money market account balances (in billions)
|
|
$
|
6.7
|
|
|
$
|
10.8
|
|
|
$
|
7.0
|
|
|
$
|
11.2
|
|
|
$
|
7.4
|
|
|
$
|
3.5
|
|
|
$
|
6.4
|
|
|
|
|
(1)
|
|
Financial results as of and for the
years ended December 31, 2009, 2008 and 2007 and the
quarters ended March 31, 2010 and 2009 include the
acquisitions of UVEST Financial Services Group, Inc.
(UVEST) (acquired on January 2, 2007), Pacific
Select Group, LLC (renamed LPL Investment Advisory Services
Group, LLC) and its wholly owned subsidiaries: Mutual
Service Corporation (MSC), Associated Financial
Group, Inc. (AFG), Associated Securities Corp.
(Associated), Associated Planners Investment
Advisory, Inc. (APIA) and Waterstone Financial
Group, Inc. (WFG) (MSC, AFG, Associated, APIA and
WFG are collectively referred to herein as the Affiliated
Entities) (acquired on June 20, 2007) and IFMG
Securities, Inc., Independent Financial Marketing Group, Inc.
and LSC Insurance Agency of Arizona, Inc. (collectively
IFMG) (acquired on November 7, 2007).
Consequently, the financial results as of and for
December 31, 2009, 2008 and 2007 and three months ended
March 31, 2010 and 2009 may not be directly comparable to
prior periods.
|
|
|
|
(2)
|
|
On December 28, 2005,
investment funds affiliated with the Majority Holders acquired a
majority of our capital stock through a merger transaction.
Activities as of December 28, 2005 and periods prior are
those of the predecessor. Predecessor net revenues were
$1,156 million, $908 million, $796 million,
$739 million and $812 million for the years ended
December 31, 2004, 2003, 2002, 2001 and 2000, respectively.
Predecessor net income was $35.4 million,
$16.4 million, $35.9 million, $38.1 million and
$29.7 million for the years ended December 31, 2004,
2003, 2002, 2001 and 2000, respectively.
|
|
|
|
(3)
|
|
The unaudited pro forma net income
per share gives effect to: (i) the recognition of
$ million of
share-based
compensation expense based on the number of restricted shares
issued under our Fifth Amended and Restated 2000 Stock Bonus
Plan multiplied by the assumed initial public offering price net
of the related tax benefit, (ii) the sale by us
of shares of common stock
(assuming the underwriters do not exercise their option to
purchase additional shares) that we are offering at the assumed
initial public offering price and after deducting estimated
underwriting discounts and commissions and estimated offering
expenses payable by us and (iii) the use of proceeds from
the sale by us of these shares to reduce amounts outstanding
under our senior secured credit facilities. For purposes of this
calculation, the assumed initial public offering price is
$ per share, which is the
midpoint of the range listed on the cover page of this
prospectus.
|
|
(4)
|
|
Total debt consists of our senior
secured credit facilities, senior unsecured subordinated notes,
revolving line of credit facility and bank loans payable.
|
|
(5)
|
|
Adjusted EBITDA, Adjusted Net
Income and Adjusted Net Income per share have limitations as
analytical tools and should not be considered in isolation, or
as substitutes for analysis of our results as reported under
accounting principles generally accepted in the United States
(GAAP). Some of these limitations are:
|
|
|
|
|
|
Adjusted EBITDA, Adjusted Net Income and Adjusted Net Income per
share do not reflect all cash expenditures, future requirements
for capital expenditures or contractual commitments;
|
|
|
|
Adjusted EBITDA, Adjusted Net Income and Adjusted Net Income per
share do not reflect changes in, or cash requirements for,
working capital needs and
|
11
|
|
|
|
|
Adjusted EBITDA does not reflect the significant interest
expense, or the cash requirements necessary to service interest
or principal payments, on our debt.
|
For a discussion of why we think these are useful measures of
our operating performance, please see Managements
Discussion and Analysis of Financial Condition and Results of
Operations How We Evaluate Growth.
|
|
|
|
|
The reconciliation from net income
to Adjusted EBITDA and Adjusted Net Income for the periods
presented is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Months
|
|
|
For the Year Ended December 31,
|
|
|
|
Ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor(2)
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(unaudited)
|
|
|
|
|
|
Net income
|
|
$
|
25,554
|
|
|
$
|
14,797
|
|
|
$
|
47,520
|
|
|
$
|
45,496
|
|
|
$
|
61,069
|
|
|
$
|
33,642
|
|
|
$
|
43,089
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,200
|
|
Interest expense
|
|
|
24,336
|
|
|
|
25,941
|
|
|
|
100,922
|
|
|
|
115,558
|
|
|
|
122,817
|
|
|
|
125,103
|
|
|
|
1,388
|
|
Income tax expense
|
|
|
19,162
|
|
|
|
11,988
|
|
|
|
25,047
|
|
|
|
47,269
|
|
|
|
46,764
|
|
|
|
21,224
|
|
|
|
46,461
|
|
Depreciation and amortization
|
|
|
25,590
|
|
|
|
27,395
|
|
|
|
108,296
|
|
|
|
100,462
|
|
|
|
78,748
|
|
|
|
65,348
|
|
|
|
17,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
94,642
|
|
|
$
|
80,121
|
|
|
$
|
281,785
|
|
|
$
|
308,785
|
|
|
$
|
309,398
|
|
|
$
|
245,317
|
|
|
$
|
134,992
|
|
EBITDA Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
expense (a)
|
|
$
|
2,536
|
|
|
$
|
1,225
|
|
|
$
|
6,437
|
|
|
$
|
4,160
|
|
|
$
|
2,159
|
|
|
$
|
2,878
|
|
|
$
|
8,354
|
|
Acquisition and integration related expenses (b)
|
|
|
140
|
|
|
|
822
|
|
|
|
3,037
|
|
|
|
18,326
|
|
|
|
16,350
|
|
|
|
1,237
|
|
|
|
33,741
|
|
Restructuring and conversion costs (c)
|
|
|
7,979
|
|
|
|
(259
|
)
|
|
|
64,658
|
|
|
|
15,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (d)
|
|
|
160
|
|
|
|
39
|
|
|
|
151
|
|
|
|
3,778
|
|
|
|
1,172
|
|
|
|
(1,520
|
)
|
|
|
11,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
105,457
|
|
|
$
|
81,948
|
|
|
$
|
356,068
|
|
|
$
|
350,171
|
|
|
$
|
329,079
|
|
|
$
|
247,912
|
|
|
$
|
188,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
25,554
|
|
|
$
|
14,797
|
|
|
$
|
47,520
|
|
|
$
|
45,496
|
|
|
$
|
61,069
|
|
|
$
|
33,642
|
|
|
$
|
43,089
|
|
After-Tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA Adjustments (e)
|
|
|
7,015
|
|
|
|
1,395
|
|
|
|
46,089
|
|
|
|
26,045
|
|
|
|
12,263
|
|
|
|
1,820
|
|
|
|
33,919
|
|
Amortization of purchased intangible assets (e)(f)
|
|
|
8,530
|
|
|
|
9,119
|
|
|
|
35,947
|
|
|
|
37,322
|
|
|
|
34,072
|
|
|
|
29,910
|
|
|
|
1,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income
|
|
$
|
41,099
|
|
|
$
|
25,311
|
|
|
$
|
129,556
|
|
|
$
|
108,863
|
|
|
$
|
107,404
|
|
|
$
|
65,372
|
|
|
$
|
78,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income per share (g)
|
|
$
|
0.42
|
|
|
$
|
0.26
|
|
|
$
|
1.32
|
|
|
$
|
1.09
|
|
|
$
|
1.08
|
|
|
$
|
0.68
|
|
|
$
|
0.82
|
|
Weighted average shares outstanding diluted
|
|
|
98,945
|
|
|
|
97,959
|
|
|
|
98,494
|
|
|
|
100,334
|
|
|
|
99,099
|
|
|
|
96,159
|
|
|
|
95,555
|
|
|
|
|
(a)
|
|
Represents share-based compensation
for stock options awarded to employees and non-executive
directors.
|
|
(b)
|
|
Represents acquisition and
integration costs primarily as a result of our 2007 acquisitions
of UVEST, the Affiliated Entities and IFMG.
|
|
(c)
|
|
Represents organizational
restructuring charges incurred in 2008 and 2009 for severance
and one-time termination benefits, asset impairments, lease and
contract termination fees and other transfer costs.
|
|
(d)
|
|
Represents impairment charges in
2008 for our equity investment in Blue Frog Solutions, Inc.
(Blue Frog) and in 2005 for our mortgage subsidiary
Innovex Mortgage, Inc., which subsequently ceased operations on
December 31, 2007, as well as other taxes and employment
tax withholding related to a nonqualified deferred compensation
plan.
|
|
|
|
(e)
|
|
EBITDA Adjustments and amortization
of purchased intangible assets, a component of depreciation and
amortization, have been tax effected using a federal rate of
35.0% and the applicable effective state rate which ranged from
3.90% to 4.71%, net of the federal tax benefit.
|
|
|
|
(f)
|
|
Represents amortization of
intangible assets and software which were $59.6 million,
$61.7 million, $56.1 million, $49.2 million and
$2.1 million before taxes for the years ended
December 31, 2009, 2008, 2007, 2006 and 2005, respectively,
and were $14.1 million and $15.1 million before taxes
for the three months ended March 31, 2010 and 2009,
respectively. The amortization of intangible assets and software
was a result of our purchase accounting adjustments from our
merger transaction in 2005 with the Majority Holders and our
2007 acquisitions of UVEST, the Affiliated Entities and IFMG.
|
12
|
|
|
(g)
|
|
Represents Adjusted Net Income
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 Net Income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
|
|
|
|
|
Months Ended
|
|
|
For The Year Ended December 31,
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share (diluted)
|
|
$
|
0.25
|
|
|
$
|
0.15
|
|
|
$
|
0.47
|
|
|
$
|
0.45
|
|
|
$
|
0.62
|
|
|
$
|
0.35
|
|
|
$
|
0.45
|
|
Adjustment for allocation of undistributed earnings to stock
units
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
After-Tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA Adjustments per share
|
|
$
|
0.07
|
|
|
$
|
0.01
|
|
|
$
|
0.47
|
|
|
$
|
0.26
|
|
|
$
|
0.12
|
|
|
$
|
0.02
|
|
|
$
|
0.35
|
|
Amortization of purchased intangible assets per share
|
|
$
|
0.09
|
|
|
$
|
0.09
|
|
|
$
|
0.37
|
|
|
$
|
0.38
|
|
|
$
|
0.34
|
|
|
$
|
0.31
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income per share
|
|
$
|
0.42
|
|
|
$
|
0.26
|
|
|
$
|
1.32
|
|
|
$
|
1.09
|
|
|
$
|
1.08
|
|
|
$
|
0.68
|
|
|
$
|
0.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6) |
|
Number of advisors is defined as those investment professionals
who are licensed to do business with our broker-dealer
subsidiaries. In 2009, we attracted record levels of new
advisors due to the dislocation in the marketplace that impacted
many of our competitors. This record recruitment was offset due
to anticipated attrition related to the consolidation of the
operations of the Affiliated Entities. Excluding this attrition,
we added 750 net new advisors during 2009, representing
6.3% advisor growth. |
|
(7) |
|
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. Non-networked
assets was not available in 2005 and accordingly, advisory and
brokerage assets is comprised of custodied and networked
accounts. |
13
RISK
FACTORS
Investing in our common stock involves a high degree of risk.
You should carefully consider the following risk factors, as
well as the other information in this prospectus, before
deciding to invest in our common stock. The occurrence of any of
the following risks could harm our business, financial
condition, results of operations or prospects. In that case, the
trading price of our common stock could decline, and you may
lose all or part of your investment.
Risks Related to
Our Business and Industry
We depend on
our ability to attract and retain experienced and productive
advisors.
We derive a large portion of our revenues from commissions and
fees generated by our advisors. Our ability to attract and
retain experienced and productive advisors has contributed
significantly to our growth and success, and our strategic plan
is premised upon continued growth in the number of our advisors.
If we fail to attract new advisors or to retain and motivate our
current advisors, our business may suffer.
The market for experienced and productive advisors is highly
competitive, and we devote significant resources to attracting
and retaining the most qualified advisors. In attracting and
retaining advisors, we compete directly with a variety of
financial institutions such as wirehouses, regional
broker-dealers, banks, insurance companies and other independent
broker-dealers. If we are not successful in attracting or
retaining highly qualified advisors, we may not be able to
recover the expense involved in attracting and training these
individuals. There can be no assurance that we will be
successful in our efforts to attract and retain the advisors
needed to achieve our growth objectives.
Our financial
condition and results of operations may be adversely affected by
market fluctuations and other economic factors.
Our financial condition and results of operations may be
adversely affected by market fluctuations and other economic
factors. Significant downturns and volatility in equity and
other financial markets have had and could continue to have an
adverse effect on our financial condition and results of
operations.
General economic and market factors can affect our commission
and fee revenue. For example, a decrease in market levels can:
|
|
|
|
|
reduce new investments by both new and existing clients in
financial products that are linked to the stock market, such as
variable life insurance, variable annuities, mutual funds and
managed accounts;
|
|
|
|
reduce trading activity, thereby affecting our brokerage
commissions;
|
|
|
|
reduce the value of advisory and brokerage assets, thereby
reducing asset-based fee income and
|
|
|
|
motivate clients to withdraw funds from their accounts, reducing
advisory and brokerage assets, advisory fee revenue and
asset-based fee income.
|
In addition, because certain of our expenses are fixed, our
ability to reduce them over short periods of time is limited,
which could negatively impact our profitability.
Significant
interest rate changes could affect our profitability and
financial condition.
Our revenues are exposed to interest rate risk primarily from
changes in the interest rates payable to us from banks
participating in our cash sweep programs. In the current low
interest rate environment, our revenue from our cash sweep
program has declined and may decline further due to changes in
interest rates or clients moving assets out of our cash sweep
program. We may also be
14
limited in the amount we can reduce interest rates payable to
clients in our cash sweep program and still offer a competitive
return.
Lack of
liquidity or access to capital could impair our business and
financial condition.
Liquidity, or ready access to funds, is essential to our
business. We expend significant resources investing in our
business, in particular with respect to our technology and
service platforms. In addition, we must maintain certain levels
of required capital. As a result, reduced levels of liquidity
could have a significant negative effect on us. Some potential
conditions that could negatively affect our liquidity include:
|
|
|
|
|
illiquid or volatile markets;
|
|
|
|
diminished access to debt or capital markets or
|
|
|
|
unforeseen cash or capital requirements, adverse legal
settlements or judgments (including, among others, risks
associated with auction rate securities).
|
The capital and credit markets continue to experience varying
degrees of volatility and disruption. In some cases, the markets
have exerted downward pressure on availability of liquidity and
credit capacity for businesses similar to ours. Without
sufficient liquidity, we could be required to curtail our
operations, and our business would suffer.
Notwithstanding the self-funding nature of our operations, we
may sometimes be required to fund timing differences arising
from the delayed receipt of funds associated with the settlement
of transactions in securities markets. Historically, these
timing differences were funded either with internally generated
cash flow or, if needed, with funds drawn under short-term
borrowing facilities, including both committed unsecured lines
of credit and uncommitted lines of credit secured by client
securities. LPL Financial, one of our broker-dealer
subsidiaries, utilizes uncommitted lines secured by client
securities to fund margin loans and other client
transaction-related timing differences.
In the event current resources are insufficient to satisfy our
needs, we may need to rely on financing sources such as bank
debt. The availability of additional financing will depend on a
variety of factors such as
|
|
|
|
|
market conditions;
|
|
|
|
the general availability of credit;
|
|
|
|
the volume of trading activities;
|
|
|
|
the overall availability of credit to the financial services
industry;
|
|
|
|
our credit ratings and credit capacity and
|
|
|
|
the possibility that our stockholders, advisors or lenders could
develop a negative perception of our long-or short-term
financial prospects if the level of our business activity
decreases due to a market downturn.
|
Similarly, our access to funds may be impaired if regulatory
authorities or rating organizations take negative actions
against us.
Disruptions, uncertainty or volatility in the capital and credit
markets may also limit our access to capital required to operate
our business. Such market conditions may limit our ability to
satisfy statutory capital requirements, generate commission, fee
and other market-related revenue to meet liquidity needs and
access the capital necessary to grow our business. As such, we
may be forced to delay raising capital, issue different types of
capital than we would otherwise, less effectively deploy such
capital or bear an unattractive cost of capital, which could
decrease our profitability and significantly reduce our
financial flexibility.
15
If the
counterparties to the derivative instruments we use to hedge our
interest rate risk default, we may be exposed to risks we had
sought to mitigate.
We use derivative instruments to hedge our interest rate risk.
If our counterparties fail to honor their obligations under the
derivative instruments, our hedges of the interest rate risk
will be ineffective. That failure could have an adverse effect
on our financial condition, results of operations and cash flows
that could be material. For the names of key counterparties upon
which we currently rely, see Managements Discussion
and Analysis of Financial Condition and Results of
Operations Interest Rate Risk.
A loss of our
marketing relationships with manufacturers of financial products
could harm our relationship with our advisors and, in turn,
their clients.
We operate on an open architecture product platform with no
proprietary financial products. To help our advisors meet their
clients needs with suitable investment options, we have
relationships with most of the industry-leading providers of
financial and insurance products. We have sponsorship agreements
with some manufacturers of fixed and variable annuities and
mutual funds that, subject to the survival of certain terms and
conditions, may be terminated upon notice. If we lose our
relationships with one or more of these manufacturers, our
ability to serve our advisors and our business may be materially
and adversely affected.
Risks Related to
Our Regulatory Environment
Regulatory
developments and our failure to comply with regulations could
adversely affect our business by increasing our costs and
exposure to litigation, affecting our reputation and making our
business less profitable.
Our business is subject to extensive U.S. regulation and
supervision, including securities and investment advisory
services. The securities industry in the United States is
subject to extensive regulation under both federal and state
laws. Our broker-dealer subsidiary, LPL Financial, is:
|
|
|
|
|
registered as a broker-dealer with the Securities and Exchange
Commission (SEC), each of the 50 states, and
the District of Columbia, Puerto Rico and the U.S. Virgin
Islands;
|
|
|
|
registered as an investment advisor with the SEC;
|
|
|
|
a member of Financial Industry Regulatory Authority, Inc.
(FINRA);
|
|
|
|
regulated by the Commodities Future Trading Commission
(CFTC) with respect to the futures and commodities
trading activities it conducts as an introducing broker and
|
|
|
|
a member of the Nasdaq Stock Market and the Chicago Stock
Exchange.
|
Much of the regulation of broker-dealers has been delegated to
self-regulatory organizations (SROs), namely FINRA
and the Municipal Securities Rulemaking Board
(MSRB). The primary regulators of LPL Financial are
FINRA, and for municipal securities, the MSRB. The CFTC has
designated the National Futures Association (NFA) as
LPL Financials primary regulator for futures and
commodities trading activities.
The SEC, FINRA, CFTC, Office of the Comptroller of the Currency
(OCC), various securities and futures exchanges and
other U.S. governmental or regulatory authorities
continuously review legislative and regulatory initiatives and
may adopt new or revised laws and regulations. There can also be
no assurance that other federal or state agencies will not
attempt to further regulate our business. These legislative and
regulatory initiatives may affect the way in which we conduct
our business and may make our business model less profitable.
Our ability to conduct business in the jurisdictions in which we
currently operate depends on our compliance with the laws, rules
and regulations promulgated by federal regulatory bodies and the
regulatory authorities in each of these jurisdictions. Our
ability to comply with all applicable laws, rules
16
and regulations is largely dependent on our establishment and
maintenance of compliance, audit and reporting systems and
procedures, as well as our ability to attract and retain
qualified compliance, audit and risk management personnel. While
we have adopted policies and procedures reasonably designed to
comply with all applicable laws, rules and regulations, these
systems and procedures may not be fully effective, and there can
be no assurance that regulators or third parties will not raise
material issues with respect to our past or future compliance
with applicable regulations.
Our profitability could also be affected by rules and
regulations that impact the business and financial communities
generally and, in particular, our advisors clients,
including changes to the laws governing taxation (including the
classification of independent contractor status of our
advisors), electronic commerce, privacy and data protection.
Failure to comply with new rules and regulations could subject
us to regulatory actions or litigation and it could have a
material adverse effect on our business, results of operations,
cash flows or financial condition. In addition, new rules and
regulations could result in limitations on the lines of business
we conduct, modifications to our business practices, increased
capital requirements or additional costs.
We are subject
to various regulatory ownership requirements, which, if not
complied with, could result in the restriction of the ongoing
conduct, growth, or even liquidation of parts of our
business.
The business activities that we may conduct are limited by
various regulatory agencies. Our membership agreement with FINRA
may be amended by application to include additional business
activities. This application process is time-consuming and may
not be successful. As a result, we may be prevented from
entering new potentially profitable businesses in a timely
manner, or at all. In addition, as a member of FINRA, we are
subject to certain regulations regarding changes in control of
our ownership. Rule 1017 of the National Association of
Securities Dealers (NASD) generally provides, among
other things, that FINRA approval must be obtained in connection
with any transaction resulting in a change in our equity
ownership that results in one person or entity directly or
indirectly owning or controlling 25% or more of our equity
capital. Similarly, the OCC imposes advance approval
requirements for a change of control, and control is presumed to
exist if a person acquires 10% or more of our common stock.
These regulatory approval processes can result in delay,
increased costs
and/or
impose additional transaction terms in connection with a
proposed change of control, such as capital contributions to the
regulated entity. As a result of these regulations, our future
efforts to sell shares or raise additional capital may be
delayed or prohibited.
We are subject
to various regulatory capital requirements, which, if not
complied with, could result in the restriction of the ongoing
conduct, growth, or even liquidation of parts of our
business.
The SEC, FINRA, CFTC, OCC and NFA have extensive rules and
regulations with respect to capital requirements. As a
registered broker-dealer, LPL Financial is subject to
Rule 15c3-1
(Uniform Net Capital Rule) under the Securities
Exchange Act of 1934, as amended (the Exchange Act),
and related SRO requirements. The CFTC and NFA also impose net
capital requirements. The Uniform Net Capital Rule specifies
minimum capital requirements that are intended to ensure the
general soundness and liquidity of broker-dealers. Because we
are not a registered broker-dealer, we are not subject to the
Uniform Net Capital Rule. However, our ability to withdraw
capital from our broker-dealer subsidiaries could be restricted,
which in turn could limit our ability to repay debt and redeem
or purchase shares of our outstanding stock. A large operating
loss or charge against net capital could adversely affect our
ability to expand or even maintain our present levels of
business.
Failure to
comply with ERISA regulations could result in penalties against
us.
We are subject to the Employee Retirement Income Security Act of
1974, as amended (ERISA) and
Sections 4975(c)(1)(A), (B), (C) and (D) of the
Internal Revenue Code of 1986, as amended (the Internal
Revenue Code), and to regulations promulgated thereunder,
insofar as we act
17
as a fiduciary under ERISA with respect to benefit
plan clients or otherwise deal with benefit plan clients. ERISA
and applicable provisions of the Internal Revenue Code impose
duties on persons who are fiduciaries under ERISA, prohibit
specified transactions involving ERISA plan clients (including,
without limitation, employee benefit plans (as defined in
Section 3(3) of ERISA), individual retirement accounts and
Keogh plans) and impose monetary penalties for violations of
these prohibitions. Our failure to comply with these
requirements could result in significant penalties against us
that could have a material adverse effect on our business (or,
in a worst case, severely limit the extent to which we could act
as fiduciaries for any plans under ERISA).
Risks Related to
Our Competition
We operate in
an intensely competitive industry, which could cause us to lose
advisors and their assets, thereby reducing our revenues and net
income.
We are subject to competition in all aspects of our business,
including competition for our advisors and their clients, from:
|
|
|
|
|
asset management firms;
|
|
|
|
commercial banks and thrift institutions;
|
|
|
|
insurance companies;
|
|
|
|
other clearing/custodial technology companies and
|
|
|
|
brokerage and investment banking firms.
|
Many of our competitors have substantially greater resources
than we do and may offer a broader range of services, including
financial products, across more markets. Some operate in a
different regulatory environment than we do which may give them
certain competitive advantages in the services they offer. For
example, certain of our competitors only provide clearing
services and consequently would not have any supervision or
oversight liability relating to actions of their financial
advisors. We believe that competition within our industry will
intensify as a result of consolidation and acquisition activity
and because new competitors face few barriers to entry.
If we fail to continue to attract highly qualified advisors or
advisors licensed with us leave us to pursue other
opportunities, or if current or potential clients of our
advisors decide to use one of their competitors, we could face a
significant decline in market share, commission and fee revenues
and net income. If we are required to increase our payout of
commissions and fees to our advisors in order to remain
competitive, our net income could be significantly reduced.
Poor service
or performance of the financial products that we offer or
competitive pressures on pricing of such services or products
may cause clients of our advisors to withdraw their assets on
short notice.
Clients of our advisors control their assets under management
with us. Poor service or performance of the financial products
that we offer or competitive pressures on pricing of such
services or products may result in the loss of accounts. In
addition, we must monitor the pricing of our services and
financial products in relation to competitors and periodically
may need to adjust commission and fee rates, interest rates on
deposits and margin loans and other fee structures to remain
competitive. Competition from other financial services firms,
such as reduced commissions to attract clients or trading volume
or higher deposit rates to attract client cash balances, could
adversely impact our business. The decrease in revenue that
could result from such an event could have a material adverse
effect on our business.
18
We face
competition in attracting and retaining key
talent.
Our success and future growth depends upon our ability to
attract and retain qualified employees. There is significant
competition for qualified employees in the broker-dealer
industry. We may not be able to retain our existing employees or
fill new positions or vacancies created by expansion or
turnover. The loss or unavailability of these individuals could
have a material adverse effect on our business.
Moreover, our success depends upon the continued services of our
key senior management personnel, including our executive
officers and senior managers. The loss of one or more of our key
senior management personnel, and the failure to recruit a
suitable replacement or replacements, could have a material
adverse effect on our business.
Risks Related to
Our Debt
Our
indebtedness could adversely affect our financial health and may
limit our ability to use debt to fund future capital
needs.
At March 31, 2010, we had total indebtedness of
$1.4 billion. Following this initial public offering, we
expect to have total indebtedness of
$ .
Our level of indebtedness could increase our vulnerability to
general adverse economic and industry conditions. It could also
require us to dedicate a substantial portion of our cash flow
from operations to payments on our indebtedness, thereby
reducing the availability of our cash flow to fund working
capital, capital expenditures and other general corporate
purposes. In addition, our level of indebtedness may limit our
flexibility in planning for changes in our business and the
industry in which we operate, place us at a competitive
disadvantage compared to our competitors that have less debt and
limit our ability to borrow additional funds.
Our ability to make scheduled payments on or to refinance
indebtedness obligations depends on our financial condition and
operating performance, which are subject to prevailing economic
and competitive conditions and to certain financial, business
and other factors beyond our control.
We may not be able to maintain a level of cash flows from
operating activities sufficient to permit us to pay the
principal, premium, if any, and interest on our indebtedness. In
addition, as discussed above, we are limited in the amount of
capital that we can draw from our broker-dealer subsidiaries. If
our cash flows and capital resources are insufficient to fund
our debt service obligations, we could face substantial
liquidity problems and could be forced to sell assets, seek
additional capital or seek to restructure or refinance our
indebtedness. These alternative measures may not be successful
or feasible. Our senior secured credit agreement restricts our
ability to sell assets. Even if we could consummate those sales,
the proceeds that we realize from them may not be adequate to
meet any debt service obligations then due. Furthermore, if an
event of default were to occur with respect to our senior
secured credit agreement or other indebtedness, our creditors
could, among other things, accelerate the maturity of our
indebtedness.
In addition, as a result of reduced operating performance or
weaker than expected financial condition, rating agencies could
downgrade our senior unsecured subordinated notes, which would
adversely affect the value of shares of our common stock.
Our senior secured credit agreement permits us to incur
additional indebtedness. Although our senior secured credit
agreement contains restrictions on the incurrence of additional
indebtedness, these restrictions are subject to a number of
significant qualifications and exceptions, and the indebtedness
incurred in compliance with these restrictions could be
substantial. Also, these restrictions do not prevent us from
incurring obligations that do not constitute
indebtedness as defined in our senior secured credit
agreement. To the extent new debt or other obligations are added
to our currently anticipated debt levels, the substantial
indebtedness risks described above would increase.
19
Restrictions
under certain of our indebtedness may prevent us from taking
actions that we believe would be in the best interest of our
business.
Certain of our indebtedness contain customary restrictions on
our activities, including covenants that may restrict us from:
|
|
|
|
|
incurring additional indebtedness or issuing disqualified stock
or preferred stock;
|
|
|
|
paying dividends on, redeeming or repurchasing our capital stock;
|
|
|
|
making investments or acquisitions;
|
|
|
|
creating liens;
|
|
|
|
selling assets;
|
|
|
|
restricting dividends or other payments to us;
|
|
|
|
guaranteeing indebtedness;
|
|
|
|
engaging in transactions with affiliates and
|
|
|
|
consolidating, merging or transferring all or substantially all
of our assets.
|
We are also required to meet specified financial ratios. These
restrictions may prevent us from taking actions that we believe
would be in the best interest of our business. Our ability to
comply with these restrictive covenants will depend on our
future performance, which may be affected by events beyond our
control. If we violate any of these covenants and are unable to
obtain waivers, we would be in default under the applicable
agreements and payment of the indebtedness could be accelerated.
The acceleration of our indebtedness under one agreement may
permit acceleration of indebtedness under other agreements that
contain cross-default or cross-acceleration provisions. If our
indebtedness is accelerated, we may not be able to repay that
indebtedness or borrow sufficient funds to refinance it. Even if
we are able to obtain new financing, it may not be on
commercially reasonable terms or on terms that are acceptable to
us. If our indebtedness is in default for any reason, our
business could be materially and adversely affected. In
addition, complying with these covenants may also cause us to
take actions that are not favorable to holders of the common
stock and may make it more difficult for us to successfully
execute our business strategy and compete against companies that
are not subject to such restrictions.
Provisions of
our senior secured credit agreement could discourage an
acquisition of us by a third party.
Certain provisions of our senior secured credit agreement could
make it more difficult or more expensive for a third party to
acquire us, and any of our future debt agreements may contain
similar provisions. Upon the occurrence of certain transactions
constituting a change of control, all indebtedness under our
senior secured credit agreement may be accelerated and become
due and payable. A potential acquirer may not have sufficient
financial resources to purchase our outstanding indebtedness in
connection with a change of control.
Risks Related to
Our Technology
We rely on
technology in our business, and technology and execution
failures could subject us to losses, litigation and regulatory
actions.
Our business relies extensively on electronic data processing
and communications systems. In addition to better serving our
advisors and clients, the effective use of technology increases
efficiency and enables firms like ours to reduce costs. Our
continued success will depend, in part, upon:
|
|
|
|
|
our ability to successfully maintain and upgrade the capability
of our systems;
|
20
|
|
|
|
|
our ability to address the needs of our advisors and their
clients by using technology to provide products and services
that satisfy their demands and
|
|
|
|
our ability to retain skilled information technology employees.
|
Failure of our systems, which could result from events beyond
our control, or an inability to effectively upgrade those
systems or implement new technology-driven products or services,
could result in financial losses, liability to clients and
damage to our reputation.
Our operations rely on the secure processing, storage and
transmission of confidential and other information in our
computer systems and networks. Although we take protective
measures and endeavor to modify them as circumstances warrant,
the computer systems, software and networks may be vulnerable to
unauthorized access, computer viruses or other malicious code
and other events that could have a security impact. If one or
more of these events occur, this could jeopardize our own, our
advisors or their clients or counterparties
confidential and other information processed, stored in and
transmitted through our computer systems and networks, or
otherwise cause interruptions or malfunctions in our own, our
advisors or their clients, our counterparties
or third parties operations. We may be required to expend
significant additional resources to modify our protective
measures, to investigate and remediate vulnerabilities or other
exposures or to make required notifications, and we may be
subject to litigation and financial losses that are either not
insured or are not fully covered through any insurance we
maintain.
The securities
settlement process exposes us to risks that may expose our
advisors and us to adverse movements in price.
LPL Financial, one of our subsidiaries, provides clearing
services and trade processing for our advisors and their clients
and certain financial institutions. Broker-dealers that clear
their own trades are subject to substantially more regulatory
requirements than brokers that outsource these functions to
third-party providers. Errors in performing clearing functions,
including clerical, technological and other errors related to
the handling of funds and securities held by us on behalf of
clients, could lead to censures, fines or other sanctions
imposed by applicable regulatory authorities as well as losses
and liability in related lawsuits and proceedings brought by our
advisors clients and others. Any unsettled securities
transactions or wrongly executed transactions may expose our
advisors and us to adverse movements in the prices of such
securities.
Our networks
may be vulnerable to security risks.
The secure transmission of confidential information over public
networks is a critical element of our operations. As part of our
normal operations, we maintain and transmit confidential
information about clients of our advisors as well as proprietary
information relating to our business operations. Our application
service provider systems maintain and process confidential data
on behalf of advisors and their clients, some of which is
critical to our advisors business operations. If our
application service provider systems are disrupted or fail for
any reason, or if our systems or facilities are infiltrated or
damaged by unauthorized persons, our advisors could experience
data loss, financial loss, harm to reputation and significant
business interruption. If such a disruption or failure occurs,
we may be exposed to unexpected liability, advisors may withdraw
their assets, our reputation may be tarnished and there could be
a material adverse effect on our business.
Our networks may be vulnerable to unauthorized access, computer
viruses and other security problems in the future. We rely on
our advisors to comply with our policies and procedures to
safeguard confidential data. The failure of our advisors to
comply with such policies and procedures could result in the
loss or wrongful use of their clients confidential
information or other sensitive information. In addition, even if
we and our advisors comply with our policies and procedures,
persons who circumvent security measures could wrongfully use
our confidential information or clients
21
confidential information or cause interruptions or malfunctions
in our operations. Such loss or use could, among other things:
|
|
|
|
|
seriously damage our reputation;
|
|
|
|
allow competitors access to our proprietary business information;
|
|
|
|
subject us to liability for a failure to safeguard client data;
|
|
|
|
result in the termination of relationships with our advisors;
|
|
|
|
subject us to regulatory sanctions or burdens, based on the
authority of the SEC and FINRA to enforce regulations regarding
business continuity planning and
|
|
|
|
require significant capital and operating expenditures to
investigate and remediate the breach.
|
Failure to
maintain technological capabilities, flaws in existing
technology, difficulties in upgrading our technology platform or
the introduction of a competitive platform could have a material
adverse effect on our business.
We depend on highly specialized and, in many cases, proprietary
technology to support our business functions, including among
others:
|
|
|
|
|
securities trading and custody;
|
|
|
|
portfolio management;
|
|
|
|
customer service;
|
|
|
|
accounting and internal financial processes and controls and
|
|
|
|
regulatory compliance and reporting.
|
In addition, our continued success depends on our ability to
effectively adopt new or adapt existing technologies to meet
client, industry and regulatory demands. We might be required to
make significant capital expenditures to maintain competitive
technology. For example, we believe that our technology
platform, particularly our BranchNet system, is one of our
competitive strengths, and our future success will depend in
part on our ability to anticipate and adapt to technological
advancements required to meet the changing demands of our
advisors. The emergence of new industry standards and practices
could render our existing systems obsolete or uncompetitive. Any
upgrades or expansions may require significant expenditures of
funds and may also cause us to suffer system degradations,
outages and failures. There cannot be any assurance that we will
have sufficient funds to adequately update and expand our
networks, nor can there be any assurance that any upgrade or
expansion attempts will be successful and accepted by our
current and prospective advisors. If our technology systems were
to fail and we were unable to recover in a timely way, we would
be unable to fulfill critical business functions, which could
lead to a loss of advisors and could harm our reputation. A
technological breakdown could also interfere with our ability to
comply with financial reporting and other regulatory
requirements, exposing us to disciplinary action and to
liability to our advisors and their clients. There cannot be any
assurance that another company will not design a similar
platform that affects our competitive advantage.
Inadequacy or
disruption of our disaster recovery plans and procedures in the
event of a catastrophe could adversely affect our
business.
We have made a significant investment in our infrastructure, and
our operations are dependent on our ability to protect the
continuity of our infrastructure against damage from catastrophe
or natural disaster, breach of security, loss of power,
telecommunications failure or other natural or man-made events.
A catastrophic event could have a direct negative impact on us
by adversely affecting our advisors, employees or facilities, or
an indirect impact on us by adversely affecting the financial
markets or the overall economy. While we have implemented
business continuity and disaster
22
recovery plans and maintain business interruption insurance, it
is impossible to fully anticipate and protect against all
potential catastrophes. If our business continuity and disaster
recovery plans and procedures were disrupted or unsuccessful in
the event of a catastrophe, we could experience a material
adverse interruption of our operations.
We rely on
outsourced service providers to perform key
functions.
We rely on outsourced service providers to perform certain key
technology, processing and support functions. For example, we
have an agreement with Thomson Reuters BETA Systems, a division
of Thomson Reuters, under which they provide us operational
support, including data processing services for securities
transactions and back office processing support. Any significant
failures by these service providers could cause us to incur
losses and could harm our reputation. If we had to change these
service providers, we would experience a disruption to our
business. Although we believe we have the resources to make such
transitions with minimal disruption, we cannot predict the costs
and time for such conversions. We cannot provide any assurance
that the disruption caused by a change in our service providers
would not have a material adverse affect on our business.
Risks Related to
Our Business Generally
Any damage to
our reputation could harm our business and lead to a loss of
revenues and net income.
We have spent many years developing our reputation for integrity
and superior client service, which is built upon our four
pillars of support for our advisors: enabling technology,
comprehensive clearing and compliance services, practice
management programs and training, and independent research. Our
ability to attract and retain advisors and employees is highly
dependent upon external perceptions of our level of service,
business practices and financial condition. Damage to our
reputation could cause significant harm to our business and
prospects and may arise from numerous sources, including:
|
|
|
|
|
litigation or regulatory actions;
|
|
|
|
failing to deliver minimum standards of service and quality;
|
|
|
|
compliance failures and
|
|
|
|
unethical behavior and the misconduct of employees, advisors or
counterparties.
|
Negative perceptions or publicity regarding these matters could
damage our reputation among existing and potential advisors and
employees. Adverse developments with respect to our industry may
also, by association, negatively impact our reputation or result
in greater regulatory or legislative scrutiny or litigation
against us. These occurrences could lead to loss of revenue and
net income.
Our business
is subject to risks related to litigation, arbitration actions
and governmental and SRO investigations.
We are subject to legal proceedings arising out of our business
operations, including lawsuits, arbitration claims, regulatory,
governmental or SRO subpoenas, investigations and actions and
other claims. Many of our legal claims are client initiated and
involve the purchase or sale of investment securities. In our
investment advisory programs, we have fiduciary obligations that
require us and our advisors to act in the best interests of our
advisors clients. We may face liabilities for actual or
alleged breaches of legal duties to our advisors clients,
in respect of issues related to the suitability of the financial
products we make available in our open architecture product
platform or the investment advice of our advisors based on their
clients investment objectives (including, for example,
auction rate securities or exchange traded funds). In addition,
we, along with other industry participants, are subject to risks
related to litigation and settlements arising from market events
such as the failures in the auction rate securities market. We
may also become subject to claims, allegations and legal
23
proceedings that we infringe or misappropriate intellectual
property or other proprietary rights of others. In addition, we
may be subject to legal proceedings related to employment
matters, including wage and hour, discrimination or harassment
claims. The outcome of any such actions cannot be predicted, and
a negative outcome in such a proceeding could result in
substantial legal liability, loss of intellectual property
rights and injunctive or other equitable relief against us.
Further, such outcome may cause us significant reputational harm
and could have a material adverse effect on our business,
results of operations, cash flows or financial condition.
Our risk
management policies and procedures may not be fully effective in
mitigating our risk exposure in all market environments or
against all types of risks.
We have adopted policies and procedures to identify, monitor and
manage our operational risk. These policies and procedures,
however, may not be fully effective. Some of our risk evaluation
methods depend upon information provided by others and public
information regarding markets, clients or other matters that are
otherwise accessible by us. In some cases, however, that
information may not be accurate, complete or
up-to-date.
Also, because our advisors work in small, decentralized offices,
additional risk management challenges may exist. If our policies
and procedures are not fully effective or we are not always
successful in capturing all risks to which we are or may be
exposed, we may suffer harm to our reputation or be subject to
litigation or regulatory actions that could have a material
adverse effect on our business and financial condition.
Misconduct and
errors by our employees and our advisors, who operate in a
decentralized-environment, could harm our
business.
Misconduct and errors by our employees and our advisors could
result in violations of law by us, regulatory sanctions
and/or
serious reputational or financial harm. We cannot always prevent
misconduct and errors by our employees and our advisors, and the
precautions we take to prevent and detect these activities may
not be effective in all cases. Prevention and detection among
our advisors, who are not our direct employees and some of whom
tend to be located in small, decentralized offices, present
additional challenges. There cannot be any assurance that
misconduct and errors by our employees and advisors will not
lead to a material adverse effect on our business.
Our insurance
coverage may be inadequate or expensive.
We are subject to claims in the ordinary course of business.
These claims may involve substantial amounts of money and
involve significant defense costs. It is not always possible to
prevent or detect activities giving rise to claims, and the
precautions we take may not be effective in all cases.
We maintain voluntary and required insurance coverage,
including, among others, general liability, property, director
and officer, excess-SIPC, business interruption, errors and
omissions, excess entity errors and omissions and fidelity bond
insurance. Recently, premium and deductible costs associated
with certain insurance coverages have increased, coverage terms
have become more restrictive and the number of insurers has
decreased. While we endeavor to purchase coverage that is
appropriate to our assessment of our risk, we are unable to
predict with certainty the frequency, nature or magnitude of
claims for direct or consequential damages. Our business may be
negatively affected if in the future our insurance proves to be
inadequate or unavailable. In addition, insurance claims may
harm our reputation or divert management resources away from
operating our business.
Our business
could be materially adversely affected as a result of the risks
associated with acquisitions and investments.
We may seek to opportunistically acquire businesses that offer
complementary products, services or technologies. These
acquisitions are accompanied by risks. For instance, the
acquisition could have a negative effect on our financial and
strategic position and reputation or the acquired
24
business could fail to further our strategic goals. We could
incur significant costs when integrating an acquired business
and may not be successful in doing so. We may have a lack of
experience in new markets, products or technologies brought on
by the acquisition and we may have an initial dependence on
unfamiliar supply or distribution partners. The acquisition may
create an impairment of relationships with customers or
suppliers of the acquired business or our advisors or suppliers.
All of these and other potential risks may serve as a diversion
of our managements attention from other business concerns
and any of these factors could have a material adverse effect on
our business.
Changes in
U.S. federal income tax law could make some of the products
distributed by our advisors less attractive to
clients.
Some of the financial products distributed by our advisors, such
as variable annuities, enjoy favorable treatment under current
U.S. federal income tax law. Changes in U.S. federal
income tax law, in particular with respect to variable annuity
products or with respect to tax rates on capital gains or
dividends, could make some of these products less attractive to
clients and, as a result, could have a material adverse effect
on our business, results of operations, cash flows or financial
condition.
Risks Related to
this Offering and Ownership of Our Common Stock
The Majority
Holders will have the ability to control the outcome of matters
submitted for stockholder approval and may have interests that
differ from those of our other stockholders.
Investment funds affiliated with the Majority Holders own a
majority of our capital stock, on a fully-diluted basis, as of
March 31, 2010. After the completion of this offering, the
Majority Holders will own
approximately % of our common
stock, or % on a fully diluted
basis. The Majority Holders have significant influence over
corporate transactions. So long as investment funds associated
with or designated by the Majority Holders continue to own a
significant amount of the outstanding shares of our common
stock, even if such amount is less than 50%, the Majority
Holders will continue to be able to strongly influence or
effectively control our decisions, regardless of whether or not
other stockholders believe that the transaction is in their own
best interests. Such concentration of voting power could also
have the effect of delaying, deterring or preventing a change of
control or other business combination that might otherwise be
beneficial to our stockholders. If the Majority Holders enter
into a change in control transaction, certain members of our
executive team have the contractual ability to terminate their
employment within the thirty day period immediately following
the twelve month anniversary of a change in control and receive
severance payments.
In addition, the Majority Holders and their affiliates are in
the business of making investments in companies and may, from
time to time in the future, acquire interests in businesses that
directly or indirectly compete with certain portions of our
business. To the extent the Majority Holders invest in such
other businesses, the Majority Holders may have differing
interests than our other stockholders. The Majority Holders may
also pursue acquisition opportunities that may be complementary
to our business and, as a result, those acquisition
opportunities may not be available to us.
An active
trading market for our common stock may not
develop.
Prior to this offering, there has been no public market for our
common stock. Although we plan to apply to have our common stock
listed on the NASDAQ Global Select Market, an active trading
market for our shares may never develop or be sustained
following this offering. If the market does not develop or is
not sustained, it may be difficult for you to sell your shares
of common stock at a price that is attractive to you or at all.
In addition, an inactive market may impair our ability to raise
capital by selling shares and may impair our ability to acquire
other companies by using our shares as consideration, which, in
turn, could materially adversely affect our business.
25
The price of
our common stock may be volatile and fluctuate substantially,
which could result in substantial losses for investors
purchasing shares in this offering.
The initial public offering price for the shares of our common
stock sold in this offering will be determined by negotiation
between the representatives of the underwriters and us. This
price may not reflect the market price of our common stock
following this offering. In addition, the market price of our
common stock is likely to be highly volatile and may fluctuate
substantially due to the following factors (in addition to the
other risk factors described in this section):
|
|
|
|
|
actual or anticipated fluctuations in our results of operations;
|
|
|
|
variance in our financial performance from the expectations of
equity research analysts;
|
|
|
|
conditions and trends in the markets we serve;
|
|
|
|
announcements of significant new services or products by us or
our competitors;
|
|
|
|
additions or changes to key personnel;
|
|
|
|
the commencement or outcome of litigation;
|
|
|
|
changes in market valuation or earnings of our competitors;
|
|
|
|
the trading volume of our common stock;
|
|
|
|
future sale of our equity securities;
|
|
|
|
changes in the estimation of the future size and growth rate of
our markets;
|
|
|
|
legislation or regulatory policies, practices or actions and
|
|
|
|
general economic conditions.
|
In addition, the stock markets in general have experienced
extreme price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of
the particular companies affected. These broad market and
industry factors may materially harm the market price of our
common stock irrespective of our operating performance. As a
result of these factors, you might be unable to resell your
shares at or above the initial public offering price after this
offering. In addition, in the past, following periods of
volatility in the overall market and the market price of a
companys securities, securities class action litigation
has often been instituted against the affected company. This
type of litigation, if instituted against us, could result in
substantial costs and a diversion of our managements
attention and resources.
We are a
holding company and rely on dividends, distributions and other
payments, advances and transfers of funds from our subsidiaries
to meet our debt service and other obligations.
We have no direct operations and derive all of our cash flow
from our subsidiaries. Because we conduct our operations
through our subsidiaries, we depend on those entities for
dividends and other payments or distributions to meet any
existing or future debt service and other obligations. The
deterioration of the earnings from, or other available assets
of, our subsidiaries for any reason could limit or impair their
ability to pay dividends or other distributions to us. In
addition, FINRA regulations restrict dividends in excess of 10%
of a member firms excess net capital without FINRAs
prior approval. Compliance with this regulation may impede our
ability to receive dividends from LPL Financial.
We currently
do not intend to pay dividends on our common stock and,
consequently, your only opportunity to achieve a return on your
investment is if the price of our common stock
appreciates.
Following the completion of this offering, we do not anticipate
that we will pay any cash dividends on shares of our common
stock for the foreseeable future. Furthermore, our senior
secured
26
credit agreement places substantial restrictions on our ability
to pay cash dividends. Any determination to pay dividends in the
future will be at the discretion of our board of directors and
will depend on results of operations, financial condition,
contractual restrictions, restrictions imposed by applicable law
and other factors our board of directors deems relevant.
Accordingly, if you purchase shares in this offering,
realization of a gain on your investment will depend on the
appreciation of the price of our common stock, which may never
occur. Investors seeking cash dividends in the foreseeable
future should not purchase our common stock. Please see the
section titled Dividend Policy for additional
information.
Upon
expiration of
lock-up
agreements between the underwriters and our officers, directors
and certain holders of our common stock, a substantial number of
shares of our common stock could be sold into the public market
shortly after this offering, which could depress our stock
price.
Our officers, directors and certain holders of our common stock
have entered into
lock-up
agreements with our underwriters which prohibit, subject to
certain limited exceptions, the disposal or pledge of, or the
hedging against, any of their common stock or securities
convertible into or exchangeable for shares of common stock for
a period through the date 180 days after the date of this
prospectus, subject to extension in certain circumstances. In
addition, certain holders who receive shares of common stock
upon vesting of their restricted stock in connection with the
initial public offering will be restricted from transferring
such shares until the earlier of 180 days after the initial
public offering and March 15, 2011. Our Stockholders
Agreement also restricts the parties thereto from transferring
their shares of common stock or any securities convertible into
or exchangeable or exercisable for shares of common stock until
180 days after the effective date of the registration
statement. The market price of our common stock could decline as
a result of sales by our existing stockholders in the market
after this offering and after the expiration of these
lock-up
periods, or the perception that these sales could occur. Once a
trading market develops for our common stock, and after these
lock-up
periods expire, many of our stockholders will have an
opportunity to sell their stock for the first time. These
factors could also make it difficult for us to raise additional
capital by selling stock. Please see the section titled
Shares Eligible for Future Sale for additional
information regarding these factors.
Our management
will have broad discretion over the use of the proceeds we
receive in this offering and might not apply the proceeds in
ways that increase the value of your investment.
Our management will have broad discretion to use the net
proceeds from this offering, and you will be relying on the
judgment of our management regarding the application of these
proceeds. They might not apply the net proceeds of this offering
in ways that increase the value of your investment. We expect to
use all of the net proceeds from this offering to repay a
portion of the term loans under our senior secured credit
facilities. Our management might not be able to yield any return
on the investment and use of these net proceeds. You will not
have the opportunity to influence our decisions on how to use
the proceeds.
Anti-takeover
provisions in our certificate of incorporation and bylaws could
prevent or delay a change in control of our
company.
Our certificate of incorporation and our bylaws contain certain
provisions that may discourage, delay or prevent a change in our
management or control over us that stockholders may consider
favorable, including the following, some of which may only
become effective when the Majority Holders collectively own less
than 40% of our outstanding shares of common stock:
|
|
|
|
|
the division of our board of directors into three classes and
the election of each class for three-year terms;
|
|
|
|
the sole ability of the board of directors to fill a vacancy
created by the expansion of the board of directors;
|
27
|
|
|
|
|
advance notice requirements for stockholder proposals and
director nominations;
|
|
|
|
limitations on the ability of stockholders to call special
meetings and to take action by written consent;
|
|
|
|
|
|
when the Majority Holders collectively own 50% or less of our
outstanding shares of common stock, the approval of holders of
at least two-thirds of the shares entitled to vote generally on
the making, alteration, amendment or repeal of our certificate
of incorporation or bylaws, will be required to adopt, amend or
repeal our bylaws, or amend or repeal certain provisions of our
certificate of incorporation;
|
|
|
|
|
|
the required approval of holders of at least two-thirds of the
shares entitled to vote at an election of the directors to
remove directors and, following the classification of the board
of directors, removal only for cause and
|
|
|
|
|
|
the ability of our board of directors to designate the terms of
and issue new series of preferred stock, without stockholder
approval, which could be used to institute a rights plan, or a
poison pill, that would work to dilute the stock ownership or a
potential hostile acquirer, likely preventing acquisitions that
have not been approved by our board of directors.
|
The existence of the foregoing provisions and anti-takeover
measures could limit the price that investors might be willing
to pay in the future for shares of our common stock. They could
also deter potential acquirers of our company, thereby reducing
the likelihood that you could receive a premium for your common
stock in the acquisition. For more information, please see the
section titled Description of Capital Stock.
If securities
or industry analysts do not publish research or reports or
publish unfavorable research or reports about our business, our
stock price and trading volume could decline.
The trading market for our common stock will depend in part on
the research and reports that securities or industry analysts
publish about us, our business, our market or our competitors.
We may not obtain research coverage by securities and industry
analysts. If no securities or industry analysts commence
coverage of our company, the trading price for our stock could
be negatively impacted. In the event we obtain securities or
industry analyst coverage, if one or more of the analysts who
covers us publishes unfavorable research or reports or
downgrades our stock, our stock price would likely decline. If
one or more of these analysts ceases to cover us or fails to
regularly publish reports on us, interest in our stock could
decrease, which could cause our stock price or trading volume to
decline.
28
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, including the sections titled Prospectus
Summary, Risk Factors, Managements
Discussion and Analysis of Financial Condition and Results of
Operations and Business, and the documents
incorporated by reference contain forward-looking statements.
Forward-looking statements convey our current expectations or
forecasts of future events. All statements contained in this
prospectus other than statements of historical fact are
forward-looking statements. Forward-looking statements include
statements regarding our future financial position, business
strategy, budgets, projected costs, plans and objectives of
management for future operations. The words may,
might, should, predict,
potential, continue,
estimate, intend, plan,
will, believe, project,
expect, seek, anticipate and
similar expressions may identify forward-looking statements, but
the absence of these words does not necessarily mean that a
statement is not forward-looking.
Any or all of our forward-looking statements in this prospectus
may turn out to be inaccurate. We have based these
forward-looking statements largely on our current expectations
and projections about future events and financial trends that we
believe may affect our financial condition, results of
operations, business strategy and financial needs. There are
important factors that could cause our actual results, level of
activity, performance or achievements to differ materially from
the results, level of activity, performance or achievements
expressed or implied by the forward looking statements
including, but 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 our advisors and
their ability to effectively market financial products and
services, the effect of current, pending and future legislation
and regulation and regulatory actions. In particular, you should
consider the numerous risks described in the Risk
Factors section of this prospectus.
Although we believe the expectations reflected in the forward
looking statements are reasonable, we cannot guarantee future
results, level of activity, performance or achievements. In
light of these risks, uncertainties and assumptions, the
forward-looking events and circumstances discussed in this
prospectus may not occur as contemplated, and actual results
could differ materially from those anticipated or implied by the
forward-looking statements.
You should not unduly rely on these forward-looking statements,
which speak only as of the date of this prospectus. Unless
required by law, we undertake no obligation to publicly update
or revise any forward-looking statements to reflect new
information or future events or otherwise. You should, however,
review the factors and risks we describe in the reports we will
file from time to time with the SEC after the date of this
prospectus. See Where You Can Find Additional
Information.
29
USE OF
PROCEEDS
We estimate that the net proceeds of the sale of the common
stock that we are offering will be approximately
$ million, or
$ million if the underwriters
exercise their option to purchase additional shares in full,
assuming an initial public offering price of
$ per share, which is the midpoint
of the range listed on the cover page of this prospectus, and
after deducting estimated underwriting discounts and commissions
and estimated offering expenses payable by us. We will not
receive any proceeds from the sale of shares of common stock by
the selling stockholders.
We expect to use all of the net proceeds from this offering
received by us to repay a portion of the term loans under our
senior secured credit facilities.
We currently have three term loan tranches under our senior
secured credit facilities a term loan tranche of
$317.1 million maturing on June 28, 2013 (the
2013 Term Loans), a term loan tranche of
$500.0 million maturing on June 25, 2015 (the
2015 Term Loans) and a term loan tranche of
$580.0 million maturing on June 28, 2017 (the
2017 Term Loans). We used the proceeds of the
2017 Term Loans, which we incurred in May 2010, together
with cash on hand, to repay all of our then-outstanding senior
unsecured subordinated notes due 2015.
The applicable margin for borrowings with respect to the
(a) 2013 Term Loans is currently 0.75% for base rate
borrowings and 1.75% for LIBOR borrowings, (b) 2015 Term
Loans is currently 1.75% for base rate borrowings and 2.75% for
LIBOR borrowings, and (c) 2017 Term Loans is currently
2.75% for base rate borrowings and 3.75% for LIBOR borrowings.
We have not yet determined how we will allocate the reduction of
indebtedness among our term loan tranches. Management will
retain broad discretion in the allocation and use of the net
proceeds to us from this offering, and determine the allocation
of the net proceeds to repay indebtedness following the
completion of this offering based on a number of factors,
including remaining maturity, applicable interest rates,
outstanding balance and ability to reborrow.
30
DIVIDEND
POLICY
We have not paid any dividends on our common stock during the
past four fiscal years and we do not currently anticipate
declaring or paying cash dividends on our common stock in the
foreseeable future. We currently intend to retain all of our
future earnings, if any, to finance operations and repay debt.
Our senior secured credit facilities contain restrictions on our
activities, including paying dividends on our capital stock. For
an explanation of these restrictions see Managements
Discussion and Analysis of Financial Condition and Results of
Operations Indebtedness. In addition, FINRA
regulations restrict dividends in excess of 10% of a member
firms excess net capital without FINRAs prior
approval, potentially impeding our ability to receive dividends
from LPL Financial. Any future determination relating to our
dividend policy will be made at the discretion of our board of
directors and will depend on a number of factors, including
future earnings, capital requirements, financial conditions,
future prospects, contractual restrictions and covenants and
other factors that our board of directors may deem relevant.
31
CAPITALIZATION
The following table sets forth our capitalization as of
March 31, 2010:
|
|
|
|
|
on an actual basis;
|
|
|
|
on an as-adjusted basis to give effect to (i) the addition
of a new $580.0 million term loan tranche of our senior
secured credit facilities on May 24, 2010, (ii) the
redemption of the $550.0 million senior unsecured
subordinated notes at a price of 105.375% of the outstanding
aggregate principal amount plus accrued and unpaid interest
through March 31, 2010, (iii) the payment in cash of
fees and costs totaling $18.0 million associated with the
new term loan tranche and (iv) the after-tax impact to
retained earnings of the loss on the early retirement of the
senior unsecured subordinated notes of $22.9 million, and
|
|
|
|
on a pro forma as-adjusted basis after giving effect to
(i) the adjustments described above, (ii) the
recognition of $ million of
share-based compensation expense based on the number of
restricted shares issued under our Fifth Amended and Restated
2000 Stock Bonus Plan multiplied by the assumed initial public
offering price net of the related tax benefit, (iii) the
sale by us
of shares
of common stock (assuming the underwriters do not exercise their
option to purchase additional shares) that we are offering at
the assumed initial public offering price and after deducting
estimated underwriting discounts and commissions and estimated
offering expenses payable by us and (iv) the use of
proceeds from the sale by us of these shares to reduce amounts
outstanding under our senior secured credit facilities. For
purpose of this table, the assumed initial public offering price
is $ per share, which is the
midpoint of the range listed on the cover page of this
prospectus.
|
You should read the following table in conjunction with our
financial statements and related notes, Selected
Consolidated Financial Data and Managements
Discussion and Analysis of Financial Condition and Results of
Operations, all included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
|
|
|
|
|
|
|
Pro-Forma, as
|
|
|
|
Actual
|
|
|
As Adjusted
|
|
|
Adjusted
|
|
|
|
(In thousands)
|
|
|
Cash and cash equivalents(4)
|
|
$
|
324,761
|
|
|
$
|
289,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior secured term loan(1)
|
|
$
|
817,117
|
|
|
$
|
1,397,117
|
|
|
|
|
|
Senior unsecured subordinated notes(2)
|
|
|
550,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term obligations
|
|
|
1,367,117
|
|
|
|
1,397,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock: $.001 par value; 200,000,000 shares
authorized; 94,241,567 shares issued and outstanding
|
|
|
87
|
|
|
|
87
|
|
|
|
|
|
Additional paid-in capital
|
|
|
682,899
|
|
|
|
682,899
|
|
|
|
|
|
Stockholder loans
|
|
|
(51
|
)
|
|
|
(51
|
)
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
(8,614
|
)
|
|
|
(8,614
|
)
|
|
|
|
|
Retained earnings
|
|
|
208,836
|
|
|
|
185,948
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity(4)
|
|
|
883,157
|
|
|
|
860,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization(4)
|
|
$
|
2,250,274
|
|
|
$
|
2,257,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Borrowings under our senior secured credit facilities bear
interest at a base rate equal to either one, two, three, six,
nine or twelve-month LIBOR plus the applicable margin, or an
alternative base rate (ABR) plus the applicable
margin. The ABR is equal to the greatest of (a) the prime rate
in effect on such day, (b) the effective federal funds rate in
effect on such day, plus 0.50% or |
32
|
|
|
|
|
(c) solely in the case of the 2015 Term Loans and the 2017 Term
Loans, 2.50%. The applicable margin on our senior secured term
credit facilities could change depending on our credit rating.
Our senior secured credit facilities are subject to certain
financial and non-financial covenants. We may voluntarily repay
outstanding loans under our senior secured credit facilities at
any time without premium or penalty, other than customary
breakage costs with respect to LIBOR loans. The
LIBOR Rate with respect to the 2015 Term Loans and the 2017 Term
Loans shall in no event be less than 1.50%. |
|
(2) |
|
As of March 31, 2010, we have $550.0 million of senior
unsecured subordinated notes due December 15, 2015. The
notes bear interest at 10.75% per annum and interest payments
are payable semiannually in arrears. We are not required to make
mandatory redemption or sinking-fund payments with respect to
the notes. The indenture underlying the senior unsecured
subordinated notes contains various restrictions on us with
respect to us, including one or more restrictions relating to
limitations on liens, sale and leaseback arrangements and funded
debt of subsidiaries. We may voluntarily repurchase our senior
unsecured subordinated notes at any time, pursuant to certain
prepayment penalties. |
|
(3) |
|
Upon the offering, the 7,423,973 restricted shares of common
stock issued to advisors under the Fifth Amended and Restated
2000 Stock Bonus Plan will vest. At such time, we will record
expense based upon the initial public offering price per share
multiplied by the number of restricted shares. We will also
record a tax benefit approximately equal to 39.55% of the
expense recorded. |
|
|
|
(4) |
|
A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share
would increase (decrease) cash and cash equivalents, total
stockholders equity and total capitalization by
$ million,
$ million and
$ million, respectively,
assuming the number of shares offered by us and the selling
stockholders, as set forth on the cover page of this prospectus,
remains the same and after deducting the estimated underwriting
discounts and commissions and estimated expenses payable by us. |
The table above does not include:
|
|
|
|
|
22,710,790 shares of common stock issuable upon the exercise of
options and warrants outstanding as of March 31, 2010, with
exercise prices ranging from $1.07 to $27.80 per share and a
weighted average exercise price of $7.00 per share (the
number, price and range of outstanding options and warrants will
be adjusted to reflect any exercise of options and warrants by
selling stockholders in connection with this offering);
|
|
|
|
2,823,452 stock units outstanding at March 31, 2010,
under our 2008 Nonqualified Deferred Compensation Plan, each
representing the right to receive one share of common stock at
the earliest of (a) a date in 2012 to be determined by the
board of directors; (b) a change of control of the company
or (c) death or disability of the holder and
|
|
|
|
3,108,907 additional shares of common stock reserved for future
grants under our equity incentive plans.
|
33
SELECTED
CONSOLIDATED FINANCIAL DATA
You should read the following selected financial and operating
data together with our consolidated financial statements and the
related notes appearing at the end of this prospectus and the
Managements Discussion and Analysis of Financial
Condition and Results of Operations section of this
prospectus. We have derived the consolidated statements of
income data for the years ended December 31, 2009, 2008 and
2007 and the consolidated statements of financial condition data
as of December 31, 2009 and 2008 from our audited financial
statements included elsewhere in this prospectus. We have
derived the consolidated statements of income data for the years
ended December 31, 2006 and 2005 and consolidated
statements of financial condition data as of December 31,
2007, 2006 and 2005 from our audited financial statements not
included in this prospectus. We have derived the condensed
consolidated statements of financial condition data as of
March 31, 2010 and the condensed consolidated statements of
income data for the three months ended March 31, 2010 and
2009 from our unaudited condensed consolidated financial
statements included elsewhere in this prospectus. Our unaudited
condensed consolidated financial statements for the three months
ended March 31, 2010 and 2009 have been prepared on the
same basis as the annual consolidated financial statements and
include all adjustments, which include only normal recurring
adjustments, necessary for fair presentation of this data in all
material respects. Our historical results for any prior period
are not necessarily indicative of results to be expected in any
future period, and our results for any interim period are not
necessarily indicative of results for a full fiscal year.
Our selected historical financial data may not be comparable
from period to period and may not be indicative of future
results. Additionally, historical dividends per share are
presented as declared by the predecessor company under its
capital structure at that time. Common shares of our predecessor
are not equal to common shares under our current capital
structure and are not necessarily indicative of amounts that
would have been received per common share of current ownership.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
|
|
|
|
Ended March 31,
|
|
|
For the Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor(2)
|
|
|
|
2010(1)
|
|
|
2009(1)
|
|
|
2009(1)
|
|
|
2008(1)
|
|
|
2007(1)
|
|
|
2006
|
|
|
2005
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
Consolidated statements of income data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
743,406
|
|
|
$
|
642,978
|
|
|
$
|
2,749,505
|
|
|
$
|
3,116,349
|
|
|
$
|
2,716,574
|
|
|
$
|
1,739,635
|
|
|
$
|
1,406,320
|
|
Total expenses
|
|
|
698,690
|
|
|
|
616,193
|
|
|
|
2,676,938
|
|
|
|
3,023,584
|
|
|
|
2,608,741
|
|
|
|
1,684,769
|
|
|
|
1,290,570
|
|
Income from continuing operations before provision for income
taxes
|
|
|
44,716
|
|
|
|
26,785
|
|
|
|
72,567
|
|
|
|
92,765
|
|
|
|
107,833
|
|
|
|
54,866
|
|
|
|
115,750
|
|
Provision for income taxes
|
|
|
19,162
|
|
|
|
11,988
|
|
|
|
25,047
|
|
|
|
47,269
|
|
|
|
46,764
|
|
|
|
21,224
|
|
|
|
46,461
|
|
Income from continuing operations
|
|
|
25,554
|
|
|
|
14,797
|
|
|
|
47,520
|
|
|
|
45,496
|
|
|
|
61,069
|
|
|
|
33,642
|
|
|
|
69,289
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26,200
|
)
|
Net income
|
|
|
25,554
|
|
|
|
14,797
|
|
|
|
47,520
|
|
|
|
45,496
|
|
|
|
61,069
|
|
|
|
33,642
|
|
|
|
43,089
|
|
Per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per basic share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.29
|
|
|
$
|
0.17
|
|
|
$
|
0.54
|
|
|
$
|
0.53
|
|
|
$
|
0.72
|
|
|
$
|
0.41
|
|
|
$
|
0.84
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per basic share
|
|
$
|
0.29
|
|
|
$
|
0.17
|
|
|
$
|
0.54
|
|
|
$
|
0.53
|
|
|
$
|
0.72
|
|
|
$
|
0.41
|
|
|
$
|
0.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
|
|
|
|
Ended March 31,
|
|
|
For the Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor(2)
|
|
|
|
2010(1)
|
|
|
2009(1)
|
|
|
2009(1)
|
|
|
2008(1)
|
|
|
2007(1)
|
|
|
2006
|
|
|
2005
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
Earnings per diluted share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.25
|
|
|
$
|
0.15
|
|
|
$
|
0.47
|
|
|
$
|
0.45
|
|
|
$
|
0.62
|
|
|
$
|
0.35
|
|
|
$
|
0.72
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per diluted share
|
|
$
|
0.25
|
|
|
$
|
0.15
|
|
|
$
|
0.47
|
|
|
$
|
0.45
|
|
|
$
|
0.62
|
|
|
$
|
0.35
|
|
|
$
|
0.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro-forma net income per share (unaudited)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor cash dividends, per common share (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A & C (Predecessor)
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
$
|
6.36
|
|
Class B (Predecessor)
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
$
|
1.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31,
|
|
As of December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor(2)
|
|
|
2010
|
|
2009
|
|
2009(1)
|
|
2008(1)
|
|
2007(1)
|
|
2006
|
|
2005
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Consolidated statements of financial condition data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
324,761
|
|
|
$
|
319,394
|
|
|
$
|
378,594
|
|
|
$
|
219,239
|
|
|
$
|
188,003
|
|
|
$
|
245,163
|
|
|
$
|
134,592
|
|
Total assets
|
|
|
3,343,286
|
|
|
|
3,344,907
|
|
|
|
3,336,936
|
|
|
|
3,381,779
|
|
|
|
3,287,349
|
|
|
|
2,797,544
|
|
|
|
2,638,486
|
|
Total debt(4)
|
|
|
1,407,117
|
|
|
|
1,465,541
|
|
|
|
1,369,223
|
|
|
|
1,467,647
|
|
|
|
1,451,071
|
|
|
|
1,344,375
|
|
|
|
1,345,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Three Months Ended March 31,
|
|
As of and for the Year Ended December 31,
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
Predecessor(2)
|
|
|
2010
|
|
2009
|
|
2009(1)
|
|
2008(1)
|
|
2007(1)
|
|
2006
|
|
2005
|
|
Other financial and operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(5) (in thousands)
|
|
$
|
105,457
|
|
|
$
|
81,948
|
|
|
$
|
356,068
|
|
|
$
|
350,171
|
|
|
$
|
329,079
|
|
|
$
|
247,912
|
|
|
$
|
188,917
|
|
Adjusted net income(5) (in thousands)
|
|
$
|
41,099
|
|
|
$
|
25,311
|
|
|
$
|
129,556
|
|
|
$
|
108,863
|
|
|
$
|
107,404
|
|
|
$
|
65,372
|
|
|
$
|
78,278
|
|
Adjusted net income per share(5)
|
|
$
|
0.42
|
|
|
$
|
0.26
|
|
|
$
|
1.32
|
|
|
$
|
1.09
|
|
|
$
|
1.08
|
|
|
$
|
0.68
|
|
|
$
|
0.82
|
|
Gross margin(6) (in thousands)
|
|
$
|
230,204
|
|
|
$
|
200,447
|
|
|
$
|
844,926
|
|
|
$
|
953,301
|
|
|
$
|
781,102
|
|
|
$
|
508,530
|
|
|
$
|
407,019
|
|
Gross margin as a % of net revenue(6)
|
|
|
31.0
|
%
|
|
|
31.2
|
%
|
|
|
30.7
|
%
|
|
|
30.6
|
%
|
|
|
28.8
|
%
|
|
|
29.2
|
%
|
|
|
28.9
|
%
|
Number of advisors(7)
|
|
|
12,026
|
|
|
|
12,294
|
|
|
|
11,950
|
|
|
|
11,920
|
|
|
|
11,089
|
|
|
|
7,006
|
|
|
|
6,481
|
|
Advisory and brokerage assets(8) (in billions)
|
|
$
|
284.6
|
|
|
$
|
231.7
|
|
|
$
|
279.4
|
|
|
$
|
233.9
|
|
|
$
|
283.2
|
|
|
$
|
164.7
|
|
|
$
|
105.4
|
|
Advisory assets under management (in billions)
|
|
$
|
81.0
|
|
|
$
|
57.5
|
|
|
$
|
77.2
|
|
|
$
|
59.6
|
|
|
$
|
73.9
|
|
|
$
|
51.1
|
|
|
$
|
38.4
|
|
Insured cash account balances (in billions)
|
|
$
|
11.4
|
|
|
$
|
12.0
|
|
|
$
|
11.6
|
|
|
$
|
11.2
|
|
|
$
|
8.6
|
|
|
$
|
5.8
|
|
|
|
n/a
|
|
Money market account balances (in billions)
|
|
$
|
6.7
|
|
|
$
|
10.8
|
|
|
$
|
7.0
|
|
|
$
|
11.2
|
|
|
$
|
7.4
|
|
|
$
|
3.5
|
|
|
$
|
6.4
|
|
35
|
|
|
(1) |
|
Financial results as of and for the years ended
December 31, 2009, 2008 and 2007 and the quarters ended
March 31, 2010 and 2009 include the acquisitions of UVEST
Financial Services Group, Inc. (acquired on January 2,
2007), Pacific Select Group, LLC and its wholly owned
subsidiaries: Mutual Service Corporation, Associated Financial
Group, Inc., Associated Securities Corp., Associated Planners
Investment Advisory, Inc. and Waterstone Financial Group, Inc.
(acquired on June 20, 2007) and IFMG Securities, Inc.,
Independent Financial Marketing Group, Inc. and LSC Insurance
Agency of Arizona, Inc. (acquired on November 7, 2007).
Consequently, the results of operations for 2009, 2008 and 2007
and three months ended March 31, 2010 and 2009 may not be
directly comparable to prior periods. |
|
|
|
(2) |
|
On December 28, 2005, investment funds affiliated with the
Majority Holders acquired a majority of our capital stock
through a merger transaction. Activities as of December 28,
2005 and periods prior are those of the predecessor. |
|
|
|
(3) |
|
The unaudited pro forma net income per share gives effect to:
(i) the recognition of
$ million of
share-based
compensation expense based on the number of restricted shares
issued under our Fifth Amended and Restated 2000 Stock Bonus
Plan multiplied by the assumed initial public offering price net
of the related tax benefit, (ii) the sale by us
of shares of common stock
(assuming the underwriters do not exercise their option to
purchase additional shares) that we are offering at the assumed
initial public offering price and after deducting estimated
underwriting discounts and commissions and estimated offering
expenses payable by us and (iii) the use of proceeds from
the sale by us of these shares to reduce amounts outstanding
under our senior secured credit facilities. For purposes of this
calculation, the assumed initial public offering price is
$ per share, which is the
midpoint of the range listed on the cover page of this
prospectus. |
|
(4) |
|
Total debt consists of our senior secured credit facilities,
senior unsecured subordinated notes, revolving line of credit
facility and bank loans payable. |
|
|
|
(5) |
|
See Managements Discussion and Analysis of Financial
Condition and Results of Operations How We Evaluate
Growth for an explanation of Adjusted EBITDA, Adjusted Net
Income and Adjusted Net Income per share. |
|
|
|
(6) |
|
Gross margin is calculated as net revenues less production
expenses. Production expenses consist of the following expense
categories from our consolidated statements of income:
(i) commissions and advisory fees and (ii) brokerage,
clearing and exchange. All other expense categories, including
depreciation and amortization, are considered general and
administrative in nature. Because our gross margin amounts do
not include any depreciation and amortization expense, our gross
margin amounts may not be comparable to those of others in our
industry. |
|
|
|
(7) |
|
Number of advisors is defined as those investment professionals
who are licensed to do business with our broker-dealer
subsidiaries. |
|
(8) |
|
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. Non-networked
assets was not available in 2005 and accordingly, advisory and
brokerage assets is comprised of custodied and networked
accounts. |
36
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and
results of operations should be read in conjunction with our
consolidated financial statements and the notes to those
consolidated financial statements appearing elsewhere in this
prospectus. This discussion contains forward-looking statements
that involve significant risks and uncertainties. As a result of
many factors, such as those set forth under Risk
Factors and elsewhere in this prospectus, our actual
results may differ materially from those anticipated in these
forward-looking statements.
Overview
We provide an integrated platform of proprietary technology,
brokerage and investment advisory services to over 12,000
independent financial advisors and financial advisors at
financial institutions across the country, enabling them to
successfully service their retail investors with unbiased,
conflict-free financial advice. In addition, we support over
4,000 financial advisors with customized clearing, advisory
platforms and technology solutions. Our singular focus is to
support our advisors with the front, middle and back-office
support they need to serve the large and growing market for
independent investment advice, particularly in the mass affluent
market. We believe we are the only company that offers advisors
the unique combination of an integrated technology platform,
comprehensive self-clearing services and full open architecture
access to leading financial products, all delivered in an
environment unencumbered by conflicts from product
manufacturing, underwriting or market making.
Our Sources of
Revenue
Our revenues are derived primarily from fees and commissions
from products and advisory services offered by our advisors to
their clients, a substantial portion of which we pay out to our
advisors, as well as fees we receive from our advisors for use
of our technology, custody and clearing platforms. We also
generate asset-based fees through a distribution of financial
products for a broad range of product manufacturers. Under our
self-clearing platform, we custody the majority of client assets
invested in these financial products, which includes providing
statements, transaction processing and ongoing account
management. In return for these services, mutual funds,
insurance companies, banks and other financial product
manufacturers pay us fees based on asset levels or number of
accounts managed. We also earn fees for margin lending to our
advisors clients.
We track recurring revenue, which we define to include our
asset-based fee revenues, advisory fee revenues, our trailing
commission revenues, our revenues from cash sweep programs and
asset-based transaction and other fee revenues. Because
recurring revenue is associated with asset balances, it will
fluctuate depending on the market value of the asset balances
and current interest rates. Accordingly, recurring revenue can
be negatively impacted by adverse external market conditions.
However, recurring revenue is meaningful to us despite these
fluctuations because it is not based on transaction volumes or
other activity-based fees, which are more difficult to predict,
particularly in declining or volatile markets.
37
The table below summarizes the sources of our revenue and the
underlying drivers:
|
|
|
|
|
Commissions and Advisory
Fees. Transaction-based commissions and
advisory fees both represent advisor-generated revenue,
generally 85-90% of which is paid to advisors.
|
|
|
|
|
|
Commissions. Transaction-based
commission revenues represent gross commissions generated by our
advisors, primarily from commissions earned on the sale of
various financial products such as fixed and variable annuities,
mutual funds, general securities, alternative investments and
insurance. We also earn trailing commission type revenues (a
commission that is paid over time such as 12(b)-1 fees) on
mutual funds and variable annuities held by clients of our
advisors. Trail commissions are recurring in nature and are
earned based on the current market value of investment holdings.
|
|
|
|
Advisory Fees. Advisory fee revenues
represent fees charged by us and our advisors to their clients
based on the value of advisory assets.
|
|
|
|
|
|
Asset-Based Fees. Asset-based fees are
comprised of fees from cash sweep programs, our financial
product manufacturer sponsorship programs, and
sub-transfer
agency and networking services. Pursuant to contractual
arrangements, uninvested cash balances in our advisors
client accounts are swept into either insured deposit accounts
at various banks or third-party money market funds, for which we
receive fees, including administrative and record-keeping fees
based on account type and the invested balances. In addition, we
receive fees from certain financial product manufacturers in
connection with sponsorship programs that support our marketing
and sales-force education and training efforts. We also earn
fees on mutual fund assets for which we provide administrative
and record-keeping services as a
sub-transfer
agent. Our networking fees represent fees paid to us by mutual
fund and annuity product manufacturers in exchange for
administrative and record-keeping services that we provide to
|
38
|
|
|
|
|
clients of our advisors. Networking fees are correlated to the
number of positions we administer, not the value of assets under
administration.
|
|
|
|
|
|
Transaction and Other Fees. Revenues
earned from transaction and other fees primarily consist of
transaction fees and ticket charges, subscription fees, IRA
custodian fees, contract and license fees, conference fees and
small/inactive account fees. We charge fees to our advisors and
their clients for executing transactions in brokerage and
fee-based advisory accounts. We earn subscription fees for the
software and technology services provided to our advisors and on
IRA custodial services that we provide for their client
accounts. We charge monthly administrative fees to our advisors.
We charge fees to financial product manufacturers for
participating in our training and marketing conferences and fees
to our advisors and their clients for accounts that fail to meet
certain specified thresholds of size or activity.
|
|
|
|
Interest and Other Revenue. Other
revenue includes marketing re-allowances from certain financial
product manufacturers as well as interest income from client
margin accounts and cash equivalents, net of operating interest
expense.
|
Our Operating
Expenses
|
|
|
|
|
Production Expenses. Production
expenses consist of commissions and advisory fees as well as
brokerage, clearing and exchange fees. We pay out the majority
of commissions and advisory fees received from sales or services
provided by our advisors. Substantially all of these payouts are
variable and correlated to the revenues generated by each
advisor.
|
|
|
|
Compensation and Benefits
Expense. Compensation and benefits expense
includes salaries and wages and related employee benefits and
taxes for our employees (including share-based compensation), as
well as compensation for temporary employees and consultants.
|
|
|
|
General and Administrative
Expenses. General and administrative expenses
include promotional fees, occupancy and equipment,
communications and data processing, regulatory fees, travel and
entertainment and professional services.
|
|
|
|
Depreciation and Amortization
Expense. Depreciation and amortization
expense represents the benefits received for using long-lived
assets. Those assets represent significant intangible assets
established through our acquisitions, as well as fixed assets
which include internally developed software, hardware, leasehold
improvements and other equipment.
|
|
|
|
Restructuring Charges. Restructuring
charges represent expenses incurred as a result of our 2009
consolidation of the Affiliated Entities and our strategic
business review committed to and implemented in 2008 to reduce
our cost structure and approve operating efficiencies.
|
|
|
|
Other Expenses. Other expenses include
bank fees, other taxes, bad debt expense and other miscellaneous
expenses.
|
How We
Evaluate Growth
We focus on several key financial and non-financial metrics in
evaluating the success of our business relationships and our
resulting financial position and operating performance. Our key
metrics
39
as of and for the years ended December 31, 2009, 2008, and
2007 and the three months ended March 31, 2010 and 2009 are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the
|
|
|
|
|
Three Months
|
|
As of and for the Year
|
|
|
Ended March 31,
|
|
Ended December 31,
|
|
|
2010
|
|
2009
|
|
2009
|
|
2008
|
|
2007
|
|
|
(unaudited)
|
|
Non-Financial Metrics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advisors(1)
|
|
|
12,026
|
|
|
|
12,294
|
|
|
|
11,950
|
|
|
|
11,920
|
|
|
|
11,089
|
|
Advisory and brokerage assets(2) (in billions)
|
|
$
|
284.6
|
|
|
$
|
231.7
|
|
|
$
|
279.4
|
|
|
$
|
233.9
|
|
|
$
|
283.2
|
|
Advisory assets under management (in billions)
|
|
$
|
81.0
|
|
|
$
|
57.5
|
|
|
$
|
77.2
|
|
|
$
|
59.6
|
|
|
$
|
73.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Metrics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue growth (decline) from prior period
|
|
|
15.6
|
%
|
|
|
(19.5
|
)%
|
|
|
(11.8
|
)%
|
|
|
14.7
|
%
|
|
|
56.2
|
%
|
Recurring revenue as a % of net revenue(3)
|
|
|
60.1
|
%
|
|
|
55.0
|
%
|
|
|
57.3
|
%
|
|
|
58.5
|
%
|
|
|
57.1
|
%
|
Gross margin(4) (in millions)
|
|
$
|
230.2
|
|
|
$
|
200.4
|
|
|
$
|
844.9
|
|
|
$
|
953.3
|
|
|
$
|
781.1
|
|
Gross margin as a % of net revenue(4)
|
|
|
31.0
|
%
|
|
|
31.2
|
%
|
|
|
30.7
|
%
|
|
|
30.6
|
%
|
|
|
28.8
|
%
|
Net income (in millions)
|
|
$
|
25.6
|
|
|
$
|
14.8
|
|
|
$
|
47.5
|
|
|
$
|
45.5
|
|
|
$
|
61.1
|
|
Adjusted EBITDA (in millions)
|
|
$
|
105.5
|
|
|
$
|
81.9
|
|
|
$
|
356.1
|
|
|
$
|
350.2
|
|
|
$
|
329.1
|
|
Adjusted Net Income (in millions)
|
|
$
|
41.1
|
|
|
$
|
25.3
|
|
|
$
|
129.6
|
|
|
$
|
108.9
|
|
|
$
|
107.4
|
|
|
|
|
(1) |
|
Advisors are defined as those investment professionals who are
licensed to do business with our broker-dealer subsidiaries. In
2009, we attracted record levels of new advisors due to the
dislocation in the marketplace that impacted many of our
competitors. This record recruitment was offset, however, by the
attrition of approximately 720 advisors licensed through the
Affiliated Entities related to the consolidation of the
operations of the Affiliated Entities. Excluding this attrition,
we added 750 new advisors during 2009, representing 6.3%
advisor growth. |
|
|
|
(2) |
|
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 recruiting and net of attrition. |
|
(3) |
|
Recurring revenue is derived from sources such as advisory fees,
asset-based fees, trailing commission fees, fees related to our
cash sweep programs, interest earned on margin accounts and
technology and service fees. In 2009, we revised our definition
of recurring revenues. Accordingly, prior period amounts have
been recast to reflect this change. |
|
|
|
(4) |
|
Gross margin is calculated as net revenues less production
expenses. Production expenses consist of the following expense
categories from our consolidated statements of income:
(i) commissions and advisory fees and (ii) brokerage,
clearing and exchange. All other expense categories, including
depreciation and amortization, are considered general and
administrative in nature. Because our gross margin amounts do
not include any depreciation and amortization expense, our gross
margin amounts may not be comparable to those of others in our
industry. |
Adjusted
EBITDA
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 below. We present Adjusted EBITDA because
we consider it an important measure of our performance. Adjusted
EBITDA is a useful financial metric in assessing our operating
performance from period to period by excluding certain items
that we believe are not representative of our core business,
such as certain material non-cash items and other adjustments
that are outside the control of management.
40
We believe that Adjusted EBITDA, viewed in addition to, and not
in lieu of, our reported GAAP results, provides useful
information to investors regarding our performance and overall
results of operations for the following reasons:
|
|
|
|
|
because non-cash equity grants made to employees at a certain
price and point in time do not necessarily reflect how our
business is performing at any particular time, stock-based
compensation expense is not a key measure of our operating
performance and
|
|
|
|
because costs associated with acquisitions and the resulting
integrations, restructuring and conversions can vary from period
to period and transaction to transaction, expenses associated
with these activities are not considered a key measure of our
operating performance.
|
We use Adjusted EBITDA:
|
|
|
|
|
as a measure of operating performance;
|
|
|
|
for planning purposes, including the preparation of budgets and
forecasts;
|
|
|
|
to allocate resources to enhance the financial performance of
our business;
|
|
|
|
to evaluate the effectiveness of our business strategies;
|
|
|
|
in communications with our board of directors concerning our
financial performance and
|
|
|
|
as a bonus target for certain of our employees.
|
Adjusted EBITDA is a non-GAAP measure as defined by
Regulation G under the Securities Act and does not purport
to be an alternative to net income as a measure of operating
performance or to cash flows from operating activities as a
measure of liquidity. The term Adjusted EBITDA is not defined
under GAAP, and Adjusted EBITDA is not a measure of net income,
operating income or any other performance measure derived in
accordance with GAAP, and is subject to important limitations.
Adjusted EBITDA has limitations as an analytical tool, and
should not be considered in isolation, or as a substitute for
analysis of our results as reported under GAAP. Some of these
limitations are:
|
|
|
|
|
Adjusted EBITDA does not reflect all cash expenditures, future
requirements for capital expenditures or contractual commitments;
|
|
|
|
Adjusted EBITDA does 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 our debt.
|
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. Because of these
limitations, Adjusted EBITDA should not be considered as a
measure of discretionary cash available to us to invest in our
business. We compensate for these limitations by relying
primarily on the GAAP results and using Adjusted EBITDA as
supplemental information.
41
Set forth below is a reconciliation from our net income to
Adjusted EBITDA for the years ended December 31, 2009, 2008
and 2007 and the three months ended March 31, 2010 and 2009
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
|
|
|
|
|
Months Ended
|
|
|
|
|
|
|
March 31,
|
|
|
For The Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(unaudited)
|
|
|
Net income
|
|
$
|
25,554
|
|
|
$
|
14,797
|
|
|
$
|
47,520
|
|
|
$
|
45,496
|
|
|
$
|
61,069
|
|
Interest expense
|
|
|
24,336
|
|
|
|
25,941
|
|
|
|
100,922
|
|
|
|
115,558
|
|
|
|
122,817
|
|
Income tax expense
|
|
|
19,162
|
|
|
|
11,988
|
|
|
|
25,047
|
|
|
|
47,269
|
|
|
|
46,764
|
|
Depreciation and amortization
|
|
|
25,590
|
|
|
|
27,395
|
|
|
|
108,296
|
|
|
|
100,462
|
|
|
|
78,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
94,642
|
|
|
$
|
80,121
|
|
|
$
|
281,785
|
|
|
$
|
308,785
|
|
|
$
|
309,398
|
|
Share-based compensation expense(a)
|
|
$
|
2,536
|
|
|
$
|
1,225
|
|
|
$
|
6,437
|
|
|
$
|
4,160
|
|
|
$
|
2,159
|
|
Acquisition and integration related expenses(b)
|
|
|
140
|
|
|
|
822
|
|
|
|
3,037
|
|
|
|
18,326
|
|
|
|
16,350
|
|
Restructuring and conversion costs(c)
|
|
|
7,979
|
|
|
|
(259
|
)
|
|
|
64,658
|
|
|
|
15,122
|
|
|
|
|
|
Other(d)
|
|
|
160
|
|
|
|
39
|
|
|
|
151
|
|
|
|
3,778
|
|
|
|
1,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
105,457
|
|
|
$
|
81,948
|
|
|
$
|
356,068
|
|
|
$
|
350,171
|
|
|
$
|
329,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Represents share-based compensation for stock options awarded to
employees and
non-executive
directors. |
|
(b) |
|
Represents acquisition and integration costs primarily as a
result of our 2007 acquisitions of UVEST, the Affiliated
Entities and IFMG. |
|
(c) |
|
Represents organizational restructuring charges incurred in 2008
and 2009 for severance and one-time termination benefits, asset
impairments, lease and contract termination fees and other
transfer costs. |
|
(d) |
|
Represents impairment charges in 2008 for our equity investment
in Blue Frog, other taxes and employment tax withholding related
to a nonqualified deferred compensation plan. |
Adjusted Net
Income and Adjusted Net Income per share
Adjusted Net Income represents net income before:
(a) share-based compensation expense, (b) amortization
of intangible assets and software, a component of depreciation
and amortization, resulting from our merger transaction in 2005
with the Majority Holders and our 2007 acquisitions,
(c) acquisition and integration related expenses and
(d) restructuring and conversion 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 Net Income per share represents Adjusted Net Income
divided by weighted average outstanding shares on a fully
diluted basis.
We prepared Adjusted Net Income and Adjusted Net Income per
share to eliminate the effects of items that we do not consider
indicative of our core operating performance.
42
We believe that Adjusted Net Income and Adjusted Net Income per
share, viewed in addition to, and not in lieu of, our reported
GAAP results provide useful information to investors regarding
our performance and overall results of operations for the
following reasons:
|
|
|
|
|
because non-cash equity grants made to employees at a certain
price and point in time do not necessarily reflect how our
business is performing at any particular time, stock-based
compensation expense is not a key measure of our operating
performance;
|
|
|
|
because costs associated with acquisitions and related
integrations, restructuring and conversions can vary from period
to period and transaction to transaction, expenses associated
with these activities are not considered a key measure of our
operating performance and
|
|
|
|
because amortization expenses can vary substantially from
company to company and from period to period depending upon each
companys financing and accounting methods, the fair value
and average expected life of acquired intangible assets and the
method by which assets were acquired, the amortization of
intangible assets obtained in acquisitions are not considered a
key measure in comparing our operating performance.
|
We have historically not used Adjusted Net Income for internal
management reporting and evaluation purposes; however, we
believe Adjusted Net Income and Adjusted Net Income per share
are useful to investors in evaluating our operating performance
because securities analysts use them as supplemental measures to
evaluate the overall performance of companies, and we anticipate
that our investor and analyst presentations after we are public
will include Adjusted Net Income and Adjusted Net Income per
share.
Adjusted Net Income and Adjusted Net Income per share are not
measures of our 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 our profitability or
liquidity.
We understand that, although Adjusted Net Income and Adjusted
Net Income per share are frequently used by securities analysts
and others in their evaluation of companies, they have
limitations as analytical tools, and you should not consider
Adjusted Net Income and Adjusted Net Income per share in
isolation, or as substitutes for an analysis of our results as
reported under GAAP. In particular you should consider:
|
|
|
|
|
Adjusted Net Income and Adjusted Net Income per share do not
reflect our cash expenditures, or future requirements for
capital expenditures or contractual commitments;
|
|
|
|
Adjusted Net Income and Adjusted Net Income per share do not
reflect changes in, or cash requirements for, our working
capital needs and
|
|
|
|
Other companies in our industry may calculate Adjusted Net
Income and Adjusted Net Income per share differently than we do,
limiting their usefulness as comparative measures.
|
Management compensates for the inherent limitations associated
with using Adjusted Net Income and Adjusted Net Income per share
through disclosure of such limitations, presentation of our
financial statements in accordance with GAAP and reconciliation
of Adjusted Net Income to the most directly comparable GAAP
measure, net income.
43
The following table sets forth a reconciliation of net income to
Adjusted Net Income and Adjusted Net Income per share for the
years ended December 31, 2009, 2008 and 2007 and the three
months ended March 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
For The Year Ended
|
|
|
|
Ended March 31,
|
|
|
December 31
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share data)
|
|
|
|
(unaudited)
|
|
|
Net income
|
|
$
|
25,554
|
|
|
$
|
14,797
|
|
|
$
|
47,520
|
|
|
$
|
45,496
|
|
|
$
|
61,069
|
|
After-Tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA Adjustments(1)
|
|
|
7,015
|
|
|
|
1,395
|
|
|
|
46,089
|
|
|
|
26,045
|
|
|
|
12,263
|
|
Amortization of purchased intangible assets(1)(2)
|
|
|
8,530
|
|
|
|
9,119
|
|
|
|
35,947
|
|
|
|
37,322
|
|
|
|
34,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income
|
|
$
|
41,099
|
|
|
$
|
25,311
|
|
|
$
|
129,556
|
|
|
$
|
108,863
|
|
|
$
|
107,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income per share(3)
|
|
$
|
0.42
|
|
|
$
|
0.26
|
|
|
$
|
1.32
|
|
|
$
|
1.09
|
|
|
$
|
1.08
|
|
Weighted average shares outstanding diluted
|
|
|
98,945
|
|
|
|
97,959
|
|
|
|
98,494
|
|
|
|
100,334
|
|
|
|
99,099
|
|
|
|
|
(1) |
|
EBITDA Adjustments and amortization of purchased intangible
assets, a component of depreciation and amortization, have been
tax effected using a federal rate of 35.0% and the applicable
effective state rate which ranged from 4.23% to 4.71%, net of
the federal tax benefit. |
|
|
|
(2) |
|
Represents amortization of intangible assets and software, which
were $59.6 million, $61.7 million and
$56.1 million before taxes for the years ended
December 31, 2009, 2008 and 2007, respectively, and were
$14.1 million and $15.1 million before taxes for the
three months ended March 31, 2010 and 2009, respectively.
The amortization of intangible assets and software was a result
of our purchase accounting adjustments from our merger
transaction in 2005 with the Majority Holders and our 2007
acquisitions of UVEST, the Affiliated Entities and IFMG. |
|
|
|
(3) |
|
Represents Adjusted Net Income 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 Net
Income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
|
|
|
|
|
Months
|
|
|
|
|
|
|
Ended March 31,
|
|
|
For The Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(unaudited)
|
|
|
Earnings per share (diluted)
|
|
$
|
0.25
|
|
|
$
|
0.15
|
|
|
$
|
0.47
|
|
|
$
|
0.45
|
|
|
$
|
0.62
|
|
Adjustment for allocation of undistributed earnings to stock
units
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
$
|
|
|
|
$
|
|
|
After-Tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA Adjustments per share
|
|
$
|
0.07
|
|
|
$
|
0.01
|
|
|
$
|
0.47
|
|
|
$
|
0.26
|
|
|
$
|
0.12
|
|
Amortization of purchased intangible assets per share
|
|
$
|
0.09
|
|
|
$
|
0.09
|
|
|
$
|
0.37
|
|
|
$
|
0.38
|
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income per share
|
|
$
|
0.42
|
|
|
$
|
0.26
|
|
|
$
|
1.32
|
|
|
$
|
1.09
|
|
|
$
|
1.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
Economic Overview
and Impact of Financial Market Events
Since the middle of 2008, financial markets worldwide,
particularly in the United States, experienced significant
volatility, turbulence and substantial declines in value,
followed by a partial recovery that began during the second
quarter of 2009. The markets decline and recovery is
illustrated by the S&P 500 index, which began 2008 at
1,447, stood at 1,280 on June 30, 2008, declined to 903 at
December 31, 2008, and dropped to 667 on March 6,
2009, before recovering to end 2009 at 1,115. During the first
quarter of 2010, the equity and fixed income markets continued
the positive trends that were observed toward the second half of
2009. For example, the S&P 500 averaged 1,124 during the
first quarter of 2010, 39.1% above the average of 808 in the
comparable prior year period. This rebound has positively
influenced our advisory and brokerage assets and improved those
revenue sources which are directly driven by client asset
levels. Despite the markets trending recovery, overall
economic activity including consumer discretionary income,
employment and consumer confidence remained weak.
In response to the market turbulence and overall economic
environment, the central banks including the Federal Reserve
have maintained historically low interest rates. The average
effective rate for federal funds was 0.13% in the first quarter
of 2010, compared to 0.12% for the fourth quarter of 2009 and
0.19% for the first quarter of 2009. The low interest rate
environment negatively impacts our revenues from client assets
in our cash sweep programs.
While our business has improved as a result of the more
favorable environment, our outlook remains cautiously optimistic
and we persist in our efforts to reduce costs and control our
expenditures.
Throughout 2008 and 2009, we launched a series of expense
management and organizational simplification initiatives that
enabled us to reduce compensation and benefits expenses and
other general and administrative expenses from 2008 to 2009 by
$72.7 million and $48.0 million, respectively. In the
fourth quarter of 2008, we initiated a series of cost reduction
measures through a strategic business review. Those efforts
included the December 31, 2008 decision to reduce our
workforce by approximately 250 employees, or approximately
10%, which resulted in additional expenditures during the fourth
quarter of 2008 and reduced compensation and benefits expense by
approximately $27.0 million during 2009 in comparison to
2008.
In addition, the strategic business review included expense
reductions that we view as temporary in nature. These items
include (a) decreases in project expenses, (b) the elimination
of or reduction in scope of certain advisor recognition programs
and annual conferences and (c) employee-related items such as
reduction in bonuses and employer contributions to our
retirement plans.
In the third quarter of 2009, we furthered our restructuring
plans by consolidating the operations of Pacific Select Group,
LLC and its wholly-owned subsidiaries, which we refer to
collectively as the Affiliated Entities, with those of LPL
Financial. We also identified opportunities to restructure and
consolidate certain advisor support activities, including sales
and marketing and compliance across certain of our subsidiaries.
As of March 31, 2010, we have incurred charges of
$63.1 million and expect $10.6 million in additional
one-time restructuring charges, all for severance and
termination benefits, asset impairments, contract termination
fees and other conversion costs. Beginning in 2010, we estimate
the 2009 consolidation of our Affiliated Entities will result in
approximately $24.0 million of annual cost savings.
We also enjoyed strong business development results in 2009 as
market turbulence resulted in a significant dislocation of
advisors at firms disrupted by or forced to merge in response to
these adverse market conditions. In 2009, we attracted 750 net
new advisors, exclusive of the attrition of those advisors
impacted by our consolidation of the operations of the
Affiliated Entities.
We continue to attempt to mitigate the impact of financial
market events on our earnings with a strategic focus on
attractive growth opportunities such as business development
from attracting new advisors and through efficiency initiatives
and expense management activities described earlier. We
45
plan to continue these efforts into future periods as they may
help mitigate some of the negative financial risks associated
with volatile market conditions and bolster our growth
capabilities. We remain focused on retaining our advisors and
enabling them to provide their clients with independent and
unbiased financial advice and leading service. This strategy is
a key advantage and we believe it provides sustainable success
for our advisors and our company.
Recent
Acquisitions and Divestitures
From time to time we undertake acquisitions
and/or
divestitures based on opportunities in the competitive
landscape. These activities are part of our overall growth
strategy, but can distort comparability when reviewing revenue
and expense trends for periods presented. The following
describes significant acquisition and divestiture activities
that have impacted our 2007, 2008 and 2009 results.
On January 2, 2007, we completed our acquisition of UVEST,
augmenting our position in providing independent third-party
brokerage services to banks, credit unions and other financial
institutions. The purchase price was $89.5 million at
closing, comprised of $78.0 million in cash financed
primarily through borrowings under our senior secured credit
facilities, as well as the issuance of 603,660 shares of
our common stock at an estimated fair value of $18.90 per share
on the date of acquisition. Immediately following the
acquisition, we satisfied certain obligations under a phantom
stock plan for UVEST employees by issuing 65,820 shares of
common stock at an estimated fair value of $18.90 per share.
On June 20, 2007, we acquired the Affiliated Entities which
increased the number of our advisors and strengthened our
position as a leading independent broker-dealer. Accordingly,
our 2007 results of operations include the activities of the
Affiliated Entities beginning on June 21, 2007. Total
purchase consideration was $120.5 million comprised of
$63.3 million in cash funded primarily through borrowings
under our senior secured credit facilities, and the issuance of
2,645,500 shares of common stock with an estimated fair
value of $21.60 per share on the date of acquisition.
On November 7, 2007, we acquired all of the outstanding
capital stock of IFMG, further expanding our reach in offering
financial services to banks, savings and loan institutions and
credit unions nationwide. Accordingly, our 2007 results of
operations include the activities of IFMG beginning on
November 7, 2007. Purchase consideration at closing was
$25.7 million and was financed with borrowings under our
senior secured credit facilities. At the time of acquisition, we
announced a plan (the Shutdown Plan) to transfer
existing IFMG financial institutional relationships to our other
broker-dealer subsidiaries, LPL Financial and UVEST. In
accordance with the Shutdown Plan, we made several post-closing
payments based on the successful recruitment, retention and
transition of these relationships during the third and fourth
quarter of 2008.
On December 31, 2007, we ceased the operations of our
subsidiary Innovex Mortgage, Inc. (Innovex). Prior
to that date, Innovex provided comprehensive mortgage services
for residential properties of the clients of our advisors.
On September 1, 2009, we consolidated the operations of the
Affiliated Entities with those of LPL Financial. The
consolidation involved the transfer of securities licenses of
certain registered representatives associated with the
Affiliated Entities and their client accounts. Following the
consolidation, the registered representatives and client
accounts that were transferred are now associated with LPL
Financial. The consolidation of the Affiliated Entities was
effected to enhance service offerings to our advisors while also
generating efficiencies.
While our acquisitions of the Affiliated Entities and IFMG have
contributed to the overall growth of our base of advisors and
related revenue and market position, we have incurred
significant non-recurring costs related to acquisition
integration and the subsequent shutdown
and/or
conversion. Many of these expenditures are in the form of
restructuring charges, personnel costs, system costs and
professional fees. For example, the consolidation of the
Affiliated Entities with LPL Financial in
46
September 2009 resulted in restructuring charges including
severance and one-time termination benefits, lease and contract
termination fees, asset impairments and transfer and conversion
costs.
Results of
Operations
Three Months
Ended March 31, 2010 and 2009
The following discussion presents an analysis of our results of
operations for the three months ended March 31, 2010 and
2009. Where appropriate, we have identified specific events and
changes that affect comparability or trends, and where possible
and practical, have quantified the impact of such items.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
|
|
(In thousands)
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
$
|
388,972
|
|
|
$
|
347,220
|
|
|
|
12.0
|
%
|
Advisory fees
|
|
|
206,330
|
|
|
|
163,905
|
|
|
|
25.9
|
%
|
Asset-based fees
|
|
|
71,450
|
|
|
|
62,654
|
|
|
|
14.0
|
%
|
Transaction and other fees
|
|
|
67,363
|
|
|
|
61,338
|
|
|
|
9.8
|
%
|
Other
|
|
|
9,291
|
|
|
|
7,861
|
|
|
|
18.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
743,406
|
|
|
|
642,978
|
|
|
|
15.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
|
513,202
|
|
|
|
442,531
|
|
|
|
16.0
|
%
|
Compensation and benefits
|
|
|
73,575
|
|
|
|
66,978
|
|
|
|
9.8
|
%
|
General and administrative
|
|
|
53,237
|
|
|
|
49,871
|
|
|
|
6.7
|
%
|
Depreciation and amortization
|
|
|
25,590
|
|
|
|
27,395
|
|
|
|
(6.6
|
)%
|
Restructuring charges
|
|
|
3,949
|
|
|
|
(327
|
)
|
|
|
|
*
|
Other
|
|
|
4,777
|
|
|
|
3,720
|
|
|
|
28.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
674,330
|
|
|
|
590,168
|
|
|
|
14.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating interest expense
|
|
|
24,336
|
|
|
|
25,941
|
|
|
|
(6.2
|
)%
|
Loss on equity method investment
|
|
|
24
|
|
|
|
84
|
|
|
|
(71.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
698,690
|
|
|
|
616,193
|
|
|
|
13.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
44,716
|
|
|
|
26,785
|
|
|
|
66.9
|
%
|
Provision for income taxes
|
|
|
19,162
|
|
|
|
11,988
|
|
|
|
59.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
25,554
|
|
|
$
|
14,797
|
|
|
|
72.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
Revenues
Commissions
The following table sets forth our commission revenue by product
category included in our unaudited condensed consolidated
statements of income for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
|
% Total
|
|
|
2009
|
|
|
% Total
|
|
|
Variable annuities
|
|
$
|
155,692
|
|
|
|
40.0
|
%
|
|
$
|
129,443
|
|
|
|
37.3
|
%
|
Mutual funds
|
|
|
115,001
|
|
|
|
29.6
|
%
|
|
|
82,822
|
|
|
|
23.9
|
%
|
Fixed annuities
|
|
|
33,888
|
|
|
|
8.7
|
%
|
|
|
60,153
|
|
|
|
17.3
|
%
|
Equities
|
|
|
24,106
|
|
|
|
6.2
|
%
|
|
|
20,086
|
|
|
|
5.8
|
%
|
Fixed income
|
|
|
21,012
|
|
|
|
5.4
|
%
|
|
|
15,637
|
|
|
|
4.5
|
%
|
Alternative investments
|
|
|
20,018
|
|
|
|
5.1
|
%
|
|
|
17,321
|
|
|
|
5.0
|
%
|
Insurance
|
|
|
18,678
|
|
|
|
4.8
|
%
|
|
|
21,101
|
|
|
|
6.0
|
%
|
Other
|
|
|
577
|
|
|
|
0.2
|
%
|
|
|
657
|
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commission revenue
|
|
$
|
388,972
|
|
|
|
100.0
|
%
|
|
$
|
347,220
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commission revenue increased by $41.8 million, or 12.0%,
for the three months ended March 31, 2010 compared with
2009. In comparison to the prior year, trail-based commissions
increased significantly as a result of improved market
conditions as well as growth in assets eligible for trail
payment. Transaction-based commissions increased slightly, also
as a result of greater sales of commission-based products. In
particular, transaction-based commissions from more market
sensitive products such as mutual funds and variable annuities
experienced an increase over the prior year period due to
increasing investor confidence. Sales of financial products with
more predictable cash flows such as fixed annuities and
insurance products, which typically increase during periods of
financial uncertainty, decreased during this period, consistent
with the markets recovery.
Advisory
Fees
Advisory fees increased by $42.4 million, or 25.9%, for the
three months ended March 31, 2010 compared with 2009. The
increase was primarily due to the effect of the rebounding
market, which prompted a significant increase on the value of
client assets in advisory programs. Our advisory assets
increased 40.9% from $57.5 billion at March 31, 2009
to $81.0 billion at March 31, 2010.
Asset-Based
Fees
Asset-based fees increased by $8.8 million, or 14.0%, for
the three months ended March 31, 2010 compared with 2009.
Revenues from product sponsors and for record-keeping services,
which are largely based on the underlying asset values,
increased due to the impact of the markets recovery on the
value of those underlying assets. Revenues from our cash sweep
programs for the three months ended March 31, 2010 declined by
$5.5 million, or 17.4% from the three months ended March 31,
2009 due to a decrease in assets held in our cash sweep programs
and the depressed interest rate environment as reflected by the
average effective federal funds rate and its influence on fees
associated with our cash sweep programs. For the three months
ended March 31, 2010, the effective federal funds rate
averaged 0.13% compared to 0.19% for the three months ended
March 31, 2009. Assets in our cash sweep programs averaged
$18.4 billion and $22.5 billion for the three months
ended March 31, 2010 and 2009, respectively.
Transaction and
Other Fees
Transaction and other fees, which include fees from advisors and
their client accounts for various processing, technology and
account services, increased by $6.0 million, or 9.8%, for
the three months ended March 31, 2010 compared with 2009. This
increase is due, in part, to $2.5 million in revenues
48
earned from advisor conferences held in 2010; these conferences
were not held in 2009 due to market conditions. In addition,
charges to advisors for professional liability insurance
services increased by $3.0 million in 2010 as compared to 2009
due to increases in the pricing for such services.
Other
Revenue
Other revenue increased by $1.4 million, or 18.2%, for the
three months ended March 31, 2010 compared with 2009. The
increase was due primarily to improved market conditions, which
drove higher direct investment marketing allowances received
from product sponsor programs, which are largely based on the
market values of the underlying assets.
Expenses
Production
Expenses
Production expenses increased by $70.7 million, or 16.0%,
for the three months ended March 31, 2010 compared with
2009. This increase was correlated with our commission and
advisory revenues, which increased by 16.5% during the same
period. Our production payout averaged 84.8% for the three
months ended March 31, 2010 and 85.0% for the three months
ended March 31, 2009.
Compensation and
Benefits Expense
Compensation and benefits increased by $6.6 million, or
9.8%, for the three months ended March 31, 2010 compared
with 2009. The increase was primarily attributed to the
restoration of certain employee-related items, including
increases in bonus levels and employer contributions to our
retirement plans in the current year period that were suspended
in 2009 as a result of our cost management initiatives. Our
average number of full-time employees was 2,464 and 2,463 for
the three months ended March 31, 2010 and 2009,
respectively.
General and
Administrative Expenses
General and administrative expenses increased by
$3.4 million, or 6.7%, for the three months ended
March 31, 2010 compared with 2009. The increase compared to
the prior year was due to aggressive cost reduction measures
that took place in the first quarter of 2009 due to our ongoing
strategic business review. As market conditions improve, we have
cautiously reinstated certain levels of general and
administrative expenses that are necessary to support the growth
and service to our advisors. During the first quarter of 2010 we
reinstated certain advisor conference services, which increased
general and administrative expenses by $6.2 million.
Depreciation and
Amortization Expense
Depreciation and amortization expense decreased by
$1.8 million, or 6.6%, for the three months ended
March 31, 2010 compared with 2009. The asset impairments of
$19.9 million that were recorded in the third and fourth
quarter of 2009 in the consolidation of our Affiliated Entities
resulted in lower balances in those intangible assets that are
amortized.
Restructuring
Charges
Restructuring charges represent expenses incurred as a result of
our 2008 strategic business review and our 2009 consolidation of
the Affiliated Entities.
Restructuring charges were $3.9 million for the three
months ended March 31, 2010, which includes charges
incurred for severance and termination benefits of
$1.8 million, contract termination costs of
$0.4 million, asset impairment charges of $0.2 million
and $1.5 million in other expenditures principally relating
to the conversion and transfer of advisors and their client
accounts from the
49
Affiliated Entities to LPL Financial. In the first quarter of
2009, we recorded $0.3 million in adjustments that reduced
previously estimated restructuring charges related to our 2008
strategic business review.
Other
Expenses
Other expenses increased by $1.1 million, or 28.4%, for the
three months ended March 31, 2010 compared with 2009. The
increase was primarily due to an increase in bad debt expense.
Interest
Expense
Interest expense includes non-operating interest expense for our
senior secured credit facilities and our senior unsecured
subordinated notes.
Interest expense decreased by $1.6 million, or 6.2%, for
the three months ended March 31, 2010 compared with 2009.
The decline reflects a decrease in the average principal amount
of debt outstanding due primarily to lower level of borrowings
on our revolving credit facility. Our average outstanding
borrowing activity in the revolving and uncommitted line of
credit facilities have decreased by $81.8 million from
$90.0 million for the three months ended March 31,
2009 to $8.2 million for the three months ended
March 31, 2010.
Loss on Equity
Method Investment
Loss on equity method investment represents our share of losses
related to our investment in a privately held technology company.
Loss on equity method investment decreased by $0.1 million,
or 71.4%, for the three months ended March 31, 2010
compared with 2009.
Provision for
Income Taxes
We estimate our full-year effective income tax rate at the end
of each interim reporting period. This estimate is used in
providing for income taxes on a
year-to-date
basis and may change in subsequent interim periods. The tax rate
in any quarter can be affected positively and negatively by
adjustments that are required to be reported in the specific
quarter of resolution.
During the three months ended March 31, 2010, we recorded
income tax expense of $19.2 million compared with an income
tax expense of $12.0 million for the three months ended
March 31, 2009. The increase in income tax expense of 59.8%
is due to an increase in income before provision for income
taxes of 66.9%, partially offset by a decrease in our effective
income tax rates. Our effective income tax rate was 42.9% and
44.8% for the three months ended March 31, 2010 and 2009,
respectively. The effective rates reflect the impact of state
taxes, settlement contingencies and expenses that are not
deductible for tax purposes.
50
Years Ended
December 31, 2009, 2008 and 2007
The following discussion presents an analysis of our results of
operations for the years ended December 31, 2009, 2008 and
2007. Where appropriate, we have identified specific events and
changes that affect comparability or trends, and where possible
and practical, have quantified the impact of such items.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Percentage Change
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
09 vs. 08
|
|
|
08 vs. 07
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
$
|
1,477,655
|
|
|
$
|
1,640,218
|
|
|
$
|
1,470,285
|
|
|
|
(9.9
|
)%
|
|
|
11.6
|
%
|
Advisory fees
|
|
|
704,139
|
|
|
|
830,555
|
|
|
|
738,938
|
|
|
|
(15.2
|
)%
|
|
|
12.4
|
%
|
Asset-based fees
|
|
|
272,893
|
|
|
|
352,293
|
|
|
|
260,935
|
|
|
|
(22.5
|
)%
|
|
|
35.0
|
%
|
Transaction and other fees
|
|
|
255,574
|
|
|
|
240,486
|
|
|
|
184,604
|
|
|
|
6.3
|
%
|
|
|
30.3
|
%
|
Other
|
|
|
39,244
|
|
|
|
52,797
|
|
|
|
61,812
|
|
|
|
(25.7
|
)%
|
|
|
(14.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
2,749,505
|
|
|
|
3,116,349
|
|
|
|
2,716,574
|
|
|
|
(11.8
|
)%
|
|
|
14.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
|
1,904,579
|
|
|
|
2,163,048
|
|
|
|
1,935,472
|
|
|
|
(11.9
|
)%
|
|
|
11.8
|
%
|
Compensation and benefits
|
|
|
270,436
|
|
|
|
343,171
|
|
|
|
257,200
|
|
|
|
(21.2
|
)%
|
|
|
33.4
|
%
|
General and administrative
|
|
|
218,416
|
|
|
|
266,447
|
|
|
|
199,895
|
|
|
|
(18.0
|
)%
|
|
|
33.3
|
%
|
Depreciation and amortization
|
|
|
108,296
|
|
|
|
100,462
|
|
|
|
78,748
|
|
|
|
7.8
|
%
|
|
|
27.6
|
%
|
Restructuring charges
|
|
|
58,695
|
|
|
|
14,966
|
|
|
|
|
|
|
|
292.2
|
%
|
|
|
*
|
|
Other
|
|
|
15,294
|
|
|
|
17,558
|
|
|
|
13,931
|
|
|
|
(12.9
|
)%
|
|
|
26.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
2,575,716
|
|
|
|
2,905,652
|
|
|
|
2,485,246
|
|
|
|
(11.4
|
)%
|
|
|
16.9
|
%
|
Interest expense
|
|
|
100,922
|
|
|
|
115,558
|
|
|
|
122,817
|
|
|
|
(12.7
|
)%
|
|
|
(5.9
|
)%
|
Loss on equity method investment
|
|
|
300
|
|
|
|
2,374
|
|
|
|
678
|
|
|
|
(87.4
|
)%
|
|
|
250.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
2,676,938
|
|
|
|
3,023,584
|
|
|
|
2,608,741
|
|
|
|
(11.5
|
)%
|
|
|
15.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
72,567
|
|
|
|
92,765
|
|
|
|
107,833
|
|
|
|
(21.8
|
)%
|
|
|
(14.0
|
)%
|
Provision for income taxes
|
|
|
25,047
|
|
|
|
47,269
|
|
|
|
46,764
|
|
|
|
(47.0
|
)%
|
|
|
1.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
47,520
|
|
|
$
|
45,496
|
|
|
$
|
61,069
|
|
|
|
4.4
|
%
|
|
|
(25.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Not meaningful.
Revenues
Commissions
The following table sets forth our commission revenue, by
product category included in our consolidated statements of
income for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
% Total
|
|
|
2008
|
|
|
% Total
|
|
|
2007
|
|
|
% Total
|
|
|
Variable annuities
|
|
$
|
551,345
|
|
|
|
37.3
|
%
|
|
$
|
627,021
|
|
|
|
38.2
|
%
|
|
$
|
605,318
|
|
|
|
41.2
|
%
|
Mutual funds
|
|
|
389,458
|
|
|
|
26.4
|
%
|
|
|
474,948
|
|
|
|
28.9
|
%
|
|
|
498,880
|
|
|
|
33.9
|
%
|
Fixed annuities
|
|
|
225,342
|
|
|
|
15.3
|
%
|
|
|
179,743
|
|
|
|
11.0
|
%
|
|
|
42,775
|
|
|
|
2.9
|
%
|
Equities
|
|
|
86,606
|
|
|
|
5.8
|
%
|
|
|
85,586
|
|
|
|
5.2
|
%
|
|
|
82,215
|
|
|
|
5.6
|
%
|
Alternative investments
|
|
|
77,079
|
|
|
|
5.2
|
%
|
|
|
112,706
|
|
|
|
6.9
|
%
|
|
|
113,183
|
|
|
|
7.7
|
%
|
Fixed income
|
|
|
75,210
|
|
|
|
5.1
|
%
|
|
|
65,309
|
|
|
|
4.0
|
%
|
|
|
48,552
|
|
|
|
3.3
|
%
|
Insurance
|
|
|
69,907
|
|
|
|
4.7
|
%
|
|
|
91,327
|
|
|
|
5.6
|
%
|
|
|
77,613
|
|
|
|
5.3
|
%
|
Other
|
|
|
2,708
|
|
|
|
0.2
|
%
|
|
|
3,578
|
|
|
|
0.2
|
%
|
|
|
1,749
|
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commission revenue
|
|
$
|
1,477,655
|
|
|
|
100.0
|
%
|
|
$
|
1,640,218
|
|
|
|
100.0
|
%
|
|
$
|
1,470,285
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
Commission revenue decreased by $162.6 million, or 9.9%,
for 2009 compared to 2008. Transaction-based commissions
decreased as a result of market turbulence and volatility that
dampened client demand for purchases of new financial products,
particularly in the more market sensitive products such as
mutual funds, alternative investments and variable annuities.
This decline was partially offset by increased sales of products
with more predictable cash flows such as fixed annuities and
fixed income securities, which investors normally favor during
periods of uncertain equity markets. Trail commissions also
decreased as a result of the effect of the markets decline
on the underlying assets eligible for trail commissions,
partially offset by additional sales of assets eligible for
trail payment.
Commission revenue increased by $169.9 million, or 11.6%,
for 2008 compared to 2007, fueled primarily by the commission
base obtained through our acquisitions of the Affiliated
Entities and IFMG. Organic commission revenue growth remained
relatively flat during this same period, attributed to the
successful recruitment of our base of advisors which increased
7.5% to 11,920 in 2008 from 11,089 in 2007, largely offset by a
decline in commissionable transactions and brokerage assets
under management due to the unfavorable market conditions in
2008.
Advisory
Fees
Advisory fees decreased by $126.4 million, or 15.2%, for
2009 compared to 2008. The decrease primarily reflects the
effect of the decline in the equity markets during 2009 as
compared to 2008. For 2009, the S&P 500 index averaged 948,
down 22.3% from the average for 2008. This decrease was
partially offset by increasing sales attributed to new advisory
relationships.
Advisory fees increased by $91.6 million, or 12.4%, in 2008
from 2007, driven in part by the advisory fee base obtained
through our acquisitions of the Affiliated Entities and IFMG and
increased sales attributed to new advisory relationships. The
growth in advisory fees from 2007 to 2008 was negatively
impacted by declines in the equity market during the second half
of 2008. The S&P 500 index averaged 1,220 for 2008, a
decrease of 17.4% from 2007.
Asset-Based
Fees
Asset-based fees decreased by $79.4 million, or 22.5%, for
2009 compared to 2008. This decrease resulted in part from the
decline in the market value of assets included in our various
sponsor and asset-based record-keeping programs, as the average
for the S&P 500 index declined 22.3% from 2008 to 2009.
Asset-based revenues in 2009 were also negatively impacted by
the declining interest rate environment as reflected by the
average effective federal funds rate and its influence on fees
associated with our cash sweep programs. For the year ended
December 31, 2009, the effective federal funds rate
averaged 0.16% compared to 1.92% for the prior year. Assets in
our cash sweep programs averaged $20.5 billion and
$19.3 billion for the years ended December 31, 2009
and 2008, respectively.
Asset-based fees increased by $91.4 million, or 35.0%, from
2007 to 2008. Fees from our cash sweep programs increased
$60.9 million driven primarily by a 72.7% increase in the
average assets custodied in these programs, which can be
attributed to prevailing negative market conditions and the
resulting shift of client assets from invested capital to our
cash sweep programs. During periods of financial uncertainty,
the amount of client assets held in cash products increases as
investors seek to reduce the risk profile of their investments.
For 2008, the increase associated with this trend was partially
offset by the negative interest rate environment and its
influence on the margins associated with these products.
Transaction and
Other Fees
Transaction and other fees increased $15.1 million, or
6.3%, for 2009 compared to 2008. This increase was primarily
attributed to increases in our number of advisors and their
client accounts. We also had increases of $6.6 million in
charges to advisors largely for professional liability insurance
52
premiums and $5.3 million in IRA custodial fees.
Transaction and other fees include revenues from conferences
held for advisors; these revenues declined by $4.4 million
from 2008 to 2009, as we cancelled various conferences as a part
of our cost containment efforts.
Transaction and other fees increased $55.9 million, or
30.3%, in 2008 from 2007. The increase was attributed primarily
to a 59.3% increase in trade volume in 2008. This increase was
primarily attributable to an increase in the number of
underlying client accounts through our acquisitions of the
Affiliated Entities and IFMG.
Other
Revenue
Other revenue decreased $13.6 million, or 25.7%, for 2009
compared to 2008. The decrease was due primarily to lower
interest revenue from client margin lending activities and to a
lesser extent by lower interest income earned on our cash
equivalents. Our average client margin balances decreased 33.5%
from $328.3 million in 2008 to $218.3 million in 2009,
reflecting a reduced demand by clients for margin leverage in
reaction to volatility in the equity markets. Margin balances
have typically decreased during periods of declining, volatile
markets such as those experienced beginning in 2008.
Other revenue decreased $9.0 million, or 14.6%, in 2008
from 2007. Prior to our dissolution of our mortgage subsidiary,
Innovex, other revenue also consisted of gains on the sale of
mortgage loans held for sale. Through our mortgage affiliate
Innovex, we recognized gains related to mortgage loans held for
sale during 2007 that did not recur in 2008 because we ceased
the operations of Innovex on December 31, 2007.
Expenses
Production
Expenses
Production expenses decreased by $258.5 million, or 11.9%,
for 2009 compared to 2008. Commission and advisory revenues
declined $289.0 million, or 11.7%, during the same period,
resulting in a corresponding decrease in our production payout
to our advisors. Our production payout averaged 85.8% in 2009
and 86.3% in 2008.
Production expenses increased by $227.6 million, or 11.8%,
for 2008 compared to 2007. The increase in production expenses
was highly correlated with our increase in commission and
advisory revenues, which increased by $261.6 million, or
11.8%, for 2008 compared to 2007. Our production payout averaged
86.3% in 2008 and 86.4% in 2007.
Compensation and
Benefits Expense
Compensation and benefits expense decreased by
$72.7 million, or 21.2%, for 2009 compared to 2008. The
decrease was primarily attributed to our ongoing strategic
business review and resulting cost management initiatives. These
initiatives, along with ordinary attrition and retirements,
resulted in our average number of full-time employees declining
by 383, or 13.6%, to 2,430 for 2009, compared to 2,813 for 2008.
Compensation and benefits expense in 2009 was further reduced
from 2008 levels due to reductions in employee-related items
including reduction in bonuses and elimination of the employer
contribution to our retirement plans.
Compensation and benefits increased by $86.0 million, or
33.4%, for 2008 compared to 2007. The increase was attributed to
salaries and benefits and the average number of full-time
employees, which grew by 729, or 35.0%, to 2,813 in 2008,
compared to 2,084 in 2007, primarily due to our acquisitions of
the Affiliated Entities and IFMG and resulting integration
efforts, and our initiative to strengthen our service
infrastructure.
53
General and
Administrative Expenses
General and administrative expenses decreased by
$48.0 million, or 18.0%, for 2009 compared to 2008. The
decrease was primarily attributable to our ongoing strategic
business review and resulting cost reduction measures which led
to decreases of $38.3 million in promotional fees,
$8.3 million in occupancy and equipment, $5.8 million
in travel and entertainment and $3.8 million in
communications and data processing.
General and administrative expenses increased by
$66.6 million, or 33.3%, for 2008 compared to 2007. The
increase was primarily attributable to increases of
$35.4 million in promotional fees and business development
expenses, $15.3 million in occupancy and equipment and
$12.1 million in communication and data processing. The
increase in these expenses was primarily due to our acquisitions
of the Affiliated Entities and IFMG, and resulting integration
efforts to support our overall growth.
Depreciation and
Amortization Expense
Depreciation and amortization expense increased by
$7.8 million, or 7.8%, for 2009 compared to 2008. The
increase was attributed to capital expenditures made to support
integration efforts related to the Affiliated Entities and the
general growth of our business.
Depreciation and amortization expense increased by
$21.7 million, or 27.6%, for 2008 compared to 2007,
attributed to amortization of identifiable intangible assets and
depreciation and amortization of fixed assets resulting from our
acquisitions of the Affiliated Entities and IFMG, as well as
capital expenditures made to support integration efforts and the
general growth of our business.
Restructuring
Charges
Restructuring charges were $58.7 million in 2009, compared
to $15.0 million in 2008. In 2009, restructuring charges
were incurred for severance and termination benefits of
$9.5 million, contract termination costs of
$15.9 million, asset impairment charges of
$19.9 million and $13.9 million in other expenditures
principally relating to the conversion and transfer of advisors
and their client accounts from the Affiliated Entities to LPL
Financial. These costs were partially offset by
$0.5 million in adjustments that were recorded in the first
half of 2009 for changes in cost estimates associated with
post-employment benefits provided to employees impacted by our
2008 strategic business review.
In 2008, we committed to and implemented a strategic business
review, resulting in a reduction in our overall workforce of
approximately 250 employees, or approximately 10% of our
workforce. Accordingly, we recorded a $15.0 million
restructuring charge at the time such plan was communicated to
our employees.
Other
Expenses
Other expenses decreased by $2.3 million, or 12.9%, from
2008 to 2009. The decrease was primarily due to cost reduction
measures.
Other expenses increased by $3.6 million, or 26.0%, from
2007 to 2008. The increase was due primarily to increases in bad
debt expense and write-off activity with respect to our
advisors. The remaining increase was due to storage services,
which grew by $1.1 million in 2008.
Interest
Expense
Interest expense decreased by $14.6 million, or 12.7%, for
2009 compared with 2008. The decline reflected lower average
interest rates on our borrowings due in part to a credit rating
upgrade received in the third quarter of 2008, partially offset
by an increase in the average principal amount of debt
outstanding due primarily to borrowings under our revolving
credit facility. Our average
54
outstanding borrowing activity in the revolving and uncommitted
line of credit facilities increased by $7.8 million from
$48.7 million for 2008 to $56.5 million for 2009.
Interest expense decreased by $7.3 million, or 5.9%, from
2007 to 2008, reflecting lower average interest rates on our
borrowings due in part by a credit rating upgrade, partially
offset by an increase in the principal amount of debt
outstanding.
Loss on Equity
Method Investment
Loss on equity investment decreased by $2.1 million, or
87.4%, for 2009 compared to 2008. The decrease was attributed to
a $1.7 million other than temporary impairment charge
incurred during the second quarter of 2008.
Loss on equity method investment increased by $1.7 million,
or 250.1%, for 2008 compared to 2007, due to the
$1.7 million other than temporary impairment charge during
the second quarter of 2008.
Provision for
Income Taxes
Our provision for income taxes decreased by $22.2 million,
or 47.0%, between 2008 and 2009. The decrease was primarily the
result of a decrease in the effective income tax rate under
GAAP, which was 34.5% for 2009 as compared to 51.0% for 2008, as
well as a decline in pre-tax income. In addition, our current
effective tax rate reflects a benefit of approximately 8% from a
newly enacted change to Californias income sourcing rules
that are scheduled to take effect on January 1, 2011. This
change requires us to revalue our deferred tax liabilities to
the rate that will be in effect when the tax liabilities are
utilized.
Our provision for income taxes increased by $0.5 million,
or 1.1%, between 2007 and 2008. The increase was primarily the
result of an increase in the effective income tax rate under
GAAP, which was 51.0% for 2008 as compared to 43.4% for 2007,
offset largely by a decline in pre-tax income. Changes in our
effective tax rates reflect additional expenses
and/or
changes in our estimates for expenses that cannot be deducted
for income tax purposes, namely a change in our estimates for
certain state income tax rates and the impact of that change on
our deferred tax liabilities. Additional increases in our
effective tax rates relate to increases in items such as meals
and entertainment and compensation for incentive stock options.
Quarterly Results
of Operations
The following table sets forth our unaudited consolidated
operating results for each of the nine quarters in the prior
two-year period plus the interim quarter ended March 31,
2010. This information is derived from our unaudited financial
statements, which in the opinion of management contain all
adjustments consisting of only normal recurring adjustments,
that we consider necessary for a fair statement of such
financial data. Operating results for these periods are not
necessarily indicative of the operating results for a full year.
Historical results are not necessarily indicative of the results
to be
55
expected in future periods. You should read this data together
with our consolidated financial statements and the related notes
included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
|
(unaudited)
|
|
|
|
(in thousands, except per share)
|
|
|
Net revenues
|
|
$
|
743,406
|
|
|
$
|
734,884
|
|
|
$
|
702,326
|
|
|
$
|
669,317
|
|
|
$
|
642,978
|
|
|
$
|
703,839
|
|
|
$
|
799,341
|
|
|
$
|
814,720
|
|
|
$
|
798,449
|
|
Gross margin(1)
|
|
$
|
230,204
|
|
|
$
|
218,006
|
|
|
$
|
221,144
|
|
|
$
|
205,329
|
|
|
$
|
200,447
|
|
|
$
|
211,844
|
|
|
$
|
251,788
|
|
|
$
|
244,551
|
|
|
$
|
245,118
|
|
Net income (loss)
|
|
$
|
25,554
|
|
|
$
|
18,598
|
|
|
$
|
(1,456
|
)
|
|
$
|
15,581
|
|
|
$
|
14,797
|
|
|
$
|
2,360
|
|
|
$
|
17,168
|
|
|
$
|
14,303
|
|
|
$
|
11,665
|
|
Earnings (loss) per share basic
|
|
$
|
0.29
|
|
|
$
|
0.21
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.18
|
|
|
$
|
0.17
|
|
|
$
|
0.03
|
|
|
$
|
0.20
|
|
|
$
|
0.17
|
|
|
$
|
0.14
|
|
Earnings (loss) per share diluted
|
|
$
|
0.25
|
|
|
$
|
0.19
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.16
|
|
|
$
|
0.15
|
|
|
$
|
0.02
|
|
|
$
|
0.17
|
|
|
$
|
0.14
|
|
|
$
|
0.12
|
|
Other Finance and Operating Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
25,554
|
|
|
$
|
18,598
|
|
|
$
|
(1,456
|
)
|
|
$
|
15,581
|
|
|
$
|
14,797
|
|
|
$
|
2,360
|
|
|
$
|
17,168
|
|
|
$
|
14,303
|
|
|
$
|
11,665
|
|
Interest expense
|
|
|
24,336
|
|
|
|
24,323
|
|
|
|
24,626
|
|
|
|
26,032
|
|
|
|
25,941
|
|
|
|
29,332
|
|
|
|
27,205
|
|
|
|
28,538
|
|
|
|
30,483
|
|
Income tax expense
|
|
|
19,162
|
|
|
|
1,521
|
|
|
|
(5,029
|
)
|
|
|
16,567
|
|
|
|
11,988
|
|
|
|
5,285
|
|
|
|
17,249
|
|
|
|
16,101
|
|
|
|
8,634
|
|
Depreciation and amortization
|
|
|
25,590
|
|
|
|
26,700
|
|
|
|
26,924
|
|
|
|
27,277
|
|
|
|
27,395
|
|
|
|
28,283
|
|
|
|
24,786
|
|
|
|
23,771
|
|
|
|
23,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
94,642
|
|
|
$
|
71,142
|
|
|
$
|
45,065
|
|
|
$
|
85,457
|
|
|
$
|
80,121
|
|
|
$
|
65,260
|
|
|
$
|
86,408
|
|
|
$
|
82,713
|
|
|
$
|
74,404
|
|
EBITDA Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense(3)
|
|
$
|
2,536
|
|
|
$
|
2,525
|
|
|
$
|
1,640
|
|
|
$
|
1,047
|
|
|
$
|
1,225
|
|
|
$
|
887
|
|
|
$
|
1,409
|
|
|
$
|
1,049
|
|
|
$
|
815
|
|
Acquisition and integration related expenses(4)
|
|
|
140
|
|
|
|
648
|
|
|
|
728
|
|
|
|
839
|
|
|
|
822
|
|
|
|
1,500
|
|
|
|
2,324
|
|
|
|
9,960
|
|
|
|
4,542
|
|
Restructuring and conversion costs(5)
|
|
|
7,979
|
|
|
|
20,497
|
|
|
|
42,135
|
|
|
|
2,285
|
|
|
|
(259
|
)
|
|
|
15,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other(6)
|
|
|
160
|
|
|
|
37
|
|
|
|
38
|
|
|
|
37
|
|
|
|
39
|
|
|
|
1,017
|
|
|
|
227
|
|
|
|
2,471
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(2)
|
|
$
|
105,457
|
|
|
$
|
94,849
|
|
|
$
|
89,606
|
|
|
$
|
89,665
|
|
|
$
|
81,948
|
|
|
$
|
83,786
|
|
|
$
|
90,368
|
|
|
$
|
96,193
|
|
|
$
|
79,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
25,554
|
|
|
$
|
18,598
|
|
|
$
|
(1,456
|
)
|
|
$
|
15,581
|
|
|
$
|
14,797
|
|
|
$
|
2,360
|
|
|
$
|
17,168
|
|
|
$
|
14,303
|
|
|
$
|
11,665
|
|
After-Tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA Adjustments(7)
|
|
|
7,015
|
|
|
|
14,745
|
|
|
|
27,177
|
|
|
|
2,772
|
|
|
|
1,395
|
|
|
|
11,442
|
|
|
|
2,712
|
|
|
|
8,364
|
|
|
|
3,527
|
|
Amortization of purchased intangible assets(7)(8)
|
|
|
8,530
|
|
|
|
8,714
|
|
|
|
8,994
|
|
|
|
9,120
|
|
|
|
9,119
|
|
|
|
9,892
|
|
|
|
9,228
|
|
|
|
9,096
|
|
|
|
9,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income(2)
|
|
$
|
41,099
|
|
|
$
|
42,057
|
|
|
$
|
34,715
|
|
|
$
|
27,473
|
|
|
$
|
25,311
|
|
|
$
|
23,694
|
|
|
$
|
29,108
|
|
|
$
|
31,763
|
|
|
$
|
24,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income per share(9)
|
|
$
|
0.42
|
|
|
$
|
0.43
|
|
|
$
|
0.35
|
|
|
$
|
0.28
|
|
|
$
|
0.26
|
|
|
$
|
0.24
|
|
|
$
|
0.29
|
|
|
$
|
0.32
|
|
|
$
|
0.24
|
|
Weighted average shares outstanding diluted
|
|
|
98,945
|
|
|
|
98,787
|
|
|
|
98,703
|
|
|
|
98,501
|
|
|
|
97,959
|
|
|
|
100,170
|
|
|
|
100,444
|
|
|
|
100,498
|
|
|
|
99,812
|
|
|
|
|
(1)
|
|
Gross margin is calculated as net
revenues less production expenses. Production expenses consist
of the following expense categories from our consolidated
statements of income: (i) commissions and advisory fees and
(ii) brokerage, clearing and exchange. All other expense
categories, including depreciation and amortization, are
considered general and administrative in nature. Because our
gross margin amounts do not include any depreciation and
amortization expense, our gross margin amounts may not be
comparable to those of others in our industry.
|
|
|
|
(2)
|
|
This table includes a
reconciliation of Adjusted EBITDA and Adjusted Net Income to net
income. For a description of why we present Adjusted EBITDA and
Adjusted Net Income please see How We Evaluate
Growth.
|
|
(3)
|
|
Represents share-based compensation
for stock options awarded to our employees and non-executive
directors.
|
|
(4)
|
|
Represents acquisition and
integration costs primarily as a result of our 2007 acquisitions
of UVEST, the Affiliated Entities and IFMG.
|
56
|
|
|
(5)
|
|
Represents organizational
restructuring charges incurred in 2008 and 2009 for severance
and one-time termination benefits, assets impairments, lease and
contract termination fees and other transfer costs, pursuant to
the terms of our senior secured credit agreement.
|
|
(6)
|
|
Represents impairment charges in
2008 for our equity investment in Blue Frog, as well as other
taxes and employment tax withholding related to a nonqualified
deferred compensation plan.
|
|
|
|
(7)
|
|
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 our applicable effective state rate which ranged from 4.23%
to 4.71%.
|
|
|
|
(8)
|
|
Represents amortization of
intangible assets and software which were $14.1 million,
$14.4 million, $14.9 million, $15.1 million,
$15.1 million, $16.4 million, $15.3 million,
$15.0 million and $15.0 million before taxes for the
three months ended March 31, 2010, December 31, 2009,
September 30, 2009, June 30, 2009, March 31,
2009, December 31, 2008, September 30, 2008,
June 30, 2008 and March 31, 2008, respectively. The
amortization of intangible assets and software was a result of
our purchase accounting adjustments from our merger transaction
in 2005 with the Majority Holders and our 2007 acquisitions of
UVEST, the Affiliated Entities and IFMG.
|
|
|
|
(9)
|
|
Represents Adjusted Net Income
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 Net Income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
|
(unaudited)
|
|
|
Earnings per share (diluted)
|
|
$
|
0.25
|
|
|
$
|
0.19
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.16
|
|
|
$
|
0.15
|
|
|
$
|
0.02
|
|
|
$
|
0.17
|
|
|
$
|
0.14
|
|
|
$
|
0.12
|
|
Adjustment for allocation of undistributed earnings to stock
units
|
|
$
|
0.01
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.01
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
After-Tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA Adjustments per share
|
|
$
|
0.07
|
|
|
$
|
0.15
|
|
|
$
|
0.28
|
|
|
$
|
0.03
|
|
|
$
|
0.01
|
|
|
$
|
0.12
|
|
|
$
|
0.03
|
|
|
$
|
0.08
|
|
|
$
|
0.03
|
|
Amortization of purchased intangible assets per share
|
|
$
|
0.09
|
|
|
$
|
0.09
|
|
|
$
|
0.09
|
|
|
$
|
0.09
|
|
|
$
|
0.09
|
|
|
$
|
0.10
|
|
|
$
|
0.09
|
|
|
$
|
0.10
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income per share
|
|
$
|
0.42
|
|
|
$
|
0.43
|
|
|
$
|
0.35
|
|
|
$
|
0.28
|
|
|
$
|
0.26
|
|
|
$
|
0.24
|
|
|
$
|
0.29
|
|
|
$
|
0.32
|
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity and
Capital Resources
Senior management establishes our liquidity and capital
policies. These policies include senior managements review
of short- and long-term cash flow forecasts, review of monthly
capital expenditures and daily monitoring of liquidity for our
subsidiaries. Decisions on the allocation of capital include
projected profitability and cash flow, risks of the business,
regulatory capital requirements and future liquidity needs for
strategic activities. Our Treasury Department assists in
evaluating, monitoring and controlling the business activities
that impact our financial condition, liquidity and capital
structure and maintains relationships with various lenders. The
objectives of these policies are to support the executive
business strategies while ensuring ongoing and sufficient
liquidity.
57
A summary of changes in cash flow data is provided as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
Ended March 31,
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Net cash flows provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(86,022
|
)
|
|
$
|
103,885
|
|
|
$
|
271,157
|
|
|
$
|
89,277
|
|
|
$
|
10,072
|
|
Investing activities
|
|
|
(3,775
|
)
|
|
|
(1,905
|
)
|
|
|
(13,724
|
)
|
|
|
(76,202
|
)
|
|
|
(168,275
|
)
|
Financing activities
|
|
|
35,964
|
|
|
|
(1,825
|
)
|
|
|
(98,078
|
)
|
|
|
18,161
|
|
|
|
101,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(53,833
|
)
|
|
|
100,155
|
|
|
|
159,355
|
|
|
|
31,236
|
|
|
|
(57,160
|
)
|
Cash and cash equivalents beginning of period
|
|
|
378,594
|
|
|
|
219,239
|
|
|
|
219,239
|
|
|
|
188,003
|
|
|
|
245,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of period
|
|
$
|
324,761
|
|
|
$
|
319,394
|
|
|
$
|
378,594
|
|
|
$
|
219,239
|
|
|
$
|
188,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash requirements and liquidity needs are primarily funded
through our cash flow from operations and our capacity for
additional borrowing.
Net cash used in or provided by operating activities includes
net income adjusted for non-cash expenses such as depreciation
and amortization, restructuring charges, share based
compensation, deferred income tax provision and changes in
operating assets and liabilities. Operating assets and
liabilities include balances related to settlement and funding
of client transactions, receivables from product sponsors and
accrued commissions and advisory fees due to our advisors.
Operating assets and liabilities that arise from the settlement
and funding of transactions by our advisors clients are
the principal cause of changes to our net cash from operating
activities and can fluctuate significantly from day to day and
period to period depending on overall trends and client
behaviors. Net cash used in operating activities for the three
months ended March 31, 2010 was $86.0 million,
compared to net cash provided by operating activities of
$103.9 million for the three months ended March 31,
2009.
Net cash provided by operating activities for 2009, 2008 and
2007 totaled $271.2 million, $89.3 million and
$10.1 million, respectively.
Net cash used in investing activities for the three months ended
March 31, 2010 and March 31, 2009 totaled
$3.8 million and $1.9 million, respectively. The
increase for the three months ended March 31, 2010 as
compared to the three months ended March 31, 2009 was
principally due to a $2.5 million deposit to the escrow
account in the first quarter of 2010 (See Note 3 of our
unaudited condensed consolidated financial statements).
Net cash used in investing activities for 2009, 2008 and 2007,
totaled $13.7 million, $76.2 million and
$168.3 million, respectively. The decrease in 2009 as
compared to 2008 was principally due to a decrease in capital
expenditures and acquisition activity. The decrease in 2008 as
compared to 2007 was principally due to our 2007 acquisitions of
UVEST, the Affiliated Entities and IFMG.
Net cash provided by financing activities for the three months
ended March 31, 2010 was $36.0 million, compared to
net cash used in financing activities of $1.8 million for
the three months ended March 31, 2009. The increase in cash
provided by financing activities for the three months ended
March 31, 2010 as compared to the three months ended
March 31, 2009 was primarily related to proceeds of
$40.0 million from our uncommitted lines of credit in the
first quarter of 2010.
Net cash used in financing activities for 2009 was
$98.1 million, compared to net cash provided by financing
activities for 2008 and 2007 of $18.2 million and
$101.0 million, respectively. The decrease in 2009 as
compared to 2008 was primarily related to a $90.0 million
pay down on our revolving line of credit, which occurred in
2009. The decrease in 2008 as compared to 2007 was primarily
related to borrowings under our senior secured credit
facilities, which did not recur at the
58
same level in 2008. These borrowings in 2007 were principally
related to our acquisitions of UVEST, the Affiliated Entities
and IFMG.
We believe that based on current levels of operations and
anticipated growth, cash flow from operations, together with
other available sources of funds, will be adequate to satisfy
our working capital needs, the payment of all of our obligations
and the funding of anticipated capital expenditures for the
foreseeable future.
Operating
Capital Requirements
Our primary requirement for working capital relates to funds we
loan to our advisors clients for trading done on margin
and funds we are required to maintain at clearing organizations
to support these clients trading activities. We require
that our advisors clients deposit funds with us in support
of their trading activities and we hypothecate securities held
as margin collateral, which we in turn use to lend to clients
for margin transactions and deposit with our clearing
organizations. These activities account for the majority of our
working capital requirements, which are primarily funded
directly or indirectly by our advisors clients. Our other
working capital needs are primarily limited to regulatory
capital requirements and software development, which we have
satisfied in the past from internally generated cash flows.
Notwithstanding the self-funding nature of our operations, we
may sometimes be required to fund timing differences arising
from the delayed receipt of client funds associated with the
settlement of client transactions in securities markets.
Historically, these timing differences were funded either with
internally generated cash flow or, if needed, with funds drawn
under short-term borrowing facilities, including both committed
unsecured lines of credit and uncommitted lines of credit
secured by client securities. LPL Financial, one of our
broker-dealer subsidiaries, utilizes uncommitted lines secured
by client securities to fund margin loans and other client
transaction-related timing differences.
Our registered broker-dealers are subject to the SECs
Uniform Net Capital Rule, which requires the maintenance of
minimum net capital. LPL Financial and Associated compute net
capital requirements under the alternative method, which
requires firms to maintain minimum net capital, as defined,
equal to the greater of $250,000 or 2% of aggregate debit
balances arising from client transactions plus 1% of net
commission payable, as defined. LPL Financial is also subject to
the CFTCs minimum financial requirements, which require
that it maintain net capital, as defined, equal to 4% of
customer funds required to be segregated pursuant to the
Commodity Exchange Act, less the market value of certain
commodity options, all as defined. UVEST, MSC and WFG all
compute net capital requirements under the aggregate
indebtedness method, which requires firms to maintain minimum
net capital, as defined, of not less than 6.67% of aggregate
indebtedness plus 1% of net commission payable, also as defined.
Our subsidiary, The Private Trust Company, N.A.
(PTC), is subject to various regulatory capital
requirements. Failure to meet minimum capital requirements can
initiate certain mandatory and possible additional discretionary
actions by regulators that, if undertaken, could have a direct
material effect on our consolidated financial statements.
Liquidity
Assessment
Our ability to meet our debt service obligations and reduce our
total debt will depend upon our future performance which, in
turn, will be subject to general economic, financial, business,
competitive, legislative, regulatory and other conditions, many
of which are beyond our control. In addition, our operating
results, cash flow and capital resources may not be sufficient
for repayment of our indebtedness in the future. Some risks that
could materially adversely affect our ability to meet our debt
service obligations include, but are not limited to, general
economic conditions and economic activity in the financial
markets. The performance of our business is correlated with the
economy and
59
financial markets, and a continuing slowdown in the economy or
financial markets could adversely affect our business, results
of operations, cash flows or financial condition.
If our cash flows and capital resources are insufficient to fund
our debt service obligations, we may be forced to reduce or
delay investments, seek additional capital or restructure or
refinance our indebtedness. These measures may not be successful
and may not permit us to meet our scheduled debt service
obligations. In the absence of sufficient cash flows and capital
resources, we could face substantial liquidity constraints and
might be required to dispose of material assets or operations to
meet our debt service and other obligations. However, our senior
secured credit agreement will restrict our ability to dispose of
assets and the use of proceeds from any such dispositions. We
may not be able to consummate those dispositions, and even if we
could consummate such dispositions, or to obtain the proceeds
that we could realize from them and, in any event, the proceeds
may not be adequate to meet any debt service obligations then
due.
Indebtedness
On May 24, 2010, we amended and restated our senior secured
credit agreement to add a new term loan tranche of
$580.0 million maturing at June 28, 2017, which we
used, together with cash on hand, to repay our
$550.0 million of senior unsecured subordinated notes, as
described below. We also extended the maturity of a
$500.0 million tranche of our term loan facility to
June 25, 2015, with the remaining $317.1 million
tranche maturing at the original maturity date of June 28,
2013.
On May 24, 2010, we gave notice of redemption of all of our
outstanding senior unsecured subordinated notes. As of
March 31, 2010, we had outstanding $550.0 million of
our senior unsecured subordinated notes. The redemption price of
the senior unsecured subordinated notes is 105.375% of the
outstanding aggregate principal amount, plus accrued and unpaid
interest thereon up to but not including June 22, 2010 (the
Redemption Date). The senior unsecured
subordinated notes were redeemed on the Redemption Date.
We also maintain a revolving credit facility which is provided
through the senior secured credit facilities. On
January 25, 2010, we amended our senior secured credit
agreement to increase the revolving credit facility from
$100 million to $218.2 million. In connection with
this amendment, we extended the maturity of a
$163.5 million tranche of the revolving credit facility to
June 28, 2013. The remaining $54.7 million tranche
retains its original maturity date of December 28, 2011.
We also maintain two uncommitted lines of credit. One of the
lines has an unspecified limit, and is primarily dependent on
our ability to provide sufficient collateral. The other line has
a limit of $100 million (increased to $150 million on
May 27, 2010) and allows for both collateralized and
uncollateralized (unsecured) borrowings.
We also are a party to interest rate swap agreements, in a
notional amount of $400 million, to mitigate interest rate
risk by hedging the variability of a portion of our
floating-rate senior secured term loan.
Interest Rate
and Fees
Borrowings under our senior secured credit facilities bear
interest at a base rate equal to the one, two, three, six, nine
or twelve-month LIBOR plus our applicable margin, or an
alternative base rate (ABR) plus our applicable
margin. The ABR is equal to the greatest of (a) the prime
rate in effect on such day, (b) the effective federal funds
rate in effect on such day plus 0.5% and (c) solely in the
case of the 2015 Term Loans and the 2017 Term Loans, 2.50%.
The applicable margin for borrowings (a) with respect to
the 2013 Term Loans is currently 0.75% for base rate borrowings
and 1.75% for LIBOR borrowings, (b) with respect to the
2015 Term Loans is currently 1.75% for base rate borrowings and
2.75% for LIBOR borrowings, (c) with respect to the 2017
Term Loans is currently 2.75% for base rate borrowings and 3.75%
for LIBOR borrowings, (d) with respect to revolver tranche
maturing in 2011 is currently 1.00% for base rate borrowings and
60
2.00% for LIBOR borrowings and (e) with respect to revolver
tranche maturing in 2013 is currently 2.50% for base rate
borrowings and 3.50% for LIBOR borrowings. The applicable margin
on our 2013 Term Loans could change depending on our credit
rating. The LIBOR Rate with respect to the 2015 Term Loans and
the 2017 Term Loans shall in no event be less than 1.50%.
In addition to paying interest on outstanding principal under
the senior secured credit facilities, we are required to pay a
commitment fee to the lenders under the revolving credit
facility in respect of the unutilized commitments thereunder.
The commitment fee rates at March 31, 2010 were 0.375% for
our revolver tranche maturing in 2011 and 0.75% for our revolver
tranche maturing in 2013, but are subject to change depending on
our leverage ratio. We must also pay customary letter of credit
fees.
Prepayments
The senior secured credit facilities (other than the revolving
credit facility) require us to prepay outstanding amounts under
our senior secured term loan facility subject to certain
exceptions, with:
|
|
|
|
|
50% (percentage will be reduced to 25% if our total leverage
ratio is 5.00 or less and to 0% if our total leverage ratio is
4.00 or less) of our annual excess cash flow (as defined in our
senior secured credit agreement) adjusted for, among other
things, changes in our net working capital;
|
|
|
|
100% of the net cash proceeds of all nonordinary course asset
sales or other dispositions of property, if we do not reinvest
or commit to reinvest those proceeds in assets to be used in our
business or to make certain other permitted investments within
15 months as long as such reinvestment is completed within
180 days and
|
|
|
|
100% of the net cash proceeds of any incurrence of debt, other
than proceeds from debt permitted under the senior secured
credit agreement.
|
The foregoing mandatory prepayments will be applied to scheduled
installments of principal of the senior secured term loan
facility in direct order.
We may voluntarily repay outstanding loans under the senior
secured credit agreement at any time without premium or penalty,
other than customary breakage costs with respect to
LIBOR loans.
Amortization
We are required to repay the loans under the senior secured term
loan facility in equal quarterly installments in aggregate
annual amounts equal to 1% of the original funded principal
amount of such facility, with the balance being payable on the
final maturity date of the facility.
Principal amounts outstanding under the revolving credit
facilities are due and payable in full at maturity.
Guarantee and
Security
The senior secured credit facilities are secured primarily
through pledges of the capital stock in our subsidiaries.
Certain
Covenants and Events of Default
The senior secured credit agreement contains a number of
covenants that, among other things, restrict, subject to certain
exceptions, our ability to:
|
|
|
|
|
incur additional indebtedness;
|
|
|
|
create liens;
|
|
|
|
enter into sale and leaseback transactions;
|
61
|
|
|
|
|
engage in mergers or consolidations;
|
|
|
|
sell or transfer assets;
|
|
|
|
pay dividends and distributions or repurchase our capital stock;
|
|
|
|
make investments, loans or advances;
|
|
|
|
prepay certain subordinated indebtedness;
|
|
|
|
engage in certain transactions with affiliates;
|
|
|
|
amend material agreements governing certain subordinated
indebtedness or
|
|
|
|
change our lines of business.
|
Our senior secured credit facilities prohibit us from paying
dividends and distributions or repurchasing our capital stock
except for limited purposes, including, but not limited to
payments in connection with: (i) redemption, repurchase,
retirement or other acquisition of our equity interests from
present or former officers, managers, consultants, employees and
directors upon the death, disability, retirement, or termination
of employment of any such person or otherwise in accordance with
any stock option or stock appreciate rights plan, any management
or employee stock ownership plan, stock subscription plan,
employment termination agreement or any employment agreements or
stockholders agreement, in an aggregate amount not to
exceed $5.0 million in any fiscal year plus the amount of
cash proceeds from certain equity issuances to such persons, the
amount of equity interests subject to a certain deferred
compensation plan and the amount of certain key-man life
insurance proceeds, (ii) franchise taxes, general corporate and
operating expenses not to exceed $3.0 million in any fiscal
year, and fees and expenses related to any unsuccessful equity
or debt offering permitted by the senior secured credit
facilities, (iii) tax liabilities to the extent attributable to
our business and our subsidiaries and (iv) dividends and other
distributions in an aggregate amount not to exceed 50% of our
cumulative consolidated net income available to stockholders at
such time so long as at the time of such payment of dividend or
the making of such distribution, and after giving effect
thereto, our leverage ratio is less than 3.50:1.00.
In addition, our financial covenant requirements include a
leverage ratio test and an interest coverage ratio test. Under
our leverage ratio test, we covenant not to allow the ratio of
our consolidated total debt (as defined in our senior secured
credit agreement) to an adjusted EBITDA reflecting financial
covenants in our senior secured credit facilities (Credit
Agreement Adjusted EBITDA) to exceed certain prescribed
levels set forth in the agreement. Under our interest coverage
ratio test, we covenant not to allow the ratio of our Credit
Agreement Adjusted EBITDA to our consolidated interest expense
(as defined in our senior secured credit agreement) to be less
than certain prescribed levels set forth in the agreement. Each
of our financial ratios is measured at the end of each fiscal
quarter.
Our senior secured credit agreement provides us with a right to
cure in the event we fail to comply with our leverage ratio test
or our interest coverage test. We must exercise this right to
cure within ten days of the delivery of our quarterly
certificate calculating the financial ratio for that quarter.
If we fail to comply with these covenants and are unable to
cure, we could face substantial liquidity problems and could be
forced to sell assets, seek additional capital or seek to
restructure or refinance our indebtedness. These alternative
measures may not be successful or feasible. Our senior secured
credit agreement restricts our ability to sell assets. Even if
we could consummate those sales, the proceeds that we realize
from them may not be adequate to meet any debt service
obligations then due. Furthermore, if an event of default were
to occur with respect to our senior secured credit agreement,
our creditors could, among other things, accelerate the maturity
of our indebtedness. See Risk Factors Our
indebtedness could adversely affect our financial health and may
limit our ability to use debt to fund future capital needs.
62
As of March 31, 2010 and December 31, 2009, we were in
compliance with all of our covenant requirements.
Our covenant requirements and pro forma ratios as of
March 31, 2010 and December 31, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
December 31, 2009
|
|
|
Covenant
|
|
Actual
|
|
Covenant
|
|
Actual
|
Financial Ratio
|
|
Requirement
|
|
Ratio
|
|
Requirement
|
|
Ratio
|
|
Leverage Test (Maximum)
|
|
|
4.40
|
|
|
|
3.08
|
|
|
|
4.60
|
|
|
|
3.42
|
|
Interest Coverage (Minimum)
|
|
|
2.25
|
|
|
|
3.97
|
|
|
|
2.15
|
|
|
|
3.81
|
|
Set forth below is a reconciliation from EBITDA, Adjusted EBITDA
and Credit Agreement Adjusted EBITDA to our net income for the
trailing twelve months ending March 31, 2010 and
December 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended,
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Net income
|
|
$
|
58,277
|
|
|
$
|
47,520
|
|
Interest expense
|
|
|
99,317
|
|
|
|
100,922
|
|
Income tax expense
|
|
|
32,221
|
|
|
|
25,047
|
|
Depreciation and amortization
|
|
|
106,491
|
|
|
|
108,296
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
296,306
|
|
|
|
281,785
|
|
Share-based compensation expense(1)
|
|
|
7,748
|
|
|
|
6,437
|
|
Acquisition and integration related expenses(2)
|
|
|
2,355
|
|
|
|
3,037
|
|
Restructuring and conversion costs(3)
|
|
|
72,896
|
|
|
|
64,658
|
|
Other(4)
|
|
|
272
|
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
|
379,577
|
|
|
|
356,068
|
|
Pro-forma adjustments(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Agreement Adjusted EBITDA
|
|
$
|
379,577
|
|
|
$
|
356,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents share-based compensation for stock options awarded to
employees and non-executive directors. |
|
(2) |
|
Represents acquisition and integration costs primarily as a
result of our 2007 acquisitions of UVEST, the Affiliated
Entities and IFMG. |
|
(3) |
|
Represents organizational restructuring charges incurred in 2008
and 2009 for severance and one-time termination benefits, assets
impairments, lease and contract termination fees and other
transfer costs, pursuant to the terms of our senior secured
credit agreement. |
|
(4) |
|
Represents excise and other taxes, pursuant to the terms of our
senior secured credit agreement. |
|
(5) |
|
Credit Agreement Adjusted EBITDA excludes pro forma general and
administrative expenditures from acquisitions, as defined under
the terms our senior secured credit agreement. There were no
such adjustments for the twelve month periods ended
March 31, 2010 and December 31, 2009. |
Interest Rate
Swaps
An interest rate swap is a financial derivative instrument
whereby two parties enter into a contractual agreement to
exchange payments based on underlying interest rates. We use
interest rate swap agreements to hedge the variability on our
floating rate for $400.0 million of our term loan under our
senior secured credit facilities. We are required to pay the
counterparty to the agreement fixed interest payments on a
notional balance and in turn receive variable interest payments
on that
63
notional balance. Payments are settled quarterly on a net basis.
As of March 31, 2010, we assessed our interest rate swaps
as being highly effective and we expect them to continue to be
highly effective. While approximately $417.1 million of our
term loan remains unhedged as of March 31, 2010, the risk
of variability on our floating interest rate is partially
mitigated by the client margin loans on which we carry floating
interest rates. At March 31, 2010, our receivables from our
advisors clients for margin loan activity were
approximately $222.6 million.
Senior
Unsecured Subordinated Notes
As of March 31, 2010, we had outstanding
$550.0 million of our senior unsecured subordinated notes.
On May 24, 2010, we gave notice of redemption of all of our
outstanding senior unsecured subordinated notes. The redemption
price of the senior unsecured subordinated notes is 105.375% of
the outstanding aggregate principal amount, plus accrued and
unpaid interest thereon to but not including the
Redemption Date. The senior unsecured subordinated notes
were redeemed on the Redemption Date.
Prior to this redemption, our senior unsecured subordinated
notes were due in 2015 and bore interest at 10.75% per annum.
Interest payments were payable semi-annually in arrears.
Bank Loans
Payable
We maintain two uncommitted lines of credit. One line has an
unspecified limit, and is primarily dependent on the
companys ability to provide sufficient collateral. The
other line has a $150.0 million limit and allows for both
collateralized and uncollateralized borrowings. At
March 31, 2010 there was a $40.0 million outstanding
balance on the unsecured portion of one of the uncommitted lines
of credit. The line was subsequently paid down in full on
April 1, 2010. Both lines were utilized in 2009, however
there were no balances outstanding at December 31, 2009.
Off-Balance-Sheet
Arrangements
We enter into various off-balance-sheet arrangements in the
ordinary course of business, primarily to meet the needs of our
advisors clients. These arrangements include firm
commitments to extend credit. For information on these
arrangements, see Notes 14 and 20 to our consolidated
financial statements.
Contractual
Obligations
The following table provides information with respect to our
commitments and obligations as of March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
< 1
|
|
|
1-3
|
|
|
4-5
|
|
|
> 5
|
|
|
|
Total
|
|
|
Year
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
|
|
(In thousands)
|
|
|
Leases and other obligations(1)
|
|
$
|
115,005
|
|
|
$
|
29,688
|
|
|
$
|
49,929
|
|
|
$
|
22,099
|
|
|
$
|
13,289
|
|
Bank loans payable unsecured
|
|
|
40,000
|
|
|
|
40,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior secured credit facilities and senior unsecured
subordinated notes(2)(3)
|
|
|
1,367,117
|
|
|
|
8,424
|
|
|
|
16,848
|
|
|
|
791,845
|
|
|
|
550,000
|
|
Fixed interest payments
|
|
|
337,505
|
|
|
|
59,125
|
|
|
|
118,250
|
|
|
|
118,250
|
|
|
|
41,880
|
|
Variable interest payments(2)(3)
|
|
|
92,617
|
|
|
|
20,174
|
|
|
|
64,268
|
|
|
|
8,175
|
|
|
|
|
|
Interest rate swap agreements(2)(3)
|
|
|
17,881
|
|
|
|
12,189
|
|
|
|
5,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
1,970,125
|
|
|
$
|
169,600
|
|
|
$
|
254,987
|
|
|
$
|
940,369
|
|
|
$
|
605,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
|
|
|
(1) |
|
Minimum payments have not been reduced by minimum sublease
rental income of $0.5 million due in the future under
noncancelable subleases. Note 10 of our unaudited condensed
consolidated financial statements provides further detail on
operating lease obligations and obligations under non-cancelable
service contracts. |
|
(2) |
|
Notes 8 and 9 of our unaudited condensed consolidated
financial statements provide further detail on these debt
obligations. |
|
(3) |
|
Our senior secured credit facilities bear interest at floating
rates. Of the $817.1 million outstanding at March 31,
2010, we have hedged the variable rate cash flows using interest
rate swaps of $400.0 million of principal (see Notes 8
and 9 of our unaudited condensed consolidated financial
statements for the three months ended March 31, 2010).
Variable interest payments are shown for the unhedged
($417.1 million) portion of the senior secured credit
facilities assuming the three-month LIBOR at March 31, 2010
remains unchanged (see Note 8 of our unaudited condensed
consolidated financial statements for more information). |
As of March 31, 2010, we reflect a liability for
unrecognized tax benefits of $22.5 million, which we have
included in income taxes payable on the unaudited condensed
consolidated statements of financial condition. This amount has
been excluded from the contractual obligations table because we
are unable to reasonably predict the ultimate amount or timing
of future tax payments.
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.
We use prices obtained from an independent third-party pricing
service to measure the fair value of our trading securities. We
validate prices received from the pricing service using various
methods including, comparison to prices received from additional
pricing services, comparison to available market prices and
review of other relevant market data including implied yields of
major categories of securities. At March 31, 2010, we did
not adjust prices received from the independent third-party
pricing service. For certificates of deposit and treasury
securities, we utilize market-based inputs including observable
market interest rates that correspond to the remaining
maturities or next interest reset dates.
Critical
Accounting Policies
Our consolidated financial statements are prepared in accordance
with GAAP, which require management to make estimates, judgments
and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. We
believe that of our critical accounting policies, the following
are noteworthy because they require management to make estimates
regarding matters that are uncertain and susceptible to change
where such change may result in a material adverse impact on our
financial position and reported financial results.
Revenue
Recognition
We record commissions received from mutual funds, annuity,
insurance, equity, fixed income, direct investment, option and
commodity transactions on a trade-date basis. Commissions also
include mutual fund and variable annuity trails, which are
recognized as a percentage of assets under management over the
period for which services are performed. Due to the significant
volume of mutual fund and variable annuity purchases and sales
transacted by financial advisors directly with product
manufacturers, management must estimate a portion of its upfront
commission and trail revenues for each accounting period for
which the proceeds have not yet been received. These estimates
are based on a number of factors including market levels, the
volume of transactions in prior periods and cash receipts in the
current period. We record commissions payable based upon
standard payout ratios for each product as it accrues for
commission revenue.
65
Legal
Reserves
We record reserves for legal proceedings in accounts payable and
accrued liabilities in our consolidated statements of financial
condition. The determination of these reserve amounts requires
significant judgment on the part of management. We consider many
factors including, but not limited to, the amount of the claim,
the amount of the loss in the clients account, the basis
and validity of the claim, the possibility of wrongdoing on the
part of a advisor, likely insurance coverage, previous results
in similar cases and legal precedents and case law. Each legal
proceeding is reviewed with counsel in each accounting period
and the reserve is adjusted as deemed appropriate by management.
Any change in the reserve amount is recorded as professional
services in our consolidated statements of income.
Valuation of
Goodwill and Other Intangibles
We test goodwill for impairment at least annually, or whenever
indications of impairment exist. An impairment exists when the
carrying amount of goodwill exceeds its implied fair value,
resulting in an impairment charge for the excess.
The value of intangible assets, including goodwill, could be
impacted by future adverse changes such as: (i) significant
declines in our operating results, (ii) a significant
decline in the valuation of comparable company stocks,
(iii) a further significant slowdown of the worldwide
economy or industry or (iv) any failure to meet the
performance projections included in our forecasts of future
operating results.
We perform an impairment analysis on our goodwill on an annual
basis on the first day of the fourth fiscal quarter (October 1).
In testing for a potential impairment of goodwill on
October 1, 2009, the estimated fair value of each of our
reporting units was significantly greater than its carrying
value, and therefore we concluded that no amount of goodwill was
impaired. At a reporting unit level, the estimated fair value
was, at a minimum, 1.5 times its carrying value.
The fair value of our reporting units was estimated using the
income approach methodology that includes the discounted cash
flow method, and the market approach methodology that includes
the use of market multiples. The discounted cash flows for each
reporting unit were based on discrete financial forecasts
developed by management for planning purposes and include
significant assumptions about revenue growth, operating margins,
discount rates and capital expenditures. Cash flows beyond the
discrete forecasts were estimated using a terminal value
calculation, which incorporated historical and forecasted
financial trends for each identified reporting unit and
considered long-term earnings growth for publicly traded peer
companies. Future cash flows were discounted to present value by
incorporating the present value techniques discussed in
Financial Accounting Standards Board Concepts Statement 7,
Using Cash Flow Information and Present Value in Accounting
Measurements.
In addition, publicly available information regarding peer
companies with comparable market capitalization was also
considered in assessing the reasonableness of cumulative fair
values of our reporting units estimated using the market
approach methodology. In our analysis, we developed appropriate
valuation multiples for each of our reporting units.
Specifically, we considered valuation multiples of our peer
companies including revenue, EBITDA, net income and after-tax
cash flows.
The income approach valuations included reporting unit cash flow
discount rates ranging from 12.1% to 16.0% and terminal growth
rates of 3.0%. Our discount rate represents our weighted average
cost of capital adjusted for company-specific risk premium. The
development of the weighted average cost of capital used in our
estimate of fair value considered current market conditions for
the equity-risk premium and risk-free interest rate, benchmark
capital structures for guideline companies with characteristics
similar to our reporting units, the size and industry of our
reporting units and risks related to the forecast of future
revenues and profitability of our reporting units. The discount
rate incorporates current market participant considerations, as
indicated above,
66
and decreased year over year, as increases in the weighted
average cost of capital (due to general economic conditions)
were offset by reductions in the company-specific risk premium.
The company-specific risk premium was reduced primarily due to
lower long-term growth and profitability assumptions associated
with the 2009 forecast. The weighted average cost of capital
used in the estimate of fair value in future periods may be
impacted by changes in market conditions (including those of
market participants), as well as the future performance of our
reporting units and is subject to change, based on changes in
specific facts and circumstances.
Significant management judgment is required in the forecasts of
future operating results that are used in the discounted cash
flow method of valuation. The estimates we have used are
consistent with the plans and estimates that we use to manage or
business. It is possible, however, that the plans may change and
estimates used may prove to be inaccurate. Changes in our
planned business operations such as unanticipated competition, a
loss of key personnel, the sale of a reporting unit or a
significant portion of a reporting unit or other unforeseen
developments could result in an impairment of our recorded
goodwill. Changes in forecasted operating results and other
assumptions could materially affect those estimates.
We review our property, equipment, capitalized software and
intangible assets for impairment whenever events or changes in
circumstances indicate that the carrying value may not be
recoverable. Such events or changes may include a deterioration
in the business climate or a significant adverse change in the
extent or manner in which a long-lived asset is being used. If
the total of projected future undiscounted cash flows is less
than the carrying amount of an asset, we may need to record an
impairment loss based on the excess of the carrying amount over
the fair value of the assets.
Income
Taxes
We estimate income tax expense based on the various
jurisdictions where we conduct business. We must then assess the
likelihood that the deferred tax assets will be realized. A
valuation allowance is established to the extent that it is
more-likely-than-not that such deferred tax assets will not be
realized. When we establish a valuation allowance or modify the
existing allowance in a certain reporting period, we generally
record a corresponding increase or decrease to the provision for
income taxes in the consolidated statements of income. We make
significant judgments in determining the provision for income
taxes, the deferred tax assets and liabilities and any valuation
allowances recorded against the deferred tax asset. Changes in
the estimate of these taxes occur periodically due to changes in
the tax rates, changes in the business operations,
implementation of tax planning strategies, resolution with
taxing authorities of issues where we have previously taken
certain tax positions and newly enacted statutory, judicial and
regulatory guidance. These changes, when they occur, affect
accrued taxes and can be material to our operating results for
any particular reporting period.
Additionally, we account for uncertain tax positions in
accordance with GAAP. The application of income tax law is
inherently complex. Laws and regulations in this area are
voluminous and are often ambiguous. We are required to make many
subjective assumptions and judgments regarding our income tax
exposures. Interpretations of and guidance surrounding income
tax laws and regulations change over time. As such, changes in
our subjective assumptions and judgments can materially affect
amounts recognized in our consolidated financial statements.
Valuation and
Accounting for Financial Derivatives
We periodically use financial derivative instruments, such as
interest rate swap agreements, to protect us against changing
market prices or interest rates and the related impact to our
assets, liabilities, or cash flows. We also evaluate our
contracts and commitments for terms that qualify as embedded
derivatives. All derivatives are reported at their corresponding
fair value in our consolidated statements of financial condition.
67
Financial derivative instruments expected to be highly effective
hedges against changes in cash flows are designated as such upon
entering into the agreement. At each reporting date, we reassess
the effectiveness of the hedge to determine whether or not it
can continue to use hedge accounting. Under hedge accounting, we
record the increase or decrease in fair value of the derivative,
net of tax impact, as other comprehensive income or losses. If
the hedge is not determined to be a perfect hedge, yet still
considered highly effective, we will calculate the ineffective
portion and record the related change in its fair value as
additional interest income or expense in the consolidated
statements of income. Amounts accumulated in other comprehensive
income are generally reclassified into earnings in the same
period or periods during which the hedged forecasted transaction
affects earnings.
Share-Based
Compensation
Certain employees, advisors, officers and directors who
contribute to our success participate in various stock option
plans. In addition, certain financial institutions participate
in a warrant plan. Stock options and warrants generally vest in
equal increments over a three to five-year period and expire on
the 10th anniversary following the date of grant.
We recognize share-based compensation expense related to
employee stock option awards in net income based on the
grant-date fair value over the requisite service period of the
individual grants, which generally equals the vesting period. We
account for stock options and warrants awarded to our advisors
and financial institutions based on the fair value of the award
at each interim reporting period. We record the increase in
price of the option or warrant as commission expense during such
period. If the value of our common stock increases over a given
period, this accounting treatment results in additional
commission expense.
As there are no observable market prices for identical or
similar instruments, we estimate fair value using a Black
Scholes valuation model. We must make assumptions regarding the
number of share-based awards that will be forfeited. The
forfeiture assumption is ultimately adjusted to the actual
forfeiture rate. Therefore, changes in the forfeiture
assumptions do not impact the total amount of expense ultimately
recognized over the vesting period. Rather, different forfeiture
assumptions would only impact the timing of expense recognition
over the vesting period.
The following table presents the weighted average assumptions
used by us in calculating the fair value of our stock options
and warrants with the Black Scholes valuation model for the
three months ended March 31, 2010 and 2009 and the years
ended December 31, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
2009
|
|
2008
|
|
2007
|
|
Expected life (in years)
|
|
|
6.51
|
|
|
|
8.81
|
|
|
|
7.13
|
|
|
|
6.52
|
|
|
|
6.50
|
|
Expected stock price volatility
|
|
|
50.32
|
%
|
|
|
48.67
|
%
|
|
|
51.35
|
%
|
|
|
33.78
|
%
|
|
|
31.08
|
%
|
Expected dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized forfeiture rate
|
|
|
4.99
|
%
|
|
|
3.00
|
%
|
|
|
4.35
|
%
|
|
|
1.51
|
%
|
|
|
1.00
|
%
|
Fair value of options
|
|
$
|
12.34
|
|
|
$
|
10.40
|
|
|
$
|
12.30
|
|
|
$
|
9.96
|
|
|
$
|
9.86
|
|
Risk-free interest rate
|
|
|
2.79
|
%
|
|
|
2.45
|
%
|
|
|
2.93
|
%
|
|
|
2.73
|
%
|
|
|
4.93
|
%
|
The risk-free interest rates are based on the implied yield
available on U.S. Treasury constant maturities in effect at
the time of the grant with remaining terms equivalent to the
respective expected terms of the options. The dividend yield of
zero is based on the fact that we have no present intention to
pay cash dividends. In the future, as we gain historical data
for volatility of our stock and the actual term over which
employees hold our options, expected volatility and the expected
term may change, which could substantially change the grant-date
fair value of future awards of stock options and, ultimately,
compensation recorded on future grants. We estimate the expected
term for our employee option awards using the simplified method
in accordance with Staff Accounting Bulletin 110,
Certain Assumptions Used in Valuation Methods, because we
do not have sufficient relevant historical
68
information to develop reasonable expectations about future
exercise patterns. We estimate the expected term for stock
options and warrants awarded to our advisors using the
contractual term. Expected volatility is calculated based on
companies of similar growth and maturity and our peer group in
the industry in which we do business because we do not have
sufficient historical volatility data. We will continue to use
peer group volatility information until our historical
volatility is relevant to measure expected volatility for future
grants.
We have assumed an annualized forfeiture rate for our stock
options and warrants based on a combined review of industry and
employee turnover data, as well as an analytical review
performed of historical pre-vesting forfeitures occurring over
the previous year. We record additional expense if the actual
forfeiture rate is lower than estimated and record a recovery of
prior expense if the actual forfeiture is higher than estimated.
As of each stock option grant date, we considered the fair value
of the underlying common stock, determined as described below,
in order to establish the option exercise price. As of each
stock option grant date, we reviewed an average of the disclosed
year-end volatility of a group of companies that we considered
peers based on a number of factors including, but not limited
to, similarity to us with respect to industry, business model,
stage of growth, financial risk or other factors, along with
considering the future plans of our company to determine the
appropriate volatility. The expected life was based on our
historical stock option activity. The risk-free interest rate
was determined by reference to the United States Treasury rates
with the remaining term approximating the expected life assumed
at the date of grant. In addition, we are required to estimate
the expected forfeiture rate and only recognize expense for
those options expected to vest. We estimate the forfeiture rate
based on our historical experience. Further, to the extent our
actual forfeiture rate is different from our estimate,
stock-based compensation expense is adjusted accordingly.
The following table sets forth all stock option and warrant
grants since January 1, 2006 through the date of this
prospectus:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Exercise or
|
|
Average
|
|
|
Number of
|
|
Purchase
|
|
Estimated Fair
|
Date of
|
|
Shares
|
|
Price per
|
|
Value of
|
Issuance
|
|
Granted
|
|
Share
|
|
Options
|
|
Q1 2006
|
|
|
|
|
|
|
n/a
|
|
|
|
n/a
|
|
Q2 2006
|
|
|
28,000
|
|
|
$
|
10.31
|
|
|
$
|
4.60
|
|
Q3 2006
|
|
|
|
|
|
|
n/a
|
|
|
|
n/a
|
|
Q4 2006
|
|
|
80,000
|
|
|
$
|
15.84
|
|
|
$
|
9.20
|
|
Q1 2007
|
|
|
124,000
|
|
|
$
|
18.89
|
|
|
$
|
8.36
|
|
Q2 2007
|
|
|
295,150
|
|
|
$
|
21.60
|
|
|
$
|
9.25
|
|
Q3 2007
|
|
|
100,000
|
|
|
$
|
25.50
|
|
|
$
|
10.69
|
|
Q4 2007
|
|
|
241,500
|
|
|
$
|
27.40
|
|
|
$
|
11.05
|
|
Q1 2008
|
|
|
1,438,500
|
|
|
$
|
27.80
|
|
|
$
|
9.78
|
|
Q2 2008
|
|
|
304,706
|
|
|
$
|
27.17
|
|
|
$
|
12.82
|
|
Q3 2008
|
|
|
184,000
|
|
|
$
|
26.33
|
|
|
$
|
11.25
|
|
Q4 2008
|
|
|
9,000
|
|
|
$
|
24.96
|
|
|
$
|
11.98
|
|
Q1 2009
|
|
|
508,606
|
|
|
$
|
18.04
|
|
|
$
|
13.55
|
|
Q2 2009
|
|
|
319,000
|
|
|
$
|
19.74
|
|
|
$
|
9.77
|
|
Q3 2009
|
|
|
1,993,000
|
|
|
$
|
22.08
|
|
|
$
|
11.79
|
|
Q4 2009
|
|
|
388,755
|
|
|
$
|
23.02
|
|
|
$
|
15.41
|
|
Q1 2010
|
|
|
75,184
|
|
|
$
|
23.41
|
|
|
$
|
13.26
|
|
69
These estimates of the fair value of our common stock were made
based on information from the following valuation dates:
|
|
|
|
|
|
|
Fair Value
|
Valuation Date
|
|
per Share
|
|
December 28, 2005
|
|
$
|
10.31
|
|
March 31, 2006
|
|
$
|
10.31
|
|
June 30, 2006
|
|
$
|
10.31
|
|
September 30, 2006
|
|
$
|
15.84
|
|
December 31, 2006
|
|
$
|
18.89
|
|
March 31, 2007
|
|
$
|
21.60
|
|
June 30, 2007
|
|
$
|
25.50
|
|
September 30, 2007
|
|
$
|
27.40
|
|
December 31, 2007
|
|
$
|
27.80
|
|
March 31, 2008
|
|
$
|
27.17
|
|
June 30, 2008
|
|
$
|
26.33
|
|
September 30, 2008
|
|
$
|
24.96
|
|
December 31, 2008
|
|
$
|
18.04
|
|
March 31, 2009
|
|
$
|
19.74
|
|
June 30, 2009
|
|
$
|
22.08
|
|
September 30, 2009
|
|
$
|
23.02
|
|
December 31, 2009
|
|
$
|
23.41
|
|
March 31, 2010
|
|
$
|
27.81
|
|
Since prior to this offering our common stock has not been
publicly traded, we established our stock price together with
the review and discussion of valuation by the Audit and
Compensation Committees in the course of performing each
committees responsibility. We considered numerous
objective and subjective factors in valuing our common stock, on
quarterly valuation dates, in accordance with the guidance in
the American Institute of Certified Public Accountants Practice
Aid Valuation of Privately-Held-Company Equity Securities Issued
as Compensation (the Practice Aid). These objective
and subjective factors included, but were not limited to:
|
|
|
|
|
current and projected market multiples of revenues and earnings,
including for peer companies;
|
|
|
|
multiples implied from recently-completed transactions involving
financial services companies;
|
|
|
|
our projected growth rates in revenues and earnings, including
EBITDA, as compared to peer companies;
|
|
|
|
contemporaneous independent valuations performed on a quarterly
basis and
|
|
|
|
our weighted average cost of capital.
|
Since 2008, independent valuations have been performed on a
quarterly basis, and are considered in the course of determining
the fair market value of our common stock. Our independent
valuations were performed in accordance with the Practice Aid
and derive an indicated value using a weighted average of three
methods. The primary method employs a market approach using
multiples of historical and projected EBITDA and pre-tax income
for peer companies. We also consider a market approach using
prices of recent transactions involving financial services
companies and an income approach based upon discounted cash flow
projections. Prior to the March 31, 2010 valuation, the
indicated value was decreased by a market discount factor,
reflecting our private status. This marketability discount
factor ranged from 10 to 20% of the indicated value. The
valuation report is then reviewed, and the fair value per share
of common stock is determined, as of each quarter end period.
That value is applied to any share or share-based issuance made
during the following quarter.
Prior to 2008, we relied on internally developed valuation
models that used methods similar to those used in our
independent valuations. In addition to use in determining the
value of stock-based
70
compensation, these valuations were used in connection with
several acquisitions for which a portion of the consideration
paid was company stock.
We have issued 7,423,973 restricted shares to our advisors.
These restricted shares may not be sold, assigned or transferred
and are not entitled to receive dividends or non-cash
distributions, until either a sale of the company that
constitutes a change in control or an initial public offering.
We account for these restricted shares by measuring such grants
at their then-current lowest aggregate value. Since the value is
contingent upon the companys decision to sell itself or
issue its common stock through an initial public offering, the
current aggregate value will be zero until such event occurs.
Upon the closing of this offering, we will record the par value,
additional paid-in capital and expense based on the fair value
per share multiplied by 7,423,973 restricted shares. We will
also record an income tax benefit equal to our effective
incremental income tax rate in effect for the period in which
the offering occurs. Based on an assumed initial public offering
price
of ,
which is the midpoint of the range listed in the cover page of
this prospectus, we expect the pre-tax expense to be
$ million and the related tax
benefit to be $ million.
Recent Accounting
Pronouncements
Refer to Note 2 of our unaudited condensed consolidated
financial statements for a discussion of recent accounting
standards and pronouncements.
Quantitative and
Qualitative Disclosures About Market Risk
Market
Risk
We maintain inventories of trading securities owned and
securities sold but not yet purchased in order to ensure
availability of securities and to facilitate client
transactions. These securities include mutual funds, debt
securities issued by the U.S. government, money market funds,
corporate debt securities, certificates of deposit and equity
securities.
Changes in value of our trading inventory may result from
fluctuations in interest rates, credit ratings of the issuer,
equity prices and the correlation among these factors. We manage
our trading inventory by product type. Our primary method of
controlling risk in our trading inventory is through the
establishment and monitoring of limits on the dollar amount of
securities positions that can be entered into and other
risk-based limits. Our trading activities in the aggregate were
significantly below these limits at December 31, 2009.
Position limits in trading inventory accounts are monitored on a
daily basis. Management also monitors inventory levels and
trading results, as well as inventory aging, pricing,
concentration and securities ratings.
At December 31, 2009, the fair value of our trading securities
owned and securities sold but not yet purchased were
$15.4 million and $4.0 million respectively. See
Note 6 of our consolidated financial statements for
information regarding the fair value of trading securities owned
and securities sold but not yet purchased associated with our
client facilitation activities. See Note 7 of our
consolidated financial statements for information regarding the
fair value of securities held to maturity.
We do not enter into contracts involving derivatives or other
similar financial instruments for trading or proprietary
purposes.
We also have market risk on the fees we earn that are based on
the market value of advisory and brokerage assets, assets on
which trail commissions are paid and assets eligible for sponsor
payments.
Interest Rate
Risk
We are exposed to risk associated with changes in interest
rates. As of March 31, 2010, all of the outstanding debt
under our senior secured credit facilities, $817.1 million,
was subject to floating
71
interest rate risk. To provide some protection against
potential rate increases associated with our floating senior
secured credit facilities, we have entered into derivative
instruments in the form of interest rate swap agreements with
Morgan Stanley Capital Services, Inc. covering a significant
portion ($400.0 million) of our senior secured
indebtedness. The interest rate swap agreements qualify for
hedge accounting and have been designated as cash flow hedges
against specific payments due on our senior secured term loan.
Accordingly, any interest rate differential is reflected in an
adjustment to interest expense over the lives of the interest
rate swap agreements. While the unhedged portion of our senior
secured debt is subject to increases in interest rates, we
believe that this risk is offset with variable interest rates
associated with client borrowings. At March 31, 2010, we
had $417.1 million in unhedged senior secured borrowings,
the variable cost of which is partially offset by variable
interest income on $222.6 million of client margin
receivables. Because of this relationship, and our expectation
for outstanding balances in the future, we do not believe that a
short-term change in interest rates would have a material impact
on our income before taxes. A 10 basis point increase in
interest rates would result in an increase in interest expense
on the variable portion of our debt of approximately
$0.4 million. For a discussion of such interest rate swap
agreements, see Note 9 to our unaudited condensed
consolidated financial statements.
We offer our advisors and their clients two primary cash sweep
programs that are interest rate sensitive: our bank sweep
programs and money market sweep vehicles involving multiple
money market fund providers. Our bank sweep programs use
multiple non-affiliated banks to provide up to $1.5 million
($3.0 million joint) of FDIC insurance for client deposits
custodied at the banks. While clients earn interest for balances
on deposit in the bank sweep programs, we earn a fee. Our fees
from the bank sweep programs are based on prevailing interest
rates in the current interest rate environment, but may be
adjusted in an increasing or decreasing interest rate
environment or for other reasons. Changes in interest rates and
fees for the bank sweep programs are monitored by our Fee and
Rate Setting Committee (the FRS Committee), which
governs and approves any changes to our fees. By meeting
promptly after interest rates change, or for other market or
non-market reasons, the FRS Committee balances financial risk of
the bank sweep programs with products that offer competitive
client yields. However, as short-term interest rates hit lower
levels, the FRS Committee may be compelled to lower fees. The
average Federal Reserve effective federal funds rate for March
2010 was 0.16%. A change in short-term interest rates of
10 basis points, if accompanied by a commensurate change in
fees for our cash sweep programs, could result in an increase or
decrease in income before income taxes of $11.4 million on
an annual basis (assuming that client balances at March 31,
2010 did not change). Actual impacts may vary depending on
interest rate levels, the significance of change, and the FRS
Committees strategy in responding to that change.
Credit
Risk
Credit risk is the risk of loss due to adverse changes in a
borrowers, issuers or counterpartys ability to
meet its financial obligations under contractual or agreed upon
terms. We bear credit risk on the activities of our
advisors clients, including the execution, settlement, and
financing of various transactions on behalf of these clients.
These activities are transacted on either a cash or margin
basis. Our credit exposure in these transactions consists
primarily of margin accounts, through which we extend credit to
clients collateralized by cash and securities in the
clients account. Under many of these agreements, we are
permitted to sell or repledge these securities held as
collateral and use these securities to enter into securities
lending arrangements or to deliver to counterparties to cover
short positions.
As our advisors execute margin transactions on behalf of their
clients, we may incur losses if clients do not fulfill their
obligations, the collateral in the clients account is
insufficient to fully cover losses from such investments, and
our advisors fail to reimburse us for such losses. Our loss on
margin accounts is immaterial and did not exceed
$0.1 million in any of the years ended December 31,
2009, 2008 and 2007. We monitor exposure to industry sectors and
individual securities and perform analyses on a regular basis in
connection with our margin lending activities.
72
We adjust our margin requirements if we believe our risk
exposure is not appropriate based on market conditions.
We are subject to concentration risk if we extend large loans to
or have large commitments with a single counterparty, borrower,
or group of similar counterparties or borrowers (e.g. in the
same industry). Receivables from and payables to clients and
stock borrowing and lending activities are conducted with a
large number of clients and counterparties and potential
concentration is carefully monitored. We seek to limit this risk
through careful review of the underlying business and the use of
limits established by senior management, taking into
consideration factors including the financial strength of the
counterparty, the size of the position or commitment, the
expected duration of the position or commitment and other
positions or commitments outstanding.
Operational
Risk
Operational risk generally refers to the risk of loss resulting
from our operations, including, but not limited to, improper or
unauthorized execution and processing of transactions,
deficiencies in our technology or financial operating systems
and inadequacies or breaches in our control processes. We
operate in diverse markets and are reliant on the ability of our
employees and systems to process a large number of transactions.
These risks are less direct and quantifiable than credit and
market risk, but managing them is critical, particularly in a
rapidly changing environment with increasing transaction
volumes. In the event of a breakdown or improper operation of
systems or improper action by employees or advisors, we could
suffer financial loss, regulatory sanctions and damage to our
reputation. Business continuity plans exist for critical
systems, and redundancies are built into the systems as deemed
appropriate. In order to mitigate and control operational risk,
we have developed and continue to enhance specific policies and
procedures that are designed to identify and manage operational
risk at appropriate levels throughout our organization and
within various departments. These control mechanisms attempt to
ensure that operational policies and procedures are being
followed and that our employees and advisors operate within
established corporate policies and limits.
73
BUSINESS
Overview
We provide an integrated platform of proprietary technology,
brokerage and investment advisory services to over 12,000
independent financial advisors and financial advisors at
financial institutions across the country, enabling them to
successfully service their retail investors with unbiased,
conflict-free financial advice. In addition, we support over
4,000 financial advisors with customized clearing, advisory
platforms and technology solutions. Our singular focus is to
support our advisors with the front, middle and back-office
support they need to serve the large and growing market for
independent investment advice, particularly in the mass affluent
market. We believe we are the only company that offers advisors
the unique combination of an integrated technology platform,
comprehensive self-clearing services and full open architecture
access to leading financial products, all delivered in an
environment unencumbered by conflicts from product
manufacturing, underwriting or market making.
For over 20 years we have served the independent advisor
markets. We currently support the largest independent advisor
base and the fifth largest overall advisor base in the United
States. Through our advisors, we are also one of the largest
distributors of financial products in the United States. Our
scale is a substantial competitive advantage and enables us to
more effectively attract and retain advisors. Our unique model
allows us to invest more resources in our advisors, increasing
their revenues and creating a virtuous cycle of
growth. We are headquartered in Boston and currently have over
2,400 employees in our Boston, Charlotte and San Diego
locations.
Market
Opportunity and Industry Background
The market our advisors serve is significant and expanding.
According to the Federal Reserve, U.S. household and
non-profit organization financial assets totaled $45.1 trillion
as of December 31, 2009, up from $41.7 trillion at
December 31, 2008 and $38.9 trillion at December 31,
2004. In addition, according to Cerulli Associates, $8.5
trillion of retail assets were professionally managed as of
December 31, 2008, up from $6.8 trillion as of
December 31, 2003. Finally, 58% of all U.S. households
utilized a financial advisor in 2008.
Cerulli Associates divides the retail advisor market into six
broad channels: the two independent channels that we serve
(independent and RIAs) and four employee model or captive
channels (insurance, wirehouse, regional and bank).
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
# of
|
|
|
Assets
|
|
|
Payout
|
|
|
|
Channel
|
|
|
# of Firms
|
|
|
Advisors
|
|
|
($ billions)
|
|
|
Range
|
|
|
Example Firms
|
Independent
|
|
|
|
1,203
|
(1)
|
|
|
|
113,746
|
(1)
|
|
|
$
|
1,801
|
(1)
|
|
|
|
70-100%
|
|
|
|
LPL, Raymond James, Cetera
|
RIA(2)
|
|
|
|
14,502
|
|
|
|
|
18,582
|
|
|
|
$
|
911
|
|
|
|
|
100%
|
|
|
|
n/a
|
Wirehouse
|
|
|
|
4
|
|
|
|
|
54,865
|
|
|
|
$
|
3,947
|
|
|
|
|
30-50%
|
|
|
|
Morgan Stanley Smith Barney, Merrill Lynch, UBS, Wells Fargo
|
Insurance
|
|
|
|
79
|
|
|
|
|
70,405
|
|
|
|
$
|
283
|
|
|
|
|
40-60%
|
|
|
|
NYLIFE Securities, Mass Mutual Investor Srvcs, Signator (John
Hancock)
|
Regional
|
|
|
|
199
|
|
|
|
|
35,960
|
|
|
|
$
|
1,149
|
|
|
|
|
40-60%
|
|
|
|
Edward Jones, RBC Dain Rauscher, Robert W. Baird, Morgan Keegan
|
Bank
|
|
|
|
282
|
|
|
|
|
16,406
|
|
|
|
$
|
182
|
|
|
|
|
30-50%
|
|
|
|
Citizens Bank, Fifth Third Bank, Third-party marketers
(PrimeVest)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Source: Cerulli Associates Intermediary Matrix, 2009
|
|
|
(1) |
|
The number of advisors in the Independent channel includes
14,769 dually-registered advisors managing
$619 billion in assets. Dually-registered advisors are not
included in firm count. |
|
(2) |
|
RIA firms are registered with the SEC but custody their assets
with companies such as LPL, Charles Schwab and Fidelity. |
During the period from 2004 to 2008, the independent channels
experienced substantial growth on both an absolute and relative
basis, taking market share from the captive channels. According
to Cerulli Associates, the independent channels market
share by number of advisors increased from 40% in 2004 to 43% in
2008. In 2008, over 132,000 independent financial advisors
managed $2.7 trillion in client assets, representing 33% of
total retail advisor client assets.
Cerulli Associates forecasts that total U.S. assets under
management will grow 29% from 2008 to 2012 due to factors such
as the retirement of the baby boomer generation as well as the
continued growth of individual retirement account rollovers.
During the same period, Cerulli Associates estimates that the
independent channels market share by number of advisors
will grow by seven percentage points to 50%, and market share by
client assets will grow six percentage points to 39%. There are
several key factors driving the growth of the independent
channels:
|
|
|
|
|
Demand for Independent Investment
Advice. We believe investors, particularly
those in the mass affluent market, and increasingly in the high
net worth market, are seeking unbiased, conflict-free advice; a
need that has become more acute given recent market volatility,
the ever increasing complexity of the securities markets and the
baby boomer generations focus on retirement savings.
Independent financial advisors are uniquely equipped to provide
this investment advice because, unlike their captive
competitors, they are not committed to any particular
proprietary products or production targets and can therefore
concentrate solely on what is in the best interest of their
clients.
|
|
|
|
Ongoing Challenges Among the Captive
Platforms. We believe the number of financial
advisors electing to leave the large captive financial
institutions to become independent financial advisors has
accelerated over the last several years because of the ongoing
consolidation among the captive platforms, particularly among
the wirehouses, and because of the reputational harm suffered by
several of the largest financial institutions during the recent
financial crisis. Furthermore, we believe many of our captive
competitors are unwilling to focus on the mass affluent market
because, unlike LPL, they are unable to service this market
profitably.
|
75
|
|
|
|
|
Greater Autonomy and Economics Desired by Financial
Advisors. We believe many financial advisors
have entrepreneurial aspirations and are attracted to the
flexibility and control of the independent financial advisor
model. Independent financial advisors also enjoy a greater share
of the brokerage commissions and advisory fees than financial
advisors at the employee model firms generally
80-90%
compared to
30-50%.
|
Our
Business
With our focus and scale, we are not only a beneficiary of the
secular shift among advisors toward independence, but an active
catalyst of this trend. Between 2004 and 2008, our number of
advisors increased at a CAGR of 20%, while according to Cerulli
Associates, the total number of advisors across all channels
remained flat. We enable our advisors to provide their clients
with high quality independent financial advice and investment
solutions, and support our advisors in managing the complexity
of their businesses by providing a comprehensive integrated
platform of technology and clearing services. We provide these
services through an open architecture product platform with no
proprietary manufactured products, which enables an unbiased,
conflict-free environment. Additionally, we offer our advisors
the highest average payout ratios among the five largest
U.S. broker-dealers, as ranked by number of advisors, which
we believe provides us with an important competitive advantage.
Our business is dedicated exclusively to our advisors; we are
not a market-maker nor do we offer investment banking or
underwriting services. Our historical advisor growth rate does
not guarantee that we will attract advisors at comparable rates
in the future. For example, when comparing our number of
advisors as of March 31, 2010 to March 31, 2009, we
had a net decrease in advisors, and as of December 31, 2009
to December 31, 2008, we had relatively no change in our
number of advisors, in both cases due to the attrition of
advisors in connection with the consolidation of the operations
of the Affiliated Entities.
The size of our organization and scalability of our solutions
allow us to continually reinvest in our technology and clearing
platforms, tailor our services to the needs of our advisors and
provide them with an attractive value proposition. We believe
that our technology and service platforms allows our advisors to
spend more time with their clients and enhance and grow their
businesses.
Our revenues are derived primarily from commissions and fees
generated by our advisors. We also generate asset-based fees
from our financial product sponsor relationships, our cash sweep
programs and
sub-transfer
agency and networking services. Under our self-clearing
platform, we custody the majority of client assets invested in
these products, which includes providing statements, transaction
processing and ongoing account management for which we receive a
fee.
Our Financial
Advisors
Serving clients in communities across the nation, our advisors
build long-term relationships with their clients by guiding them
through the complexities of investment decisions, retirement
solutions, financial planning and wealth-management. We support
the evolution of our advisors businesses over time and
provide a range of solutions as their needs change.
The relationship with our advisors is embodied in our Commitment
Creed, which serves as a set of guiding principles for our
relationships with our advisors. For more than 20 years it
has been ingrained in our culture and reflects our singular
focus on the advisors we serve. The size and growth of our
business has benefited from this focus. Our advisor base has
grown from 3,596 advisors in 2000 to 12,026 as of March 31,
2010, representing a CAGR in excess of 14%. Our historical
advisor growth rate does not guarantee that we will attract
advisors at comparable rates in the future.
Our advisor base includes independent financial advisors, RIAs
and advisors at small and mid-sized financial institutions. In
order to license with us, advisors must meet our stringent
requirements which include a thorough review of the
advisors education, experience, credit and compliance
history. These advisors are licensed with LPL Financial and
enter into a registered representative agreement that
establishes the duties and responsibilities of each party.
Pursuant to the registered representative
76
agreement, each advisor makes a series of representations,
including that the advisor will disclose to all customers and
prospective customers that the advisor is acting as our
registered representative, that all orders for securities will
be placed through us, that the advisor will sell only products
we have approved and that the advisor will comply with LPL
policies and procedures as well as securities rules and
regulations. These advisors also agree not to engage in any
outside business activity without prior approval from us and not
to act as an agent for any of our competitors.
In return for a high level of services provided by us,
including, among others, transaction processing and technology
services we provide to the advisors to support their daily
activities, we typically retain a range of 10 to 15 percent of
the commission and advisory fee revenue generated by our
advisors and pay out the remaining 85 to 90 percent to
them. In addition, advisors pay certain fees directly to us
relating to technology and platform access, insurance coverage
and licensing fees. The registered representative agreement is
terminable without cause on 30 days notice and for cause
immediately upon notice.
Advisors that join us average over 15 years of industry
experience. This substantial industry experience allows us to
focus on enhancing our advisors businesses without the
need for basic training or subsidizing advisors that are new to
the industry. Our independent advisors join us from a broad
range of firms including wirehouses, regional and insurance
broker dealers, banks and other independent firms. Our flexible
business platform allows our advisors to choose the most
appropriate business model to support their clients, whether
they conduct brokerage business, offer brokerage and fee-based
services on our corporate RIA platforms or provide fee-based
services through their own RIAs.
Our independent advisors and RIAs are entrepreneurial
independent contractors who market their services through 4,000
branch offices. They are primarily located in rural and suburban
areas and as such are viewed as local providers of independent
advice. Approximately 70% of these advisors operate under their
own brand name. We approve and assist these advisors with their
own branding, marketing and promotion.
Among our 12,000 advisors, we support over 2,400 advisors at
over 750 banks and credit unions seeking to provide a broad
array of services for their financial advisors. For these
institutions, whose core capabilities may not include investment
and financial planning services, or who find the technology,
infrastructure and regulatory requirements to be cost
prohibitive, we provide their financial advisors with the
services they need to be successful, allowing the institutions
to focus their energy and capital on their core businesses.
We also provide support to over 4,000 additional financial
advisors who are affiliated and licensed with insurance
companies. These outsourcing arrangements provide customized
clearing, advisory platforms and technology solutions that
enable financial advisors at these insurance companies to
efficiently provide a breadth of services to their client base.
Our Service
Value Proposition
The core of our business is dedicated to meeting the evolving
needs of our advisors and providing the platform and tools to
grow and enhance the profitability of their businesses. We
support our advisors by providing front, middle and back-office
solutions through the four pillars of our distinct value
proposition: enabling technology, comprehensive clearing and
compliance services, practice management programs and training,
and independent research. The comprehensive and automated nature
of our offering enables our advisors to focus on their clients
while successfully and efficiently managing the complexities of
running their own practice.
Enabling
Technology
We provide our technology and service to advisors through
BranchNet, our proprietary, integrated technology platform that
is server-based and web-accessed. Using the BranchNet
77
workstation, our advisors effectively manage all critical
aspects of their businesses while remaining highly efficient and
responsive to their clients needs. Time-consuming
processes, such as account opening and management, document
imaging, transaction execution, and account rebalancing, are
automated to improve efficiency and accuracy. Substantially all
of our advisors utilize BranchNet as their core technology
platform. Through BranchNet, our advisors have direct access to
a fully-integrated array of tools and support systems, including:
|
|
|
|
|
comprehensive account lookup for accounts and direct business
data;
|
|
|
|
straight-through processing of trade orders and account
maintenance requests and
|
|
|
|
secure and reliable data maintenance
|
In addition to the account management capabilities of BranchNet,
the Resource Center, embedded within BranchNet, provides
advisors with access to our research, training, compliance and
support services and the ability to review products and develop
marketing materials.
|
|
|
|
|
direct access to financial product information, exclusive
research commentaries, detailed regulatory requirements,
valuable marketing tools, operational details, comprehensive
training and technical support;
|
|
|
|
client management and business development tools;
|
|
|
|
trading and research tools and
|
|
|
|
business management resources.
|
Many advisors also subscribe to premium features, such as
performance reporting, financial planning and customized
websites. Select third-party resources have been integrated into
our technology software, enabling seamless access to important
tools, broadening our range of offerings and reducing duplicate
operational functions.
We believe BranchNet allows our advisors to transact and monitor
their business more efficiently, lowering operating costs for
their business. Once on BranchNet, advisors have the ability to
choose which services suit their business plan, purchasing only
the services that are needed to grow their business.
Comprehensive
Clearing and Compliance Services
We custody and clear the majority of our advisors
transactions, providing an enhanced advisor experience and
expedited processing capabilities. Our self-clearing platform
enables us to better control client data, more efficiently
process and report trades, facilitate platform development,
reduce costs and ultimately enhance the quality of the services
we provide our advisors. Our self-clearing platform also enables
us to serve a wider variety of advisors, including RIAs and
hybrid RIAs. Because we are self-clearing, we can address all
facets of securities transaction processing, including:
|
|
|
|
|
order routing, trading support, execution and clearing, and
position keeping;
|
|
|
|
regulatory and tax compliance and reporting and
|
|
|
|
investment accounting and recordkeeping.
|
All of these services are backed by our service center and
operations organizations focused on providing timely, accurate
and consistent support, with each employee committed to
delivering best in class service. This shared commitment allows
us to meet our financial advisors and institutions
needs so they can best serve their clients.
In 2010, we launched Service360, a new service paradigm for our
most productive advisors. Service360 offers these advisors a
wide array of organizational support. Service360 is a team-based
approach to service, in which teams are dedicated to a defined
set of advisors. Service360 is scheduled to be fully implemented
by December 2010, at which time it will service over 4,000
78
advisors with timely accurate, and efficient service delivered
in a more personal, relationship-focused manner and with greater
accountability and ownership on the part of the service team.
We have made sizeable investments in our compliance offering to
enable our advisors to run a fully compliant office. Since 2000,
our commitment of resources and focus on compliance have enabled
us to maintain one of the best regulatory compliance records,
based upon the number of regulatory events reported in
FINRAs BrokerCheck Reports, among the five largest
U.S. broker-dealers, ranked by number of advisors. Several
years ago we made the strategic decision to fully integrate our
compliance tools into our technology platform to further enhance
compliance effectiveness and scalability. Over
300 employees assist our advisors through:
|
|
|
|
|
training advisors on new products, new FINRA guidelines,
compliance tools, security policies and procedures, anti-money
laundering and best practices;
|
|
|
|
review and approval of advertising materials;
|
|
|
|
technology-enabled surveillance of trading activities and sales
practices;
|
|
|
|
oversight and monitoring of registered investment advisory
activities;
|
|
|
|
securities registration, advisory and insurance licensing of
advisors and
|
|
|
|
audits of branch offices.
|
Practice
Management Programs and Training
Our practice management programs help our advisors enhance and
grow their businesses. Our experience gives us the ability to
benchmark the best practices of successful advisors and develop
customized recommendations to meet the specific needs of an
advisors business and market. Because of our scale, we are
able to dedicate a experienced group of 91 professionals
that work with our advisors to build and better manage their
business and client relationships through
one-on-one
consulting as well as group training. In addition, we hold 140
conferences and group training events annually for the benefit
of our advisors. Our practice management and training services
include:
|
|
|
|
|
personalized business consulting support that helps advisors
enhance the value and operational efficiency of their businesses;
|
|
|
|
advisory and brokerage consulting to support advisors in growing
their businesses with our broad range of products and fee-based
offerings, as well as wealth management services to assist
advisors serving high net worth clients with comprehensive
estate, tax, philanthropic, and financial planning processes;
|
|
|
|
marketing campaigns and consultation to enable advisors to build
awareness of their services and capitalize on opportunities in
their local markets;
|
|
|
|
transition services to help advisors establish independent
practices and migrate client accounts to us and
|
|
|
|
training programs on topics including technology, use of
advisory platforms and business development.
|
Independent
Research
We provide our advisors with integrated access to comprehensive
proprietary research on mutual funds, separate accounts,
insurance and annuities, asset allocation strategies, financial
markets and the economy, among other areas. Our research team
consists of over 25 professionals with an average of
12 years of industry experience, dedicated to providing
unbiased and conflict-free advice. Our research is designed to
empower our advisors to give their clients thoughtful advice in
an efficient manner. In particular, our research facilitates the
growth of our advisory platform through generation of model
portfolio and asset allocation overlay services and the
distribution of our
79
packaged products. Our research team actively works with our
product diligence group in screening financial products offered
through our platform. Our lack of proprietary products or
investment banking services helps ensure that our research
remains unbiased and objective.
With a focus on performance, service and transparency, our
research team utilizes a wide spectrum of available tools to
deliver timely perspectives on the ever-changing economic
marketplace and products, enabling advisors to help their
clients understand and adjust to the latest developments.
Through its objective recommendations and portfolio management,
the research group helps advisors meet a broad range of investor
needs effectively. Our research enables advisors to:
|
|
|
|
|
keep abreast of changes in markets and the global economy,
through our daily market update call and email, published
materials, blogs and media presence;
|
|
|
|
proactively respond to emerging trends;
|
|
|
|
leverage the expertise and experience of our research team in
building individual investment portfolios that are fully
integrated in our technology platform and
|
|
|
|
seek specific advice through our ASK (accurate, swift and
knowledgeable) Research Service Desk, a team of research
professionals dedicated exclusively to advisor
investment-research inquiries via phone and email.
|
A substantial portion of our research is compliance-approved so
that advisors are able to share it with clients when working
with them to make investment decisions.
Our Economic
Value Proposition
We offer a compelling economic value proposition that is a key
factor in our ability to attract and retain advisors. The
independent channels pay advisors a greater share of brokerage
commissions and advisory fees than the captive
channels generally
80-90%
compared to
30-50%.
Because of our scale and efficient operating model, we offer our
advisors the highest average payout ratios among the five
largest U.S. broker-dealers, ranked by number of advisors,
which we believe provides us with an important competitive
advantage. We believe our superior technology and service
platforms enable our advisors to operate their practices at a
lower cost than other independent advisors. As a result, we
believe owners of practices associated with us earn meaningfully
more pre-tax profit than owners of practices affiliated with
other independent brokerage firms. We attribute this difference
in profitability in part to lower fixed costs driven by the need
for fewer staff at our associated practices. Finally, as
business owners, independent financial advisors, unlike captive
advisors, also have the opportunity to build equity in their own
businesses.
We also believe our solutions enable our financial institutions
to be more productive and therefore generate greater
profitability relative to other financial institutions supported
by third party firms.
Our Product
Access
We do not manufacture any financial products. Instead, we
provide our advisors open architecture access to a unique
variety of commission, fee-based, cash and money market products
and services. Our product diligence group conducts extensive
diligence on substantially all of the new products we offer,
including annuities, real estate investment trusts, alternative
investments and mutual funds. Our platform provides access to
over 8,500 financial products, manufactured by over
400 product sponsors. Typically, we enter into arrangements
with these product sponsors pursuant to the sponsors
standard distribution agreement.
The sales and administration of these products are facilitated
through BranchNet and Resource Center, which allow our advisors
to access client accounts, product information, asset allocation
models, investment recommendations, and economic insight as well
as perform trade execution.
80
As of March 31, 2010, advisory and brokerage assets totaled
$285 billion, of which $81 billion was in advisory
assets. In 2009, brokerage sales were over $28 billion,
including over $10 billion in mutual funds and
$14 billion in annuities. Advisory sales were over
$23 billion, which consisted primarily of mutual funds. As
a result of this scale and significant distribution
capabilities, we can offer leading products and services with
attractive economics to our advisors.
Commission-Based
Products
Commission-based products are those for which we and our
advisors receive an up front commission and, for certain
products, a trailing commission. Our brokerage offerings include
variable and fixed annuities, mutual funds, general securities,
alternative investments, retirement and 529 education
savings plans, fixed income and insurance. Our insurance
offering is provided through LPL Insurance Associates, Inc.
(LPLIA), a brokerage general agency which provides
personalized advance case design,
point-of-sale
service and product support for a broad range of life,
disability and long-term care products. As of March 31,
2010, the total assets in our commission-based products were
approximately $204 billion.
Fee-Based
Advisory Platforms and Support
We have been an innovator in fee-based solutions since the
introduction of our Strategic Asset Management platform in 1991.
Today we have five fee-based advisory platforms that provide
centrally managed or customized solutions from which advisors
can choose to meet the investment needs of their mass affluent
and high net worth clients. The fee structure aligns the
interests of our advisors with their clients, while establishing
a valuable recurring revenue stream for the advisor and for us.
Our fee-based platforms provide access to no-load/load-waived
mutual funds, exchange-traded funds, stocks, bonds, conservative
option strategies, unit investment trusts and no-load,
institutional money managers and multi-manager variable
annuities. We provide third-party equity research and
asset-management services. As of March 31, 2010, the total
assets in these platforms was $81 billion.
Cash Sweep
Programs
We assist our advisors in managing their clients cash
balances through two primary cash sweep programs depending on
account type: a money market sweep vehicle involving multiple
money market fund providers and an insured bank deposit sweep
vehicle. Our insured bank deposit sweep vehicle allocates client
cash balances across multiple non-affiliated banks to provide
advisors with up to $1.5 million ($3.0 million joint)
of insurance through the Federal Deposit Insurance Corporation
(FDIC). As of March 31, 2010, the total assets
in our cash sweep programs, which are held within brokerage and
advisory accounts, exceeded $18 billion.
In addition to the products above, we also offer trust,
investment management and custodial services for estates and
families through our subsidiary PTC.
Our Financial
Model
We have a proven track record of strong financial performance.
We have increased our annual Adjusted EBITDA for the past five
consecutive years with only one decline in annual revenue in
2009 in conjunction with the major market downturn. Our net
income over the same period has declined two times, in 2006 and
2008. We have experienced greater variability in our net income
primarily due to amortization of purchased assets and interest
expense from our senior secured credit facilities and
subordinated notes, both a result of our merger transaction in
2005 with the Majority Holders, as well as expenses associated
with our acquisition integration and restructuring initiatives.
Since 2005, we have grown our net revenues at an 18% CAGR, our
net income at a 2% CAGR, our Adjusted EBITDA at a 17% CAGR and
our Adjusted Net Income at a 13% CAGR. Our historical growth
rates do not guarantee future results, levels of activity,
performance or achievements.
81
As we demonstrated during the financial crisis of 2008 and 2009,
our financial model has inherent resilience, and our overall
financial performance is a function of the following favorable
characteristics:
Our financial model has numerous, attractive financial
characteristics:
|
|
|
|
|
Our revenues stem from diverse sources, including
advisor-generated commission and advisory fees as well as fees
from product manufacturers, recordkeeping, cash sweep balances
and other ancillary services. They are not concentrated by
advisor, product or geography. For the year ended
December 31, 2009, no single relationship with our
independent advisor practices, banks, credit unions, or
insurance companies accounted for more than 3% of our net
revenues, and no single advisor accounted for more than 1% of
our net revenues.
|
|
|
|
Furthermore, a majority of our revenue base is recurring in
nature.
|
|
|
|
Our expenses are primarily variable, as they consist principally
of payouts on advisor-generated revenues.
|
|
|
|
Our profit margins are stable and should expand over time
because we actively manage our general and administrative
expenses.
|
|
|
|
We are able to operate with low capital expenditures and limited
capital requirements, and as a result our cash flow is not
encumbered.
|
|
|
|
We generate substantial free cash flow which we reinvest into
our business.
|
We have demonstrated the resilience of our financial model
through market downturns, particularly in the financial crisis
of 2008 and 2009. This inherent resilience is a function of the
following dynamics of our business:
|
|
|
|
|
A significant proportion of our revenues are not correlated with
the equity financial markets, such as software licensing,
account and client fees.
|
|
|
|
The variable component of our cost base is directly linked to
revenues generated by our advisors. Furthermore, the payout
percentages are tied to advisor productivity levels.
|
|
|
|
Our general and administrative expenses can be actively managed.
|
Our Competitive
Strengths
|
|
|
|
|
Significant Scale and Market Leadership
Position. We are an established leader in the
independent advisor market, which is our core business focus.
Our scale enables us to benefit from the following dynamics:
|
|
|
|
|
|
We actively reinvest in our comprehensive technology platform
and practice support, which further improves the productivity of
our advisors.
|
|
|
|
|
|
As one of the largest distributors of financial products in the
United States, we are able to obtain attractive economics from
product manufacturers.
|
|
|
|
Among the five largest U.S. broker-dealers by number of
advisors, we offer the highest average payout ratios to our
advisors.
|
The combination of our ability to reinvest in the business and
maintain highly competitive payout ratios allows us to attract
and retain advisors successfully. This, in turn, drives our
growth and leads to a virtuous cycle that reinforces
our established scale advantage.
|
|
|
|
|
Unique Value Proposition for Independent
Advisors. We deliver a comprehensive and
integrated suite of products and services to support the
practices of our independent advisors. We believe we are the
only institution that offers a conflict-free, open architecture
and scalable
|
82
|
|
|
|
|
platform. The benefits of our purchasing power lead to high
payouts and greater economics to the advisors. Our platform also
creates an entrepreneurial opportunity that empowers independent
advisors to build equity in their businesses. This generates a
significant opportunity to attract and retain highly qualified
advisors who are seeking independence.
|
|
|
|
|
|
Unique Value Proposition for
Institutions. We provide solutions to
financial institutions, such as regional banks, credit unions
and insurers, who seek to provide a broad array of services for
their customers. We believe many institutions find the
technology, infrastructure and regulatory requirements
associated with delivering financial advice to be
cost-prohibitive. We provide comprehensive solutions that enable
financial advisors at these institutions to offer financial
advice.
|
|
|
|
Ability to Profitably Serve the Mass-Affluent
Market. Since inception, our core focus has
been on advisors who serve the mass-affluent market. We have
designed and integrated all aspects of our platforms and
services to profitably meet the needs of these advisors. We
believe there is an attractive opportunity in the mass-affluent
market, in part because wirehouses have not historically focused
on the mass affluent market. We believe our scale position will
sustain and strengthen our competitive advantage in the
mass-affluent market.
|
|
|
|
Ability to Serve a Broad Range of Advisor
Models. As a result of our integrated
technology platform and the resulting flexibility, we are able
to attract and retain advisors from multiple channels, including
wirehouses, regional broker-dealers and other independent
broker-dealers. This platform serves a variety of independent
advisor models, including independent financial advisors, RIAs
and hybrid-RIAs. Additionally, we are able to give our advisors
flexibility in choosing how they conduct their business. This
enables us to better retain our existing advisor base by
facilitating their ability to transition among independent
advisor models as preferences evolve within the market. In
addition, although we have grown through our focus on the mass
affluent market, the breadth of our platform has facilitated
growing penetration of the high net worth market. As of
March 31, 2010 our advisors supported accounts with more
than $1 million in assets that in the aggregate represented
$42.2 billion in advisory and brokerage assets, or 15% of
our total. Although our advisors average production is typically
below that of some of the wirehouse channel firms, our array of
integrated technology and services supports advisors with
significant production. In the 2010 rankings of the Top
1,000 Financial Advisors in Barrons survey,
thirty-one of our advisors appeared in the top 1,000 and three
in the top 100. In addition, we ranked fifth in the number of
advisors included in the ranking.
|
|
|
|
Experienced and Committed Senior Management
Team. We have an experienced and committed
senior management team that provides stable and long-standing
leadership for our business. On average, our senior management
has 26 years of industry experience. The team has a track
record of success as demonstrated in the companys
financial performance through the recent market downturn. As the
current management team has played a significant role in
building out the business, they have a fundamental understanding
of the operations from the ground up. The management team is
aligned with stockholders and holds significant equity ownership
in the company.
|
Our Sources of
Growth
We expect to increase our revenue and profitability by
benefiting from favorable industry trends and by executing
strategies to accelerate our growth beyond that of the broader
markets in which we operate.
Favorable
Industry Trends
|
|
|
|
|
Growth in Investable Assets. According
to Cerulli Associates, total assets under management in the
United States is anticipated to grow at 7% per year over the
next 4 years
|
83
|
|
|
|
|
and retirement assets are expected to grow 8% from 2008 to 2014
(in part due to the retirement of the baby boomer generation and
the resulting assets which are projected to flow out of
retirement plans and into individual retirement accounts). In
addition, individual retirement account rollovers are projected
to double, growing from $3.6 trillion as of 2008 to
$6.8 trillion by 2014.
|
|
|
|
|
|
Increasing Demand for Independent Financial
Advice. Retail investors, particularly in the
mass affluent market, are increasingly seeking financial advice
from independent sources. We are highly focused on helping
independent advisors meet the needs of the mass-affluent market,
which constitutes a significant portion of investable assets,
according to Cerulli Associates, and we believe presents
significant opportunity for growth.
|
|
|
|
Advisor Migration to
Independence. Independent channels are
gaining market share from captive channels. We believe that we
are not just a beneficiary of this secular shift, but an active
catalyst in the movement to independence.
|
|
|
|
Macroeconomic Trends. As the
macroeconomic environment continues to stabilize, we anticipate
an appreciation in asset prices and a rise in interest rates
from current, historically low levels. We expect that our
business will benefit from growth in advisory and brokerage
assets as well as increasing asset-based and cash sweep fees.
|
LPL-Specific
Growth Opportunities
|
|
|
|
|
Attracting New Advisors to Our
Platform. We intend to grow the number of
advisors either independent or with financial
institutions who are served by our platform. Based
on the number of financial advisors, we have only 3.8% market
share of the approximately 310,000 financial advisors in the
United States, according to Cerulli Associates, and we have the
ability to attract seasoned advisors of any practice size and
from any channel, including wirehouses, regional broker-dealers
and other independent broker-dealers. Additionally, we are able
to support a wide range of business models, including
independent financial advisors, RIAs and hybrid-RIAs. This
flexibility drives sustainable growth in new advisors who seek
to transfer to our platform. We also expect to significantly
expand our developing share of the RIA market.
|
|
|
|
Ramp-up
of Newly-Attracted Advisors. We predominately
attract experienced advisors who have established practices. In
our experience, it takes an average of three years for newly
hired advisors to re-establish their practices and associated
revenues. This seasoning process creates accelerated growth of
revenue from new advisors.
|
|
|
|
Increasing Productivity of Existing Advisor
Base. The productivity of advisors increases
over time as we enable them to add new clients, gain shares of
their clients investable assets, and expand their existing
practices with additional advisors. We facilitate these
productivity improvements by helping our advisors better manage
their practices in an increasingly complex environment.
|
|
|
|
Our Business Model has Inherent Economies of
Scale. The largely fixed costs necessary to
support our advisors delivers higher marginal profitability as
client assets and revenue grow. Historically, this dynamic has
been demonstrated through the growth in our operating margins.
|
|
|
|
Opportunistic Pursuit of
Acquisitions. We have a proven history of
expanding our business through opportunistic acquisitions. In
the past six years, we have successfully completed four
transactions. Our scalable business model and operating platform
make us an attractive acquirer in a fragmented market.
|
84
Competition
We believe we offer a unique and dedicated value proposition to
independent financial advisors and financial institutions who
are focused primarily on mass affluent investors. This value
proposition is built upon the delivery of our services through
our scale, independence and integrated technology, which we
believe is not replicated in the industry, and as a result we do
not have any direct competitors to our business model. For
example, because we do not have any proprietary manufacturing
products, we do not view firms that manufacture asset management
products and other financial products as competitors.
We compete to attract and retain experienced and productive
advisors with a variety of financial firms. Within the
independent channel, the industry is highly fragmented,
comprised primarily of small regional firms that rely on
third-party custodians and technology providers to support their
operations. Within the captive wirehouse channel, which tends to
consist of large nationwide firms with multiple lines of
business, competitors include Morgan Stanley Smith Barney LLC;
Merrill Lynch, Pierce, Fenner, & Smith Incorporated; UBS
Financial Services Inc.; Wells Fargo Advisors, LLC; who
typically focus on the highly competitive high net worth
investor market. Competition for advisors also includes regional
firms, such as Edward D. Jones & Co., L.P. and Raymond
James Financial Services, Inc.. RIAs, who are licensed directly
with the SEC and not through a broker-dealer, select third-party
firms for custodial services, and competitors include Charles
Schwab & Co. and Fidelity Brokerage Services LLC.
Our competitors who do not offer a complete solution for
advisors are frequently enabled by third-party firms. Pershing
LLC, a subsidiary of Bank of New York Mellon, offers custodial
services to independent firms who are not self-clearing and to
RIAs. Other examples include Albridge Solutions, a subsidiary of
PNC Financial Services LLC, Advent Software, Inc. and
Morningstar, Inc., who provide an array of technology and
research resources.
Our advisors compete for clients with financial advisors of
brokerage firms, banks, insurance companies, asset management
and investment advisory firms. In addition, they also compete
with a number of firms offering direct to investor on-line
financial services and discount brokerage services, such as
Charles Schwab & Co. and Fidelity Brokerage Services LLC.
Employees
As of March 31, 2010, we had 2,480 full-time
employees. None of our employees are subject to collective
bargaining agreements governing their employment with us. Our
continued growth is dependent, in part, on our ability to
recruit and retain skilled technical sales and professional
personnel. We believe that our relationship with our employees
is strong.
Our Corporate
Structure
LPL Investment Holdings Inc. is the parent company of our
collective businesses. Our original broker-dealer, LPL
Financial, was formed in 1989. In 2005, investment funds
affiliated with the Majority Holders acquired a majority
ownership stake in LPL Investment Holdings Inc., with the
remaining interest owned primarily by our founders, senior
management and advisors.
In recent years we have grown our business through a number of
opportunistic acquisitions. We strengthened our position as a
leading independent broker-dealer through our acquisition of
Pacific Select Group, LLC (renamed LPL Investment Advisory
Services Group, LLC) and the Affiliated Entities in 2007.
In September of 2009, we consolidated the operations of the
Affiliated Entities with those of LPL Financial. The
consolidation involved the transfer of securities licenses of
certain registered representatives associated with the
Affiliated Entities and their client accounts. Following the
completion of these transfer activities, the registered
representatives and client accounts that transferred are now
associated with LPL Financial.
85
Our acquisitions of UVEST and IFMG in 2007 further expanded our
reach in offering financial services through banks, savings and
loan institutions and credit unions nationwide.
Our subsidiary, Independent Advisers Group Corporation
(IAG), offers an investment advisory solution to
insurance companies to support their financial advisors who are
licensed with them. Our subsidiary, LPLIA, operates as a
brokerage general agency which offers life, long-term care and
disability insurance sales and services. Through our subsidiary
PTC we offer trust, investment management and custodial services
for estates and families.
Regulation
The financial services industry is subject to extensive
regulation by U.S. federal and state regulatory agencies
and securities exchanges and by
non-U.S. government
agencies or regulatory bodies and securities exchanges. We take
an active leadership role in the development of the rules and
regulations that govern our industry. Given the recent turmoil
in the financial services industry, we anticipate continued
heightened scrutiny and significant modifications in these rules
and regulations. We strive to be at the forefront of influencing
this change. Throughout our history we have also invested
heavily, with the benefit of our scale, in our compliance
functions to monitor our compliance with the numerous legal and
regulatory requirements applicable to our business.
Broker-Dealer
Regulation
LPL Financial, our wholly owned subsidiary, is a registered
broker-dealer with the SEC, a member of FINRA, a member of
various self-regulatory organizations and a participant in
various clearing organizations including The Depository
Trust Company, the National Securities Clearing Corporation
and the Options Clearing Corporation. LPL Financial is
registered as a broker-dealer in each of the 50 states, the
District of Columbia, Puerto Rico and the U.S. Virgin
Islands.
Our subsidiaries UVEST, MSC, Associated and WFG are also
registered broker-dealers with the SEC, and are members of
FINRA. Similar to LPL Financial, UVEST conducts business on a
national basis; however it acts as an introducing firm, using a
third-party firm for securities clearing and custody functions.
Prior to the consolidation of the Affiliated Entities, each
broker-dealer also conducted business on a national basis as an
introducing firm, using a third-party firm for securities
clearing and custody functions.
Broker dealers are subject to rules and regulations covering all
aspects of the securities business, including sales and trading
practices, public offerings, publication of research reports,
use and safekeeping of clients funds and securities,
capital adequacy, recordkeeping and reporting, and the conduct
of directors, officers and employees. Broker dealers are also
regulated by state securities administrators in those
jurisdictions where they do business. Compliance with many of
the rules and regulations applicable to us involves a number of
risks because rules and regulations are subject to varying
interpretations. Regulators make periodic examinations and
review annual, monthly and other reports on our operations,
track record and financial condition. Violations of rules and
regulations governing a broker dealers actions could
result in censure, penalties and fines, the issuance of
cease-and-desist
orders, the suspension or expulsion from the securities industry
of such broker dealer or its officers or employees, or other
similar adverse consequences. The rules of the Municipal
Securities Rulemaking Board, which are enforced by FINRA, apply
to the municipal securities activities of LPL Financial, UVEST,
MSC, Associated and WFG.
Our margin lending is regulated by the Federal Reserve
Boards restrictions on lending in connection with client
purchases and short sales of securities, and FINRA rules also
require such subsidiaries to impose maintenance requirements on
the value of securities contained in margin accounts. In many
cases, our margin policies are more stringent than these rules.
86
Investment
Adviser Regulation
As investment advisers registered with the SEC, our subsidiaries
LPL Financial, UVEST, the Affiliated Entities, and IAG are
subject to the requirements of the Investment Advisers Act of
1940, as amended, and the SECs regulations thereunder, as
well as to examination by the SECs staff. Such
requirements relate to, among other things, fiduciary duties to
clients, performance fees, maintaining an effective compliance
program, solicitation arrangements, conflicts of interest,
advertising, limitations on agency cross and principal
transactions between the advisor and advisory clients,
recordkeeping and reporting requirements, disclosure
requirements and general anti-fraud provisions. In addition,
certain of our subsidiaries are subject to ERISA, and
Sections 4975(c)(1)(A), (B), (C) or (D) of the
Internal Revenue Code, and to regulations promulgated
thereunder, insofar as they are a fiduciary under
ERISA with respect to benefit plan clients or otherwise deal
with benefit plan clients. ERISA and applicable provisions of
the Internal Revenue Code, impose certain duties on persons who
are fiduciaries under ERISA, prohibit certain transactions
involving ERISA plan clients (including, without limitation,
employee benefit plans (as defined in Section 3(3) of
ERISA), individual retirement accounts and Keogh plans) and
provide monetary penalties for violations of these prohibitions.
The SEC is authorized to institute proceedings and impose
sanctions for violations of the Advisers Act, ranging from fines
and censure to termination of an investment advisers
registration. Investment advisers also are subject to certain
state securities laws and regulations. Non-compliance with the
Advisers Act or other federal and state securities laws and
regulations could result in investigations, sanctions,
disgorgement, fines or other similar consequences.
Commodities
and Futures Regulation
LPL Financial is licensed as a futures commission merchant
(FCM) and commodity pool operator with the CFTC and
is a member of the NFA. Although licensed as a FCM and a
commodity pool operator, LPL Financials futures activities
are limited to conducting business as a guaranteed introducing
broker. LPL Financial is regulated by the CFTC and NFA.
Violations of the rules of the CFTC and the NFA could result in
remedial actions including fines, registration terminations or
revocations of exchange memberships. As a guaranteed introducing
broker, LPL Financial clears commodities and futures products
through ADM Investor Services International Limited
(ADM), and all commodities accounts and related
client positions are held by ADM.
Trust Regulation
Through our subsidiary PTC we offer trust, investment management
and custodial services for estates and families. PTC is
chartered as a non-depository national banking association. As a
limited purpose national bank, PTC is regulated and regularly
examined by the OCC. PTC files reports with the OCC within
30 days after the conclusion of each calendar quarter.
Because the powers of PTC are limited to providing fiduciary
services and investment advice, it does not have the power or
authority to accept deposits or make loans. For this reason,
trust assets under PTCs management are not insured by the
FDIC.
As PTC is not a bank as defined under the Bank
Holding Company Act of 1956, neither its parent, PTC Holdings,
Inc., nor PTC is regulated by the Board of Governors of the
Federal Reserve System as a bank holding company. However,
because it is subject to regulation by the OCC, PTC is subject
to various laws and regulations enforced by the OCC, such as
capital adequacy, change of control restrictions and regulations
governing fiduciary duties, conflicts of interest, self-dealing
and anti-money laundering. For example, the Change in Bank
Control Act, as implemented by OCC supervisory policy, imposes
restrictions on parties who wish to acquire a controlling
interest in a trust company or the holding company of a trust
company such as LPL Investment Holdings Inc. In general, an
acquisition of 10% or more of our common stock, or an
acquisition of control as defined in OCC
regulations, would require OCC approval. These laws and
regulations are designed to serve
87
specific bank regulatory and supervisory purposes and are not
meant for the protection of PTC, LPL or its stockholders.
Regulatory
Capital
The SEC, FINRA, OCC, CFTC and the NFA have stringent rules and
regulations with respect to the maintenance of specific levels
of net capital by regulated entities. Generally, a
broker-dealers net capital is net worth plus qualified
subordinated debt less deductions for certain types of assets.
The net capital rule under the Exchange Act requires that at
least a minimum part of a broker-dealers assets be
maintained in a relatively liquid form. Because we are a
guaranteed introducing broker for commodities and futures that
is also a registered broker-dealer, CFTC rules require us to
comply with higher net capital requirements of the net capital
rule under the Exchange Act.
The SEC, FINRA and CFTC impose rules that require notification
when net capital falls below certain predefined criteria. These
rules also dictate the ratio of debt to equity in the regulatory
capital composition of a broker-dealer, and constrain the
ability of a broker-dealer to expand its business under certain
circumstances. If a broker-dealer fails to maintain the required
net capital, it may be subject to suspension or revocation of
registration by the applicable regulatory agency, and suspension
or expulsion by these regulators ultimately could lead to the
broker-dealers liquidation. Additionally, the net capital
rule and certain FINRA rules impose requirements that may have
the effect of prohibiting a broker-dealer from distributing or
withdrawing capital, and that require prior notice to the SEC
and FINRA for certain capital withdrawals. All of our
subsidiaries that are subject to net capital rules have been,
and currently are, in compliance with those rules and have net
capital in excess of the minimum requirements.
Anti-Money
Laundering
The USA PATRIOT Act of 2001 (the PATRIOT Act)
contains anti-money laundering and financial transparency laws
and mandates the implementation of various regulations
applicable to broker-dealers, FCMs and other financial services
companies. Financial institutions subject to the PATRIOT Act
generally must have anti-money laundering procedures in place,
implement specialized employee training programs, designate an
anti-money laundering compliance officer and are audited
periodically by an independent party to test the effectiveness
of compliance. We have established policies, procedures and
systems designed to comply with these regulations.
Privacy
Regulatory activity in the areas of privacy and data protection
continues to grow worldwide and is generally being driven by the
growth of technology and related concerns about the rapid and
widespread dissemination and use of information. We must comply
with these information-related regulations, including, but not
limited to, the 1999 Gramm-Leach-Bliley Act, SEC
Regulation S-P,
the Fair Credit Reporting Act of 1970, as amended, and the 2003
Fair and Accurate Credit Transactions Act, to the extent they
are applicable to us.
Trademarks
LPL
Financial®,
LPL®,
LPL Career
Match®,
the LPL Financial logo, LPL Partners
Program®,
Integrated Advisory
Services®,
Manager Access
Select®,
OMP®
and
BranchNet®
are our registered trademarks. Applications for registered
trademarks are pending for DO IT SMARTER and Manager Access
Network.
Service360tm,
LPL Financial
AdvisorFirsttm,
ClientsFirsttm,
LPL Financial
RolloverNettm
and LPL
Accounttm
are unregistered trademarks that we use as well.
Properties
Our corporate offices are located in Boston, Massachusetts where
we lease approximately 36,000 square feet of space under a
lease agreement that expires on June 30, 2012, and
88
approximately 21,000 square feet of space under a lease
agreement that expires on May 31, 2013, in San Diego,
California where we lease approximately 407,000 square feet
of space under lease agreements that expire starting on
May 31, 2012, and Charlotte, North Carolina where we lease
a total of approximately 238,000 square feet of space under
lease agreements expiring on November 30, 2016 and
February 28, 2017.
Our subsidiary PTC, located in Cleveland, Ohio, leases
approximately 6,000 square feet of space under a lease
agreement that expires on March 31, 2012.
Our subsidiary UVEST, located in Charlotte, North Carolina,
leases approximately 42,000 square feet of space under a
lease agreement that expires on December 31, 2013, all of
which has been vacated. In 2009, UVEST moved into our corporate
headquarters in Charlotte, North Carolina.
Our subsidiary MSC leases approximately 38,000 square feet
of space in West Palm Beach, Florida under a lease agreement
that expires February 28, 2018, included in this amount is
approximately 25,000 square feet of vacated space.
Our subsidiary WFG leases approximately 17,000 square feet
of space in Itasca, Illinois under a lease agreement that
expires June 30, 2016.
Our subsidiary AFG leases approximately 24,000 square feet
of space in El Segundo, California under a lease agreement that
expires February 14, 2012, included in this amount is
approximately 22,000 square feet of vacated space.
We own approximately 4.5 acres of land in San Diego.
We believe that our existing properties are adequate for the
current operating requirements of our business and that
additional space will be available as needed.
Legal
Proceedings
We are presently and regularly involved in legal proceedings in
the ordinary course of our business, including lawsuits,
arbitration claims, regulatory
and/or
governmental subpoenas, investigations and actions, and other
claims. Many of our legal proceedings are initiated by our
advisors clients and involve the purchase or sale of
investment securities.
In connection with various acquisitions, and under the
applicable purchase and sale agreement, we have received
third-party indemnification for certain legal proceedings and
claims. These matters have been defended and paid directly by
the indemnifying party. On October 1, 2009, our subsidiary,
LPL Holdings, Inc. (LPLH), received written notice
from a third-party indemnitor under a certain purchase and sale
agreement asserting that it is no longer obligated to indemnify
the company for certain claims under the provisions of the
purchase and sale agreement. We believe that this assertion is
without merit and we have commenced litigation to enforce our
indemnity rights.
We believe, based on the information available at this time,
after consultation with counsel, consideration of insurance, if
any, and the indemnifications provided by the third-party
indemnitors, notwithstanding the assertions by an indemnifying
party noted in the preceding paragraph, that the outcome of such
matters will not have a material adverse impact on our business,
results of operations, cash flows or financial condition.
We cannot predict at this time the effect that any future legal
proceeding will have on our business. Given the current
regulatory environment and our business operations throughout
the country, it is likely that we will become subject to further
legal proceedings. Our ultimate liability, if any, in connection
with any future such matters is uncertain and is subject to
contingencies not yet known.
89
MANAGEMENT
Executive
Officers and Directors
The following table sets forth the name, age and position of
each of our executive officers and directors as of July 1,
2010:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Mark S. Casady
|
|
|
49
|
|
|
Chief Executive Officer and Chairman of the Board
|
Esther M. Stearns
|
|
|
50
|
|
|
President and Chief Operating Officer
|
Robert J. Moore
|
|
|
48
|
|
|
Chief Financial Officer
|
William E. Dwyer
|
|
|
52
|
|
|
Managing Director, President National Sales and
Marketing
|
Denise M. Abood
|
|
|
48
|
|
|
Managing Director, Human Capital
|
Dan H. Arnold
|
|
|
45
|
|
|
Managing Director and Divisional President, Institution Services
|
Stephanie L. Brown
|
|
|
57
|
|
|
Managing Director, General Counsel
|
Jonathan G. Eaton
|
|
|
51
|
|
|
Managing Director, Custom Clearing Services
|
Christopher F. Feeney
|
|
|
54
|
|
|
Managing Director, Chief Information Officer
|
Mark R. Helliker
|
|
|
47
|
|
|
Managing Director, Broker-Dealer Support Services
|
John J. McDermott
|
|
|
53
|
|
|
Managing Director, Chief Risk Officer
|
James S. Putnam
|
|
|
55
|
|
|
Director, Vice-Chairman
|
Richard W. Boyce
|
|
|
56
|
|
|
Director(3)
|
John J. Brennan
|
|
|
55
|
|
|
Director(1)
|
Erik D. Ragatz
|
|
|
37
|
|
|
Director
|
James S Riepe
|
|
|
67
|
|
|
Director(1)(2)(3)
|
Richard P. Schifter
|
|
|
57
|
|
|
Director(2)
|
Jeffrey E. Stiefler
|
|
|
63
|
|
|
Director(1)
|
Allen R. Thorpe
|
|
|
39
|
|
|
Director(2)(3)
|
|
|
|
(1) |
|
Member of Audit Committee. |
|
(2) |
|
Member of Nominating and Governance Committee. |
|
(3) |
|
Member of Compensation Committee. |
Executive
Officers
Mark S.
Casady Chief Executive Officer, Director and
Chairman of the Board Since 2005
Mr. Casady is chairman of the board of directors and our
chief executive officer. He joined us in May 2002 as chief
operating officer, became our president in April 2003, and
became our chief executive officer and chairman in December
2005. Before joining our firm, Mr. Casady was managing
director, mutual fund group for Deutsche Asset Management,
Americas formerly Scudder Investments. He joined
Scudder in 1994 and held roles as managing director
Americas; head of global mutual fund group and head of defined
contribution services. He was also a member of the Scudder,
Stevens and Clark Board of Directors and Management Committee.
He is former chairman and a current board member of the Insured
Retirement Institute and serves on FINRAs board of
governors. Mr. Casady received his B.S. from Indiana
University and his M.B.A. from DePaul University.
90
Mr. Casadys pertinent experience, qualifications,
attributes and skills include his:
|
|
|
|
|
unique perspective and insights into our operations as our
current chairman and chief executive officer, including
knowledge of our business relationships, competitive and
financial positioning, senior leadership, and strategic
opportunities and challenges;
|
|
|
|
operating, business, and management experience as chief
executive officer and
|
|
|
|
expertise in the financial industry, underscored by his current
role as a member of the board of governors of FINRA and a member
of the board of the Insured Retirement Institute.
|
Esther M.
Stearns President and Chief Operating
Officer
Ms. Stearns has been our president since March 2007 and our
chief operating officer since September 2004. She joined us in
July 1996 as chief information officer. Today, Ms. Stearns
is responsible for oversight of our Broker/Dealer Support
Services, Business Technology Services and Custom Clearing
Services business units, in addition to several Corporate Shared
Services areas, such as Corporate Communication, Human Capital,
Strategic Planning and Sponsor Relations. Prior to joining us,
she was vice president of information systems at Charles
Schwab & Co., Inc., where she worked for 14 years
in a variety of leadership roles. She received her B.A. from the
University of Chicago.
Robert J.
Moore Chief Financial Officer
Mr. Moore joined us in September 2008 as chief financial
officer. He is responsible for formulating financial policy and
planning as well as ensuring the effectiveness of the financial
functions within our firm. He also has oversight of our research
and risk management functions. From
2006-2008,
Mr. Moore served as chief executive officer and chief
financial officer at ABN AMRO North America and LaSalle
Bank Corporation. Before this role, Mr. Moore worked for
Diageo PLC, Europe and Great Britain, in a number of finance
management positions, ultimately serving as chief financial
officer. Mr. Moore has a B.B.A. in finance from the
University of Texas, Austin and a M.M. in finance, marketing and
international business from Northwestern University and is a
Chartered Financial Analyst (CFA).
William E.
Dwyer Managing Director, President
National Sales and Marketing
Mr. Dwyer has served as managing director,
president National Sales and Marketing since
September 2009. He joined us in July 1992 and became managing
director, branch development in January 2004, managing director,
national sales in July 2005, and managing director, president of
Independent Advisor Services in February 2007. Mr. Dwyer is
responsible for the management, satisfaction, retention and
recruitment of our advisors. Mr. Dwyer serves as vice chair
of the Financial Services Institute Board of Directors. He is
also a member of the boards of directors of the Securities
Industry and Financial Markets Association and serves on its
Private Client Services Executive Committee. He received his
B.A. from Boston College.
Denise M.
Abood Managing Director, Human Capital
Ms. Abood has served as managing director since January
2008 and the leader of our Human Capital group since January
2007. In this role, she is responsible for several functions
critical to our firm, including organizational development and
training, human resources, employee recruiting, compensation and
benefits, real estate and facilities, payroll and mail services.
Ms. Abood was formerly chief financial officer for UVEST
(prior to our acquisition of UVEST) where she also led the UVEST
Mortgage Company. Prior to joining UVEST, from
1998-2002,
she held two roles at Wachovia Bank, initially as the chief
financial officer for capital markets services and then as head
of the technology business office. Ms. Abood holds a B.B.A.
from Wittenberg University.
91
Dan H.
Arnold Managing Director and Divisional President,
Institution Services
Mr. Arnold serves as managing director and divisional
president of our Institution Services business since June 2007.
He is responsible for new business development and business
consulting, as well as for Insurance Associates Incorporated,
which provides insurance solutions for our firm. Mr. Arnold
joined our firm in January 2007 following our acquisition of
UVEST. Prior to joining us, Mr. Arnold worked at UVEST for
13 years, serving most recently as president and chief
operating officer. Mr. Arnold is a graduate of Auburn
University and holds an M.B.A. in finance from Georgia State
University.
Stephanie L.
Brown Managing Director, General
Counsel
Ms. Brown joined us in August 1989 and has been responsible
for the Legal Department throughout her tenure. From 1989 to
2004, Ms. Brown was also responsible for our Compliance
organization. Ms. Brown is currently serving as a member of
FINRAs National Adjudicatory Councils Statutory
Disqualification Committee and also as a member of FINRAs
Independent Broker/Dealer and Membership Committees, the SIFMA
Private Client Legal Committee, and the IRI Government Relations
Committee. Ms Brown is also a member representative of the
Financial Services Roundtable as well as a member of the
Financial Services Roundtables Lawyers Council, the
Regulatory Oversight Committee, and the Securities Working
Group. Prior to joining us, Ms. Brown was an associate
attorney with the law firm of Kelley Drye & Warren in
Washington, D.C., specializing in corporate and securities
law. Ms. Brown received her B.A. cum laude from Bryn
Mawr College and her J.D. from the Catholic University of
America.
Jonathan G.
Eaton Managing Director, Custom Clearing
Services
Mr. Eaton joined us in June 1997 and became managing
director, Custom Clearing Services in January 2008. He is also
responsible for our Sponsor Relations Group and The Private
Trust Company, N.A. Prior to this position, Mr. Eaton
served as our executive vice president of product marketing.
Before joining us, Mr. Eaton spent 14 years at MFS
Investment Management. His positions at MFS included national
account management, corporate marketing, product development,
and market research. Mr. Eaton attended the University of
Maine.
Christopher F.
Feeney Managing Director, Chief Information
Officer
Mr. Feeney joined us in January 2008 as chief information
officer and managing director for the Business Technology
Services business unit. Mr. Feeney is responsible for
enhancing the technology offerings and support we provide to our
advisors and their clients. From
2005-2007,
Mr. Feeney was global managing director of wealth
management at Thomson Financial. Mr. Feeney was chief
executive officer of Telerate, Inc., from July 2003 until its
sale to Reuters in December 2004. He holds a B.A. in literature
from the State University of New York, Oneonta, and completed
the Securities Industry Institute at the Wharton School.
Mark R.
Helliker Managing Director, Broker-Dealer Support
Services
Mr. Helliker joined us in July 2008 as managing director of
Broker/Dealer Support Services. He is responsible for the
day-to-day
management of operations for advisors and new-advisor
transitions, as well as for enhancing the financial professional
experience. Prior to joining us, Mr. Helliker worked at
Charles Schwab for 10 years, most recently as senior vice
president of Charles Schwab Institutional. Mr. Helliker has
a B.A. in political science from the University of Portsmouth in
England and an M.B.A. in management from San Diego State
University.
John J.
McDermott Managing Director, Chief Risk
Officer
Mr. McDermott joined us in July 2009 as managing director
and chief risk officer. In this role, he is focused on
optimizing resources dedicated to risk and compliance across our
firm, building
92
consistency, and continuing to strengthen all teams with a
holistic and strategic approach. Prior to joining us,
Mr. McDermott worked for 35 years at Merrill Lynch,
where he held a series of leadership roles including global head
of compliance and internal audit. Mr. McDermott has a B.A.
from Wesleyan University and a J.D. from Rutgers University.
Directors
James S.
Putnam, Director and Vice Chairman of the Board Since
2005
Mr. Putnam has been chief executive officer of Global
Portfolio Advisors (GPA) since September 2004.
He has served on the board of directors of GPA since 1998, and
has been director and vice chairman since December 2005. Prior
to his tenure with GPA, Mr. Putnam was employed by LPL
Financial beginning in 1983 where he held several positions,
culminating in managing director of national sales, responsible
for branch development, recruitment, retention and management of
LPL Financial advisors. He was also responsible for marketing
and all product sales. Mr. Putnam began his securities
career as a retail representative with Dean Witter Reynolds in
1979. Mr. Putnam received a B.A. Law Enforcement
Administration from Western Illinois University.
Mr. Putnams pertinent experience, qualifications,
attributes and skills include his:
|
|
|
|
|
unique current and historical perspective and insights into our
operations as our current Vice Chairman and our former managing
director of national sales;
|
|
|
|
operating, business and management experience as a current chief
executive officer at GPA and
|
|
|
|
expertise in the financial industry and deep familiarity with
our advisors.
|
Richard W.
Boyce, Director Since 2009
Mr. Boyce has been a partner at TPG Capital since 1997. He
founded and leads TPG Capitals Operating Group, which
drives performance improvement across all TPG Capital companies.
In his first role with TPG Capital, he served as chief executive
officer of J. Crew Group, Inc., from 1997 to 1999, and as a
board member from 1997 to 2006. He became chairman of Burger
King Corporation in 2002 and serves on that board today. Prior
to joining TPG Capital, Mr. Boyce was employed by PepsiCo.
Inc. from 1992 to 1997, including as senior vice president of
operations for Pepsi-Cola North America. He has previously
served on the boards of directors of several other TPG Capital
companies, including Del Monte Foods, ON Semiconductor and Gate
Gourmet. Mr. Boyce received a B.S.E. from Princeton
University in 1976 and received his M.B.A. from the Stanford
Graduate School of Business in 1980.
Mr. Boyces pertinent experience, qualifications,
attributes and skills include his:
|
|
|
|
|
high level of financial, operating and management experience,
gained through his roles as chief executive officer of J. Crew
Group, Inc. and as chairman of the board of directors of Burger
King Corporation;
|
|
|
|
high level of financial literacy gained through his investment
experience as a partner at TPG Capital and
|
|
|
|
knowledge and experience gained through service on the board of
other public companies.
|
John J.
Brennan, Director Since 2010
Mr. Brennan is chairman emeritus and senior advisor of The
Vanguard Group, Inc. Mr. Brennan joined Vanguard in July
1982. He was elected president in 1989, served as chief
executive officer from 1996 to 2008 and chairman of the board
from 1998 to 2009. Mr. Brennan is chairman of the Financial
Accounting Foundation; a governor of FINRA; a director of the
United Way of Southeastern Pennsylvania and a trustee of the
University of Notre Dame and King Abdullah University of
93
Science and Technology. He graduated from Dartmouth College
and received his M.B.A. from the Harvard Business School. He has
received honorary degrees from Curry College and Drexel
University.
Mr. Brennans pertinent experience, qualifications,
attributes and skills include his:
|
|
|
|
|
high level of financial literacy and operating and management
experience, gained through his roles as chief executive officer
and as chairman of the board of directors of The Vanguard Group,
Inc. and through his service with the Financial Accounting
Foundation and
|
|
|
|
expertise in the financial industry, underscored by his current
role as a member of the board of governors of FINRA.
|
Erik D.
Ragatz, Director Since 2009
Mr. Ragatz is a managing director at Hellman &
Friedman LLC. His primary areas of focus are the
energy/industrials, financial services and healthcare
industries. He is a director of Sheridan Holdings, Inc. and
Goodman Global, Inc., where he serves as chairman of the board.
Mr. Ragatz was formerly a Director of Texas Genco LLC. He
was also active in Hellman & Friedman LLCs
investments in Arch Capital Group Ltd., Digitas, Inc.,
Gaztransport et Technigaz S.A.S. and Nasdaq Stock Market LLC.
Prior to joining Hellman & Friedman LLC in 2001,
Mr. Ragatz was employed by Bain Capital in Boston and
Sydney, Australia. Previously he worked as a management
consultant for Bain & Company in San Francisco.
Mr. Ragatz graduated from Stanford University where he was
elected to Phi Beta Kappa. He earned an M.B.A. from the Stanford
Graduate School of Business.
Mr. Ragatzs pertinent experience, qualifications,
attributes and skills include his:
|
|
|
|
|
high level of financial literacy gained through his investment
experience as a managing director at Hellman &
Friedman LLC and
|
|
|
|
experience on other company boards and board committees,
including his role as chairman of the board at Goodman Global,
Inc.
|
James S.
Riepe, Director Since 2008
Mr. Riepe is a senior advisor and retired vice chairman of
the board of directors of T. Rowe Price Group, Inc.
(TRP), where he worked for nearly 25 years.
Previously, he served on TRPs management committee;
oversaw TRPs mutual fund activities, and served as
chairman of the T. Rowe Price Mutual Funds. He served as
chairman of the board of governors of the Investment Company
Institute and was a member of the board of governors of the
National Association of Securities Dealers (now FINRA) and
chaired its Investment Companies Committee. Mr. Riepe is a
member of the board of directors of The NASDAQ OMX Group,
Genworth Financial Inc., UTI Asset Management Company of India,
and the Baltimore Equitable Society. He also served as chairman
of the board of trustees of the University of Pennsylvania from
which he earned a B.S. and an M.B.A.
Mr. Riepes pertinent experience, qualifications,
attributes and skills include his:
|
|
|
|
|
high level of financial literacy and operating and management
experience, gained through his executive management positions
and role as chairman of the board of directors of T. Rowe Price
Group, Inc.;
|
|
|
|
expertise in the financial industry, underscored by his
35 years of experience in investment management and his
prior roles as a member of the board of governors of FINRA and
as chairman of the board of governors of the Investment Company
Institute and
|
|
|
|
knowledge and experience gained through service on the board of
other public companies.
|
94
Richard P.
Schifter, Director Since 2005
Mr. Schifter has been a partner at TPG Capital since 1994.
Prior to joining TPG Capital, Mr. Schifter was a partner at
the law firm of Arnold & Porter in
Washington, D.C., where he specialized in bankruptcy law
and corporate restructuring. He joined Arnold & Porter
in 1979 and was a partner from 1986 through 1994.
Mr. Schifter currently serves on the boards of directors of
American Beacon Advisors, Inc., Republic Airways, Bristol Group,
Ariel Reinsurance Company Ltd., EverBank Financial Corp., and
Youth, I.N.C. (Improving Non-profits for Children) and on the
board of overseers of the University of Pennsylvania Law School.
Mr. Schifter received a B.A. from George Washington
University in 1975 and graduated from the University of
Pennsylvania Law School in 1978.
Mr. Schifters pertinent experience, qualifications,
attributes and skills include his:
|
|
|
|
|
high level of financial literacy gained through his investment
experience as a partner at TPG Capital;
|
|
|
|
experience on other company boards and board committees and
|
|
|
|
nearly 15 years of experience as a corporate attorney with
an internationally-recognized law firm.
|
Jeffrey E.
Stiefler, Director Since 2006
Mr. Stiefler serves as a venture partner for Emergence
Capital Partners, as chairman of Touch Commerce and Logic Source
and as a director of Verifone and Taleo. Previously, he was
chairman, CEO and president of Digital Insight from 2003 through
2007. From 1995 to 2003, Mr. Stiefler served as an advisor
to two private equity firms, McCown DeLeeuw and Company and
North Castle Partners. He also served as vice-chairman of Walker
Digital Corporation and was a director of Education Lending
Group. Prior to 1995, Mr. Stiefler was president and a
director of American Express Company and president and CEO of
IDS Financial Services Corporation (which became American
Express Financial Advisors and then Ameriprise). Previously, he
held leadership positions with Citicorp and Boise Cascade
Corporation. Mr. Stiefler served as director or trustee of
a number of philanthropic institutions, including The Salk
Institute, Minnesota Business Partnership, Minneapolis Symphony
and Carlson School of Management. He received his B.A. from
Williams College and M.B.A. from the Harvard Business School.
Mr. Stieflers pertinent experience, qualifications,
attributes and skills include his:
|
|
|
|
|
high level of financial literacy and operating and management
experience, gained through his roles as chief executive officer,
advisor and director of various corporations and
|
|
|
|
expertise in the financial industry, underscored by his
experience as president and director of American Express Company
and president and chief executive officer of IDS Financial
Services Corporation.
|
Allen R.
Thorpe, Director Since 2005
Mr. Thorpe is a managing director of Hellman &
Friedman LLC and leads Hellman & Friedman LLCs
New York office. His primary areas of focus are financial
services and healthcare. He is a director of Emdeon Inc.,
Sheridan Holdings, Inc. and Mondrian Holdings Ltd., and is a
member of the advisory board of Grosvenor Capital Management
Holdings, LLLP and Artisan Partners Holdings LP. He was formerly
a director of portfolio companies Gartmore Investment Management
Limited, Mitchell International, Vertafore Inc. and Activant
Solutions, Inc. Prior to joining Hellman & Friedman
LLC in 1999, Mr. Thorpe was a vice president with Pacific
Equity Partners and a manager at Bain & Company.
Mr. Thorpe graduated from Stanford University and earned an
M.B.A. from the Harvard Business School where he was a Baker
Scholar.
95
Mr. Thorpes pertinent experience, qualifications,
attributes and skills include his:
|
|
|
|
|
high level of financial literacy gained through his investment
experience as a managing director at Hellman &
Friedman LLC and
|
|
|
|
knowledge and experience gained through service on the boards of
other public companies including those in the financial services
sector.
|
Code of
Ethics
We have adopted a Code of Ethics that applies to, among others,
our principal executive officer, principal financial officer,
and principal accounting officer or controller, or persons
performing similar functions. Copies of our Code of Ethics are
available, free of charge, by writing to us at the following
address:
LPL Investment Holdings Inc.
One Beacon Street
Boston, MA 02108
Our Code of Ethics will be available on our website at
www.lpl.com. If we make any substantive amendments to, or grant
any waivers from, the code of ethics for any director or
officer, we will disclose the nature of such amendment or waiver
on our website or in a current report on
Form 8-K.
Board Composition
and Director Independence
Our business and affairs are managed under the direction of the
board of directors. Our board of directors is currently composed
of nine directors. Under our certificate of incorporation that
will be in effect upon the completion of this offering, the
authorized number of directors may be changed only by resolution
of the board of directors, provided that until the Majority
Holders cease collectively to beneficially own 40% or more of
the outstanding shares of common stock, the number of directors
shall not be increased without, in addition to any other vote
otherwise required by law, the affirmative vote or written
consent of at least 60% of the outstanding shares of common
stock. At each annual meeting of stockholders, commencing with
the meeting in 2011, the directors will be elected to serve
until the earlier of their death, resignation or removal, or
until their successors have been elected and qualified.
Vacancies and newly-created directorships on the board may be
filled by the remaining directors, and until the Majority
Holders cease collectively to beneficially own 40% or more of
the outstanding shares of common stock, vacancies on the board
may also be filled by holders of a majority of the outstanding
shares of common stock.
Currently, each director is elected for a one-year term. Our
certificate of incorporation that will become effective upon the
closing of this offering provides that at the first annual
meeting after the first date on which the Majority Holders cease
to beneficially own at least 40% of the outstanding shares of
common stock, the Board shall be divided into three classes with
staggered three-year terms.
For as long as the Majority Holders continue to own beneficially
40% or more of the outstanding shares of common stock, directors
may be removed with or without cause by holders of a majority of
the outstanding shares of common stock. Following the first time
when the Majority Holders cease collectively to beneficially own
at least 40% of the outstanding shares of common stock and our
Board is divided into three classes as described above, our
directors may be removed only for cause by the affirmative vote
of the holders of at least two-thirds of the voting power of our
outstanding shares of capital stock entitled to vote generally
in the election of directors, voting together as a single class.
The listing standards of the NASDAQ Global Select Market require
that, subject to specified exceptions, each member of a listed
companys audit, compensation and governance and nominating
committees be independent and that audit committee members also
satisfy independence criteria set forth in
Rule 10A-3
under the Exchange Act. In addition to complying with all of the
independence criteria set forth in
Rule 10A-3
under the Exchange Act, Rule 5605(a)(2) of the listing rules of
the NASDAQ Global Select Market further provides that a director
will only qualify as an independent
96
director if, in the opinion of that companys board
of directors, that person does not have a relationship that
would interfere with the exercise of independent judgment in
carrying out the responsibilities of a director.
We expect that, following this offering, Messrs. Putnam,
Boyce, Brennan, Ragatz, Riepe, Schifter, Stiefler and Thorpe
will be independent directors under the applicable rules of the
SEC and the NASDAQ Global Select Market. Messrs. Riepe,
Stiefler and Brennan are also independent directors as such term
is defined in
Rule 10A-3(b)(1)
under the Exchange Act. In accordance with listing standards of
the NASDAQ Global Select Market, a majority of our directors are
independent.
Board
Committees
Upon the completion of this offering, we will have an audit
committee (the Audit Committee), a compensation
committee (the Compensation Committee) and a
nominating and corporate governance committee (the
Nominating and Governance Committee) with the
composition and responsibilities described below. The members of
each committee are appointed by the board of directors and serve
until their successor is elected and qualified, unless they are
earlier removed or resign. In addition, from time to time,
special committees may be established under the direction of the
board of directors when necessary to address specific issues.
Audit
Committee
Following the offering, the Audit Committee will be composed of
the following members: James Riepe, Jeffrey Stiefler and John
Brennan. Mr. Brennan will serve as the Chairperson of the
Audit Committee.
Each member of our Audit Committee is independent under the
listing standards of the NASDAQ Global Select Market and under
Rule 10A-3
of the Exchange Act. None of the directors on our Audit
Committee is or has been an employee of ours or any of our
subsidiaries. None of our Audit Committee members simultaneously
serves on the audit committees of more than three public
companies, including ours. All members of our Audit Committee
meet the requirements for financial literacy and are able to
read and understand fundamental financial statements, including
the companys balance sheet, income statement and cash flow
statement. Our board will determine which member of our Audit
Committee qualifies as an audit committee financial expert under
the applicable requirements of the rules and regulations of the
SEC.
Our Audit Committee will be responsible for, among other things:
|
|
|
|
|
selecting the independent auditors;
|
|
|
|
pre-approving all audit engagement fees and terms, as well as
audit and permitted non-audit services to be provided by the
independent auditors;
|
|
|
|
at least annually, obtaining and reviewing a report of the
independent auditors describing the audit firms internal
quality-control procedures and any material issues raised by its
most recent review of internal quality controls;
|
|
|
|
annually evaluating the qualifications, performance and
independence of the independent auditors;
|
|
|
|
discussing the scope of the audit and any problems or
difficulties;
|
|
|
|
setting policies regarding the hiring of current and former
employees of the independent auditors;
|
|
|
|
reviewing and discussing the annual audited and quarterly
unaudited financial statements and Managements
Discussion and Analysis of Financial Conditions in Results of
Operations with management and the independent auditor;
|
|
|
|
discussing types of information to be disclosed in earnings
press releases and provided to analysts and rating agencies;
|
97
|
|
|
|
|
discussing policies governing the process by which risk
assessment and risk management is to be undertaken;
|
|
|
|
reviewing disclosures made by the chief executive officer and
chief financial officer regarding any significant deficiencies
or material weaknesses in our internal control over financial
reporting;
|
|
|
|
reviewing internal audit activities and qualifications of the
internal audit function;
|
|
|
|
establishing procedures for receipt, retention and treatment of
complaints received by us regarding accounting, auditing or
internal controls and the submission of anonymous employee
concerns regarding accounting and auditing;
|
|
|
|
discussing with our general counsel legal matters that could
reasonably be expected to have a material impact on business or
financial statements;
|
|
|
|
|
|
approving all related person transactions;
|
|
|
|
|
|
periodically reviewing and reassessing the Audit Committee
charter;
|
|
|
|
providing information to our board of directors that may be
relevant to the annual evaluation of performance and
effectiveness of the board of directors and its
committees and
|
|
|
|
preparing the report required by the SEC to be included in our
annual report on
Form 10-K
or our proxy or information statement.
|
The Audit Committee has authority under its charter to obtain
advice and assistance from outside legal counsel, accounting, or
other outside advisors as deemed appropriate to perform its
duties and responsibilities. A copy of the charter will be
available on our website at www.lpl.com.
Nominating and
Governance Committee
Upon completion of this offering, the Nominating and Governance
Committee of our board of directors will consist initially of
James Riepe, Richard Schifter and Allen Thorpe.
Mr. Schifter will serve as Chairperson of the Nominating
and Governance Committee. All members will be independent under
the listing standards of the NASDAQ Global Select Market.
The Nominating and Governance Committee will be responsible for
and oversee:
|
|
|
|
|
recruiting and retention of qualified persons to serve on our
board of directors;
|
|
|
|
proposing such individuals to the board of directors for
nomination for election as directors;
|
|
|
|
evaluating the performance, size and composition of our board of
directors and
|
|
|
|
compliance activities.
|
Prior to the consummation of this offering, our board of
directors will adopt a written charter under which the
Nominating and Governance Committee will operate. A copy of the
charter will be available on our website at www.lpl.com.
Compensation
Committee
Upon completion of this offering, our Compensation Committee
will be composed of the following members: Richard Boyce, James
Riepe and Allen Thorpe. Mr. Thorpe will serve as the
Chairperson of the Compensation Committee. Our board of
directors has affirmatively determined that each member meets
the definition of independent director under the
listing requirements of the Nasdaq Global Select Market.
98
The Compensation Committee is responsible for:
|
|
|
|
|
reviewing and approving corporate and individual goals and
objectives relevant to executive officer compensation and
evaluating the performance of executive officers in light of the
goals and objectives;
|
|
|
|
reviewing and approving executive officer compensation;
|
|
|
|
reviewing and approving the chief executive officers
compensation based upon the Compensation Committees
evaluation of the chief executive officers performance;
|
|
|
|
making recommendations to the board of directors regarding the
adoption of new incentive compensation and equity-based plans,
and administering our existing incentive compensation and
equity-based plans;
|
|
|
|
making recommendations to the board of directors regarding
compensation of the board members and its committee members;
|
|
|
|
reviewing and discussing with management the compensation
discussion and analysis to be included in our filings with the
SEC and preparing an annual compensation committee report for
inclusion in our annual proxy statement;
|
|
|
|
reviewing and approving generally any significant non-executive
compensation and benefits plans;
|
|
|
|
reviewing our significant policies, practices and procedures
concerning human resource-related matters and
|
|
|
|
overseeing any other such matters as the board of directors
shall deem appropriate from time to time.
|
The Compensation Committee has authority under its charter to
access such internal and external resources, including retaining
legal, financial, or other advisors, as the Compensation
Committee deems necessary or appropriate to fulfill its
responsibilities. A copy of the charter will be available on our
website at www.lpl.com.
Risk
Management
We have established various committees of the board of directors
to manage the risks associated with our business. Our Audit
Committee was established for the primary purpose of overseeing
(i) the integrity of our consolidated financial statements,
(ii) our compliance with legal and regulatory requirements
that may impact our consolidated financial statements or
financial operations, (iii) the independent auditors
qualifications and independence and (iv) the performance of
our independent auditor and internal audit function. Our
Compensation Committee was established for the primary purpose
of (i) overseeing our efforts to attract, retain and
motivate members of our senior management team in partnership
with the chief executive officer, (ii) to carry out the
boards overall responsibility relating to the
determination of compensation for all executive officers,
(iii) to oversee all other aspects of our compensation and
human resource policies and (iv) to oversee our management
resources, succession planning and management development
activities. We also have established a Risk Oversight Committee
comprised of a group of senior executives to oversee the
management of our business risks.
In addition to various committees, we have written policies and
procedures that govern the conduct of business by our advisors,
our employees, our relationship with clients and the terms and
conditions of our relationships with product manufacturers. Our
client and advisor policies address the extension of credit for
client accounts, data and physical security, compliance with
industry regulation and codes of ethics to govern employee and
advisor conduct among other matters.
99
Compensation
Committee Interlocks and Insider Participation
No member of the Compensation Committee is or has been an
officer or employee of ours or any of our subsidiaries. None of
our executive officers serves or has served as a member of the
board of directors, compensation committee or other board
committee performing equivalent functions of any entity that has
one or more executive officers serving as one of our directors
or on our Compensation Committee.
100
EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
Overview and
Philosophy
The executive compensation program for our named executive
officers generally is designed to closely align their interests
with those of our stockholders on both a short-term and
long-term basis, and to attract and retain key executives
critical to our success. That alignment has been achieved
principally by ensuring that a significant portion of
compensation is directly related to the financial strength and
sustainability of our firm. We believe that this philosophy of
seeking to align the interests of our executive management with
those of stockholders has been a key contributor to the growth
and successful performance of our firm.
In addressing compensation, the Compensation Committee attempts
to balance short-term and long-term components to properly
reward performance, encourage retention and align executive pay
with that of executives at comparable companies in our industry.
The elements of our executive compensation program are base
salary, annual cash bonus, and a long-term equity incentive
program. In setting executive compensation levels, consideration
is given to the totality of the compensation rather than
individual elements.
Total executive compensation, including equity-based
compensation, is highly dependent on performance, experience,
responsibility and our financial results. A significant portion
of each executives compensation is variable and directly
dependent upon performance against pre-determined corporate
goals.
Role of
Compensation Committee
Our Compensation Committee is composed entirely of independent
directors under the listing rules of the NASDAQ Global Select
Market and is responsible for establishing and overseeing our
compensation philosophy and our executive compensation policies
and programs. Our Compensation Committee reviews and approves
the total compensation payable to each member of the executive
management committee. The Compensation Committees charter
sets forth the Compensation Committees responsibilities.
The Compensation Committee recommends any revisions to such
charter to the board of directors for approval.
Role of
Executive Officers
Our chief executive officer annually reviews the individual
performance of each of his direct reports, including the other
named executive officers, and provides the Compensation
Committee with evaluations of each such direct report as well as
recommendations regarding such persons base salary level,
annual cash bonus, and long term equity award. Our chief
executive officer and our managing director, human capital
attend Compensation Committee meetings (although they leave the
meetings during discussions of compensation actions affecting
them personally) and assist the Compensation Committee in
determining the final compensation levels for our named
executive officers.
Role of
Compensation Consultants
In establishing total target compensation levels for our
executive officers, the Compensation Committee determines the
ranges of market compensation that it believes will enable us to
effectively compete for and retain high performing, qualified
executives. During 2009, Hewitt Associates and McLagan Inc.
(together, the Compensation Consultants) were
engaged by the company to provide executive compensation
consulting services to the Compensation Committee and management.
The Compensation Consultants provided us with a review of
executive compensation based on a select group of financial
services companies with similar operating characteristics and
market
101
capitalization to us, which we refer to as our peer group. We
do not tie total compensation, which consists of base salary,
annual bonus and long-term equity, or individual elements of
compensation to a specific percentile of compensation of our
peer group. Rather, we use information for our peer group to
provide us with insight on market compensation practices and
program designs with respect to base salary and short- and
long-term incentives for companies comparable to us. The
analysis provided showed that the total compensation for each of
our named executive officers for our 2009 fiscal year is below
the 60th percentile of data from companies in our peer group.
This data is one factor used by the Compensation Committee when
approving compensation for our named executive officers. The
companies within our peer group consist of:
|
|
|
Ameriprise Financial, Inc.
|
|
Jeffries Group, Inc.
|
Automatic Data Processing, Inc.
|
|
Knight Capital Group, Inc.
|
Broadridge Financial Solutions, Inc.
|
|
MF Global Holdings Ltd
|
Charles Schwab & Co., Inc.
|
|
National Financial Partners Corp.
|
DST Systems, Inc.
|
|
Penson Worldwide, Inc.
|
E*Trade Financial Corp.
|
|
Raymond James Financial, Inc.
|
Fidelity National Information Systems
|
|
SEI Investments Company
|
Fiserv, Inc.
|
|
Stifel Financial Corp.
|
GFI Group Inc.
|
|
TD Ameritrade Inc.
|
Investment Technology Group, Inc.
|
|
Waddell & Reed Inc.
|
As companies comprising our peer group change due to merger,
acquisition, market capitalization or business model, the
Compensation Committee will consider appropriate changes to the
group. Our goal is to ensure that we continue to measure our
compensation practices against organizations from which we may
recruit key executives, or otherwise consider as important
benchmarks in our industry.
Base
Salary
We believe that the base salary element is required in order to
provide our named executive officers with a stable income stream
that is commensurate with their responsibilities and the
competitive market conditions. The base salaries of the named
executive officers are set based on the responsibilities of the
individual, taking into account the individuals skills,
experience, prior compensation levels, and market compensation
for our peer group. We review base salary for the named
executive officers annually.
Bonus
We establish annual cash bonus opportunities for our named
executive officers based on proposed goals, prior compensation
levels, and market compensation for comparable positions within
our peer group. We believe that these cash bonuses provide a
significant incentive to our named executive officers to work
towards achieving our company objectives as they are tied to
certain of our key performance measures. These cash bonuses are
discretionary as to the amount, timing, and conditions, subject
to the terms of the plan under which they are awarded and the
named executive officers employment agreement. For 2009,
cash bonuses were issued to Mr. Casady and Ms. Stearns
pursuant to our LPL Investment Holdings Inc. and Affiliates 2009
Corporate Executive Bonus Plan. The other named executive
officers received cash bonuses in 2009 from our general employee
bonus pool. In 2010, we expect to grant cash bonuses to our
named executive officers under the LPL Investment Holdings Inc.
and Affiliates Corporate Executive Bonus Plan and our general
employee bonus pool.
Our Compensation Committee evaluates our cash bonus award
opportunities with the goal of setting the total target
compensation opportunity for each named executive officer at a
level the Compensation Committee believes represents the value
the named executive officer contributes to our success, based on
his or her performance, and maintains a competitive position
with our peer group.
102
Our bonus awards tie a significant portion of the overall
compensation of each named executive officer to key corporate
objectives and stated financial goals of our company, which are
established annually. We determine whether the target bonuses
are paid based on the companys performance and
profitability. We have the discretion, subject to the terms of
the various bonus awards and applicable employment agreements,
to pay bonuses below the established amounts.
For the year ended December 31, 2009, the target dollar
amount for the annual cash bonus for each of our named executive
officers, based on 100% achievement of the metric targets
discussed below, were as follows:
|
|
|
|
|
Mark S. Casady, Chairman and Chief Executive Officer
|
|
$
|
1,226,500
|
|
Esther M. Stearns, President and Chief Operating Officer
|
|
$
|
591,250
|
|
Robert J. Moore, Chief Financial Officer
|
|
$
|
350,000
|
|
William E. Dwyer, President, National Sales and Marketing
|
|
$
|
288,750
|
|
Stephanie L. Brown, Managing Director, General Counsel
|
|
$
|
187,000
|
|
Our chief executive officer met with the Compensation Committee
in February 2010 to discuss our actual achievement compared to
our 2009 corporate objectives. The Compensation Committee
determined that the 2009 metric targets were exceeded and
awarded cash bonuses for each named executive officer in the
following amounts:
|
|
|
|
|
Mark S. Casady, Chairman and Chief Executive Officer
|
|
$
|
1,500,000
|
|
Esther M. Stearns, President and Chief Operating Officer
|
|
$
|
650,000
|
|
Robert J. Moore, Chief Financial Officer
|
|
$
|
350,000
|
|
William E. Dwyer, President, National Sales and Marketing
|
|
$
|
450,000
|
|
Stephanie L. Brown, Managing Director, General Counsel
|
|
$
|
300,000
|
|
This determination was based on an analysis of the factors set
forth in the table below.
|
|
|
Strategic Objectives
|
|
Performance
|
|
Achieve $353.4 million in Adjusted EBITDA
|
|
Adjusted EBITDA of $356.1 million achieved
|
|
|
|
Articulate an overarching service philosophy to
improve support to advisors
|
|
Succeeded in improving and articulating service
philosophy to our advisors
|
|
|
|
Increase the likelihood that our advisors will
recommend us to other advisors through a measurable process
|
|
Successfully utilized a methodology to measure the
likelihood that our advisors will recommend us to other advisors
|
|
|
|
Deliver programs to increase accuracy, quality and
accountability in broker-dealer support services
|
|
Successfully delivered programs increasing accuracy,
quality and accountability in broker-dealer support services
|
|
|
|
Maintain SOX compliance and enhance existing risk
management programs
|
|
Improved SOX compliance processes and enhanced risk
management programs
|
The Compensation Committee granted cash bonuses for certain of
our named executive officers in 2009 that exceeded their
original target dollar amounts. This decision was made based on
the fact that we achieved each of our strategic objectives. In
particular, the Compensation Committee felt that additional cash
bonus compensation was warranted because we achieved Adjusted
EBITDA of $356.1 million, the highest level of Adjusted
EBITDA in our history, in a particularly challenging fiscal
period.
The metrics used to determine corporate performance may vary
from
year-to-year
as our strategy and plans change. For 2010, the financial
performance metric used for determining bonus payments will be
Adjusted EBITDA.
103
Long-Term
Equity Incentive Program
The purpose of our Long-Term Equity Incentive Program is to
retain key executives and incentivize achievement of goals that
drive long-term stockholder value. We provide stock-based,
long-term compensation for named executive officers through our
stockholder-approved equity plans. Stock options entitle the
holder to purchase during a specified time period, a fixed
number of shares of our common stock at a set price. The plans
provide for stock options and other types of awards, including
cash, which vest over a period determined by the Compensation
Committee.
The named executives officers currently have awards outstanding
under the 2005 Stock Option Plan for Non-Qualified Stock
Options, the 2005 Stock Option Plan for Incentive Stock Options
and the 2008 Stock Option Plan (the Current Plans).
By the terms of the Current Plans, no new awards may be granted
following an initial public offering.
To replace the Current Plans, we adopted, effective upon
completion of the initial public offering, an omnibus equity
incentive plan (the EIP) that will permit the
granting of various types of awards to our key employees,
directors, consultants and our advisors. Types of awards that
may be granted are: stock options, stock appreciation rights,
restricted stock, unrestricted stock, stock units, restricted
stock units, performance awards, cash awards and other awards
that are convertible into or otherwise based on stock.
The Compensation Committee, acting upon the recommendation of
our chief executive officer, determines the number of options to
be issued to each named executive officer. The grants are not
calculated based on a fixed formula but instead are determined
based on the subjective judgment of the Compensation Committee
in reviewing several factors. For 2009, stock options were
issued to our named executive officers to reward their
contributions to the company, to incentivize their future
performance and as a retention mechanism. In particular, our
chief financial officer received a special grant of
80,000 options with a three year cliff vesting provision to
encourage his continued commitment to the company and to further
align his equity holdings with those of the other named
executive officers. In addition, Mr. Moore exchanged
$550,000 of his guaranteed bonus for the 2009 fiscal year for
50,000 options, also with a three year cliff vesting
provision. Finally, our Compensation Committee reviewed past
equity grants to each named executive officer to maintain
consistency with past practice.
162(m)
Policy
Prior to the consummation of this offering, we have been subject
to the limits on deductibility of compensation set forth in
Section 162(m) of the Internal Revenue Code.
Section 162(m) denies publicly-held companies a tax
deduction of annual compensation in excess of $1 million
paid to their chief executive officer or any of their three
other most highly compensated executive officers (other than the
chief financial officer) employed on the last day of a given
year, unless their compensation is based on qualified
performance criteria. Subject to certain transition rules, to
qualify for deductibility, these criteria must be established by
a committee of independent directors and approved, as to their
material terms, by that companys stockholders. We intend
to structure our bonus and long-term equity incentive programs
so that they qualify as performance-based compensation under
Section 162(m). However, our Compensation Committee may
approve compensation or changes to plans, programs or awards
that may cause the compensation or awards not to comply with
Section 162(m) if it determines that such action is
appropriate and in our best interests.
Employment
Agreements
We entered into definitive employment agreements with certain
members of senior management including Mr. Casady,
Ms. Stearns, Mr. Dwyer, and Ms. Brown (the
Current Agreements). These employment agreements
were executed in connection with the acquisition of our Company
by investment funds affiliated with the Majority Holders in
December 2005. These agreements had an
104
initial term of three years and automatically renew for
subsequent one-year terms unless we provide written notice
within 90 days prior to the completion of the then-current
term.
The Current Agreements required us to adopt option plans under
which our employees are eligible to receive awards of stock
options for our common stock. See Long-Term
Equity Incentive Program.
Mr. Casadys Current Agreement also provides that we
will take steps to ensure that he is elected to and remains a
member of the board of directors and, at least until the
completion of this offering, the chairman of the board of
directors.
We expect to amend and restate the Current Agreements and enter
into a new employment agreement with Mr. Moore, each of
which will be effective upon completion of the initial public
offering (the New Agreements). The New Agreements
will have a three-year term (five years in the case of
Mr. Casady) with automatic annual renewal unless we provide
notice of non-renewal within 90 days prior to the
completion of the then-current term. In addition to the other
terms of his New Agreement, set forth below, we have agreed in
Mr. Casadys New Agreement to take steps to ensure
that Mr. Casady is elected to and remains a member of the
board of directors and, for so long as the company is a
controlled company under the listing standards of the NASDAQ
Global Select Market, is chairman of the board of directors.
Employment
Arrangements with Named Executive Officers
Base
Salaries
Mr. Casady, Ms. Stearns, Mr. Moore,
Mr. Dwyer, and Ms. Brown receive an annual base salary
for the 2010 fiscal year of no less than $800,000, $625,000,
$600,000, $500,000, and $375,000, respectively. Both the Current
Agreements and New Agreements provide that each such executive
officer is entitled to participate in the bonus plan that we may
establish from time to time and in our equity incentive plans.
Intellectual
Property, Confidentiality, and Non-Compete Clauses
The Current Agreements with Mr. Casady, Ms. Stearns,
Mr. Dwyer, and Ms. Brown require each of them to
promptly disclose and assign any individual rights that he or
she may have in any intellectual property (including concepts
and business opportunities) to us. The executive officers must
also maintain confidentiality of all information that is
confidential and proprietary to us, subject to customary
exceptions. Under a non-compete provision, they may not engage
in prohibited competitive conduct for a period of two years
following termination of the employment agreement for cause,
without cause, for good reason or in the event of termination
for retirement or disability. The executive officers may not
engage in prohibited competitive conduct for a period of one
year following the termination of the employment agreement for
other than good reason, unless the Company elects to pay
severance, in which case the applicable period is two years.
This non-compete period is reduced to 18 months in the
event of a termination as a result of which the executive
officer is entitled to a severance payment calculated with a
severance multiplier of 1.5. During this time, these executive
officers (i) may not engage or participate in, directly or
indirectly, any business or entity which is competitive with us,
(ii) will refrain from soliciting existing and prospective
targets, suppliers, advisors or employees to terminate their
relationship with us and (iii) will refrain from diverting,
or attempting to divert, from us or any of our subsidiaries any
of our advisors, targets, suppliers or employees.
Under a non-compete provision of the New Agreements,
Ms. Stearns, Mr. Moore, Mr. Dwyer, and
Ms. Brown may not engage in prohibited competitive conduct
for a period of:
|
|
|
|
|
twenty-four months in the event of termination without cause or
for good reason during the initial term;
|
|
|
|
|
|
twenty-four months in the event of termination for cause,
retirement or disability;
|
|
|
|
|
|
eighteen months in the event of nonrenewal of the employment
agreement;
|
105
|
|
|
|
|
eighteen months in the event of termination without cause or for
good reason during renewal periods and
|
|
|
|
|
|
twelve months in the event of voluntary termination without good
reason, unless the Company elects to pay severance, in which
case the applicable period is twenty-four months.
|
Under the New Agreement, Mr. Casady may not engage in
prohibited competitive conduct for a period of:
|
|
|
|
|
twelve months in the event of termination without cause
(including non-renewal), for good reason, for cause, as a result
of retirement, or as a result of disability and
|
|
|
|
|
|
twelve months in the event of voluntary termination without good
reason, unless the Company elects to pay severance, in which
case the applicable period is twenty-four months.
|
Severance and
Change-in-Control
Payments
Under the terms of the Current Agreements and the New Agreements
with the named executive officers, we may be obligated to make
severance payments following the termination of their
employment. These benefits are described below under
Potential Payments upon Termination or
Change-in-Control.
We, however, have no obligation to grant the executive officer
any
gross-up
or other make-whole compensation for any tax imposed
on payments made to the executive officers, including
parachute payments. Under the New Agreements,
severance payable following a change in control would be subject
to a modified golden parachute cutback provision pursuant to
which excess parachute payments would be reduced to the extent
such reduction would result in greater after-tax benefits.
Nonqualified
Deferred Compensation
On November 19, 2008, we established an unfunded, unsecured
deferred compensation plan to permit holders of stock options
issued under the 2005 Stock Option Plan for Incentive Stock
Options and 2005 Stock Option Plan for Non-Qualified Stock
Options that were expiring in 2009 and 2010 to receive stock
units of the 2008 Nonqualified Deferred Compensation Plan. Stock
units represent the right to receive one share of common stock
upon distribution. Distribution will occur at the earliest of
(a) a date in 2012 to be determined by the board of
directors; (b) a change in control of the company; or
(c) death or disability of the participant. The issuance of
stock units, which occurred in December 2008, is not taxable for
federal and state income tax purposes until the participant
receives a distribution under the deferred compensation plan.
401(k)
Plan
We maintain a retirement savings plan, or a 401(k) Plan, for the
benefit of all eligible employees, including our named executive
officers (on the same basis as all eligible employees). Under
the terms of the 401(k) Plan, employees may elect to make tax
deferred compensation up to the statutorily prescribed limit.
After one year of service, we match contributions in an amount
equal to the lesser of (a) 20% of the amount designated by
the employee for withholding and (b) 2% of the
employees eligible compensation (the Employer
Match). An employees interests in his or her
deferrals are 100% vested when contributed. The 401(k) Plan is
intended to qualify under Sections 401(a) and 501(a) of the
Internal Revenue Code. As such, contributions to the 401(k) Plan
and earnings on those contributions are not taxable to the
employees until distributed from the 401(k) Plan, and all
contributions are deductible by us when made. We provide this
benefit to all of our eligible employees, and it is provided to
our named executive officers on the same basis as all other
eligible employees.
Effective January 1, 2009, we suspended the employer match.
However, in January 2010, the Compensation Committee approved a
special employer match (calculated as described above) to be
applied to all eligible contributions for calendar year 2009
pursuant to the terms of the 401(k) Plan. In addition, in March
2010, the Employer Match was reinstated retroactive to
January 1, 2010.
106
Compensation of
Named Executive Officers
The tables in the following sections of this proxy statement
provide information required by the SEC regarding compensation
paid to or earned by our named executive officers. The footnotes
to these tables provide important information to explain the
values presented in the tables and are an important part of our
disclosures.
Summary
Compensation Table
The following table sets forth information concerning the total
compensation for the years ended December 31, 2007, 2008,
and 2009 for the persons who serve as the chief executive
officer, chief financial officer, and the other three most
highly compensated executive officers of our company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonqualified
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
Option
|
|
Incentive Plan
|
|
Compensation
|
|
All Other
|
|
|
|
|
|
|
Salary
|
|
Bonus
|
|
Awards
|
|
Awards
|
|
Compensation
|
|
Earnings
|
|
Compensation
|
|
Total
|
Name and Principal Position
|
|
Year
|
|
($)(1)
|
|
($)(2)
|
|
($)
|
|
($)(3)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
Mark S. Casady
|
|
|
2009
|
|
|
|
800,000
|
|
|
|
1,500,000
|
|
|
|
|
|
|
|
1,414,440
|
|
|
|
|
|
|
|
|
|
|
|
10,738
|
(4)
|
|
|
3,725,178
|
|
Chairman; CEO
|
|
|
2008
|
|
|
|
800,000
|
|
|
|
1,032,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,707
|
(5)
|
|
|
1,843,449
|
|
|
|
|
2007
|
|
|
|
761,923
|
|
|
|
2,230,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,438
|
(6)
|
|
|
3,003,361
|
|
Robert J. Moore
|
|
|
2009
|
|
|
|
600,000
|
|
|
|
350,000
|
|
|
|
|
|
|
|
2,215,413
|
|
|
|
|
|
|
|
|
|
|
|
157,668
|
(7)
|
|
|
3,323,081
|
|
CFO
|
|
|
2008
|
|
|
|
198,077
|
|
|
|
378,910
|
|
|
|
|
|
|
|
1,352,352
|
|
|
|
|
|
|
|
|
|
|
|
27,236
|
(8)
|
|
|
1,956,575
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Esther M. Stearns
|
|
|
2009
|
|
|
|
625,000
|
|
|
|
650,000
|
|
|
|
|
|
|
|
942,960
|
|
|
|
|
|
|
|
|
|
|
|
9,922
|
(9)
|
|
|
2,227,882
|
|
President, COO
|
|
|
2008
|
|
|
|
531,250
|
|
|
|
497,846
|
|
|
|
|
|
|
|
783,200
|
|
|
|
|
|
|
|
|
|
|
|
5,912
|
(10)
|
|
|
1,818,208
|
|
|
|
|
2007
|
|
|
|
425,000
|
|
|
|
1,075,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,137
|
(11)
|
|
|
1,503,137
|
|
William E. Dwyer
|
|
|
2009
|
|
|
|
450,000
|
|
|
|
450,000
|
|
|
|
|
|
|
|
589,350
|
|
|
|
|
|
|
|
|
|
|
|
10,673
|
(12)
|
|
|
1,500,023
|
|
Managing Director, President National
|
|
|
2008
|
|
|
|
450,000
|
|
|
|
243,134
|
|
|
|
|
|
|
|
342,650
|
|
|
|
|
|
|
|
|
|
|
|
10,913
|
(13)
|
|
|
1,046,697
|
|
Sales and Marketing
|
|
|
2007
|
|
|
|
408,500
|
|
|
|
600,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110,817
|
(14)
|
|
|
1,119,317
|
|
Stephanie L. Brown(15)
|
|
|
2009
|
|
|
|
355,000
|
|
|
|
300,000
|
|
|
|
|
|
|
|
471,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,126,480
|
|
Managing Director,
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Counsel
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes the dollar value of base salary earned by each named
executive officer. |
|
(2) |
|
Includes the dollar value of bonus earned by each named
executive officer. |
|
(3) |
|
The amounts in this column reflect the aggregate grant date fair
value of option awards granted to our named executive officers
in fiscal 2009. We use the Black-Scholes option pricing model to
estimate our compensation cost for stock option awards. For a
description of the assumptions used in determining grant date
fair value, see Note 15 to our consolidated financial
statements included elsewhere in this prospectus. |
|
(4) |
|
Includes automobile lease payments and related expenses and
securities commissions. |
|
(5) |
|
Includes automobile lease payments and related expenses and
securities commissions. |
|
(6) |
|
Includes automobile lease payments and related expenses and
securities commissions. |
|
(7) |
|
Includes $156,548, the aggregate incremental cost of taxable
relocation expenses and $1,021, the aggregate incremental cost
relating to automobile lease payments and related expenses. |
|
(8) |
|
Includes $26,891, the aggregate incremental cost of taxable
relocation expenses and $345, the aggregate incremental cost
relating to automobile lease payments and related expenses. |
|
(9) |
|
Includes automobile lease payments and related expenses,
securities commissions and for medical taxable fringe benefits. |
|
(10) |
|
Includes automobile lease payments and related expenses, medical
taxable fringe benefits and securities commissions. |
107
|
|
|
(11) |
|
Includes automobile lease payments and related expenses and
securities commissions. |
|
(12) |
|
Includes automobile lease payments and related expenses and
securities commissions. |
|
(13) |
|
Includes automobile lease payments and related expenses and
securities commissions. |
|
(14) |
|
Includes $10,242, the aggregate incremental cost relating to
automobile lease payments and related expenses, $100,000, the
aggregate incremental cost for relocation payment and $575, the
aggregate incremental cost in securities commissions. |
|
(15) |
|
Ms. Brown was not a named executive officer in 2008 or
2007. Her compensation is therefore only disclosed for the year
ended December 31, 2009. |
Grants of
Plan-Based Awards
We have provided the following Grants of Plan-Based Awards table
to provide additional information about stock awards granted to
our named executive officers during the year ended
December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
|
|
|
|
|
|
|
|
|
Awards:
|
|
|
|
Grant Date Fair
|
|
|
|
|
Securities
|
|
Exercise or Base
|
|
Value of
|
|
|
|
|
Underlying
|
|
Price of Option or
|
|
Stock and
|
|
|
Grant
|
|
Options
|
|
Stock Awards ($/Sh)
|
|
Option Awards
|
Name
|
|
Date
|
|
(#)(1)
|
|
(2)
|
|
(3)
|
|
Mark S. Casady
|
|
|
9/14/2009
|
|
|
|
120,000
|
|
|
$
|
22.08
|
|
|
$
|
1,414,440
|
|
Robert J. Moore
|
|
|
6/12/2009
|
|
|
|
130,000
|
|
|
$
|
19.74
|
|
|
$
|
1,272,453
|
|
|
|
|
9/14/2009
|
|
|
|
80,000
|
|
|
$
|
22.08
|
|
|
$
|
942,960
|
|
Esther M. Stearns
|
|
|
9/14/2009
|
|
|
|
80,000
|
|
|
$
|
22.08
|
|
|
$
|
942,960
|
|
William E. Dwyer
|
|
|
9/14/2009
|
|
|
|
50,000
|
|
|
$
|
22.08
|
|
|
$
|
589,350
|
|
Stephanie L. Brown
|
|
|
9/14/2009
|
|
|
|
40,000
|
|
|
$
|
22.08
|
|
|
$
|
471,480
|
|
|
|
|
(1) |
|
This represents the number of stock options granted to our
executives under the 2008 Stock Option Plan. With the exception
of one of Mr. Moores grants, these awards are
scheduled to vest over a five-year period in five equal tranches
with the first tranche vesting on the first anniversary of the
grant date. Mr. Moores option award granted
June 12, 2009 is scheduled to vest completely on the third
anniversary of the grant date. |
|
|
|
(2) |
|
For a discussion of our methodology for determining the fair
value of our common stock, see Managements
Discussion and Analysis of Financial Condition
Results of Operations Critical Accounting
Policies Share Based Compensation. |
|
|
|
(3) |
|
These amounts are the grant date fair value of the stock options
as represented by the total compensation expense that will be
recognized for these awards. We use the Black-Scholes option
pricing model to estimate our compensation cost for stock option
awards. The assumptions used in the Black-Scholes model for
grants made on June 12, 2009 were: (i) an expected
life of 6.5 years for each option; (ii) dividend yield
of 0.0%; (iii) expected stock price volatility of 45.57%;
and (iv) a risk-free rate of return of 3.14%. The
assumptions used in the Black-Scholes model for grants made on
September 14, 2009 were: (i) an expected life of
6.5 years for each option; (ii) dividend yield of
0.0%; (iii) expected stock price volatility of 51.62%; and
(iv) a risk-free rate of return of 2.69%. |
108
Outstanding
Equity Awards at December 31, 2009
The following table shows information relating to unexercised
option awards for each named executive officer as of
December 31, 2009. Except as otherwise noted, awards have a
10-year term
and are scheduled to vest over a five-year period in five equal
tranches with the first tranche vesting on the first anniversary
of the grant date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
Incentive Plan
|
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Number of
|
|
Number of
|
|
Securities
|
|
|
|
|
|
|
Securities
|
|
Securities
|
|
Underlying
|
|
|
|
|
|
|
Underlying
|
|
Underlying
|
|
Unexercised
|
|
Option
|
|
|
|
|
Unexercised
|
|
Unexercised
|
|
Unearned
|
|
Exercise
|
|
Option
|
|
|
Options (#)
|
|
Options (#)
|
|
Options
|
|
Price
|
|
Expiration
|
Name
|
|
Exercisable
|
|
Unexercisable
|
|
(#)
|
|
($)
|
|
Date
|
|
Mark S. Casady
|
|
|
2,003,650
|
|
|
|
|
|
|
|
|
|
|
|
1.88
|
|
|
|
5/2/2013
|
|
|
|
|
500,910
|
|
|
|
|
|
|
|
|
|
|
|
1.35
|
|
|
|
11/30/2013
|
|
|
|
|
1,402,560
|
|
|
|
|
|
|
|
|
|
|
|
1.49
|
|
|
|
5/31/2014
|
|
|
|
|
|
|
|
|
120,000
|
|
|
|
|
|
|
|
22.08
|
|
|
|
9/14/2019
|
|
Robert J. Moore
|
|
|
24,000
|
|
|
|
96,000
|
|
|
|
|
|
|
|
26.33
|
|
|
|
9/9/2018
|
|
|
|
|
|
|
|
|
130,000
|
(1)
|
|
|
|
|
|
|
19.74
|
|
|
|
6/12/2019
|
|
|
|
|
|
|
|
|
80,000
|
|
|
|
|
|
|
|
22.08
|
|
|
|
9/14/2019
|
|
Esther M. Stearns
|
|
|
2,003,760
|
|
|
|
|
|
|
|
|
|
|
|
1.88
|
|
|
|
5/2/2013
|
|
|
|
|
16,000
|
|
|
|
64,000
|
|
|
|
|
|
|
|
27.80
|
|
|
|
2/5/2018
|
|
|
|
|
|
|
|
|
80,000
|
|
|
|
|
|
|
|
22.08
|
|
|
|
9/14/2019
|
|
William E. Dwyer
|
|
|
13,360
|
|
|
|
|
|
|
|
|
|
|
|
2.07
|
|
|
|
1/15/2012
|
|
|
|
|
554,380
|
|
|
|
|
|
|
|
|
|
|
|
1.88
|
|
|
|
5/2/2013
|
|
|
|
|
267,160
|
|
|
|
|
|
|
|
|
|
|
|
1.35
|
|
|
|
11/30/2013
|
|
|
|
|
667,920
|
|
|
|
|
|
|
|
|
|
|
|
1.49
|
|
|
|
5/31/2014
|
|
|
|
|
7,000
|
|
|
|
28,000
|
|
|
|
|
|
|
|
27.80
|
|
|
|
2/5/2018
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
22.08
|
|
|
|
9/14/2019
|
|
Stephanie L. Brown
|
|
|
3,000
|
|
|
|
12,000
|
|
|
|
|
|
|
|
27.80
|
|
|
|
2/5/2018
|
|
|
|
|
|
|
|
|
40,000
|
|
|
|
|
|
|
|
22.08
|
|
|
|
9/14/2019
|
|
|
|
|
(1) |
|
This award is scheduled to vest completely on the third
anniversary of the grant date. |
109
Options Exercised
and Stock Vested
The following table sets forth the options exercised during the
year ended December 31, 2009 relating to the named
executive officers.
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Number of
|
|
|
|
|
Shares
|
|
Value
|
|
|
Acquired on
|
|
Realized on
|
|
|
Exercise
|
|
Exercise
|
Name
|
|
(#)
|
|
($)(1)
|
|
Mark S. Casady
|
|
|
|
|
|
|
|
|
Robert J. Moore
|
|
|
|
|
|
|
|
|
Esther M. Stearns
|
|
|
|
|
|
|
|
|
William E. Dwyer
|
|
|
23,000
|
|
|
|
513,820
|
|
Stephanie L. Brown
|
|
|
64,680
|
|
|
|
1,444,951
|
|
|
|
|
(1) |
|
Amount is based on a value of $23.41 per share, which we believe
is the fair market value based on our valuation as of
December 31, 2009. |
Non-Qualified
Deferred Compensation
The following table shares information relating to non-qualified
deferred compensation stock units for each named executive
officer as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Qualified Deferred Compensation
|
|
|
For the Year Ended December 31, 2009
|
|
|
Executive
|
|
|
|
Aggregate
|
|
|
|
|
|
|
Contributions in
|
|
Registrant
|
|
Earnings in
|
|
|
|
Aggregate
|
|
|
Last Fiscal
|
|
Contributions in
|
|
Last Fiscal
|
|
Aggregate
|
|
Balance at
|
|
|
Year
|
|
Last Fiscal
|
|
Year
|
|
Withdrawals/
|
|
12/31/09
|
Name
|
|
($)
|
|
Year
|
|
($)(1)
|
|
Distributions
|
|
($)(1)
|
|
Mark S. Casady
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert J. Moore
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Esther M. Stearns
|
|
|
|
|
|
|
|
|
|
|
3,371,915
|
|
|
|
|
|
|
|
14,699,560
|
|
William E. Dwyer
|
|
|
|
|
|
|
|
|
|
|
510,922
|
|
|
|
|
|
|
|
2,227,438
|
|
Stephanie L. Brown
|
|
|
|
|
|
|
|
|
|
|
326,727
|
|
|
|
|
|
|
|
1,424,335
|
|
|
|
|
(1) |
|
Amounts included herein do not constitute above-market or
preferential earnings and therefore are not reported as
compensation in the Summary Compensation Table. |
110
Potential
Payments upon Termination or Change in Control
The following table presents, for each named executive officer,
the potential post-employment payments upon a termination or
change in control and assumes that the triggering event took
place on December 31, 2009. Set forth below the table is a
description of certain post-employment arrangements with our
named executive officers, including the severance benefits and
change-in-control
benefits to which they would be entitled under their Current
Agreements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Without Cause or for
|
|
Death and
|
|
Change-in-
|
Named Executive
Officer
|
|
Benefit
|
|
Good Reason ($)
|
|
Disability ($)
|
|
Control ($)(6)
|
|
Mark S. Casady
|
|
Severance(1)
|
|
|
4,545,000
|
|
|
|
|
|
|
|
|
|
|
|
Bonus(2)
|
|
|
|
|
|
|
2,230,000
|
|
|
|
|
|
|
|
Stock Options(3)
|
|
|
84,932,774
|
|
|
|
85,092,374
|
|
|
|
85,092,374
|
|
|
|
COBRA Reimbursement(4)
|
|
|
19,321
|
|
|
|
19,321
|
|
|
|
|
|
Esther M. Stearns
|
|
Severance(1)
|
|
|
2,550,000
|
|
|
|
|
|
|
|
|
|
|
|
Bonus(2)
|
|
|
|
|
|
|
1,075,000
|
|
|
|
|
|
|
|
Stock Options(3)
|
|
|
43,140,953
|
|
|
|
43,247,353
|
|
|
|
43,247,353
|
|
|
|
COBRA Reimbursement(4)
|
|
|
17,534
|
|
|
|
17,534
|
|
|
|
|
|
Robert J. Moore(5)
|
|
Severance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonus
|
|
|
|
|
|
|
350,000
|
|
|
|
|
|
|
|
Stock Options(3)
|
|
|
|
|
|
|
583,500
|
|
|
|
583,500
|
|
|
|
COBRA Reimbursement
|
|
|
|
|
|
|
|
|
|
|
|
|
William E. Dwyer
|
|
Severance(1)
|
|
|
1,462,500
|
|
|
|
|
|
|
|
|
|
|
|
Bonus(2)
|
|
|
|
|
|
|
525,000
|
|
|
|
|
|
|
|
Stock Options(3)
|
|
|
32,755,260
|
|
|
|
32,821,760
|
|
|
|
32,821,760
|
|
|
|
COBRA Reimbursement(4)
|
|
|
18,165
|
|
|
|
18,165
|
|
|
|
|
|
Stephanie L. Brown
|
|
Severance(1)
|
|
|
1,042,500
|
|
|
|
|
|
|
|
|
|
|
|
Bonus(2)
|
|
|
|
|
|
|
340,000
|
|
|
|
|
|
|
|
Stock Options(3)
|
|
|
|
|
|
|
53,200
|
|
|
|
53,200
|
|
|
|
COBRA Reimbursement(4)
|
|
|
19,321
|
|
|
|
19,321
|
|
|
|
|
|
|
|
|
(1) |
|
Represents payment under Current Agreements of a severance
multiplier of 1.5 times the executive officers base salary
and target bonus for the year of termination. |
|
|
|
(2) |
|
Represents payment under Current Agreements of target bonus for
the year of termination. |
|
|
|
(3) |
|
Represents exercise by executive of all vested stock options
upon termination without cause or for good reason or in case of
termination for death or disability and of all vested and
unvested stock options upon
change-in-control.
See Stock Options. Amounts are based on
a value of $23.41 per share, which we believe is the fair market
value as of December 31, 2009. |
|
|
|
(4) |
|
Represents lump sum payment under Current Agreements equal to
the costs of COBRA coverage for the executive officer and his or
her family for a one-year period. |
|
|
|
(5) |
|
Mr. Moore does not have a Current Agreement, but was
guaranteed a bonus for 2009 pursuant to his offer letter, as
amended. |
|
|
|
(6) |
|
If the executives employment with us is terminated without
cause or for good reason (as described further below) in
connection with a
change-in-control,
he or she would also be eligible for the severance and COBRA
reimbursement payments under the column titled Without
Cause or For Good Reason. |
Termination
without Cause or for Good Reason
In accordance with the Current Agreements, all compensation and
benefits shall terminate on the date of employment termination.
If a named executive officer (other than Mr. Moore who does
not have a Current Agreement) is terminated without cause or
terminates his or her employment for good
111
reason (the definition of which includes the termination
within 30 days following the first anniversary of a
change-in-control
event and our non-renewal of such employment agreement), then we
must pay the named executive officer, subject to such named
executive officers compliance with post-termination
obligations relating to confidentiality, intellectual property
and non-competition (see Employment
Agreements Employment Arrangements with Named
Executive Officers Intellectual Property,
Confidentiality and Non-Compete Clauses), an amount equal
to:
|
|
|
|
|
the named executive officers base salary and target bonus
for the year of termination (the Severance)
multiplied by 1.5;
|
|
|
|
|
|
any and all accrued but unpaid compensation, vacation and
business expenses (the Accrued Compensation);
|
|
|
|
|
|
a lump sum equal to one year of premiums (including
administrative charges) of continued health and dental plan
participation under COBRA by such executive and his or her
dependents (the COBRA Payment) and
|
|
|
|
|
|
2 years continued participation under our group life, health,
dental and vision plans in which the named executive officer was
participating immediately prior to the date of termination
(Continued Benefits Participation).
|
Cause under the Current Agreements means:
|
|
|
|
|
the intentional failure to perform his or her duties or gross
negligence or willful misconduct in the regular duties or other
breach of fiduciary duty or material breach of the employment
agreement that remains uncured after 30 days notice;
|
|
|
|
|
|
conviction of a felony; or
|
|
|
|
|
|
fraud, embezzlement or other dishonesty that has a material
adverse effect on us.
|
Change-in-control
under the Current Agreements, subject to certain exceptions,
means the consummation of:
|
|
|
|
|
any consolidation or merger of the company with or into any
other person, or any other similar transaction, whether or not
we are a party thereto, in which our stockholders immediately
prior to such transaction own directly or indirectly capital
stock either (1) representing less than 50% of the equity
interests or voting power of the company or the surviving entity
or (2) that does not have directly or indirectly have the
power to elect a majority of the entire Board or other similar
governing body;
|
|
|
|
any transaction or series of transactions, whether or not we are
a party thereto, after giving effect to which in excess of 50%
is owned directly or indirectly by any person other than us and
our affiliates or
|
|
|
|
a sale or disposition of all of our assets;
|
provided that, notwithstanding the foregoing, a
change-in-control
does not include (1) an event described in the three
bullets above if the stockholders entitled to vote immediately
prior to the event own, directly or indirectly, 50% or more of
the voting stock of the resulting, surviving, or acquiring
corporation or (2) an initial public offering.
Under the terms of the New Agreements, if a named executive
officer other than Mr. Casady is terminated without cause
or for good reason, then we must pay, subject to
compliance with post-termination restrictive covenants (see
Employment Agreements Employment
Arrangements with
112
Named Executive Officers Intellectual Property,
Confidentiality and Non-Compete Clauses) and execution of
a release of claims, an amount equal to:
|
|
|
|
|
Severance multiplied by two for terminations during the initial
term and 1.5 thereafter (including non-renewal by us);
|
|
|
|
|
|
a pro-rated annual bonus based on actual performance for the
year of termination (not to exceed the pro-rated target bonus)
(the Pro-Rata Actual Bonus) and
|
|
|
|
|
|
Continued Benefits Participation.
|
Under his New Agreement, if Mr. Casady is terminated
without cause or for good reason (which definition
no longer includes termination without good reason following a
change in control event), he is entitled to:
|
|
|
|
|
Severance multiplied by one;
|
|
|
|
|
|
the Pro-Rata Actual Bonus, and
|
|
|
|
|
|
Continued Benefits Participation.
|
For purposes of the New Agreements, the definition of
change in control has been modified to eliminate a
transaction where the pre-transaction owners of our equity own
less than 50% of the equity economic interests or voting power
of us or the resulting entity after the transaction.
Termination
Other than For Good Reason
Except as provided below, upon termination by the executive
other than for good reason, each executive officer party to a
Current Agreement is subject to a one-year non-compete covenant
and is entitled to receive: (1) Accrued Compensation and (2) the
COBRA Payment. However, at the board of directors
discretion, and subject to such named executive officers
continuous compliance with post-termination restrictive
covenants relating to confidentiality, intellectual property and
non-competition (see Employment
Agreements Employment Arrangements with Named
Executive Officers Intellectual Property,
Confidentiality and Non-Compete Clauses), the named
executive officer may be entitled to receive the same benefits
as if the executive were terminated without cause or for good
reason, except that the relevant severance multiplier would be
one, and the executive would be subject to a non-competition
covenant for two years.
Under the New Agreements, a named executive officer who
terminates his or her employment other than for good reason is
entitled to receive the same payments as under the Current
Agreement. At our election, we may treat the termination like a
termination without cause and make the same payments payable
under a termination without cause and extend the
post-termination restrictive covenants from twelve months to
twenty-four months.
Death,
Disability and Retirement
For each named executive officer party to a Current Agreement or
a New Agreement, upon termination due to death, the named
executive officers estate will be entitled to (1) Accrued
Compensation, (2) the COBRA Payment and (3) the Pro-Rata Target
Bonus. Upon termination for disability, which must have
continued for six months during which the executive officer
received full salary and benefits, defined as the inability of
the named executive officer to perform substantially all of his
duties for six months, the named executive officer will receive
(1) Accrued Compensation, (2) the COBRA Payment and (3) the
Pro-Rata Target Bonus. Upon termination of employment, resulting
from retirement at minimum age of 65, the named executive
officer will be entitled to (1) Accrued Compensation and (2) the
COBRA Payment.
113
Stock
Options
In accordance with the named executive officers option
agreements, unless otherwise agreed to by the company, unvested
stock options are cancelled upon termination of employment.
Unless the named executive officer is terminated for cause,
vested options will be exercisable for (1) two years
following termination of employment by reason of retirement, but
not later than the option expiration date,
(2) 12 months following death or disability, but in
each case, not later than the option expiration date or
(3) 90 days following termination in other cases, but
not later than the option expiration date.
In the event of a
change-in-control,
if the named executive officers stock options will not be
assumed, substituted or cashed out, all outstanding unvested
options will vest and become exercisable prior to the
change-in-control.
Upon consummation of the
change-in-control
event, all outstanding but unexercised options will be
terminated.
All stock options held by named executive officers as of
December 31, 2009 were originally granted under our 2005
Stock Option Plan for Nonqualified Stock Options, 2005 Stock
Option Plan for Incentive Stock Options and our 2008 Stock
Option Plan.
Board of Director
Compensation
In February 2010, our board of directors approved revisions to
our non-affiliated director compensation policy. Non-affiliated
directors receive a $50,000 annual retainer, a $1,500 attendance
fee for each regular meeting, and a $750 attendance fee for each
committee meeting. The Audit Committee Chairperson receives an
additional $15,000 as part of his annual retainer while the
Compensation Committee Chairperson receives an additional
$10,000 as part of his annual retainer. Each other Audit
Committee and Compensation Committee member receives an
additional $3,000 as part of his annual retainer.
Mr. Casady, Mr. Putnam, and the directors affiliated
with our private equity owners do not receive any additional
compensation for service as directors. In the past, grants of
stock options have supplemented the compensation paid to our
non-affiliated directors. In March 2010, we adopted the LPL
Investment Holdings, Inc. Director Restricted Stock Plan (the
Restricted Stock Plan) for our non-affiliated
directors. Each non-affiliated director will receive an annual
grant of restricted shares of Common Stock valued at $100,000,
with vesting to occur on the second anniversary of the grant
date. These grants of equity serve to further align our
directors interests with the interests of our stockholders.
The following table sets forth the compensation each of the
non-affiliated directors received from us for service on the
board of directors for the fiscal year ended December 31,
2009.
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
|
|
|
|
|
|
Fees
|
|
|
|
|
|
|
|
Value and
|
|
|
|
|
|
|
|
|
Earned
|
|
|
|
|
|
Non-Equity
|
|
Nonqualified
|
|
|
|
|
|
|
|
|
or Paid
|
|
Stock
|
|
Option
|
|
Incentive Plan
|
|
Deferred
|
|
All Other
|
|
|
|
|
|
|
in Cash
|
|
Awards
|
|
Awards
|
|
Compensation
|
|
Compensation
|
|
Compensation
|
|
Total
|
Name
|
|
Year
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
Earnings
|
|
($)(1)
|
|
($)
|
|
Richard W. Boyce
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John J. Brennan(1)
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey A. Goldstein(2)
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Douglas M. Haines(3)
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James S. Putnam
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Erik D. Ragatz
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James S. Riepe
|
|
|
2009
|
|
|
|
25,000
|
|
|
|
|
|
|
|
131,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
156,895
|
|
Richard P. Schifter
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey E. Stiefler
|
|
|
2009
|
|
|
|
25,000
|
|
|
|
|
|
|
|
131,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
156,895
|
|
Allen R. Thorpe
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Mr. Brennan joined our board of directors on
February 11, 2010 and therefore received no compensation in
fiscal year 2009. |
|
(2) |
|
Mr. Goldstein resigned from his position as director on
July 24, 2009. |
|
(3) |
|
Mr. Haines resigned from his position as director on
June 2, 2009. |
In addition to the payments disclosed in the table above, our
directors are reimbursed for reasonable
out-of-pocket
expenses incurred in connection with their attendance at board
and committee meetings.
Risks Arising
from Compensation Policies and Practices
We have reviewed and evaluated the philosophy and standards on
which our compensation plans have been developed and implemented
across our company. It is our belief that our compensation
programs do not encourage inappropriate actions by our executive
officers. Specifically, we believe that our compensation plans
and process avoid:
|
|
|
|
|
a compensation mix overly weighted toward annual bonus awards;
|
|
|
|
an excessive focus on stock option awards that would cause
behavior to drive short-term stock price gains in lieu of
long-term value creation and
|
|
|
|
unreasonable financial goals or thresholds that would encourage
efforts to generate near-term revenue with an adverse impact on
long-term success.
|
We believe that our current business process and planning cycle
fosters the following behaviors and controls that would mitigate
the potential for adverse risk caused by the action of our
executive officers:
|
|
|
|
|
we have defined processes for developing strategic and annual
operating plans, approval of capital investments, internal
controls over financial reporting, and other financial,
operational and compliance policies and practices;
|
|
|
|
annual review of corporate and individual objectives of the
executive officers to align these goals with our annual
operating and strategic plans, achieve the proper risk reward
balance, and do not encourage unnecessary or excessive risk
taking;
|
115
|
|
|
|
|
incentive awards are based on a review of a variety of
indicators, including both financial performance and strategic
achievements, reducing the potential to concentrate on one
indicator as the basis of an annual incentive award;
|
|
|
|
the mixes between fixed and variable, annual and long-term, and
cash and equity compensation are designed to encourage
strategies and actions that are in our long-term best interests;
|
|
|
|
discretionary authority by the Compensation Committee to adjust
annual bonus funding and payments reduces business risk
associated with our cash bonus program and
|
|
|
|
stock option awards vest over a period of time. As a result of
the longer time horizon to receive the value of a stock option
award, the prospect of short-term or risky behavior is mitigated.
|
116
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Review, Approval
or Ratification of Transactions with Related Persons
Prior to the effectiveness of the registration statement of
which this prospectus forms a part, we had not adopted policies
or procedures for the review, approval or ratification of
certain transactions with related persons. Such transactions are
currently reviewed by management and where appropriate have been
(and will continue to be) reviewed by our Audit Committee (other
than the committee members involved, if any) on a
case-by-case
basis. However, in accordance with the charter of our Audit
Committee, which will become effective upon the closing of this
offering, and our policy with respect to related person
transactions, which our board of directors (acting through our
Audit Committee) will adopt prior to the closing of this
offering, our Audit Committee will be responsible for reviewing
and approving related person transactions.
The policy with respect to related person transactions will
apply to transactions, arrangements and relationships (or any
series of similar transactions, arrangements or relationships)
where the aggregate amount involved will or may be expected to
exceed $120,000 in any calendar year, and where we (or our
subsidiaries) are a participant and in which a related person
has or will have a direct or indirect material interest. A
related person is: (1) any person who is, or at any time
since the beginning of our fiscal year was a director or
executive officer of the company, or a nominee for director or
executive officer of the company; (2) any person who is
known to be the beneficial owner of more than 5% of any class of
our voting securities; (3) any immediate family member of
the foregoing persons and (4) any firm, corporation or
other entity in which any of the foregoing persons has a
position or relationship, or in which such person, together with
his or her immediate family members, has a 10% or greater
beneficial ownership.
In the course of its review and approval of related party
transactions, our Audit Committee will consider the relevant
facts and circumstances to decide whether to approve such
transactions. In particular, our policy with respect to related
party transactions will require our Audit Committee to consider,
among other factors it deems appropriate:
|
|
|
|
|
the related persons relationship to us and interest in the
transaction;
|
|
|
|
|
|
the material facts of the proposed transaction, including the
proposed aggregate value of the transaction;
|
|
|
|
|
|
the impact on a directors independence in the event the
related person is a director or an immediate family member of
the director;
|
|
|
|
|
|
the benefits to us of the proposed transaction;
|
|
|
|
|
|
if applicable, the availability of other sources of comparable
products or services and
|
|
|
|
|
|
an assessment of whether the proposed transaction is on terms
that are comparable to the terms available to an unrelated third
party or to employees generally.
|
The Audit Committee may only approve those transactions that are
in, or are not inconsistent with, our best interests and those
of our stockholders, as the Audit Committee determines in good
faith.
Agreements with
Management
We and certain members of senior management have entered into
employment agreements. Certain of these terms and conditions are
more fully described in Executive Compensation
Employment Arrangements.
117
Stockholders
and Management Agreements
We are currently party to a Stockholders Agreement dated
December 28, 2005, among the company, certain investment
funds affiliated with the Majority Holders, the founders, the
executives who had entered into employment agreements as of the
date and certain other holders of common stock, the terms of
which are described in, and incorporated by reference herein,
from the section titled Certain Relationship and Related
Transactions of our proxy statement filed on
April 27, 2010. In connection with this offering, we intend
to amend this Stockholders Agreement and terminate a
majority of the rights and obligations that would otherwise
survive the offering, including the registration rights, the
right to require us to purchase shares upon an employee
holders termination and the drag along rights and
obligations described above. We plan to enter into a new
agreement with the Majority Holders that will provide them with
certain rights, including a right to designate a certain number
of directors to our board of directors and demand and piggyback
registration rights.
In connection with this offering, we intend to enter into an
agreement with our named executive officers pursuant to which
our named executive officers will agree to certain limitations
on the transfer of their common stock (including common stock
issued upon exercise of options) for the four years following
the offering. Pursuant to this agreement, each of our named
executive officers will agree not to sell more than 8% of the
common stock (including common stock issued upon exercise of
options) held immediately prior to the offering in any year,
subject to certain exceptions (including exceptions for
transfers to family members, transfers for estate planning
purposes, transfers for charitable gifts and transfers in
connection with deferred compensation plan payout). This level
is increased for named executive officers that do not sell the
maximum permitted amount in any year or in this offering. The
agreement terminates upon the earliest of the fourth anniversary
of this offering or, with respect to any named executive
officer, the death or disability of the named executive officer,
the termination of such named executive officers
employment with us or a change in title and duties such that the
executive no longer qualifies as a named executive officer. The
agreement may be amended or waived in an agreement signed by the
Company and the named executive officer.
Other
Arrangements
During the period since the beginning of our last fiscal year,
we forgave loans in an aggregate amount of $1.3 million to
four of our employees upon such employees becoming executive
officers of the company, which has been recorded as compensation
and benefits expense within the consolidated statements of
income.
AlixPartners, LLP (AlixPartners), a company
majority-owned by one of the Majority Holders,
Hellman & Friedman LLC, provides our
subsidiary, LPL Financial, with consulting services pursuant to
an agreement for interim management and consulting services. LPL
Financial paid $0.6 million, $4.2 million and
$0.9 million to AlixPartners during the years ended
December 31, 2009, 2008 and 2007, respectively.
Artisan Partners Limited Partnership (Artisan) pays
fees to LPL Financial in exchange for product distribution and
record-keeping services. One of the Majority Holders,
Hellman & Friedman LLC, holds a minority interest
in Artisan. During the years ended December 31, 2009, 2008
and 2007, LPL Financial earned $1.5 million,
$1.6 million and $1.9 million, respectively, in fees
from Artisan. Additionally, as of December 31, 2009 and
2008, Artisan owed LPL Financial $0.5 million and
$0.3 million, respectively, which is included in
receivables from product sponsors, broker-dealers and clearing
organizations on the consolidated statements of financial
condition. During the three months ended March 31, 2010 and
March 31, 2009, LPL Financial earned $0.6 million and
$0.3 million, respectively in fees from Artisan.
American Beacon Advisor, Inc. (Beacon), a company
majority-owned by one of the Majority Holders, TPG Capital, pays
fees to LPL Financial in exchange for product distribution and
record-keeping services. During the years ended
December 31, 2009 and 2008, LPL Financial earned
$0.4 million and $0.3 million, respectively, in fees
from Beacon. Additionally, as of December 31, 2009
118
and 2008, Beacon owed LPL Financial $0.1 million, which is
included in receivables from product sponsors, broker-dealers
and clearing organizations on the consolidated statements of
financial condition. The Company earned $0.1 million and
$0.1 million in fees from Beacon in the three months ended
March 31, 2010 and March 31, 2009, respectively.
XOJET, Inc. (XOJET) provides chartered aircraft
services. During the year ended December 31, 2009, LPL
Financial paid $0.3 million to XOJET for services to be
provided in 2010. One of the Majority Holders, TPG Capital,
holds a minority interest in XOJET.
Certain entities affiliated with SunGard Data Systems Inc.
(SunGard), provide LPL Financial with data center
recovery services. One of the Majority Holders, TPG Capital,
holds a minority interest in SunGard. LPL Financial paid
$0.5 million to SunGard during the year ended
December 31, 2009. LPL Financial paid $0.1 million to
SunGard during the three months ended March 31, 2010.
119
PRINCIPAL AND
SELLING STOCKHOLDERS
The following table sets forth certain information with respect
to the beneficial ownership of our common stock at July 1,
2010 for:
|
|
|
|
|
each person whom we know beneficially owns more than five
percent of our common stock;
|
|
|
|
each of our directors;
|
|
|
|
each of our named executive officers;
|
|
|
|
all of our directors and executive officers as a group and
|
|
|
|
each other selling stockholder.
|
The number of shares beneficially owned by each stockholder is
determined under rules issued by the SEC and includes voting or
investment power with respect to securities. Under these rules,
beneficial ownership includes any shares as to which the
individual or entity has sole or shared voting power or
investment power. Each of the stockholders listed has sole
voting and investment power with respect to the shares
beneficially owned by the stockholder unless noted otherwise,
subject to community property laws where applicable.
The percentage of common stock beneficially owned by each person
before the offering is based on 94,267,644 shares of common
stock. See Description of Capital Stock. Shares of
common stock that may be acquired within 60 days following
July 1, 2010 pursuant to the exercise of options or
warrants are deemed to be outstanding for the purpose of
computing the percentage ownership of such holder but are not
deemed to be outstanding for computing the percentage ownership
of any other person shown in the table. Beneficial ownership
representing less than one percent is denoted with an
*.
Unless otherwise indicated, the address for each of the
stockholders in the table below is
c/o LPL
Investment Holdings Inc., One Beacon Street, Boston,
Massachusetts 02108.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares of
|
|
|
|
Number of Shares of
|
|
|
Common Stock Beneficially
|
|
|
|
Common Stock Beneficially
|
|
|
Owned Prior to the
|
|
Number of
|
|
Owned After the
|
|
|
Offering
|
|
Shares
|
|
Offering
|
Name of Beneficial
Owner
|
|
Number
|
|
Percentage
|
|
Offered
|
|
Number
|
|
Percentage
|
|
Hellman & Friedman LLC(1)
|
|
|
34,210,185
|
|
|
|
36.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
%
|
TPG Partners, IV, L.P.(2)
|
|
|
34,210,185
|
|
|
|
36.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
%
|
Mark S. Casady(3)
|
|
|
3,907,120
|
|
|
|
4.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
%
|
Robert J. Moore(4)
|
|
|
24,000
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
Esther M. Stearns(5)
|
|
|
2,036,260
|
|
|
|
2.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
%
|
William E. Dwyer(6)
|
|
|
1,772,936
|
|
|
|
1.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
%
|
Stephanie L. Brown(7)
|
|
|
844,873
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
Richard W. Boyce(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
John J. Brennan
|
|
|
22,136
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
James S. Putnam
|
|
|
486,970
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
Erik D. Ragatz(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
James S. Riepe(9)
|
|
|
86,070
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
Richard P. Schifter(10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
Jeffrey E. Stiefler(11)
|
|
|
119,066
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
Allen R. Thorpe(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
All directors and executive officers as a group
(19 persons)(12)
|
|
|
10,551,241
|
|
|
|
11.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
%
|
Selling Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120
|
|
|
(1) |
|
Hellman & Friedman Capital Partners V, L.P.,
Hellman & Friedman Capital Partners V (Parallel), L.P.
and Hellman & Friedman Capital Associates V, L.P.
beneficially own 34,210,185.10 shares of our common stock.
The address for each of these funds is
c/o Hellman &
Friedman LLC, One Maritime Plaza, 12th Fl., San Francisco,
CA 94111. Hellman & Friedman Investors V, L.P. is
the sole general partner of Hellman & Friedman Capital
Partners V, L.P. and Hellman & Friedman Capital
Partners V (Parallel), L.P. Hellman & Friedman LLC is
the sole general partner of each of Hellman & Friedman
Investors V, L.P. and Hellman & Friedman Capital
Associates V, L.P. The shares of the company are owned of
record by Hellman & Friedman Capital Partners V,
L.P., which owns 30,077,594.70 shares, Hellman &
Friedman Capital Partners V (Parallel), L.P., which owns
4,115,485.30 shares, and Hellman & Friedman
Capital Associates V, L.P., which owns
17,105.10 shares. An investment committee of
Hellman & Friedman LLC has sole voting and dispositive
control over the shares of the company. The investment committee
is comprised of F. Warren Hellman, Brian M. Powers, Philip U.
Hammarskjold, Patrick J. Healy and Thomas F. Steyer; provided,
however, that Mr. Steyer has no authority or voting rights
with respect to investment committee decisions relating to the
company. Messrs. Ragatz and Thorpe serve as Managing
Directors of Hellman & Friedman LLC, but neither of
them serves on the investment committee. Each of the members of
the investment committee, as well as Messrs. Ragatz and
Thorpe, disclaim beneficial ownership of the shares in the
company, except to the extent of their respective pecuniary
interest therein. |
|
|
|
(2) |
|
Includes 34,210,185 shares of common stock (the TPG
Stock) held by TPG Partners IV, L.P., a Delaware
limited partnership (TPG Partners IV), whose general
partner is TPG GenPar IV, L.P., a Delaware limited
partnership, whose general partner is TPG GenPar IV
Advisors, LLC, a Delaware limited liability company, whose sole
member is TPG Holdings I, L.P., a Delaware limited
partnership, whose general partner is TPG
Holdings I-A,
LLC, a Delaware limited liability company, whose sole member is
TPG Group Holdings (SBS), L.P., a Delaware limited partnership,
whose general partner is TPG Group Holdings (SBS) Advisors, Inc.
David Bonderman and James G. Coulter are directors, officers and
sole shareholders of TPG Group Holdings (SBS) Advisors, Inc. and
may therefore be deemed to be the beneficial owners of the TPG
Stock. The address for each of TPG Partners IV, TPG Group
Holdings (SBS) Advisors, Inc. and Messrs. Bonderman and
Coulter is
c/o TPG
Capital, L.P., 301 Commerce Street, Suite 3300,
Fort Worth, TX 76102. |
|
|
|
(3) |
|
Includes 3,907,120 shares of common stock issuable upon
exercise of stock options exercisable within 60 days. |
|
|
|
(4) |
|
Includes 24,000 shares of common stock issuable upon
exercise of stock options exercisable within 60 days. |
|
|
|
(5) |
|
Includes 2,035,760 shares of common stock issuable upon
exercise of stock options exercisable within 60 days. |
|
|
|
(6) |
|
Consists of 23,000 shares that Mr. Dwyer holds directly and
1,516,820 shares of common stock issuable upon exercise of
stock options exercisable within 60 days. This also
includes 233,115 held through trusts over which Mr. Dwyer
disclaims beneficial ownership. |
|
|
|
(7) |
|
Includes 6,000 shares of common stock issuable upon
exercise of stock options exercisable within 60 days. |
|
|
|
(8) |
|
Mr. Boyce, who is one of our directors, is a partner at TPG
Capital, L.P., which is an affiliate of TPG Partners IV.
Mr. Boyce has no voting or investment power over, and
disclaims beneficial ownership of, the TPG Stock. The address of
Mr. Boyce is
c/o TPG
Capital, L.P., 301 Commerce Street, Suite 3300,
Fort Worth, TX 76102. |
|
|
|
(9) |
|
Includes 11,992 shares of common stock issuable upon
exercise of stock options exercisable within 60 days. |
|
|
|
(10) |
|
Mr. Schifter, who is one of our directors, is a partner at
TPG Capital, L.P., which is an affiliate of TPG Partners IV.
Mr. Schifter has no voting or investment power over, and
disclaims beneficial ownership of, the TPG Stock. The address of
Mr. Schifter is
c/o TPG
Capital, L.P., 301 Commerce Street, Suite 3300,
Fort Worth, TX 76102. |
|
|
|
(11) |
|
Includes 44,988 shares of common stock issuable upon
exercise of stock options exercisable within 60 days. |
|
|
|
(12) |
|
Includes an aggregate of 8,363,410 shares of common stock
issuable upon exercise of stock options exercisable within 60
days. |
121
DESCRIPTION OF
CAPITAL STOCK
The following is a description of the material terms of our
certificate of incorporation and bylaws as each is anticipated
to be in effect upon the closing of this offering.
General
Under our certificate of incorporation, we have authority to
issue up to 600,000,000 shares of capital stock, of which
all shares shall be shares of common stock, par value $0.001 per
share. As of July 1, 2010, we had 94,267,644 shares of
common stock outstanding, held by 1,166 holders, including
7,423,973 shares of restricted common stock (the
restricted shares) that are held by
1,070 advisors and 6,408 restricted shares that are held by
3 non-executive directors.
Holders of our common stock are entitled to one vote for each
share held on all matters submitted to a vote of stockholders
and do not have cumulative voting rights. An election of
directors by our stockholders shall be determined by a plurality
of the votes cast by the stockholders entitled to vote on the
election. Holders of common stock are entitled to receive
proportionately any dividends as may be declared by our board of
directors, subject to any preferential dividend rights of any
series of preferred stock that is outstanding at the time of the
dividend.
In the event of our liquidation or dissolution, the holders of
common stock are entitled to receive proportionately our net
assets available for distribution to stockholders after payment
of all debts and other liabilities and subject to the prior
rights of any outstanding preferred stock.
All shares of common stock will, when issued, be duly
authorized, fully paid and nonassessable. The rights,
preferences and privileges of holders of common stock are
subject to the rights of the holders of shares of any series of
preferred stock that the company may designate and issue in the
future.
Equity
Plans
As of July 1, 2010 we had outstanding options to acquire
22,597,332 shares of common stock, which are held by our
employees, directors and advisors, and warrants to acquire
38,815 shares of common stock to financial institutions. We
have also issued stock units to certain of our employees under
the 2008 Nonqualified Deferred Compensation Plan which will
entitle the holders to 2,823,452 shares of common stock
upon the earlier to occur of the employees death or
disability, a change in control of the company or a date in 2012
to be determined by our board of directors. In addition, under
our Fifth Amended and Restated 2000 Stock Bonus Plan, certain of
our advisors have restricted shares which will vest upon
consummation of our initial public offering.
Anti-takeover
Effects of the Delaware General Corporation Law and Our
Certificate of Incorporation and Bylaws
Our certificate of incorporation and our bylaws contain
provisions that may delay, defer or discourage another party
from acquiring control of us, some of which may only become
effective when the Majority Holders collectively cease to
beneficially own at least 40% or more of our outstanding shares
of common stock (such time referred to in this section as the
triggering event). We expect that these provisions,
which are summarized below, will discourage coercive takeover
practices or inadequate takeover bids. These provisions are also
designed to encourage persons seeking to acquire control of us
to first negotiate with the board of directors, which we believe
may result in an improvement of the terms of any such
acquisition in favor of our stockholders. However, they may also
discourage acquisitions that some stockholders may favor. This
offering will not constitute a triggering event.
122
Board of
Directors
The board of directors currently has nine members. Our
certificate of incorporation provides that until the occurrence
of the triggering event (as defined above), the number of
directors shall not be increased without, in addition to any
other vote otherwise required by law, the affirmative vote or
written consent of at least 60% of the outstanding shares of
common stock. In addition, the stockholders agreement that
we expect to enter into will provide that the board of directors
will not have more than nine members for so long as either
Hellman & Friedman LLC and its affiliates or TPG Capital
and its affiliates are entitled to appoint two directors under
the stockholders agreement. See Certain
Relationships and Related Party Transactions
Stockholders Agreement.
Potential
Staggered Board
Our certificate of incorporation provides that at the first
annual meeting after the triggering event, the Board shall be
divided into three classes with staggered three-year terms. The
classification of our Board could make it more difficult for a
third party to acquire, or discourage a third party from seeking
to acquire, control of our company.
Action by
Written Consent
The Delaware General Corporation Law (DGCL) provides
that, unless otherwise stated in a corporations
certificate of incorporation, the stockholders may act by
written consent without a meeting. Our certificate of
incorporation and bylaws provide that following the triggering
event, any action required or permitted to be taken by our
stockholders at an annual meeting or special meeting of the
stockholders may only be taken at such annual or special
meeting, and not by written consent without a meeting, if it is
properly brought before such annual or special meeting.
Special
Meeting of Stockholders and Advance Notice Requirements for
Stockholder Proposals
Our certificate of incorporation and bylaws provide that, except
as otherwise required by law, special meetings of the
stockholders can only be called by (a) our chairman or vice
chairman of the Board, (b) our president, (c) a
majority of the board of directors through a special resolution,
or (d) prior to the triggering event, the holders of at
least 40% of the outstanding shares of common stock.
In addition, following the occurrence of the triggering event
described above, our bylaws will require advance notice
procedures for stockholder proposals to be brought before an
annual meeting of the stockholders, including the nomination of
directors. Stockholders at an annual meeting may only consider
the proposals specified in the notice of meeting or brought
before the meeting by or at the direction of the board of
directors, or by a stockholder of record on the record date for
the meeting, who is entitled to vote at the meeting and who has
delivered a timely written notice in proper form to our
secretary, of the stockholders intention to bring such
business before the meeting.
These provisions could have the effect of delaying until the
next stockholder meeting any stockholder actions that are
favored by the holders of a majority of our outstanding voting
securities.
Requirements
for Removal and Interim Election of Directors
At such time as our board of directors has been divided into
three classes, our certificate of incorporation and bylaws
provide that the directors may only be removed for cause and
only by the affirmative vote of the holders of at least
two-thirds of the voting power of our outstanding shares of
capital stock entitled to vote generally in the election of
directors, voting together as a single class. Prior to the
triggering event, directors may be removed, with or without
cause, by the holders of a majority of the shares entitled to
vote on the election of directors, voting together as a single
class.
123
Vacancies and newly-created directorships may be filled only by
a vote of a majority of the directors then in office, even
though less than a quorum, and not by the stockholders, except
that, prior to a triggering event, such vacancies may be filled
by, in addition to any other vote otherwise required by law, the
affirmative vote of holders of a majority of the outstanding
shares of common stock. In addition, the certificate of
incorporation provides that any vacancy created by the removal
of a director by the stockholders shall only be filled by, in
addition to any other vote otherwise required by law, the
affirmative vote of a majority of the outstanding shares of
common stock. Our bylaws allow the presiding officer at a
meeting of the stockholders to adopt rules and regulations for
the conduct of meetings which may have the effect of precluding
the conduct of certain business at a meeting if the rules and
regulations are not followed.
These provisions may have the effect of deferring, delaying or
discouraging hostile takeovers, or changes in control or
management of our company.
Amendment to
Certificate of Incorporation and Bylaws
The DGCL provides generally that the affirmative vote of a
majority of the outstanding stock entitled to vote on amendments
to a corporations certificate of incorporation or bylaws
is required to approve such amendment, unless a
corporations certificate of incorporation or bylaws, as
the case may be, requires a greater percentage. Following the
first time when the Majority Holders collectively cease to own
more than 50% of our outstanding shares of common stock, our
bylaws may be amended or repealed by a majority vote of our
board of directors or, in addition to any other vote otherwise
required by law, the affirmative vote of at least
two-thirds
of the voting power of our outstanding shares of common stock.
Additionally, following the first time when the Majority Holders
collectively cease to own more than 50% of our outstanding
shares of common stock, the affirmative vote of at least
two-thirds
of the voting power of the outstanding shares of capital stock
entitled to vote on the adoption, alteration, amendment or
repeal of our certificate of incorporation, voting as a single
class is required to amend or repeal or to adopt any provision
inconsistent with the Board of Directors, No
Action by Written Consent, Special Meetings of
Stockholders, Amendments to the Amended and Restated
Certificate of Incorporation and Bylaws and Business
Combinations provisions described in our certificate of
incorporation. These provisions may have the effect of
deferring, delaying or discouraging the removal of any
anti-takeover defenses provided for in our certificate of
incorporation and our bylaws.
Exclusive
Jurisdiction of Certain Actions
Our certificate of incorporation requires, to the fullest extent
permitted by law, that derivative actions brought in the name of
the Company, actions against directors, officers and employees
for breach of fiduciary duty and other similar actions may be
brought only in the Court of Chancery in the State of Delaware.
Although we believe this provision benefits the Company by
providing increased consistency in the application of Delaware
law in the types of lawsuits to which it applies, the provision
may have the effect of discouraging lawsuits against our
directors and officers.
Authorized but
Unissued Shares
The authorized but unissued shares of common stock and preferred
stock are available for future issuance without stockholder
approval, subject to any limitations imposed by the listing
standards of the NASDAQ Global Select Market. These additional
shares may be used for a variety of corporate finance
transactions, acquisitions and employee benefit plans. The
existence of authorized but unissued common stock and preferred
stock could make more difficult, or discourage an attempt to
obtain control of us by means of a proxy contest, tender offer,
merger, or otherwise.
124
Business
Combinations
We have elected to not be subject to Section 203 of the
DGCL, which regulates business combinations with
interested stockholders.
Transfer Agent
and Registrar
The transfer agent and registrar for our common stock is The
Bank of New York Mellon Corporation.
Listing
We intend to apply to list our shares of common stock for
quotation on the NASDAQ Global Select Market under the symbol
LPLA.
125
SHARES ELIGIBLE
FOR FUTURE SALE
Before this offering, there has not been a public market for our
common stock. As described below, only a limited number of
shares currently outstanding will be available for sale
immediately after this offering due to contractual and legal
restrictions on resale. Nevertheless, future sales of
substantial amounts of our common stock, including shares issued
upon exercise of outstanding options and warrants, in the public
market after the restrictions lapse, or the possibility of such
sales, could cause the prevailing market price of our common
stock to fall or impair our ability to raise equity capital in
the future.
Upon completion of this offering, we will have
outstanding shares
of our common stock, assuming no exercise by the underwriters of
their option to purchase additional shares and no exercise of
options or warrants outstanding as
of .
Of these shares,
all shares
of our common stock sold in this offering will be freely
tradable in the public market without restriction or further
registration under the Securities Act, unless these shares are
held by our affiliates, as that term is defined in Rule 144
under the Securities Act. Shares purchased by our affiliates may
not be resold except pursuant to an effective registration
statement or an exemption from registration, including the safe
harbor under Rule 144 of the Securities Act described
below. In
addition, shares
of common stock issued upon exercise of stock options granted
under certain of our equity plans which are registered under
Form S-8
will be freely tradable in the public market, subject to certain
contractual and legal restrictions described below.
The
remaining shares
of our common stock will be restricted securities,
as that term is defined in Rule 144 under the Securities
Act. These restricted securities may be sold in the public
market only pursuant to an effective registration statement or
an exemption from registration under Rule 144 under the
Securities Act. These rules are summarized below. Subject to our
stockholders agreement and the
lock-up
agreements described below and the provisions of Rule 144,
these restricted securities will be available for sale in the
public market as follows:
|
|
|
Number of Shares
|
|
Date of Availability for
Sale
|
|
|
|
Various times after the date of this prospectus pursuant to
Rule 144
|
|
|
Various times beginning 180 days after the date of this
prospectus
|
Lock-Up
Arrangements
The company and its officers, directors, employees and certain
stockholders, including the selling stockholders, who together
hold an aggregate
of shares
of our common stock after the completion of this offering, have
agreed, subject to limited exceptions, not to directly or
indirectly sell or dispose of any shares of common stock (except
for shares to be sold by the selling stockholders in this
offering) or any securities convertible into or exchangeable or
exercisable for shares of common stock for a period of
180 days after the date of this prospectus without the
prior written consent of Goldman, Sachs & Co. and
Morgan Stanley & Co. Incorporated. This 180-day
lock-up
period may be extended in certain circumstances as described
under Underwriting (Conflicts of Interest). In
addition, certain holders who receive shares of common stock
upon vesting of their restricted stock in connection with the
initial public offering will be restricted from transferring
such shares until the earlier of 180 days from the date of
the initial public offering or March 15, 2011. Our
Stockholders Agreement also restricts the parties thereto
from transferring their shares of common stock or any securities
convertible into or exchangeable or exercisable for shares of
common stock until 180 days after the effective date of the
registration statement of which this prospectus forms a part.
126
Rule 144
In general, under Rule 144, immediately upon the completion
of this offering, a person who is not our affiliate and has not
been our affiliate at any time during the preceding three months
will be entitled to sell any shares of our common stock that
such person has held for at least six months, including the
holding period of any prior owner other than one of our
affiliates, without regard to volume limitations. Sales of our
common stock by any such person would be subject to the
availability of current public information about us if the
shares to be sold were held by such person for less than one
year.
Our affiliates who have beneficially owned shares of our common
stock for at least six months, including the holding period of
any prior owner other than another of our affiliates, would be
entitled to sell within any three-month period those shares and
any other shares they have acquired that are not restricted
securities, provided that the aggregate number of shares sold
does not exceed the greater of:
|
|
|
|
|
1% of the number of shares of our common stock then outstanding,
which will equal
approximately shares
immediately after this offering and
|
|
|
|
|
|
the average weekly trading volume in our common stock on the
Nasdaq Global Select Market during the four calendar weeks
preceding the date of filing of a Notice of Proposed Sale of
Securities Pursuant to Rule 144 with respect to the sale.
|
Sales under Rule 144 by our affiliates are also subject to
manner of sale provisions and notice requirements and to the
availability of current public information about us.
Stock
Plans
We have filed a registration statement on
Form S-8
under the Securities Act covering shares of our common stock
issuable upon exercise of outstanding options under our 2005
Stock Option Plan for Non-Qualified Stock Options, 2005 Stock
Option Plan for Incentive Stock Options, 2008 Stock Option Plan
and 2008 Advisor Incentive Plan. We plan to file another
registration statement on
Form S-8
to cover shares of common stock under our 2010 Omnibus Equity
Incentive Plan. Resale of these registered shares will occur
only after the expiration of any applicable contractual
lock-up
periods.
Registration
Rights
Subject to the lock-up agreements described above, certain
holders of our common stock may demand that we register their
shares under the Securities Act or, if we file another
registration statement under the Securities Act other than a
Form S-8
covering securities issuable under our equity plans or on
Form S-4,
may elect to include their shares of common stock in such
registration. If these shares are registered, they will be
freely tradable without restriction under the Securities Act.
127
MATERIAL U.S.
FEDERAL TAX CONSIDERATIONS FOR
NON-U.S.
HOLDERS OF COMMON STOCK
The following is a summary of certain material U.S. federal
income and estate tax considerations relating to the purchase,
ownership and disposition of our common stock by
Non-U.S. Holders
(defined below). This summary does not purport to be a complete
analysis of all the potential tax considerations relevant to
Non-U.S. Holders
of our common stock. This summary is based upon the Internal
Revenue Code, the Treasury regulations promulgated or proposed
thereunder and administrative and judicial interpretations
thereof, all as of the date hereof and all of which are subject
to change at any time, possibly on a retroactive basis.
This summary assumes that shares of our common stock are held as
capital assets within the meaning of
Section 1221 of the Internal Revenue Code. This summary
does not purport to deal with all aspects of U.S. federal
income and estate taxation that might be relevant to particular
Non-U.S. Holders
in light of their particular investment circumstances or status,
nor does it address specific tax considerations that may be
relevant to particular persons (including, for example,
financial institutions, broker-dealers, insurance companies,
partnerships or other pass-through entities, certain
U.S. expatriates, tax-exempt organizations, pension plans,
controlled foreign corporations, passive
foreign investment companies, corporations that accumulate
earnings to avoid U.S. federal income tax, persons in
special situations, such as those who have elected to mark
securities to market or those who hold common stock as part of a
straddle, hedge, conversion transaction, synthetic security or
other integrated investment, persons that have a
functional currency other than the U.S. dollar,
or holders subject to the alternative minimum tax). In addition,
this summary does not address certain estate and gift tax
considerations or considerations under the tax laws of any
state, local or
non-U.S. jurisdiction.
For purposes of this summary, a
Non-U.S. Holder
means a beneficial owner of common stock that for
U.S. federal income tax purposes is not:
|
|
|
|
|
an individual who is a citizen or resident of the United States;
|
|
|
|
a corporation or any other organization taxable as a corporation
for U.S. federal income tax purposes, created or organized
in or under the laws of the United States, any state thereof or
the District of Columbia;
|
|
|
|
an estate, the income of which is included in gross income for
U.S. federal income tax purposes regardless of its
source; or
|
|
|
|
a trust if (1) a U.S. court is able to exercise
primary supervision over the trusts administration and one
or more U.S. persons have the authority to control all of
the trusts substantial decisions or (2) the trust has
a valid election in effect under applicable U.S. Treasury
Regulations to be treated as a U.S. person.
|
If an entity that is classified as a partnership for United
States federal income tax purposes holds our common stock, the
tax treatment of its partners will generally depend upon the
status of the partner and the activities of the partnership.
Partnerships and other entities that are classified as
partnerships for United States federal income tax purposes and
persons holding our common stock through a partnership or other
entity classified as a partnership for United States federal
income tax purposes are urged to consult their own tax advisors.
There can be no assurance that the Internal Revenue Service
(IRS) will not challenge one or more of the tax
consequences described herein, and we have not obtained, nor do
we intend to obtain, an opinion of counsel with respect to the
U.S. federal income or estate tax consequences to a
Non-U.S. Holder
of the purchase, ownership or disposition of our common stock.
128
THIS SUMMARY IS FOR GENERAL INFORMATION ONLY AND IS NOT
INTENDED TO BE TAX ADVICE.
NON-U.S. HOLDERS
ARE URGED TO CONSULT THEIR TAX ADVISORS CONCERNING THE
U.S. FEDERAL INCOME AND ESTATE TAXATION, STATE, LOCAL AND
NON-U.S. TAXATION
AND OTHER TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF OUR COMMON STOCK, AS WELL AS THE APPLICATION
OF STATE, LOCAL AND
NON-U.S. INCOME
AND OTHER TAX LAWS.
Distributions on
Our Common Stock
As discussed under Dividend Policy above, we do not
currently expect to pay dividends. In the event that we do make
a distribution of cash or property with respect to our common
stock, any such distributions generally will constitute
dividends for U.S. federal income tax purposes to the
extent of our current or accumulated earnings and profits, as
determined under U.S. federal income tax principles. If a
distribution exceeds our current and accumulated earnings and
profits, the excess will be treated as a tax-free return of the
Non-U.S. Holders
investment, up to such holders tax basis in the common
stock. Any remaining excess will be treated as capital gain,
subject to the tax treatment described below in Gain on
Sale, Exchange or Other Taxable Disposition of Our Common
Stock.
Dividends paid to a
Non-U.S. Holder
generally will be subject to a 30% U.S. federal withholding
tax unless such
Non-U.S. Holder
provides us or our agent, as the case may be, with the
appropriate IRS
Form W-8,
such as :
|
|
|
|
|
IRS
Form W-8BEN
(or successor form) claiming, under penalties of perjury, a
reduction in withholding under an applicable income tax
treaty, or
|
|
|
|
IRS
Form W-8ECI
(or successor form) stating that a dividend paid on common stock
is not subject to withholding tax because it is effectively
connected with a trade or business in the United States of the
Non-U.S. Holder
(in which case such dividend generally will be subject to
regular graduated U.S. tax rates as described below).
|
The certification requirement described above also may require a
Non-U.S. Holder
that provides an IRS form or that claims treaty benefits to
provide its U.S. taxpayer identification number.
Each
Non-U.S. Holder
is urged to consult its own tax advisor about the specific
methods for satisfying these requirements. A claim for exemption
will not be valid if the person receiving the applicable form
has actual knowledge or reason to know that the statements on
the form are false.
If dividends are effectively connected with a trade or business
in the United States of the
Non-U.S. Holder
(and, if required by an applicable income tax treaty,
attributable to a U.S. permanent establishment), the
Non-U.S. Holder,
although exempt from the withholding tax described above
(provided that the certifications described above are
satisfied), will be subject to U.S. federal income tax on
such dividends on a net income basis in the same manner as if it
were a resident of the United States. In addition, if such
Non-U.S. Holder
is a
non-U.S. corporation
and dividends are effectively connected with its trade or
business in the United States (and, if required by an applicable
income tax treaty, attributable to a U.S. permanent
establishment), such
Non-U.S. Holder
may be subject to an additional branch profits tax
equal to 30% (unless reduced by an applicable income treaty) in
respect of such effectively-connected income.
If a
Non-U.S. Holder
is eligible for a reduced rate of U.S. federal withholding
tax pursuant to an income tax treaty, such holder may obtain a
refund or credit of any excess amount withheld by timely filing
an appropriate claim for refund with the IRS.
Gain on Sale,
Exchange or Other Taxable Disposition of Our Common
Stock
Subject to the discussion below under the Section titled
Recently Enacted Legislation Affecting Taxation of Our
Common Stock Held By or Through Foreign Entities, in
general, a
Non-U.S. holder
will not be subject to U.S. federal income tax or
withholding tax on gain realized upon such holders
129
sale, exchange or other taxable disposition of shares of our
common stock unless (i) such
Non-U.S. Holder
is an individual who is present in the United States for
183 days or more in the taxable year of disposition, and
certain other conditions are met, (ii) we are or have been
a United States real property holding corporation,
as defined in the Internal Revenue Code (a USRPHC),
at any time within the shorter of the five-year period preceding
the disposition and the
Non-U.S. Holders
holding period the share our common stock, or (iii) such
gain is effectively connected with the conduct by such
Non-U.S. Holder
of a trade or business in the United States (and, if required by
an applicable income tax treaty, is attributable to a permanent
establishment maintained by such
Non-U.S. Holder).
If the first exception applies, the
Non-U.S. Holder
generally will be subject to U.S. federal income tax at a
rate of 30% (or at a reduced rate under an applicable income tax
treaty) on the amount by which such
Non-U.S. Holders
capital gains allocable to U.S. sources exceed capital
losses allocable to U.S. sources during the taxable year of
the disposition. If the third exception applies, the
Non-U.S. Holder
generally will be subject to U.S. federal income tax with
respect to such gain in the same manner as a U.S. Holder,
unless otherwise provided in an applicable income tax treaty,
and a
Non-U.S. Holder
that is a corporation for U.S. federal income tax purposes
may also be subject to a branch profits tax with respect to such
gain at a rate of 30% (or at a reduced rate under an applicable
income tax treaty).
Generally, a corporation is a U.S. real property holding
corporation only if the fair market value of its U.S. real
property interests (as defined in the Internal Revenue Code)
equals or exceeds 50% of the sum of the fair market value of its
worldwide real property interests plus its other assets used or
held for use in a trade or business. Although there can be no
assurance, we believe that we are not, and do not anticipate
becoming, a USRPHC. However, because the determination of
whether we are a USRPHC depends on the fair market value of our
U.S. real property relative to the fair market value of
other business assets, there can be no assurance that we will
not become a USRPHC in the future. Even if we become a USRPHC, a
Non-U.S. Holder
would not be subject to U.S. federal income tax on a sale,
exchange or other taxable disposition of our common stock so
long as our common stock continues to be regularly traded on an
established securities market and such
Non-U.S. Holder
does not own and is not deemed to own (directly, indirectly or
constructively) more than 5% of our common stock at any time
during the shorter of the five year period ending on the date of
disposition and the holders holding period.
Recently Enacted
Legislation Affecting Taxation of Our Common Stock Held By or
Through Foreign Entities
Recently enacted legislation generally will impose a United
States federal withholding tax of 30% on dividends and the gross
proceeds of a disposition of our common stock paid after
December 31, 2012 to a foreign financial
institution (as specially defined under these rules),
unless such institution enters into an agreement with the United
States government to withhold on certain payments and to collect
and provide to the United States tax authorities substantial
information regarding United States account holders of such
institution (which includes certain equity and debt holders of
such institution, as well as certain account holders that are
foreign entities with United States owners). The legislation
also will generally impose a United States federal withholding
tax of 30% on dividends and the gross proceeds of a disposition
of our common stock paid after December 31, 2012 to a
non-financial foreign entity unless such entity provides the
withholding agent with a certification identifying the direct
and indirect United States owners of the entity. The scope of
these requirements remains unclear and potentially subject to
material changes resulting from any future guidance. Under
certain circumstances, a
non-United
States holder might be eligible for refunds or credits of such
taxes. Prospective investors are encouraged to consult with
their own tax advisors regarding the possible implications of
this legislation on their investment in our common stock.
Non-U.S. holders
are urged to consult their own advisors about the new
requirements and the effect that such new requirements may have
on them.
130
Backup
Withholding and Information Reporting
Subject to the discussion in the preceding paragraph, we must
report annually to the IRS and to each
Non-U.S. Holder
the gross amount of the distributions on our common stock paid
to such holder and the tax withheld, if any, with respect to
such distributions.
Non-U.S. holders
may have to comply with specific certification procedures to
establish that the holder is not a U.S. person (as defined
in the Internal Revenue Code) in order to avoid backup
withholding at the applicable rate, currently 28% and scheduled
to increase to 31% for taxable years 2011 and thereafter, with
respect to dividends on our common stock. Dividends paid to
Non-U.S. Holders
subject to the U.S. withholding tax, as described above in
Distributions on Our Common Stock, generally will be
exempt from U.S. backup withholding.
Information reporting and backup withholding will generally
apply to the proceeds of a disposition of our common stock by a
Non-U.S. Holder
effected by or through the U.S. office of any broker,
U.S. or foreign, unless the holder certifies its status as
a
Non-U.S. Holder
and satisfies certain other requirements, or otherwise
establishes an exemption. Generally, information reporting and
backup withholding will not apply to a payment of disposition
proceeds to a
Non-U.S. Holder
where the transaction is effected outside the United States
through a
non-U.S. office
of a broker. However, for information reporting purposes,
dispositions effected through a
non-U.S. office
of a broker with substantial U.S. ownership or operations
generally will be treated in a manner similar to dispositions
effected through a U.S. office of a broker.
Non-U.S. holders
should consult their own tax advisors regarding the application
of the information reporting and backup withholding rules to
them.
Copies of information returns may be made available to the tax
authorities of the country in which the
Non-U.S. Holder
resides or is incorporated under the provisions of a specific
treaty or agreement.
Backup withholding is not an additional tax. Any amounts
withheld under the backup withholding rules from a payment to a
Non-U.S. Holder
can be refunded or credited against the
Non-U.S. Holders
U.S. federal income tax liability, if any, provided that an
appropriate claim is timely filed with the IRS.
Federal Estate
Tax
Common stock held by an individual Non-U.S. Holder at the
time of death and common stock held by entities the property of
which is potentially includible in such an individuals
gross estate for U.S. federal estate tax purposes will be
included in such Non-U.S. Holders gross estate for
U.S. federal estate tax purposes, unless an applicable
estate tax treaty provides otherwise. Under current law, no
estate tax is imposed on amounts included in the taxable estate
of decedents dying in calendar year 2010. Generally, amounts
included in the taxable estate of decedents after
December 31, 2010 will be subject to U.S. federal
estate tax at a maximum rate of 55%. Congress may pass
legislation amending the U.S. federal estate tax rates, or
other aspects of the U.S. federal estate tax, and any such
changes may apply retroactively.
131
UNDERWRITING
(CONFLICTS OF INTEREST)
The company, the selling stockholders and the underwriters named
below have entered into an underwriting agreement with respect
to the shares being offered. Subject to certain conditions, each
underwriter has severally agreed to purchase the number of
shares indicated in the following table. Goldman,
Sachs & Co. and Morgan Stanley & Co.
Incorporated are the representatives of the underwriters.
|
|
|
|
|
Underwriters
|
|
Number of Shares
|
|
Goldman, Sachs & Co.
|
|
|
|
|
Morgan Stanley & Co. Incorporated
|
|
|
|
|
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
|
|
|
|
|
J.P. Morgan Securities Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
The underwriters are committed to take and pay for all of the
shares being offered, if any are taken, other than the shares
covered by the option described below unless and until this
option is exercised.
If the underwriters sell more shares than the total number set
forth in the table above, the underwriters have an option to buy
up to an
additional shares.
They may exercise that option for 30 days. If any shares
are purchased pursuant to this option, the underwriters will
severally purchase shares in approximately the same proportion
as set forth in the table above.
The following tables show the per share and total underwriting
discounts and commissions to be paid to the underwriters by the
company and the selling stockholders. Such amounts are shown
assuming both no exercise and full exercise of the
underwriters option to
purchase additional
shares.
|
|
|
|
|
|
|
|
|
Paid by the Company
|
|
No Exercise
|
|
Full Exercise
|
|
Per Share
|
|
$
|
|
|
|
$
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Paid by the Selling
Stockholders
|
|
No Exercise
|
|
Full Exercise
|
|
Per Share
|
|
$
|
|
|
|
$
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
Shares sold by the underwriters to the public will initially be
offered at the initial public offering price set forth on the
cover of this prospectus. Any shares sold by the underwriters to
securities dealers may be sold at a discount of up to
$ per share from the initial
public offering price. If all the shares are not sold at the
initial public offering price, the representatives may change
the offering price and the other selling terms. The offering of
the shares by the underwriters is subject to receipt and
acceptance and subject to the underwriters right to reject
any order in whole or in part.
The company and its officers, directors, employees and certain
stockholders, including the selling stockholders, have agreed,
subject to certain exceptions, not to dispose of or hedge any of
their common stock or securities convertible into or
exchangeable for shares of common stock during
132
the period from the date of this prospectus continuing through
the date 180 days after the date of this prospectus. The
restrictions described in the above paragraph do not apply to:
|
|
|
|
|
transfers of shares of common stock by any such person other
than us (i) as a bona fide gift or gifts,
(ii) to immediate family members, trusts for the benefit of
such person or its immediate family members, or limited
partnerships the partners of which are such person
and/or its
immediate family members, (iii) by will or intestacy or
(iv) to limited or general partners, members, stockholders
or affiliates (as defined under
Rule 12b-2
of the Exchange Act) of such person or, in the case of a
corporation, to its wholly-owned subsidiary; provided that in
each case, the donee, distributee or transferee shall sign and
deliver a
lock-up
agreement, such transfer or distribution shall be a disposition
for no value and no filing under Section 16(a) of the
Exchange Act during the restricted period shall be required or
shall be voluntarily made in connection therewith;
|
|
|
|
|
|
the exercise of options to purchase shares of common stock
granted prior to the date hereof under our stock incentive plan
or stock purchase plan described herein, or the disposition to
us of shares of restricted stock granted pursuant to the terms
of such plan prior to the date hereof, provided that no filing
under Section 16(a) of the Exchange Act during the restricted
period shall be required or shall be voluntarily made in
connection therewith;
|
|
|
|
|
|
transfer by any such person other than us of shares of common
stock acquired on the open market following the completion of
this offering, provided that no filing under Section 16(a)
of the Exchange Act during the restricted period shall be
required or shall be voluntarily made in connection therewith;
|
|
|
|
|
|
the establishment of a trading plan pursuant to
Rule 10b5-1
under the Exchange Act for the transfer of shares of common
stock, provided that such plan does not provide for the transfer
of shares of common stock during the restricted period;
|
|
|
|
|
|
the sale of shares of common stock to the underwriters in
connection with this offering; and
|
|
|
|
|
|
transfers of shares of common stock with the prior written
consent of the underwriters.
|
See Shares Available for Future Sale for a
discussion of certain transfer restrictions.
The 180-day
restricted period described above will be automatically extended
if: (1) during the last 17 days of the
180-day
restricted period the company issues an earnings release or
announces material news or a material event; or (2) prior
to the expiration of the
180-day
restricted period, the company announces that it will release
earnings results during the
15-day
period following the last day of the
180-day
period, in which case the restrictions described in the
preceding paragraph will continue to apply until the expiration
of the
18-day
period beginning on the issuance of the earnings release of the
announcement of the material news or material event.
Prior to the offering, there has been no public market for the
shares. The initial public offering price has been negotiated
among the company and the representatives. Among the factors to
be considered in determining the initial public offering price
of the shares, in addition to prevailing market conditions, will
be the companys historical performance, estimates of the
business potential and earnings prospects of the company, an
assessment of the companys management and the
consideration of the above factors in relation to market
valuation of companies in related businesses.
An application has been made to list the common stock on the
NASDAQ Global Select Market under the symbol LPLA.
In connection with the offering, the underwriters may purchase
and sell shares of common stock in the open market. These
transactions may include short sales, stabilizing transactions
and purchases to cover positions created by short sales. Short
sales involve the sale by the underwriters of a greater number
of shares than they are required to purchase in the offering.
Covered short sales are sales made in an amount not
greater than the underwriters option to purchase
additional
133
shares from the company in the offering. The underwriters may
close out any covered short position by either exercising their
option to purchase additional shares or purchasing shares in the
open market. In determining the source of shares to close out
the covered short position, the underwriters will consider,
among other things, the price of shares available for purchase
in the open market as compared to the price at which they may
purchase additional shares pursuant to the option granted to
them. Naked short sales are any sales in excess of
such option. The underwriters must close out any naked short
position by purchasing shares in the open market. A naked short
position is more likely to be created if the underwriters are
concerned that there may be downward pressure on the price of
the common stock in the open market after pricing that could
adversely affect investors who purchase in the offering.
Stabilizing transactions consist of various bids for or
purchases of common stock made by the underwriters in the open
market prior to the completion of the offering.
The underwriters may also impose a penalty bid. This occurs when
a particular underwriter repays to the underwriters a portion of
the underwriting discount received by it because the
representatives have repurchased shares sold by or for the
account of such underwriter in stabilizing or short covering
transactions.
Purchases to cover a short position and stabilizing
transactions, as well as other purchases by the underwriters for
their own accounts, may have the effect of preventing or
retarding a decline in the market price of the companys
stock, and together with the imposition of the penalty bid, may
stabilize, maintain or otherwise affect the market price of the
common stock. As a result, the price of the common stock may be
higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be
discontinued at any time. These transactions may be effected on
the NASDAQ Global Select Market, in the
over-the-counter
market or otherwise.
European Economic
Area
In relation to each Member State of the European Economic Area
which has implemented the Prospectus Directive (each, a Relevant
Member State), each underwriter has represented and agreed that
with effect from and including the date on which the Prospectus
Directive is implemented in that Relevant Member State (the
Relevant Implementation Date) it has not made and will not make
an offer of shares to the public in that Relevant Member State
prior to the publication of a prospectus in relation to the
shares which has been approved by the competent authority in
that Relevant Member State or, where appropriate, approved in
another Relevant Member State and notified to the competent
authority in that Relevant Member State, all in accordance with
the Prospectus Directive, except that it may, with effect from
and including the Relevant Implementation Date, make an offer of
shares to the public in that Relevant Member State at any time:
(a) to legal entities which are authorised or regulated to
operate in the financial markets or, if not so authorised or
regulated, whose corporate purpose is solely to invest in
securities;
(b) to any legal entity which has two or more of
(1) an average of at least 250 employees during the
last financial year; (2) a total balance sheet of more than
43,000,000 and (3) an annual net turnover of more
than 50,000,000, as shown in its last annual or
consolidated accounts;
(c) to fewer than 100 natural or legal persons (other than
qualified investors as defined in the Prospectus Directive)
subject to obtaining the prior consent of the representatives
for any such offer; or
(d) in any other circumstances which do not require the
publication by the Issuer of a prospectus pursuant to
Article 3 of the Prospectus Directive.
For the purposes of this provision, the expression an
offer of shares to the public in relation to any
shares in any Relevant Member State means the communication in
any form and by any means of sufficient information on the terms
of the offer and the shares to be offered so as to enable an
investor to decide to purchase or subscribe the shares, as the
same may be varied in that Relevant
134
Member State by any measure implementing the Prospectus
Directive in that Relevant Member State and the expression
Prospectus Directive means Directive 2003/71/EC and includes any
relevant implementing measure in each Relevant Member State.
Notice to
Residents of the United Kingdom
Each underwriter has represented and agreed that:
(a) it has only communicated or caused to be communicated
and will only communicate or cause to be communicated an
invitation or inducement to engage in investment activity
(within the meaning of Section 21 of the FSMA) received by
it in connection with the issue or sale of the shares in
circumstances in which Section 21(1) of the FSMA does not
apply to the Issuer; and
(b) it has complied and will comply with all applicable
provisions of the FSMA with respect to anything done by it in
relation to the shares in, from or otherwise involving the
United Kingdom.
Notice to
Residents of Hong Kong
The shares may not be offered or sold by means of any document
other than (i) in circumstances which do not constitute an
offer to the public within the meaning of the Companies
Ordinance (Cap.32, Laws of Hong Kong), or (ii) to
professional investors within the meaning of the
Securities and Futures Ordinance (Cap.571, Laws of Hong Kong)
and any rules made thereunder, or (iii) in other
circumstances which do not result in the document being a
prospectus within the meaning of the Companies
Ordinance (Cap.32, Laws of Hong Kong), and no advertisement,
invitation or document relating to the shares may be issued or
may be in the possession of any person for the purpose of issue
(in each case whether in Hong Kong or elsewhere), which is
directed at, or the contents of which are likely to be accessed
or read by, the public in Hong Kong (except if permitted to do
so under the laws of Hong Kong) other than with respect to
shares which are or are intended to be disposed of only to
persons outside Hong Kong or only to professional
investors within the meaning of the Securities and Futures
Ordinance (Cap. 571, Laws of Hong Kong) and any rules made
thereunder.
Notice to
Residents of Singapore
This prospectus has not been registered as a prospectus with the
Monetary Authority of Singapore. Accordingly, this prospectus
and any other document or material in connection with the offer
or sale, or invitation for subscription or purchase, of the
shares may not be circulated or distributed, nor may the shares
be offered or sold, or be made the subject of an invitation for
subscription or purchase, whether directly or indirectly, to
persons in Singapore other than (i) to an institutional
investor under Section 274 of the Securities and Futures
Act, Chapter 289 of Singapore (the SFA),
(ii) to a relevant person, or any person pursuant to
Section 275(1A), and in accordance with the conditions,
specified in Section 275 of the SFA or (iii) otherwise
pursuant to, and in accordance with the conditions of, any other
applicable provision of the SFA.
Where the shares are subscribed or purchased under
Section 275 by a relevant person which is: (a) a
corporation (which is not an accredited investor) the sole
business of which is to hold investments and the entire share
capital of which is owned by one or more individuals, each of
whom is an accredited investor; or (b) a trust (where the
trustee is not an accredited investor) whose sole purpose is to
hold investments and each beneficiary is an accredited investor,
shares, debentures and units of shares and debentures of that
corporation or the beneficiaries rights and interest in
that trust shall not be transferable for 6 months after
that corporation or that trust has acquired the shares under
Section 275 except: (1) to an institutional investor
under Section 274 of the SFA or to a relevant person, or
any person pursuant to Section 275(1A), and in accordance
with the conditions, specified in Section 275 of the SFA;
(2) where no consideration is given for the transfer; or
(3) by operation of law.
135
Notice to
Residents of Japan
The securities have not been and will not be registered under
the Financial Instruments and Exchange Law of Japan (the
Financial Instruments and Exchange Law) and each underwriter has
agreed that it will not offer or sell any securities, directly
or indirectly, in Japan or to, or for the benefit of, any
resident of Japan (which term as used herein means any person
resident in Japan, including any corporation or other entity
organized under the laws of Japan), or to others for re-offering
or resale, directly or indirectly, in Japan or to a resident of
Japan, except pursuant to an exemption from the registration
requirements of, and otherwise in compliance with, the Financial
Instruments and Exchange Law and any other applicable laws,
regulations and ministerial guidelines of Japan.
Conflicts of
Interest
Certain of the underwriters or their affiliates hold equity
interests in the company or are lenders or have committed to
lend under our senior secured credit facilities, including
Goldman, Sachs & Co., Morgan Stanley & Co.
Incorporated, Merrill Lynch, Pierce, Fenner & Smith
Incorporated and J.P. Morgan Securities Inc. We intend to
repay outstanding amounts under our senior secured credit
facilities using the net proceeds of this offering received by
us and will pay such amounts to the underwriters or their
respective affiliates in proportion to their respective current
commitments under the senior secured credit facilities. Because
certain underwriters or their affiliates or associated persons
will receive more than 5% of the net proceeds of the offering
received by us, the offering is made in compliance with
Rule 2720 of the Conduct Rules of the NASD, as administered
by FINRA. Rule 2720 requires a qualified independent
underwriter to participate in the preparation of the
registration statement and the prospectus, and exercise the
usual standards of due diligence with respect to such documents.
Morgan Stanley & Co. Incorporated has served in that
capacity and performed due diligence investigations and reviewed
and participated in the preparation of this prospectus and of
the registration statement of which this prospectus forms a part.
Directed Share
Program
At our request, the underwriters have reserved for sale, at the
initial public offering price, up
to shares
offered in this prospectus for sale to the companys
directors, officers, employees and business associates. The
number of shares of common stock available for sale to the
general public will be reduced to the extent such persons
purchase such reserved shares. Any reserved shares that are not
so purchased will be offered by the underwriters to the general
public on the same basis as the other shares offered in this
prospectus.
The underwriters will not execute sales in discretionary
accounts without the prior written specific approval of the
customers.
The company estimates that their share of the total expenses of
the offering, excluding underwriting discounts and commissions,
will be approximately $ . The
underwriters have agreed to reimburse us for certain expenses up
to a maximum of $700,000 in the aggregate in connection with the
offering.
The company and the selling stockholders have agreed to
indemnify the several underwriters against certain liabilities,
including liabilities under the Securities Act.
The underwriters and their respective affiliates are full
service financial institutions engaged in various activities,
which may include securities trading, commercial and investment
banking, financial advisory, investment management, principal
investment, hedging, financing and brokerage activities. Certain
of the underwriters and their respective affiliates have from
time to time performed, and may
136
in the future perform, various financial advisory and investment
banking services for us, for which they received or will receive
customary fees and expenses. These services include depository
relationships in connection with the companys cash sweep
program.
In the ordinary course of their various business activities, the
underwriters and their respective affiliates may make or hold a
broad array of investments and actively trade debt and equity
securities (or related derivative securities) and financial
instruments (including bank loans) for their own account and for
the accounts of their customers and may at any time hold long
and short positions in such securities and instruments. Such
investment and securities activities may involve securities and
instruments of the company.
137
LEGAL
MATTERS
Ropes & Gray LLP, Boston, Massachusetts, will pass for
us on the validity of the shares of common stock offered by this
prospectus. The underwriters are being represented by Cleary
Gottlieb Steen & Hamilton LLP, New York, New York.
EXPERTS
The consolidated financial statements as of December 31,
2009 and 2008, and for each of the three years in the period
ended December 31, 2009, included in this Prospectus, and
the effectiveness of LPL Investment Holdings Inc.s
internal control over financial reporting as of
December 31, 2009, have been audited by
Deloitte & Touche LLP, an independent registered
public accounting firm, as stated in their report appearing
herein and elsewhere in the Registration Statement. Such
consolidated financial statements have been so included in
reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
WHERE YOU CAN
FIND ADDITIONAL INFORMATION
We file certain reports with the SEC, including annual reports
on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K.
We have filed with the SEC a registration statement on
Form S-1
under the Securities Act that registers the shares of our common
stock to be sold in this offering. This prospectus does not
contain all of the information set forth in the registration
statement and the exhibits and schedules filed as part of the
registration statement. For further information with respect to
us and our common stock, we refer you to the registration
statement and the exhibits and schedules filed as a part of the
registration statement. Statements contained in this prospectus
concerning the contents of any contract or any other document
are not necessarily complete. If a contract or document has been
filed as an exhibit to the registration statement, we refer you
to the copy of the contract or document that has been filed.
Each statement in this prospectus relating to a contract or
document filed as an exhibit is qualified in all respects by the
filed exhibit.
The reports and other information we file with the SEC can be
read and copied at the SECs Public Reference Room at
100 F Street, N.E., Washington D.C. 20549. You may
obtain information regarding the operation of the public
reference room by calling
1-800-SEC-0330.
The SEC also maintains a website
(http://www.sec.gov)
that contains reports, proxy and information statements and
other information that we file electronically with the SEC. Our
website address is www.lpl.com. We make available free of
charge, through our website, our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and all amendments to those reports, as soon as reasonably
practicable after such material is electronically filed with or
furnished to the SEC. Please note that our website address is
provided as an inactive textual reference only. Unless
specifically stated elsewhere in this prospectus, the
information contained on, or accessible through, our website is
not part of this prospectus, and is therefore not incorporated
by reference.
INCORPORATION OF
CERTAIN INFORMATION BY REFERENCE
The SEC allows us to incorporate by reference the
information contained in documents that we have filed with them,
which means that we can disclose important information to you by
referring you to those documents. The information incorporated
by reference is considered to be part of this prospectus. We
hereby incorporate by reference the documents listed below:
|
|
|
|
|
our annual report on
Form 10-K
for the fiscal year ended December 31, 2009 as filed on
March 9, 2010;
|
|
|
|
our quarterly report on
Form 10-Q
for the three months ended March 31, 2010 as filed on
May 7, 2010;
|
138
|
|
|
|
|
our current reports on
Form 8-K
filed on January 27, 2010, February 18, 2010,
May 28, 2010, June 14, 2010 and June 17, 2010;
|
|
|
|
|
|
our proxy statement on Schedule 14A as filed on
April 27, 2010 and
|
|
|
|
|
|
our definitive information statement on Schedule 14C as
filed on June 28, 2010.
|
Any statement incorporated or deemed to be incorporated by
reference shall be deemed to be modified or superseded for
purposes of this prospectus to the extent that a statement
contained in this prospectus or in any other subsequently filed
document which also is or is deemed to be incorporated by
reference in this prospectus modifies or supersedes that
statement.
You may request a copy of these filings, at no cost, by writing
or telephoning us at the following address:
Secretary
LPL Investment Holdings Inc.
One Beacon Street
Boston, Massachusetts 02108
(617) 423-3644
We make available these filings on our website, www.lpl.com.
Unless specifically stated elsewhere in this prospectus, the
information contained on, or accessible through, our website is
not incorporated by reference into this registration statement.
139
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
Commissions
|
|
$
|
388,972
|
|
|
$
|
347,220
|
|
Advisory fees
|
|
|
206,330
|
|
|
|
163,905
|
|
Asset-based fees
|
|
|
71,450
|
|
|
|
62,654
|
|
Transaction and other fees
|
|
|
67,363
|
|
|
|
61,338
|
|
Interest income, net of operating interest expense
|
|
|
4,871
|
|
|
|
5,394
|
|
Other
|
|
|
4,420
|
|
|
|
2,467
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
743,406
|
|
|
|
642,978
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
Commissions and advisory fees
|
|
|
504,862
|
|
|
|
434,702
|
|
Compensation and benefits
|
|
|
73,575
|
|
|
|
66,978
|
|
Depreciation and amortization
|
|
|
25,590
|
|
|
|
27,395
|
|
Promotional
|
|
|
14,350
|
|
|
|
12,642
|
|
Occupancy and equipment
|
|
|
12,018
|
|
|
|
12,445
|
|
Professional services
|
|
|
9,799
|
|
|
|
8,366
|
|
Communications and data processing
|
|
|
8,526
|
|
|
|
9,186
|
|
Brokerage, clearing and exchange
|
|
|
8,340
|
|
|
|
7,829
|
|
Regulatory fees and expenses
|
|
|
6,148
|
|
|
|
5,474
|
|
Restructuring charges
|
|
|
3,949
|
|
|
|
(327
|
)
|
Travel and entertainment
|
|
|
2,396
|
|
|
|
1,758
|
|
Other
|
|
|
4,777
|
|
|
|
3,720
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
674,330
|
|
|
|
590,168
|
|
Non-operating interest expense
|
|
|
24,336
|
|
|
|
25,941
|
|
Loss on equity method investment
|
|
|
24
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
698,690
|
|
|
|
616,193
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE PROVISION FOR INCOME TAXES
|
|
|
44,716
|
|
|
|
26,785
|
|
PROVISION FOR INCOME TAXES
|
|
|
19,162
|
|
|
|
11,988
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
25,554
|
|
|
$
|
14,797
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE (Note 12):
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.29
|
|
|
$
|
0.17
|
|
Diluted
|
|
$
|
0.25
|
|
|
$
|
0.15
|
|
See notes to unaudited condensed consolidated financial
statements.
F-2
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
(Unaudited)
(Dollars in thousands, except par value)
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
324,761
|
|
|
$
|
378,594
|
|
Cash and securities segregated under federal and other
regulations
|
|
|
310,411
|
|
|
|
288,608
|
|
Receivables from:
|
|
|
|
|
|
|
|
|
Clients, net of allowance of $797 at March 31, 2010 and
$792 at December 31, 2009
|
|
|
272,708
|
|
|
|
257,529
|
|
Product sponsors, broker-dealers and clearing organizations
|
|
|
208,971
|
|
|
|
171,900
|
|
Others, net of allowances of $8,077 at March 31, 2010 and
$6,159 at December 31, 2009
|
|
|
146,374
|
|
|
|
139,317
|
|
Securities owned:
|
|
|
|
|
|
|
|
|
Trading(1)
|
|
|
15,703
|
|
|
|
15,361
|
|
Held-to-maturity
|
|
|
10,339
|
|
|
|
10,454
|
|
Securities borrowed
|
|
|
3,310
|
|
|
|
4,950
|
|
Fixed assets, net of accumulated depreciation and amortization
of $254,952 at March 31, 2010 and $239,868 at
December 31, 2009
|
|
|
87,080
|
|
|
|
101,584
|
|
Goodwill
|
|
|
1,293,366
|
|
|
|
1,293,366
|
|
Intangible assets, net of accumulated amortization of $144,980
at March 31, 2010 and $136,177 at December 31, 2009
|
|
|
587,823
|
|
|
|
597,083
|
|
Other assets
|
|
|
82,440
|
|
|
|
78,190
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,343,286
|
|
|
$
|
3,336,936
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
Bank loans payable
|
|
$
|
40,000
|
|
|
$
|
|
|
Drafts payable
|
|
|
134,747
|
|
|
|
125,767
|
|
Payables to clients
|
|
|
410,208
|
|
|
|
493,943
|
|
Payables to broker-dealers and clearing organizations
|
|
|
23,441
|
|
|
|
18,217
|
|
Accrued commissions and advisory fees payable
|
|
|
113,812
|
|
|
|
110,040
|
|
Accounts payable and accrued liabilities
|
|
|
177,319
|
|
|
|
175,742
|
|
Income taxes payable
|
|
|
38,718
|
|
|
|
24,226
|
|
Interest rate swaps
|
|
|
14,250
|
|
|
|
17,292
|
|
Securities sold but not yet purchased at market value
|
|
|
2,312
|
|
|
|
4,003
|
|
Senior credit facilities and subordinated notes
|
|
|
1,367,117
|
|
|
|
1,369,223
|
|
Deferred income taxes net
|
|
|
138,205
|
|
|
|
147,608
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,460,129
|
|
|
|
2,486,061
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
Common stock, $.001 par value; 200,000,000 shares
authorized; 94,241,567 shares issued and outstanding at
March 31, 2010 of which 7,430,381 are restricted, and
94,214,762 shares issued and outstanding at
December 31, 2009 of which 7,423,973 are restricted
|
|
|
87
|
|
|
|
87
|
|
Additional paid-in capital
|
|
|
682,899
|
|
|
|
679,277
|
|
Stockholder loans
|
|
|
(51
|
)
|
|
|
(499
|
)
|
Accumulated other comprehensive loss
|
|
|
(8,614
|
)
|
|
|
(11,272
|
)
|
Retained earnings
|
|
|
208,836
|
|
|
|
183,282
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
883,157
|
|
|
|
850,875
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
3,343,286
|
|
|
$
|
3,336,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes $7,799 and $7,797 pledged
to clearing organizations at March 31, 2010 and
December 31, 2009, respectively.
|
See notes to unaudited condensed consolidated financial
statements.
F-3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common
|
|
|
Paid-In
|
|
|
Stockholder
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Stockholders
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Loans
|
|
|
Income (Loss)
|
|
|
Earnings
|
|
|
Equity
|
|
|
BALANCE December 31, 2008
|
|
$
|
87
|
|
|
$
|
670,897
|
|
|
$
|
(936
|
)
|
|
$
|
(15,498
|
)
|
|
$
|
135,762
|
|
|
$
|
790,312
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,797
|
|
|
|
14,797
|
|
Unrealized gain on interest rate swaps, net of tax expense of
$393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,034
|
|
|
|
|
|
|
|
1,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,831
|
|
Stockholder loans
|
|
|
|
|
|
|
|
|
|
|
456
|
|
|
|
|
|
|
|
|
|
|
|
456
|
|
Share-based compensation
|
|
|
|
|
|
|
1,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,426
|
|
Repurchase of 10,000 shares of common stock
|
|
|
|
|
|
|
(181
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(181
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE March 31, 2009
|
|
$
|
87
|
|
|
$
|
672,142
|
|
|
$
|
(480
|
)
|
|
$
|
(14,464
|
)
|
|
$
|
150,559
|
|
|
$
|
807,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE December 31, 2009
|
|
$
|
87
|
|
|
$
|
679,277
|
|
|
$
|
(499
|
)
|
|
$
|
(11,272
|
)
|
|
$
|
183,282
|
|
|
$
|
850,875
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,554
|
|
|
|
25,554
|
|
Unrealized gain on interest rate swaps, net of tax expense of
$384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,658
|
|
|
|
|
|
|
|
2,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,212
|
|
Exercise of stock options
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
Stockholder loans
|
|
|
|
|
|
|
|
|
|
|
448
|
|
|
|
|
|
|
|
|
|
|
|
448
|
|
Share-based compensation
|
|
|
|
|
|
|
3,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,145
|
|
Issuance of 20,000 shares of common stock
|
|
|
|
|
|
|
468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE March 31, 2010
|
|
$
|
87
|
|
|
$
|
682,899
|
|
|
$
|
(51
|
)
|
|
$
|
(8,614
|
)
|
|
$
|
208,836
|
|
|
$
|
883,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial
statements.
F-4
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
25,554
|
|
|
$
|
14,797
|
|
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
|
|
|
|
|
|
|
|
|
Noncash items:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
25,590
|
|
|
|
27,395
|
|
Amortization of debt issuance costs
|
|
|
1,111
|
|
|
|
936
|
|
Impairment of fixed assets
|
|
|
195
|
|
|
|
|
|
Loss (gain) on disposal of fixed assets
|
|
|
2
|
|
|
|
(14
|
)
|
Share-based compensation
|
|
|
3,145
|
|
|
|
1,426
|
|
Provision for bad debts
|
|
|
2,169
|
|
|
|
672
|
|
Deferred income tax provision
|
|
|
(9,787
|
)
|
|
|
(5,397
|
)
|
Loss on equity method investment
|
|
|
24
|
|
|
|
84
|
|
Lease abandonment
|
|
|
(80
|
)
|
|
|
|
|
Loan forgiveness
|
|
|
1,627
|
|
|
|
|
|
Other
|
|
|
(222
|
)
|
|
|
431
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Cash and securities segregated under federal and other
regulations
|
|
|
(21,803
|
)
|
|
|
10,607
|
|
Receivables from clients
|
|
|
(15,237
|
)
|
|
|
54,234
|
|
Receivables from product sponsors, broker-dealers and clearing
organizations
|
|
|
(37,071
|
)
|
|
|
63,140
|
|
Receivables from others
|
|
|
(10,339
|
)
|
|
|
(14,810
|
)
|
Securities owned
|
|
|
(101
|
)
|
|
|
553
|
|
Securities borrowed
|
|
|
1,640
|
|
|
|
(361
|
)
|
Other assets
|
|
|
(574
|
)
|
|
|
(2,988
|
)
|
Drafts payable
|
|
|
8,980
|
|
|
|
2,084
|
|
Payables to clients
|
|
|
(83,735
|
)
|
|
|
(55,241
|
)
|
Payables to broker-dealers and clearing organizations
|
|
|
5,224
|
|
|
|
3,549
|
|
Accrued commissions and advisory fees payable
|
|
|
3,772
|
|
|
|
288
|
|
Accounts payable and accrued liabilities
|
|
|
1,093
|
|
|
|
(7,413
|
)
|
Income taxes payable
|
|
|
14,492
|
|
|
|
11,646
|
|
Securities sold but not yet purchased
|
|
|
(1,691
|
)
|
|
|
(1,733
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(86,022
|
)
|
|
|
103,885
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial
statements.
F-5
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash
Flows (Continued)
(Unaudited)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
(1,463
|
)
|
|
$
|
(1,235
|
)
|
Proceeds from the disposal of fixed assets
|
|
|
|
|
|
|
67
|
|
Purchase of securities classified as
held-to-maturity
|
|
|
(2,008
|
)
|
|
|
(2,237
|
)
|
Proceeds from maturity of securities classified as
held-to-maturity
|
|
|
2,100
|
|
|
|
1,500
|
|
Deposits of restricted cash
|
|
|
(2,454
|
)
|
|
|
|
|
Release of restricted cash
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(3,775
|
)
|
|
|
(1,905
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from bank loans payable
|
|
|
40,000
|
|
|
|
|
|
Repayment of senior credit facilities
|
|
|
(2,106
|
)
|
|
|
(2,106
|
)
|
Payment of debt issuance costs
|
|
|
(2,407
|
)
|
|
|
|
|
Repayment of stockholder loans
|
|
|
|
|
|
|
462
|
|
Proceeds from stock options exercised
|
|
|
9
|
|
|
|
|
|
Issuance of common stock
|
|
|
468
|
|
|
|
|
|
Repurchase of common stock
|
|
|
|
|
|
|
(181
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
35,964
|
|
|
|
(1,825
|
)
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(53,833
|
)
|
|
|
100,155
|
|
CASH AND CASH EQUIVALENTS Beginning of period
|
|
|
378,594
|
|
|
|
219,239
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS End of period
|
|
$
|
324,761
|
|
|
$
|
319,394
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
9,595
|
|
|
$
|
11,221
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
14,796
|
|
|
$
|
5,758
|
|
|
|
|
|
|
|
|
|
|
NONCASH DISCLOSURES:
|
|
|
|
|
|
|
|
|
Capital expenditures purchased through short-term credit
|
|
$
|
560
|
|
|
$
|
1,034
|
|
|
|
|
|
|
|
|
|
|
Increase in unrealized gain on interest rate swaps, net of tax
expense
|
|
$
|
2,658
|
|
|
$
|
953
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial
statements.
F-6
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
|
|
1.
|
Organization and
Description of the Company
|
LPL Investment Holdings Inc. (LPLIH), a Delaware
holding corporation, together with its consolidated subsidiaries
(collectively, the Company) provides an integrated
platform of proprietary technology, brokerage and investment
advisory services to independent financial advisors and
financial advisors at financial institutions (collectively
advisors) in the United States. Through its
proprietary technology, custody and clearing platforms, the
Company provides access to diversified financial products and
services enabling its advisors to offer independent financial
advice and brokerage services to retail investors (their
clients).
Quarterly Reporting The unaudited
condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). These unaudited condensed
consolidated financial statements reflect all adjustments that
are, in the opinion of management, necessary for a fair
statement of the results for the interim periods presented.
These adjustments are of a normal recurring nature. The
Companys results for any interim period are not
necessarily indicative of results for a full year or any other
interim period. Certain reclassifications were made to
previously reported amounts in the unaudited condensed
consolidated financial statements and notes thereto to make them
consistent with the current period presentation.
The unaudited condensed consolidated financial statements do not
include all information and notes necessary for a complete
presentation of financial position, results of operations and
cash flows in conformity with generally accepted accounting
principles in the United States of America (GAAP).
Accordingly, these financial statements should be read in
conjunction with the Companys audited consolidated
financial statements and the related notes for the year ended
December 31, 2009, contained in the Companys Annual
Report on
Form 10-K
as filed with the SEC. The Company has evaluated subsequent
events up to and including the date these unaudited condensed
consolidated financial statements were issued.
Consolidation These unaudited
condensed consolidated financial statements include the accounts
of LPLIH and its subsidiaries. Intercompany transactions and
balances have been eliminated. Equity investments in which the
Company exercises significant influence but does not exercise
control and is not the primary beneficiary are accounted for
using the equity method.
Use of Estimates The preparation of
the unaudited condensed consolidated financial statements in
conformity with GAAP requires the Company to make estimates and
judgments that affect the reported amounts of assets and
liabilities, revenue and expenses and related disclosures of
contingent assets and liabilities. On an on-going basis, the
Company evaluates estimates, including those related to revenue
and related expense recognition, asset impairment, valuation of
accounts receivable, contingencies and litigation, and valuation
and recognition of share-based payments. These accounting
policies are stated in the notes to the audited consolidated
financial statements for the year ended December 31, 2009,
contained in the Annual Report on
Form 10-K
as filed with the SEC. These estimates are based on the
information that is currently available and on various other
assumptions that the Company believes to be reasonable under the
circumstances. Actual results could vary from these estimates
under different assumptions or conditions and the differences
may be material to the unaudited condensed consolidated
financial statements.
Reportable Segment The Companys
internal reporting is organized into three service channels;
Independent Advisor Services, Institution Services and Custom
Clearing Services, which are designed to enhance the services
provided to its advisors and financial institutions. These
service channels qualify as individual operating segments, but
are aggregated and viewed as one single
F-7
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
reportable segment due to their similar economic
characteristics, products and services, production and
distribution process, regulatory environment and quantitative
thresholds.
Fair Value of Financial Instruments
The Companys financial assets and liabilities are carried
at fair value or at amounts that, because of their short-term
nature, approximate current fair value, with the exception of
its indebtedness. The Company carries borrowings on its senior
secured credit facilities and unsecured subordinated notes at
amortized cost. As of March 31, 2010, the carrying amount
and fair value of these borrowings were approximately
$1,367 million and $1,316 million, respectively. As of
December 31, 2009, the carrying amount and fair value was
approximately $1,369 million and $1,278 million,
respectively. See Note 4 for additional detail regarding
the Companys fair value measurements.
Recently Issued Accounting
Pronouncements Recent accounting
pronouncements or changes in accounting pronouncements during
the three months ended March 31, 2010, as compared to the
recent accounting pronouncements described in the Companys
2009 Annual Report on
Form 10-K,
that are of significance, or potential significance, to the
Company are discussed below.
In January 2010, the Financial Accounting Standards Board issued
Accounting Standards Update (ASU)
No. 2010-06,
Fair Value Measurements and Disclosures (Topic
820) Improving Disclosures about Fair Value
Measurements (ASU
2010-6). ASU
2010-6
requires new disclosures regarding significant transfers into
and out of Level 1 and Level 2 fair value measurements
and separate disclosures about purchases, sales, issuances and
settlements relating to Level 3 fair value measurements.
This ASU also clarifies existing disclosures of inputs and
valuation techniques for Level 2 and Level 3 fair
value measurements. ASU
2010-6 is
effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosure of
activity within Level 3 fair value measurements, which is
effective for fiscal years beginning after December 15,
2010 and for interim periods within those years. The adoption of
ASU 2010-6
did not have a material impact on the Companys unaudited
condensed consolidated financial statements.
Strategic
Business Review Initiative
On December 29, 2008, the Company committed to and
implemented an organizational restructuring plan intended to
reduce its cost structure and improve operating efficiencies,
which resulted in a reduction in its overall workforce of
approximately 250 employees. In accordance with Accounting
Standards Codification Topic 420, Accounting for Costs
Associated with Exit or Disposal Activities, the Company has
recorded severance and one-time involuntary termination benefit
accruals in accounts payable and accrued liabilities within the
unaudited condensed consolidated statements of financial
condition. The Company completed this initiative and expects to
pay all costs by April 2011.
The following table summarizes the balance of accrued expenses
related to the strategic business review and the changes in the
accrued amounts as of and for the three months ended
March 31, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Balance
|
|
|
|
|
|
Accrued Balance
|
|
|
Cumulative
|
|
|
|
at December 31,
|
|
|
|
|
|
at March 31,
|
|
|
Costs Incurred
|
|
|
|
2009
|
|
|
Payments
|
|
|
2010
|
|
|
to Date(1)
|
|
|
Severance and benefits
|
|
$
|
1,996
|
|
|
$
|
(696
|
)
|
|
$
|
1,300
|
|
|
$
|
14,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
At March 31, 2010, cumulative costs incurred to date
represent the total expected costs. |
F-8
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
Consolidation
of Affiliated Entities Initiative
On July 10, 2009, the Company committed to a corporate
restructuring plan that consolidated the operations of Mutual
Service Corporation (MSC), Associated Financial
Group, Inc., Associated Securities Corp., Inc.
(Associated), Associated Planners Investment
Advisory, Inc. and Waterstone Financial Group, Inc.
(WFG) (together, the Affiliated
Entities) with LPL Financial Corporation (LPL
Financial). This restructuring was effected to enhance
service offerings to advisors while also generating
efficiencies. The Company expects total costs associated with
the initiative to be approximately $73.8 million. The
Company has incurred the majority of these costs and anticipates
recognizing the remaining costs by December 2013; however,
adjustments may occur due to estimates of abandoned lease
obligations with terms that extend through 2018.
The Company paid charges related to the conversion and transfer
of certain advisors associated with the Affiliated Entities and
their client accounts. Following the completion of these
transfer activities, the registered representatives and client
accounts that transferred are associated with LPL Financial. In
2009, as a condition for the regulatory approval of the
transfer, the Affiliated Entities were required to deposit
$12.8 million into escrow accounts pending the resolution
of certain matters, of which $7.3 million was released.
During the first quarter of 2010, the Company was required to
deposit an additional $2.5 million into the escrow
accounts, of which $0.1 million has been released.
The Company paid charges related to early termination costs
associated with certain contracts held by the Affiliated
Entities. Additionally, the Company recorded accruals for
employee related costs, including severance and one-time
involuntary termination benefits that will be recognized ratably
over the employees remaining service period.
The Company recognized charges related to the early termination
and partial abandonment of certain lease arrangements offset by
estimates for
sub-lease
efforts. The Company anticipates additional costs of
approximately $1.9 million related to the abandonment of
the remaining office space, which can not be fully estimated
until the date of abandonment. The Company also recorded
non-cash charges for the impairment of fixed assets associated
with abandoned lease arrangements.
The following table summarizes the balance of accrued expenses
and the changes in the accrued amounts as of and for the three
months ended March 31, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
Cumulative
|
|
|
Total
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Costs
|
|
|
Expected
|
|
|
|
December 31,
|
|
|
Costs
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
Incurred
|
|
|
Restructuring
|
|
|
|
2009
|
|
|
Incurred
|
|
|
Payments
|
|
|
Non-cash
|
|
|
2010
|
|
|
to Date
|
|
|
Costs
|
|
|
Severance and benefits
|
|
$
|
2,759
|
|
|
$
|
1,774
|
|
|
$
|
(2,412
|
)
|
|
$
|
(456
|
)
|
|
$
|
1,665
|
|
|
$
|
11,210
|
|
|
$
|
11,525
|
|
Lease and contract termination fees
|
|
|
7,458
|
|
|
|
485
|
|
|
|
(1,519
|
)
|
|
|
80
|
|
|
|
6,504
|
|
|
|
16,404
|
|
|
|
18,455
|
|
Asset impairments
|
|
|
|
|
|
|
195
|
|
|
|
|
|
|
|
(195
|
)
|
|
|
|
|
|
|
20,119
|
|
|
|
20,177
|
|
Conversion and transfer costs
|
|
|
304
|
|
|
|
1,495
|
|
|
|
(397
|
)
|
|
|
(1,128
|
)
|
|
|
274
|
|
|
|
15,378
|
|
|
|
23,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,521
|
|
|
$
|
3,949
|
|
|
$
|
(4,328
|
)
|
|
$
|
(1,699
|
)
|
|
$
|
8,443
|
|
|
$
|
63,111
|
|
|
$
|
73,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
Fair Value
Measurements
|
Fair value is defined as the exchange price that would be
received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market
participants at the measurement date. Inputs used to measure
fair value are prioritized within a three-level fair value
hierarchy. This hierarchy requires
F-9
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
entities to maximize the use of observable inputs and minimize
the use of unobservable inputs. The three levels of inputs used
to measure fair value are as follows:
|
|
|
|
|
Level 1 Quoted prices in active
markets for identical assets or liabilities.
|
|
|
|
Level 2 Observable inputs other
than quoted prices included in Level 1, such as quoted
prices for similar assets and liabilities in active markets;
quoted prices for identical or similar assets and liabilities in
markets that are not active; or other inputs that are observable
or can be corroborated by observable market data.
|
|
|
|
Level 3 Unobservable inputs that
are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities. This
includes certain pricing models, discounted cash flow
methodologies and similar techniques that use significant
unobservable inputs.
|
The Companys fair value measurements are evaluated within
the fair value hierarchy, based on the nature of inputs used to
determine the fair value at the measurement date. At
March 31, 2010, the Company had the following financial
assets and liabilities that are measured at fair value on a
recurring basis:
Cash Equivalents The Companys
cash equivalents include money market funds, which are short
term in nature with readily determinable values derived from
active markets.
Securities Segregated Under Federal and Other
Regulations The Companys segregated
accounts contain U.S. treasury securities that are short
term in nature with readily determinable values derived from
quoted prices in active markets.
Securities Owned and Securities Sold But Not Yet
Purchased The Companys trading
securities consist of house account model portfolios for the
purpose of benchmarking the performance of its fee based
advisory platforms and temporary positions resulting from the
processing of client transactions. Examples of these securities
include money market funds, U.S. treasuries, mutual funds,
certificates of deposit, traded equity securities and debt
securities.
The Company uses prices obtained from independent third-party
pricing services to measure the fair value of its trading
securities. Prices received from the pricing services are
validated using various methods including comparison to prices
received from additional pricing services, comparison to
available quoted market prices and review of other relevant
market data including implied yields of major categories of
securities. In general, these quoted prices are derived from
active markets for identical assets or liabilities. When quoted
prices in active markets for identical assets and liabilities
are not available, the quoted prices are based on similar assets
and liabilities or inputs other than the quoted prices that are
observable, either directly or indirectly. For certificates of
deposit and treasury securities, the Company utilizes
market-based inputs including observable market interest rates
that correspond to the remaining maturities or the next interest
reset dates. At March 31, 2010, the Company did not adjust
prices received from the independent third-party pricing
services.
Other Assets The Companys other
assets include deferred compensation plan assets that are
invested in money market funds and mutual funds which are
actively traded and valued based on quoted market prices in
active markets.
Interest Rate Swaps The Companys
interest rate swaps are not traded on a market exchange;
therefore, the fair values are determined using externally
developed valuation models which include assumptions about the
London Interbank Offered Rate (LIBOR) yield curve at
interim reporting dates as well as counterparty credit risk and
the Companys own non-performance risk.
F-10
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
There have been no transfers of assets or liabilities between
fair value measurement classifications during the three months
ended March 31, 2010. The following tables summarize the
Companys financial assets and financial liabilities
measured at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Measurements
|
|
|
At March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
152,683
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
152,683
|
|
Securities segregated under federal and other regulations
|
|
|
308,387
|
|
|
|
|
|
|
|
|
|
|
|
308,387
|
|
Securities owned trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
177
|
|
|
|
|
|
|
|
|
|
|
|
177
|
|
Mutual funds
|
|
|
7,035
|
|
|
|
|
|
|
|
|
|
|
|
7,035
|
|
Equity securities
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
Debt securities
|
|
|
|
|
|
|
365
|
|
|
|
|
|
|
|
365
|
|
U.S. treasury obligations
|
|
|
7,799
|
|
|
|
|
|
|
|
|
|
|
|
7,799
|
|
Certificates of deposit
|
|
|
|
|
|
|
297
|
|
|
|
|
|
|
|
297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities owned trading
|
|
|
15,041
|
|
|
|
662
|
|
|
|
|
|
|
|
15,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
14,874
|
|
|
|
|
|
|
|
|
|
|
|
14,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
490,985
|
|
|
$
|
662
|
|
|
$
|
|
|
|
$
|
491,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold but not yet purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
$
|
2,200
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,200
|
|
Equity securities
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
Certificates of deposit
|
|
|
|
|
|
|
72
|
|
|
|
|
|
|
|
72
|
|
Debt securities
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities sold but not yet purchased
|
|
|
2,219
|
|
|
|
93
|
|
|
|
|
|
|
|
2,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
|
|
|
|
14,250
|
|
|
|
|
|
|
|
14,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
|
$
|
2,219
|
|
|
$
|
14,343
|
|
|
$
|
|
|
|
$
|
16,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-11
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Measurements
|
|
|
At December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
223,665
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
223,665
|
|
Securities segregated under federal and other regulations
|
|
|
279,579
|
|
|
|
|
|
|
|
|
|
|
|
279,579
|
|
Securities owned trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
181
|
|
Mutual funds
|
|
|
6,694
|
|
|
|
|
|
|
|
|
|
|
|
6,694
|
|
Equity securities
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
Debt securities
|
|
|
|
|
|
|
425
|
|
|
|
|
|
|
|
425
|
|
U.S. treasury obligations
|
|
|
7,797
|
|
|
|
|
|
|
|
|
|
|
|
7,797
|
|
Certificates of deposit
|
|
|
|
|
|
|
253
|
|
|
|
|
|
|
|
253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities owned trading
|
|
|
14,683
|
|
|
|
678
|
|
|
|
|
|
|
|
15,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
12,739
|
|
|
|
|
|
|
|
|
|
|
|
12,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
530,666
|
|
|
$
|
678
|
|
|
$
|
|
|
|
$
|
531,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold but not yet purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
$
|
3,773
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,773
|
|
U.S. treasury obligations
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
Equity securities
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
Certificates of deposit
|
|
|
|
|
|
|
123
|
|
|
|
|
|
|
|
123
|
|
Debt securities
|
|
|
|
|
|
|
95
|
|
|
|
|
|
|
|
95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities sold but not yet purchased
|
|
|
3,785
|
|
|
|
218
|
|
|
|
|
|
|
|
4,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
|
|
|
|
17,292
|
|
|
|
|
|
|
|
17,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
|
$
|
3,785
|
|
|
$
|
17,510
|
|
|
$
|
|
|
|
$
|
21,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Held-to-Maturity
Securities
|
The Company holds certain investments in securities including
U.S. government notes. The Company has both the intent and
the ability to hold these investments to maturity and classifies
them as such. Interest income is accrued as earned. Premiums and
discounts are amortized using a method that approximates the
effective yield method over the term of the security and are
recorded as an adjustment to the investment yield.
F-12
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
The amortized cost, gross unrealized gains and fair value of
securities
held-to-maturity
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Fair Value
|
|
|
At March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government notes
|
|
$
|
10,339
|
|
|
$
|
55
|
|
|
$
|
10,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government notes
|
|
$
|
10,354
|
|
|
$
|
49
|
|
|
$
|
10,403
|
|
Certificate of deposit
|
|
|
100
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,454
|
|
|
$
|
49
|
|
|
$
|
10,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The maturities of securities
held-to-maturity
at March 31, 2010 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 Year
|
|
|
1-2 Years
|
|
|
Total
|
|
|
U.S. government notes at amortized cost
|
|
$
|
3,763
|
|
|
$
|
6,576
|
|
|
$
|
10,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government notes at fair value
|
|
$
|
3,780
|
|
|
$
|
6,614
|
|
|
$
|
10,394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of intangible assets as of March 31, 2010
and December 31, 2009 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Value
|
|
|
Amortization
|
|
|
Value
|
|
|
At March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Definite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Advisor and financial institution relationships
|
|
$
|
458,424
|
|
|
$
|
(97,869
|
)
|
|
$
|
360,555
|
|
Product sponsor relationships
|
|
|
231,930
|
|
|
|
(46,426
|
)
|
|
|
185,504
|
|
Trust client relationships
|
|
|
2,630
|
|
|
|
(685
|
)
|
|
|
1,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total definite-lived intangible assets
|
|
$
|
692,984
|
|
|
$
|
(144,980
|
)
|
|
$
|
548,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademark and trade name
|
|
|
|
|
|
|
|
|
|
|
39,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
|
|
|
|
|
|
$
|
587,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Definite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Advisor and financial institution relationships
|
|
$
|
458,424
|
|
|
$
|
(91,586
|
)
|
|
$
|
366,838
|
|
Product sponsor relationships
|
|
|
231,930
|
|
|
|
(43,482
|
)
|
|
|
188,448
|
|
Trust client relationships
|
|
|
2,630
|
|
|
|
(652
|
)
|
|
|
1,978
|
|
Trademarks and trade names
|
|
|
457
|
|
|
|
(457
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total definite-lived intangible assets
|
|
$
|
693,441
|
|
|
$
|
(136,177
|
)
|
|
$
|
557,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademark and trade name
|
|
|
|
|
|
|
|
|
|
|
39,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
|
|
|
|
|
|
$
|
597,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-13
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
Total amortization expense of intangible assets was
$9.3 million and $10.0 million for the three months
ended March 31, 2010 and 2009, respectively. Amortization
expense for each of the fiscal years ended December 2010
(remainder) through 2014 and thereafter is estimated as follows
(in thousands):
|
|
|
|
|
2010 remainder
|
|
$
|
27,746
|
|
2011
|
|
|
36,840
|
|
2012
|
|
|
36,548
|
|
2013
|
|
|
35,927
|
|
2014
|
|
|
35,927
|
|
Thereafter
|
|
|
375,016
|
|
|
|
|
|
|
Total
|
|
$
|
548,004
|
|
|
|
|
|
|
The Companys effective income tax rate differs from the
federal corporate tax rate of 35%, primarily as a result of
state taxes, settlement contingencies and expenses that are not
deductible for tax purposes. These items resulted in effective
tax rates of 42.9% and 44.8% for the three months ended
March 31, 2010 and 2009, respectively. Deferred income
taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes.
Senior Secured Credit Facilities
Borrowings under the Companys senior secured credit
facilities bear interest at a base rate equal to either one,
two, three, six, nine or twelve-month LIBOR plus the applicable
margin, or an alternative base rate (ABR) plus the
applicable margin. The ABR is equal to the greater of the prime
rate or the effective federal funds rate plus
1/2
of 1.00%. The applicable margin on the senior secured term
credit facilities could change depending on the Companys
credit rating. The senior secured credit facilities are subject
to certain financial and nonfinancial covenants. As of
March 31, 2010 and December 31, 2009, the Company was
in compliance with such covenants. The Company may voluntarily
repay outstanding loans under its senior secured credit
facilities at any time without premium or penalty, other than
customary breakage costs with respect to LIBOR loans.
Senior Unsecured Subordinated Notes
The Company has $550.0 million of senior unsecured
subordinated notes due December 15, 2015. The notes bear
interest at 10.75% per annum and interest payments are payable
semiannually in arrears. The Company is not required to make
mandatory redemption or sinking-fund payments with respect to
the notes. The indenture underlying the senior unsecured
subordinated notes contains various restrictions with respect to
the issuer, including one or more restrictions relating to
limitations on liens, sale and leaseback arrangements and funded
debt of subsidiaries. The Company may voluntarily repurchase its
senior unsecured subordinated notes at any time, pursuant to
certain prepayment penalties.
Revolving Line of Credit On
January 25, 2010, the Company amended its senior secured
credit facilities to increase the revolving credit facility from
$100.0 million to $218.2 million, $10.0 million
of which is being used to support the issuance of an irrevocable
letter of credit for its subsidiary, The Private
Trust Company, N.A. (PTC). As a result of the
amendment, the Company paid $2.8 million in debt issuance
costs, which have been capitalized in other assets within the
unaudited condensed consolidated statements of financial
condition and are being amortized as additional interest expense
over the expected term of the related debt agreement. The
Company also
F-14
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
extended the maturity of a $163.5 million tranche of the
revolving facility to June 28, 2013, while the remaining
$54.7 million tranche retains its original maturity date of
December 28, 2011. The tranche maturing in 2013 is priced
at LIBOR + 3.50% with a commitment fee of 0.75%. The tranche
maturing in 2011 maintains its previous pricing of LIBOR + 2.00%
with a commitment fee of 0.375%. There was no outstanding
balance on the revolving line of credit at March 31, 2010
and December 31, 2009.
Bank Loans Payable The Company
maintains two uncommitted lines of credit. One line has an
unspecified limit, and is primarily dependent on the
Companys ability to provide sufficient collateral. The
other line has a $100.0 million limit and allows for both
collateralized and uncollateralized borrowings. At
March 31, 2010 there was a $40.0 million outstanding
balance on the unsecured portion of one of the uncommitted lines
of credit. The line was subsequently paid down in full on
April 1, 2010. Both lines were utilized in 2009, however
there were no balances outstanding at December 31, 2009.
The Companys outstanding borrowings were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
Interest
|
|
|
|
Maturity
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
Bank loans payable unsecured
|
|
|
7/31/2010
|
|
|
$
|
40,000
|
|
|
|
1.00
|
%
|
|
$
|
|
|
|
|
|
|
Senior secured term loan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unhedged
|
|
|
6/28/2013
|
|
|
|
417,117
|
|
|
|
2.04
|
%(1)
|
|
|
419,223
|
|
|
|
2.00
|
%(3)
|
Hedged with interest rate swaps
|
|
|
6/28/2013
|
|
|
|
400,000
|
|
|
|
2.04
|
%(2)
|
|
|
400,000
|
|
|
|
2.00
|
%(4)
|
Senior unsecured subordinated notes
|
|
|
12/15/2015
|
|
|
|
550,000
|
|
|
|
10.75
|
%
|
|
|
550,000
|
|
|
|
10.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings
|
|
|
|
|
|
|
1,407,117
|
|
|
|
|
|
|
|
1,369,223
|
|
|
|
|
|
Less current borrowings (maturities within 12 months)
|
|
|
|
|
|
|
48,424
|
|
|
|
|
|
|
|
8,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings net of current portion
|
|
|
|
|
|
$
|
1,358,693
|
|
|
|
|
|
|
$
|
1,360,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of March 31, 2010, the variable interest rate for the
unhedged portion of the senior secured term loan is based on the
three-month LIBOR of 0.29%, plus the applicable interest rate
margin of 1.75%. |
|
(2) |
|
As of March 31, 2010, the variable interest rate for the
hedged portion of the senior secured term loan is based on the
three-month LIBOR of 0.29%, plus the applicable interest rate
margin of 1.75%. |
|
(3) |
|
As of December 31, 2009, the variable interest rate for the
unhedged portion of the senior secured term loan is based on the
three-month LIBOR of 0.25% plus the applicable interest rate
margin of 1.75%. |
|
(4) |
|
As of December 31, 2009, the variable interest rate for the
hedged portion of the senior secured term loan is based on the
three-month LIBOR of 0.25%, plus the applicable interest rate
margin of 1.75%. |
F-15
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
The following summarizes borrowing activity in the revolving and
uncommitted line of credit facilities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Average balance outstanding
|
|
$
|
8,168
|
|
|
$
|
90,000
|
|
Weighted-average interest rate
|
|
|
1.16
|
%
|
|
|
2.45
|
%
|
The minimum calendar year payments and maturities of borrowings
as of March 31, 2010 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
|
|
|
Senior
|
|
|
Total
|
|
|
|
Secured
|
|
|
Unsecured
|
|
|
Amount
|
|
|
2010 remainder
|
|
$
|
6,318
|
|
|
$
|
|
|
|
$
|
6,318
|
|
2011
|
|
|
8,424
|
|
|
|
|
|
|
|
8,424
|
|
2012
|
|
|
8,424
|
|
|
|
|
|
|
|
8,424
|
|
2013
|
|
|
793,951
|
|
|
|
|
|
|
|
793,951
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
550,000
|
|
|
|
550,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
817,117
|
|
|
$
|
550,000
|
|
|
$
|
1,367,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
An interest rate swap is a financial derivative instrument
whereby two parties enter into a contractual agreement to
exchange payments based on underlying interest rates. The
Company uses interest rate swap agreements to hedge the
variability on its floating rate senior secured term loan. The
Company is required to pay the counterparty to the agreement
fixed interest payments on a notional balance and in turn,
receives variable interest payments on that notional balance.
Payments are settled quarterly on a net basis.
The following table summarizes information related to the
Companys interest rate swaps as of March 31, 2010 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
|
|
|
|
|
|
|
Notional
|
|
|
Fixed
|
|
|
Receive
|
|
|
Fair
|
|
|
Maturity
|
Balance
|
|
|
Pay Rate
|
|
|
Rate(1)
|
|
|
Value
|
|
|
Date
|
|
$
|
70,000
|
|
|
|
3.43
|
%
|
|
|
0.29
|
%
|
|
$
|
(550
|
)
|
|
June 30, 2010
|
|
120,000
|
|
|
|
4.79
|
%
|
|
|
0.29
|
%
|
|
|
(1,352
|
)
|
|
June 30, 2010
|
|
145,000
|
|
|
|
4.83
|
%
|
|
|
0.29
|
%
|
|
|
(7,384
|
)
|
|
June 30, 2011
|
|
65,000
|
|
|
|
4.85
|
%
|
|
|
0.29
|
%
|
|
|
(4,964
|
)
|
|
June 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
400,000
|
|
|
|
|
|
|
|
|
|
|
$
|
(14,250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The variable receive rate reset on the last day of the period,
based on the applicable three-month LIBOR. The effective rate
from December 31, 2009 through March 30, 2010 was
0.25%. As of March 31, 2010, the effective rate was 0.29%. |
The interest rate swap agreements qualify for hedge accounting
and have been designated as cash flow hedges against specific
payments due on the Companys senior secured term loan. As
of
F-16
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
March 31, 2010, the Company assessed the interest rate swap
agreements as being highly effective and expects them to
continue to be highly effective. Accordingly, the changes in
fair value of the interest rate swaps have been recorded as
other comprehensive loss, with the fair value included as a
liability on the Companys unaudited condensed consolidated
statements of financial condition. The Company has reclassified
$4.3 million and $3.9 million from other comprehensive
loss as additional interest expense for the three months ended
March 31, 2010 and 2009, respectively. Based on current
interest rate assumptions and assuming no additional interest
rate swap agreements are entered into, the Company expects to
reclassify $17.2 million or $9.8 million after tax,
from other comprehensive loss as additional interest expense
over the next 12 months.
|
|
10.
|
Commitments and
Contingencies
|
Leases The Company leases certain
office space and equipment at its headquarter locations 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.
Service Contracts The Company is party
to certain long-term contracts for systems and services that
enable back office trade processing and clearing for its product
and service offerings. One agreement, for clearing services,
contains no minimum annual purchase commitment, but the
agreement provides for certain penalties should the Company fail
to maintain a certain threshold of client accounts.
Future minimum payments under leases, lease commitments and
other non-cancellable contractual obligations with remaining
terms greater than one year as of March 31, 2010 are as
follows (in thousands):
|
|
|
|
|
Years ending December 31
|
|
|
|
|
2010 remainder
|
|
$
|
22,152
|
|
2011
|
|
|
30,144
|
|
2012
|
|
|
23,469
|
|
2013
|
|
|
15,410
|
|
2014
|
|
|
8,765
|
|
Thereafter
|
|
|
15,065
|
|
|
|
|
|
|
Total(1)
|
|
$
|
115,005
|
|
|
|
|
|
|
|
|
|
(1) |
|
Minimum payments have not been reduced by minimum sublease
rental income of $0.5 million due in the future under
noncancellable subleases. |
Total rental expense for all operating leases was approximately
$4.4 million and $5.3 million for the three months
ended March 31, 2010 and 2009, respectively.
Guarantees The Company occasionally
enters into certain types of contracts that contingently require
it to indemnify certain parties against third-party claims. The
terms of these obligations vary and, because a maximum
obligation is not explicitly stated, the Company has determined
that it is not possible to make an estimate of the amount that
it could be obligated to pay under such contracts.
The Companys subsidiaries provide guarantees to securities
clearing houses and exchanges under their standard membership
agreements, which require a member to guarantee the performance
of other members. Under these agreements, if a member becomes
unable to satisfy its obligations to the clearing houses and
exchanges, all other members would be required to meet any
shortfall. The Companys liability under these arrangements
is not quantifiable and may exceed the cash and
F-17
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
securities it has posted as collateral. However, the potential
requirement for the Company to make payments under these
agreements is remote. Accordingly, no liability has been
recognized for these transactions.
Loan Commitments From time to time,
the Company makes loans to its advisors, primarily to newly
recruited advisors to assist in the transition process. Due to
timing differences, the Company may make commitments to issue
such loans prior to actually funding them. These commitments are
generally contingent upon certain events occurring, including
but not limited to the financial advisor joining the Company,
and may be forgivable. The Company had no significant unfunded
commitments at March 31, 2010 and December 31, 2009.
Litigation The Company has been named
as a defendant in various legal actions, including arbitrations.
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 predict
with certainty what the eventual loss or range of loss related
to such matters will be. The Company recognizes a legal
liability when it believes it is probable a liability has
occurred and the amount can be reasonably estimated. Defense
costs are expensed as incurred and classified as professional
services within the unaudited condensed consolidated statements
of income. When there is indemnification or insurance, the
Company may engage in defense of settlement and subsequently
seek reimbursement for such matters.
In connection with various acquisitions, and pursuant to the
purchase and sale agreements, the Company has received
third-party indemnification for certain legal proceedings and
claims. These matters have been defended and paid directly by
the indemnifying party.
On October 1, 2009, LPL Holdings, Inc., a subsidiary of the
Company, received written notice from a third-party indemnitor
under a certain purchase and sale agreement asserting that it is
no longer obligated to indemnify the Company for certain claims
under the provisions of the purchase and sale agreement. The
Company believes that this assertion is without merit and has
commenced litigation to enforce its indemnity rights.
Additionally, the Company may settle certain legal claims before
they are resolved with the indemnifying party.
The Company believes, based on the information available at this
time, after consultation with counsel, consideration of
insurance, if any, and the indemnifications provided by the
third-party indemnitors, notwithstanding the assertions by an
indemnifying party noted in the preceding paragraph, that the
outcome of such matters will not have a material adverse impact
on unaudited condensed consolidated statements of financial
condition, income or cash flows.
Other Commitments As of March 31,
2010, the Company had received collateral primarily in
connection with client margin loans with a market value of
approximately $311.6 million, which it can sell or
repledge. Of this amount, approximately $157.7 million has
been pledged or sold as of March 31, 2010;
$136.5 million was pledged to banks in connection with
unutilized secured margin lines of credit, $12.8 million
was pledged with client-owned securities to the Options Clearing
Corporation, and $8.4 million was loaned to the Depository
Trust Company (DTC) through participation in
its Stock Borrow Program. As of December 31, 2009, the
Company had received collateral primarily in connection with
client margin loans with a market value of approximately
$227.9 million, which it can sell or repledge. Of this
amount, approximately $158.8 million has been pledged or
sold as of December 31, 2009; $141.6 million was
pledged to banks in connection with unutilized secured margin
lines of credit, $10.0 million was pledged with
client-owned securities to the Options Clearing Corporation, and
$7.2 million was loaned to the DTC through participation in
its Stock Borrow Program.
F-18
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
In August of 2007, pursuant to agreements with a large global
insurance company, LPL Financial began providing brokerage,
clearing and custody services on a fully disclosed basis;
offering its investment advisory programs and platforms; and
providing technology and additional processing and related
services to its advisors and their clients. The terms of the
agreements are five years, subject to additional
24-month
extensions. Termination fees may be payable by a terminating or
breaching party depending on the specific cause of termination.
|
|
11.
|
Share-Based
Compensation
|
Certain employees, advisors, officers and directors who
contribute to the success of the Company participate in various
stock option plans. In addition, certain financial institutions
participate in a warrant plan. Stock options and warrants
generally vest in equal increments over a three- to five-year
period and expire on the 10th anniversary following the date of
grant.
The Company recognizes share-based compensation expense related
to employee stock option awards based on the grant date fair
value over the requisite service period of the award, which
generally equals the vesting period. The Company recognized
$2.5 million and $1.2 million of share-based
compensation related to the vesting of employee stock option
awards during the three months ended March 31, 2010 and
2009, respectively. As of March 31, 2010, total
unrecognized compensation cost related to non-vested share-based
compensation arrangements granted was $29.9 million, which
is expected to be recognized over a weighted-average period of
3.77 years.
The Company recognizes share-based compensation expense for
stock options and warrants awarded to its advisors and financial
institutions based on the fair value of awards at each interim
reporting period. The Company recognized $0.6 million and
$0.2 million of share based compensation during the three
months ended March 31, 2010 and 2009, respectively, related
to the vesting of stock options and warrants awarded to its
advisors and financial institutions. As of March 31, 2010,
total unrecognized compensation cost related to non-vested
share-based compensation arrangements granted was
$12.2 million for advisors and financial institutions,
which is expected to be recognized over a weighted-average
period of 4.11 years.
The following table presents the weighted-average assumptions
used by the Company in calculating the fair value of its stock
options and warrants with the Black-Scholes valuation model that
have been granted during the three months ended March 31,
2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
Expected life (in years)
|
|
|
6.51
|
|
|
|
8.81
|
|
Expected stock price volatility
|
|
|
50.32
|
%
|
|
|
48.67
|
%
|
Expected dividend yield
|
|
|
|
|
|
|
|
|
Annualized forfeiture rate
|
|
|
4.99
|
%
|
|
|
3.00
|
%
|
Fair value of options
|
|
$
|
12.34
|
|
|
$
|
10.40
|
|
Risk-free interest rate
|
|
|
2.79
|
%
|
|
|
2.45
|
%
|
The risk-free interest rates are based on the implied yield
available on U.S. Treasury constant maturities in effect at
the time of the grant with remaining terms equivalent to the
respective expected terms of the options. The dividend yield of
zero is based on the fact that the Company has no present
intention to pay cash dividends. The Company estimates the
expected term for its employee option awards using the
simplified method in accordance with Staff Accounting
Bulletin 110, Certain Assumptions Used in Valuation
Methods, because the Company does not have sufficient
relevant historical information to develop reasonable
expectations about future exercise patterns. The Company
estimates the expected term for stock options and warrants
awarded to advisors and financial institutions using the
contractual term. Expected volatility is calculated based on
companies
F-19
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
of similar growth and maturity and the Companys peer group
in the industry in which the Company does business because the
Company does not have sufficient historical volatility data. The
Company will continue to use peer group volatility information
until historical volatility of the Company is available to
measure expected volatility for future grants. In the future, as
the Company gains historical data for volatility of its own
stock and the actual term over which stock options and warrants
are held expected volatility and the expected term may change,
which could substantially change the grant-date fair value of
future awards of stock options and warrants and, ultimately,
compensation recorded on future grants.
The Company has assumed an annualized forfeiture rate for its
stock options and warrants based on a combined review of
industry and employee turnover data, as well as an analytical
review performed of historical pre-vesting forfeitures occurring
over the previous year. The Company records additional expense
if the actual forfeiture rate is lower than estimated and
records a recovery of prior expense if the actual forfeiture is
higher than estimated.
The following table summarizes the Companys activity in
its stock option and warrant plans for the three months ended
March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Weighted-Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Term (Years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Outstanding December 31, 2009
|
|
|
22,702,469
|
|
|
$
|
6.99
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
68,776
|
|
|
|
23.41
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(397
|
)
|
|
|
22.82
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(60,058
|
)
|
|
|
23.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding March 31, 2010
|
|
|
22,710,790
|
|
|
$
|
7.00
|
|
|
|
4.76
|
|
|
$
|
472,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable March 31, 2010
|
|
|
18,221,524
|
|
|
$
|
3.05
|
|
|
|
3.74
|
|
|
$
|
451,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about outstanding
stock option and warrant awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
Total
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Remaining
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
Range of Exercise
Prices
|
|
Shares
|
|
|
Life (Years)
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
At March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1.07 $2.38
|
|
|
17,185,660
|
|
|
|
3.50
|
|
|
$
|
1.74
|
|
|
|
17,185,660
|
|
|
$
|
1.74
|
|
$10.30 $19.74
|
|
|
948,799
|
|
|
|
8.65
|
|
|
|
18.30
|
|
|
|
198,876
|
|
|
|
16.74
|
|
$21.60 $22.08
|
|
|
2,209,650
|
|
|
|
9.18
|
|
|
|
22.02
|
|
|
|
124,499
|
|
|
|
21.60
|
|
$23.02 $27.80
|
|
|
2,366,681
|
|
|
|
8.24
|
|
|
|
26.58
|
|
|
|
712,489
|
|
|
|
27.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,710,790
|
|
|
|
4.76
|
|
|
$
|
7.00
|
|
|
|
18,221,524
|
|
|
$
|
3.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Nonqualified
Deferred Compensation Plan
On November 19, 2008, the Company established an unfunded,
unsecured deferred compensation plan to permit employees and
former employees that hold non-qualified stock options issued
under the 2005 Stock Option Plan for Incentive Stock Options and
2005 Stock Option Plan for Non-qualified Stock Options that were
to expire in 2009 and 2010, to receive stock units under the
F-20
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
2008 Nonqualified Deferred Compensation Plan. Stock units
represent the right to receive one share of common stock.
Distribution will occur at the earliest of (a) a date in
2012 to be determined by the Board of Directors; (b) a
change in control of the Company; or (c) death or
disability of the participant. Issuance of stock options for
stock units, which occurred in December 2008, is not taxable for
federal and state income tax purposes until the participant
receives a distribution under the deferred compensation plan. At
March 31, 2010, the Company had 2,823,452 stock units
outstanding under the 2008 Nonqualified Deferred Compensation
Plan.
2000 Stock Bonus
Plan
The Companys advisors participate in the fifth amended and
restated 2000 Stock Bonus Plan (the Stock Bonus
Plan), which provided for the grant and allocation of
bonus credits. Each bonus credit represented the right to
receive shares of common stock. Participation in the Stock Bonus
Plan was dependent upon meeting certain eligibility criteria,
and bonus credits were allocated to eligible participants based
on certain performance metrics, including amount and type of
commissions, as well as tenure. Bonus credits vested annually in
equal increments over a three-year period and expired on the
tenth anniversary following the date of grant. Unvested bonus
credits held by advisors who terminated prior to vesting were
forfeited and reallocated to other advisors eligible under the
plan. In 2008, the Company amended and restated its Stock Bonus
Plan to provide its advisors with physical ownership of common
stock of the Company. Consequently, on December 28, 2008,
the Company issued 7,423,973 restricted shares. These restricted
shares are entitled to vote but may not be sold, assigned or
transferred and are not entitled to receive dividends or
non-cash distributions, until either a sale of the Company that
constitutes a change in control or an initial public offering.
The Company accounts for restricted shares granted to its
advisors by measuring such grants at their then-current lowest
aggregate value. Since the value is contingent upon the
Companys decision to sell itself or issue its common stock
to the public through a registered initial public offering, the
current aggregate value will be zero until such event occurs.
Upon the occurrence of such an event, the Company will record
the par value, additional paid in capital and expense based on
the number of restricted shares under the stock bonus plan
multiplied by the fair market value determined at the event date.
Director
Restricted Stock Plan
In March 2010, the Company established a Director Restricted
Stock Plan (the Director Plan). Eligible
participants include non-employee directors who are in a
position to make a significant contribution to the success of
the Company. Restricted stock awards vest on the second
anniversary of the date of grant and upon termination of
service, unvested awards shall immediately be forfeited. On
March 15, 2010, the Company issued 6,408 restricted stock
awards to certain of its directors at a fair value of $23.41 per
share. A summary of the status of the Companys restricted
stock awards under the Director Plan as of and for the three
months ending March 31, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Number of
|
|
|
Grant-Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Nonvested at January 1, 2010
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
6,408
|
|
|
|
23.41
|
|
Vested
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at March 31, 2010
|
|
|
6,408
|
|
|
$
|
23.41
|
|
|
|
|
|
|
|
|
|
|
F-21
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
The Company accounts for restricted stock awards granted to its
non-employee directors by measuring such awards at their grant
date fair value. Share-based compensation expense is recognized
ratably over the requisite service period, which generally
equals the vesting period. As of March 31, 2010, total
unrecognized compensation cost was $0.2 million, which is
expected to be recognized over a weighted-average remaining
period of 1.96 years.
In calculating earnings per share using the two-class method,
the Company is required to allocate a portion of its earnings to
employees that hold stock units that contain non-forfeitable
rights to dividends or dividend equivalents under its 2008
Nonqualified Deferred Compensation Plan. Basic earnings per
share is computed by dividing income less earnings attributable
to employees that hold stock units under the 2008 Nonqualified
Deferred Compensation Plan by the basic weighted average number
of shares outstanding. Diluted earnings per share is computed in
a manner similar to basic earnings per share, except the
weighted average number of shares outstanding is increased to
include the dilutive effect of outstanding stock options,
warrants and other stock-based awards.
A reconciliation of the income used to compute basic and diluted
earnings per share for the periods noted was as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
Net income, as reported
|
|
$
|
25,554
|
|
|
$
|
14,797
|
|
Less: allocation of undistributed earnings to stock units
|
|
|
(414
|
)
|
|
|
(380
|
)
|
|
|
|
|
|
|
|
|
|
Net income, for computing basic earnings per share
|
|
$
|
25,140
|
|
|
$
|
14,417
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
Net income, as reported
|
|
$
|
25,554
|
|
|
$
|
14,797
|
|
Less: allocation of undistributed earnings to stock units
|
|
|
(364
|
)
|
|
|
(337
|
)
|
|
|
|
|
|
|
|
|
|
Net income, for computing diluted earnings per share
|
|
$
|
25,190
|
|
|
$
|
14,460
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the weighted average number of shares
outstanding used to compute basic and diluted earnings per share
for the periods noted was as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Basic weighted average number of shares outstanding
|
|
|
86,800
|
|
|
|
86,542
|
|
Dilutive common share equivalents
|
|
|
12,145
|
|
|
|
11,417
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average number of shares outstanding
|
|
|
98,945
|
|
|
|
97,959
|
|
|
|
|
|
|
|
|
|
|
F-22
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
Basic and diluted earnings per share for the periods noted was
as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Basic earnings per share
|
|
$
|
0.29
|
|
|
$
|
0.17
|
|
Diluted earnings per share
|
|
$
|
0.25
|
|
|
$
|
0.15
|
|
|
|
13.
|
Related Party
Transactions
|
Alix Partners, LLP (Alix Partners), a company
majority-owned by one of the Companys majority
stockholders, provides LPL Financial services pursuant to an
agreement for interim management and consulting. The Company
paid $0.6 million to AlixPartners during the three months
ended March 31, 2009.
One of the Companys majority stockholders owns a minority
interest in Artisan Partners Limited Partnership
(Artisan), which pays fees in exchange for product
distribution and record-keeping services. During the three
months ended March 31, 2010 and 2009, the Company earned
$0.6 million and $0.3 million, respectively, in fees
from Artisan. Additionally, as of March 31, 2010 and
December 31, 2009, Artisan owed the Company
$0.6 million and $0.5 million, respectively, which is
included in receivables from product sponsors, broker-dealers
and clearing organizations on the unaudited condensed
consolidated statements of financial condition.
American Beacon Advisor, Inc. (Beacon), a company
majority-owned by one of the Companys majority
stockholders, pays fees in exchange for product distribution and
record-keeping services. During the three months ended
March 31, 2010 and 2009, the Company earned
$0.1 million and, $0.1 million, respectively, in fees
from Beacon. Additionally, as of March 31, 2010 and
December 31, 2009, Beacon owed the Company
$0.1 million and $0.1 million, respectively, which is
included in receivables from product sponsors, broker-dealers
and clearing organizations on the unaudited condensed
consolidated statements of financial condition.
One of the Companys majority stockholders owns a minority
interest in XOJET, Inc. (XOJET), which provides
chartered aircraft services. The Company paid $0.1 million
to XOJET during the three months ended March 31, 2010.
Certain entities affiliated with SunGard Data Systems Inc.
(SunGard), a company majority-owned by one of the
Companys majority stockholders, provide data center
recovery services. The Company paid $0.1 million to SunGard
during the three months ended March 31, 2010.
Blue Frog Solutions, Inc. (Blue Frog), a privately
held technology company in which the Company holds an equity
interest, provides software licensing for annuity order entry
and compliance. The Company paid $0.7 million and
$0.5 million to Blue Frog for such services during the
three months ended March 31, 2010 and 2009, respectively.
In conjunction with the acquisition of UVEST Financial Services
Group, Inc. (UVEST), the Company made full-recourse
loans to certain members of management (also selling
stockholders), most of whom are now stockholders of the Company.
In February 2010, the Company forgave approximately
$0.4 million to a stockholder. As of March 31, 2010
and December 31, 2009, outstanding stockholder loans, which
are reported as a deduction from stockholders equity, were
approximately $0.1 million and $0.5 million,
respectively.
F-23
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
|
|
14.
|
Net
Capital/Regulatory Requirements
|
The Companys registered broker-dealers are subject to the
SECs Uniform Net Capital Rule
(Rule 15c3-1
under the Securities Exchange Act of 1934), which requires the
maintenance of minimum net capital, as defined. Net capital is
calculated for each broker-dealer subsidiary individually.
Excess net capital of one broker-dealer subsidiary may not be
used to offset a net capital deficiency of another broker-dealer
subsidiary. Net capital and the related net capital requirement
may fluctuate on a daily basis.
Net capital and net capital requirements for the Companys
broker-dealer subsidiaries as of March 31, 2010 are
presented in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Net
|
|
|
Excess Net
|
|
|
|
Net Capital
|
|
|
Capital Required
|
|
|
Capital
|
|
|
LPL Financial Corporation
|
|
$
|
102,639
|
|
|
$
|
6,646
|
|
|
$
|
95,993
|
|
UVEST Financial Services Group, Inc.
|
|
|
10,874
|
|
|
|
1,656
|
|
|
|
9,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
113,513
|
|
|
$
|
8,302
|
|
|
$
|
105,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In connection with the consolidation of the Affiliated Entities;
Associated, MSC and WFG have ceased operations but continue to
be required to meet certain regulatory requirements until such
time that their broker-dealer license withdrawals are complete.
At March 31, 2010, Associated, MSC and WFG had net capital
of $3.0 million, $14.7 million and $1.8 million,
respectively, which was $2.8 million, $14.4 million
and $1.7 million, respectively, in excess of their minimum
net capital requirements.
LPL Financial is a clearing broker-dealer and UVEST is an
introducing broker-dealer. Prior to the cessation of operations,
Associated, MSC and WFG were introducing broker-dealers.
PTC is also subject to various regulatory capital requirements.
Failure to meet minimum capital requirements can initiate
certain mandatory and possible additional discretionary actions
by regulators that, if undertaken, could have a direct material
effect on the Companys unaudited condensed consolidated
financial statements. As of March 31, 2010 and
December 31, 2009, the Company and PTC have met all capital
adequacy requirements to which it is subject.
The Company operates in a highly regulated industry. Applicable
laws and regulations restrict permissible activities and
investments. These policies require compliance with various
financial and financial advisor related regulations. The
consequences of noncompliance can include substantial monetary
and nonmonetary sanctions. In addition, the Company is also
subject to comprehensive examinations and supervision by various
governmental and self-regulatory agencies. These regulatory
agencies generally have broad discretion to prescribe greater
limitations on the operations of a regulated entity for the
protection of investors or public interest. Furthermore, where
the agencies determine that such operations are unsafe or
unsound, fail to comply with applicable law, or are otherwise
inconsistent with the laws and regulations or with the
supervisory policies, greater restrictions may be imposed.
|
|
15.
|
Financial
Instruments with Off-Balance-Sheet Credit Risk and
Concentrations of Credit Risk
|
LPL Financials client securities activities are transacted
on either a cash or margin basis. In margin transactions, LPL
Financial extends credit to the client, subject to various
regulatory and internal margin requirements, collateralized by
cash and securities in the clients account. As clients
write options contracts or sell securities short, LPL Financial
may incur losses if the clients do not
F-24
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
fulfill their obligations and the collateral in the
clients accounts is not sufficient to fully cover losses
that clients may incur from these strategies. To control this
risk, LPL Financial monitors margin levels daily and clients are
required to deposit additional collateral, or reduce positions,
when necessary.
LPL Financial is obligated to settle transactions with brokers
and other financial institutions even if its clients fail to
meet their obligation to LPL Financial. Clients are required to
complete their transactions on the settlement date, generally
three business days after the trade date. If clients do not
fulfill their contractual obligations, LPL Financial may incur
losses. LPL Financial has established procedures to reduce this
risk by generally requiring that clients deposit cash
and/or
securities into their account prior to placing an order.
LPL Financial may at times maintain inventories in equity
securities on both a long and short basis that are recorded on
the unaudited condensed consolidated statements of financial
condition at market value. While long inventory positions
represent LPL Financials ownership of securities, short
inventory positions represent obligations of LPL Financial to
deliver specified securities at a contracted price, which may
differ from market prices prevailing at the time of completion
of the transaction. Accordingly, both long and short inventory
positions may result in losses or gains to LPL Financial as
market values of securities fluctuate. To mitigate the risk of
losses, long and short positions are
marked-to-market
daily and are continuously monitored by LPL Financial.
UVEST is engaged in buying and selling securities and other
financial instruments for clients of advisors and financial
institutions. Such transactions are introduced and cleared
through a third-party clearing firm on a fully disclosed basis.
While introducing broker-dealers generally have less risk than
clearing firms, their clearing agreements expose them to credit
risk in the event that their clients dont fulfill
contractual obligations with the clearing broker-dealer.
The Affiliated Entities were engaged in buying and selling
securities and other financial instruments for clients of
advisors. Such transactions were introduced and cleared through
a third-party clearing firm on a fully disclosed basis. These
firms no longer conduct such activities. The registered
representatives and their client accounts have either
transitioned or are in the process of transitioning to LPL
Financial or to new firms.
On May 24, 2010, the Company entered into a Third Amended
and Restated Credit Agreement (the Amended Credit
Agreement). The Amended Credit Agreement amends and
restates the Companys Second Amended and Restated Credit
Agreement, dated as of June 18, 2007. Pursuant to the
Amended Credit Agreement, the Company has established a new term
loan tranche of $580.0 million maturing on June 28,
2017 (the 2017 Term Loans). The Company also
extended the maturity of a $500.0 million tranche of its
term loan facility to June 25, 2015 (the 2015 Term
Loans), with the remaining $317.1 million tranche of
the term loan facility maturing on the original maturity date of
June 28, 2013 (the 2013 Term Loans).
The applicable margin for borrowings with respect to the
(a) 2013 Term Loans is currently 0.75% for base rate
borrowings and 1.75% for LIBOR borrowings; (b) 2015 Term
Loans is currently 1.75% for base rate borrowings and 2.75% for
LIBOR borrowings, and (c) 2017 Term Loans is currently
2.75% for base rate borrowings and 3.75% for LIBOR borrowings.
The applicable margin on the 2013 Term Loans could change
depending on the Companys credit rating. The LIBOR Rate
with respect to the 2015 Term Loans and the 2017 Term Loans
shall in no event be less than 1.50%.
On May 24, 2010, the Company gave notice of redemption of
all of its outstanding Senior Subordinated Notes due 2015 (the
2015 Notes), representing an aggregate principal
amount of $550.0 million. The redemption price of the 2015
Notes was 105.375% of the outstanding aggregate
F-25
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
principal amount, or approximately $29.6 million, plus
accrued and unpaid interest thereon up to but not including
June 22, 2010 (the Redemption Date). The
Company redeemed the 2015 Notes on the Redemption Date using the
proceeds from the new term loan tranche under its Amended Credit
Agreement and additional cash on hand. The aggregate cash
payment for the redemption, including accrued interest was
approximately $610.4 million. The Company also recorded a
pre-tax charge of $37.9 million in its consolidated
statement of income in the second quarter of 2010 for the
redemption of the 2015 Notes. This charge includes $29.6 million
premium paid to redeem the 2015 Notes, $6.9 million in
unamortized debt issuance costs associated with the 2015 Notes,
and $1.4 million in legal and other costs associated with the
issuance of the new term loan tranche.
F-26
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
LPL Investment Holdings Inc.
Boston, Massachusetts
We have audited the accompanying consolidated statements of
financial condition of LPL Investment Holdings Inc. and
subsidiaries (the Company) as of December 31,
2009 and 2008, and the related consolidated statements of
income, stockholders equity, and cash flows for each of
the three years in the period ended December 31, 2009.
These consolidated financial statements are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of LPL
Investment Holdings Inc. and subsidiaries as of
December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2009, in conformity with
accounting principles generally accepted in the United States of
America.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
December 31, 2009, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 9, 2010 expressed an
unqualified opinion on the Companys internal control over
financial reporting.
Costa Mesa, California
March 9, 2010
(June 4, 2010 as to Note 16 and July 9, 2010 as
to Note 22)
F-27
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
For the Years
Ended December 31, 2009, 2008 and 2007
(Dollars in
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
$
|
1,477,655
|
|
|
$
|
1,640,218
|
|
|
$
|
1,470,285
|
|
Advisory fees
|
|
|
704,139
|
|
|
|
830,555
|
|
|
|
738,938
|
|
Asset-based fees
|
|
|
272,893
|
|
|
|
352,293
|
|
|
|
260,935
|
|
Transaction and other fees
|
|
|
255,574
|
|
|
|
240,486
|
|
|
|
184,604
|
|
Interest income, net of interest expense
|
|
|
20,545
|
|
|
|
33,684
|
|
|
|
35,677
|
|
Other
|
|
|
18,699
|
|
|
|
19,113
|
|
|
|
26,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
2,749,505
|
|
|
|
3,116,349
|
|
|
|
2,716,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions and advisory fees
|
|
|
1,872,478
|
|
|
|
2,132,050
|
|
|
|
1,908,666
|
|
Compensation and benefits
|
|
|
270,436
|
|
|
|
343,171
|
|
|
|
257,200
|
|
Depreciation and amortization
|
|
|
108,296
|
|
|
|
100,462
|
|
|
|
78,748
|
|
Promotional
|
|
|
61,451
|
|
|
|
99,707
|
|
|
|
64,302
|
|
Restructuring charges
|
|
|
58,695
|
|
|
|
14,966
|
|
|
|
|
|
Occupancy and equipment
|
|
|
50,475
|
|
|
|
58,752
|
|
|
|
43,419
|
|
Professional services
|
|
|
38,071
|
|
|
|
31,492
|
|
|
|
31,478
|
|
Communications and data processing
|
|
|
36,194
|
|
|
|
39,967
|
|
|
|
27,822
|
|
Brokerage, clearing and exchange
|
|
|
32,101
|
|
|
|
30,998
|
|
|
|
26,806
|
|
Regulatory fees and expenses
|
|
|
23,217
|
|
|
|
21,747
|
|
|
|
17,939
|
|
Travel and entertainment
|
|
|
9,008
|
|
|
|
14,782
|
|
|
|
14,935
|
|
Other
|
|
|
15,294
|
|
|
|
17,558
|
|
|
|
13,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
2,575,716
|
|
|
|
2,905,652
|
|
|
|
2,485,246
|
|
Interest expense from senior credit facilities, subordinated
notes and revolving line of credit
|
|
|
100,922
|
|
|
|
115,558
|
|
|
|
122,817
|
|
Loss on equity method investment
|
|
|
300
|
|
|
|
2,374
|
|
|
|
678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
2,676,938
|
|
|
|
3,023,584
|
|
|
|
2,608,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE PROVISION FOR INCOME TAXES
|
|
|
72,567
|
|
|
|
92,765
|
|
|
|
107,833
|
|
PROVISION FOR INCOME TAXES
|
|
|
25,047
|
|
|
|
47,269
|
|
|
|
46,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
47,520
|
|
|
$
|
45,496
|
|
|
$
|
61,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE (Note 16):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.54
|
|
|
$
|
0.53
|
|
|
$
|
0.72
|
|
Diluted
|
|
$
|
0.47
|
|
|
$
|
0.45
|
|
|
$
|
0.62
|
|
See notes to consolidated financial statements.
F-28
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
As of
December 31, 2009 and 2008
(Dollars in
thousands, except par value)
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
378,594
|
|
|
$
|
219,239
|
|
Cash and securities segregated under federal and other
regulations
|
|
|
288,608
|
|
|
|
341,575
|
|
Receivables from:
|
|
|
|
|
|
|
|
|
Clients, net of allowance of $792 at December 31, 2009 and
$972 at December 31, 2008
|
|
|
257,529
|
|
|
|
295,797
|
|
Product sponsors, broker-dealers and clearing organizations
|
|
|
171,900
|
|
|
|
231,400
|
|
Others, net of allowances of $6,159 at December 31, 2009
and $4,076 at December 31, 2008
|
|
|
139,317
|
|
|
|
93,771
|
|
Securities owned:
|
|
|
|
|
|
|
|
|
Trading
|
|
|
15,361
|
|
|
|
10,811
|
|
Held-to-maturity
|
|
|
10,454
|
|
|
|
10,504
|
|
Securities borrowed
|
|
|
4,950
|
|
|
|
604
|
|
Fixed assets, net of accumulated depreciation and amortization
of $239,868 at December 31, 2009 and $185,537 at
December 31, 2008
|
|
|
101,584
|
|
|
|
161,760
|
|
Debt issuance costs, net of accumulated amortization of $15,724
at December 31, 2009 and $11,981 at December 31, 2008
|
|
|
16,542
|
|
|
|
19,927
|
|
Goodwill
|
|
|
1,293,366
|
|
|
|
1,293,366
|
|
Intangible assets, net of accumulated amortization of $136,177
at December 31, 2009 and $106,563 at December 31, 2008
|
|
|
597,083
|
|
|
|
654,703
|
|
Other assets
|
|
|
61,648
|
|
|
|
48,322
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,336,936
|
|
|
$
|
3,381,779
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
Drafts payable
|
|
$
|
125,767
|
|
|
$
|
154,431
|
|
Revolving line of credit
|
|
|
|
|
|
|
90,000
|
|
Payables to clients
|
|
|
493,943
|
|
|
|
463,011
|
|
Payables to broker-dealers and clearing organizations
|
|
|
18,217
|
|
|
|
21,734
|
|
Accrued commissions and advisory fees payable
|
|
|
110,040
|
|
|
|
100,327
|
|
Accounts payable and accrued liabilities
|
|
|
129,898
|
|
|
|
120,882
|
|
Income taxes payable
|
|
|
24,226
|
|
|
|
12,281
|
|
Unearned revenue
|
|
|
45,844
|
|
|
|
36,658
|
|
Interest rate swaps
|
|
|
17,292
|
|
|
|
25,417
|
|
Securities sold but not yet purchased at market value
|
|
|
4,003
|
|
|
|
3,910
|
|
Senior credit facilities and subordinated notes
|
|
|
1,369,223
|
|
|
|
1,377,647
|
|
Deferred income taxes net
|
|
|
147,608
|
|
|
|
185,169
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,486,061
|
|
|
|
2,591,467
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (Notes 14 and 20)
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
Common stock, $.001 par value; 200,000,000 shares
authorized; 94,214,762 shares issued and outstanding at
December 31, 2009 of which 7,423,973 are restricted, and
93,967,967 shares issued and outstanding at
December 31, 2008 of which 7,423,973 are restricted
|
|
|
87
|
|
|
|
87
|
|
Additional paid-in capital
|
|
|
679,277
|
|
|
|
670,897
|
|
Stockholder loans
|
|
|
(499
|
)
|
|
|
(936
|
)
|
Accumulated other comprehensive loss
|
|
|
(11,272
|
)
|
|
|
(15,498
|
)
|
Retained earnings
|
|
|
183,282
|
|
|
|
135,762
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
850,875
|
|
|
|
790,312
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
3,336,936
|
|
|
$
|
3,381,779
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-29
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
For the Years
Ended December 31, 2009, 2008 and 2007
(Dollars in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common
|
|
|
Paid-In
|
|
|
Stockholder
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Stockholders
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Loans
|
|
|
Income (Loss)
|
|
|
Earnings
|
|
|
Equity
|
|
|
BALANCE December 31, 2006
|
|
$
|
83
|
|
|
$
|
591,254
|
|
|
$
|
|
|
|
$
|
1,938
|
|
|
$
|
33,642
|
|
|
$
|
626,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,069
|
|
|
|
61,069
|
|
Unrealized loss on interest rate swaps, net of tax benefit of
$5,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,450
|
)
|
|
|
|
|
|
|
(8,450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,619
|
|
Cumulative effect of change in accounting principle upon
adoption of new tax guidance, net of tax benefit of $2,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,445
|
)
|
|
|
(4,445
|
)
|
Stockholder loans
|
|
|
|
|
|
|
|
|
|
|
(1,242
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,242
|
)
|
Tax benefit from stock options exercised
|
|
|
|
|
|
|
191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
191
|
|
Exercise of stock options
|
|
|
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
|
|
Share-based compensation
|
|
|
|
|
|
|
2,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,160
|
|
Issuance of common stock for acquisitions
|
|
|
3
|
|
|
|
70,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE December 31, 2007
|
|
$
|
86
|
|
|
$
|
664,568
|
|
|
$
|
(1,242
|
)
|
|
$
|
(6,512
|
)
|
|
$
|
90,266
|
|
|
$
|
747,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,496
|
|
|
|
45,496
|
|
Unrealized loss on interest rate swaps, net of tax benefit of
$5,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,986
|
)
|
|
|
|
|
|
|
(8,986
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,510
|
|
Stockholder loans
|
|
|
|
|
|
|
|
|
|
|
306
|
|
|
|
|
|
|
|
|
|
|
|
306
|
|
Tax benefit from stock options exercised
|
|
|
|
|
|
|
668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
668
|
|
Exercise of stock options
|
|
|
1
|
|
|
|
585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
586
|
|
Share-based compensation
|
|
|
|
|
|
|
4,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,859
|
|
Issuance of 143,884 shares of common stock
|
|
|
|
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
Repurchase of 136,470 shares of common stock
|
|
|
|
|
|
|
(3,783
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,783
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE December 31, 2008
|
|
$
|
87
|
|
|
$
|
670,897
|
|
|
$
|
(936
|
)
|
|
$
|
(15,498
|
)
|
|
$
|
135,762
|
|
|
$
|
790,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,520
|
|
|
|
47,520
|
|
Unrealized gain on interest rate swaps, net of tax expense of
$3,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,226
|
|
|
|
|
|
|
|
4,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,746
|
|
Stockholder loans
|
|
|
|
|
|
|
|
|
|
|
437
|
|
|
|
|
|
|
|
|
|
|
|
437
|
|
Exercise of stock options
|
|
|
|
|
|
|
290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
290
|
|
Tax benefit from stock options exercised
|
|
|
|
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147
|
|
Share-based compensation
|
|
|
|
|
|
|
8,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,124
|
|
Repurchase of 10,000 shares of common stock
|
|
|
|
|
|
|
(181
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(181
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE December 31, 2009
|
|
$
|
87
|
|
|
$
|
679,277
|
|
|
$
|
(499
|
)
|
|
$
|
(11,272
|
)
|
|
$
|
183,282
|
|
|
$
|
850,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
47,520
|
|
|
$
|
45,496
|
|
|
$
|
61,069
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits received from retention plans
|
|
|
|
|
|
|
4,347
|
|
|
|
8,293
|
|
Depreciation and amortization
|
|
|
108,296
|
|
|
|
100,462
|
|
|
|
78,748
|
|
Amortization of debt issuance costs
|
|
|
3,757
|
|
|
|
3,742
|
|
|
|
3,675
|
|
Impairment of fixed assets
|
|
|
1,288
|
|
|
|
|
|
|
|
|
|
Loss on disposal of fixed assets
|
|
|
329
|
|
|
|
47
|
|
|
|
129
|
|
Share-based compensation
|
|
|
8,124
|
|
|
|
4,859
|
|
|
|
2,160
|
|
Provision for bad debts
|
|
|
3,319
|
|
|
|
3,471
|
|
|
|
3,142
|
|
Deferred income tax provision
|
|
|
(41,460
|
)
|
|
|
(26,138
|
)
|
|
|
(21,320
|
)
|
Loss on equity method investment
|
|
|
300
|
|
|
|
2,374
|
|
|
|
678
|
|
Impairment of intangible assets
|
|
|
18,636
|
|
|
|
|
|
|
|
|
|
Lease abandonment
|
|
|
6,612
|
|
|
|
|
|
|
|
|
|
Loan forgiveness
|
|
|
2,072
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(647
|
)
|
|
|
1,815
|
|
|
|
561
|
|
Mortgage loans held for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Originations of loans
|
|
|
|
|
|
|
|
|
|
|
(114,755
|
)
|
Proceeds from sale of loans
|
|
|
|
|
|
|
|
|
|
|
120,193
|
|
Gain on sale of loans
|
|
|
|
|
|
|
|
|
|
|
(1,061
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and securities segregated under federal and other
regulations
|
|
|
52,967
|
|
|
|
(145,764
|
)
|
|
|
(143,633
|
)
|
Receivables from clients
|
|
|
38,268
|
|
|
|
114,833
|
|
|
|
(85,024
|
)
|
Receivables from product sponsors, broker-dealers and clearing
organizations
|
|
|
59,500
|
|
|
|
(71,247
|
)
|
|
|
(52,508
|
)
|
Receivables from others
|
|
|
(50,937
|
)
|
|
|
423
|
|
|
|
(37,109
|
)
|
Securities owned
|
|
|
(3,832
|
)
|
|
|
2,542
|
|
|
|
(3,771
|
)
|
Securities borrowed
|
|
|
(4,346
|
)
|
|
|
8,434
|
|
|
|
3,648
|
|
Other assets
|
|
|
(8,061
|
)
|
|
|
(6,687
|
)
|
|
|
(6,103
|
)
|
Drafts payable
|
|
|
(28,664
|
)
|
|
|
27,287
|
|
|
|
22,257
|
|
Payables to clients
|
|
|
30,932
|
|
|
|
56,334
|
|
|
|
112,103
|
|
Payables to broker-dealers and clearing organizations
|
|
|
(3,517
|
)
|
|
|
(26,191
|
)
|
|
|
17,570
|
|
Accrued commissions and advisory fees payable
|
|
|
9,713
|
|
|
|
(26,257
|
)
|
|
|
16,442
|
|
Accounts payable and accrued liabilities
|
|
|
(236
|
)
|
|
|
26,628
|
|
|
|
13,750
|
|
Income taxes payable
|
|
|
11,945
|
|
|
|
1,633
|
|
|
|
475
|
|
Unearned revenue
|
|
|
9,186
|
|
|
|
(4,239
|
)
|
|
|
8,432
|
|
Securities sold but not yet purchased
|
|
|
93
|
|
|
|
(8,927
|
)
|
|
|
2,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
271,157
|
|
|
|
89,277
|
|
|
|
10,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(8,313
|
)
|
|
|
(62,812
|
)
|
|
|
(71,294
|
)
|
Proceeds from disposal of fixed assets
|
|
|
200
|
|
|
|
|
|
|
|
41
|
|
Purchase of securities classified as
held-to-maturity
|
|
|
(3,746
|
)
|
|
|
(7,732
|
)
|
|
|
(5,493
|
)
|
Proceeds from maturity of securities classified as
held-to-maturity
|
|
|
3,700
|
|
|
|
7,600
|
|
|
|
5,604
|
|
Purchase of equity method investment
|
|
|
|
|
|
|
|
|
|
|
(5,000
|
)
|
F-31
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows (Continued)
(Dollars in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Proceeds from the sale of equity investment
|
|
|
31
|
|
|
|
|
|
|
|
|
|
Deposits of restricted cash
|
|
|
(12,759
|
)
|
|
|
|
|
|
|
|
|
Release of restricted cash
|
|
|
7,163
|
|
|
|
|
|
|
|
|
|
Purchase of intangible assets
|
|
|
|
|
|
|
|
|
|
|
(3,444
|
)
|
Acquisitions, net of existing cash balance
|
|
|
|
|
|
|
(13,258
|
)
|
|
|
(88,689
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(13,724
|
)
|
|
|
(76,202
|
)
|
|
|
(168,275
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (repayment of) proceeds from revolving line of credit
|
|
$
|
(90,000
|
)
|
|
$
|
25,000
|
|
|
$
|
65,000
|
|
Repayment of senior credit facilities
|
|
|
(8,424
|
)
|
|
|
(8,424
|
)
|
|
|
(8,304
|
)
|
Proceeds from senior credit facilities
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
Payment of debt amendment costs
|
|
|
(372
|
)
|
|
|
|
|
|
|
(936
|
)
|
Excess tax benefit related to stock options exercised
|
|
|
147
|
|
|
|
668
|
|
|
|
191
|
|
Loans to stockholders
|
|
|
|
|
|
|
|
|
|
|
(1,242
|
)
|
Repayment of stockholder loans
|
|
|
462
|
|
|
|
114
|
|
|
|
|
|
Proceeds from stock options exercised
|
|
|
290
|
|
|
|
586
|
|
|
|
52
|
|
Issuance of common stock
|
|
|
|
|
|
|
4,000
|
|
|
|
|
|
Repurchase of common stock
|
|
|
(181
|
)
|
|
|
(3,783
|
)
|
|
|
|
|
Proceeds from warehouse lines of credit
|
|
|
|
|
|
|
|
|
|
|
114,781
|
|
Repayment of warehouse lines of credit
|
|
|
|
|
|
|
|
|
|
|
(118,499
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(98,078
|
)
|
|
|
18,161
|
|
|
|
101,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
159,355
|
|
|
|
31,236
|
|
|
|
(57,160
|
)
|
CASH AND CASH EQUIVALENTS Beginning of year
|
|
|
219,239
|
|
|
|
188,003
|
|
|
|
245,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS End of year
|
|
$
|
378,594
|
|
|
$
|
219,239
|
|
|
$
|
188,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
101,128
|
|
|
$
|
116,581
|
|
|
$
|
124,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
54,919
|
|
|
$
|
71,487
|
|
|
$
|
66,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONCASH DISCLOSURES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures purchased through short-term credit
|
|
$
|
2,640
|
|
|
$
|
1,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in unrealized gain (loss) on interest rate
swaps, net of tax expense (benefit)
|
|
$
|
4,226
|
|
|
$
|
(8,986
|
)
|
|
$
|
(8,450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes payable recorded as a cumulative effect of change
in accounting principle upon the adoption of new tax guidance,
net of tax benefit
|
|
|
|
|
|
|
|
|
|
$
|
(4,445
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired
|
|
|
|
|
|
$
|
17,556
|
|
|
$
|
322,057
|
|
Cash paid for common stock acquired
|
|
|
|
|
|
|
|
|
|
|
(167,071
|
)
|
Additional consideration for post-closing payments
|
|
|
|
|
|
|
(13,258
|
)
|
|
|
|
|
Common stock issued for acquisitions
|
|
|
|
|
|
|
|
|
|
|
(68,552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities assumed
|
|
|
|
|
|
$
|
4,298
|
|
|
$
|
86,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued to acquire intangible assets
|
|
|
|
|
|
|
|
|
|
$
|
1,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued to satisfy accrued liability
|
|
|
|
|
|
|
|
|
|
$
|
1,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-32
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
|
|
1.
|
Organization and
Description of the Company
|
LPL Investment Holdings Inc. (LPLIH), a Delaware
holding corporation, together with its consolidated subsidiaries
(collectively, the Company) provides an integrated
platform of proprietary technology, brokerage and investment
advisory services to independent financial advisors and
financial advisors at financial institutions (collectively
advisors) in the United States of America. Through
its proprietary technology, custody and clearing platforms, the
Company provides access to diversified financial products and
services enabling its advisors to offer independent financial
advice and brokerage services to retail investors (their
clients).
On December 28, 2005, LPL Holdings, Inc.
(LPLH), and its subsidiaries were acquired through a
merger transaction with BD Acquisition Inc., a wholly owned
subsidiary of LPLIH (previously named BD Investment Holdings,
Inc.). LPLIH was formed by investment funds affiliated with TPG
Capital, and Hellman & Friedman LLC (collectively, the
Majority Holders). The acquisition was accomplished
through the merger of BD Acquisition, Inc. with and into LPLH,
with LPLH being the surviving entity (the
Acquisition). The Acquisition was financed by a
combination of borrowings under the Companys senior credit
facilities, the issuance of senior unsecured subordinated notes
and direct and indirect equity investments from the Majority
Holders, co-investors, management and the Companys
advisors.
Description of Our Subsidiaries LPLH,
a Massachusetts holding corporation, owns 100% of the issued and
outstanding common stock of LPL Financial Corporation (LPL
Financial), UVEST Financial Services Group, Inc.
(UVEST), LPL Independent Advisor Services Group LLC
(IASG), Independent Advisers Group Corporation
(IAG) and LPL Insurance Associates, Inc.
(LPLIA). LPLH is also the majority stockholder in
PTC Holdings, Inc. (PTCH), and owns 100% of the
issued and outstanding voting common stock. As required by the
Office of the Comptroller of the Currency, members of the Board
of Directors of PTCH own shares of nonvoting common stock in
PTCH.
LPL Financial, headquartered in Boston, San Diego and
Charlotte, is a clearing broker-dealer and an investment adviser
that principally transacts business as an agent for its advisors
and financial institutions on behalf of their clients in a broad
array of financial products and services. LPL Financial is
licensed to operate in all 50 states, Washington D.C. and
Puerto Rico.
UVEST, headquartered in Charlotte, is an introducing
broker-dealer and investment adviser that provides independent,
nonproprietary third-party brokerage and advisory services to
banks, credit unions and other financial institutions. UVEST is
licensed to operate in all 50 states and Washington D.C.
IASG is a holding company for Mutual Service Corporation
(MSC), Associated Financial Group, Inc.
(AFG), Associated Securities Corp., Inc.
(Associated), Associated Planners Investment
Advisory, Inc. (APIA) and Waterstone Financial
Group, Inc. (WFG) (together, the Affiliated
Entities). The Affiliated Entities engaged primarily in
introducing brokerage and advisory transactions to unaffiliated
third-party clearing broker-dealers. On September 14, 2009,
the securities licenses of advisors associated with the
Affiliated Entities who elected to transfer, as well as their
respective client accounts which had previously cleared through
a third-party platform, were transferred to the LPL Financial
clearing platform. Following the completion of these transfer
activities, advisors and client accounts previously associated
with the Affiliated Entities are now associated with LPL
Financial. See Notes 3 and 4 for further discussion.
IAG is a registered investment adviser which offers an
investment advisory platform for clients of advisors working for
other financial institutions.
LPLIA operates as a brokerage general agency, which offers life,
long-term care and disability insurance sales and services.
F-33
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
PTCH is a holding company for The Private Trust Company,
N.A. (PTC). PTC is chartered as a non-depository
limited purpose national bank, providing a wide range of trust,
investment management and custodial services for estates and
families. PTC also provides Individual Retirement Account
custodial services for its affiliates.
Innovex Mortgage, Inc. (Innovex), which conducted
real estate mortgage banking and brokerage activities, ceased
operations on December 31, 2007. Innovex originated
residential mortgage loans for clients of advisors licensed with
LPL Financial. Innovex performed underwriting, loan origination
and funding for a variety of mortgage and home equity loan
products to suit the needs of borrowers. Innovexs revenues
were derived from the referral of loans to lenders and the
origination and sale of residential real estate loans for
placement in the secondary market. Innovex was a Housing and
Urban Development approved Title II nonsupervised mortgagee.
|
|
2.
|
Summary of
Significant Accounting Policies
|
Basis of Presentation These
consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United
States of America (GAAP), which require the Company
to make estimates and assumptions regarding the valuation of
certain financial instruments, intangible assets, allowance for
doubtful accounts, valuation of stock compensation, accruals for
liabilities, income taxes, revenue and expense accruals, and
other matters that affect the consolidated financial statements
and related disclosures. Actual results could differ materially
from those estimates under different assumptions or conditions
and the differences may be material to the consolidated
financial statements. Certain reclassifications were made to
previously reported amounts in the consolidated financial
statements and notes thereto to make them consistent with the
current period presentation.
The Company has evaluated subsequent events up to and including
the date these consolidated financial statements were issued.
Consolidation These consolidated
financial statements include the accounts of LPLIH and its
subsidiaries. Intercompany transactions and balances have been
eliminated. Equity investments in which the Company exercises
significant influence but does not exercise control and is not
the primary beneficiary are accounted for using the equity
method.
Revenue
Recognition Policies
Commission The Company records
commissions received from mutual funds, annuity, insurance,
equity, fixed income, direct investment, option and commodity
transactions on a trade-date basis. Commissions also include
mutual fund and variable annuity trails, which are recognized as
earned. Due to the significant volume of mutual fund and
variable annuity purchases and sales transacted by advisors
directly with product manufacturers, management estimates its
trail revenues and upfront commission for each accounting period
for which the proceeds have not yet been received. These
estimates are based on a number of factors, primarily on market
levels and the volume of similar transactions in prior periods.
The amount of such accruals are shown as commissions receivable
from product sponsors and others (see Note 8) included in
the caption, receivables from product sponsors, broker-dealers
and clearing organizations in our consolidated statements of
financial condition. The Company also records commissions
payable based upon standard payout ratios for each product as it
accrues for commission revenue.
Advisory and Asset-Based Fees The
Company charges investment advisory fees based on an
advisors portfolio value, generally at the beginning of
each quarter. Advisory fees collected in advance are recorded as
unearned revenue and are recognized ratably over the period in
which such
F-34
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
fees are earned. Advisory fees collected in arrears are recorded
as earned. Asset-based fees are primarily derived from the
Companys marketing,
sub-transfer
agency agreements, and cash sweep products and are recorded and
recognized ratably over the period in which services are
provided.
Transaction and Other Fees The Company
charges transaction fees for executing noncommissionable
transactions on client accounts. Transaction related charges are
recognized on a trade-date basis. Other fees relate to services
provided and other account charges generally outlined in the
Companys agreements with its clients, advisors and
financial institutions. Such fees are recognized as services are
performed or as earned, as applicable. In addition, the Company
offers various software-related products, for which fees are
charged on a subscription basis and are recognized over the
subscription period.
Interest Income, Net of Interest
Expense The Company earns interest income
from its cash equivalents and client margin balances, less
interest expense on related transactions. Because interest
expense incurred in connection with cash equivalents and client
margin balances is completely offset by revenue on related
transactions, the Company considers such interest to be an
operating expense. Interest expense for the years ended
December 31, 2009, 2008 and 2007 did not exceed
$1.0 million in any fiscal year presented.
Gain on Sale of Mortgage Loans Held for
Sale The Company, through its mortgage
affiliate Innovex, recognized gains on the sale of mortgage
loans held for sale on the date of settlement. On
December 31, 2007, Innovex ceased operations. Prior to that
date, a gain was recognized based on the difference between the
selling price and the carrying value of the related mortgage
loans sold, including deferred loan origination fees and certain
direct origination costs. All loans were sold on a
servicing-released basis (i.e. the Company did not service the
loans after they were sold, and all loans were sold before the
first payment was made). Loans were accounted for as sold when
control of the mortgage loans was surrendered. Control over
mortgage loans was deemed to be surrendered when (i) the
mortgage loans were isolated from the Company, (ii) the
buyer had the right (free of conditions that constrain it from
taking advantage of that right) to pledge or exchange the loans,
and (iii) the Company did not maintain effective control of
the mortgage loans through either (a) an agreement that
entitled and obligated the Company to repurchase or redeem the
mortgage loans before maturity or (b) the ability to
unilaterally cause the buyer to return specific mortgage loans.
Compensation and Benefits The Company
records compensation and benefits for all cash and deferred
compensation, benefits and related taxes as earned by its
employees. Compensation and benefits expense also includes fees
earned by temporary employees and contractors who perform
similar services to those performed by the Companys
employees, primarily software development and project management
activities. Temporary employee and contractor services of
$18.0 million, $36.9 million, and $25.4 million
were incurred during the years ended December 31, 2009,
2008, and 2007, respectively.
Share-Based Compensation The Company
recognizes share-based compensation expense related to employee
stock option awards in net income based on the grant-date fair
value over the requisite service period of the individual
grants, which generally equals the vesting period. The Company
accounts for stock options and warrants awarded to its advisors
and financial institutions based on the fair value of the award
at each interim reporting period.
Stock Split The Company affected a
ten-for-one
stock split as of January 1, 2008. All per share amounts,
average shares and options outstanding, and shares and options
outstanding have been adjusted retroactively to reflect the
stock split.
Income Taxes In preparing the
consolidated financial statements, the Company estimates income
tax expense based on various jurisdictions where it conducts
business. The Company must
F-35
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
then assess the likelihood that the deferred tax assets will be
realized. A valuation allowance is established to the extent
that it is more-likely-than-not that such deferred tax assets
will not be realized. When the Company establishes a valuation
allowance or modifies the existing allowance in a certain
reporting period, the Company generally records a corresponding
increase or decrease to tax expense in the consolidated
statements of income. Management makes significant judgments in
determining the provision for income taxes, the deferred tax
assets and liabilities, and any valuation allowances recorded
against the deferred tax asset. Changes in the estimate of these
taxes occur periodically due to changes in the tax rates,
changes in the business operations, implementation of tax
planning strategies, resolution with taxing authorities of
issues where the Company had previously taken certain tax
positions and newly enacted statutory, judicial and regulatory
guidance. These changes could have a material affect on the
Companys consolidated statements of financial condition,
income or cash flows in the period or periods in which they
occur.
The Company recognizes the tax effects of a position in the
financial statements only if it is more-likely-than-not to be
sustained based solely on its technical merits, otherwise no
benefits of the position are to be recognized. The
more-likely-than-not threshold must continue to be met in each
reporting period to support continued recognition of a benefit.
Moreover, each tax position meeting the recognition threshold is
required to be measured as the largest amount that is greater
than 50 percent likely to be realized upon ultimate
settlement with a taxing authority that has full knowledge of
all relevant information. See Note 11 for additional detail
regarding the Companys uncertain tax positions.
Cash and Cash Equivalents Cash and
cash equivalents are composed of interest and
noninterest-bearing deposits, money market funds and
U.S. government obligations that meet the definition of a
cash equivalent. Cash equivalents are highly liquid investments,
with original maturities of less than 90 days that are not
required to be segregated under federal or other regulations.
Cash and Securities Segregated Under Federal and Other
Regulations Certain subsidiaries of the
Company are subject to requirements related to maintaining cash
or qualified securities in a segregated reserve account for the
exclusive benefit of its customers in accordance with SEC
Rule 15c3-3
and other regulations.
Receivables From and Payables to
Clients Receivables from and payables to
clients includes amounts due on cash and margin transactions.
The Company extends credit to its clients to finance their
purchases of securities on margin. The Company receives income
from interest charged on such extensions of credit. The Company
pays interest on certain client free credit balances held
pending investment. Loans to clients are generally fully
collateralized by client securities, which are not included in
the consolidated statements of financial condition.
To the extent that margin loans and other receivables from
clients are not fully collateralized by client securities,
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 client
and/or the
clients advisor and the Companys historical
experience in collecting on such transactions.
F-36
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The following schedule reflects the Companys activity in
providing for an allowance for uncollectible amounts due from
clients for the years ended December 31, 2009 and 2008 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Beginning balance January 1
|
|
$
|
972
|
|
|
$
|
529
|
|
Provision
|
|
|
|
|
|
|
443
|
|
Recoveries
|
|
|
(180
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance December 31
|
|
$
|
792
|
|
|
$
|
972
|
|
|
|
|
|
|
|
|
|
|
Receivables From Product Sponsors, Broker-Dealers and
Clearing Organizations Receivables from
product sponsors, broker-dealers and clearing organizations
primarily consists of commission and transaction-related
receivables.
Receivables From Others Receivables
from others primarily consists of other accrued fees from
product sponsors and advisors. The Company periodically extends
credit to its advisors in the form of recruiting loans,
commission advances, and other loans. The decisions to extend
credit to advisors are generally based on either the
advisors credit history, their ability to generate future
commissions, or both. Management maintains an allowance for
uncollectible amounts using an aging analysis that takes into
account the advisors registration status and the specific
type of receivable. The aging thresholds and specific
percentages used represent managements best estimates of
probable losses. Management monitors the adequacy of these
estimates through periodic evaluations against actual trends
experienced.
The following schedule reflects the Companys activity in
providing for an allowance for uncollectible amounts due from
others for the years ended December 31, 2009 and 2008 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Beginning balance January 1
|
|
$
|
4,076
|
|
|
$
|
5,266
|
|
Provision for bad debts(1)
|
|
|
3,319
|
|
|
|
3,028
|
|
Charge-offs net of recoveries
|
|
|
(1,236
|
)
|
|
|
(4,218
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance December 31
|
|
$
|
6,159
|
|
|
$
|
4,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the year ended December 31, 2009, the Company has
classified $0.3 million of the provision for bad debt as
restructuring charges with the consolidated statements of income
(see Note 4). |
Classification and Valuation of Certain
Investments The classification of an
investment determines its accounting treatment. The Company
generally classifies its investments in debt and equity
instruments (including mutual funds, annuities, corporate bonds,
government bonds and municipal bonds) as trading securities,
except for government notes held by PTCH, which are classified
as
held-to-maturity
based on managements intent and ability to hold them to
maturity. The Company has not classified any investments as
available-for-sale.
Investment classifications are subject to ongoing review and can
change. Securities classified as trading are carried at fair
value, while securities classified as
held-to-maturity
are carried at cost or amortized cost. When possible, the fair
value of securities is determined by obtaining quoted market
prices. The Company also makes estimates about the fair value of
investments and the timing for recognizing losses based on
market conditions and other factors. If its estimates change,
the Company may recognize additional losses. Both unrealized and
realized gains and losses on trading securities are recognized
in other revenue on a net basis in the consolidated statements
of income.
F-37
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Securities Owned and Sold But Not Yet
Purchased Securities owned and securities
sold but not yet purchased are reflected on a trade-date basis
at market value with realized and unrealized gains and losses
being recorded in other revenue in the consolidated statements
of income. Clients securities transactions are recorded on
a settlement-date basis, with related commission income and
expense reported on a trade-date basis.
U.S. government notes are carried at amortized cost and
classified as
held-to-maturity,
as the Company has both the intent and ability to hold them to
maturity. Interest income is accrued as earned. Premiums and
discounts are amortized, using a method that approximates the
effective yield method, over the term of the security and
recorded as an adjustment to the investment yield.
Interest income is accrued as earned and dividends are recorded
on the ex-dividend date.
Securities Borrowed and Loaned
Securities borrowed and securities loaned are accounted for as
collateralized financings and are recorded at the amount of the
cash provided for securities borrowed transactions and cash
received for securities loaned (generally in excess of market
values). The adequacy of the collateral deposited for securities
borrowed is continuously monitored and adjusted when considered
necessary to minimize the risk associated with this activity. At
December 31, 2009 and December 31, 2008, the Company
had $5.0 million and $0.6 million, respectively, in
securities borrowed. The collateral received for securities
loaned is generally cash and is adjusted daily through the
Depository Trust Companys (DTC) net
settlement process, and securities loaned is included in payable
to broker-dealers and clearing organizations in the consolidated
statements of financial condition. Securities loaned generally
represent client securities that can be pledged under standard
margin loan agreements. At December 31, 2009 and
December 31, 2008, the Company had $7.2 million and
$5.3 million, respectively, of pledged securities loaned
under the DTC Stock Borrow Program.
Fixed Assets Furniture, equipment,
computers, purchased software, capitalized software and
leasehold improvements are recorded at historical cost, net of
accumulated depreciation and amortization. Depreciation is
recognized using the straight-line method over the estimated
useful lives of the assets. Furniture, equipment, computers and
purchased software are depreciated over a period of three to
seven years. Automobiles have depreciable lives of five years.
Leasehold improvements are amortized over the lesser of their
useful lives or the terms of the underlying leases. Management
reviews fixed assets for impairment whenever events or changes
in circumstances indicate the carrying amount of the assets may
not be recoverable.
Software Development Costs Software
development costs are charged to operations as incurred.
Software development costs include costs incurred in the
development and enhancement of software used in connection with
services provided by the Company that do not otherwise qualify
for capitalization.
The costs of internally developed software that qualify for
capitalization are capitalized as fixed assets and subsequently
amortized over the estimated useful life of the software, which
is generally three years. The costs of internally developed
software are included in fixed assets at the point at which the
conceptual formulation, design and testing of possible software
project alternatives are complete and management authorizes and
commits to funding the project. The Company does not capitalize
pilot projects and projects where it believes that the future
economic benefits are less than probable.
Reportable Segment The Companys
internal reporting is organized into three service channels;
Independent Advisor Services, Institution Services and Custom
Clearing Services, which are designed to enhance the services
provided to its advisors and financial institutions. These
service channels qualify as individual operating segments, but
are aggregated and viewed as one single
F-38
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
reportable segment due to their similar economic
characteristics, products and services, production and
distribution process, regulatory environment and quantitative
thresholds.
Goodwill, Intangible Assets and Trademarks and Trade
Names The Company classifies intangible
assets into three categories: (1) intangible assets with
definite lives subject to amortization, (2) intangible
assets with indefinite lives not subject to amortization and
(3) goodwill. The Company determines the useful lives of
identifiable intangible assets after considering the specific
facts and circumstances related to each intangible asset.
Factors considered when determining useful lives include the
contractual term of any agreement, the history of the asset, the
Companys long-term strategy for the use of the asset, any
laws or other local regulations which could impact the useful
life of the asset, and other economic factors, including
competition and specific market conditions. Intangible assets
that are deemed to have definite lives are amortized, on a
straight-line basis, over their useful lives, generally ranging
from 5 20 years. See Note 10 for further
discussion.
When facts and circumstances indicate that the carrying value of
definite-lived intangible assets may not be recoverable, the
Company assesses the recoverability of the carrying value by
preparing estimates of future cash flows. The Company recognizes
an impairment loss if the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the
carrying amount. The impairment loss recognized is the amount by
which the carrying amount exceeds the fair value. The Company
uses a variety of methodologies to determine the fair value of
these assets, including discounted cash flow models, which are
consistent with the assumptions the Company believes
hypothetical marketplace participants would use. For the year
ended December 31, 2009, the Company recorded a
$17.5 million charge for the impairment of advisor and
financial institution relationship intangible assets which is
included in restructuring charges within the consolidated
statements of income. See Notes 4 and 10 for further
discussion. No impairment occurred for the years ended
December 31, 2008 and 2007.
The Company tests intangible assets determined to have
indefinite useful lives, including trademarks trade names and
goodwill, for impairment annually, or more frequently if events
or circumstances indicate that assets might be impaired. The
Company performs these annual impairment reviews as of the first
day of the fourth quarter (October 1). The Company uses a
variety of methodologies in conducting impairment assessments of
indefinite-lived intangible assets, including, but not limited
to, discounted cash flow models, which are based on the
assumptions the Company believes hypothetical marketplace
participants would use. For indefinite-lived intangible assets,
other than goodwill, if the carrying amount exceeds the fair
value, an impairment charge is recognized in an amount equal to
that excess. For the year ended December 31, 2009, the
Company recorded a $1.1 million charge for the impairment
of trademarks and trade names which is included in restructuring
charges within the consolidated statements of income. See
Notes 4 and 10 for further discussion. No impairment
occurred for the years ended December 31, 2008 and 2007.
The Company performs impairment tests of goodwill at the
reporting unit level, which represent its operating segments.
There were no changes to the Companys reporting units in
2009. The goodwill impairment test consists of a two-step
process, if necessary. The first step is to compare the fair
value of a reporting unit to its carrying value, including
goodwill. The Company typically uses discounted cash flow models
to determine the fair value of a reporting unit. The assumptions
used in these models are consistent with those the Company
believes hypothetical marketplace participants would use. If the
fair value of the reporting unit is less than its carrying
value, the second step of the impairment test must be performed
in order to determine the amount of impairment loss, if any. The
second step compares the implied fair value of the reporting
unit goodwill with the carrying amount of that goodwill. If the
carrying amount of the reporting units goodwill exceeds
its implied fair value, an impairment charge is recognized in an
amount equal to that excess. The loss recognized cannot
F-39
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
exceed the carrying amount of goodwill. No impairment occurred
for the years ended December 31, 2009, 2008 and 2007.
Deferred Loan Issuance and Amendment
Costs Debt issuance and amendment costs have
been capitalized and are being amortized as additional interest
expense over the expected terms of the related debt agreements.
Equity Method Investment The
Companys equity method investment is accounted for under
the equity method when it exerts significant influence and
ownership does not exceed 50% of the common stock. The Company
records the investment at cost in the consolidated statements of
financial condition and adjusts the carrying amount of the
investment to recognize its share of earnings or losses while
recording such earnings or losses within the consolidated
statements of income.
Mortgage Loans Held for Sale Through
its mortgage affiliate, Innovex, the Company originated
residential mortgage loans through a warehouse line of credit
facility or as a broker for other banks. The Company ceased the
operations of Innovex on December 31, 2007.
Prior to this date, mortgage loans held for sale were carried at
the lower of aggregate cost or fair value and were sold on a
nonrecourse basis with certain representations and warranties.
Fair value was determined by outstanding commitments from
investors. The Company evaluated the need for market valuation
reserves on mortgage loans held for sale based on a number of
quantitative and qualitative factors, primarily changes in
interest rates and collateral values. The Company sold all
mortgage loans that it originated.
The Company had an agreement with certain third-party financial
institutions for them to purchase loans originated by the
Company, as long as such loans met certain criteria, generally
within 30 days from funding. Loan origination and
processing fees and certain direct origination costs were
deferred until the related loan was sold.
Drafts Payable Drafts payable
represent checks drawn against the Company that have not yet
cleared through the bank. At December 31, 2009, the Company
had amounts drawn of $111.1 million related to client
activities, and $14.7 million of corporate overdrafts under
a sweep agreement with a bank.
Legal Reserves The Company records
reserves for legal proceedings in accounts payable and accrued
liabilities in the statement of financial condition. The
determination of these reserve amounts requires significant
judgment on the part of management. Management considers many
factors including, but not limited to, future legal expenses,
the amount of the claim, the amount of the loss in the
clients account, the basis and validity of the claim, the
possibility of wrongdoing on the part of advisors and financial
institutions, likely insurance coverage, previous results in
similar cases, and legal precedents and case law. Each legal
proceeding is reviewed with counsel in each accounting period
and the reserve is adjusted as deemed appropriate by management.
Any change in the reserve amount is recorded as professional
services in the consolidated statement of income.
Derivative Instruments and Hedging
Activities The Company uses interest rate
swap agreements to protect itself against changing interest
rates and the related impact to the Companys cash flows.
The Company also evaluates its contracts and commitments for
terms that qualify as embedded derivatives. All derivatives are
reported at their corresponding fair value in the Companys
consolidated statements of financial condition.
Financial derivative instruments expected to be highly effective
hedges against changes in cash flows are designated as such upon
entering into the agreement. At each reporting date, the Company
reassesses the effectiveness of the hedge to determine whether
or not it can continue to use hedge
F-40
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
accounting. Under hedge accounting, the Company records the
increase or decrease in fair value of the derivative, net of tax
impact, as other comprehensive income or loss. If the hedge is
not determined to be a perfect hedge, yet is still considered
highly effective, the Company will calculate the ineffective
portion and record the related change in its fair value as
additional interest income or expense in the consolidated
statements of income. Amounts accumulated in other comprehensive
income (loss) are reclassified into earnings in the same period
or periods during which the hedged forecasted transaction
affects earnings.
Fair Value of Financial Instruments
The Companys financial assets and liabilities are carried
at fair value or at amounts that, because of their short-term
nature, approximate current fair value, with the exception of
its indebtedness. The Company carries its indebtedness at
amortized cost. As of December 31, 2009, the carrying
amount and fair value of the Companys indebtedness was
approximately $1,369 million and $1,278 million,
respectively. As of December 31, 2008, the carrying amount
and fair value was approximately $1,468 million and
$1,057 million, respectively. See Note 6 for
additional detail regarding the Companys fair value
measurements.
Commitments and Contingencies The
Company recognizes liabilities for contingencies when analysis
indicates it is both probable that a liability has been incurred
and the amount of loss can be reasonably estimated. When a range
of probable loss can be estimated, the Company accrues the most
likely amount.
Comprehensive Income (Loss) The
Companys comprehensive income (loss) is composed of net
income and the effective portion of the unrealized gains
(losses) on financial derivatives in cash flow hedge
relationships, net of related tax effects.
Recently Issued Accounting
Pronouncements Recent accounting
pronouncements or changes in accounting pronouncements during
the year ended December 31, 2009, that are of significance,
or potential significance, to the Company are discussed below.
In June 2009, the Financial Accounting Standards Board
(FASB) issued guidance now codified as Accounting
Standards Codification (the Codification or
ASC) Topic 105, Generally Accepted Accounting
Principles, which established a single source of
authoritative, non-governmental GAAP, except for rules and
interpretive releases of the SEC, which are sources of
authoritative GAAP for SEC registrants. All other
non-grandfathered, non-SEC accounting literature that was not
included in the Codification became non-authoritative. The
Codification is effective for financial statements for interim
or annual reporting periods ending after September 15,
2009. The Company adopted the new guidelines and numbering
system prescribed by the Codification when referring to GAAP. As
the Codification was not intended to change or alter existing
GAAP, it did not have a material impact on the Companys
consolidated financial statements.
In April 2009, the FASB issued three staff positions intended to
provide additional application guidance and enhance the
disclosures regarding fair value measurements and impairments of
securities. This guidance is now codified within ASC Topic 820,
Financial Measurements and Disclosures (ASC Topic
820), ASC Topic 825, Financial Instruments
(ASC Topic 825) and ASC Topic 320,
Investments Debt and Equity Securities
(ASC Topic 320). ASC Topic 820 provides guidance
on determining fair value when market activity has decreased.
Updates contained within ASC Topic 825 enhance consistency in
financial reporting by increasing the frequency of fair value
disclosures. ASC Topic 320 provides additional guidance designed
to create greater clarity and consistency in accounting for and
presenting impairment losses on debt securities. Except for the
addition of required disclosures, the adoption of the provisions
contained in these topics did not have a material impact on the
Companys consolidated financial statements.
F-41
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
In May 2009, the FASB issued guidance now codified as ASC Topic
855, Subsequent Events (ASC Topic 855), which
established a general standard of accounting for and disclosure
of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued.
The Company adopted the provisions of ASC Topic 855, which did
not have a material impact on its consolidated financial
statements.
In June 2009, the FASB issued guidance now codified as ASC Topic
810, Consolidation (ASC Topic 810), which
amends the evaluation criteria to identify the primary
beneficiary of a variable interest entity (VIE) and
requires ongoing reassessment of whether an enterprise is the
primary beneficiary of the VIE. ASC Topic 810 significantly
changes the consolidation rules for VIEs including the
consolidation of common structures, such as joint ventures,
equity method investments and collaboration arrangements. The
guidance is applicable to all new and existing VIEs. The
provisions of ASC Topic 810 are effective for interim and annual
reporting periods ending after November 15, 2009. The
Company adopted ASC Topic 810, which did not have a material
impact on its consolidated financial statements.
In August 2009, the FASB issued Accounting Standards Update
(ASU)
No. 2009-05,
Fair Value Measurements and Disclosures (Topic
820) Measuring Liabilities at Fair Value
(ASU
2009-05).
ASU 2009-05
provides clarification in measuring the fair value of
liabilities in circumstances in which a quoted price in an
active market for the identical liability is not available and
in circumstances in which a liability is restricted from being
transferred. This ASU also clarifies that both a quoted price in
an active market for the identical liability at the measurement
date and the quoted price for the identical liability when
traded as an asset in an active market when no adjustments to
the quoted price of the asset are required are Level 1 fair
value measurements. The Company adopted ASU
2009-05,
which did not have a material impact on its consolidated
financial statements.
Acquisition of
UVEST
On January 2, 2007, the Company completed its acquisition
of all of the outstanding capital stock of UVEST, augmenting the
Companys position in providing services to banks, credit
unions and other financial institutions. The purchase price
totaled $89.5 million; $78.0 million in cash and the
issuance of 603,660 shares of common stock at an estimated
fair value of $18.90 per share. As part of the purchase price
allocation, the Company recorded intangible assets for
relationships with financial institutions and product sponsors.
The value assigned to these relationships was
$54.3 million, which is being amortized on a straight-line
basis over the expected useful life of 20 years.
Additionally, the Company assigned value to the trademark and
trade name in the amount of $0.5 million. The trademark and
trade name was determined to have an expected useful life of
18 months and therefore amortized over the same period. As
of December 31, 2008, the trademark and trade name were
fully amortized. Goodwill in the amount of $27.4 million
was created for the excess purchase price over the value of
assets and liabilities assumed.
Immediately following the acquisition, the Company satisfied
certain obligations under a phantom stock plan for UVEST
employees by issuing 65,820 shares of common stock at an
estimated fair value of $18.90 per share.
Acquisition of
the Affiliated Entities
On June 20, 2007, the Company acquired the Affiliated
Entities. This acquisition increased the number of advisors and
strengthened the Companys position as a leading
independent broker-dealer in the United States.
F-42
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The total purchase price was approximately $120.5 million;
$63.3 million in cash and the issuance of
2,645,500 shares of common stock with an estimated fair
value of $21.60 per share. As part of the purchase price
allocation, the Company estimated the value of intangible assets
for relationships with advisors and financial institutions and
product sponsors to be $67.1 million, which was amortized
on a straight-line basis over their expected useful lives
ranging from 10 to 20 years. Additionally, the Company
estimated the value of trademarks and trade names in the amount
of $2.3 million. The trademarks and trade names were
determined to have an expected useful life of three to five
years and therefore amortized over the same period. Goodwill in
the amount of $11.3 million was also recorded as part of
the acquisition. Subsequent to the purchase, the Company settled
an outstanding state tax audit. This settlement, which was
favorable to the Company, resulted in a $0.1 million
reduction to goodwill.
On July 10, 2009, the Company committed to a corporate
restructuring plan to consolidate the operations of the
Affiliated Entities with LPL Financial. See Note 4 for
further discussion.
Acquisition of
IFMG
On November 7, 2007, the Company completed its acquisition
of IFMG Securities, Inc., Independent Financial Marketing Group,
Inc. and LSC Insurance Agency of Arizona, Inc. (collectively
IFMG). The purpose of this acquisition was to
transfer IFMGs relationships with financial institution
clients to other broker-dealer subsidiaries of the Company. In
conjunction with its acquisition of IFMG, the Company announced
a shutdown plan (the Shutdown Plan), which offered
relocation and employment to certain employees and terminated
the remaining operations of IFMG within twelve months following
the acquisition.
The total purchase price was $39.0 million, including
initial purchase consideration of $25.7 million, as well as
$7.1 million in post-closing payments made through 2008
based on the successful recruitment and retention of certain
institutional relationships. As part of the purchase price
allocation, the Company estimated the value of intangible assets
for relationships with advisors and financial institutions and
product sponsors to be $25.6 million, which will be
amortized on a straight-line basis over their expected useful
lives of 10 years. Additionally, the value of certain
technology and non-compete agreements has been estimated at
$1.1 million and $0.6 million, respectively, both of
which are being amortized over 3 years.
In conjunction with the acquisition, the Company made retention
payments to financial institutions doing business through IFMG
as an incentive to convert to one of the Companys other
technology and clearing platforms. As of December 31, 2009,
the Company has paid $0.9 million in retention payments,
which are classified as other assets in the consolidated
statements of financial condition, and are being amortized over
the life of the contractual agreements, ranging from six months
to six years.
As part of the Shutdown Plan, the Company evaluated whether or
not it will utilize certain long term contractual relationships
with vendors of IFMG. Consequently, the Company cancelled
various contracts resulting in $2.3 million in cancellation
charges. Cancellation fees and any estimated losses attributable
to vendor and or lease contracts have been recorded as
additional purchase price consideration.
Strategic
Business Review Initiative
On December 29, 2008, the Company committed to and
implemented an organizational restructuring plan intended to
reduce its cost structure and improve operating efficiencies,
which
F-43
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
resulted in a reduction in its overall workforce of
approximately 250 employees. In accordance with ASC Topic
420, Accounting for Costs Associated with Exit or Disposal
Activities, the Company has recorded severance and one-time
involuntary termination benefit accruals in accounts payable and
accrued liabilities within the consolidated statements of
financial condition. The Company completed this initiative and
expects to pay all costs by April, 2011.
The following table summarizes the balance of accrued expenses
related to the strategic business review and the changes in the
accrued amounts as of and for the year ended December 31,
2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
Cumulative
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Costs
|
|
|
|
December 31,
|
|
|
Costs
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Incurred
|
|
|
|
2008
|
|
|
Incurred(1)
|
|
|
Payments
|
|
|
Non-cash
|
|
|
2009
|
|
|
to Date(2)
|
|
|
Severance and benefits
|
|
$
|
14,533
|
|
|
$
|
(467
|
)
|
|
$
|
(12,070
|
)
|
|
$
|
|
|
|
$
|
1,996
|
|
|
$
|
14,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represent changes in the Companys estimates for the cost
of providing post employment benefits to employees impacted by
its restructuring activities. |
|
(2) |
|
At December 31, 2009, cumulative costs incurred to date
represent the total expected costs. |
Consolidation
of Affiliated Entities Initiative
On July 10, 2009, the Company committed to a corporate
restructuring plan that consolidated the operations of the
Affiliated Entities with LPL Financial. This restructuring was
effected to enhance service offerings to financial advisors
while also generating efficiencies. The Company expects total
costs associated with the initiative to be approximately
$74.2 million. The Company incurred the majority of these
costs in 2009 and anticipates recognizing the remaining costs by
December 2013; however, adjustments may occur due to estimates
of abandoned lease obligations with terms that extend through
2018.
The Company paid charges related to the conversion and transfer
of certain advisors associated with the Affiliated Entities and
their client accounts. Following the completion of these
transfer activities, the registered representatives and client
accounts that transferred are associated with LPL Financial. As
a condition for the regulatory approval of the transfer, the
Affiliated Entities were required to deposit $12.8 million
into escrow accounts pending the resolution of certain matters,
of which $7.3 million has been released as of
December 31, 2009. The adequacy of these escrow accounts is
evaluated quarterly. These escrow accounts are considered
restricted cash and included in other assets within the
consolidated statements of financial condition.
The Company paid charges related to early termination costs
associated with certain contracts held by the Affiliated
Entities (see Note 14). Additionally, the Company recorded
severance costs and one-time involuntary termination benefits
associated with the elimination of 189 positions and will
recognize these accruals ratably over the employees
remaining service period.
The Company recorded non-cash charges for the impairment of
intangible assets resulting from advisor attrition and
discontinued use of certain brand names and logos (see
Note 10), and fixed assets associated with abandoned lease
arrangements. The Company also recognized charges related to the
early termination and partial abandonment of certain lease
arrangements offset by estimates for
sub-lease
efforts. The Company anticipates additional costs of
approximately $2.8 million related to the abandonment of
the remaining office space, which can not be fully estimated
until the date of abandonment.
F-44
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The following table summarizes the balance of accrued expenses
and the changes in the accrued amounts as of and for the year
ended December 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
Total
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Expected
|
|
|
|
December 31,
|
|
|
Costs
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Restructuring
|
|
|
|
2008
|
|
|
Incurred(1)
|
|
|
Payments
|
|
|
Non-cash
|
|
|
2009
|
|
|
Costs
|
|
|
Severance and benefits
|
|
$
|
|
|
|
$
|
9,436
|
|
|
$
|
(6,551
|
)
|
|
$
|
(126
|
)
|
|
$
|
2,759
|
|
|
$
|
11,356
|
|
Lease and contract termination fees
|
|
|
|
|
|
|
15,919
|
|
|
|
(8,358
|
)
|
|
|
(103
|
)
|
|
|
7,458
|
|
|
|
19,079
|
|
Asset impairments
|
|
|
|
|
|
|
19,924
|
|
|
|
|
|
|
|
(19,924
|
)
|
|
|
|
|
|
|
20,238
|
|
Conversion and transfer costs
|
|
|
|
|
|
|
13,883
|
|
|
|
(11,222
|
)
|
|
|
(2,357
|
)
|
|
|
304
|
|
|
|
23,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
59,162
|
|
|
$
|
(26,131
|
)
|
|
$
|
(22,510
|
)
|
|
$
|
10,521
|
|
|
$
|
74,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
At December 31, 2009, costs incurred represent the total
cumulative costs incurred. |
|
|
5.
|
Equity Method
Investment
|
On May 11, 2007, the Company acquired for
$5.0 million, an approximate 22.6% ownership interest in
Blue Frog Solutions, Inc. (Blue Frog). This
investment provides the Company with a strategic ownership
interest in one of its vendors that provides technology for
variable annuity order entry and monitoring. The Company follows
the equity method of accounting, as it has the ability to
exercise significant influence over operating and financial
policies, primarily through a representation on the Board of
Directors. The Company has classified its equity method
investment within other assets in the consolidated statements of
financial condition, and has recognized its share of earnings or
losses in the consolidated statements of income in loss on
equity method investment. Such losses were $0.3 million and
$0.6 million for the years ended December 31, 2009 and
2008, respectively.
In June 2008, the Company determined that an other than
temporary impairment existed due to the recapitalization of Blue
Frog by an outside investor. Accordingly, the Company recognized
an impairment loss of $1.7 million, representing the
difference in the carrying value of its investment compared with
the per share value implied by the transaction. Such loss is
calculated on the consolidated statements of income as a loss on
equity method investment. The Company has retained a 13.9%
ownership interest and a seat on the Board of Directors.
|
|
6.
|
Fair Value
Measurements
|
Fair value is defined as the exchange price that would be
received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market
participants at the measurement date. Inputs used to measure
fair value are prioritized within a three-level fair value
hierarchy. This hierarchy requires entities to maximize the use
of observable inputs and minimize the use of unobservable
inputs. The three levels of inputs used to measure fair value
are as follows:
|
|
|
|
|
Level 1 Quoted prices in active
markets for identical assets or liabilities.
|
|
|
|
Level 2 Observable inputs other
than quoted prices included in Level 1, such as quoted
prices for similar assets and liabilities in active markets;
quoted prices for identical or similar assets and liabilities in
markets that are not active; or other inputs that are observable
or can be corroborated by observable market data.
|
F-45
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
|
|
Level 3 Unobservable inputs that
are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities. This
includes certain pricing models, discounted cash flow
methodologies and similar techniques that use significant
unobservable inputs.
|
The Companys fair value measurements are evaluated within
the fair value hierarchy, based on the nature of inputs used to
determine the fair value at the measurement date. At
December 31, 2008, the Company had the following financial
assets and liabilities that are measured at fair value on a
recurring basis:
Cash Equivalents The Companys
cash equivalents include money market funds, which are short
term in nature with readily determinable values derived from
active markets.
Securities Segregated Under Federal and Other
Regulations The Companys segregated
accounts contain U.S. treasury securities that are short
term in nature with readily determinable values derived from
quoted prices in active markets.
Securities Owned and Securities Sold But Not Yet
Purchased The Companys trading
securities consist of house account model portfolios for the
purpose of benchmarking the performance of its fee based
advisory platforms and temporary positions resulting from the
processing of client transactions. Examples of these securities
include money market funds, U.S. treasuries, mutual funds,
certificates of deposit, traded equity securities and debt
securities.
The Company uses prices obtained from independent third-party
pricing services to measure the fair value of its trading
securities. Prices received from the pricing services are
validated using various methods including comparison to prices
received from additional pricing services, comparison to
available quoted market prices and review of other relevant
market data including implied yields of major categories of
securities. In general, these quoted prices are derived from
active markets for identical assets or liabilities. When quoted
prices in active markets for identical assets and liabilities
are not available, the quoted prices are based on similar assets
and liabilities or inputs other than the quoted prices that are
observable, either directly or indirectly. For certificates of
deposit and treasury securities, the Company utilizes
market-based inputs including observable market interest rates
that correspond to the remaining maturities or the next interest
reset dates. At December 31, 2009, the Company did not
adjust prices received from the independent third-party pricing
services.
Other Assets The Companys other
assets include deferred compensation plan assets that are
invested in money market funds and mutual funds which are
actively traded and valued based on quoted market prices in
active markets.
Interest Rate Swaps The Companys
interest rate swaps are not traded on a market exchange;
therefore, the fair values are determined using externally
developed valuation models which include assumptions about the
London Interbank Offered Rate (LIBOR) yield curve at
interim reporting dates as well as counterparty credit risk and
the Companys own non-performance risk.
F-46
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The Company has segregated all recurring fair value measurements
into the most appropriate level within the fair value hierarchy
in the tables below, based on an evaluation of inputs used to
determine the fair value at December 31, 2009 and 2008 (in
thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Measurements
|
|
|
At December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
223,665
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
223,665
|
|
Securities segregated under federal and other regulations
|
|
|
279,579
|
|
|
|
|
|
|
|
|
|
|
|
279,579
|
|
Securities owned trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
181
|
|
Mutual funds
|
|
|
6,694
|
|
|
|
|
|
|
|
|
|
|
|
6,694
|
|
Equity securities
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
Debt securities
|
|
|
|
|
|
|
425
|
|
|
|
|
|
|
|
425
|
|
U.S. treasury obligations
|
|
|
7,797
|
|
|
|
|
|
|
|
|
|
|
|
7,797
|
|
Certificates of deposit
|
|
|
|
|
|
|
253
|
|
|
|
|
|
|
|
253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities owned trading
|
|
|
14,683
|
|
|
|
678
|
|
|
|
|
|
|
|
15,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
12,739
|
|
|
|
|
|
|
|
|
|
|
|
12,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
530,666
|
|
|
$
|
678
|
|
|
$
|
|
|
|
$
|
531,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold but not yet purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
$
|
3,773
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,773
|
|
U.S. treasury obligations
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
Equity securities
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
Certificates of deposit
|
|
|
|
|
|
|
123
|
|
|
|
|
|
|
|
123
|
|
Debt securities
|
|
|
|
|
|
|
95
|
|
|
|
|
|
|
|
95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities sold but not yet purchased
|
|
|
3,785
|
|
|
|
218
|
|
|
|
|
|
|
|
4,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
|
|
|
|
17,292
|
|
|
|
|
|
|
|
17,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
|
$
|
3,785
|
|
|
$
|
17,510
|
|
|
$
|
|
|
|
$
|
21,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain assets and liabilities are not measured at fair value on
an ongoing basis but are subject to fair value measurement in
certain circumstances, for example, when evidence of impairment
exists. During the year ended December 31, 2009, the
Company recorded asset impairment charges of $18.6 million
for certain intangible assets that were determined to have no
estimated fair value (see Note 10). The fair value was
determined based on the loss of future expected cash flows for
advisors who were not retained as a result of the consolidation
of the Affiliated Entities, as well as the discontinued use of
certain brand names and logos and their lack of marketability.
The Company has determined that the impairment qualifies as a
Level 3 measurement under the fair value hierarchy.
F-47
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Measurements
|
|
|
At December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
56,122
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
56,122
|
|
Securities owned trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
238
|
|
|
|
|
|
|
|
|
|
|
|
238
|
|
Mutual funds
|
|
|
6,659
|
|
|
|
|
|
|
|
|
|
|
|
6,659
|
|
Equity securities
|
|
|
585
|
|
|
|
|
|
|
|
|
|
|
|
585
|
|
Debt securities
|
|
|
|
|
|
|
510
|
|
|
|
|
|
|
|
510
|
|
U.S. treasury obligations
|
|
|
2,819
|
|
|
|
|
|
|
|
|
|
|
|
2,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities owned trading
|
|
|
10,301
|
|
|
|
510
|
|
|
|
|
|
|
|
10,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
6,965
|
|
|
|
|
|
|
|
|
|
|
|
6,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
73,388
|
|
|
$
|
510
|
|
|
$
|
|
|
|
$
|
73,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold but not yet purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
$
|
3,585
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,585
|
|
Equity securities
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
87
|
|
Debt securities
|
|
|
|
|
|
|
238
|
|
|
|
|
|
|
|
238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities sold but not yet purchased
|
|
|
3,672
|
|
|
|
238
|
|
|
|
|
|
|
|
3,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
|
|
|
|
25,417
|
|
|
|
|
|
|
|
25,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
|
$
|
3,672
|
|
|
$
|
25,655
|
|
|
$
|
|
|
|
$
|
29,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
Held-to-Maturity
Securities
|
The amortized cost, gross unrealized gains and fair value of
securities
held-to-maturity
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Fair Value
|
|
|
At December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government notes
|
|
$
|
10,354
|
|
|
$
|
49
|
|
|
$
|
10,403
|
|
Certificate of deposit
|
|
|
100
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,454
|
|
|
$
|
49
|
|
|
$
|
10,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government notes
|
|
$
|
10,404
|
|
|
$
|
173
|
|
|
$
|
10,577
|
|
Certificate of deposit
|
|
|
100
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,504
|
|
|
$
|
173
|
|
|
$
|
10,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-48
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The maturities of securities
held-to-maturity
at December 31, 2009, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 Year
|
|
|
1-2 Years
|
|
|
Total
|
|
|
U.S. government notes
|
|
$
|
5,126
|
|
|
$
|
5,228
|
|
|
$
|
10,354
|
|
Certificate of deposit
|
|
|
100
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortized cost
|
|
$
|
5,226
|
|
|
$
|
5,228
|
|
|
$
|
10,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fair value
|
|
$
|
5,256
|
|
|
$
|
5,247
|
|
|
$
|
10,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.
|
Receivables From
Product Sponsors, Broker-Dealers and Clearing Organizations and
Payables to Broker-Dealers and Clearing Organizations
|
Receivables from product sponsors, broker-dealers and clearing
organizations and payables to broker-dealers and clearing
organizations were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Receivables:
|
|
|
|
|
|
|
|
|
Commissions receivable from product sponsors and others
|
|
$
|
102,920
|
|
|
$
|
87,078
|
|
Receivable from clearing organizations
|
|
|
49,793
|
|
|
|
88,722
|
|
Receivable from broker-dealers
|
|
|
12,195
|
|
|
|
45,630
|
|
Securities
failed-to-deliver
|
|
|
6,992
|
|
|
|
9,970
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
$
|
171,900
|
|
|
$
|
231,400
|
|
|
|
|
|
|
|
|
|
|
Payables:
|
|
|
|
|
|
|
|
|
Securities loaned
|
|
$
|
7,239
|
|
|
$
|
5,252
|
|
Securities
failed-to-receive
|
|
|
5,495
|
|
|
|
9,227
|
|
Payable to broker-dealers
|
|
|
2,787
|
|
|
|
4,079
|
|
Payable to clearing organizations
|
|
|
2,696
|
|
|
|
3,176
|
|
|
|
|
|
|
|
|
|
|
Total payables
|
|
$
|
18,217
|
|
|
$
|
21,734
|
|
|
|
|
|
|
|
|
|
|
LPL Financial clears commodities transactions for its advisors
through another broker-dealer on a fully disclosed basis. The
amount payable to broker-dealers relates to the aforementioned
transactions and is collateralized by securities owned by LPL
Financial.
F-49
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The components of fixed assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Internally developed software
|
|
$
|
193,682
|
|
|
$
|
190,949
|
|
Computers and software
|
|
|
82,459
|
|
|
|
87,113
|
|
Leasehold improvements
|
|
|
41,559
|
|
|
|
42,547
|
|
Furniture and equipment
|
|
|
17,180
|
|
|
|
20,116
|
|
Property
|
|
|
6,572
|
|
|
|
6,572
|
|
|
|
|
|
|
|
|
|
|
Total fixed assets
|
|
|
341,452
|
|
|
|
347,297
|
|
Accumulated depreciation and amortization
|
|
|
(239,868
|
)
|
|
|
(185,537
|
)
|
|
|
|
|
|
|
|
|
|
Fixed assets net
|
|
$
|
101,584
|
|
|
$
|
161,760
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense for fixed assets was
$69.3 million, $60.2 million and $43.7 million
for the years ended December 31, 2009, 2008 and 2007,
respectively.
|
|
10.
|
Goodwill and
Intangible Assets
|
On September 15, 2009, and in conjunction with the
Companys consolidation initiative, intangible assets
residing at the Affiliated Entities were transferred to LPL
Financial. This exchange has occurred between entities under
common control and accordingly, the Company transferred advisor
relationship and sponsor relationship intangible assets at their
approximate carrying amounts of $30.9 million and
$11.9 million, respectively. There was no change in the
useful lives of the intangible assets, which continue to be
amortized over a period of 10 to 20 years.
At the time of consolidation, a portion of the advisor
relationships and trademarks and trade names of the Affiliated
Entities were determined to have no future economic benefit.
Accordingly, the Company recorded impairment charges of
$16.1 million for advisor relationships and
$1.1 million for trademarks and trade names. In the fourth
quarter of 2009, the Company recorded an additional impairment
charge of $1.4 million for advisor relationships. The
impairment of advisor relationships was determined based upon
the attrition of advisor and their related revenue streams
during the period of consolidation. The impairment of trademarks
and trade names was based upon the discontinued use of brand
names and logos of the Affiliated Entities. The Company has
recorded the asset impairments as restructuring charges (see
Note 4) and has classified them as such on its
consolidated statements of income.
F-50
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The components of intangible assets as of December 31, 2009
and 2008 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Value
|
|
|
Amortization
|
|
|
Value
|
|
|
At December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Definite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Advisor and financial institution relationships
|
|
$
|
458,424
|
|
|
$
|
(91,586
|
)
|
|
$
|
366,838
|
|
Product sponsor relationships
|
|
|
231,930
|
|
|
|
(43,482
|
)
|
|
|
188,448
|
|
Trust client relationships
|
|
|
2,630
|
|
|
|
(652
|
)
|
|
|
1,978
|
|
Trademarks and trade names
|
|
|
457
|
|
|
|
(457
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total definite-lived intangible assets
|
|
$
|
693,441
|
|
|
$
|
(136,177
|
)
|
|
$
|
557,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademark and trade name
|
|
|
|
|
|
|
|
|
|
|
39,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
|
|
|
|
|
|
$
|
597,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
Definite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Advisor and financial institution relationships
|
|
$
|
482,397
|
|
|
$
|
(71,318
|
)
|
|
$
|
411,079
|
|
Product sponsor relationships
|
|
|
233,663
|
|
|
|
(33,442
|
)
|
|
|
200,221
|
|
Trust client relationships
|
|
|
2,630
|
|
|
|
(521
|
)
|
|
|
2,109
|
|
Trademarks and trade names
|
|
|
2,757
|
|
|
|
(1,282
|
)
|
|
|
1,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total definite-lived intangible assets
|
|
$
|
721,447
|
|
|
$
|
(106,563
|
)
|
|
$
|
614,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademark and trade name
|
|
|
|
|
|
|
|
|
|
|
39,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
|
|
|
|
|
|
$
|
654,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortization expense of intangible assets was
$39.0 million, $40.3 million and $35.1 million
for the years ended December 31, 2009, 2008 and 2007,
respectively. Amortization expense for each of the fiscal years
ended December 2010 through 2014 and thereafter is estimated as
follows (in thousands):
|
|
|
|
|
2010
|
|
$
|
37,006
|
|
2011
|
|
|
36,840
|
|
2012
|
|
|
36,548
|
|
2013
|
|
|
35,927
|
|
2014
|
|
|
35,927
|
|
Thereafter
|
|
|
375,016
|
|
|
|
|
|
|
Total
|
|
$
|
557,264
|
|
|
|
|
|
|
F-51
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The Companys provision (benefit) for income taxes is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Current provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
53,757
|
|
|
$
|
61,498
|
|
|
$
|
58,123
|
|
State
|
|
|
12,750
|
|
|
|
11,909
|
|
|
|
9,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current provision
|
|
|
66,507
|
|
|
|
73,407
|
|
|
|
68,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(24,360
|
)
|
|
|
(25,385
|
)
|
|
|
(18,151
|
)
|
State
|
|
|
(17,100
|
)
|
|
|
(753
|
)
|
|
|
(3,169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred benefit
|
|
|
(41,460
|
)
|
|
|
(26,138
|
)
|
|
|
(21,320
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
25,047
|
|
|
$
|
47,269
|
|
|
$
|
46,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The principal items accounting for the differences in income
taxes computed at the U.S. statutory rate (35%) and the
effective income tax rate comprise the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Taxes computed at statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income taxes net of federal benefit
|
|
|
(3.9
|
)
|
|
|
7.8
|
|
|
|
4.1
|
|
Share-based compensation
|
|
|
1.5
|
|
|
|
1.0
|
|
|
|
|
|
Uncertain tax positions
|
|
|
1.8
|
|
|
|
3.6
|
|
|
|
3.7
|
|
Non-deductible expenses
|
|
|
0.6
|
|
|
|
1.6
|
|
|
|
1.3
|
|
Change in valuation allowance
|
|
|
0.1
|
|
|
|
1.2
|
|
|
|
|
|
Other
|
|
|
(0.6
|
)
|
|
|
0.8
|
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
34.5
|
%
|
|
|
51.0
|
%
|
|
|
43.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys current effective tax rate reflects a benefit
of approximately 8% from a newly enacted change to
Californias income sourcing rules that is scheduled to
take effect on January 1, 2011. This change requires the
Company to revalue its deferred tax liabilities to the rate that
will be in effect when the tax liabilities are utilized.
F-52
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The components of the net deferred tax liabilities included in
the consolidated statements of financial condition were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
State taxes
|
|
$
|
15,019
|
|
|
$
|
19,976
|
|
Reserves for litigation, vacation, and bonuses
|
|
|
24,030
|
|
|
|
19,003
|
|
Unrealized gain on interest rate swaps
|
|
|
5,675
|
|
|
|
9,920
|
|
Deferred rent
|
|
|
5,649
|
|
|
|
6,457
|
|
Share-based compensation
|
|
|
6,905
|
|
|
|
5,212
|
|
Provision for bad debts
|
|
|
2,849
|
|
|
|
2,041
|
|
Net operating losses of acquired subsidiaries
|
|
|
172
|
|
|
|
236
|
|
Other
|
|
|
1,841
|
|
|
|
2,777
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
62,140
|
|
|
|
65,622
|
|
Valuation allowance
|
|
|
(1,340
|
)
|
|
|
(1,290
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
60,800
|
|
|
|
64,332
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Amortization of intangible assets and trademarks and trade names
|
|
|
(191,108
|
)
|
|
|
(228,163
|
)
|
Depreciation of fixed assets
|
|
|
(17,300
|
)
|
|
|
(21,338
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(208,408
|
)
|
|
|
(249,501
|
)
|
|
|
|
|
|
|
|
|
|
Deferred income taxes net
|
|
$
|
(147,608
|
)
|
|
$
|
(185,169
|
)
|
|
|
|
|
|
|
|
|
|
At January 1, 2009, the Company had gross unrecognized tax
benefits of $20.3 million. Of this total, $2.6 million
represents amounts acquired during the Companys
acquisition of the Affiliated Entities. The acquired
unrecognized tax benefits will have no impact on the
Companys annual effective tax rate as these are fully
indemnified by the seller in accordance with the purchase and
sale agreement. Of the remaining $17.7 million,
$13.1 million (net of the federal benefit on state issues)
represents the amount of unrecognized tax benefits that, if
recognized, would favorably affect the effective income tax rate
in any future periods.
The following table reflects a reconciliation of the beginning
and ending balances of the total amounts of gross unrecognized
tax benefits including interest and penalties (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Balance Beginning of year
|
|
$
|
20,258
|
|
|
$
|
15,139
|
|
|
$
|
8,533
|
|
Increases related to acquired tax positions
|
|
|
142
|
|
|
|
969
|
|
|
|
2,725
|
|
Increases related to current year tax positions
|
|
|
4,066
|
|
|
|
6,480
|
|
|
|
5,657
|
|
Reductions as a result of a lapse of the applicable statute of
limitations related to acquired tax positions
|
|
|
(627
|
)
|
|
|
(596
|
)
|
|
|
(524
|
)
|
Reductions as a result of a lapse of the applicable statute of
limitations related to prior period tax positions
|
|
|
(1,881
|
)
|
|
|
(1,734
|
)
|
|
|
(1,252
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance End of year
|
|
$
|
21,958
|
|
|
$
|
20,258
|
|
|
$
|
15,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-53
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
At December 31, 2009, the Company had gross unrecognized
tax benefits of $22.0 million. Of this total,
$2.1 million represents amounts acquired due to the
Companys acquisition of the Affiliated Entities. The
acquired unrecognized tax benefits will have no impact on the
Companys annual effective tax rate as these are fully
indemnified by the seller in accordance with the purchase and
sale agreement. At December 31, 2009, the Company has
recorded a receivable from seller in the amount of
$2.1 million, which is included in other assets in the
accompanying consolidated statements of financial condition. Of
the remaining $19.9 million, $14.4 million (net of the
federal benefit on state issues) represents the amount of
unrecognized tax benefits that, if recognized, would favorably
affect the effective income tax rate in any future periods.
The Company accrues interest and penalties related to
unrecognized tax benefits in its provision for income taxes
within the consolidated statements of financial condition. At
January 1, 2009, the Company had $1.3 accrued for interest
and $2.9 million accrued for penalties. At
December 31, 2009, the liability for unrecognized tax
benefits included accrued interest of $1.9 million and
penalties of $3.4 million. Tax expense for the year ended
December 31, 2009 includes interest expense of
$0.6 million and penalties of $0.5 million.
The Company and its subsidiaries file income tax returns in the
federal jurisdiction, as well as most state jurisdictions, and
are subject to routine examinations by the respective taxing
authorities. The Company has concluded all federal and state
income tax matters for years through 2004, with the exception of
California, which has concluded income tax matters for years
through 2003.
The tax years of 2005 to 2009 remain open to examination by
major taxing jurisdictions to which the Company is subject, with
the exception of California discussed above. In the next
12 months, the Company expects a reduction in unrecognized
tax benefits of $3.9 million primarily related to the
statute of limitations expiration in various state jurisdictions.
Senior Secured Credit Facilities
Borrowings under the Companys senior secured credit
facilities bear interest at a base rate equal to either one,
two, three, six, nine or twelve-month LIBOR plus the applicable
margin, or an alternative base rate (ABR) plus the
applicable margin. The ABR is equal to the greater of the prime
rate or the effective federal funds rate plus
1/2
of 1.00%. The applicable margin on the senior secured term
credit facilities could change depending on the Companys
credit rating. The senior secured credit facilities are subject
to certain financial and nonfinancial covenants. As of
December 31, 2009, the Company was in compliance with all
such covenants.
Senior Unsecured Subordinated Notes
The Company has $550.0 million of senior unsecured
subordinated notes due December 15, 2015. The notes bear
interest at 10.75% per annum and interest payments are payable
semiannually in arrears. The Company is not required to make
mandatory redemption or sinking-fund payments with respect to
the notes. The indenture underlying the senior unsecured
subordinated notes contains various restrictions with respect to
the issuer, including one or more restrictions relating to
limitations on liens, sale and leaseback arrangements and funded
debt of subsidiaries.
Revolving Line of Credit The Company
maintains a $100.0 million revolving line of credit
facility, $10.0 million of which is being used to support
the issuance of an irrevocable letter of credit for its
subsidiary, PTC. Borrowings under the Companys revolving
credit facility bear interest at a base rate equal to the one,
two, three, six, nine or twelve-month LIBOR plus an interest
rate margin of an additional 2.00% or an ABR plus the applicable
margin of 1.00%. The Company also pays a fee of
F-54
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
0.375% for the unused balance. At December 31, 2008, the
Company had a balance outstanding of $90.0 million. There
was no outstanding balance on the revolving line of credit at
December 31, 2009.
On January 25, 2010, the Company amended its senior secured
credit facilities to increase the revolving credit facility from
$100.0 million to $218.2 million. The Company also
extended the maturity of a $163.5 million tranche of the
revolving facility to June 28, 2013, with the remaining
$54.7 million tranche maturing at the original maturity
date of December 28, 2011. The tranche maturing in 2013 is
priced at LIBOR + 3.50% with a commitment fee of 0.75% The
tranche maturing in 2011 maintains its current pricing of LIBOR
+ 2.00% with a commitment fee of 0.375%.
Bank Loans Payable The Company
maintains two uncommitted lines of credit. One line has an
unspecified limit, and is primarily dependent on the
Companys ability to provide sufficient collateral. The
other line has a $100.0 million limit and allows for both
collateralized and uncollateralized borrowings. Both lines were
utilized during the years, but there were no balances
outstanding at December 31, 2009 and 2008.
The Companys outstanding borrowings were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
Interest
|
|
|
|
Maturity
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
Revolving line of credit
|
|
|
12/28/2011
|
|
|
$
|
|
|
|
|
|
%
|
|
$
|
90,000
|
|
|
|
2.46
|
%(3)
|
Senior secured term loan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unhedged
|
|
|
6/28/2013
|
|
|
|
419,223
|
|
|
|
2.00
|
%(1)
|
|
|
332,647
|
|
|
|
2.23
|
%(4)
|
Hedged with interest rate swaps
|
|
|
6/28/2013
|
|
|
|
400,000
|
|
|
|
2.00
|
%(2)
|
|
|
495,000
|
|
|
|
3.21
|
%(5)
|
Senior unsecured subordinated notes
|
|
|
12/15/2015
|
|
|
|
550,000
|
|
|
|
10.75
|
%
|
|
|
550,000
|
|
|
|
10.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings
|
|
|
|
|
|
|
1,369,223
|
|
|
|
|
|
|
|
1,467,647
|
|
|
|
|
|
Less current borrowings (maturities within 12 months)
|
|
|
|
|
|
|
8,424
|
|
|
|
|
|
|
|
8,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings net of current portion
|
|
|
|
|
|
$
|
1,360,799
|
|
|
|
|
|
|
$
|
1,459,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of December 31, 2009, the variable interest rate for the
unhedged portion of the senior secured term loan is based on the
three-month LIBOR of 0.25%, plus the applicable interest rate
margin of 1.75%. |
|
(2) |
|
As of December 31, 2009, the variable interest rate for the
hedged portion of the senior secured term loan is based on the
three-month LIBOR of 0.25%, plus the applicable interest rate
margin of 1.75%. |
|
(3) |
|
As of December 31, 2008, the variable interest rate for the
revolving line of credit is based on the one-month LIBOR of
0.46% plus the applicable interest rate margin of 2.00%. |
|
(4) |
|
As of December 31, 2008, the variable interest rate for the
unhedged portion of the senior secured term loan is based on a
weighted average of the one- and three-month LIBOR of 0.46% and
1.46%, respectively, plus the applicable interest rate margin of
1.75%. |
|
(5) |
|
As of December 31, 2008, the variable interest rate for the
hedged portion of the senior secured term loan is based on the
three-month LIBOR of 1.46%, plus the applicable interest rate
margin of 1.75%. |
F-55
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The following summarizes borrowing activity in the revolving and
uncommitted line of credit facilities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Average balance outstanding
|
|
$
|
56,472
|
|
|
$
|
48,725
|
|
|
$
|
6,282
|
|
Weighted-average interest rate
|
|
|
2.41
|
%
|
|
|
4.74
|
%
|
|
|
6.93
|
%
|
The minimum calendar year payments and maturities of borrowings
as of December 31, 2009 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
|
|
|
Senior
|
|
|
Total
|
|
|
|
Secured
|
|
|
Unsecured
|
|
|
Amount
|
|
|
2010
|
|
$
|
8,424
|
|
|
$
|
|
|
|
$
|
8,424
|
|
2011
|
|
|
8,424
|
|
|
|
|
|
|
|
8,424
|
|
2012
|
|
|
8,424
|
|
|
|
|
|
|
|
8,424
|
|
2013
|
|
|
793,951
|
|
|
|
|
|
|
|
793,951
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
550,000
|
|
|
|
550,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
819,223
|
|
|
$
|
550,000
|
|
|
$
|
1,369,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
An interest rate swap is a financial derivative instrument
whereby two parties enter into a contractual agreement to
exchange payments based on underlying interest rates. The
Company uses interest rate swap agreements to hedge the
variability on its floating rate senior secured term loan. The
Company is required to pay the counterparty to the agreement
fixed interest payments on a notional balance and in turn,
receives variable interest payments on that notional balance.
Payments are settled quarterly on a net basis.
The following table summarizes information related to the
Companys interest rate swaps as of December 31, 2009
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
|
|
|
|
|
Notional
|
|
Fixed
|
|
Receive
|
|
Fair
|
|
Maturity
|
Balance
|
|
Pay Rate
|
|
Rate(1)
|
|
Value
|
|
Date
|
|
|
70,000
|
|
|
|
3.43%
|
|
|
|
0.25%
|
|
|
|
$ (1,087)
|
|
|
|
June 30, 2010
|
|
|
120,000
|
|
|
|
4.79%
|
|
|
|
0.25%
|
|
|
|
(2,672)
|
|
|
|
June 30, 2010
|
|
|
145,000
|
|
|
|
4.83%
|
|
|
|
0.25%
|
|
|
|
(8,406)
|
|
|
|
June 30, 2011
|
|
|
65,000
|
|
|
|
4.85%
|
|
|
|
0.25%
|
|
|
|
(5,127)
|
|
|
|
June 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$400,000
|
|
|
|
|
|
|
|
|
|
|
|
$(17,292)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The variable receive rate reset on the last day of the period,
based on the applicable three-month LIBOR. The effective rate
from September 30, 2009 through December 30, 2009, was
0.28%. As of December 31, 2009, the effective rate was
0.25%. |
The interest rate swap agreements qualify for hedge accounting
and have been designated as cash flow hedges against specific
payments due on the Companys senior secured term loan. As
of December 31, 2009, the Company assessed the interest
rate swap agreements as being highly effective and expects them
to continue to be highly effective. Accordingly, the changes in
fair value of
F-56
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
the interest rate swaps have been recorded as other
comprehensive loss, with the fair value included as a liability
on the Companys consolidated statements of financial
condition. The Company has reclassified $16.6 million and
$6.0 million from other comprehensive loss as additional
interest expense for the years ended December 31, 2009 and
2008, respectively. Based on current interest rate assumptions
and assuming no additional interest rate swap agreements are
entered into, the Company expects to reclassify
$17.3 million or $11.3 million after tax, from other
comprehensive loss as additional interest expense over the next
12 months.
|
|
14.
|
Commitments and
Contingencies
|
Leases The Company leases certain
office space and equipment at its headquarter locations 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.
Service Contracts The Company is party
to certain long-term contracts for systems and services that
enable back office trade processing and clearing for its product
and service offerings. One agreement, for clearing services,
contains no minimum annual purchase commitment, but the
agreement provides for certain penalties should the Company fail
to maintain a certain threshold of client accounts. In 2009, the
number of client accounts declined below the threshold, and as a
result, the Company incurred fees of $9.1 million, which
have been classified as restructuring charges within the
consolidated statements of income. Further declines in accounts
on this clearing platform could subject the Company to future
costs or penalties.
Future minimum payments under leases, lease commitments and
other noncancellable contractual obligations with remaining
terms greater than one year as of December 31, 2009, are as
follows (in thousands):
|
|
|
|
|
Years ending December 31
|
|
|
|
|
2010
|
|
$
|
27,543
|
|
2011
|
|
|
27,445
|
|
2012
|
|
|
20,495
|
|
2013
|
|
|
13,662
|
|
2014
|
|
|
7,483
|
|
Thereafter
|
|
|
16,324
|
|
|
|
|
|
|
Total
|
|
$
|
112,952
|
|
|
|
|
|
|
Total rental expense for all operating leases was approximately
$20.1 million, $22.1 million and $14.4 million
for the years ended December 31, 2009, 2008 and 2007,
respectively.
Guarantees The Company occasionally
enters into certain types of contracts that contingently require
it to indemnify certain parties against third-party claims. The
terms of these obligations vary and, because a maximum
obligation is not explicitly stated, the Company has determined
that it is not possible to make an estimate of the amount that
it could be obligated to pay under such contracts.
The Companys subsidiaries provide guarantees to securities
clearing houses and exchanges under their standard membership
agreements, which require a member to guarantee the performance
of other members. Under these agreements, if a member becomes
unable to satisfy its obligations to the clearing houses and
exchanges, all other members would be required to meet any
shortfall. The Companys liability under these arrangements
is not quantifiable and may exceed the cash and securities it
has posted as collateral. However, the potential requirement for
the Company to make
F-57
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
payments under these agreements is remote. Accordingly, no
liability has been recognized for these transactions.
Loan Commitments From time to time,
the Company makes loans to its advisors, primarily to newly
recruited advisors to assist in the transition process. Due to
timing differences, the Company may make commitments to issue
such loans prior to actually funding them. These commitments are
generally contingent upon certain events occurring, including
but not limited to the advisor joining the Company, and may be
forgivable. The Company had no unfunded commitments at
December 31, 2009.
Litigation The Company has been named
as a defendant in various legal actions, including arbitrations.
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 predict
with certainty what the eventual loss or range of loss related
to such matters will be. The Company recognizes a legal
liability when it believes it is probable a liability has
occurred and the amount can be reasonably estimated. Defense
costs are expensed as incurred and classified as professional
services within the consolidated statements of income.
In connection with various acquisitions, and pursuant to the
purchase and sale agreements, the Company has received
third-party indemnification for certain legal proceedings and
claims. These matters have been defended and paid directly by
the indemnifying party.
On October 1, 2009, LPLH received written notice from a
third-party indemnitor under a certain purchase and sale
agreement asserting that it is no longer obligated to indemnify
the Company for certain claims under the provisions of the
purchase and sale agreement. The Company believes that this
assertion is without merit and has commenced litigation to
enforce its indemnity rights.
The Company believes, based on the information available at this
time, after consultation with counsel, consideration of
insurance, if any, and the indemnifications provided by the
third-party indemnitors, notwithstanding the assertions by an
indemnifying party noted in the preceding paragraph, that the
outcome of such matters will not have a material adverse impact
on consolidated statements of financial condition, income or
cash flows.
Other Commitments As of
December 31, 2009, the Company had received collateral
primarily in connection with client margin loans with a market
value of approximately $227.9 million, which it can sell or
repledge. Of this amount, approximately $158.8 million has
been pledged or sold as of December 31, 2009;
$141.6 million was pledged to banks in connection with
unutilized secured margin lines of credit, $10.0 million
was pledged with client-owned securities to the Options Clearing
Corporation, and $7.2 million was loaned to the DTC through
participation in its Stock Borrow Program. As of
December 31, 2008, the Company had received collateral
primarily in connection with client margin loans with a market
value of approximately $335.9 million, which it can sell or
repledge. Of this amount, approximately $152.3 million has
been pledged or sold as of December 31, 2008;
$143.8 million was pledged to banks in connection with
unutilized secured margin lines of credit, $3.2 million was
pledged with client-owned securities to the Options Clearing
Corporation, and $5.3 million was loaned to the DTC through
participation in its Stock Borrow Program.
Innovex ceased operations on December 31, 2007. Prior to
that date, Innovex sold its mortgage loans without recourse.
Innovex was usually required by the buyers (investors) of these
loans to make certain representations concerning credit
information, loan documentation, and collateral. Innovex did not
repurchase any loans during the year ended December 31,
2007.
In August of 2007, pursuant to agreements with a large global
insurance company, LPL Financial began providing brokerage,
clearing and custody services on a fully disclosed basis;
offering its
F-58
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
investment advisory programs and platforms; and providing
technology and additional processing and related services to its
financial advisors and clients. The terms of the agreements are
five years, subject to additional
24-month
extensions. Termination fees may be payable by a terminating or
breaching party depending on the specific cause of termination.
|
|
15.
|
Share-Based
Compensation
|
Certain employees, advisors, officers and directors who
contribute to the success of the Company participate in various
stock option plans. In addition, certain financial institutions
participate in a warrant plan. Stock options and warrants
generally vest in equal increments over a three- to five-year
period and expire on the 10th anniversary following the date of
grant.
The Company recognized $6.5 million, $4.6 million and
$2.2 million of share-based compensation related to
employee stock option awards during the years ended
December 31, 2009, 2008 and 2007, respectively. As of
December 31, 2009, total unrecognized compensation cost
related to non-vested share-based compensation arrangements
granted was $31.9 million, which is expected to be
recognized over a weighted-average period of 3.98 years.
The Company recognized $1.6 million and $0.30 million
of share based compensation during the years ended
December 31, 2009 and 2008, respectively, related to the
vesting of stock options and warrants awarded to its advisors
and financial institutions. The Company recognizes share-based
compensation expense for stock options and warrants awarded to
its advisors and financial institutions based on the fair value
of awards at each interim reporting period. As of
December 31, 2009, total unrecognized compensation cost
related to non-vested share-based compensation arrangements
granted was $11.4 million for advisors and financial
institutions, which is expected to be recognized over a
weighted-average period of 4.36 years.
The following table presents the weighted-average assumptions
used by the Company in calculating the fair value of its stock
options and warrants with the Black-Scholes valuation model for
the years ended December 31, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Expected life (in years)
|
|
|
7.13
|
|
|
|
6.52
|
|
|
|
6.50
|
|
Expected stock price volatility
|
|
|
51.35
|
%
|
|
|
33.78
|
%
|
|
|
31.08
|
%
|
Expected dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized forfeiture rate
|
|
|
4.35
|
%
|
|
|
1.51
|
%
|
|
|
1.00
|
%
|
Fair value of options
|
|
$
|
12.30
|
|
|
$
|
9.96
|
|
|
$
|
9.86
|
|
Risk-free interest rate
|
|
|
2.93
|
%
|
|
|
2.73
|
%
|
|
|
4.93
|
%
|
The risk-free interest rates are based on the implied yield
available on U.S. Treasury constant maturities in effect at
the time of the grant with remaining terms equivalent to the
respective expected terms of the options. The dividend yield of
zero is based on the fact that the Company has no present
intention to pay cash dividends. In the future, as the Company
gains historical data for volatility of its own stock and the
actual term over which employees hold its options, expected
volatility and the expected term may change, which could
substantially change the grant-date fair value of future awards
of stock options and, ultimately, compensation recorded on
future grants. The Company estimates the expected term for its
employee option awards using the simplified method in accordance
with Staff Accounting Bulletin 110, Certain Assumptions
Used in Valuation Methods, because the Company does not have
sufficient relevant historical information to develop reasonable
expectations about future exercise patterns. The Company
estimates the expected term for stock options and warrants
awarded to its advisors and financial institutions using the
contractual term. Expected volatility is calculated based on
companies of similar growth and maturity and the
F-59
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Companys peer group in the industry in which the Company
does business because the Company does not have sufficient
historical volatility data. The Company will continue to use
peer group volatility information until historical volatility of
the Company is relevant to measure expected volatility for
future grants.
The Company has assumed an annualized forfeiture rate for its
stock options and warrants based on a combined review of
industry and employee turnover data, as well as an analytical
review performed of historical pre-vesting forfeitures occurring
over the previous year. The Company records additional expense
if the actual forfeiture rate is lower than estimated and
records a recovery of prior expense if the actual forfeiture is
higher than estimated.
The following table summarizes the Companys activity in
its stock option and warrant plans for the years ended
December 31, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Term (Years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Outstanding December 31, 2006
|
|
|
21,047,950
|
|
|
$
|
1.64
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
760,650
|
|
|
|
23.51
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(47,180
|
)
|
|
|
1.12
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(13,340
|
)
|
|
|
14.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2007
|
|
|
21,748,080
|
|
|
|
2.46
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,936,206
|
|
|
|
27.55
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(286,968
|
)
|
|
|
2.04
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(3,319,035
|
)
|
|
|
2.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2008
|
|
|
20,078,283
|
|
|
|
4.87
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
3,209,361
|
|
|
|
21.32
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(256,795
|
)
|
|
|
1.13
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(328,380
|
)
|
|
|
21.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2009
|
|
|
22,702,469
|
|
|
$
|
6.99
|
|
|
|
5.00
|
|
|
$
|
380,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable December 31, 2009
|
|
|
17,884,685
|
|
|
$
|
2.64
|
|
|
|
3.91
|
|
|
$
|
373,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-60
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The following table summarizes information about outstanding
stock options and warrants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
Total
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Life
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
Range of Exercise
Prices
|
|
Shares
|
|
|
(Years)
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
At December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1.07 $2.38
|
|
|
17,185,660
|
|
|
|
3.75
|
|
|
$
|
1.74
|
|
|
|
17,185,660
|
|
|
$
|
1.74
|
|
$10.30 $19.74
|
|
|
952,164
|
|
|
|
8.90
|
|
|
|
18.30
|
|
|
|
90,262
|
|
|
|
15.00
|
|
$21.60 $22.08
|
|
|
2,247,650
|
|
|
|
9.43
|
|
|
|
22.02
|
|
|
|
124,499
|
|
|
|
21.60
|
|
$23.02 $27.80
|
|
|
2,316,995
|
|
|
|
8.43
|
|
|
|
26.68
|
|
|
|
484,264
|
|
|
|
27.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,702,469
|
|
|
|
5.00
|
|
|
$
|
6.99
|
|
|
|
17,884,685
|
|
|
$
|
2.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
Nonqualified Deferred Compensation Plan
On November 19, 2008, the Company established an unfunded,
unsecured deferred compensation plan to permit employees and
former employees that held non-qualified stock options issued
under the 2005 Stock Option Plan for Incentive Stock Options and
2005 Stock Option Plan for Non-qualified Stock Options that were
expiring in 2009 and 2010 to receive stock units of the 2008
Nonqualified Deferred Compensation Plan. Stock units represent
the right to receive one share of common stock. Distribution
will occur at the earliest of (a) December 31, 2012;
(b) a change in control of the Company; or (c) death
or disability of the participant. The issuance of stock units,
which occurred in December 2008, is not taxable for federal and
state income tax purposes until the participant receives a
distribution under the deferred compensation plan. At
December 31, 2009 and 2008, the Company had 2,823,452 stock
units outstanding under the 2008 Nonqualified Deferred
Compensation Plan.
Restricted
Shares
The Companys advisors participate in the fifth amended and
restated 2000 Stock Bonus Plan (the Stock Bonus
Plan), which provided for the grant and allocation of
bonus credits. Each bonus credit represented the right to
receive shares of common stock. Participation in the Stock Bonus
Plan was dependent upon meeting certain eligibility criteria,
and bonus credits were allocated to eligible participants based
on certain performance metrics, including amount and type of
commissions, as well as tenure. Bonus credits vested annually in
equal increments over a three-year period and expired on the
tenth anniversary following the date of grant. Unvested bonus
credits held by advisors who terminated prior to vesting were
forfeited and reallocated to other advisors eligible under the
plan. In 2008, the Company amended and restated its Stock Bonus
Plan to provide the advisors with physical ownership of common
stock of the Company. Consequently, on December 28, 2008,
the Company issued 7,423,973 restricted shares in exchange for
bonus credits. These restricted shares may not be sold, assigned
or transferred and are not entitled to receive dividends or
non-cash distributions, until either a sale of the Company that
constitutes a change in control or an initial public offering.
The Company accounts for restricted shares granted to its
advisors by measuring such grants at their then-current lowest
aggregate value. Since the value is contingent upon the
Companys decision to sell itself or issue its common stock
to the public through a registered initial public offering, the
current aggregate value will be zero until such event occurs.
Upon the occurrence of such an event,
F-61
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
the Company will record the par value, additional paid in
capital and expense based on the number of restricted shares
under the stock bonus plan multiplied by the fair market value
determined at the event date.
In calculating earnings per share using the two-class method,
the Company is required to allocate a portion of its earnings to
employees that hold stock units that contain non-forfeitable
rights to dividends or dividend equivalents under its 2008
Nonqualified Deferred Compensation Plan. Basic earnings per
share is computed by dividing income less earnings attributable
to employees that hold stock units under the 2008 Nonqualified
Deferred Compensation Plan by the basic weighted average number
of shares outstanding. Diluted earnings per share is computed in
a manner similar to basic earnings per share, except the
weighted average number of shares outstanding is increased to
include the dilutive effect of outstanding stock options,
warrants and other stock-based awards.
A reconciliation of the income used to compute basic and diluted
earnings per share for the years noted was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, as reported
|
|
$
|
47,520
|
|
|
$
|
45,496
|
|
|
$
|
61,069
|
|
Less: allocation of undistributed earnings to stock units
|
|
|
(919
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, for computing basic earnings per share
|
|
$
|
46,601
|
|
|
$
|
45,492
|
|
|
$
|
61,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, as reported
|
|
$
|
47,520
|
|
|
$
|
45,496
|
|
|
$
|
61,069
|
|
Less: allocation of undistributed earnings to stock units
|
|
|
(810
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, for computing diluted earnings per share
|
|
$
|
46,710
|
|
|
$
|
45,493
|
|
|
$
|
61,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the weighted average number of shares
outstanding used to compute basic and diluted earnings per share
for the years noted was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(In thousands)
|
|
Basic weighted average number of shares outstanding
|
|
|
86,649
|
|
|
|
86,447
|
|
|
|
84,950
|
|
Dilutive common share equivalents
|
|
|
11,845
|
|
|
|
13,887
|
|
|
|
14,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average number of shares outstanding
|
|
|
98,494
|
|
|
|
100,334
|
|
|
|
99,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share for the years noted was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Basic earnings per share
|
|
$
|
0.54
|
|
|
$
|
0.53
|
|
|
$
|
0.72
|
|
Diluted earnings per share
|
|
$
|
0.47
|
|
|
$
|
0.45
|
|
|
$
|
0.62
|
|
F-62
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
17.
|
Employee and
Advisor Benefit Plans
|
The Company participates in a 401(k) defined contribution plan
sponsored by LPL Financial. All employees meeting minimum age
and length of service requirements are eligible to participate.
The Company has an employer matching program whereby employer
contributions were made to the 401(k) plan. For 2009,
contributions were made in an amount equal to the lesser of 20%
of the amount designated by the employee for withholding or 2%
of the employees eligible compensation. For 2008 and 2007,
contributions were made in an amount equal to the lesser of 50%
of the amount designated by the employee for withholding or 5%
of the employees eligible compensation. The Companys
total cost under the 401(k) plan was $1.7 million,
$4.8 million and $3.8 million for the years ended
December 31, 2009, 2008 and 2007, respectively.
On January 1, 2008, the Company adopted a non-qualified
deferred compensation plan for the purpose of attracting and
retaining advisors who operate, for tax purposes, as independent
contractors, by providing an opportunity for participating
advisors to defer receipt of a portion of their gross
commissions generated primarily from commissions earned on the
sale of various products. The deferred compensation plan has
been fully funded to date by participant contributions. Plan
assets are invested in mutual funds, which are held by the
Company in a Rabbi Trust. The liability for benefits accrued
under the non-qualified deferred compensation plan totaled
$12.3 million at December 31, 2009, which is included
in accounts payable and accrued liabilities in the consolidated
statements of financial condition. The cash values of the
related trust assets was $12.0 million at December 31,
2009, which is measured at fair value and included in other
assets in the consolidated statements of financial condition.
Certain employees and advisors of the Companys
subsidiaries participated in non-qualified deferred compensation
plans (the Plans) that permitted participants to
defer portions of their compensation and earn interest on the
deferred amounts. The Plans have been closed to new participants
and no contributions have been made since the acquisition date.
Plan assets are held by the Company in a Rabbi Trust and
accounted for in the manner described above. As of
December 31, 2009, the Company has recorded assets of
approximately $0.8 million and liabilities of
$1.6 million, which are included in other assets and
accounts payable and accrued liabilities, respectively, in the
consolidated statements of financial condition.
|
|
18.
|
Related Party
Transactions
|
Alix Partners, LLP (Alix Partners), a company
majority-owned by one of the Companys Majority Holders,
provides LPL Financial services pursuant to an agreement for
interim management and consulting. The Company paid
$0.6 million, $4.2 million and $0.9 million to
AlixPartners during the years ended December 31, 2009, 2008
and 2007, respectively.
One of the Companys Majority Holders owns a minority
interest in Artisan Partners Limited Partnership
(Artisan), which pays fees to LPL Financial in
exchange for product distribution and record-keeping services.
During the years ended December 31, 2009, 2008 and 2007,
the Company earned $1.5 million, $1.6 million and
$1.9 million, respectively, in fees from Artisan.
Additionally, as of December 31, 2009 and 2008, Artisan
owed the Company $0.5 million and $0.3 million,
respectively, which is included in receivables from product
sponsors, broker-dealers and clearing organizations on the
consolidated statements of financial condition.
American Beacon Advisor, Inc. (Beacon), a company
majority-owned by one of the Companys Majority Holders,
pays fees to LPL Financial in exchange for product distribution
and record-keeping services. During the years ended
December 31, 2009 and 2008, the Company earned
$0.4 million and, $0.3 million, respectively, in fees
from Beacon. Additionally, as of December 31, 2009 and
2008,
F-63
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Beacon owed the Company $0.1 million, which is included in
receivables from product sponsors, broker-dealers and clearing
organizations on the consolidated statements of financial
condition.
Certain entities affiliated with SunGard Data Systems Inc.
(SunGard), a company majority-owned by one of the
Companys Majority Holders, provide LPL Financial and MSC
with data center recovery services. The Company paid
$0.5 million to SunGard during the year ended
December 31, 2009.
Blue Frog, a privately held technology company in which the
Company holds an equity interest, provides LPL Financial with
software licensing for annuity order entry and compliance. The
Company paid $0.8 million and $0.3 million to Blue
Frog for such services during the years ended December 31,
2009 and 2008, respectively.
In conjunction with the acquisition of UVEST, the Company made
full-recourse loans to certain members of management (also
selling stockholders), most of whom are now stockholders of the
Company. As of December 31, 2009 and 2008, outstanding
stockholder loans, which are reported as a deduction from
stockholders equity, were approximately $0.5 million
and $0.9 million, respectively.
|
|
19.
|
Net
Capital/Regulatory Requirements
|
The Companys registered broker-dealers are subject to the
SECs Uniform Net Capital Rule
(Rule 15c3-1
under the Securities Exchange Act of 1934), which requires the
maintenance of minimum net capital, as defined. Net capital is
calculated for each broker-dealer subsidiary individually.
Excess net capital of one broker-dealer subsidiary may not be
used to offset a net capital deficiency of another broker-dealer
subsidiary. Net capital and the related net capital requirement
may fluctuate on a daily basis.
Net capital and net capital requirements for the Companys
broker-dealer subsidiaries as of December 31, 2009 are
presented in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
Minimum
|
|
|
|
|
|
|
Net
|
|
|
Net Capital
|
|
|
Excess Net
|
|
|
|
Capital
|
|
|
Required
|
|
|
Capital
|
|
|
LPL Financial Corporation
|
|
$
|
64,149
|
|
|
$
|
6,221
|
|
|
$
|
57,928
|
|
UVEST Financial Services Group, Inc.
|
|
|
10,099
|
|
|
|
1,673
|
|
|
|
8,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
74,248
|
|
|
$
|
7,894
|
|
|
$
|
66,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In connection with the consolidation of the Affiliated Entities;
Associated, MSC and WFG have ceased operations but continue to
be required to meet certain regulatory requirements until such
time that their broker-dealer license withdrawals are complete.
At December 31, 2009, Associated, MSC and WFG had net
capital of $7.6 million, $15.1 million and
$3.0 million, respectively, which was $7.4 million,
$14.7 million and $2.9 million, respectively, in
excess of their minimum net capital requirements.
LPL Financial is a clearing broker-dealer and the remaining
broker-dealer subsidiaries are introducing broker-dealers.
PTC is also subject to various regulatory capital requirements.
Failure to meet minimum capital requirements can initiate
certain mandatory and possible additional discretionary actions
by regulators that, if undertaken, could have a direct material
effect on the Companys consolidated financial
F-64
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
statements. As of December 31, 2009, the Company has met
all capital adequacy requirements to which it is subject.
The Company operates in a highly regulated industry. Applicable
laws and regulations restrict permissible activities and
investments. These policies require compliance with various
financial and customer-related regulations. The consequences of
noncompliance can include substantial monetary and nonmonetary
sanctions. In addition, the Company is also subject to
comprehensive examinations and supervisions by various
governmental and self-regulatory agencies. These regulatory
agencies generally have broad discretion to prescribe greater
limitations on the operations of a regulated entity for the
protection of investors or public interest. Furthermore, where
the agencies determine that such operations are unsafe or
unsound, fail to comply with applicable law, or are otherwise
inconsistent with the laws and regulations or with the
supervisory policies, greater restrictions may be imposed.
|
|
20.
|
Financial
Instruments with Off-Balance-Sheet Credit Risk and
Concentrations of Credit Risk
|
LPL Financials client securities activities are transacted
on either a cash or margin basis. In margin transactions, LPL
Financial extends credit to the client, subject to various
regulatory and internal margin requirements, collateralized by
cash and securities in the clients account. As clients
write options contracts or sell securities short, LPL Financial
may incur losses if the clients do not fulfill their obligations
and the collateral in the clients accounts is not
sufficient to fully cover losses that clients may incur from
these strategies. To control this risk, LPL Financial monitors
margin levels daily and clients are required to deposit
additional collateral, or reduce positions, when necessary.
LPL Financial is obligated to settle transactions with brokers
and other financial institutions even if its clients fail to
meet their obligation to LPL Financial. Clients are required to
complete their transactions on the settlement date, generally
three business days after the trade date. If clients do not
fulfill their contractual obligations, LPL Financial may incur
losses. LPL Financial has established procedures to reduce this
risk by generally requiring that clients deposit cash
and/or
securities into their account prior to placing an order.
LPL Financial may at times maintain inventories in equity
securities on both a long and short basis that are recorded on
the consolidated statements of financial condition at market
value. While long inventory positions represent LPL
Financials ownership of securities, short inventory
positions represent obligations of LPL Financial to deliver
specified securities at a contracted price, which may differ
from market prices prevailing at the time of completion of the
transaction. Accordingly, both long and short inventory
positions may result in losses or gains to LPL Financial as
market values of securities fluctuate. To mitigate the risk of
losses, long and short positions are
marked-to-market
daily and are continuously monitored by LPL Financial.
UVEST is engaged in buying and selling securities and other
financial instruments for clients of advisors. Such transactions
are introduced and cleared through a third-party clearing firm
on a fully disclosed basis. While introducing broker-dealers
generally have less risk than clearing firms, their clearing
agreements expose them to credit risk in the event that their
clients dont fulfill contractual obligations with the
clearing broker-dealer.
The Affiliated Entities were engaged in buying and selling
securities and other financial instruments for clients of
advisors. Such transactions were introduced and cleared through
a third-party clearing firm on a fully disclosed basis. These
firms no longer conduct such activities. The registered
representatives and their client accounts have either
transitioned or are in the process of transitioning to LPL
Financial or to new firms.
F-65
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
21.
|
Selected
Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
(In thousands)
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Revenues
|
|
$
|
643,040
|
|
|
$
|
669,366
|
|
|
$
|
702,378
|
|
|
$
|
734,906
|
|
Net revenues
|
|
|
642,978
|
|
|
|
669,317
|
|
|
|
702,326
|
|
|
|
734,884
|
|
Gross margin(1)
|
|
|
200,447
|
|
|
|
205,329
|
|
|
|
221,144
|
|
|
|
218,006
|
|
Net income (loss)
|
|
$
|
14,797
|
|
|
$
|
15,581
|
|
|
$
|
(1,456
|
)
|
|
$
|
18,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
(In thousands)
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Revenues
|
|
$
|
798,647
|
|
|
$
|
814,947
|
|
|
$
|
799,537
|
|
|
$
|
703,999
|
|
Net revenues
|
|
|
798,449
|
|
|
|
814,720
|
|
|
|
799,341
|
|
|
|
703,839
|
|
Gross margin(1)
|
|
|
245,118
|
|
|
|
244,551
|
|
|
|
251,788
|
|
|
|
211,844
|
|
Net income
|
|
$
|
11,665
|
|
|
$
|
14,303
|
|
|
$
|
17,168
|
|
|
$
|
2,360
|
|
|
|
|
(1) |
|
Gross margin is calculated as net revenues less production
expenses. Production expenses consist of the following expense
categories from the consolidated statements of income:
(i) commissions and advisory fees and (ii) brokerage,
clearing and exchange. All other expense categories, including
depreciation and amortization, are considered general and
administrative in nature. Because the Companys gross
margin amounts do not include any depreciation and amortization
expense, the gross margin amounts may not be comparable to those
of others in the Companys industry. |
On May 24, 2010, the Company entered into a Third Amended
and Restated Credit Agreement (the Amended Credit
Agreement). The Amended Credit Agreement amends and
restates the Companys Second Amended and Restated Credit
Agreement, dated as of June 18, 2007. Pursuant to the
Amended Credit Agreement, the Company has established a new term
loan tranche of $580.0 million maturing on June 28,
2017 (the 2017 Term Loans). The Company also
extended the maturity of a $500.0 million tranche of its
term loan facility to June 25, 2015 (the 2015 Term
Loans), with the remaining $317.1 million tranche of
the term loan facility maturing on the original maturity date of
June 28, 2013 (the 2013 Term Loans).
The applicable margin for borrowings with respect to the
(a) 2013 Term Loans is currently 0.75% for base rate
borrowings and 1.75% for LIBOR borrowings; (b) 2015 Term
Loans is currently 1.75% for base rate borrowings and 2.75% for
LIBOR borrowings, and (c) 2017 Term Loans is currently
2.75% for base rate borrowings and 3.75% for LIBOR borrowings.
The applicable margin on our 2013 Term Loans could change
depending on the Companys credit rating. The LIBOR Rate
with respect to the 2015 Term Loans and the 2017 Term Loans
shall in no event be less than 1.50%.
On May 24, 2010, the Company gave notice of redemption of
all of its outstanding Senior Subordinated Notes due 2015 (the
2015 Notes), representing an aggregate principal
amount of $550.0 million. The redemption price of the 2015
Notes was 105.375% of the outstanding aggregate principal
amount, or approximately $29.6 million, plus accrued and
unpaid interest thereon up to but not including June 22,
2010 (the Redemption Date). The Company
redeemed the 2015 Notes on the
F-66
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Redemption Date using the proceeds from the new term loan
tranche under its Amended Credit Agreement and additional cash
on hand. The aggregate cash payment for the redemption,
including accrued interest was approximately $610.4 million. The
Company also recorded a pre-tax charge of $37.9 million in
its consolidated statement of income in the second quarter of
2010 for the redemption of the 2015 Notes. This charge includes
$29.6 million premium paid to redeem the 2015 Notes,
$6.9 million in unamortized debt issuance costs associated
with the 2015 Notes, and $1.4 million in legal and other
costs associated with the issuance of the new term loan tranche.
F-67
Common Stock
Goldman,
Sachs & Co.
Morgan
Stanley
BofA
Merrill Lynch
J.P. Morgan
PART II
INFORMATION NOT
REQUIRED IN PROSPECTUS
|
|
Item 13.
|
Other Expenses
of Issuance and Distribution.
|
The following table indicates the expenses to be incurred in
connection with the offering described in this registration
statement, other than underwriting discounts and commissions,
all of which will be paid by the registrant. All amounts are
estimated except the SEC registration fee and FINRA filing fee.
|
|
|
|
|
|
|
Amount
|
|
SEC registration fee
|
|
$
|
42,780
|
|
FINRA filing fee
|
|
|
60,500
|
|
Stock exchange listing fee
|
|
|
25,000
|
|
Accountants fees and expenses
|
|
|
*
|
|
Legal fees and expenses
|
|
|
*
|
|
Blue Sky fees and expenses
|
|
|
*
|
|
Transfer Agents fees and expenses
|
|
|
*
|
|
Printing and engraving expenses
|
|
|
*
|
|
Miscellaneous
|
|
|
*
|
|
|
|
|
|
|
Total Expenses
|
|
$
|
*
|
|
|
|
|
|
|
|
|
|
* |
|
To be filed by amendment. |
|
|
Item 14.
|
Indemnification
of Directors and Officers.
|
Section 102(b)(7) of the DGCL enables a corporation in its
original certificates of incorporation or an amendment thereto
to eliminate or limit the personal liability of a director for
violations of the directors fiduciary duty, except
(i) for any breach of the directors duty of loyalty
to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) for
liability of directors for unlawful payment of dividends or
unlawful stock purchase or redemptions pursuant to
Section 174 of the DGCL or (iv) for any transaction
from which a director derived an improper personal benefit. Our
certificate of incorporation includes a provision that
eliminates the personal liability of directors for monetary
damages for actions taken as a director to the fullest extent
authorized by the DGCL.
Section 145(a) of the DGCL provides in relevant part that a
corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or
completed action, suit or proceeding (other than an action by or
in the right of the corporation) by reason of the fact that such
person is or was a director or officer of the corporation, or is
or was serving at the request of the corporation as a director
or officer of another entity, against expenses (including
attorneys fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding if such person
acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such
persons conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contedere or its
equivalent, shall not, of itself, create a presumption that such
person did not act in good faith and in a manner which such
person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal
action or proceeding, had reasonable cause to believe that such
persons conduct was lawful.
Section 145(b) of the DGCL provides in relevant part that a
corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation
to procure a judgment in its favor by
II-1
reason of the fact that the person is or was a director or
officer of the corporation, or is or was serving at the request
of the corporation as a director or officer of another entity,
against expenses (including attorneys fees) actually and
reasonably incurred by such person in connection with the
defense or settlement of such action or suit if the person acted
in good faith and in a manner the person reasonably believed to
be in or not opposed to the best interests of the corporation
and except that no indemnification shall be made in respect of
any claim, issue or matter as to which such person shall have
been adjudged to be liable to the corporation unless and only to
the extent that the Court of Chancery or the court in which such
action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the
Court of Chancery or such other court shall deem proper.
Our certificate of incorporation generally provides that we will
indemnify our directors and officers to the fullest extent
permitted by law. Our certificate of incorporation also provides
that the indemnification and advancement of expenses provided
by, or granted pursuant to the certificate of incorporation are
not exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under
any bylaw, agreement, vote of stockholders or otherwise. Section
145(f) of the DGCL further provides that a right to
indemnification or to advancement of expenses arising under a
provision of the certificate of incorporation shall not be
eliminated or impaired by an amendment to such provision after
the occurrence of the act or omission which is the subject of
the civil, criminal, administrative or investigation action,
suit or proceeding for which indemnification or advancement of
expenses is sought.
We have also entered into indemnification agreements with
certain of our directors and officers. Such agreements generally
provide for indemnification by reason of being our director or
officer, as the case may be. These agreements are in addition to
the indemnification provided by our charters and bylaws.
We also obtained officers and directors liability
insurance which insures against liabilities that officers and
directors of the registrant may, in such capacities, incur.
Section 145(g) of the DGCL provides that a corporation
shall have power to purchase and maintain insurance on behalf of
any person who is or was a director or officer of the
corporation, or is or was serving at the request of the
corporation as a director or officer of another entity, against
any liability asserted against such person and incurred by such
person in any such capacity, or arising out of such
persons status as such, whether or not the corporation
would have the power to indemnify such person against such
liability under that section.
Pursuant to the stockholders agreement entered into with
certain stockholders, the company has agreed to indemnify such
stockholders from certain liabilities incurred in connection
with this registration statement.
The underwriting agreement we will enter into in connection with
the offering of common stock described in this registration
statement provides for indemnification by the underwriters of
the registrant and its executive officers and directors, and by
the registrant of the underwriters, for certain liabilities,
including liabilities arising under the Securities Act.
Also see Undertakings.
|
|
Item 15.
|
Recent Sales
of Unregistered Securities.
|
The following sets forth information regarding all unregistered
securities sold during the last three fiscal years. Within the
last three years, the registrant has issued and sold the
following securities:
|
|
|
|
|
On January 2, 2007, we issued 17 stockholders of UVEST
an aggregate of 669,480 shares of common stock based on a
stock valuation of $18.90 per share. These shares were issued
and sold in connection with the UVEST acquisition in reliance
upon the available exemptions from
|
II-2
|
|
|
|
|
registration requirements of Section 4(2) of the
Securities Act. Each stockholder was provided information about
our finances, business and management in connection with the
acquisition. The offering was made through direct communication
with this small stockholder group in connection with our
acquisition of UVEST. Each recipient became a party to our
Stockholders Agreement, which prohibits the transfers of
shares unless in compliance with the terms of the
Stockholders Agreement and applicable securities laws. The
shares of common stock issued contain restrictive legends.
|
|
|
|
|
|
On June 20, 2007, we issued 2,645,500 shares of our
common stock to Pacific Select, LLC. These shares were issued in
connection with a Purchase and Sale Agreement among Pacific Life
Insurance Company, Pacific Select Group, LLC, the Company and
LPL Holdings pursuant to which we acquired the Affiliated
Entities from Pacific Select Group, LLC. These shares were
issued in reliance upon the available exemptions from
registration requirements of Section 4(2) of the Securities
Act. Information about our finances, business and management was
accessible to Pacific Select Group, LLC through materials
provided in connection with the Purchase and Sale Agreement.
Pacific Select Group, LLC is a party to our Stockholders
Agreement, which prohibits the transfers of shares unless in
compliance with the terms of the Stockholders Agreement
and applicable securities laws. The shares of common stock
issued contain restrictive legends.
|
|
|
|
|
|
On September 17, 2007, we issued 4,386 shares of our
common stock to 21 credit unions, each of which were
stockholders of XCU Capital Corporation, Inc. (XCU).
These shares were issued in connection with an Institution
Transfer Agreement with XCU and its parent, XCU Corporation,
Inc. pursuant to which we acquired the rights related to
business relationships with certain institutions from XCU. These
shares were issued in reliance upon the available exemptions
from registration requirements of Section 4(2) of the Securities
Act. Information about our finances, business and management was
accessible to these sophisticated institutions through our
annual and quarterly reports filed pursuant to the Exchange Act
and through materials provided in connection with the
Institution Transfer Agreement. The offering was made through
direct communication with these sophisticated institutions. Each
recipient became a party to our Stockholders Agreement,
which prohibits the transfers of shares unless in compliance
with the terms of the Stockholders Agreement and
applicable securities laws. The shares of common stock issued
contain restrictive legends.
|
|
|
|
|
|
On March 14, 2008, we issued and sold to a trust affiliated
with our director, Jeffrey Stiefler, 71,942 shares of our
common stock, at a price per share of $27.80. On March 14,
2008, our director, James Riepe, and an affiliated trust, each
acquired 35,971 shares of our common stock at a price per
share of $27.80. The transactions were conducted in reliance
upon the available exemptions from the registration requirements
of Section 4(2) of the Securities Act. Both directors are
accredited investors. As directors, each has access to
information about our finances, business and management. The
directors and affiliated trusts are parties to our
Stockholders Agreement, which prohibits the transfers of
shares unless in compliance with the terms of the
Stockholders Agreement and applicable securities laws. The
shares of common stock issued contain restrictive legends.
|
|
|
|
|
|
On June 10, 2008, we issued incentive equity awards in the
form of warrants to 44 credit unions and banks, each of
which is an accredited investor, to purchase up to an aggregate
total of 9,575 shares of our common stock at an exercise
price per share of $27.17, pursuant to our 2008 Financial
Institution Incentive Plan. These warrants were issued in
reliance upon the available exemptions from registration
requirements of Section 4(2) of the Securities Act and
pursuant to Rule 506 of Regulation D promulgated under
the Securities Act. This issuance was not for purposes of
raising capital and no consideration was paid by the credit
unions or banks. Each credit union and bank had an established
relationship with us prior to the issuance. In addition,
information about our finances, business and management was
accessible to the credit unions and banks through our annual and
quarterly reports filed
|
II-3
|
|
|
|
|
pursuant to the Exchange Act. The common stock issuable upon
exercise of these warrants is subject to our Stockholders
Agreement, which prohibits the transfers of these shares unless
in compliance with the terms of the Stockholders Agreement
and applicable securities laws. Shares issued upon exercise of
these warrants contain restrictive legends.
|
|
|
|
|
|
On June 13, 2008, we issued incentive equity awards in the
form of warrants to one credit union and one bank,
each of which is an accredited investor, to purchase up to an
aggregate total of 579 shares of our common stock at an
exercise price per share of $27.17, pursuant to our 2008
Financial Institution Incentive Plan. These warrants were issued
in reliance upon the available exemptions from registration
requirements of Section 4(2) of the Securities Act and
pursuant to Rule 506 of Regulation D promulgated under
the Securities Act. This issuance was not for purposes of
raising capital and no consideration was paid by the credit
union or bank. The credit union and bank had an established
relationship with us prior to the issuance. In addition,
information about our finances, business and management was
accessible to the credit union and bank through our annual and
quarterly reports filed pursuant to the Exchange Act. The common
stock issuable upon exercise of these warrants is subject to our
Stockholders Agreement, which prohibits the transfers of
these shares unless in compliance with the terms of the
Stockholders Agreement and applicable securities laws.
Shares issued upon exercise of these warrants contain
restrictive legends.
|
|
|
|
|
|
On December 28, 2008, we issued 7,423,973 restricted shares
to our advisors who held bonus credits under our fifth amended
and restated 2000 Stock Bonus Plan. These restricted shares may
not be sold, assigned or transferred and are not entitled to
receive dividends or non-cash distributions, until either a sale
of the company that constitutes a change in control or an
initial public offering. No consideration was paid to the
registrant by any recipient of any of the recipient shares. The
transactions were conducted in reliance upon the available
exemptions from registration requirements of the Securities Act,
including those contained in Section 3(a)(9).
|
|
|
|
On December 31, 2008, we issued 2,823,452 restricted stock
units under our 2008 Nonqualified Deferred Compensation Plan to
certain employees. These restricted stock units were issued to
holders of options issued under our 2005 Stock Option Plan for
Non-Qualified Stock Options and our 2005 Stock Option Plan for
Incentive Stock Options, that were expiring in 2009 and 2010. No
consideration was paid to the registrant by any recipient of any
of the restricted stock units. The transactions were conducted
in reliance upon the available exemptions from registration
requirements of the Securities Act, including those contained in
Section 3(a)(9).
|
|
|
|
|
|
On February 19, 2009, we issued incentive equity awards in the
form of warrants to 57 credit unions and banks, each of
which is an accredited investor, to purchase up to an aggregate
total of 12,362 shares of our common stock at an exercise price
per share of $18.04, pursuant to our 2008 Financial Institution
Incentive Plan. These warrants were issued in reliance upon the
available exemptions from registration requirements of Section
4(2) of the Securities Act and pursuant Rule 506 of Regulation D
promulgated under the Securities Act. This issuance was not for
the purposes of raising capital and no consideration was paid by
the credit unions or banks. Each credit union and bank had an
established relationship with us prior to the issuance. In
addition, information about our finances, business and
management was accessible to the credit unions and banks through
our annual and quarterly reports filed pursuant to the Exchange
Act. The common stock issuable upon exercise of these warrants
is subject to our Stockholders Agreement, which prohibits
the transfers of these shares unless in compliance with the
terms of the Stockholders Agreement and applicable
securities laws. Shares issued upon exercise of these warrants
contain restrictive legends.
|
|
|
|
|
|
On November 4, 2009, we issued incentive equity awards in
the form of warrants to 44 credit unions and banks, each of
which is an accredited investor, to purchase up to an aggregate
|
II-4
|
|
|
|
|
total of 18,763 shares of our common stock at an exercise
price per share of $23.02, pursuant to our 2008 Financial
Institution Incentive Plan. These warrants were issued in
reliance upon the available exemptions from registration
requirements of Section 4(2) of the Securities Act and
pursuant to Rule 506 of Regulation D promulgated under
the Securities Act. This issuance was not for the purposes of
raising capital and no consideration was paid by the credit
unions or banks. Each credit union and bank had an established
relationship with us prior to the issuance. In addition,
information about our finances, business and management was
accessible to the credit unions and banks through our annual and
quarterly reports filed pursuant to the Exchange Act. The common
stock issuable upon exercise of these warrants is subject to our
Stockholders Agreement, which prohibits the transfers of
these shares unless in compliance with the terms of the
Stockholders Agreement and applicable securities laws.
Shares issued upon exercise of these warrants contain
restrictive legends.
|
There were no underwritten offerings employed in connection with
any of the transactions set forth above.
|
|
Item 16.
|
Exhibits and
Financial Statement Schedules.
|
(a) Exhibits
|
|
|
|
|
Number
|
|
Description
|
|
|
1
|
.1
|
|
Form of Underwriting Agreement
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation (to be
effective upon completion of this offering)
|
|
3
|
.2*
|
|
Second Amended and Restated Bylaws (to be effective upon
completion of this offering)
|
|
4
|
.1*
|
|
Specimen common stock certificate
|
|
4
|
.2
|
|
Stockholders Agreement, dated as of December 28,
2005, among LPLIH Investment Holdings Inc., LPL Holdings, Inc.
and other stockholders party thereto (1)
|
|
4
|
.3
|
|
Fifth Amended and Restated LPL Investment Holdings Inc. 2000
Stock Bonus Plan (6)
|
|
5
|
.1*
|
|
Opinion of Ropes & Gray LLP
|
|
10
|
.1
|
|
2005 Stock Option Plan for Incentive Stock Options (2)
|
|
10
|
.2
|
|
2005 Stock Option Plan for Nonqualified Stock Options (2)
|
|
10
|
.3
|
|
Executive Employment Agreement between Mark S. Casady and LPL
Holdings, Inc., dated December 28, 2005 (2)
|
|
10
|
.4
|
|
Executive Employment Agreement between Esther M. Stearns and LPL
Holdings, Inc., dated December 28, 2005 (2)
|
|
10
|
.5
|
|
Executive Employment Agreement between William E. Dwyer III
and LPL Holdings, Inc., dated December 28, 2005 (2)
|
|
10
|
.6**
|
|
Executive Employment Agreement between Dan H. Arnold and UVEST
Financial Services Group Inc. dated January 2, 2007
|
|
10
|
.7**
|
|
Amendment dated September 28, 2009 to the Executive
Employment Agreement between Dan H. Arnold and UVEST
Financial Services Group Inc. dated January 2, 2007
|
|
10
|
.8**
|
|
Executive Employment Agreement between Stephanie L. Brown and
LPL Holdings, Inc., dated December 28, 2005
|
|
10
|
.9**
|
|
Executive Employment Agreement between Jonathan G. Eaton and LPL
Holdings, Inc., dated December 28, 2005
|
|
10
|
.10
|
|
Form of Indemnification Agreement
|
|
10
|
.11
|
|
LPL Investment Holdings Inc. 2008 Stock Option Plan (3)
|
|
10
|
.12**
|
|
Form of LPL Investment Holdings Inc. Stock Option Agreement
|
|
10
|
.13
|
|
2008 Nonqualified Deferred Compensation Plan (5)
|
|
10
|
.14
|
|
LPL Investment Holdings Inc. Advisor Incentive Plan (4)
|
|
10
|
.15**
|
|
LPL Investment Holdings Inc. 2008 Financial Institution
Incentive Plan
|
II-5
|
|
|
|
|
Number
|
|
Description
|
|
|
10
|
.16
|
|
LPL Investment Holdings Inc. and Affiliates Corporate Executive
Bonus Plan, approved on March 15, 2010 (9)
|
|
10
|
.17**
|
|
Thomson Transaction Services Master Subscription Agreement dated
as of January 5, 2009 between LPL Financial Corporation and
Thomson Financial LLC
|
|
10
|
.18
|
|
Third Amended and Restated Credit Agreement, dated as of
May 24, 2010, by and among LPL Investment Holdings Inc.,
LPL Holdings, Inc., the several lenders from time to time party
thereto, Morgan Stanley Senior Funding, Inc. as administrative
agent, and Morgan Stanley & Co. as collateral agent
(10)
|
|
10
|
.19
|
|
2010 Omnibus Equity Incentive Plan
|
|
10
|
.20*
|
|
Form of 2010 Omnibus Equity Incentive Plan Option Agreement
|
|
21
|
.1
|
|
List of Subsidiaries of LPL Investment Holdings Inc. (8)
|
|
23
|
.1
|
|
Consent of Deloitte & Touche LLP, independent
registered public accounting firm
|
|
23
|
.2*
|
|
Consent of Ropes & Gray LLP (included in
Exhibit 5.1)
|
|
24
|
.1**
|
|
Power of Attorney
|
|
|
|
(1) |
|
Incorporated by reference to the Amendment No. 1 to
Registration Statement on Form 10 of the Company filed on
July 10, 2007. |
|
|
|
(2) |
|
Incorporated by reference to the Registration Statement on
Form 10 of the Company filed on April 30, 2007. |
|
|
|
(3) |
|
Incorporated by reference to the
Form 8-K
filed on February 21, 2008. |
|
(4) |
|
Incorporated by reference to the Form S-8 on June 5,
2008. |
|
(5) |
|
Incorporated by reference to the
Form 8-K
filed on November 25, 2008. |
|
(6) |
|
Incorporated by reference to the
Form 8-K
filed on December 18, 2008. |
|
(7) |
|
Incorporated by reference to the
Form 10-Q
filed on May 14, 2009. |
|
(8) |
|
Incorporated by reference to the
Form 10-K
filed on March 9, 2010. |
|
(9) |
|
Incorporated by reference to the Schedule 14A filed on
April 27, 2010. |
|
(10) |
|
Incorporated by reference to the
Form 8-K
filed on May 28, 2010. |
|
|
|
* |
|
To be filed by amendment |
|
|
|
|
|
Confidential treatment requested as to certain portions, which
portions have been omitted and filed separately with the
Securities and Exchange Commission. |
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that
in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid
by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
II-6
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)
(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time
it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Boston, The Commonwealth of
Massachusetts, on the 9th day of July, 2010.
LPL Investment Holdings Inc.
Mark S. Casady
Chief Executive Officer and Chairman
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons
in the capacities and on the dates indicated:
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
*
Mark
S. Casady
|
|
Chief Executive Officer and Chairman (Principal Executive
Officer)
|
|
July 9, 2010
|
|
|
|
|
|
*
Robert
J. Moore
|
|
Chief Financial Officer
(Principal Financial Officer)
|
|
July 9, 2010
|
|
|
|
|
|
*
Thomas
D. Lux
|
|
Chief Accounting Officer
(Principal Accounting Officer)
|
|
July 9, 2010
|
|
|
|
|
|
*
John
J. Brennan
|
|
Director
|
|
July 9, 2010
|
|
|
|
|
|
*
Richard
W. Boyce
|
|
Director
|
|
July 9, 2010
|
|
|
|
|
|
*
James
S. Putnam
|
|
Director, Vice Chairman
|
|
July 9, 2010
|
|
|
|
|
|
*
Erik
D. Ragatz
|
|
Director
|
|
July 9, 2010
|
|
|
|
|
|
*
James
S. Riepe
|
|
Director
|
|
July 9, 2010
|
|
|
|
|
|
*
Richard
P. Schifter
|
|
Director
|
|
July 9, 2010
|
|
|
|
|
|
*
Jeffrey
E. Stiefler
|
|
Director
|
|
July 9, 2010
|
II-8
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
*
Allen
R. Thorpe
|
|
Director
|
|
July 9, 2010
|
|
|
|
|
|
|
|
*By:
|
|
/s/ Mark
S. Casady
Mark
S. Casady
Attorney-in-fact
|
|
|
|
|
II-9
exv1w1
Exhibit 1.1
LPL Investment Holdings Inc.
Common Stock
Underwriting Agreement
, 2010
Goldman, Sachs & Co.
Morgan Stanley & Co. Incorporated
As representatives (the Representatives) of the several Underwriters
named in Schedule I hereto
c/o Goldman, Sachs & Co.
200 West Street
New York, New York 10282
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Ladies and Gentlemen:
LPL Investment Holdings Inc., a Delaware corporation (the Company), proposes, subject to the
terms and conditions stated herein, to issue and sell to the Underwriters named in Schedule I
hereto (the Underwriters) an aggregate of shares of common stock, par value $0.001 per share
(Stock) of the Company, the stockholders of the Company named in Schedule II hereto (the Selling
Stockholders) propose, severally and not jointly and subject to the terms and conditions stated
herein, to sell to the Underwriters an aggregate of shares of Stock and the Company proposes,
subject to the terms and conditions stated herein, to sell to the Underwriters, at the election of
the Underwriters, up to additional shares of Stock. The aggregate of shares to
be sold by the Company and the Selling Stockholders is herein called the Firm Shares and the
aggregate of additional shares to be sold by the Company is herein called the Optional
Shares. The Firm Shares and the Optional Shares that the Underwriters elect to purchase pursuant
to Section 2 hereof are herein collectively called the Shares.
The Company hereby confirms its engagement of Morgan Stanley & Co. Incorporated (Morgan
Stanley), and Morgan Stanley hereby confirms its agreement with the Company to render services as
a qualified independent underwriter within the meaning of Rule 2720 of the Conduct Rules of the
National Association of Securities Dealers, Inc. (Rule 2720), as administered by the Financial
Industry Regulatory Authority, Inc. (FINRA) with respect to the offering and sale of the Shares.
Morgan Stanley, in its capacity as qualified independent underwriter and not otherwise, is referred
to herein as the QIU. As compensation for the services of the QIU hereunder, the Company agrees
to pay the QIU $10,000 at the First Time of Delivery (as defined in Section 4(a) hereof).
1. (a) The Company represents and warrants to, and agrees with, each of the Underwriters that:
(i) A registration statement on Form S-1 (File No. 333-167325) (the Initial
Registration Statement) in respect of the Shares has been filed with the Securities and
Exchange Commission (the Commission); the Initial Registration Statement and any
post-effective amendment thereto, each in the form heretofore delivered to you, and,
excluding exhibits thereto but including all documents incorporated by reference in the
prospectus contained therein, to you for each of the other Underwriters, have been declared
effective by the Commission in such form; other than a registration statement, if any,
increasing the size of the offering (a Rule 462(b) Registration Statement), filed pursuant
to Rule 462(b) under the Securities Act of 1933, as amended (the Act), which became
effective upon filing, no other document with respect to the Initial Registration Statement
or document incorporated by reference therein has heretofore been filed with the Commission;
and no stop order suspending the effectiveness of the Initial Registration Statement, any
post-effective amendment thereto or the Rule 462(b) Registration Statement, if any, has been
issued and no proceeding for that purpose has been initiated or, to the knowledge of the
Company, threatened by the Commission (any preliminary prospectus included in the Initial
Registration Statement or filed with the Commission pursuant to Rule 424(a) of the rules and
regulations of the Commission under the Act is hereinafter called a Preliminary
Prospectus; the various parts of the Initial Registration Statement and the Rule 462(b)
Registration Statement, if any, including all exhibits thereto and including the information
contained in the form of final prospectus filed with the Commission pursuant to Rule 424(b)
under the Act in accordance with Section 5(a) hereof and deemed by virtue of Rule 430A under
the Act to be part of the Initial Registration Statement at the time it was declared
effective, each as amended at the time such part of the Initial Registration Statement
became effective or such part of the Rule 462(b) Registration Statement, if any, became or
hereafter becomes effective, are hereinafter collectively called the Registration
Statement; the Preliminary Prospectus relating to the Shares that was included in the
Registration Statement immediately prior to the Applicable Time (as defined in Section
1(a)(iii) hereof) is hereinafter called the Pricing Prospectus; such final prospectus, in
the form first filed pursuant to Rule 424(b) under the Act, is hereinafter called the
Prospectus; any reference herein to any Preliminary Prospectus, the Pricing Prospectus or
the Prospectus shall be deemed to refer to and include the documents incorporated by
reference therein pursuant to Item 12 of Form S-1 under the Act, as of the date of such
prospectus; and any issuer free writing prospectus as defined in Rule 433 under the Act
relating to the Shares is hereinafter called an Issuer Free Writing Prospectus);
(ii) No order preventing or suspending the use of any Preliminary Prospectus or any
Issuer Free Writing Prospectus has been issued by the Commission, and each Preliminary
Prospectus, at the time of filing thereof, conformed in all material respects to the
requirements of the Act and the rules and regulations of the Commission thereunder, and did
not contain an untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided, however, that this
representation and warranty shall not apply to any statements or omissions made in reliance
upon and in conformity with information furnished in writing to the Company by an
Underwriter through the
2
Representatives expressly for use therein or by a Selling Stockholder expressly for use
in the preparation of the answers therein to Items 7 and 11(m) of Form S-1;
(iii)
For the purposes of this Agreement, the Applicable Time
is [a]/[p]m
(Eastern time) on the date of this Agreement; the Pricing Prospectus, as supplemented by
those Issuer Free Writing Prospectuses, if any, and other information listed on Schedule
III(c) hereto, taken together (collectively, the Pricing Disclosure Package), as of the
Applicable Time, did not include any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and each Issuer Free Writing
Prospectus listed on Schedule III(a) or Schedule III(c) hereto does not conflict with the
information contained in the Registration Statement, the Pricing Prospectus or the
Prospectus and each such Issuer Free Writing Prospectus, as supplemented by and taken
together with the Pricing Disclosure Package as of the Applicable Time, did not include any
untrue statement of a material fact or omit to state any material fact necessary in order to
make the statements therein, in the light of the circumstances under which they were made,
not misleading; provided, however, that this representation and warranty shall not apply to
statements or omissions made in reliance upon and in conformity with information furnished
in writing to the Company by an Underwriter through the Representatives expressly for use
therein or by a Selling Stockholder expressly for use in the preparation of the answers
therein to Items 7 and 11(m) of Form S-1;
(iv) The documents incorporated by reference in the Pricing Prospectus and the
Prospectus, when they were filed with the Commission, conformed in all material respects to
the requirements of the Securities Exchange Act of 1934, as amended (the Exchange Act),
and the rules and regulations of the Commission thereunder, and none of such documents
contained an untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein not misleading;
provided, however, that this representation and warranty shall not apply to any statements
or omissions made in reliance upon and in conformity with information furnished in writing
to the Company by an Underwriter through the Representatives expressly for use therein or by
a Selling Stockholder expressly for use in the preparation of the answers therein to Items 7
and 11(m) of Form S-1; and no such documents were filed with the Commission since the
Commissions close of business on the business day immediately prior to the date of this
Agreement and prior to the execution of this Agreement, except as set forth on Schedule
III(b) hereto;
(v) The Registration Statement conforms, and the Prospectus and any further amendments
or supplements to the Registration Statement and the Prospectus will conform, in all
material respects to the requirements of the Act and the rules and regulations of the
Commission thereunder and do not and will not, as of the applicable effective date as to
each part of the Registration Statement and as of the applicable filing date as to the
Prospectus and any amendment or supplement thereto, contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading; provided, however, that this representation and
warranty shall not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by an Underwriter through
the Representatives expressly for use therein or by a Selling Stockholder expressly for use
in the preparation of the answers therein to Items 7 and 11(l) of Form S-1;
(vi) Neither the Company nor any of its subsidiaries listed on Annex I hereto (each a
Significant Subsidiary and collectively, the Significant Subsidiaries) has sustained
3
since the date of the latest audited financial statements included or incorporated by
reference in the Pricing Prospectus any material loss or interference with its business from
fire, explosion, flood or other calamity, whether or not covered by insurance, or from any
labor dispute or court or governmental action, order or decree, otherwise than as set forth
or contemplated in the Pricing Prospectus; and, since the respective dates as of which
information is given in the Registration Statement and the Pricing Prospectus, there has not
been any change in the capital stock (other than pursuant to the conversion, exchange or
exercise of convertible, exchangeable or exercisable securities, including without
limitation options and warrants, and the grant of equity incentives, in each case in the
ordinary course of business) or long-term debt of the Company and its subsidiaries, taken as
a whole, or any material adverse change, or any development that would, individually or in
the aggregate, have a material adverse effect on (A) the current or future consolidated
financial position, stockholders equity or results of operations of the Company and its
subsidiaries, taken as a whole (a Material Adverse Effect) or (B) the current or future
general affairs or management of the Company, in each case, otherwise than as set forth or
contemplated in the Pricing Prospectus;
(vii) The Company and its subsidiaries have good and marketable title in fee simple to
all real property and good and marketable title to all personal property (other than
Intellectual Property, which is covered in subsection (xxxi) below) owned by them, in each
case free and clear of all liens, encumbrances and defects except such as are described in
the Pricing Prospectus or such as would not, individually or in the aggregate, have a
Material Adverse Effect; and any real property and buildings held under lease by the Company
and its subsidiaries are held by them under valid, subsisting and enforceable leases with
such exceptions as would not, individually or in the aggregate, have a Material Adverse
Effect;
(viii) The Company has been duly incorporated and is validly existing as a corporation
in good standing under the laws of the State of Delaware, with corporate power and authority
to own its properties and conduct its business as described in the Pricing Prospectus, and
has been duly qualified as a foreign corporation for the transaction of business and is in
good standing under the laws of each other jurisdiction in which it owns or leases
properties or conducts any business so as to require such qualification, or is subject to no
material liability or disability by reason of the failure to be so qualified in any such
jurisdiction; and each Significant Subsidiary of the Company has been duly incorporated and
is validly existing as a corporation in good standing under the laws of its jurisdiction of
incorporation;
(ix) The Company has an authorized capitalization as set forth in the Pricing
Prospectus, and all of the issued shares of capital stock of the Company have been duly and
validly authorized and issued and are fully paid and non-assessable and conform in all
material respects to the description of the Stock contained in the Pricing Prospectus and
Prospectus; and all of the issued shares of capital stock of each Significant Subsidiary of
the Company have been duly and validly authorized and issued, are fully paid and
non-assessable and (except for directors qualifying shares and except as otherwise set
forth in the Pricing Disclosure Package) are owned directly or indirectly by the Company,
free and clear of all liens, encumbrances, equities or claims (other than liens arising
under the Companys existing secured indebtedness described in the Pricing Prospectus and
the Prospectus); no Stock has been issued contrary to any pre-emptive rights, whether
arising from contract or by operation of law; and there are no outstanding securities
convertible into or exchangeable for, or warrants, rights or options to purchase from the
Company, or obligations
4
of the Company to issue Stock or any other class of capital stock of the Company
(except as set forth in the Pricing Disclosure Package);
(x) The unissued Shares to be issued and sold by the Company to the Underwriters
hereunder have been duly and validly authorized and, when issued and delivered against
payment therefor as provided herein, will be duly and validly issued and fully paid and
non-assessable and will conform in all material respects to the description of the Stock
contained in the Prospectus;
(xi) The issue and sale of the Shares to be sold by the Company and the compliance by
the Company with this Agreement and the consummation by the Company of the transactions
herein contemplated will not conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, (A) any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to
which any of the property or assets of the Company or any of its subsidiaries is subject,
(B) the Certificate of Incorporation or By-laws of the Company or other organizational
documents of any of its subsidiaries, or (C) any statute or any order, rule or regulation of
any court or governmental agency or body having jurisdiction over the Company or any of its
subsidiaries or any of their properties, except where, for purposes of clauses (A) and (C),
such conflict, breach, violation or default would not, individually or in the aggregate,
have a Material Adverse Effect; and no consent, approval,
authorization, order, registration
or qualification of or with any such court or governmental agency or body is required for
the issue and sale of the Shares or the consummation by the Company of the transactions
contemplated by this Agreement, except for (1) the registration under the Act of the Shares,
(2) such consents, approvals, authorizations, orders, registrations or qualifications as may
be required under state securities or Blue Sky laws and (3) the approval of FINRA of the
underwriting terms and arrangements in connection with the purchase and distribution of the
Shares by the Underwriters;
(xii) Neither the Company nor any of its subsidiaries is (A) in violation of its
Certificate of Incorporation or By-laws or other organizational documents, as applicable,
(B) in default in the performance or observance of any material obligation, agreement,
covenant or condition contained in any indenture, mortgage, deed of trust, loan agreement,
lease or other agreement or instrument to which it is a party or by which it or any of its
properties may be bound or (C) in violation of any statute, law, rule, regulation, judgment,
order or decree of any court, regulatory body, administrative agency, governmental body,
arbitrator or other authority having jurisdiction over the Company or such subsidiary or any
of its properties, as applicable, except where, for purposes of clauses (B) and (C), such
default or violation would not, individually or in the aggregate, have a Material Adverse
Effect;
(xiii) The statements set forth in the Pricing Prospectus and Prospectus under the
caption Description of Capital Stock, insofar as they purport to constitute a summary of
the terms of the Stock, under the caption Material U.S. Federal Income Tax Considerations
For Non-U.S. Holders Of Common Stock, under the caption BusinessRegulation and under
the caption Underwriting, insofar as they purport to describe the provisions of the
documents and U.S. laws referred to therein, are accurate, complete and fair summaries in
all material respects;
5
(xiv) Other than as set forth in the Pricing Prospectus, there are no legal or
governmental proceedings pending to which the Company, any of its subsidiaries or, to the
Companys knowledge, any officer or director of the Company is a party or of which any
property of the Company, any of its subsidiaries or any officer or director of the Company
is the subject which, if determined adversely to the Company or any of its subsidiaries,
would individually or in the aggregate have a Material Adverse Effect; and, to the Companys
knowledge, no such proceedings are threatened or contemplated by governmental authorities or
threatened by others;
(xv) The Company is not and, after giving effect to the offering and sale of the Shares
sold by the Company and the application of the proceeds thereof, will not be an investment
company, as such term is defined in the Investment Company Act of 1940, as amended (the
Investment Company Act);
(xvi) At the time of filing the Initial Registration Statement the Company was not and
is not an ineligible issuer, as defined under Rule 405 under the Act;
(xvii) Deloitte & Touche LLP, who have certified certain financial statements of the
Company and its subsidiaries, and have audited the Companys internal control over financial
reporting and managements assessment thereof, are independent public accountants as
required by the Act and the rules and regulations of the Commission thereunder;
(xviii) The Company maintains a system of internal control over financial reporting (as
such term is defined in Rule 13a-15(f) under the Exchange Act) that complies with the
requirements of the Exchange Act and has been designed by the Companys principal executive
officer and principal financial officer, or under their supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles
in the United States (GAAP). Except as disclosed in the Pricing Prospectus, the Companys
internal control over financial reporting is effective and the Company is not aware of any
material weaknesses in its internal control over financial reporting;
(xix) Except as disclosed in the Pricing Prospectus, since the date of the latest
audited financial statements included or incorporated by reference in the Pricing
Prospectus, there has been no change in the Companys internal control over financial
reporting that has materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting;
(xx) The Company maintains disclosure controls and procedures (as such term is defined
in Rule 13a-15(e) under the Exchange Act) that comply with the requirements of the Exchange
Act; such disclosure controls and procedures have been designed to ensure that material
information relating to the Company and its subsidiaries is made known to the Companys
principal executive officer and principal financial officer by others within those entities;
and such disclosure controls and procedures are effective;
(xxi) Except as disclosed in the Pricing Prospectus, the Company, each of its
subsidiaries and each officer or director of the Company or such subsidiaries possess all
registrations, licenses, certificates, permits and other authorizations issued by the
appropriate federal or state regulatory authorities necessary to conduct their respective
businesses (including as an investment advisor, a commodity trading advisor, a commodity
pool operator, a futures commission merchant or a broker-dealer, as applicable), and is in
compliance with
6
all applicable laws, rules and regulations requiring any such registrations, licenses,
certificates, permits and other authorizations, including those rules and regulations listed
under the caption BusinessRegulation of the Pricing Prospectus (the Investment
Regulations) except where non-possession or non-compliance would not, individually or in
the aggregate, have a Material Adverse Effect; and, except as disclosed in the Pricing
Prospectus, neither the Company nor any such subsidiaries or, to the knowledge of the
Company, any officer or director of the Company or such subsidiaries, has received any
notice of proceedings relating to the revocation or modification of any such registrations,
licenses, certificates, permits or other authorizations which, if the subject of an
unfavorable decision, ruling or finding, would, individually or in the aggregate, have a
Material Adverse Effect;
(xxii) This Agreement has been duly authorized, executed and delivered by the Company;
(xxiii) The Company and each of its subsidiaries have filed all federal, state and
local tax returns that are required to be filed or have requested extensions thereof, and
have made all withholdings, given all notices and supplied all other information and kept
all records and documentation in relation to taxes which they were required to make, give,
supply or keep, and all such tax returns, withholdings, notices, records and information
were complete and accurate (except in any case in which the failure to do so would not,
individually or in the aggregate, have a Material Adverse Effect) and the Company and each
of its subsidiaries have paid all taxes required to be paid by the Company or any of its
subsidiaries and any other assessment, fine or penalty levied against the Company or any of
its subsidiaries, to the extent that any of the foregoing is due and payable, and have made
adequate provisions in its accounts for any taxes that will become due, or which have arisen
or accrued or will arise or accrue with regard to the period up to and including each Time
of Delivery (as defined in Section 4 hereof), except as would not, individually or in the
aggregate, have a Material Adverse Effect. The charges, accruals and reserves on the books
of the Company and each of its subsidiaries in respect of all tax liabilities of the Company
and each of its subsidiaries for any years not finally determined are adequate to meet any
assessments or re-assessments for additional tax for any years not finally determined,
except to the extent of any inadequacy that would not, individually or in the aggregate,
have a Material Adverse Effect;
(xxiv) [Reserved]
(xxv) The Company and each of its subsidiaries are insured by insurers of recognized
financial responsibility against such losses and risks and in such amounts as are prudent
and customary in the businesses in which they are engaged; all policies of insurance
insuring the Company or any of its subsidiaries or their respective businesses, assets,
employees, officers and directors are in full force and effect; the Company and its
subsidiaries are in compliance with the terms of such policies and instruments in all
material respects; there are no claims by the Company or any of its subsidiaries under any
such policy or instrument as to which any insurance company is denying liability or
defending under a reservation of rights clause; neither the Company nor any such subsidiary
has been refused any insurance coverage sought or applied for; and neither the Company nor
any such subsidiary has any reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business at a cost that would not,
individually or in the aggregate, have a Material Adverse Effect;
7
(xxvi) Neither the Company nor any of its subsidiaries nor, to the knowledge of the
Company, any director, officer, agent, employee or affiliate of the Company or any of its
subsidiaries (in his, her or its capacity as a director, officer, agent, employee or
affiliate of the Company or any of its subsidiaries) is aware of or has taken any action,
directly or indirectly, that would result in a violation by such persons of the Foreign
Corrupt Practices Act of 1977, as amended, and the rules and regulations thereunder (the
FCPA), including, without limitation, making use of the mails or any means or
instrumentality of interstate commerce corruptly in furtherance of an offer, payment,
promise to pay or authorization of the payment of any money, or other property, gift,
promise to give, or authorization of the giving of anything of value to any foreign
official (as such term is defined in the FCPA) or any foreign political party or official
thereof or any candidate for foreign political office, in contravention of the FCPA and the
Company, its subsidiaries and, to the knowledge of the Company, its affiliates have
conducted their businesses in compliance with the FCPA and have instituted and maintain
policies and procedures designed to ensure continued compliance therewith;
(xxvii) The operations of the Company and its subsidiaries are and have been conducted
at all times in material compliance with applicable financial record-keeping and reporting
requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, the
money laundering statutes of all jurisdictions in which the Company and its subsidiaries
conduct business, the rules and regulations thereunder and any related or similar rules,
regulations or guidelines, issued, administered or enforced by any governmental agency
(collectively, the Money Laundering Laws) and no action, suit or proceeding by or before
any court or governmental agency, authority or body or any arbitrator involving the Company
or any of its subsidiaries with respect to the Money Laundering Laws is pending or, to the
knowledge of the Company, threatened;
(xxviii) Neither the Company nor any of its subsidiaries nor, to the knowledge of the
Company, any director, officer, agent, employee or affiliate of the Company or any of its
subsidiaries (in his, her or its capacity as a director, officer, agent, employee or
affiliate of the Company or any of its subsidiaries) is currently subject to any U.S.
sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury
Department (OFAC); and the Company will not directly or knowingly indirectly use the
proceeds of the offering, or lend, contribute or otherwise make available such proceeds to
any subsidiary, joint venture partner or other person or entity, for the purpose of
financing the activities of any person currently subject to any U.S. sanctions administered
by OFAC;
(xxix) No labor problem or dispute with the employees of the Company or any of its
subsidiaries exists or, to the knowledge of the Company, is threatened, and the Company is
not aware of any existing or threatened labor disturbance by the employees of any of its or
its subsidiaries principal suppliers, contractors or customers, that could, individually or
in the aggregate, have a Material Adverse Effect;
(xxx) Each of the Company and its subsidiaries has fulfilled its obligations, if any,
under the minimum funding standards of Section 302 of the United States Employee Retirement
Income Security Act of 1974 (ERISA) and the regulations and published interpretations
thereunder with respect to each plan (as defined in Section 3(3) of ERISA and such
regulations and published interpretations) in which employees of the Company and its
subsidiaries are eligible to participate and each such plan is in compliance in all material
respects with the presently applicable provisions of ERISA and such regulations and
published interpretations. The Company and its subsidiaries have not incurred any unpaid
8
liability to the Pension Benefit Guaranty Corporation (other than for the payment of
premiums in the ordinary course) or to any such plan under Title IV of ERISA;
(xxxi) The Company or one of its subsidiaries owns or possesses adequate rights to all
inventions, patent applications, patents, trademarks (both registered and unregistered),
trade names, service names, copyrights, trade secrets and other proprietary information and
rights which are material to the conduct of the Companys business (collectively, the
Intellectual Property), and the Company is unaware of any claim, or any reasonable basis
for any such claim, to the contrary, or any challenge by any other person to the rights of
the Company or any of its subsidiaries with respect to the Intellectual Property. To the
knowledge of the Company, the Company is not infringing or misappropriating the intellectual
property of any third party. None of the Company or its subsidiaries has received notice of
a claim of infringement or misappropriation of the intellectual property of a third party,
and the Company is unaware of any claim of misappropriation, or any reasonable basis for any
such claim. The Intellectual Property owned by the Company is owned solely and exclusively
by the Company and/or its subsidiaries and any Intellectual Property that is the subject of
a registration is valid and enforceable.
(xxxii) The Company has not taken and will not take, directly or indirectly, any action
designed to or that would constitute or that might reasonably be expected to cause or result
in, under the Exchange Act or otherwise, stabilization or manipulation of the price of the
Shares;
(xxxiii) No subsidiary of the Company is currently prohibited, directly or indirectly,
from paying any dividends to the Company, from making any other distribution on such
subsidiarys capital stock, from repaying to the Company any loans or advances to such
subsidiary from the Company or from transferring any of such subsidiarys property or assets
to the Company or any other subsidiary of the Company, except as disclosed in the Pricing
Prospectus;
(xxxiv) There is and has been no failure on the part of the Company or, to the
knowledge of the Company after reasonable investigation, any of the Companys directors or
officers, in their capacities as such, to comply with any provision of the Sarbanes Oxley
Act of 2002 and the rules and regulations promulgated in connection therewith, including
Section 402 related to loans and Sections 302 and 906 related to certifications;
(xxxv) Any certificate signed by any authorized officer of the Company and delivered to
the Representatives or counsel for the Underwriters in connection with the offering of the
Shares shall be deemed a representation and warranty by the Company, as to matters covered
thereby, to each Underwriter;
(xxxvi) Nothing has come to the attention of the Company that has caused the Company to
believe that the statistical and market-related data included in the Pricing Prospectus is
not based on or derived from sources that the Company reasonably believes are reliable and
accurate in all material respects;
(xxxvii) [Reserved]
(xxxviii) Except as set forth in the Pricing Prospectus, there are no persons with
registration rights or other similar rights to have any securities registered by the Company
under the Act;
9
(xxxix) The combined historical financial statements of the Company and its
consolidated subsidiaries included in the Pricing Prospectus and the Registration Statement
present fairly in all material respects the financial condition, results of operations,
stockholders equity and cash flows of the Company as of the dates and for the periods
indicated, comply as to form in all material respects with the applicable accounting
requirements of the Act and have been prepared in conformity with GAAP applied on a
consistent basis throughout the periods involved (except as otherwise noted therein). The
selected financial data set forth under the caption Selected Consolidated Financial Data
in the Pricing Prospectus fairly present, on the basis stated in the Pricing Prospectus, the
information included therein; and
(xl) The Significant Subsidiaries are the only significant subsidiaries of the Company
as defined in Rule 1-02 of Regulation S-X under the Act.
(b) Each of the Selling Stockholders severally represents and warrants to, and agrees with,
each of the Underwriters and the Company that:
(i) All consents, approvals, authorizations and orders necessary for the execution and
delivery by such Selling Stockholder of this Agreement and the selling stockholder agreement
executed by such Selling Stockholder (the Selling Stockholder Agreement), and for the sale
and delivery of the Shares to be sold by such Selling Stockholder hereunder, have been
obtained; and such Selling Stockholder has full right, power and authority to enter into
this Agreement and the Selling Stockholder Agreement and to sell, assign, transfer and
deliver the Shares to be sold by such Selling Stockholder hereunder;
(ii) The sale of the Shares to be sold by such Selling Stockholder hereunder and the
compliance by such Selling Stockholder with all of the provisions of this Agreement and the
Selling Stockholder Agreement and the consummation of the transactions herein and therein
contemplated will not conflict with or result in a breach or violation of any of the terms
or provisions of, or constitute a default under, any statute, indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which such Selling Stockholder is
a party or by which such Selling Stockholder is bound or to which any of the property or
assets of such Selling Stockholder is subject, nor will such action result in any violation
of the provisions of the Certificate of Incorporation or By-laws of such Selling Stockholder
if such Selling Stockholder is a corporation, the Partnership Agreement of such Selling
Stockholder if such Selling Stockholder is a partnership or any statute or any order, rule
or regulation of any court or governmental agency or body having jurisdiction over such
Selling Stockholder or the property of such Selling Stockholder, including Investment
Regulations (provided, that no representation and warranty is made in this Section 1(b)(ii)
with respect to the anti-fraud provisions of federal and state securities laws), and no
consent, approval, authorization or order of, or qualification with, any court or
governmental body or agency is required for the performance by such Selling Stockholder of
its obligations under this Agreement or the Selling Stockholder Agreement and consummation
of the transactions contemplated by this Agreement in connection with the Shares to be sold
by such Selling Stockholder hereunder, except for the registration under the Act of the
Shares and such consents, approvals, authorizations, orders, registrations or qualifications
as may be required under state securities or Blue Sky laws in connection with the purchase
and distribution of the Shares by the Underwriters;
10
(iii) Such Selling Stockholder has, and immediately prior to the First Time of Delivery
(as defined in Section 4 hereof) such Selling Stockholder will have, good and valid title to
the Shares to be sold by such Selling Stockholder hereunder, free and clear of all liens,
encumbrances, equities or claims; and, upon delivery of such Shares and payment therefor
pursuant hereto, good and valid title to such Shares, free and clear of all liens,
encumbrances, equities or claims, will pass to the several Underwriters;
(iv) During the period beginning from the date hereof and continuing to and including
the date 180 days after the date of the Prospectus (the Lock-Up Period), not to offer,
sell, contract to sell, pledge, grant any option to purchase, make any short sale or
otherwise dispose of, except as provided hereunder, any securities of the Company that are
substantially similar to the Shares, including but not limited to any options or warrants to
purchase shares of Stock or any securities that are convertible into or exchangeable for, or
that represent the right to receive, Stock or any such substantially similar securities (the
Subject Securities) other than (A) transfers as a bona fide gift or gifts, (B) transfers
to immediate family members, trusts for the benefit of the Selling Stockholder or immediate
family members of the Selling Stockholder, or limited partnerships the partners of which are
the Selling Stockholder and/or immediate family members of the Selling Stockholder, (C)
transfers by will or intestacy, (D) transfers to limited or general partners, members,
stockholders or affiliates (as defined under Rule 12b-2 of the Exchange Act) of such Selling
Stockholder or, in the case of a corporation, to a wholly-owned subsidiary of such Selling
Stockholder, (E) the exercise of the Selling Stockholders option to purchase Shares granted
prior to the date hereof under a stock incentive plan or stock purchase plan of the Company
described in the Pricing Prospectus and the Prospectus, or the disposition to the Company of
the Selling Stockholders shares of restricted stock granted pursuant to the terms of such
plan prior to the date hereof, or (F) transfer of the Subject Securities acquired on the
open market following the First Time of Delivery; (G) the establishment of a trading plan
pursuant to Rule 10b5-1 under the Exchange Act for the transfer of shares of Stock, provided
that such plan does not provide for the transfer of shares during the Lock-Up Period; (H)
the sale of Shares to the Underwriters in connection with the public offering contemplated
hereby; or (I) transfers with the prior written consent of the Representatives on behalf of
the Underwriter; provided that, in the case of any transfer or distribution pursuant to
clauses (A) through (D) of this Section 1(b)(iv), each donee, distributee or transferee
shall sign and deliver a lock-up agreement substantially to the effect set forth in this
Section 1(b)(iv) in form and substance satisfactory to the Representatives and such transfer
or distribution shall be a disposition for no value; provided further that, in the case of
any transfer, distribution, exercise or disposition pursuant to clauses (A) through (F) of
this Section 1(b)(iv), no filing under Section 16(a) of the Exchange Act during the Lock-Up
Period shall be required or shall be voluntarily made in connection therewith. For purposes
of this Section 1(b)(iv), immediate family shall mean any relationship by blood, marriage
or adoption, not more remote than a first cousin. If (Y) during the last 17 days of the
initial Lock-Up Period, the Company releases earnings results or announces material news or
a material event or (Z) prior to the expiration of the initial Lock-Up Period, the Company
announces that it will release earnings results during the 15-day period following the last
day of the initial Lock-Up Period, then in each case the Lock-Up Period will be
automatically extended until the expiration of the 18-day period beginning on the date of
release of the earnings results or the announcement of the material news or material event,
as applicable, unless the Representatives waive, in writing, such extension; such Selling
Stockholder hereby acknowledges that the Company has agreed herein to provide written notice
of any event that
11
would result in an extension of the Lock-Up Period pursuant to the previous sentence to
such Selling Stockholder (in accordance with Section 13 hereof) and agrees that any such
notice properly delivered will be deemed to have been given to, and received by, the Selling
Stockholder; such Selling Stockholder hereby further agrees that, prior to engaging in any
transaction or taking any other action that is subject to the terms of this provision during
the period from the date hereof to and including the 34th day following the expiration of
the initial Lock-Up Period, it will give notice thereof to the Company and will not
consummate such transaction or take any such action unless it has received written
confirmation from the Company that the Lock-Up Period (as such may have been extended
pursuant to the previous paragraph) has expired;
(v) Such Selling Stockholder has not taken and will not take, directly or indirectly,
any action designed to or that would constitute or that might reasonably be expected to
cause or result in, under the Exchange Act or otherwise, stabilization or manipulation of
the price of the Shares;
(vi) To the extent that any statements or omissions made in the Registration Statement,
any Preliminary Prospectus, the Pricing Prospectus or the Prospectus or any amendment or
supplement thereto are made in reliance upon and in conformity with written information
furnished to the Company by such Selling Stockholder pursuant to Items 7 and 11(m) of Form
S-1 expressly for use therein, such Registration Statement, Preliminary Prospectus and the
Pricing Supplement did, and the Prospectus and any further amendments or supplements to the
Registration Statement and the Prospectus, when they become effective or are filed with the
Commission, as the case may be, will conform in all material respects to the requirements of
the Act and the rules and regulations of the Commission thereunder and will not contain any
untrue statement of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading;
(vii) In order to document the Underwriters compliance with the reporting and
withholding provisions of the Tax Equity and Fiscal Responsibility Act of 1982 with respect
to the transactions herein contemplated, such Selling Stockholder will deliver to you prior
to or at the First Time of Delivery (as hereinafter defined) a properly completed and
executed United States Treasury Department Form W-9 (or other applicable form or statement
specified by Treasury Department regulations in lieu thereof) as an exhibit to the Selling
Stockholder Agreement;
(viii) Certificates in negotiable form representing all of the Shares to be sold by
such Selling Stockholder hereunder have been placed in custody under the custody provisions
of the Selling Stockholder Agreement to Mellon Investor Services LLC (operating with the
service name BNY Mellon Shareowner Services), a New Jersey limited liability company, as
custodian (the Custodian), and such Selling Stockholder has duly executed and delivered
the power of attorney included in the Selling Stockholder Agreement, appointing the persons
indicated in Schedule II hereto, and each of them, as such Selling Stockholders
attorneys-in-fact (the Attorneys-in-Fact) with authority to execute and deliver this
Agreement on behalf of such Selling Stockholder, to determine the purchase price to be paid
by the Underwriters to the Selling Stockholders as provided in Section 2 hereof, to
authorize the delivery of the Shares to be sold by such Selling Stockholder hereunder and
otherwise to act on behalf of such Selling Stockholder in connection with the transactions
contemplated by this Agreement and the Selling Stockholder Agreement;
12
(ix) The Shares represented by the certificates held in custody for such Selling
Stockholder under the Selling Stockholder Agreement are subject to the interests of the
Underwriters hereunder; the arrangements made by such Selling Stockholder for such custody,
and the appointment by such Selling Stockholder of the Attorneys-in-Fact by the Selling
Stockholder Agreement, are to that extent irrevocable; the obligations of the Selling
Stockholders hereunder shall not be terminated by operation of law, whether by the death or
incapacity of any individual Selling Stockholder or, in the case of an estate or trust, by
the death or incapacity of any executor or trustee or the termination of such estate or
trust, or in the case of a partnership or corporation, by the dissolution of such
partnership or corporation, or by the occurrence of any other event; if any individual
Selling Stockholder or any such executor or trustee should die or become incapacitated, or
if any such estate or trust should be terminated, or if any such partnership or corporation
should be dissolved, or if any other such event should occur, before the delivery of the
Shares to be sold by such Selling Stockholder hereunder, certificates representing the
Shares to be sold by such Selling Stockholder hereunder shall be delivered by or on behalf
of the Selling Stockholders in accordance with the terms and conditions of this Agreement
and the Selling Stockholder Agreement; and actions taken by the Attorneys-in-Fact pursuant
to the Selling Stockholder Agreement shall be as valid as if such death, incapacity,
termination, dissolution or other event had not occurred, regardless of whether or not the
Custodian, the Attorneys-in-Fact, or any of them, shall have received notice of such death,
incapacity, termination, dissolution or other event; and
(x) Such Selling Stockholder is not prompted by any material non-public information
concerning the Company or any of its subsidiaries that is not disclosed in the Pricing
Prospectus to sell its Shares pursuant to this Agreement.
2. Subject to the terms and conditions herein set forth, (a) the Company and each of the
Selling Stockholders agree, severally and not jointly, to sell to each of the Underwriters, and
each of the Underwriters agrees, severally and not jointly, to purchase from the Company and each
of the Selling Stockholders, at a purchase price per share of
$ , the number of Firm Shares (to
be adjusted by the Representatives so as to eliminate fractional shares) determined by multiplying
the aggregate number of Firm Shares to be sold by the Company and each of the Selling Stockholders
as set forth opposite their respective names in Schedule II hereto by a fraction, the numerator of
which is the aggregate number of Firm Shares to be purchased by such Underwriter as set forth
opposite the name of such Underwriter in Schedule I hereto and the denominator of which is the
aggregate number of Firm Shares to be purchased by all of the Underwriters from the Company and all
of the Selling Stockholders hereunder and (b) in the event and to the extent that the Underwriters
shall exercise the election to purchase Optional Shares as provided below, the Company agrees to
sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly,
to purchase from the Company, at the purchase price per share set forth in clause (a) of this
Section 2, that portion of the number of Optional Shares as to which such election shall have been
exercised (to be adjusted by the Representatives so as to eliminate fractional shares) determined
by multiplying such number of Optional Shares by a fraction the numerator of which is the maximum
number of Optional Shares which such Underwriter is entitled to purchase as set forth opposite the
name of such Underwriter in Schedule I hereto and the denominator of which is the maximum number of
Optional Shares that all of the Underwriters are entitled to purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at their election up to
Optional Shares, at the purchase price per share set forth in the paragraph above, for the sole
13
purpose of covering sales of shares in excess of the number of Firm Shares, provided that the
purchase price per Optional Share shall be reduced by an amount per share equal to any dividends or
distributions declared by the Company and payable on the Firm Shares but not payable on the
Optional Shares. Any such election to purchase Optional Shares may be exercised only by written
notice from the Representatives to the Company, given within a period of 30 calendar days after the
date of this Agreement and setting forth the aggregate number of Optional Shares to be purchased
and the date on which such Optional Shares are to be delivered, as determined by the
Representatives but in no event earlier than the First Time of Delivery (as defined in Section 4
hereof) or, unless the Representatives and the Company otherwise agree in writing, earlier than two
or later than ten business days after the date of such notice.
As compensation to the Underwriters for their commitments hereunder, the Company and each of
the Selling Stockholders at each Time of Delivery (as defined in Section 4 hereof) will pay to
Goldman, Sachs & Co., for the accounts of the several
Underwriters, an amount equal to
$ per
share for the Shares to be delivered by the Company and the Selling Stockholders hereunder at such
Time of Delivery.
3. Upon the authorization by the Representatives of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms and conditions set
forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder, in definitive form, and in
such authorized denominations and registered in such names as Goldman, Sachs & Co. may request upon
at least forty-eight hours prior notice to the Company and the Selling Stockholders shall be
delivered by or on behalf of the Company and the Selling Stockholders to Goldman, Sachs & Co.,
through the facilities of the Depository Trust Company (DTC), for the account of such
Underwriter, against payment by or on behalf of such Underwriter of the purchase price therefor by
wire transfer of Federal (same-day) funds to the account specified by the Company and the Custodian
to Goldman, Sachs & Co. at least forty-eight hours in advance. The time and date of such delivery
and payment shall be, with respect to the Firm Shares, 9:30 a.m., New York City time, on [], 2010
or such other time and date as the Representatives, the Company and the Selling Stockholders may
agree upon in writing, and, with respect to the Optional Shares, 9:30 a.m., New York City time, on
the date specified by the Representatives in the written notice given by Representatives of the
Underwriters election to purchase such Optional Shares, or such other time and date as the
Representatives and the Company may agree upon in writing. Such time and date for delivery of the
Firm Shares is herein called the First Time of Delivery, such time and date for delivery of the
Optional Shares, if not the First Time of Delivery, is herein called the Second Time of Delivery,
and each such time and date for delivery is herein called a Time of Delivery.
At each Time of Delivery, the Company and each of the Selling Stockholders will pay, or cause
to be paid, the commission payable at such Time of Delivery to the Underwriters under Section 2
hereof by wire transfer of Federal (same-day) funds to the account specified by Goldman, Sachs &
Co.
(b) The documents to be delivered at each Time of Delivery by or on behalf of the parties
hereto pursuant to Section 8 hereof, including the cross receipt for the Shares and any additional
documents requested by the Underwriters pursuant to Section 8(m) hereof, will be delivered at the
offices of Cleary Gottlieb Steen & Hamilton LLP, One Liberty Plaza, New York, New York 10006 (the
Closing Location), and the Shares will be delivered through the facilities of DTC, all at such
Time of Delivery. A meeting will be held at the Closing Location at p.m., New York City time,
on the
14
New York Business Day next preceding such Time of Delivery, at which meeting the final drafts
of the documents to be delivered pursuant to the preceding sentence will be available for review by
the parties hereto. For the purposes of this Agreement, New York Business Day shall mean each
Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in
New York City are generally authorized or obligated by law or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by the Representatives and to file such
Prospectus pursuant to Rule 424(b) under the Act not later than the Commissions close of business
on the second business day following the execution and delivery of this Agreement, or, if
applicable, such earlier time as may be required by Rule 430A(a)(3) under the Act; to make no
further amendment or any supplement to the Registration Statement or the Prospectus prior to the
last Time of Delivery which shall be disapproved by you promptly after reasonable notice thereof;
to advise you, promptly after it receives notice thereof, of the time when any amendment to the
Registration Statement has been filed or becomes effective or any amendment or supplement to the
Prospectus has been filed and to furnish you with copies thereof; to file promptly all material
required to be filed by the Company with the Commission pursuant to Rule 433(d) under the Act; to
advise you, promptly after it receives notice thereof, of the issuance by the Commission of any
stop order or of any order preventing or suspending the use of any Preliminary Prospectus or other
prospectus in respect of the Shares, of the suspension of the qualification of the Shares for
offering or sale in any jurisdiction, of the initiation or threatening of any proceeding for any
such purpose, or of any request by the Commission for the amending or supplementing of the
Registration Statement or the Prospectus or for additional information; and, in the event of the
issuance of any stop order or of any order preventing or suspending the use of any Preliminary
Prospectus or other prospectus or suspending any such qualification, to promptly use its best
efforts to obtain the withdrawal of such order;
(b) Promptly from time to time to take such action as the Representatives may reasonably
request to qualify the Shares for offering and sale under the securities laws of such jurisdictions
as the Representatives may request and to comply with such laws so as to permit the continuance of
sales and dealings therein in such jurisdictions for as long as may be necessary to complete the
distribution of the Shares, provided that in connection therewith the Company shall not be required
to qualify as a foreign corporation or to file a general consent to service of process in any
jurisdiction or to subject itself to taxation in any such jurisdiction in which it is not otherwise
subject to taxation on the date hereof;
(c) Promptly after the date of this Agreement and from time to time, to furnish the
Underwriters with written and electronic copies of the Prospectus in New York City in such
quantities as you may reasonably request, and, if the delivery of a prospectus (or in lieu thereof,
the notice referred to in Rule 173(a) under the Act) is required at any time prior to the
expiration of nine months after the time of issue of the Prospectus in connection with the offering
or sale of the Shares and if at such time any event shall have occurred as a result of which the
Prospectus as then amended or supplemented would include an untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made when such Prospectus (or in lieu thereof, the notice
referred to in Rule 173(a) under the Act) is delivered, not misleading, or, if for any other reason
it shall be necessary during such same period to amend or supplement the Prospectus in order to
comply with the Act, to notify you and upon your request to prepare and furnish without charge to
each Underwriter and to any dealer in securities as many written and electronic copies as you may
from time to time reasonably request of an amended Prospectus or a supplement to the Prospectus
which will correct such statement or
15
omission or effect such compliance; and in case any Underwriter is required to deliver a
prospectus (or in lieu thereof, the notice referred to in Rule 173(a) under the Act) in connection
with sales of any of the Shares at any time nine months or more after the time of issue of the
Prospectus, upon your request but at the expense of such Underwriter, to prepare and deliver to
such Underwriter as many written and electronic copies as you may reasonably request of an amended
or supplemented Prospectus complying with Section 10(a)(3) of the Act;
(d) To make generally available to its securityholders as soon as practicable, but in any
event not later than sixteen months after the effective date of the Registration Statement (as
defined in Rule 158(c) under the Act), an earnings statement of the Company and its subsidiaries
(which need not be audited) complying with Section 11(a) of the Act and the rules and regulations
of the Commission thereunder (including, at the option of the Company, Rule 158);
(e) During the Lock-Up Period, not to offer, sell, contract to sell, pledge, grant any option
to purchase, make any short sale or otherwise dispose of, except as provided hereunder, or file any
registration statement with the Commission relating to the offering of, any securities of the
Company that are substantially similar to the Shares, including but not limited to any options or
warrants to purchase shares of Stock or any securities that are convertible into or exchangeable
for, or that represent the right to receive, Stock or any such substantially similar securities,
other than (i) the issuance of securities of the Company to employees, advisors or consultants
pursuant to stock incentive plans existing on the date of this Agreement, (ii) the filing by the
Company of any registration statement on Form S-8 or a successor form thereto, (iii) the issuance
of securities of the Company upon the conversion or exchange of convertible or exchangeable
securities outstanding as of the date of this Agreement and (iv) the issuance of securities of the
Company in connection with the acquisition by the Company or one or more of its subsidiaries of the
assets or capital stock of another person or entity, whether through merger, asset acquisition,
stock purchase or otherwise (provided that, the aggregate number of shares issued pursuant to
clause (iv) of this Section 5(e) does not exceed
shares of Stock and prior to such
issuance the recipient of such shares shall sign and deliver to the Company a lock-up letter
substantially to the effect set forth in Section 1(b)(iv) in form and substance satisfactory to the
Representatives), in each case without the prior written consent of the Representatives; provided,
however, that if (1) during the last 17 days of the initial Lock-Up Period, the Company releases
earnings results or announces material news or a material event or (2) prior to the expiration of
the initial Lock-Up Period, the Company announces that it will release earnings results during the
15-day period following the last day of the initial Lock-Up Period, then in each case the Lock-Up
Period will be automatically extended until the expiration of the 18-day period beginning on the
date of release of the earnings results or the announcement of the material news or material event,
as applicable, unless the Representatives waive, in writing, such extension; the Company will
provide the Representatives, each Selling Stockholder and each stockholder subject to the Lock-Up
Period pursuant to the lock-up letters described in Section 8(k) with prior notice of any such
announcement that gives rise to an extension of the Lock-up Period; the Company agrees with each of
the Underwriters that, during the Lock-Up Period, the Company will waive any lock-up provisions in
existing agreements with holders of its securities, if and only if such waiver is requested by the
Representatives in writing;
(f) To the extent required by applicable law, to furnish to its stockholders as soon as
practicable after the end of each fiscal year an annual report (including a balance sheet and
statements of income, stockholders equity and cash flows of the Company and its consolidated
16
subsidiaries certified by independent public accountants) and, as soon as practicable after
the end of each of the first three quarters of each fiscal year (beginning with the fiscal quarter
ending after the effective date of the Registration Statement), to make available to its
stockholders consolidated summary financial information of the Company and its subsidiaries for
such quarter in reasonable detail;
(g) During a period of two years from the effective date of the Registration Statement, to
furnish to the Representatives copies of all reports or other communications (financial or other)
furnished to stockholders, and to deliver to the Representatives, as soon as they are available,
copies of any reports and financial statements furnished to or filed with the Commission or any
national securities exchange on which any class of securities of the Company is listed; provided,
however, that the Company may satisfy the requirements of this Section 5(g) by filing any such
reports, communications or information with the Commission via the Commissions Electronic Data
Gathering, Analysis and Retrieval System;
(h) To use the net proceeds received by it from the sale of the Shares pursuant to this
Agreement in the manner specified in the Pricing Prospectus under the caption Use of Proceeds;
(i) To use its best efforts to list for trading, subject to notice of issuance, the Shares on
the NASDAQ Global Select Market (the Exchange);
(j) To
file with the Commission such information on Form 10-Q or Form 10-K as may be required
by Rule 463 under the Act;
(k) If the Company elects to rely upon Rule 462(b), to file a Rule 462(b) Registration
Statement with the Commission in compliance with Rule 462(b) by 10:00 p.m., Washington, D.C. time,
on the date of this Agreement, and at the time of filing either pay to the Commission the filing
fee for the Rule 462(b) Registration Statement or give irrevocable instructions for the payment of
such fee pursuant to Rule 111(b) under the Act; and
(l) Upon request of any Underwriter, to furnish, or cause to be furnished, to such Underwriter
an electronic version of the Companys trademarks, servicemarks and corporate logo for use on the
website, if any, operated by such Underwriter for the purpose of facilitating the on-line offering
of the Shares (the License); provided, however, that the License shall be used solely for the
purpose described above, is granted without any fee and may not be assigned or transferred.
6. (a) The Company represents and agrees that, without the prior consent of the
Representatives, it has not made and will not make any offer relating to the Shares that would
constitute a free writing prospectus as defined in Rule 405 under the Act; each Underwriter
represents and agrees that, without the prior consent of the Company and the Representatives, it
has not made and will not make any offer relating to the Shares that would constitute a free
writing prospectus; any such free writing prospectus the use of which has been consented to by the
Company and the Representatives is listed on Schedule II(a) or Schedule II(c) hereto;
(b) The Company has complied and will comply with the requirements of Rule 433 under the Act
applicable to any Issuer Free Writing Prospectus, including timely filing with the Commission or
retention where required and legending; and the Company represents that it has satisfied and agrees
that it will satisfy the conditions under Rule 433 under the Act to avoid a requirement to file
with the Commission any electronic road show;
(c) The Company agrees that if at any time following issuance of an Issuer Free Writing
Prospectus any event occurred or occurs as a result of which such Issuer Free Writing Prospectus
17
would conflict with the information in the Registration Statement, the Pricing Prospectus or
the Prospectus or would include an untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the light of the circumstances
then prevailing, not misleading, the Company will give prompt notice thereof to the Representatives
and, if requested by the Representatives, will prepare and furnish without charge to each
Underwriter an Issuer Free Writing Prospectus or other document which will correct such conflict,
statement or omission; provided, however, that this representation and warranty shall not apply to
any statements or omissions in an Issuer Free Writing Prospectus made in reliance upon and in
conformity with information furnished in writing to the Company by an Underwriter through the
Representatives expressly for use therein.
7. The Company covenants and agrees with the several Underwriters that the Company will pay or
cause to be paid: (i) the fees, disbursements and expenses of the Companys counsel and accountants
in connection with the registration of the Shares under the Act and all other expenses in
connection with the preparation, printing, reproduction and filing of the Registration Statement,
any Preliminary Prospectus, any Issuer Free Writing Prospectus and the Prospectus and amendments
and supplements thereto and the mailing and delivering of copies thereof to the Underwriters and
dealers; (ii) the cost of producing any Agreement among Underwriters, this Agreement, the Blue Sky
Memorandum, closing documents (including any compilations thereof) and any other documents in
connection with the offering, purchase, sale and delivery of the Shares; (iii) all expenses in
connection with the qualification of the Shares for offering and sale under state securities laws
as provided in Section 5(b) hereof, including the reasonable fees and disbursements of counsel for
the Underwriters in connection with such qualification and in connection with any Blue Sky survey;
(iv) all fees and expenses in connection with listing the Shares on the Exchange; (v) the filing
fees incident to, and the fees and disbursements of counsel for the Underwriters in connection
with, any required review by FINRA of the terms of the sale of the Shares, including any fees
incurred on behalf of or disbursements by Morgan Stanley in its capacity as QIU, in an amount not
to exceed $50,000; (vi) the cost of preparing stock certificates, if applicable; (vii) the cost and
charges of any transfer agent or registrar; (viii) the costs and expenses of the Company relating to investor presentations
on any road show undertaken in connection with the marketing of the offering of the Shares, including, without limitation,
the travel and lodging expenses of the representatives and officers of the Company and the Company's pro rata share of
the cost of any aircraft or ground transportation (based on the respective number of passengers from the Company
and the Underwriters) chartered in connection with the road show, but not including, without limitation, any expenses
associated with any electronic road show; and (ix) all other costs and expenses
incident to the performance of its and the Selling Stockholders obligations hereunder which are
not otherwise specifically provided for in this Section 7. Each Selling Stockholder covenants and
agrees with the several Underwriters that such Selling Stockholder will pay or cause to be paid (1)
any fees and expenses of counsel for such Selling Stockholder and (2) all expenses and taxes
incident to the sale and delivery of the Shares to be sold by such Selling Stockholder to the
Underwriters hereunder; provided, that Goldman, Sachs & Co. agrees to pay New York State stock
transfer taxes associated with the sale of the Shares by each Selling Stockholder, and each Selling
Stockholder agrees to reimburse Goldman, Sachs & Co. for associated carrying costs if such tax
payment in respect of the Shares sold by such Selling Stockholder is not rebated on the day of
payment and for any portion of such tax payment not rebated. It is understood that, except as
provided in this Section 7, and Sections 9 and 12 hereof, the Underwriters will pay all of their
own costs and expenses, including the fees of their counsel, stock transfer taxes on resale of any
of the Shares by them, and any advertising expenses connected with any offers they may make.
8. The obligations of the Underwriters hereunder, as to the Shares to be delivered at each
Time of Delivery, shall be subject, in their discretion, to the condition that all representations
and warranties of the Company and of the Selling Stockholders herein and in the Selling Stockholder
Agreements are, at and as of such Time of Delivery, true and correct, the condition that the
Company
18
and the Selling Stockholders shall have performed all of its and their respective obligations
hereunder and under the Selling Stockholder Agreements theretofore to be performed, and the
following additional conditions:
(a) The Prospectus shall have been filed with the Commission pursuant to Rule 424(b) under the
Act within the applicable time period prescribed for such filing by the rules and regulations under
the Act and in accordance with Section 5(a) hereof; all material required to be filed by the
Company pursuant to Rule 433(d) under the Act shall have been filed with the Commission within the
applicable time period prescribed for such filing by Rule 433; if the Company has elected to rely
upon Rule 462(b) under the Act, the Rule 462(b) Registration Statement shall have become effective
by 10:00 P.M., Washington, D.C. time, on the date of this Agreement; no stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have been issued and no
proceeding for that purpose shall have been initiated or threatened by the Commission; no stop
order suspending or preventing the use of the Prospectus or any Issuer Free Writing Prospectus
shall have been initiated or, to the knowledge of the Company, threatened by the Commission; and
all requests for additional information on the part of the Commission shall have been complied with
to your reasonable satisfaction;
(b) Cleary Gottlieb Steen & Hamilton LLP, counsel for the Underwriters, shall have furnished
to you such written opinion or opinions, dated such Time of Delivery, in form and substance
satisfactory to you, and such counsel shall have received such papers and information as they may
reasonably request to enable them to pass upon such matters;
(c) Ropes & Gray LLP, counsel for the Company, shall have furnished to you their written
opinion or opinions, dated such Time of Delivery, in form and substance satisfactory to you;
(d) Wilmer Cutler Pickering Hale and Dorr LLP, special regulatory counsel for the Company
shall have furnished to you their written opinion or opinions, dated such Time of Delivery, in form
and substance satisfactory to you;
(e) The counsel for the Selling Stockholders listed on Schedule IV hereto shall have furnished
to you their written opinion with respect to such Selling Stockholders for whom they are acting as
counsel, dated the First Time of Delivery, in form and substance satisfactory to you;
(f) On the date of the Prospectus at a time prior to the execution of this Agreement, at 9:30
a.m., New York City time, on the effective date of any post-effective amendment to the Registration
Statement filed subsequent to the date of this Agreement and also at each Time of Delivery,
Deloitte & Touche LLP shall have furnished to you a letter or letters, dated the respective dates
of delivery thereof, in form and substance satisfactory to you;
(g) (i) Neither the Company nor any of its subsidiaries shall have sustained since the date of
the latest audited financial statements included or incorporated by reference in the Pricing
Prospectus any loss or interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as set forth or contemplated in the Pricing Prospectus, and
(ii) since the respective dates as of which information is given in the Pricing Prospectus there
shall not have been any change in the capital stock (other than pursuant to the conversion,
exchange or exercise of convertible, exchangeable or exercisable securities, including without
limitation options and warrants, and the grant of equity incentives, in each case in the ordinary
course of business) or long-term debt of the Company or any of its subsidiaries or any change or
development that would have a Material Adverse Effect, otherwise than as set forth or contemplated
in the Pricing Prospectus, the effect of
19
which, in any such case described in clause (i) or (ii), is in the judgment of the
Representatives so material and adverse as to make it impracticable or inadvisable to proceed with
the public offering or the delivery of the Shares being delivered at such Time of Delivery on the
terms and in the manner contemplated in the Prospectus;
(h) On or after the Applicable Time, (i) no downgrading shall have occurred in the rating
accorded the Companys debt securities by any nationally recognized statistical rating
organization, as that term is defined by the Commission for purposes of Rule 436(g)(2) under the
Act, and (ii) no such organization shall have publicly announced that it has under surveillance or
review, with possible negative implications, its rating of any of the Companys debt securities;
(i) On or after the Applicable Time, there shall not have occurred any of the following: (i) a
suspension or material limitation in trading in securities generally on the Exchange; (ii) a
suspension or material limitation in trading in the Companys securities on the Exchange; (iii) a
general moratorium on commercial banking activities declared by either Federal, New York or State
authorities or a material disruption in commercial banking or securities settlement or clearance
services in the United States; (iv) the outbreak or escalation of hostilities involving the United
States or the declaration by the United States of a national emergency or war; or (v) the
occurrence of any other calamity or crisis or any change in financial, political or economic
conditions in the United States or elsewhere, if the effect of any such event specified in clause
(iv) or (v) in the judgment of the Representatives makes it impracticable or inadvisable to proceed
with the public offering or the delivery of the Shares being delivered at such Time of Delivery on
the terms and in the manner contemplated in the Prospectus;
(j) The Shares to be sold at such Time of Delivery shall have been duly listed, subject to
notice of issuance, on the Exchange;
(k) The Company shall have obtained and delivered to the Underwriters executed copies of an
agreement from each person listed on Schedule V, substantially to the effect set forth in Section
1(b)(iv) hereof in form and substance satisfactory to the Representatives;
(l) The Company shall have complied with the provisions of Section 5(c) hereof with respect to
the furnishing of prospectuses on the New York Business Day next succeeding the date of this
Agreement; and
(m) The Company and the Selling Stockholders shall have furnished or caused to be furnished to
you at such Time of Delivery, as applicable, certificates of officers of the Company and of the
Selling Stockholders, respectively, satisfactory to you as to the accuracy of the representations
and warranties of the Company and the Selling Stockholders, respectively, herein at and as of such
Time of Delivery, as applicable, as to the performance by the Company and the Selling Stockholders
of all of their respective obligations hereunder to be performed at or prior to such Time of
Delivery, as applicable, and as to such other matters as you may reasonably request, and the
Company shall have furnished or caused to be furnished certificates as to the matters set forth in
subsections (a) and (g) of this Section and as to such other matters as you may reasonably request.
9. (a) The Company will indemnify and hold harmless each Underwriter against any losses,
claims, damages or liabilities, joint or several, to which such Underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of
a material fact contained in the Registration Statement, any Preliminary Prospectus, the Pricing
Prospectus or the Prospectus, or any amendment or supplement thereto, any Issuer Free Writing
Prospectus or any
20
issuer information filed or required to be filed pursuant to Rule 433(d) under the Act, or
arise out of or are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not misleading, and will
reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter
in connection with investigating or defending any such action or claim as such expenses are
incurred; provided, however, that the Company shall not be liable in any such case to the extent
that any such loss, claim, damage or liability arises out of or is based upon an untrue statement
or alleged untrue statement or omission or alleged omission made in the Registration Statement, any
Preliminary Prospectus, the Pricing Prospectus or the Prospectus, or any amendment or supplement
thereto, any Issuer Free Writing Prospectus or any issuer information filed or required to be
filed pursuant to Rule 433(d) under the Act in reliance upon and in conformity with written
information furnished to the Company by any Underwriter through the Representatives expressly for
use therein.
The Company will also indemnify and hold harmless Morgan Stanley and each person, if any, who
controls Morgan Stanley within the meaning of either Section 15 of the Act, or Section 20 of the
Exchange Act, from and against any and all losses, claims, damages or liabilities incurred as a
result of Morgan Stanleys participation as QIU within the meaning of Rule 2720 in connection with
the offering of the Shares, except for any losses, claims, damages and liabilities resulting from
Morgan Stanleys, or such controlling persons, willful misconduct.
(b) Each of the Selling Stockholders will indemnify and hold harmless each Underwriter against
any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become
subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement, any Preliminary Prospectus,
the Pricing Prospectus or the Prospectus, or any amendment or supplement thereto, any Issuer Free
Writing Prospectus or any issuer information filed or required to be filed pursuant to Rule
433(d) under the Act, or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the statements therein
not misleading, in each case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in the Registration Statement,
any Preliminary Prospectus, the Pricing Prospectus or the Prospectus, or any amendment or
supplement thereto, any Issuer Free Writing Prospectus or any issuer information filed or
required to be filed pursuant to Rule 433(d) under the Act in reliance upon and in conformity with
written information furnished to the Company by such Selling Stockholder expressly for use therein;
and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such action or claim as such expenses
are incurred; provided, however, that such Selling Stockholder shall not be liable in any such case
to the extent that any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission made in the
Registration Statement, any Preliminary Prospectus, the Pricing Prospectus or the Prospectus, or
any amendment or supplement thereto, any Issuer Free Writing Prospectus or any issuer information
filed or required to be filed pursuant to Rule 433(d) under the Act in reliance upon and in
conformity with written information furnished to the Company by any Underwriter through the
Representatives expressly for use therein; provided further, that the liability of such Selling
Stockholder pursuant to this subsection 9(b) shall not exceed the product of (i) the number of
Shares sold by such Selling Stockholder and (ii) the initial public offering price of the Shares
listed on Schedule III(c) hereto.
21
(c) Each Underwriter will indemnify and hold harmless the Company and each Selling Stockholder
against any losses, claims, damages or liabilities to which the Company or such Selling Stockholder
may become subject, under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or
alleged untrue statement of a material fact contained in the Registration Statement, any
Preliminary Prospectus, the Pricing Prospectus or the Prospectus, or any amendment or supplement
thereto, or any Issuer Free Writing Prospectus or any issuer information filed or required to be
filed pursuant to Rule 433(d) under the Act, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, in each case to the extent, but only to the extent,
that such untrue statement or alleged untrue statement or omission or alleged omission was made in
the Registration Statement, any Preliminary Prospectus, the Pricing Prospectus or the Prospectus,
or any amendment or supplement thereto, or any Issuer Free Writing Prospectus or any issuer
information filed or required to be filed pursuant to Rule 433(d) under the Act in reliance upon
and in conformity with written information furnished to the Company by such Underwriter through the
Representatives expressly for use therein; and will reimburse the Company and each Selling
Stockholder for any legal or other expenses reasonably incurred by the Company or such Selling
Stockholder in connection with investigating or defending any such action or claim as such expenses
are incurred.
(d) Promptly after receipt by an indemnified party under subsection (a), (b) or (c) above of
notice of the commencement of any action, such indemnified party shall, if a claim in respect
thereof is to be made against the indemnifying party under such subsection, notify the indemnifying
party in writing of the commencement thereof; but the omission so to notify the indemnifying party
shall not relieve it from any liability which it may have to any indemnified party otherwise than
under such subsection. In case any such action shall be brought against any indemnified party and
it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party (who shall not, except with the consent of the indemnified
party, be counsel to the indemnifying party), and, after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the indemnifying party shall
not be liable to such indemnified party under such subsection for any legal expenses of other
counsel or any other expenses, in each case subsequently incurred by such indemnified party, in
connection with the defense thereof other than reasonable costs of investigation. Notwithstanding
anything contained herein to the contrary, if indemnity may be sought pursuant to Section 9(a)
hereof in respect of such action or proceeding against Morgan Stanley in its capacity as QIU, then
in addition to such separate firm for the indemnified parties, the indemnifying party shall be
liable for the reasonable fees and expenses of not more than one separate firm (in addition to any
local counsel) for Morgan Stanley in its capacity as QIU, and all persons, if any, who control
Morgan Stanley within the meaning of either Section 15 of the Act or Section 20 of the Exchange
Act. No indemnifying party shall, without the written consent of the indemnified party, effect the
settlement or compromise of, or consent to the entry of any judgment with respect to, any pending
or threatened action or claim in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified party is an actual or potential party to such action or
claim) unless such settlement, compromise or judgment (i) includes an unconditional release of the
indemnified party from all liability arising out of such action or claim and (ii) does not include
a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of any
indemnified party.
22
(e) If the indemnification provided for in this Section 9 is unavailable to or insufficient to
hold harmless an indemnified party under subsection (a), (b) or (c) above in respect of any losses,
claims, damages or liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect the relative benefits received by the Company and the
Selling Stockholders on the one hand and the Underwriters on the other from the offering of the
Shares. If, however, the allocation provided by the immediately preceding sentence is not
permitted by applicable law or if the indemnified party failed to give the notice required under
subsection (d) above, then each indemnifying party shall contribute to such amount paid or payable
by such indemnified party in such proportion as is appropriate to reflect not only such relative
benefits but also the relative fault of the Company and the Selling Stockholders on the one hand
and the Underwriters on the other in connection with the statements or omissions which resulted in
such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other
relevant equitable considerations. The relative benefits received by the Company and the Selling
Stockholders on the one hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting expenses) received by the
Company and the Selling Stockholders bear to the total underwriting discounts and commissions
received by the Underwriters, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or alleged omission to
state a material fact relates to information supplied by the Company or the Selling Stockholders on
the one hand or the Underwriters on the other and the parties relative intent, knowledge, access
to information and opportunity to correct or prevent such statement or omission. The Company, each
of the Selling Stockholders and the Underwriters agree that it would not be just and equitable if
contribution pursuant to this subsection (e) were determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to above in this subsection
(e). The amount paid or payable by an indemnified party as a result of the losses, claims, damages
or liabilities (or actions in respect thereof) referred to above in this subsection (e) shall be
deemed to include any legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (e), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares underwritten by it and
distributed to the public were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement
or omission or alleged omission. Notwithstanding the foregoing provisions of this subsection (e),
no Selling Stockholder shall be required to (i) contribute unless such Selling Stockholder would
have had indemnification obligations pursuant to Section 9(b) above or (ii) contribute any amount
in excess of the amount by which such Selling Stockholders gross proceeds received by it from the
sale of the Shares pursuant to this Agreement exceeds the amount of any damages which such Selling
Stockholders has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters obligations in this
subsection (e) to contribute are several in proportion to their respective underwriting obligations
and not joint.
23
(f) The respective obligations of the Company and the Selling Stockholders under this Section
9 shall be in addition to any liability which the Company and the respective Selling Stockholders
may otherwise have and shall extend, upon the same terms and conditions, to each officer and
director of each Underwriter and to each person, if any, who controls any Underwriter within the
meaning of the Act and each broker-dealer affiliate of any Underwriter; and the obligations of the
Underwriters under this Section 9 shall be in addition to any liability which the respective
Underwriters may otherwise have and shall extend, upon the same terms and conditions, to each
officer and director of the Company and to each person, if any, who controls the Company or any
Selling Stockholder within the meaning of the Act. The Company agrees and confirms that references
to affiliates of Morgan Stanley & Co. Incorporated that appear in this Agreement shall be
understood to include Mitsubishi UFJ Morgan Stanley Securities Co., Ltd.
10. (a) If any Underwriter shall default in its obligation to purchase the Shares that it has
agreed to purchase hereunder at a Time of Delivery, the Representatives may in their discretion
arrange for the Representatives or another party or other parties to purchase such Shares on the
terms contained herein. If within thirty-six hours after such default by any Underwriter the
Representatives do not arrange for the purchase of such Shares, then the Company and the Selling
Stockholders shall be entitled to a further period of thirty-six hours within which to procure
another party or other parties satisfactory to the Representatives to purchase such Shares on such
terms. In the event that, within the respective prescribed periods, the Representatives notify the
Company and the Selling Stockholders that the Representatives have so arranged for the purchase of
such Shares, or the Company and the Selling Stockholders notify the Representatives that they have
so arranged for the purchase of such Shares, the Representatives or the Company and the Selling
Stockholders shall have the right to postpone a Time of Delivery for a period of not more than
seven days, in order to effect whatever changes may thereby be made necessary in the Registration
Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees to
file promptly any amendments or supplements to the Registration Statement or the Prospectus which
in the Representatives opinion may thereby be made necessary. The term Underwriter as used in
this Agreement shall include any person substituted under this Section with like effect as if such
person had originally been a party to this Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting
Underwriter or Underwriters by the Representatives and the Company and the Selling Stockholders as
provided in subsection (a) above, the aggregate number of such Shares which remains unpurchased
does not exceed one-eleventh of the aggregate number of all the Shares to be purchased at such Time
of Delivery, then the Company and the Selling Stockholders shall have the right to require each
non-defaulting Underwriter to purchase the number of Shares which such Underwriter agreed to
purchase hereunder at such Time of Delivery and, in addition, to require each non-defaulting
Underwriter to purchase its pro rata share (based on the number of Shares which such Underwriter
agreed to purchase hereunder) of the Shares of such defaulting Underwriter or Underwriters for
which such arrangements have not been made; but nothing herein shall relieve a defaulting
Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting
Underwriter or Underwriters by the Representatives and the Company and the Selling Stockholders as
provided in subsection (a) above, the aggregate number of such Shares which remains unpurchased
exceeds one-eleventh of the aggregate number of all of the Shares to be purchased at such Time of
Delivery, or if the Company and the Selling Stockholders shall not exercise the right described in
subsection (b) above to require non-defaulting Underwriters to purchase Shares of a
24
defaulting Underwriter or Underwriters, then this Agreement (or, with respect to the Second
Time of Delivery, the obligations of the Underwriters to purchase and of the Company to sell the
Optional Shares) shall thereupon terminate, without liability on the part of any non-defaulting
Underwriter or the Company or the Selling Stockholders, except for the expenses to be borne by the
Company and the Selling Stockholders and the Underwriters as provided in Section 7 hereof and the
indemnity and contribution agreements in Sections 9 and 10 hereof; but nothing herein shall relieve
a defaulting Underwriter from liability for its default.
11. The respective indemnities, agreements, representations and warranties of the Company, the
Selling Stockholders and the several Underwriters, as set forth in this Agreement or made by or on
behalf of them, respectively, pursuant to this Agreement, shall remain in full force and effect,
regardless of any investigation (or any statement as to the results thereof) made by or on behalf
of any Underwriter or any controlling person of any Underwriter, or the Company, or any of the
Selling Stockholders, or any officer or director or controlling person of the Company, or any
controlling person of any Selling Stockholder, and shall survive delivery of and payment for the
Shares.
12. If this Agreement shall be terminated pursuant to Section 10 hereof, neither the Company
nor the Selling Stockholders shall then be under any liability to any Underwriter except as
provided in Sections 7 and 9 hereof; but, if for any other reason any Shares are not delivered by
or on behalf of the Company and the Selling Stockholders as provided herein, the Company will
reimburse the Underwriters through the Representatives for all out-of-pocket expenses approved in
writing by the Representatives, including fees and disbursements of counsel, reasonably incurred by
the Underwriters in making preparations for the purchase, sale and delivery of the Shares not so
delivered, but the Company shall then be under no further liability to any Underwriter in respect
of the Shares not so delivered except as provided in Sections 7 and 9 hereof.
13. In all dealings hereunder, the Representatives shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any statement, request,
notice or agreement on behalf of any Underwriter made or given by the Representatives; and in all
dealings with any Selling Stockholder hereunder, the Underwriters and the Company shall be entitled
to act and rely upon any statement, request, notice or agreement on behalf of such Selling
Stockholder made or given by any or all of the Attorneys-in-Fact for such Selling Stockholder.
All statements, requests, notices and agreements hereunder shall be in writing, and if to the
Underwriters shall be delivered or sent by mail, telex or facsimile transmission to the
Representatives in care of Goldman, Sachs & Co., 200 West Street, New York, New York 10282,
Attention: Registration Department; if to any Selling Stockholder shall be delivered or sent by
mail, telex or facsimile transmission to counsel for such Selling Stockholder at its address set
forth in Schedule II hereto; and if to the Company shall be delivered or sent by mail, telex or
facsimile transmission to the address of the Company set forth on the cover of the Registration
Statement, Attention: Secretary; provided, however, that any notice to an Underwriter pursuant to
Section 9(d) hereof shall be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its Underwriters Questionnaire or telex constituting such
Questionnaire, which address will be supplied to the Company or the Selling Stockholders by the
Representatives on request; provided further, however, that notices under Section 5(e) shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or facsimile
transmission to the Representatives in care of Goldman, Sachs & Co., 200 West Street, New York, New
York 10282-2198, Attention: Control Room, and if to any stockholder subject to the Lock-Up Period
pursuant to the lock-up letters described in Section 8(k) shall be delivered or sent by mail to his
or her respective address provided in Schedule IV
25
attached hereto or such other address as such stockholder provides in writing to the Company.
Any such statements, requests, notices or agreements shall take effect upon receipt thereof.
In accordance with the requirements of the USA Patriot Act (Title III of Pub. L. 107-56
(signed into law October 26, 2001)), the Underwriters are required to obtain, verify and record
information that identifies their respective clients, including the Company, which information may
include the name and address of their respective clients, as well as other information that will
allow the Underwriters to properly identify their respective clients.
14. This Agreement shall be binding upon, and inure solely to the benefit of, the
Underwriters, the Company and the Selling Stockholders and, to the extent provided in Sections 9
and 10 hereof, the officers and directors of the Company and each person who controls the Company,
any Selling Stockholder or any Underwriter, and their respective heirs, executors, administrators,
successors and assigns, and no other person shall acquire or have any right under or by virtue of
this Agreement. No purchaser of any of the Shares from any Underwriter shall be deemed a successor
or assign by reason merely of such purchase.
15. Time shall be of the essence of this Agreement. As used herein, the term business day
shall mean any day when the Commissions office in Washington, D.C. is open for business.
16. The Company acknowledges and agrees that (i) the purchase and sale of the Shares pursuant
to this Agreement is an arms-length commercial transaction between the Company, on the one hand,
and the several Underwriters, on the other, (ii) in connection therewith and with the process
leading to such transaction each Underwriter is acting solely as a principal and not the agent or
fiduciary of the Company, (iii) no Underwriter has assumed an advisory or fiduciary responsibility
in favor of the Company with respect to the offering contemplated hereby or the process leading
thereto (irrespective of whether such Underwriter has advised or is currently advising the Company
on other matters) or any other obligation to the Company except the obligations expressly set forth
in this Agreement and (iv) the Company has consulted its own legal and financial advisors to the
extent it deemed appropriate. The Company agrees that it will not claim that the Underwriters, or
any of them, has rendered advisory services of any nature or respect, or owes a fiduciary or
similar duty to the Company, in connection with such transaction or the process leading thereto.
17. This Agreement supersedes all prior agreements and understandings (whether written or
oral) between the Company and the Underwriters, or any of them, with respect to the subject matter
hereof.
18. THIS AGREEMENT AND ANY MATTERS RELATED TO THIS TRANSACTION SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF
CONFLICT OF LAWS THAT WOULD RESULT IN THE APPLICATION OF ANY LAW OTHER THAN THE LAWS OF THE STATE
OF NEW YORK. The Company agrees that any suit or proceeding arising in respect of this Agreement
or our engagement will be tried exclusively in the U.S. District Court for the Southern District of
New York or, if that court does not have subject matter jurisdiction, in any state court located in
The City and County of New York and the Company agrees to submit to the jurisdiction of, and to
venue in, such courts.
19. The Company and each of the Underwriters hereby irrevocably waives, to the fullest extent
permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out
of or relating to this Agreement or the transactions contemplated hereby.
26
20. This Agreement may be executed by any one or more of the parties hereto in any number of
counterparts, each of which shall be deemed to be an original, but all such counterparts shall
together constitute one and the same instrument.
21. Notwithstanding anything herein to the contrary, the Company and the Selling Stockholders
are authorized to disclose to any persons the U.S. federal and state income tax treatment and tax
structure of the potential transaction and all materials of any kind (including tax opinions and
other tax analyses) provided to the Company and the Selling Stockholders relating to that treatment
and structure, without the Underwriters imposing any limitation of any kind. However, any
information relating to the tax treatment and tax structure shall remain confidential (and the
foregoing sentence shall not apply) to the extent necessary to enable any person to comply with
securities laws. For this purpose, tax structure is limited to any facts that may be relevant to
that treatment.
27
If the foregoing is in accordance with your understanding, please sign and return to us six
counterparts hereof, and upon the acceptance hereof by you, on behalf of each of the Underwriters,
this letter and such acceptance hereof shall constitute a binding agreement among each of the
Underwriters, the Company and each of the Selling Stockholders. It is understood that your
acceptance of this letter on behalf of each of the Underwriters is pursuant to the authority set
forth in a form of Agreement among Underwriters, the form of which shall be submitted to the
Company and the Selling Stockholders for examination, upon request, but without warranty on your
part as to the authority of the signers thereof.
Any person executing and delivering this Agreement as Attorney-in-Fact for a Selling
Stockholder represents by so doing that he or she has been duly appointed as Attorney-in-Fact by
such Selling Stockholder pursuant to a validly existing and binding Power of Attorney that
authorizes such Attorney-in-Fact to take such action.
|
|
|
|
|
|
Very truly yours,
LPL Investment Holdings Inc.
|
|
|
By: |
|
|
|
|
Name: |
|
|
|
|
Title: |
|
|
|
|
Selling Stockholders
|
|
|
By: |
|
|
|
|
Name: |
|
|
|
|
Title: |
As Attorney-in-Fact acting on behalf of
each of the Selling Stockholders named
in Schedule II to this Agreement. |
|
|
28
Accepted as of the date hereof:
Goldman, Sachs & Co.
|
|
|
|
|
By:
|
|
|
|
|
|
|
|
|
|
|
|
(Goldman, Sachs & Co.) |
|
|
|
|
|
|
|
Morgan Stanley & Co. Incorporated |
|
|
|
|
|
By: |
|
|
|
|
|
|
|
|
|
|
|
Name: |
|
|
|
|
Title: |
|
|
On behalf of each of the Underwriters
29
SCHEDULE I
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Optional |
|
|
|
|
|
|
|
Shares to be |
|
|
|
Total Number of |
|
|
Purchased if |
|
|
|
Firm Shares |
|
|
Maximum Option |
|
Underwriter |
|
to be Purchased |
|
|
Exercised |
|
Goldman, Sachs & Co. |
|
|
|
|
|
|
|
|
Morgan Stanley & Co. Incorporated |
|
|
|
|
|
|
|
|
Merrill Lynch, Pierce, Fenner & Smith Incorporated |
|
|
|
|
|
|
|
|
J.P. Morgan Securities Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
II-30
SCHEDULE II
|
|
|
|
|
|
|
Total Number of |
|
|
|
Firm Shares |
|
|
|
to be Sold |
|
The Company |
|
|
|
|
The Selling Stockholders (a): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Each Selling Stockholder has appointed Mark S. Casady and Stephanie L. Brown, and each of
them, as the Attorneys-in-Fact for such Selling Stockholder. |
Schedule II-1
SCHEDULE III
(a) Issuer Free Writing Prospectuses not included in the Pricing Disclosure Package
(b) Additional documents incorporated by reference
(c) Information other than the Pricing Prospectus that comprise the Pricing Disclosure Package
The
initial public offering price per share for the Shares is
$ .
The
number of Shares purchased by the Underwriters is .
Schedule III-1
SCHEDULE IV
[List of Selling Stockholders pursuant to Section 8(e)]
Schedule IV-1
SCHEDULE V
[List of persons locked up]
Schedule V-1
ANNEX I
(a) LPL Holdings, Inc., a Massachusetts corporation
(b) LPL Financial Corporation, a California corporation
(c) UVEST Financial Services, Inc., a North Carolina corporation
Annex I-1
exv3w1
Exhibit 3.1
AMENDED AND
RESTATED CERTIFICATE OF INCORPORATION
OF
LPL INVESTMENT HOLDINGS INC.
LPL Investment Holdings Inc., a Delaware corporation (the
Corporation), hereby certifies that this
Amended and Restated Certificate of Incorporation (the
Amended and Restated Certificate of
Incorporation) has been duly adopted in accordance
with Sections 228, 242 and 245 of the General Corporation
Law of the State of Delaware, and that:
A. The name of the Corporation is: LPL Investment Holdings
Inc.
B. The original Certificate of Incorporation of the
Corporation was filed with the Secretary of the State of
Delaware on October 25, 2005 (as amended, the
Original Certificate of Incorporation). The
Corporation was incorporated under the name BD Investment
Holdings Inc.
C. This Amended and Restated Certificate of Incorporation
amends and restates the Original Certificate of Incorporation of
the Corporation.
D. The Certificate of Incorporation, upon the filing of
this Amended and Restated Certificate of Incorporation, shall
read in its entirety as follows:
ARTICLE I
NAME
The name of the corporation is LPL Investment Holdings Inc. (the
Corporation).
ARTICLE II
REGISTERED OFFICE AND AGENT
The address of the Corporations registered office in the
State of Delaware is 1209 Orange Street, in the City of
Wilmington, County of New Castle, 19801. The name of the
Corporations registered agent at such address is The
Corporation Trust Company.
ARTICLE III
PURPOSE
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the
General Corporation Law of the State of Delaware (the
DGCL).
ARTICLE IV
CAPITALIZATION
(a) Authorized Shares. The total number
of shares of stock which the Corporation shall have authority to
issue is 675,000,000, consisting of 600,000,000 shares of
Common Stock, par value $0.001 per share (Common
Stock), and 75,000,000 shares of Preferred Stock,
par value $0.001 per share (Preferred Stock).
(b) Preferred Stock. Shares of Preferred
Stock may be issued in one or more series, from time to time,
with each such series to consist of such number of shares and to
have such voting powers relative to other classes or series of
Preferred Stock, if any, or Common Stock, full or limited or no
voting powers, and such designations, preferences and relative,
participating, optional or other special rights, and the
qualifications, limitations or restrictions thereof, as shall be
stated in the resolution or resolutions providing for the
issuance of such series adopted by the board of directors of the
Corporation (the Board of Directors), and the
Board of Directors is hereby expressly vested with the
authority, to the full extent now or hereafter provided by
applicable law, to adopt any such resolution or resolutions.
(c) Voting. Each holder of Common Stock,
as such, shall be entitled to one vote for each share of Common
Stock held of record by such holder on all matters on which
stockholders generally are entitled to vote; provided,
that, except as otherwise required by law, holders of Common
Stock, as
such, shall not be entitled to vote on any amendment to this
Amended and Restated Certificate of Incorporation (including,
but not limited to, any certificate of designations relating to
any series of Preferred Stock) that relates solely to the terms
of one or more outstanding series of Preferred Stock if the
holders of such affected series are entitled, either separately
or together with the holders of one or more other such series,
to vote thereon pursuant to this Amended and Restated
Certificate of Incorporation (including, but not limited to, any
certificate of designations relating to any series of Preferred
Stock) or pursuant to the DGCL.
(d) No Class Vote On Changes In Authorized Number
of Shares Of Preferred Stock. Subject to the
special rights of the holders of any series of Preferred Stock
pursuant to the terms of this Amended and Restated Certificate
of Incorporation, any certificate of designations or any
resolution or resolutions providing for the issuance of such
series of stock adopted by the Board of Directors, the number of
authorized shares of Preferred Stock may be increased or
decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a
majority of the voting power of the outstanding shares of
capital stock of the Corporation entitled to vote generally in
the election of directors irrespective of the provisions of
Section 242(b)(2) of the DGCL.
ARTICLE V
BOARD OF DIRECTORS
(a) Number of Directors; Vacancies and Newly Created
Directorships. The number of directors
constituting the Board of Directors shall be not fewer than 3
and not more than 15, each of whom shall be a natural person.
Subject to the previous sentence and to the special rights of
the holders of any series of Preferred Stock to elect directors,
the precise number of directors shall be fixed exclusively
pursuant to a resolution adopted by the Board of Directors,
provided, however, that until the first date (the
Trigger Date) on which TPG Partners IV, L.P.
and its successors and Affiliates (collectively,
TPG) and Hellman & Friedman Capital
Partners V, L.P., Hellman & Friedman Capital
Partners V (Parallel), L.P. and Hellman & Friedman
Capital Associates V, L.P. and their respective successors
and Affiliates (collectively the H&F
Entities and, together with TPG, the Sponsor
Holders) cease collectively to beneficially own
(directly or indirectly) forty percent (40%) or more of the
outstanding shares of Common Stock, the number of directors
shall not be increased to more than nine without, in addition to
any other vote otherwise required by law, the affirmative vote
or written consent of sixty percent (60%) of the outstanding
shares of Common Stock. Affiliate means, with
respect to any Person, any other Person that controls, is
controlled by, or is under common control with such Person; the
term control, as used in this definition,
means the power to direct or cause the direction of the
management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract
or otherwise, and controlled and
controlling have meanings correlative to the
foregoing. Person means an individual, any
general partnership, limited partnership, limited liability
company, corporation, trust, business trust, joint stock
company, joint venture, unincorporated association, cooperative
or association or any other legal entity or organization of
whatever nature, and shall include any successor (by merger or
otherwise) of such entity. For the purpose of this Amended and
Restated Certificate of Incorporation beneficial
ownership shall be determined in accordance with
Rule 13d-3
promulgated under the Securities Exchange Act of 1934, as
amended (the Exchange Act). Vacancies and
newly-created directorships shall be filled (i) by vote of
a majority of the directors then in office, although less than a
quorum, or by a sole remaining director or (ii) until the
Trigger Date, in addition to any other vote otherwise required
by law, by the affirmative vote of a majority of the outstanding
shares of Common Stock. Any vacancy created by the removal of a
director by the stockholders shall only be filled, in addition
to any other vote otherwise required by law, by vote of a
majority of the outstanding shares of Common Stock. No decrease
in the number of directors constituting the Board of Directors
shall shorten the term of any incumbent director.
(b) Classified Board of
Directors. Subject to the special rights of the
holders of any series of Preferred Stock to elect directors,
immediately following the Trigger Date, the Board of Directors
(other than those directors elected by the holders of any series
of Preferred Stock) shall be classified into three classes:
Class I; Class II; and Class III. Each class
shall consist, as nearly as possible, of one-third of the total
number of directors constituting the entire Board of Directors
and the allocation of directors among
the three classes shall be determined by the Board of Directors.
The initial Class I Directors shall serve for a term
expiring at the first annual meeting of stockholders of the
Corporation following the Trigger Date; the initial
Class II Directors shall serve for a term expiring at the
second annual meeting of stockholders following the Trigger
Date; and the initial Class III Directors shall serve for a
term expiring at the third annual meeting of stockholders
following the Trigger Date. Each director in each class shall
hold office until his or her successor is duly elected and
qualified or until his or her earlier death, resignation or
removal. At each annual meeting of stockholders beginning with
the first annual meeting of stockholders following the meeting
at which the Board of Directors is classified under this
paragraph (b) of this Article V, the successors of the
class of directors whose term expires at that meeting shall be
elected to hold office for a term expiring at the annual meeting
of stockholders to be held in the third year following the year
of their election, with each director in each such class to hold
office until his or her successor is duly elected and qualified
or until his or her earlier death, resignation or removal. If
the number of directors is changed, any increase or decrease
shall be apportioned among the classes so as to maintain the
number of directors in each class as nearly equal as possible.
(c) Removal. Subject to the special
rights of the holders of any series of Preferred Stock to elect
directors, following the classification of the Board of
Directors pursuant to paragraph (b) of this Article V,
the directors of the Corporation may be removed only for cause
by the affirmative vote of sixty-six and two-thirds percent
(662/3%)
of the voting power of the outstanding shares of capital stock
of the Corporation entitled to vote generally in the election of
directors, voting together as a single class.
ARTICLE VI
LIMITATION OF DIRECTOR LIABILITY
To the fullest extent that the DGCL or any other law of the
State of Delaware (as they exist on the date hereof or as they
may hereafter be amended) permits the limitation or elimination
of the liability of directors, no director of the Corporation
shall be liable to the Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director. No
amendment to, or modification or repeal of, this Article VI
shall adversely affect any right or protection of a director of
the Corporation existing hereunder with respect to any state of
facts existing or act or omission occurring, or any cause of
action, suit or claim that, but for this Article VI, would
accrue or arise, prior to such amendment, modification or repeal.
ARTICLE VII
MEETINGS OF STOCKHOLDERS
(a) No Action by Written Consent. On or
following the Trigger Date, any action required or permitted to
be taken by the stockholders of the Corporation may be effected
only at a duly called annual or special meeting of stockholders
of the Corporation and may not be effected by any consent in
writing by such stockholders.
(b) Special Meetings of
Stockholders. Subject to any special rights of
the holders of any series of Preferred Stock, and to the
requirements of applicable law, special meetings of stockholders
of the Corporation may be called only by either (a) the
Chairman or Vice Chairman of the Board of Directors or the
President of the Corporation, (b) the Board of Directors
pursuant to a written resolution adopted by a majority of the
total number of directors which the Corporation would have if
there were no vacancies or (c) prior to the Trigger Date,
the Secretary of the Corporation at the request of the holders
of forty percent (40%) or more of the outstanding shares of
Common Stock.
(c) Election of Directors by Written
Ballot. Election of directors need not be by
written ballot.
ARTICLE VIII
AMENDMENTS TO THE AMENDED AND RESTATED CERTIFICATE OF
INCORPORATION AND BYLAWS
(a) Bylaws. In furtherance and not in
limitation of the powers conferred by law, the Board of
Directors is expressly authorized to make, alter, amend or
repeal the bylaws of the Corporation subject to the power of the
stockholders of the Corporation to make, alter, amend or repeal
the
bylaws; provided, that with respect to the powers of
stockholders to make, alter, amend or repeal the bylaws, from
and after the first date on which the Sponsor Holders cease
collectively to beneficially own (directly or indirectly) shares
of capital stock representing more than fifty percent (50%) of
the voting power of the outstanding shares of capital stock of
the Corporation entitled to vote generally on the making,
alteration, amendment or repeal of the bylaws, then, in addition
to any other vote otherwise required by law, the affirmative
vote of the holders of at least sixty-six and two-thirds percent
(66
2/3%)
of the voting power of the outstanding shares of Common Stock
shall be required to make, alter, amend or repeal the bylaws of
the Corporation.
(b) Amendments to the Certificate of
Incorporation. Notwithstanding anything to the
contrary contained in this Amended and Restated Certificate of
Incorporation, and notwithstanding that a lesser percentage may
be permitted from time to time by applicable law, no provision
of Article V, paragraphs (a) and (b) of
Article VII, Article VIII and Article IX may be
altered, amended or repealed in any respect, nor may any
provision or bylaw inconsistent therewith be adopted, unless in
addition to any other vote required by this Amended and Restated
Certificate of Incorporation or otherwise required by law,
(i) so long as the Sponsor Holders collectively
beneficially own (directly or indirectly) more than fifty
percent (50%) of the outstanding shares of Common Stock, such
alteration, amendment, repeal or adoption is approved by, in
addition to any other vote otherwise required by law, the
affirmative vote of the holders of a majority of the voting
power of the outstanding shares of Common Stock and
(ii) from and after the date on which the Sponsor Holders
cease collectively to beneficially own (directly or indirectly)
more than fifty percent (50%) of the outstanding shares of
Common Stock, such alteration, amendment, repeal or adoption is
approved by, in addition to any other vote otherwise required by
law, the affirmative vote of the holders of at least sixty-six
and two-thirds percent (66
2/3%)
of the voting power of the outstanding shares of Common Stock.
ARTICLE IX
BUSINESS COMBINATIONS
The Corporation hereby expressly elects not to be governed by
Section 203 of the DGCL.
ARTICLE X
RENOUNCEMENT OF CORPORATE OPPORTUNITY
(a) Scope. The provisions of this
Article X are set forth to define, to the extent permitted
by applicable law, the duties of Exempted Persons (as defined
below) to the Corporation with respect to certain classes or
categories of business opportunities. Exempted
Persons means each director of the Corporation who is
not an employee of the Corporation or any of its subsidiaries (a
Non-Employee Director) and each Sponsor
Holder and their respective Affiliates (other than the
Corporation and its subsidiaries) and all of their respective
partners, principals, directors, officers, members, managers
and/or
employees, including any of the foregoing who serve as officers
or directors of the Corporation.
(b) Competition and Allocation of Corporate
Opportunities. The Exempted Persons shall not
have any fiduciary duty to refrain from engaging directly or
indirectly in the same or similar business activities or lines
of business as the Corporation or any of its subsidiaries. To
the fullest extent permitted by applicable law, the Corporation,
on behalf of itself and its subsidiaries, renounces any interest
or expectancy of the Corporation and its subsidiaries in, or in
being offered an opportunity to participate in, business
opportunities that are from time to time presented to the
Exempted Persons, even if the opportunity is one that the
Corporation or its subsidiaries might reasonably be deemed to
have pursued or had the ability or desire to pursue if granted
the opportunity to do so, and each such Exempted Person shall
have no duty to communicate or offer such business opportunity
to the Corporation and, to the fullest extent permitted by
applicable law, shall not be liable to the Corporation or any of
its subsidiaries for breach of any fiduciary or other duty, as a
director or officer or otherwise, by reason of the fact that
such Exempted Person pursues or acquires such business
opportunity, directs such business opportunity to another person
or fails to present such business opportunity, or information
regarding such business opportunity, to the Corporation or its
subsidiaries.
(c) Certain Matters Deemed Not Corporate
Opportunities. In addition to and notwithstanding
the foregoing provisions of this Article X, a corporate
opportunity shall not be deemed to belong to the Corporation if
it is a business opportunity that the Corporation is not
financially able or contractually permitted or legally able to
undertake, or that is, from its nature, not in the line of the
Corporations business or is of no practical advantage to
it or that is one in which the Corporation has no interest or
reasonable expectancy.
(d) Amendment of this
Article. Notwithstanding anything to the contrary
elsewhere contained in this Amended and Restated Certificate of
Incorporation and in addition to any vote required by the DGCL,
the affirmative vote of eighty percent (80%) of the voting power
of the outstanding shares of capital stock entitled to vote on
the adoption, alteration, amendment or repeal of amendments to
this Amended and Restated Certificate of Incorporation, voting
together as a single class, shall be required to alter, amend or
repeal, or to adopt any provision inconsistent with, this
Article X. No amendment or repeal of this Article X
shall apply to or have any effect on the liability or alleged
liability of any Exempted Person for or with respect to any
activities or opportunities of which such Exempted Person
becomes aware prior to such amendment or repeal.
ARTICLE XI
EXCLUSIVE JURISDICTION OF CERTAIN ACTIONS
The Court of Chancery of the State of Delaware shall, to the
fullest extent permitted by applicable law, be the sole and
exclusive forum for (i) any derivative action or proceeding
brought on behalf of the Corporation, (ii) any action
asserting a claim of breach of a fiduciary duty owed by any
director, officer or other employee of the Corporation to the
Corporation or the Corporations stockholders,
(iii) any action asserting a claim against the Corporation
arising pursuant to any provision of the DGCL or the
Corporations Amended and Restated Certificate of
Incorporation or bylaws or (iv) any action asserting a
claim against the Corporation governed by the internal affairs
doctrine, in each such case subject to said Court of Chancery
having personal jurisdiction over the indispensable parties
named as defendants therein. Any person or entity purchasing or
otherwise acquiring any interest in shares of capital stock of
the Corporation shall be deemed to have notice of and consented
to the provisions of this Article XI.
ARTICLE XII
SEVERABILITY
If any provision or provisions of this Amended and Restated
Certificate of Incorporation shall be held to be invalid,
illegal or unenforceable as applied to any circumstance for any
reason whatsoever: (i) the validity, legality and
enforceability of such provisions in any other circumstance and
of the remaining provisions of this Amended and Restated
Certificate of Incorporation (including, without limitation,
each portion of any paragraph of this Amended and Restated
Certificate of Incorporation containing any such provision held
to be invalid, illegal or unenforceable that is not itself held
to be invalid, illegal or unenforceable) shall not in any way be
affected or impaired thereby and (ii) to the fullest extent
possible, the provisions of this Amended and Restated
Certificate of Incorporation (including, without limitation,
each such portion of any paragraph of this Amended and Restated
Certificate of Incorporation containing any such provision held
to be invalid, illegal or unenforceable) shall be construed so
as to permit the Corporation to protect its directors, officers,
employees and agents from personal liability in respect of their
good faith service to or for the benefit of the Corporation to
the fullest extent permitted by law.
[remainder of page
intentionally left blank signature page follows]
IN WITNESS WHEREOF, the undersigned has caused this Amended and
Restated Certificate of Incorporation to be executed by the
officer below this day
of ,
2010.
LPL INVESTMENT HOLDINGS INC.
Name:
Title:
exv10w10
Exhibit 10.10
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (this Agreement) is made as of ___, by and
between LPL Investment Holdings Inc., a Delaware corporation (Holdings or the Company)
and ___(the Indemnitee), an officer and/or director of the Company.
RECITALS
WHEREAS, although the Amended Certificate of Incorporation and the By-Laws of Holdings provide
for advancement and indemnification of the officers and directors of Holdings and the Indemnitee
may also be entitled to advancement and indemnification pursuant to the Delaware General
Corporation Law, the Delaware General Corporation Law expressly contemplates that
contracts may be entered into between Holdings and officers of Holdings and/or members of the Board
of Directors of Holdings with respect to advancement and indemnification of officers and directors;
and
WHEREAS, the Indemnitees continued service to the Company substantially benefits the Company;
and
WHEREAS, the Board of Directors of Holdings has determined that it is in the best interest of
the Company to obligate itself contractually to indemnify, and to pay, on a current basis, expenses
in advance of a final disposition of any Proceeding on behalf of the Indemnitee to the fullest
extent permitted by applicable law in order to induce the Indemnitee to serve or continue to serve
the Company free from undue concern that the Indemnitee will not be so indemnified or that any
indemnification obligation will not be met; and
WHEREAS, this Agreement is a supplement to and in furtherance of the certificate and bylaws or
partnership agreement, as the case may be, of Holdings and any Enterprise (as defined below) and
any resolutions adopted pursuant thereto, and shall not be deemed a substitute therefor, nor to
diminish or abrogate any rights of the Indemnitee thereunder; and
WHEREAS, the Indemnitee is willing to serve, continue to serve and to take on additional
service for or on behalf of the Company and certain other Enterprises on the condition that the
Indemnitee is indemnified by the Company;
NOW, THEREFORE, in consideration of the promises and the covenants contained herein, the
Company and the Indemnitee do hereby covenant and agree as follows:
1. Definitions. For purposes of this Agreement, the following terms shall have the
meanings hereafter assigned to them:
(a) Corporate Status describes the status of a person who is or was a
director, trustee, partner, managing member, officer, employee, agent or fiduciary of the Company
or of any other Enterprise.
(b) A Disinterested Director shall mean a director of the applicable
Company who, at the time of a vote referred to in the definition of Reviewing Party is not (i) the
Indemnitee, (ii) a Party to (or a participant in) the Proceeding for which indemnification is
sought or (iii) an individual having a significant familial, financial, professional or employment
relationship with the Indemnitee, which relationship would, in the circumstances, reasonably be
1
expected to exert an influence on such directors judgment when voting on the decision being
made.
(c) Enterprise shall mean (i) Holdings; or (ii) any other corporation,
partnership, limited liability company, joint venture, trust, employee benefit plan or other
enterprise which is a controlled affiliate or wholly or partially owned direct or indirect
subsidiary, or employee benefit plan, of the Company and of which the Indemnitee is or was serving
as a director, trustee, general partner, managing member, officer, employee, agent or fiduciary; or
(iii) any other corporation, partnership, limited liability company, joint venture, trust, employee
benefit plan or other enterprise, in each case, of which Indemnitee is or was serving at the
request of the Company. Enterprise shall specifically include, without limitation, LPL Holdings,
Inc.; LPL Financial Corporation; and UVEST Financial Services Group Inc.
(d) Expenses shall mean all reasonable expenses, including, but not
limited to, attorneys fees, retainers, court costs, transcript costs, fees of experts, witness
fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage,
delivery service fees, and all other disbursements or expenses of the types customarily incurred in
connection with prosecuting, defending, preparing to prosecute or defend, investigating, being or
preparing to be a witness in, or otherwise participating in, a Proceeding.
Expenses shall include such fees and expenses, and costs incurred in connection with any
appeal resulting from any Proceeding, including without limitation the premium, security for, and
other costs relating to any cost bond, supersedeas bond, or other appeal bond or its equivalent.
Expenses, however, shall not include amounts paid in settlement by the Indemnitee or the amount of
judgments or fines against the Indemnitee.
(e) An Indemnifiable Matter shall mean any Proceeding in which the
Indemnitee was, is or will be involved as a Party, witness or otherwise by reason of Indemnitees
Corporate Status, by reason of any acts or omissions on his part while acting as an officer or
director of such Company, or by reason of the fact that he is or was serving as a director,
trustee, general partner, managing member, officer, employee, agent or fiduciary of any other
Enterprise, in each case whether or not serving in such capacity at the time any Expense, judgment,
fine or amount paid in settlement is incurred for which indemnification, reimbursement, or
advancement of Expenses can be provided under this Agreement.
(f) Indemnitee-Related Entities means any corporation, partnership,
limited liability company, joint venture, trust, employee benefit plan or other enterprise (other
than the Company, any other Enterprise or the insurer under and pursuant to an insurance policy
issued to or insuring either Company or any Enterprise) from whom the Indemnitee may be entitled to
indemnification, reimbursement, or advancement of Expenses.
(g) An Indemnitee Statement shall mean a written demand by the Indemnitee
to the Company for a payment pursuant to Section 2(c) of this Agreement, accompanied by a written
statement from the Indemnitee to the Company in which the Indemnitee (i) affirms, with respect to
the applicable Indemnifiable Matter, the Indemnitees good faith belief that the Indemnitee has met
the relevant standard of conduct described in Section 145 of the Delaware General Corporation
Law or that the Proceeding involves conduct for which liability has been eliminated under such
Companys certificate of incorporation or bylaws and (ii) undertakes to repay any funds paid in
advance of a final disposition of a Proceeding (or funds paid directly by the Company advance of a
final disposition of a Proceeding) if, with respect to
2
the applicable Indemnifiable Matter, the Indemnitee is not entitled to indemnification under
applicable law as ultimately determined by a court of competent jurisdiction.
(h) Jointly Indemnifiable Claims shall be broadly construed and shall
include, without limitation, any Proceeding for which the Indemnitee shall be entitled to
indemnification, reimbursement, or advancement of Expenses from (i) either the Company and/or any
other Enterprise pursuant to the Indemnification Sources, on the one hand, and (ii) any
Indemnitee-Related Entity under any other agreement or arrangement between any Indemnitee-Related
Entity and the Indemnitee pursuant to which the Indemnitee is indemnified or entitled to
advancement of Expenses, the laws of the jurisdiction of incorporation or organization of any
Indemnitee-Related Entity and/or the certificate of incorporation, certificate of organization,
bylaws, partnership agreement, operating agreement, certificate of formation, certificate of
limited partnership or other organizational or governing documents of any Indemnitee-Related
Entity, on the other hand.
(i) A Liability shall mean an obligation to pay a loss, liability, cost,
judgment, settlement, penalty, and/or fines (including an excise tax assessed with respect to an
employee benefit plan) in connection with an Indemnifiable Matter and any Expenses incurred in
connection with an Indemnifiable Matter.
(j) A Party shall mean an individual who was, is, or is threatened to be
made, a defendant or respondent in a Proceeding, or a subject, target, person of interest, or other
person within the scope of any Proceeding. The Indemnitee shall be considered a Party in a
Proceeding in which the Indemnitee seeks a declaratory judgment with respect to matters related to
an Indemnifiable Matter.
In addition, the Indemnitee shall be considered a Party for all aspects of an Indemnifiable
Matter even though the Indemnitee asserts counter-claims or cross-claims.
(k) Person means an individual, a corporation, a limited liability
company, an association, a partnership, an estate, a trust and any other entity or organization,
other than the Company or any of its subsidiaries.
(l) A Proceeding shall mean any threatened, pending or completed action,
suit, arbitration, mediation, alternate dispute resolution proceeding, investigation, inquiry,
administrative hearing or any other actual, threatened or completed proceeding, whether brought in
the right of the Company or otherwise, whether informal or formal, and whether of a civil,
criminal, administrative or investigative nature, including, without limitation, any such
proceeding pending as of the date of this Agreement.
(m) The Reviewing Party in connection with an Indemnifiable Matter shall be
selected by the Indemnitee from the following persons:
(i) if there are two or more Disinterested Directors on the Board of Directors of
the applicable Company, such Board of Directors acting by majority vote of all Disinterested
Directors, or by a majority of the members of a committee of the Board of Directors of such Company
consisting of two or more Disinterested Directors; or
(ii) a Special Legal Counsel selected by the Indemnitee and approved by:
3
(a) if there are two or more Disinterested Directors on the Board
of Directors of
the applicable Company, the Board of Directors of such Company acting by majority vote of all
Disinterested Directors, or by a majority of the members of a committee of the Board of Directors
of such Company consisting of two or more Disinterested Directors; or
(b) if there are fewer than two Disinterested Directors on the
Board of Directors of
the applicable Company, the full Board of Directors of the Company, with directors who do not
qualify as Disinterested Directors eligible to vote; or
(n) Special Legal Counsel shall mean, at any time, any law firm, or a
member of a law firm, that (a) is experienced in matters of corporation law and (b) is not, at such
time, or has not been in the five years prior to such time, retained to represent: (i) any Company
or Enterprise or the Indemnitee in any matter material to either such party (other than as Special
Legal Counsel), or (ii) any other Party to (or participant in) the Proceeding giving rise to a
claim for indemnification hereunder. Notwithstanding the foregoing, the term Special Legal
Counsel shall not include any person who, under the applicable standards of professional conduct
then prevailing, would have a conflict of interest in representing the Company or any Enterprise or
the Indemnitee in an action to determine the Indemnitees rights under this Agreement. The Company
agrees to pay the reasonable fees and expenses of the Special Legal Counsel referred to above and
to fully indemnify such counsel against any and all Expenses, claims, liabilities and damages
arising out of or relating to this Agreement or its engagement pursuant hereto and to be liable
therefor.
2. Indemnification and Advancement in General.
(a) In the event the Indemnitee is a Party, witness or otherwise a participant in an
Indemnifiable Matter, the Company shall be obligated to indemnify the Indemnitee for any associated
Liabilities to the fullest extent permitted by law. Subject to Section 2(d) and in accordance with
the procedures set forth in Section 3, any indemnification pursuant to this Section 2(a) must be
determined by the Reviewing Party to be permissible under the Delaware General Corporation Law in
the specific Proceeding. The Company shall make any such payment to which the Indemnitee is
entitled pursuant to this Section 2(a) as soon as practicable but in no event later than ten (10)
days after a determination by the Reviewing Party that Indemnitee is entitled to indemnification.
(b) The Company shall be liable to indemnify the Indemnitee and pay for or reimburse
Expenses and other amounts incurred by or on behalf of the Indemnitee (i) in taking any action to
enforce any provision of this Agreement, including all Expenses incurred bringing a claim,
counterclaim or cross claim in a legal proceeding, arbitration or otherwise to enforce this
Agreement or any provisions of this Agreement or (ii) for recovery under any directors and
officers liability insurance policy maintained by the Company.
(c) Notwithstanding anything herein to the contrary, the Company shall, to the
fullest extent permitted by law, be obligated to pay, on a current and as-incurred basis, any and
all Expenses incurred by Indemnitee in an Indemnifiable Matter (an Expense Advance)
within ten (10) days after the receipt by the Company of a statement or statements requesting such
advances from time to time, provided that the Indemnitee has delivered to the Company an Indemnitee
Statement. Such Expense Advances shall (i) be unsecured and interest free; (ii) be made without
regard to the Indemnitees ability to repay the advances; (iii) be made without regard to the
Indemnitees ultimate entitlement to indemnification under the other provisions of this Agreement;
and (iv) include any and all Expenses incurred pursuing an action to enforce any
4
rights under this Agreement, including Expenses incurred preparing and forwarding statements
to the Company to support the advances claimed. The Indemnitee shall qualify for advancement of
Expenses solely upon the execution and delivery to the Company of the Indemnitee Statement.
(d) Notwithstanding any other provisions of this Agreement, to the extent that the
Indemnitee is a Party to (or a participant in) and is successful, on the merits or otherwise, in
any Proceeding in connection with an Indemnifiable Matter or in defense of any claim, issue or
matter therein, in whole or in part, the Company shall be obligated to indemnify the Indemnitee
against all Expenses incurred by him in connection therewith. If the Indemnitee is not wholly
successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but
less than all claims, issues or matters in such Proceeding, the Company shall be obligated to
indemnify Indemnitee against all Expenses incurred by the Indemnitee or on the Indemnitees behalf
in connection with each successfully resolved claim, issue or matter. If the Indemnitee is not
wholly successful in such Proceeding, the Company also shall be liable to indemnify the Indemnitee
against all Expenses incurred in connection with any claim, issue or matter that is related to any
claim, issue, or matter on which the Indemnitee was successful. For purposes of this Section and
without limitation, the termination of any claim, issue or matter in such a Proceeding by
dismissal, with or without prejudice, or settlement of any such claim prior to a final judgment by
a court of competent jurisdiction with respect to such Proceeding, shall be deemed to be a
successful result as to such claim, issue or matter.
(e) This Agreement shall constitute authorization to provide indemnification, pay
funds, on a current basis, and reimburse expenses under Section 145 of the Delaware General
Corporation Law. Any limitation under any law applicable to any Enterprise concerning
indemnification or advancement shall not limit the indemnification and advancement obligations of
any Enterprise to which such law does not apply.
(f) For purposes of this Section 2, the meaning of the phrase to the fullest extent
permitted by law shall include, but not be limited to:
(1) to the fullest extent permitted by the provision of the Delaware General
Corporation Law that permits a corporation to indemnify its officers and directors,
(2) to the fullest extent permitted by the provision of the Delaware General
Corporation Law that authorizes or contemplates additional indemnification by agreement; and
(3) to the fullest extent authorized or permitted by any amendments to or
replacements of the Delaware General Corporation Law adopted after the date of this Agreement that
increase the extent to which a corporation may indemnify its officers and directors.
3. Procedure for Indemnification.
(a) In order to obtain indemnification under this Agreement, the Indemnitee shall,
anytime following Indemnitees submission of an Indemnitee Statement to the Company, and consistent
with the time period of this Agreement as set forth in Section 5 of this Agreement, submit to the
Company a written request for indemnification pursuant to this Section 3(a). No determination of
Indemnitees entitlement to indemnification shall be made until such written request for a
determination is submitted by Indemnitee to the Company pursuant to this Section 3(a).
5
(b) No written request for indemnification or determination of Indemnitees entitlement to
indemnification shall be required in order to obtain advancement of Expenses pursuant to Section
2(c).
(c) The failure to submit a written request to the Company will relieve the Company of its
indemnification obligations under this Agreement only to the extent the Company can establish that
such failure to make a written request resulted in actual material prejudice to it, and the failure
to make a written request will not relieve the Company from any liability which it may have to
indemnify the Indemnitee otherwise than under this Agreement.
(d) The Company shall, promptly upon receipt of such a request for indemnification, advise the
Board of Directors of the Company in writing that the Indemnitee has requested indemnification.
(e) The Indemnitee shall cooperate with the Reviewing Party making such
determination with respect to the Indemnitees entitlement to indemnification, including providing
to such Reviewing Party upon request any documentation or information which is not privileged or
otherwise protected from disclosure and which is reasonably available to the Indemnitee and
reasonably necessary to such determination.
(f) Any costs or expenses (including attorneys fees and disbursements) incurred by the
Indemnitee in so cooperating with the Reviewing Party, as the case may be, making such
determination shall be advanced and borne by the Company (where the Indemnitee executes and
delivers to the Company the Indemnitee Statement) irrespective of the determination as to the
Indemnitees entitlement to indemnification) and the Company should be obligated to indemnify and
hold the Indemnitee harmless therefrom.
(g) In making a determination with respect to Indemnitees entitlement to
indemnification hereunder, the Reviewing Party making such determination shall presume that the
Indemnitee is entitled to indemnification under this Agreement if the Indemnitee has submitted an
Indemnitee Statement, and the Company shall have the burden of proof to overcome that presumption
in connection with the making by any person, persons or entity of any determination contrary to
that presumption. Neither the failure of the Company (including by its Board of Directors) or of
Special Legal Counsel to have made a determination prior to the commencement of any judicial
proceeding or arbitration pursuant to this Agreement that indemnification is proper in the
circumstances because the Indemnitee has met the applicable standard of conduct, nor an actual
determination by the Company (including by its Board of Directors) or by Special Legal Counsel that
the Indemnitee has not met such applicable standard of conduct, shall create a presumption that the
Indemnitee has not met the applicable standard of conduct.
(h) If the Reviewing Party shall not have made a determination within sixty (60)
days after receipt by the Company of the Indemnitees written request for indemnification pursuant
to Section 3(a) of this Agreement, the requisite determination of entitlement to indemnification
shall be deemed to have been made and the Indemnitee shall be entitled to such indemnification,
absent (i) a failure by the Indemnitee to comply with Section 3(e) hereof, (ii) a misstatement by
the Indemnitee of a material fact, or an omission of a material fact necessary to make the
Indemnitees statement not materially misleading, in connection with the request for
indemnification, or (iii) a prohibition of such indemnification under applicable law; provided,
however, that such 60-day period may be extended for a reasonable time, not to exceed an additional
thirty (30) days, if the Special Legal Counsel making the determination with respect to
6
entitlement to indemnification in good faith requires such additional time for the obtaining
or evaluating of documentation and/or information relating thereto.
(i) The termination of any Proceeding or of any claim, issue or matter therein, by
judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent,
shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the
right of the Indemnitee to indemnification or create a presumption that the Indemnitee did not meet
any particular standard of conduct required pursuant to this Agreement.
(j) For purposes of any determination of good faith, the Indemnitee shall be deemed
to have acted in good faith if the Indemnitees action or failure to act is based on the records or
books of account of the Enterprise, including financial statements, or on information supplied to
the Indemnitee by the officers, employees or committees of the board of directors of the Enterprise
in the course of their duties, or on the advice of legal counsel for the Enterprise or on
information or records given or reports made to the Enterprise by an independent certified public
accountant or by an appraiser or other expert selected by the Enterprise. The provisions of this
Section 3(j) shall not be deemed to be exclusive or to limit in any way the other circumstances in
which the Indemnitee may be deemed or found to have met the applicable standard of conduct set
forth in this Agreement.
(k) The knowledge and/or actions, or failure to act, of any other director, partner,
managing member, officer, agent, employee or trustee of the Enterprise shall not be imputed to the
Indemnitee for purposes of determining his right to indemnification under this Agreement.
4. Remedies.
(a) In the event that (i) a determination is made pursuant to Section 2(a) of this
Agreement that the Indemnitee is not entitled to indemnification under this Agreement, (ii) payment
of Expenses is not timely made pursuant to Section 2(c) or Section 3(f) of this Agreement within
ten (10) days after receipt by the Company of a written request therefor, (where the Indemnitee has
executed and delivered to the applicable Company the Indemnitee Statement), (iii) payment of
indemnification is not made within ten (10) days after a determination has been made by the
Reviewing Party that the Indemnitee is entitled to indemnification pursuant to Section 2(a) of this
Agreement, (iv) an Enterprise or any other person takes or threatens to take any action to declare
this Agreement void or unenforceable, or institutes any litigation or other action or Proceeding
designed to deny, or to recover from, the Indemnitee the benefits provided or intended to be
provided to the Indemnitee hereunder, or (v) there is any breach of this Agreement, the Indemnitee
shall be entitled to seek an adjudication by a court of competent jurisdiction as to his
entitlement to such indemnification or payment of Expenses, on a current basis, or may seek an
award in arbitration to be conducted by a single arbitrator pursuant to the Commercial Arbitration
Rules of the American Arbitration Association. The Company shall not oppose the Indemnitees right
to seek any such adjudication or award in arbitration.
(b) If the Indemnitee has commenced adjudication or arbitration to secure a determination,
with respect to an Indemnifiable Matter, that the Indemnitee is entitled to indemnification under
this Agreement, any determination made by the Reviewing Party that indemnification of the
Indemnitee is not permissible under the Delaware General Corporation Law with respect to
such Indemnifiable Matter shall not be binding, and (where the Indemnitee has executed and
delivered to the applicable Company the Indemnitee Statement) the Indemnitee shall not be required
to reimburse the Company for any Expense Advance until a final judicial
7
determination (as to which all rights of appeal therefrom have been exhausted or lapsed) that
indemnification is not legally permissible is made with respect to such matter.
(c) In the event that a determination shall have been made pursuant to Section 2(a)
of this Agreement that the Indemnitee is not entitled to indemnification, any judicial proceeding
or arbitration, commenced pursuant to this Section 4, shall be conducted in all respects as a de
novo trial, or arbitration, on the merits, and the Indemnitee shall not be prejudiced by reason of
that adverse determination. In any judicial proceeding or arbitration commenced pursuant to this
Section 4, the Company shall have the burden of proving the Indemnitee is not entitled to
indemnification or advancement of Expenses, as the case may be.
(d) If a determination shall have been made pursuant to Section 2(a) of this
Agreement that the Indemnitee is entitled to indemnification, the Company shall be bound by, and
shall have no right to challenge, such determination in any judicial proceeding or arbitration
commenced pursuant to this Section 4, absent a misstatement by the Indemnitee of a material fact,
or an omission of a material fact necessary to make the Indemnitees statement not materially
misleading, in connection with Indemnitees request for indemnification.
(e) In the event that the Indemnitee is a Party to (or a witness or otherwise a
participant in) a judicial proceeding or arbitration pursuant to this Section 4 concerning the
Indemnitees rights under, or to recover damages for breach of, this Agreement, the Indemnitee
shall be entitled to recover from the Company, and shall be indemnified by the Company against, any
and all Expenses incurred by the Indemnitee (where, with respect to an Indemnifiable Matter, the
Indemnitee has executed and delivered to the Company the Indemnitee Statement) in such judicial
adjudication or arbitration.
If it shall be determined in said judicial adjudication or arbitration that the Indemnitee is
entitled to receive part but not all of the indemnification or advancement of Expenses sought, the
Indemnitee shall be entitled to recover from the Company (who shall be liable therefor), and shall
be indemnified by the Company against, any and all Expenses incurred by the Indemnitee in
connection with such judicial adjudication or arbitration.
(f) The Company shall be precluded from asserting in any judicial proceeding or
arbitration commenced pursuant to this Section 4 that the procedures and presumptions of this
Agreement are not valid, binding and enforceable and shall stipulate in any such court or before
any such arbitrator that the Company is bound by all the provisions of this Agreement.
(g) Notwithstanding anything in this Agreement to the contrary, no determination as to
Indemnitees entitlement to indemnification under this Agreement shall be required to be made prior
to the final disposition of the Proceeding.
5. Duration of the Agreement. This Agreement shall continue until and terminate
upon the later of: (a) 10 years after the date that the Indemnitee shall have ceased to serve as a
director of the Company or as a director, partner, managing member, officer, employee, agent or
trustee of any other Enterprise; or (b) 1 year after the final termination (i) of any Proceeding
(including any rights of appeal) then pending in respect of which the Indemnitee requests
indemnification or advancement of Expenses hereunder and (ii) of any judicial proceeding or
arbitration pursuant to Section 4 of this Agreement (including any rights of appeal) involving the
Indemnitee. This Agreement shall be binding upon the Company and its successors and assigns and
shall inure to the benefit of the Indemnitee and his heirs, executors and administrators.
8
6. Non-exclusivity, Etc. The rights of indemnification and to receive payment of
Expenses, on a current basis, as provided by this Agreement shall not be deemed exclusive of any
other rights to which the Indemnitee may at any time be entitled under applicable law, the
Companys or any other Enterprises certificate of incorporation, the Companys or any other
Enterprises Bylaws, any agreement, a vote of stockholders or a resolution of directors, or
otherwise.
No amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or
restrict any right of the Indemnitee under this Agreement in respect to any action taken or omitted
by such Indemnitee prior to such amendment, alteration or repeal.
To the extent that a change in Delaware law, whether by statute or judicial decision, permits
greater indemnification or advancement of Expenses than would be afforded currently under the
Companys or any other Enterprises Bylaws and this Agreement, it is the intent of the parties
hereto that the Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such
change. No right or remedy herein conferred is intended to be exclusive of any other right or
remedy, and every other right and remedy shall be cumulative and in addition to every other right
and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The
assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the
concurrent assertion or employment of any other right or remedy.
7. Liability Insurance. To the extent that the Company maintains an insurance
policy or policies providing liability insurance for directors, partners, managing members,
officers, employees, agents or trustees of the Company or of any other Enterprise, the Indemnitee
shall be covered by such policy or policies in accordance with its or their terms to the maximum
extent of the coverage available for any such director, partner, managing member, officer,
employee, agent or trustee under such policy or policies.
If, at the time of the receipt of a notice of a claim pursuant to Section 2 hereof, the
Company has director and officer liability insurance in effect, the Company shall give prompt
notice of the commencement of such Proceeding to the insurers in accordance with the procedures set
forth in the respective policies. The Company shall thereafter take all necessary or desirable
action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result
of such Proceeding in accordance with the terms of such policies. The Company shall maintain an
insurance policy or policies for directors, partners, managing members, officers, employees, agents
or trustees of the Company and of all Enterprises in an amount reasonably acceptable to the Chief
Executive Officer of the Company.
8. Amendments, Etc. No supplement, modification or amendment of this Agreement
shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the
provisions of this Agreement shall constitute a waiver of any other provisions hereof (whether or
not similar) nor shall such waiver constitute a continuing waiver.
9. Subrogation. Subject to Section 11(b) of this Agreement, in the event of
payment under this Agreement, the Company shall be subrogated to the extent of such payment to all
of the rights of recovery of the Indemnitee, who shall execute all such papers and do all such
things as may be necessary or desirable to secure such rights.
10. No Duplication of Payments. Subject to Section 11(b) of this Agreement, the
Company shall not be liable under this Agreement to make any payment in connection with any
9
Proceeding involving the Indemnitee to the extent the Indemnitee has otherwise received
payment (under any insurance policy, the Companys certificate of incorporation or by-laws or
otherwise) of the amounts otherwise indemnifiable hereunder.
11. Contribution; Jointly Indemnifiable Claims.
(a) To the fullest extent permissible under applicable law, if the indemnification
provided for in this Agreement is unavailable to the Indemnitee for any reason whatsoever, the
Company, in lieu of indemnifying the Indemnitee, shall contribute to the amount incurred by the
Indemnitee, whether for judgments, fines, penalties, excise taxes, amounts paid or to be paid in
settlement and/or for Expenses, in connection with any claim relating to an Indemnifiable Matter
under this Agreement, in such proportion in order to reflect (i) the relative benefits received by
the Company and the Indemnitee as a result of the event(s) and/or transaction(s) giving cause to
such Proceeding; and/or (ii) the relative fault of the Company (and its directors, officer,
employees and agents) and the Indemnitee in connection with such event(s) and/or transaction(s).
(b) Given that certain Jointly Indemnifiable Claims may arise, the Company
acknowledges and agrees that the Company shall be fully and primarily responsible for the payment
to the Indemnitee in respect of indemnification or advancement of Expenses in connection with any
such Jointly Indemnifiable Claim, whether Indemnitees right to indemnification or advancement
arises, pursuant to and in accordance with (as applicable) the terms of (i) the Delaware General
Corporation Law, (ii) the Amended and Restated Certificate of Incorporation and the By-Laws of the
Company, (iii) this Agreement, (iv) any other agreement between either Company or any other
Enterprise and the Indemnitee pursuant to which the Indemnitee is indemnified, (v) the laws of the
jurisdiction of incorporation or organization of any other Enterprise and/or (vi) the certificate
of incorporation, certificate of organization, bylaws, partnership agreement, operating agreement,
certificate of formation, certificate of limited partnership or other organizational or governing
documents of any other Enterprise ((i) through (vi) collectively, the Indemnification
Sources), without regard to any right of recovery the Indemnitee may have from the
Indemnitee-Related Entities. Under no circumstance shall either Company or any other Enterprise be
entitled to any right of subrogation or contribution from the Indemnitee-Related Entities pursuant
to any right of indemnification Indemnitee has under a contract between Indemnitee and any
Indemnitee-Related Entities, and no right of indemnification or advancement of Expenses or any
other right of recovery the Indemnitee may have from the Indemnitee-Related Entities shall reduce
or otherwise alter the rights of the Indemnitee or the obligations of either Company or any other
Enterprise under the Indemnification Sources.
(c) In the event that any of the Indemnitee-Related Entities shall make any payment to the
Indemnitee in respect of indemnification or advancement of Expenses with respect to any Jointly
Indemnifiable Claim, (i) the Company shall, and to the extent applicable shall cause the other
Enterprises to, reimburse, indemnify and hold harmless each Indemnitee-Related Entity making such
payment to the extent of such payment promptly upon written demand from such Indemnitee-Related
Entity, (ii) to the extent not previously and fully reimbursed by the Company and/or any other
Enterprise pursuant to clause (i), the Indemnitee-Related Entity making such payment shall be
subrogated to the extent of the outstanding balance of such payment to all of the rights of
recovery of the Indemnitee against the Company and/or any other Enterprise, as applicable, and
(iii) Indemnitee shall execute all papers reasonably required and shall do all things that may be
reasonably necessary to secure such rights, including
10
the execution of such documents as may be necessary to enable the Indemnitee-Related Entities
effectively to bring suit to enforce such rights.
(d) The Company and Indemnitee agree that each of the Indemnitee-Related Entities shall be
third-party beneficiaries with respect to this Agreement entitled to enforce this Agreement as
though each such Indemnitee-Related Entity were a party to this Agreement. The Company shall cause
each of the other Enterprises to perform the terms and obligations of this Agreement as though each
such Enterprise was a party to this Agreement.
12. Joint and Several Liability. To the extent that both the Company and one or
more Enterprises are obligated to indemnify the Indemnitee, the Company shall be jointly and
severally obligated with such Enterprise(s) to indemnify the Indemnitee pursuant to the terms of
this Agreement.
13. Binding Effect, Etc. This Agreement shall be binding upon and inure to the benefit of and
be enforceable by the parties hereto and their respective successors, assigns, including, with
respect to the Company, any direct or indirect successor by purchase, merger, consolidation or
otherwise to all or substantially all of the business or assets of the Company, and including, with
respect to the Indemnitee, the Indemnitees estate, heirs and personal representatives. This
Agreement shall continue in effect regardless of whether the Indemnitee continues to serve as an
officer or director of the Company or of any other Enterprise.
14. Severability. If any provision or provisions of this Agreement shall be held to
be invalid, illegal or unenforceable for any reason whatsoever: (a) the validity, legality and
enforceability of the remaining provisions of this Agreement (including, without limitation, each
portion of any Section of this Agreement containing any such provision held to be invalid, illegal
or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be
affected or impaired thereby and shall remain enforceable to the fullest extent permitted by law;
(b) such provision or provisions shall be deemed reformed to the extent necessary to conform to
applicable law and to give the maximum effect to the intent of the parties hereto; and (c) to the
fullest extent possible, the provisions of this Agreement (including, without limitation, each
portion of any section of this Agreement containing any such provision held to be invalid, illegal
or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to
give effect to the intent manifested thereby.
15. Notices. All notices, requests, demands and other communications under this
Agreement shall be in writing and shall be deemed to have been duly given (a) if delivered by hand
and receipted for by the party to whom said notice or other communication shall have been directed,
or (b) mailed by certified or registered mail with postage prepaid, on the third business day after
the date on which it is so mailed:
(a) If to the Indemnitee, at the address indicated on the signature page of this
Agreement, or such other address as the Indemnitee shall provide in writing to the Company.
(b) If to the Company to: LPL Holdings, Inc., One Beacon Street, 22nd Floor, Boston,
MA 02108, Attn: Secretary (or, if the Indemnitee is at such time the Secretary, to the President of
the Company).
16. Governing Law. This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of Delaware applicable to contracts made and to be performed
in such state without giving effect to the principles of conflicts of law.
11
17. References. References to statutes, regulations and documents shall be deemed to
mean such statutes, regulations and documents as amended from time to time and any successor
statutes, regulations and documents.
12
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed as of the day and year
first above written.
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed as of the day and year
first above written.
|
|
|
|
|
|
LPL INVESTMENT HOLDINGS INC.
|
|
|
By: |
|
|
|
|
Name: |
|
|
|
|
Title: |
|
|
|
exv10w19
Exhibit 10.19
LPL INVESTMENT
HOLDINGS INC.
2010 OMNIBUS EQUITY INCENTIVE PLAN
1. DEFINED TERMS
Exhibit A, which is incorporated by reference, defines the
terms used in the Plan and sets forth certain operational rules
related to those terms.
2. PURPOSE
The Plan has been established to advance the interests of the
Company by providing for the grant to Participants of Awards.
3. ADMINISTRATION
The Administrator has discretionary authority, subject only to
the express provisions of the Plan, to interpret the Plan;
determine eligibility for and grant Awards; determine, modify or
waive the terms and conditions of any Award; prescribe forms,
rules and procedures; and otherwise do all things necessary to
carry out the purposes of the Plan. Determinations of the
Administrator made under the Plan will be conclusive and will
bind all parties.
4. LIMITS ON AWARDS UNDER THE PLAN
(a) Number of Shares. At the
Effective Date, the maximum number of shares of Stock that may
be delivered in satisfaction of Awards under the Plan shall be:
(1) 12,055,945 shares of the Stock; plus
(2) any shares of Stock that become available for grant
under the Companys Existing Plans after the Effective Date
as a result of termination of awards under the Existing Plans;
provided, that such shares will not be available for issuance of
ISOs.
(b) ISO Shares; Adjustments to Maximum Available
Shares. The maximum number of shares of Stock
deliverable upon the exercise of ISOs is 10,000,000 Shares
of Stock that are subject to Awards that have been terminated,
cancelled or forfeited upon termination of Employment under
Section 6(a)(4) without becoming exercisable shall be
available again for future grant under the Plan. The number of
shares of Stock delivered in satisfaction of Awards shall be
determined net of shares of Stock withheld by the Company in
payment of the exercise price of the Award or in satisfaction of
tax withholding requirements with respect to the Award and, for
the avoidance of doubt, without including any shares of Stock
underlying Awards settled in cash or which otherwise expire or
become unexercisable without having been exercised or are
forfeited to or repurchased by the Company due to failure to
vest. The limits set forth in this Section 4(b) shall be
construed to comply with Section 422. To the extent
consistent with the requirements of Section 422 and with
other applicable legal requirements (including applicable stock
exchange requirements), Stock issued under awards of an acquired
company that are converted, replaced or adjusted in connection
with the acquisition shall not reduce the number of shares
available for delivery upon the exercise of Awards under the
Plan.
(c) Type of Shares. Stock
delivered by the Company under the Plan may be authorized but
unissued Stock or previously issued Stock acquired by the
Company. No fractional shares of Stock will be delivered under
the Plan.
(d) Section 162(m)
Limits. The maximum number of shares of Stock
for which Stock Options may be granted to any person in a
calendar year and the maximum number of shares of Stock subject
to SARs granted to any person in any calendar year will each be
400,000. The maximum number of shares subject to other Awards
granted to any person in any calendar year will be
100,000 shares. The maximum amount payable to any person in
any year under Cash Awards will be $5,000,000. The foregoing
provision will be construed in a manner consistent with
Section 162(m).
5. ELIGIBILITY AND PARTICIPATION
The Administrator will select Participants from among those key
Employees, registered representatives and directors of, and
consultants and advisors to, the Company or its Affiliates who,
in the opinion of the Administrator, are in a position to make a
significant contribution to the success of the Company and its
Affiliates; provided, that, subject to such express
exceptions, if any, as the Administrator may establish,
eligibility shall be further limited to those persons as to whom
the use of a
Form S-8
registration statement is permissible. Eligibility for ISOs is
limited to employees of the Company or of a parent
corporation or subsidiary corporation of the
Company as those terms are defined in Section 424 of the
Code. Eligibility for Awards other than ISOs are limited to
individuals described in the first sentence of this
Section 5 who are providing direct services on the date of
grant of the Award to the Company or to a subsidiary of the
Company that would be described in the first sentence of Treas.
Regs. 1.409A-1(b)(5)(iii)(E).
6. RULES APPLICABLE TO AWARDS
(a) All Awards
(1) Award Provisions. The
Administrator will determine the terms of all Awards, subject to
the limitations provided herein. By accepting (or, under such
rules as the Administrator may prescribe, being deemed to have
accepted) an Award, the Participant agrees to the terms of the
Award and the Plan. Notwithstanding any provision of this Plan
to the contrary, awards of an acquired company that are
converted, replaced or adjusted in connection with the
acquisition may contain terms and conditions that are
inconsistent with the terms and conditions specified herein, as
determined by the Administrator.
(2) Term of Plan. No Awards may be
made after the date that is one day before the
10th anniversary of the Effective Date, but previously
granted Awards may continue beyond that date in accordance with
their terms.
(3) Transferability. Neither ISOs
nor, except as the Administrator otherwise expressly provides in
accordance with the second sentence of this
Section 6(a)(3), Awards that are not ISOs may be
transferred other than by will or by the laws of descent and
distribution, and during a Participants lifetime ISOs
(and, except as the Administrator otherwise expressly provides
in accordance with the second sentence of this
Section 6(a)(3), other Awards requiring exercise that are
not ISOs) may be exercised only by the Participant. The
Administrator may permit Awards that are not ISOs, but not
Awards that are ISOs, to be transferred by gift, subject to such
limitations as the Administrator may impose.
(4) Vesting, etc. The
Administrator may determine the time or times at which an Award
will vest or become exercisable and the terms on which an Award
requiring exercise will remain exercisable. Without limiting the
foregoing, the Administrator may at any time accelerate the
vesting or exercisability of an Award, regardless of any adverse
or potentially adverse tax consequences resulting from such
acceleration. Unless the Administrator expressly provides
otherwise, however, the following rules will apply:
(A) Immediately upon the cessation of the
Participants Employment, each Award requiring exercise
that is then held by the Participant or by the
Participants permitted transferees, if any, will cease to
be exercisable and will terminate, except to the extent
otherwise provided in (B), (C), (D) or (E) below, and
all other Awards that are then held by the Participant or by the
Participants permitted transferees, if any, to the extent
not already vested will be forfeited.
(B) Subject to (C), (D) and (E) below, all Stock
Options and SARs held by the Participant or the
Participants permitted transferees, if any, immediately
prior to the cessation of the Participants Employment, to
the extent then exercisable, will remain exercisable for the
lesser of (i) a period of 90 days or (ii) the
period ending on the latest date on which such Stock Option or
SAR could have been exercised without regard to this
Section 6(a)(4), and will thereupon terminate;
(C) All Stock Options and SARs held by a Participant or the
Participants permitted transferees, if any, immediately
prior to the Participants death or total and permanent
disability (as determined by the Administrator in its sole
discretion), to the extent then exercisable, will remain
exercisable for the lesser of (i) the one year period
ending with the first anniversary of the Participants
death or the date on which the Participant becomes so disabled
or (ii) the period ending on the latest date on which such
Stock Option or SAR could have been exercised without regard to
this Section 6(a)(4), and will thereupon terminate;
(D) All Stock Options and SARs held by a Participant or the
Participants permitted transferees, if any, immediately
prior to the Participants Retirement, to the extent then
exercisable will remain exercisable for the lesser of (i) a
period of two years or (ii) the period ending on the latest
date on which such Stock Option could have been exercised
without regard to this Section 6(a)(4), and will thereupon
terminate; provided that all Stock Options and SARs will
terminate immediately in the event the Board determines that the
Participant is (i) not in compliance with any
non-competition or non-solicitation or non-disclosure agreement
with the Company, or (ii) if no such agreement exists,
engages in Competitive Activity, within twelve (12) months
following the Participants Retirement in violation of a
Participants Award agreement; and
(E) All Stock Options and SARs held by a Participant or the
Participants permitted transferees, if any, immediately
prior to the cessation of the Participants Employment will
immediately terminate upon such cessation if the Administrator
in its sole discretion determines that such cessation of
Employment is for Cause.
(5) Competitive Activity. The
Administrator may cancel, rescind, withhold or otherwise limit
or restrict any Award at any time if the Participant is not in
compliance with all applicable provisions of the Award agreement
and the Plan, or if the Participant breaches any agreement with
the Company or its Affiliates with respect to non-competition,
non-solicitation or confidentiality.
(6) Taxes. The delivery, vesting
or retention of Stock under an Award is conditioned upon full
satisfaction by the Participant of all tax withholding
requirements with respect to the Award. The Administrator will
make such provision for the withholding and payment of taxes as
it deems necessary. Such taxes shall be remitted to the Company
by cash or check acceptable to the Administrator or by other
means acceptable to the Administrator. In particular, but not in
limitation of the foregoing, the Administrator may, but need
not, hold back shares of Stock from an Award or permit a
Participant to tender previously owned shares of Stock in
satisfaction of tax withholding requirements (but not in excess
of the minimum withholding required by law).
(7) Dividend Equivalents, Etc. The
Administrator may in its sole discretion provide for the payment
of amounts in lieu of cash dividends or other cash distributions
with respect to Stock subject to an Award whether or not the
holder of such Award is otherwise entitled to share in the
actual dividend or distribution in respect of such Award. Any
payment of dividend equivalents or similar payments shall be
established and administered consistent either with exemption
from, or in compliance with, the requirements of
Section 409A. In addition, any amounts payable in respect
of Restricted Stock or Restricted Stock Units may be subject to
such limits or restrictions as the Administrator may impose.
(8) Rights Limited. Nothing in the
Plan will be construed as giving any person the right to
continued employment or service with the Company or its
Affiliates, or any rights as a stockholder except as to shares
of Stock actually issued under the Plan. The loss of existing or
potential profit in Awards will not constitute an element of
damages in the event of termination of Employment for any
reason, even if the termination is in violation of an obligation
of the Company or any Affiliate to the Participant.
(9) Section 162(m). This
Section 6(a)(9) applies to any Performance Award intended
to qualify as performance-based for the purposes of
Section 162(m) other than a Stock Option or SAR. In the
case of any Performance Award to which this Section 6(a)(9)
applies, the Plan and
such Award will be construed to the maximum extent permitted by
law in a manner consistent with qualifying the Award for such
exception. With respect to such Performance Awards, the
Administrator will pre-establish, in writing, one or more
specific Performance Criteria no later than 90 days after
the commencement of the period of service to which the
performance relates (or at such earlier time as is required to
qualify the Award as performance-based under
Section 162(m)). Prior to grant, vesting or payment of the
Performance Award, as the case may be, the Administrator will
certify whether the applicable Performance Criteria have been
attained and such determination will be final and conclusive. No
Performance Award to which this Section 6(a)(9) applies may
be granted after the first meeting of the stockholders of the
Company held in 2015 until the listed performance measures set
forth in the definition of Performance Criteria (as
originally approved or as subsequently amended) have been
resubmitted to and reapproved by the stockholders of the Company
in accordance with the requirements of Section 162(m) of
the Code, unless such grant is made contingent upon such
approval.
(10) Coordination with Other
Plans. Awards under the Plan may be granted
in tandem with, or in satisfaction of or substitution for, other
awards made under other compensatory plans or programs of the
Company or its Affiliates. For example, but without limiting the
generality of the foregoing, awards under other compensatory
plans or programs of the Company or its Affiliates may be
settled in Stock (including, without limitation, Unrestricted
Stock) if the Administrator so determines, in which case the
shares delivered shall be treated as awarded under the Plan (and
shall reduce the number of shares thereafter available under the
Plan in accordance with the rules set forth in Section 4).
In any case where an award is made under another plan or program
of the Company or its Affiliates and such award is intended to
qualify for the performance-based compensation exception under
Section 162(m), and such award is settled by the delivery
of Stock or another Award under the Plan, the applicable
Section 162(m) limitations under both the other plan or
program and under the Plan shall be applied to the Plan as
necessary (as determined by the Administrator) to preserve the
availability of the Section 162(m) performance-based
compensation exception with respect thereto.
(11) Section 409A. Each Award
shall contain such terms as the Administrator determines, and
shall be construed and administered, such that the Award either
(i) qualifies for an exemption from the requirements of
Section 409A to the extent applicable, or
(ii) satisfies such requirements.
(12) Certain Requirements of Corporate
Law. Awards shall be granted and administered
consistent with the requirements of applicable Delaware law
relating to the issuance of stock and the consideration to be
received therefor, and with the applicable requirements of the
stock exchanges or other trading systems on which the Stock is
listed or entered for trading, in each case as determined by the
Administrator.
(b) Awards Requiring Exercise.
(1) Time And Manner Of
Exercise. Unless the Administrator expressly
provides otherwise, an Award requiring exercise will not be
deemed to have been exercised until the Administrator receives a
notice of exercise (in form acceptable to the Administrator),
which may be an electronic notice, signed (including electronic
signature in form acceptable to the Administrator) by the
appropriate person and accompanied by any payment required under
the Award. If the Award is exercised by any person other than
the Participant, the Administrator may require satisfactory
evidence that the person exercising the Award has the right to
do so.
(2) Exercise Price. The exercise
price (or the base value from which appreciation is to be
measured) of each Award requiring exercise shall be 100% (in the
case of an ISO granted to a ten-percent shareholder within the
meaning of subsection (b)(6) of Section 422, 110%) of the
fair market value of the Stock subject to the Award, determined
as of the date of grant, or such other amount as the
Administrator may determine in connection with the grant. No
such Award, once granted, may be repriced other than in
accordance with the terms of Section 9 below and
stockholder approval requirements of the New York Stock
Exchange, as applicable. Fair market value shall be determined
by the Administrator consistent with the applicable requirements
of Section 422 and Section 409A.
(3) Payment Of Exercise
Price. Where the exercise of an Award is to
be accompanied by payment, payment of the exercise price shall
be by cash or check acceptable to the Administrator, or, if so
permitted by the Administrator and if legally permissible,
(i) through the delivery of unrestricted shares of Stock
that have been outstanding for at least six months (unless the
Administrator approves a shorter period) and that have a fair
market value equal to the exercise price, (ii) through a
broker-assisted exercise program acceptable to the
Administrator, (iii) through the withholding of shares of
Stock otherwise to be delivered upon exercise of the Award whose
Fair Market Value is equal to the aggregate exercise price of
the Award being exercised, (iv) by other means acceptable
to the Administrator, or (v) by any combination of the
foregoing permissible forms of payment. No Award requiring
exercise or portion thereof may be exercised unless, at the time
of exercise, the fair market value of the shares of Stock
subject to such Award or portion thereof exceeds the exercise
price for the Award or such portion. The delivery of shares in
payment of the exercise price under clause (i) above may be
accomplished either by actual delivery or by constructive
delivery through attestation of ownership, subject to such rules
as the Administrator may prescribe.
(4) Maximum Term. Awards requiring
exercise will have a maximum term not to exceed ten
(10) years from the date of grant (five (5) years from
the date of grant in the case of an ISO granted to a ten-percent
shareholder within the meaning of subsection (b)(6) of
Section 422) from the date of grant.
7. EFFECT OF CERTAIN TRANSACTIONS
(a) Mergers, etc. Except as
otherwise provided in an Award, the Administrator shall, in its
sole discretion, determine the effect of a Covered Transaction
on Awards, which determination may include, but is not limited
to, taking the following actions:
(1) Assumption or Substitution. If
the Covered Transaction is one in which there is an acquiring or
surviving entity, the Administrator may provide for the
assumption or continuation of some or all outstanding Awards or
for the grant of new awards in substitution therefor by the
acquiror or survivor or an affiliate of the acquiror or survivor.
(2) Cash-Out of Awards. If the
Covered Transaction is one in which holders of Stock will
receive upon consummation a payment (whether cash, non-cash or a
combination of the foregoing), then subject to
Section 7(a)(5) below the Administrator may provide for
payment (a cash-out), with respect to some or all
Awards or any portion thereof, equal in the case of each
affected Award or portion thereof to the excess, if any, of
(A) the fair market value of one share of Stock times the
number of shares of Stock subject to the Award or such portion,
over (B) the aggregate exercise or purchase price, if any,
under the Award or such portion (in the case of an SAR, the
aggregate base value above which appreciation is measured), in
each case on such payment terms (which need not be the same as
the terms of payment to holders of Stock) and other terms, and
subject to such conditions, as the Administrator determines;
provided, that the Administrator shall not exercise its
discretion under this Section 7(a)(2) with respect to an
Award or portion thereof providing for nonqualified
deferred compensation subject to Section 409A in a
manner that would constitute an extension or acceleration of, or
other change in, payment terms if such change would be
inconsistent with the applicable requirements of
Section 409A.
(3) Acceleration of Certain
Awards. If the Covered Transaction (whether
or not there is an acquiring or surviving entity) is one in
which there is no assumption, substitution or cash-out, then
subject to Section 7(a)(5) below the Administrator may
provide that each Award will become fully exercisable and the
delivery of any shares of Stock remaining deliverable under each
outstanding Award of Stock Units (including Restricted Stock
Units and Performance Awards to the extent consisting of Stock
Units) will be accelerated and such shares will be delivered,
prior to the Covered Transaction, in each case on a basis that
gives the holder of the Award a reasonable opportunity, as
determined by the Administrator, following exercise of the Award
or the delivery of the shares, as the case may be, to
participate as a stockholder in the Covered Transaction;
provided, that to the extent acceleration pursuant to this
Section 7(a)(3) of an Award subject to Section 409A
would cause the Award to fail to satisfy the requirements of
Section 409A, the
Award shall not be accelerated and the Administrator in lieu
thereof shall take such steps as are necessary to ensure that
payment of the Award is made in a medium other than Stock and on
terms that as nearly as possible, but taking into account
adjustments required or permitted by this Section 7,
replicate the prior terms of the Award.
(4) Termination of Awards Upon Consummation of
Covered Transaction. Each Award will
terminate upon consummation of the Covered Transaction, other
than the following: (i) Awards assumed pursuant to
Section 7(a)(1) above; (ii) Awards converted pursuant
to the proviso in Section 7(a)(3) above into an ongoing
right to receive payment other than Stock, and
(iii) outstanding shares of Restricted Stock (which will be
treated in the same manner as other shares of Stock, subject to
Section 7(a)(5) below).
(5) Additional Limitations. Any
share of Stock and any cash or other property delivered pursuant
to Section 7(a)(2) or Section 7(a)(3) above with
respect to an Award may, in the discretion of the Administrator,
contain such restrictions, if any, as the Administrator deems
appropriate to reflect any performance or other vesting
conditions to which the Award was subject and that did not lapse
(and were not satisfied) in connection with the Covered
Transaction. For purposes of the immediately preceding sentence,
a cash-out under Section 7(a)(2) above or the acceleration
of exercisability of an Award under Section 7(a)(3) above
shall not, in and of itself, be treated as the lapsing (or
satisfaction) of a performance or other vesting condition. In
the case of Restricted Stock that does not vest in connection
with the Covered Transaction, the Administrator may require that
any amounts delivered, exchanged or otherwise paid in respect of
such Stock in connection with the Covered Transaction be placed
in escrow or otherwise made subject to such restrictions as the
Administrator deems appropriate to carry out the intent of the
Plan.
(b) Changes in and Distributions With Respect to
Stock
(1) Basic Adjustment
Provisions. In the event of a stock dividend,
stock split or combination of shares (including a reverse stock
split), recapitalization or other change in the Companys
capital structure, the Administrator shall make appropriate
adjustments to the maximum number of shares specified in
Section 4(a) that may be delivered under the Plan and to
maximum share limits described in Section 4(d), and will
also make appropriate adjustments to the number and kind of
shares of stock or securities subject to Awards then outstanding
or subsequently granted, any exercise prices relating to Awards
and any other provision of Awards affected by such change.
(2) Certain Other Adjustments. The
Administrator may also make adjustments of the type described in
Section 7(b)(1) above to take into account distributions to
stockholders other than those provided for in Section 7(a)
and 7(b)(1), or any other event, if the Administrator determines
that adjustments are appropriate to avoid distortion in the
operation of the Plan and to preserve the value of Awards made
hereunder, having due regard for the qualification of ISOs under
Section 422 and the requirements of Section 409A and
for the performance-based compensation rules of
Section 162(m), where applicable.
(3) Continuing Application of Plan
Terms. References in the Plan to shares of
Stock will be construed to include any stock or securities
resulting from an adjustment pursuant to this Section 7.
8. LEGAL CONDITIONS ON DELIVERY OF STOCK
The Company will use commercially reasonable efforts to satisfy
applicable legal requirements for the issuance of shares of
Stock pursuant to the exercise of any Award. The Company will
not be obligated to deliver any shares of Stock pursuant to the
Plan or to remove any restriction from shares of Stock
previously delivered under the Plan until: (i) the Company
is satisfied that all legal matters in connection with the
issuance and delivery of such shares have been addressed and
resolved; (ii) if the outstanding Stock is at the time of
delivery listed on any stock exchange or national market system,
the shares to be delivered have been listed or authorized to be
listed on such exchange or system upon official notice of
issuance; and (iii) all conditions of the Award have been
satisfied or waived. If the sale of Stock has not been
registered under the Securities Act of 1933, as amended,
the Company may require, as a condition to exercise of the
Award, such representations or agreements as counsel for the
Company may consider appropriate to avoid violation of such Act.
The Company may require that certificates evidencing Stock
issued under the Plan bear an appropriate legend reflecting any
restriction on transfer applicable to such Stock, and the
Company may hold the certificates pending lapse of the
applicable restrictions.
9. AMENDMENT AND TERMINATION
The Administrator may at any time or times amend the Plan or any
outstanding Award for any purpose which may at the time be
permitted by law, and may at any time terminate the Plan as to
any future grants of Awards; provided, that except as
otherwise expressly provided in the Plan the Administrator may
not, without the Participants consent, alter the terms of
a Award so as to affect materially and adversely the
Participants rights under the Award, unless the
Administrator expressly reserved the right to do so at the time
the Award was granted. In furtherance of the foregoing, the
Administrator may, without stockholder approval, amend any
outstanding Award requiring exercise to provide an exercise
price (or base value, in the case of an SAR) per share that is
lower than the then-current exercise price (or base value) per
share of such outstanding Award (but not lower than the exercise
price or base value at which a new Award of the same type could
be granted on the date of such amendment). The Board may also,
without stockholder approval, cancel any outstanding award
(whether or not granted under the Plan) and grant in
substitution therefor new Awards under the Plan covering the
same or a different number of shares of Common Stock, including,
in the case of an Award requiring exercise, a new Award having
an exercise price (or base value, in the case of an SAR) per
share lower than the then-current exercise price (or base value,
in the case of an SAR) per share of the cancelled award, subject
to the requirements of Section 6(b)(2) above. Any
amendments to the Plan shall be conditioned upon stockholder
approval only to the extent, if any, such approval is required
by law (including the Code and applicable stock exchange
requirements), as determined by the Administrator.
10. OTHER COMPENSATION ARRANGEMENTS
The existence of the Plan or the grant of any Award will not in
any way affect the Companys right to award a person
bonuses or other compensation in addition to Awards under the
Plan.
11. MISCELLANEOUS
(a) Waiver of Jury Trial. By
accepting an Award under the Plan, each Participant waives any
right to a trial by jury in any action, proceeding or
counterclaim concerning any rights under the Plan and any Award,
or under any amendment, waiver, consent, instrument, document or
other agreement delivered or which in the future may be
delivered in connection therewith, and agrees that any such
action, proceedings or counterclaim shall be tried before a
court and not before a jury. By accepting an Award under the
Plan, each Participant certifies that no officer,
representative, or attorney of the Company has represented,
expressly or otherwise, that the Company would not, in the event
of any action, proceeding or counterclaim, seek to enforce the
foregoing waivers.
(b) Limitation of
Liability. Notwithstanding anything to the
contrary in the Plan, neither the Company, nor any Affiliate,
nor the Administrator, nor any person acting on behalf of the
Company, any Affiliate, or the Administrator, shall be liable to
any Participant or to the estate or beneficiary of any
Participant or to any other holder of an Award by reason of any
acceleration of income, or any additional tax (including any
interest and penalties), asserted by reason of the failure of an
Award to satisfy the requirements of Section 422 or
Section 409A or by reason of Section 4999 of the Code,
or otherwise asserted with respect to the Award; provided, that
nothing in this Section 11(b) shall limit the ability of
the Administrator or the Company, in its discretion, to provide
by separate express written agreement with a Participant for a
gross-up
payment or other payment in connection with any such
acceleration of income or additional tax.
(c) Rule 16b-3. During
any time when the Company has a class of equity security
registered under Section 12 of the Exchange Act, it is the
intent of the Company that Awards pursuant to the Plan and the
exercise of any Awards granted hereunder that would otherwise be
subject to Section 16(b) of the Exchange Act will qualify
for exemption provided by
Rule 16b-3
under the
Exchange Act. To the extent that any provision of the Plan or
action by the Administrator does not comply with the
requirements of
Rule 16b-3,
it shall be deemed inoperative with respect to such Awards to
the extent permitted by law and deemed advisable by the
Administrator, and shall not affect the validity of the Plan. In
the event that
Rule 16b-3
is revised or replaced, the Administrator may exercise its
discretion to modify this Plan in any respect necessary to
satisfy the requirements of, or to take advantage of any
features of, the revised exemption or its replacement.
12. ESTABLISHMENT OF
SUB-PLANS
The Board may from time to time establish one or more
sub-plans
under the Plan for purposes of satisfying applicable blue sky,
securities or tax laws of various jurisdictions. The Board shall
establish such
sub-plans by
adopting supplements to the Plan setting forth (i) such
limitations on the Administrators discretion under the
Plan as the Board deems necessary or desirable and
(ii) such additional terms and conditions not otherwise
inconsistent with the Plan as the Board shall deem necessary or
desirable. All supplements adopted by the Board shall be deemed
to be part of the Plan, but each supplement shall apply only to
Participants within the affected jurisdiction and the Company
shall not be required to provide copies of any supplement to
Participants in any jurisdiction that is not affected.
13. GOVERNING LAW
Except as otherwise provided by the express terms of an Award
agreement or under a
sub-plan
described in Section 12, the provisions of the Plan and of
Awards under the Plan and all claims or disputes arising out of
our based upon the Plan or any Award under the Plan or relating
to the subject matter hereof or thereof will be governed by and
construed in accordance with the domestic substantive laws of
the State of Delaware without giving effect to any choice or
conflict of laws provision or rule that would cause the
application of the domestic substantive laws of any other
jurisdiction.
EXHIBIT A
Definition of
Terms
The following terms, when used in the Plan, will have the
meanings and be subject to the provisions set forth below:
Administrator: The Compensation
Committee, except that the Compensation Committee may delegate
(i) to one or more of its members (or one or more other
members of the Board) such of its duties, powers and
responsibilities as it may determine; (ii) to one or more
officers of the Company the power to grant rights or options to
the extent permitted by Section 157(c) of the Delaware
General Corporation Law; and (iii) to such Employees or
other persons as it determines such ministerial tasks as it
deems appropriate. In the event of any delegation described in
the preceding sentence, the term Administrator shall
include the person or persons so delegated to the extent of such
delegation.
Affiliate: Any corporation or
other entity that stands in a relationship to the Company that
would result in the Company and such corporation or other entity
being treated as one employer under Section 414(b) and
Section 414(c) of the Code, except that in determining
eligibility for the grant of an Award by reason of service for
an Affiliate, Sections 414(b) and 414(c) of the Code shall
be applied by substituting at least 50% for at
least 80% under Section 1563(a)(1), (2) and
(3) of the Code and Treas. Regs. § 1.414(c)-2;
provided, that to the extent permitted under
Section 409A, at least 20% shall be used in
lieu of at least 50%; and further provided,
that the lower ownership threshold described in this definition
(50% or 20% as the case may be) shall apply only if the same
definition of affiliation is used consistently with respect to
all compensatory stock options or stock awards (whether under
the Plan or another plan). The Company may at any time by
amendment provide that different ownership thresholds
(consistent with Section 409A) apply but any such change
shall not be effective for twelve (12) months.
Award: Any or a combination of the
following:
(i) Stock Options.
(ii) SARs.
(iii) Restricted Stock
(iv) Unrestricted Stock.
(v) Stock Units, including Restricted Stock Units.
(vi) Performance Awards.
(vii) Cash Awards.
(viii) Awards (other than Awards described in
(i) through (vi) above) that are convertible into or
otherwise based on Stock.
Board: The Board of Directors of
the Company.
Cash Award: An Award denominated
in cash.
Cause: In the case of any
Participant, unless a defined term cause is set
forth in a Participants Award or employment agreement in
which case such definition shall govern, a termination by the
Company or an affiliate of the Participants Employment or
a termination by the Participant of the Participants
Employment, in either case following the occurrence of any of
the following events: (i) the Participants willful
and continued failure to perform, or gross negligence or willful
misconduct in the performance of, his or her material duties
with respect to the Company or an Affiliate which, if curable,
continues beyond ten business days after a written demand for
substantial performance is delivered to the Participant by the
Company; or (ii) Participants conviction of, or a
plea of nolo contendere to, a crime constituting a felony under
the laws of the United States or any state thereof;
(iii) the Participants committing or engaging in any
act of fraud, embezzlement, theft or other act of dishonesty
against the Company or its subsidiaries that causes material
injury, monetarily or otherwise, to the Company or an Affiliate;
or (iv) the Participants breach of his or her
noncompetition
or nonsolicitation obligations in any agreement with the Company
that causes material injury, monetarily or otherwise, to the
Company or an Affiliate.
Code: The U.S. Internal
Revenue Code of 1986 as from time to time amended and in effect,
or any successor statute as from time to time in effect.
Company: LPL Investment Holdings
Inc.
Compensation Committee: The
Compensation and Human Resources Committee of the Board.
Competitive Activity: engaging,
directly or indirectly, alone or as principal, agent, employee,
employer, consultant, investor, partner or manager, or providing
advisory or other services to, or owning any stock or any other
ownership interest in, or making any financial investment in any
business (or entity) that engages in any business in which the
Company and its subsidiaries are engaged, or that provides any
material products
and/or
services that the Company or its subsidiaries were actively
developing or designing (provided that where such Competitive
Activity occurs following termination of Employment, the
Competitive Activity shall be determined at the date of
termination); provided, that the foregoing shall not restrict
the Participant from owning less than two percent (2%) of the
outstanding securities of any class of securities listed on a
national exchange or inter-dealer quotation system.
Covered Transaction: Any of
(i) a consolidation, merger, or similar transaction or
series of related transactions, including a sale or other
disposition of stock, in which the Company is not the surviving
corporation or which results in the acquisition of all or
substantially all of the Companys then outstanding common
stock by a single person or entity or by a group of persons
and/or
entities acting in concert, in each case by other than an
Affiliate (ii) a sale or transfer of all or substantially all
the Companys assets, or (iii) a dissolution or
liquidation of the Company. Where a Covered Transaction involves
a tender offer that is reasonably expected to be followed by a
merger described in clause (i) (as determined by the
Administrator), the Covered Transaction will be deemed to have
occurred upon consummation of the tender offer.
Effective Date: The date on which
the initial public offering of LPL becomes effective within the
meaning of the Securities Act of 1933.
Employee: Any person who is
employed by the Company or an Affiliate.
Employment: A Participants
employment or other service relationship with the Company and
its Affiliates. Employment will be deemed to continue, unless
the Administrator expressly provides otherwise, so long as the
Participant is employed by, or otherwise is providing services
in a capacity described in Section 5 to the Company or its
Affiliates. If a Participants employment or other service
relationship is with an Affiliate and that entity ceases to be
an Affiliate, the Participants Employment will be deemed
to have terminated when the entity ceases to be an Affiliate
unless the Participant transfers Employment to the Company or
its remaining Affiliates. Notwithstanding the foregoing, in
construing the provisions of any Award relating to the payment
of nonqualified deferred compensation (subject to
Section 409A) upon a termination or cessation of
Employment, references to termination or cessation of
employment, separation from service, retirement or similar or
correlative terms shall be construed to require a
separation from service (as that term is defined in
Section 1.409A-1(h)
of the Treasury Regulations) from the Company and from all other
corporations and trades or businesses, if any, that would be
treated as a single service recipient with the
Company under
Section 1.409A-1(h)(3)
of the Treasury Regulations. The Company may, but need not,
elect in writing, subject to the applicable limitations under
Section 409A, any of the special elective rules prescribed
in
Section 1.409A-1(h)
of the Treasury Regulations for purposes of determining whether
a separation from service has occurred. Any such
written election shall be deemed a part of the Plan.
Exchange Act: The Securities
Exchange Act of 1934, as from time to time amended and in
effect, or any successor statute as from time to time in effect.
Existing Plans: LPL Investment
Holdings Inc. 2005 Stock Option Plan for Non-Qualified Stock
Options; LPL Investment Holdings Inc. 2005 Stock Option Plan for
Incentive Stock Options; LPL
Investment Holdings Inc. 2008 Stock Option Plan; and LPL
Investment Holdings Inc. Advisor Incentive Plan.
ISO: A Stock Option intended to be
an incentive stock option within the meaning of
Section 422. Each option granted pursuant to the Plan will
be treated as providing by its terms that it is to be a
non-incentive stock option unless, as of the date of grant, it
is expressly designated as an ISO.
Participant: A person who is
granted an Award under the Plan.
Performance Award: An Award
subject to Performance Criteria. The Compensation Committee in
its discretion may grant Performance Awards that are intended to
qualify for the performance-based compensation exception under
Section 162(m) and Performance Awards that are not intended
so to qualify.
Performance Criteria: Specified
criteria, other than the mere continuation of Employment or the
mere passage of time, the satisfaction of which is a condition
for the grant, exercisability, vesting or full enjoyment of an
Award. For purposes of Awards that are intended to qualify for
the performance-based compensation exception under
Section 162(m), a Performance Criterion will mean an
objectively determinable measure of performance relating to any
or any combination of the following (measured either absolutely
or by reference to an index or indices and determined either on
a consolidated basis or, as the context permits, on a
divisional, subsidiary, line of business, project or
geographical basis or in combinations thereof): sales; revenues;
assets; expenses; earnings before or after deduction for all or
any portion of interest, taxes, depreciation, or amortization,
whether or not on a continuing operations or an aggregate or per
share basis; return on equity, investment, capital or assets;
one or more operating ratios; borrowing levels, leverage ratios
or credit rating; market share; capital expenditures; cash flow;
stock price; stockholder return; sales of particular products or
services; customer acquisition or retention; acquisitions and
divestitures (in whole or in part); joint ventures and strategic
alliances; spin-offs,
split-ups
and the like; reorganizations; or recapitalizations,
restructurings, financings (issuance of debt or equity) or
refinancings. A Performance Criterion and any targets with
respect thereto determined by the Administrator need not be
based upon an increase, a positive or improved result or
avoidance of loss. To the extent consistent with the
requirements for satisfying the performance-based compensation
exception under Section 162(m), the Administrator may
provide in the case of any Award intended to qualify for such
exception that one or more of the Performance Criteria
applicable to such Award will be adjusted in an objectively
determinable manner to reflect events (for example, but without
limitation, acquisitions or dispositions) occurring during the
performance period that affect the applicable Performance
Criterion or Criteria.
Plan: The LPL Investment Holdings
Inc. 2010 Omnibus Equity Incentive Plan as from time to time
amended and in effect.
Restricted Stock: Stock subject to
restrictions requiring that it be redelivered or offered for
sale to the Company if specified conditions are not satisfied.
Restricted Stock Unit: A Stock
Unit that is, or as to which the delivery of Stock or cash in
lieu of Stock is, subject to the satisfaction of specified
performance or other vesting conditions.
Retirement: Termination of
Employment other than for Cause following attainment of
age 65 and completion of five (5) years of continuous
service with the Company.
SAR: A right entitling the holder
upon exercise to receive an amount (payable in cash or in shares
of Stock of equivalent value) equal to the excess of the fair
market value of the shares of Stock subject to the right over
the base value from which appreciation under the SAR is to be
measured.
Section 162(m): Section 162(m)
of the Code.
Section 409A: Section 409A
of the Code.
Section 422: Section 422
of the Code.
Stock: Common Stock of the
Company, par value $0.001 per share.
Stock Option: An option entitling
the holder to acquire shares of Stock upon payment of the
exercise price.
Stock Unit: An unfunded and
unsecured promise, denominated in shares of Stock, to deliver
Stock or cash measured by the value of Stock in the future.
Unrestricted Stock: Stock not
subject to any restrictions under the terms of the Award.
exv23w1
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent
to the use in this Amendment No. 2 to Registration Statement No. 333-167325 of our
report dated March 9, 2010, (June 4, 2010 as to Note 16 and July 9, 2010 as to Note 22) relating to
the consolidated financial statements of LPL Investment Holdings Inc. (the Company) appearing in
the Prospectus, which is part of such Registration Statement. We consent to the incorporation by
reference in this Amendment No. 2 to Registration Statement No. 333-167325 of our report dated March
9, 2010, relating to the effectiveness of the Companys internal control over financial reporting
appearing in the Annual Report on Form 10-K of the Company for the year ended December 31, 2009,
which is part of such Registration Statement.
We also consent to the reference to us under the heading Experts in such Prospectus.
/s/ Deloitte &
Touche
LLP
Costa
Mesa, California
July 9, 2010