e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended September 30, 2010 |
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
to
Commission File Number: 000-52609
LPL Investment Holdings Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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20-3717839 |
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
One Beacon Street, Boston, MA 02108
(Address of Principal Executive Offices) (Zip Code)
(617) 423-3644
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such
files). o Yes o No
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):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). o Yes þ No
The number of shares of Common Stock, par value $0.001 per share, outstanding as of
October 20, 2010 was 94,249,753.90.
WHERE YOU CAN FIND MORE INFORMATION
We are required to file annual, quarterly and current reports and other information required
by the Securities Exchange Act of 1934, as amended, with the Securities and Exchange Commission, or
SEC. You may read and copy any document we file with the SEC at the SECs public reference room
located at 100 F Street, N.E., Washington, D.C. 20549, U.S.A. Please call the SEC at 1-800-SEC-0330
for further information on the public reference room. Our SEC filings are also available to the
public from the SECs internet site at http://www.sec.gov.
When we use the terms LPLIH, we, us, our, and the Company we mean LPL Investment
Holdings Inc., a Delaware corporation, and its consolidated subsidiaries, taken as a whole, unless
the context otherwise indicates.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q in Item 2 Managements Discussion and Analysis of
Financial Condition and Results of Operations and in other sections includes forward-looking
statements (regarding the Companys future financial condition, results of operations, business
strategy, financial needs and other similar matters) that involve risks and uncertainties.
Forward-looking statements can be identified by words such as anticipates, expects, believes,
plans, predicts, and similar terms. Forward-looking statements are not guarantees of future
performance and our actual results may differ significantly from the results discussed in the
forward-looking statements. 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 advisory and brokerage assets, effects of competition in the financial services industry,
changes in the number of our financial advisors and institutions 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 outlined
in Risk Factors in the Companys Registration Statement on Form S-1, filed on June 4, 2010, as
amended.
Although we believe the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, level of activity, performance or achievements. You
should not rely upon forward-looking statements as predictions of future events. We will not
undertake and we specifically disclaim any obligation to release publicly the result of any
revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or
to reflect the occurrence of events, whether or not anticipated. In that respect, we wish to
caution readers not to place undue reliance on any such forward-looking statements, which speak
only as of the date made.
ii
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
(Dollars in thousands, except per share data)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2010 |
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2009 |
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2010 |
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2009 |
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REVENUES: |
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Commissions |
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$ |
385,273 |
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$ |
370,249 |
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$ |
1,194,414 |
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$ |
1,084,900 |
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Advisory fees |
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212,344 |
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182,141 |
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633,820 |
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507,509 |
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Asset-based fees |
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81,599 |
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70,894 |
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230,485 |
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201,287 |
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Transaction and other fees |
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70,243 |
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68,764 |
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205,738 |
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191,711 |
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Interest income, net of operating interest expense |
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5,105 |
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4,992 |
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14,882 |
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15,379 |
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Other |
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5,400 |
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5,286 |
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14,192 |
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13,835 |
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Net revenues |
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759,964 |
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702,326 |
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2,293,531 |
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2,014,621 |
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EXPENSES: |
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Commissions and advisory fees |
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517,266 |
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472,960 |
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1,569,424 |
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1,363,583 |
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Compensation and benefits |
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74,627 |
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66,337 |
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223,024 |
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198,156 |
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Depreciation and amortization |
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19,772 |
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26,924 |
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67,472 |
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81,596 |
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Promotional |
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23,497 |
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24,492 |
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49,141 |
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50,108 |
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Professional services |
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14,683 |
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10,002 |
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37,950 |
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26,939 |
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Occupancy and equipment |
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12,979 |
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13,207 |
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36,742 |
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37,469 |
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Brokerage, clearing and exchange |
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8,362 |
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8,222 |
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25,944 |
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24,118 |
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Communications and data processing |
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7,693 |
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8,809 |
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24,509 |
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26,352 |
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Regulatory fees and expenses |
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6,038 |
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7,106 |
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18,715 |
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18,022 |
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Restructuring charges |
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1,863 |
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42,219 |
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10,434 |
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41,695 |
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Travel and entertainment |
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3,908 |
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2,171 |
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9,528 |
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6,269 |
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Other |
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3,750 |
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1,640 |
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11,801 |
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11,003 |
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Total operating expenses |
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694,438 |
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684,089 |
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2,084,684 |
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1,885,310 |
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Non-operating interest expense |
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19,511 |
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24,626 |
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71,530 |
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76,599 |
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Loss on extinguishment of debt |
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37,979 |
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Loss (gain) on equity method investment |
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3 |
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96 |
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(18 |
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264 |
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Total expenses |
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713,952 |
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708,811 |
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2,194,175 |
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1,962,173 |
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INCOME (LOSS) BEFORE PROVISION FOR (BENEFIT FROM)
INCOME TAXES |
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46,012 |
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(6,485 |
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99,356 |
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52,448 |
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PROVISION FOR (BENEFIT FROM) INCOME TAXES |
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19,868 |
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(5,029 |
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39,658 |
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23,526 |
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NET INCOME (LOSS) |
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$ |
26,144 |
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$ |
(1,456 |
) |
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$ |
59,698 |
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$ |
28,922 |
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EARNINGS (LOSS) PER SHARE (Note 12): |
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Basic |
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$ |
0.30 |
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$ |
(0.02 |
) |
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$ |
0.68 |
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$ |
0.33 |
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Diluted |
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$ |
0.26 |
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$ |
(0.02 |
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$ |
0.59 |
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$ |
0.29 |
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See notes to unaudited condensed consolidated financial statements.
1
LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition
(Unaudited)
(Dollars in thousands, except par value)
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September 30, |
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December 31, |
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2010 |
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2009 |
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ASSETS |
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Cash and cash equivalents |
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$ |
442,547 |
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$ |
378,594 |
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Cash and securities segregated under federal and other regulations |
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243,949 |
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288,608 |
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Receivables from: |
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Clients, net of allowance of $1,474 at September 30, 2010 and $792 at December 31, 2009 |
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274,598 |
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257,529 |
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Product sponsors, broker-dealers and clearing organizations |
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184,352 |
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171,900 |
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Others, net of allowances of $8,652 at September 30, 2010 and $6,159 at December 31, 2009 |
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159,128 |
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139,317 |
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Securities owned: |
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Trading(1) |
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18,561 |
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15,361 |
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Held-to-maturity |
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10,582 |
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10,454 |
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Securities borrowed |
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5,732 |
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4,950 |
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Fixed assets, net of accumulated depreciation and amortization of $267,831 at September 30,
2010 and $239,868 at December 31, 2009 |
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74,273 |
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101,584 |
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Goodwill |
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1,293,366 |
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1,293,366 |
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Intangible assets, net of accumulated amortization of $163,499 at September 30, 2010 and
$136,177 at December 31, 2009 |
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569,303 |
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597,083 |
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Debt issuance costs, net of accumulated amortization of $12,833 at September 30, 2010 and
$15,724 at December 31, 2009 |
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24,984 |
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16,542 |
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Other assets |
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63,521 |
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61,648 |
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Total assets |
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$ |
3,364,896 |
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$ |
3,336,936 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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LIABILITIES: |
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Drafts payable |
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$ |
144,669 |
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$ |
125,767 |
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Payables to clients |
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408,245 |
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493,943 |
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Payables to broker-dealers and clearing organizations |
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26,420 |
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18,217 |
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Accrued commissions and advisory fees payable |
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121,008 |
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110,040 |
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Accounts payable and accrued liabilities |
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183,599 |
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175,742 |
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Income taxes payable |
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24,017 |
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24,226 |
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Interest rate swaps |
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9,665 |
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17,292 |
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Securities sold but not yet purchased at market value |
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2,680 |
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4,003 |
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Senior credit facilities and subordinated notes |
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1,390,132 |
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1,369,223 |
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Deferred income taxes net |
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|
127,126 |
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|
147,608 |
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Total liabilities |
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2,437,561 |
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2,486,061 |
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STOCKHOLDERS EQUITY: |
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Common stock, $.001 par value; 200,000,000 shares authorized; 94,246,414 shares issued
and outstanding at September 30, 2010 of which 7,405,811 are restricted, and
94,214,762 shares issued and outstanding at December 31, 2009 of which 7,423,973 are
restricted |
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87 |
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87 |
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Additional paid-in capital |
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690,194 |
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679,277 |
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Stockholder loans |
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(52 |
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(499 |
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Accumulated other comprehensive loss |
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(5,874 |
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(11,272 |
) |
Retained earnings |
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242,980 |
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|
183,282 |
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Total stockholders equity |
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927,335 |
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850,875 |
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Total liabilities and stockholders equity |
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$ |
3,364,896 |
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$ |
3,336,936 |
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(1) |
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Includes $10,799 and $7,797 pledged to clearing organizations at September 30, 2010 and December 31, 2009, respectively. |
See notes to unaudited condensed consolidated financial statements.
2
LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders Equity
(Unaudited)
(Dollars in thousands)
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Accumulated |
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Additional |
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Other |
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Total |
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Common |
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Paid-In |
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Stockholder |
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Comprehensive |
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Retained |
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Stockholders |
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Stock |
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Capital |
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Loans |
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Income (Loss) |
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Earnings |
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Equity |
|
BALANCE December 31, 2008 |
|
$ |
87 |
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$ |
670,897 |
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|
$ |
(936 |
) |
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$ |
(15,498 |
) |
|
$ |
135,762 |
|
|
$ |
790,312 |
|
Comprehensive income: |
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Net income |
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|
28,922 |
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|
28,922 |
|
Unrealized gain on
interest rate swaps,
net of tax expense of
$1,793 |
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|
|
|
|
|
|
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|
3,163 |
|
|
|
|
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|
3,163 |
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Total comprehensive income |
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|
|
32,085 |
|
Exercise of stock options |
|
|
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|
|
|
258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
258 |
|
Tax benefits from
share-based compensation |
|
|
|
|
|
|
147 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
147 |
|
Stockholder loans |
|
|
|
|
|
|
|
|
|
|
443 |
|
|
|
|
|
|
|
|
|
|
|
443 |
|
Share-based compensation |
|
|
|
|
|
|
4,965 |
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|
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|
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|
4,965 |
|
Repurchase of
10,000 shares of common
stock |
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|
(181 |
) |
|
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|
(181 |
) |
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|
BALANCE September 30, 2009 |
|
$ |
87 |
|
|
$ |
676,086 |
|
|
$ |
(493 |
) |
|
$ |
(12,335 |
) |
|
$ |
164,684 |
|
|
$ |
828,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
BALANCE December 31, 2009 |
|
$ |
87 |
|
|
$ |
679,277 |
|
|
$ |
(499 |
) |
|
$ |
(11,272 |
) |
|
$ |
183,282 |
|
|
$ |
850,875 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,698 |
|
|
|
59,698 |
|
Unrealized gain on
interest rate swaps,
net of tax expense of
$2,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,398 |
|
|
|
|
|
|
|
5,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,096 |
|
Exercise of stock options |
|
|
|
|
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56 |
|
Tax benefits from
share-based compensation |
|
|
|
|
|
|
272 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
272 |
|
Stockholder loans |
|
|
|
|
|
|
|
|
|
|
447 |
|
|
|
|
|
|
|
|
|
|
|
447 |
|
Share-based compensation |
|
|
|
|
|
|
10,121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,121 |
|
Issuance of 20,000 shares
of common stock |
|
|
|
|
|
|
468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE September 30, 2010 |
|
$ |
87 |
|
|
$ |
690,194 |
|
|
$ |
(52 |
) |
|
$ |
(5,874 |
) |
|
$ |
242,980 |
|
|
$ |
927,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial statements.
3
LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
59,698 |
|
|
$ |
28,922 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Noncash items: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
67,472 |
|
|
|
81,596 |
|
Amortization of debt issuance costs |
|
|
3,623 |
|
|
|
2,807 |
|
Impairment of fixed assets |
|
|
840 |
|
|
|
|
|
Loss on extinguishment of debt |
|
|
37,979 |
|
|
|
|
|
Share-based compensation |
|
|
10,121 |
|
|
|
4,965 |
|
Provision for bad debts |
|
|
3,682 |
|
|
|
2,953 |
|
Deferred income tax provision |
|
|
(22,711 |
) |
|
|
(21,678 |
) |
Impairment of intangible assets |
|
|
|
|
|
|
17,873 |
|
Loan forgiveness |
|
|
3,932 |
|
|
|
|
|
Other |
|
|
(79 |
) |
|
|
(165 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Cash and securities segregated under federal and other regulations |
|
|
44,659 |
|
|
|
71,986 |
|
Receivables from clients |
|
|
(17,804 |
) |
|
|
21,551 |
|
Receivables from product sponsors, broker-dealers and clearing organizations |
|
|
(12,452 |
) |
|
|
54,910 |
|
Receivables from others |
|
|
(26,234 |
) |
|
|
(30,965 |
) |
Securities owned |
|
|
(3,284 |
) |
|
|
(4,868 |
) |
Securities borrowed |
|
|
(782 |
) |
|
|
(1,028 |
) |
Other assets |
|
|
2,548 |
|
|
|
(3,341 |
) |
Drafts payable |
|
|
18,902 |
|
|
|
(51,203 |
) |
Payables to clients |
|
|
(85,698 |
) |
|
|
(72,082 |
) |
Payables to broker-dealers and clearing organizations |
|
|
8,203 |
|
|
|
(355 |
) |
Accrued commissions and advisory fees payable |
|
|
10,968 |
|
|
|
2,129 |
|
Accounts payable and accrued liabilities |
|
|
5,498 |
|
|
|
(74 |
) |
Income taxes payable |
|
|
63 |
|
|
|
4,626 |
|
Securities sold but not yet purchased |
|
|
(1,323 |
) |
|
|
(1,104 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
107,821 |
|
|
|
107,455 |
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial statements.
4
LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Continued)
(Unaudited)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
(10,934 |
) |
|
$ |
(6,403 |
) |
Proceeds from the disposal of fixed assets |
|
|
|
|
|
|
135 |
|
Purchase of securities classified as held-to-maturity |
|
|
(5,392 |
) |
|
|
(3,746 |
) |
Proceeds from maturity of securities classified as held-to-maturity |
|
|
5,200 |
|
|
|
3,700 |
|
Deposits of restricted cash |
|
|
(4,121 |
) |
|
|
(12,759 |
) |
Release of restricted cash |
|
|
2,971 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(12,276 |
) |
|
|
(19,073 |
) |
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from senior credit facilities |
|
|
566,700 |
|
|
|
|
|
Redemption of subordinated notes |
|
|
(579,563 |
) |
|
|
|
|
Net repayment of revolving line of credit |
|
|
|
|
|
|
(56,500 |
) |
Repayment of senior credit facilities |
|
|
(9,091 |
) |
|
|
(6,318 |
) |
Payment of debt issuance costs |
|
|
(7,181 |
) |
|
|
|
|
Payment of deferred transaction costs |
|
|
(3,253 |
) |
|
|
|
|
Repayment of stockholder loans |
|
|
|
|
|
|
462 |
|
Proceeds from stock options exercised |
|
|
56 |
|
|
|
258 |
|
Excess tax benefits from share-based compensation |
|
|
272 |
|
|
|
147 |
|
Issuance of common stock |
|
|
468 |
|
|
|
|
|
Repurchase of common stock |
|
|
|
|
|
|
(181 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(31,592 |
) |
|
|
(62,132 |
) |
|
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
63,953 |
|
|
|
26,250 |
|
CASH AND CASH EQUIVALENTS Beginning of period |
|
|
378,594 |
|
|
|
219,239 |
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS End of period |
|
$ |
442,547 |
|
|
$ |
245,489 |
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
73,994 |
|
|
$ |
61,997 |
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
62,804 |
|
|
$ |
41,420 |
|
|
|
|
|
|
|
|
NONCASH DISCLOSURES: |
|
|
|
|
|
|
|
|
Capital expenditures purchased through short-term credit |
|
$ |
2,436 |
|
|
$ |
105 |
|
|
|
|
|
|
|
|
Increase in unrealized gain on interest rate swaps, net of tax expense |
|
$ |
5,398 |
|
|
$ |
3,163 |
|
|
|
|
|
|
|
|
Discount on proceeds from senior credit facilities recorded as debt
issuance costs |
|
$ |
13,300 |
|
|
$ |
|
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial statements.
5
LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
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).
2. Basis of Presentation
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 business
channels; Independent Advisor Services, Institution Services and Custom Clearing Services, which
are designed to enhance the services provided to its advisors. These channels qualify as individual
operating segments,
but are aggregated and viewed as one single reportable segment due to their similar economic
characteristics, products and services, production and distribution process, regulatory environment
and quantitative thresholds.
6
LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
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 September 30,
2010, the carrying amount and fair value of these borrowings were approximately $1,390 million and
$1,371 million, respectively. As of December 31, 2009, the carrying amount and fair value were
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 nine months ended September 30, 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.
3. Restructuring
Strategic Business Review Initiative
On December 29, 2008, the Company committed to 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 nine months ended
September 30, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Balance |
|
|
|
|
|
|
|
|
|
|
Accrued Balance |
|
|
Cumulative |
|
|
|
at December 31, |
|
|
Costs |
|
|
|
|
|
|
at September 30, |
|
|
Costs Incurred |
|
|
|
2009 |
|
|
Incurred(1) |
|
|
Payments |
|
|
2010 |
|
|
to Date(2) |
|
Severance and benefits |
|
$ |
1,996 |
|
|
$ |
43 |
|
|
$ |
(1,209 |
) |
|
$ |
830 |
|
|
$ |
14,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents adjustments for changes in the Companys estimates for the cost of providing
post employment benefits to employees impacted by restructuring activities. |
|
(2) |
|
At September 30, 2010, cumulative costs incurred to date represent the total expected costs. |
7
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 $73.7 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 nine months ended September 30,
2010, the Company was required to deposit an additional $4.1 million into the escrow accounts and
$3.0 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 $0.1 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 nine months ended September 30, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued |
|
|
Cumulative |
|
|
Total |
|
|
|
Balance at |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
Costs |
|
|
Expected |
|
|
|
December 31, |
|
|
Costs |
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
Incurred |
|
|
Restructuring |
|
|
|
2009 |
|
|
Incurred |
|
|
Payments |
|
|
Non-cash |
|
|
2010 |
|
|
to Date |
|
|
Costs |
|
Severance and benefits |
|
$ |
2,759 |
|
|
$ |
2,113 |
|
|
$ |
(3,569 |
) |
|
$ |
(456 |
) |
|
$ |
847 |
|
|
$ |
11,549 |
|
|
$ |
11,549 |
|
Lease and contract
termination fees |
|
|
7,458 |
|
|
|
2,352 |
|
|
|
(3,195 |
) |
|
|
80 |
|
|
|
6,695 |
|
|
|
18,271 |
|
|
|
18,402 |
|
Asset impairments |
|
|
|
|
|
|
840 |
|
|
|
|
|
|
|
(840 |
) |
|
|
|
|
|
|
20,764 |
|
|
|
20,764 |
|
Conversion and transfer
costs |
|
|
304 |
|
|
|
5,086 |
|
|
|
(1,843 |
) |
|
|
(3,422 |
) |
|
|
125 |
|
|
|
18,969 |
|
|
|
22,988 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
10,521 |
|
|
$ |
10,391 |
|
|
$ |
(8,607 |
) |
|
$ |
(4,638 |
) |
|
$ |
7,667 |
|
|
$ |
69,553 |
|
|
$ |
73,703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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:
8
LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
|
|
|
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 September 30,
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 securities owned
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 securities owned. 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 September 30, 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.
9
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 nine months ended September 30, 2010. The following tables summarize the
Companys financial assets and financial liabilities measured at fair value on a recurring basis
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted |
|
|
|
|
|
|
|
|
|
|
|
|
Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
Active |
|
|
Significant |
|
|
|
|
|
|
|
|
|
Markets for |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
Fair Value |
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Measurements |
|
At September 30, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents |
|
$ |
296,865 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
296,865 |
|
Securities segregated under federal
and other regulations |
|
|
242,022 |
|
|
|
|
|
|
|
|
|
|
|
242,022 |
|
Securities owned trading: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
|
113 |
|
|
|
|
|
|
|
|
|
|
|
113 |
|
Mutual funds |
|
|
7,248 |
|
|
|
|
|
|
|
|
|
|
|
7,248 |
|
Debt securities |
|
|
|
|
|
|
360 |
|
|
|
|
|
|
|
360 |
|
U.S. treasury obligations |
|
|
10,799 |
|
|
|
|
|
|
|
|
|
|
|
10,799 |
|
Certificates of deposit |
|
|
|
|
|
|
41 |
|
|
|
|
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities owned trading |
|
|
18,160 |
|
|
|
401 |
|
|
|
|
|
|
|
18,561 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets |
|
|
15,550 |
|
|
|
|
|
|
|
|
|
|
|
15,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value |
|
$ |
572,597 |
|
|
$ |
401 |
|
|
$ |
|
|
|
$ |
572,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold but not yet purchased: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds |
|
$ |
2,434 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,434 |
|
Certificates of deposit |
|
|
|
|
|
|
225 |
|
|
|
|
|
|
|
225 |
|
Equity securities |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
4 |
|
Debt securities |
|
|
|
|
|
|
17 |
|
|
|
|
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities sold but not yet
purchased |
|
|
2,438 |
|
|
|
242 |
|
|
|
|
|
|
|
2,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
|
|
|
|
|
9,665 |
|
|
|
|
|
|
|
9,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value |
|
$ |
2,438 |
|
|
$ |
9,907 |
|
|
$ |
|
|
|
$ |
12,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted |
|
|
|
|
|
|
|
|
|
|
|
|
Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
Active |
|
|
Significant |
|
|
|
|
|
|
|
|
|
Markets for |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
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.
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 September 30, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government notes |
|
$ |
10,582 |
|
|
$ |
91 |
|
|
$ |
10,673 |
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2010 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 Year |
|
|
1-3 Years |
|
|
Total |
|
U.S. government notes at amortized cost |
|
$ |
5,059 |
|
|
$ |
5,523 |
|
|
$ |
10,582 |
|
|
|
|
|
|
|
|
|
|
|
U.S. government notes at fair value |
|
$ |
5,071 |
|
|
$ |
5,602 |
|
|
$ |
10,673 |
|
|
|
|
|
|
|
|
|
|
|
6. Intangible Assets
The components of intangible assets as of September 30, 2010 and December 31, 2009 are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
|
|
Value |
|
|
Amortization |
|
|
Value |
|
At September 30, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
Definite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Advisor and financial institution relationships |
|
$ |
458,424 |
|
|
$ |
(110,437 |
) |
|
$ |
347,987 |
|
Product sponsor relationships |
|
|
231,930 |
|
|
|
(52,312 |
) |
|
|
179,618 |
|
Trust client relationships |
|
|
2,630 |
|
|
|
(751 |
) |
|
|
1,879 |
|
|
|
|
|
|
|
|
|
|
|
Total definite-lived intangible assets |
|
$ |
692,984 |
|
|
$ |
(163,500 |
) |
|
$ |
529,484 |
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Trademark and trade name |
|
|
|
|
|
|
|
|
|
|
39,819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
|
|
|
|
|
|
|
|
$ |
569,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
12
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 $27.8 million for the
three and nine months ended September 30, 2010, respectively, and $9.8 million and $29.7 million
for the three and nine months ended September 30, 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 |
|
$ |
9,226 |
|
2011 |
|
|
36,840 |
|
2012 |
|
|
36,548 |
|
2013 |
|
|
35,927 |
|
2014 |
|
|
35,927 |
|
Thereafter |
|
|
375,016 |
|
|
|
|
|
Total |
|
$ |
529,484 |
|
|
|
|
|
7. Income Taxes
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 43.2% and 77.5% for the three
months ended September 30, 2010 and 2009, respectively, and 39.9% and 44.9% for the nine months
ended September 30, 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.
8. Indebtedness
Senior Secured Credit Facilities Term Loans 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 established a new term loan
tranche of $580.0 million maturing on June 28, 2017 (the 2017 Term Loans) and recorded $16.6
million in debt issuance costs that are capitalized in the unaudited condensed consolidated
statements of financial condition. 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 and could change depending on the
Companys
credit rating; (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 LIBOR Rate with respect to the 2015 Term Loans and the 2017 Term Loans shall
in no event be less than 1.50%.
Borrowings under the Companys senior secured term loan 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% for the 2013 Term Loans and the
greater of the prime rate, effective federal funds rate plus 1/2 of 1.00%, or 2.50% for the 2015 Term
Loans and the 2017 Term Loans. The senior secured credit facilities are subject to certain
financial and nonfinancial covenants. As of September 30, 2010 and December 31, 2009, the Company
was in compliance with such covenants.
13
LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
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 Secured Credit Facilities 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 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 extended the maturity of a
$163.5 million tranche of the revolving credit
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 credit facility
at September 30, 2010 and December 31, 2009.
Senior Unsecured Subordinated Notes On May 24, 2010, the Company gave notice of redemption
of all of its outstanding senior unsecured 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 $579.6 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 and accordingly, recorded the
charge as a loss on debt extinguishment within its unaudited condensed consolidated statements of
income. None of the 2015 Notes remain outstanding. The Company used the proceeds from the 2017 Term
Loans under its Amended Credit Agreement and additional cash on hand to finance the redemption. The
aggregate cash payment for the redemption, including accrued and unpaid interest, was approximately
$610.4 million.
Prior to the Redemption Date, the Company had $550.0 million of senior unsecured subordinated
notes due December 15, 2015 bearing interest at 10.75% per annum. The interest payments were
payable semiannually in arrears.
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 $150.0 million limit and allows for both collateralized and
uncollateralized borrowings.
Both lines were utilized in 2010 and 2009; however, there were no balances outstanding at
September 30, 2010 or December 31, 2009.
14
LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
The Companys outstanding borrowings were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
Interest |
|
|
|
Maturity |
|
|
Balance |
|
|
Rate |
|
|
Balance |
|
|
Rate |
|
Senior secured term loan: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged with interest rate swaps |
|
|
6/28/2013 |
|
|
$ |
210,000 |
|
|
|
2.04 |
%(1) |
|
$ |
400,000 |
|
|
|
2.00 |
%(6) |
Unhedged: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 Term Loans |
|
|
6/28/2013 |
|
|
|
105,532 |
|
|
|
2.04 |
%(2) |
|
|
419,223 |
|
|
|
2.00 |
%(7) |
2015 Term Loans |
|
|
6/25/2015 |
|
|
|
497,500 |
|
|
|
4.25 |
%(3) |
|
|
|
|
|
|
|
|
2017 Term Loans |
|
|
6/28/2017 |
|
|
|
577,100 |
|
|
|
5.25 |
%(4) |
|
|
|
|
|
|
|
|
Senior unsecured subordinated notes |
|
|
(5) |
|
|
|
|
|
|
|
|
|
|
|
550,000 |
|
|
|
10.75 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings |
|
|
|
|
|
|
1,390,132 |
|
|
|
|
|
|
|
1,369,223 |
|
|
|
|
|
Less current borrowings (maturities within 12 months) |
|
|
|
|
|
|
13,971 |
|
|
|
|
|
|
|
8,424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings net of current portion |
|
|
|
|
|
$ |
1,376,161 |
|
|
|
|
|
|
$ |
1,360,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of September 30, 2010, the variable interest rate for the hedged
portion of the 2013 Term Loans is based on the three-month LIBOR of
0.29%, plus the applicable interest rate margin of 1.75%. |
|
(2) |
|
As of September 30, 2010, the variable interest rate for the unhedged
portion of the 2013 Term Loans is based on the three-month LIBOR of
0.29%, plus the applicable interest rate margin of 1.75%. |
|
(3) |
|
As of September 30, 2010, the variable interest rate for the unhedged
portion of the 2015 Term Loans is based on the greater of the
three-month LIBOR of 0.29% or 1.50%, plus the applicable interest rate
margin of 2.75%. |
|
(4) |
|
As of September 30, 2010, the variable interest rate for the unhedged
portion of the 2017 Term Loans is based on the greater of the
three-month LIBOR of 0.29% or 1.50%, plus the applicable interest rate
margin of 3.75%. |
|
(5) |
|
On June 22, 2010, the Company redeemed its 2015 Notes, which had an
original maturity date of December 15, 2015. |
|
(6) |
|
As of December 31, 2009, the variable interest rate for the hedged
portion of the 2013 Term Loans is based on the three-month LIBOR of
0.25%, plus the applicable interest rate margin of 1.75%. |
|
(7) |
|
As of December 31, 2009, the variable interest rate for the unhedged
portion of the 2013 Term Loans is based on the three-month LIBOR of
0.25% plus the applicable interest rate margin of 1.75%. |
The following summarizes borrowing activity in the revolving and uncommitted line of credit
facilities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Average balance outstanding |
|
$ |
89 |
|
|
$ |
44,559 |
|
|
$ |
2,766 |
|
|
$ |
75,276 |
|
Weighted-average interest rate |
|
|
1.00 |
% |
|
|
2.32 |
% |
|
|
1.16 |
% |
|
|
2.41 |
% |
15
LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
The minimum calendar year payments and maturities of the senior secured borrowings as of
September 30, 2010 are as follows (in thousands):
|
|
|
|
|
2010 remainder |
|
$ |
3,493 |
|
2011 |
|
|
13,971 |
|
2012 |
|
|
13,971 |
|
2013 |
|
|
319,197 |
|
2014 |
|
|
10,800 |
|
Thereafter |
|
|
1,028,700 |
|
|
|
|
|
Total |
|
$ |
1,390,132 |
|
|
|
|
|
9. 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. 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
September 30, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable |
|
|
|
|
|
|
|
Notional |
|
Fixed |
|
|
Receive |
|
|
Fair |
|
|
Maturity |
Balance |
|
Pay Rate |
|
|
Rate(1) |
|
|
Value |
|
|
Date |
$ 145,000 |
|
|
4.83 |
% |
|
|
0.29 |
% |
|
$ |
(4,833 |
) |
|
June 30, 2011 |
65,000 |
|
|
4.85 |
% |
|
|
0.29 |
% |
|
|
(4,832 |
) |
|
June 30, 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 210,000 |
|
|
|
|
|
|
|
|
|
$ |
(9,665 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The variable receive rate reset on the last day of the period, based
on the applicable three-month LIBOR. The effective rate from June 30,
2010 through September 29, 2010 was 0.53%. As of September 30, 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
September 30, 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 $2.3 million and $10.9 million from other
comprehensive loss as additional interest expense for the three and nine months ended September 30,
2010, respectively, and $2.7 million and $12.2 million for the three and nine months ended
September 30, 2009, respectively. Based on current interest rate assumptions and assuming no
additional interest rate swap agreements are entered into, the Company expects to reclassify
$9.5 million or $5.7 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.
16
LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
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 September 30, 2010 are as follows (in
thousands):
|
|
|
|
|
Years ending December 31 |
|
|
|
|
2010 remainder |
|
$ |
7,847 |
|
2011 |
|
|
31,230 |
|
2012 |
|
|
24,635 |
|
2013 |
|
|
15,510 |
|
2014 |
|
|
8,765 |
|
Thereafter |
|
|
15,065 |
|
|
|
|
|
Total(1) |
|
$ |
103,052 |
|
|
|
|
|
|
|
|
(1) |
|
Minimum payments have not been reduced by minimum sublease rental
income of $0.7 million due in the future under noncancellable
subleases. |
Total rental expense for all operating leases was $4.3 million and $12.8 million
for the three and nine months ended September 30, 2010, respectively, and $5.0 million and
$15.3 million for the three and nine months ended September 30, 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
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 advisor
joining the Company, and may be forgivable. The Company had no significant unfunded commitments at
September 30, 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.
17
LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
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. Such litigation remains pending in the court system.
During the third quarter of 2010, the Company settled two arbitrations that
involve activities covered under the third-party indemnification
agreement described above. In connection with these
settlements, the Company has recorded legal expenses of $8.9 million during the nine months ended
September 30, 2010, of which $5.6 million has been recorded in the third quarter of 2010. These
legal expenses have been included in professional services within the unaudited condensed
consolidated statements of income. The Company will seek to recover the costs associated with
defending and settling these matters, plus other costs incurred on matters that the Company
believes are subject to the indemnification. The remaining claims outstanding for which the
indemnifying party is disputing its obligation involve alleged damages that are not material to the
Companys unaudited condensed consolidated statements of financial condition, income or cash flows.
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 September 30, 2010, the Company had received collateral primarily in
connection with client margin loans with a market value of approximately $327.9 million, which it
can sell or repledge. Of this amount, approximately $174.1 million has been pledged or sold as of
September 30, 2010; $151.4 million was pledged to banks in connection with unutilized secured
margin lines of credit, $12.3 million was pledged with client-owned securities to the Options
Clearing Corporation, and $10.4 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.
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.
18
LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
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 $7.6 million and $4.0 million of
share-based compensation related to the vesting of employee stock option awards during the nine
months ended September 30, 2010 and 2009, respectively, which is included in compensation and benefits on
the unaudited condensed consolidated statements of income. As of September 30, 2010, total
unrecognized compensation cost related to non-vested share-based compensation arrangements granted
was $28.2 million, which is expected to be recognized over a weighted-average period of 3.44 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 $2.5 million and $1.0 million of share-based compensation
during the nine months ended September 30, 2010 and 2009, respectively, related to the vesting of
stock options and warrants awarded to its advisors and financial institutions, which is classified
within commission and advisory expenses on the unaudited condensed consolidated statements of
income. As of September 30, 2010, total unrecognized compensation cost related to non-vested
share-based compensation arrangements granted was $10.1 million for advisors and financial
institutions, which is expected to be recognized over a weighted-average period of 3.61 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 nine months ended September 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2009 |
Expected life (in years) |
|
|
6.51 |
|
|
|
6.84 |
|
Expected stock price volatility |
|
|
50.30 |
% |
|
|
50.98 |
% |
Expected dividend yield |
|
|
|
|
|
|
|
|
Annualized forfeiture rate |
|
|
5.00 |
% |
|
|
4.64 |
% |
Fair value of options |
|
$ |
12.33 |
|
|
$ |
11.79 |
|
Risk-free interest rate |
|
|
2.79 |
% |
|
|
2.77 |
% |
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 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, employee and advisor 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.
19
LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
The following table summarizes the Companys activity in its stock option and warrant plans
for the nine months ended September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number |
|
|
Average |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
of |
|
|
Exercise |
|
|
Term |
|
|
Value |
|
|
|
Shares |
|
|
Price |
|
|
(Years) |
|
|
(In thousands) |
|
Outstanding December 31, 2009 |
|
|
22,702,469 |
|
|
$ |
6.99 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
68,776 |
|
|
|
23.41 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(29,814 |
) |
|
|
1.86 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(187,505 |
) |
|
|
21.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding September 30, 2010 |
|
|
22,553,926 |
|
|
$ |
6.92 |
|
|
|
4.25 |
|
|
$ |
486,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable September 30, 2010 |
|
|
18,704,480 |
|
|
$ |
3.61 |
|
|
|
3.40 |
|
|
$ |
465,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1.07 $2.38 |
|
|
17,142,240 |
|
|
|
3.01 |
|
|
$ |
1.74 |
|
|
|
17,142,240 |
|
|
$ |
1.74 |
|
$10.30 $19.74 |
|
|
941,164 |
|
|
|
8.15 |
|
|
|
18.30 |
|
|
|
208,217 |
|
|
|
16.74 |
|
$21.60 $22.08 |
|
|
2,149,650 |
|
|
|
8.67 |
|
|
|
22.02 |
|
|
|
539,190 |
|
|
|
21.94 |
|
$23.02 $27.80 |
|
|
2,320,872 |
|
|
|
7.76 |
|
|
|
26.57 |
|
|
|
814,833 |
|
|
|
27.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,553,926 |
|
|
|
4.25 |
|
|
$ |
6.92 |
|
|
|
18,704,480 |
|
|
$ |
3.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 to expire in 2009 and 2010, to receive stock units under 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) 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 September 30, 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. 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
20
LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
Company that constitutes a change in control or an initial public offering. There are
7,399,403 restricted shares issued and outstanding as of September 30, 2010.
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 nine months ending September 30, 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 September 30, 2010 |
|
|
6,408 |
|
|
$ |
23.41 |
|
|
|
|
|
|
|
|
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 September 30, 2010, total unrecognized compensation cost was $0.1 million, which is expected to
be recognized over a weighted-average remaining period of 1.45 years.
12. Earnings per Share
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.
21
LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
A reconciliation of the income used to compute basic and diluted earnings per share for the
periods noted was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
|
For the Nine |
|
|
|
Months Ended |
|
|
Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss), as reported |
|
$ |
26,144 |
|
|
$ |
(1,456 |
) |
|
$ |
59,698 |
|
|
$ |
28,922 |
|
Less: allocation of undistributed earnings to stock units |
|
|
(424 |
) |
|
|
|
|
|
|
(968 |
) |
|
|
(585 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss), for computing basic earnings per share |
|
$ |
25,720 |
|
|
$ |
(1,456 |
) |
|
$ |
58,730 |
|
|
$ |
28,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss), as reported |
|
$ |
26,144 |
|
|
$ |
(1,456 |
) |
|
$ |
59,698 |
|
|
$ |
28,922 |
|
Less: allocation of undistributed earnings to stock units |
|
|
(370 |
) |
|
|
|
|
|
|
(848 |
) |
|
|
(515 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss), for computing diluted earnings per share |
|
$ |
25,774 |
|
|
$ |
(1,456 |
) |
|
$ |
58,850 |
|
|
$ |
28,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
|
For the Nine |
|
|
|
Months Ended |
|
|
Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Basic weighted average number of shares outstanding |
|
|
86,838 |
|
|
|
86,697 |
|
|
|
86,817 |
|
|
|
86,608 |
|
Dilutive common share equivalents |
|
|
12,774 |
|
|
|
|
|
|
|
12,486 |
|
|
|
11,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average number of shares outstanding |
|
|
99,612 |
|
|
|
86,697 |
|
|
|
99,303 |
|
|
|
98,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share for the periods noted were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
For the Nine |
|
|
Months Ended |
|
Months Ended |
|
|
September 30, |
|
September 30, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
Basic earnings (loss) per share |
|
|
$0.30 |
|
|
|
$(0.02 |
) |
|
|
$0.68 |
|
|
|
$0.33 |
|
Diluted earnings (loss) per share |
|
|
$0.26 |
|
|
|
$(0.02 |
) |
|
|
$0.59 |
|
|
|
$0.29 |
|
Basic weighted average shares outstanding and diluted weighted average shares outstanding were
the same for the three months September 30, 2009, because the effect of potential shares of common
stock was anti-dilutive since the Company generated a net loss.
The computation of diluted earnings per share excluded stock options and warrants to purchase
2,832,223 shares and 3,165,183 shares for the three months ended September 30, 2010 and 2009,
respectively, and 3,226,653 shares and 3,041,438 shares for the nine months ended September 30,
2010 and 2009, respectively, because the effect would have been anti-dilutive.
Restricted shares issued under the Companys 2000 Stock Bonus Plan have been excluded from the
calculation of basic and diluted earnings per share for all periods presented because the shares
are contingent on a change in control or an initial public offering. There are 7,399,403 restricted
shares issued and outstanding as of September 30, 2010.
13. Related Party Transactions
AlixPartners, LLP (AlixPartners), a company majority-owned by one of the Companys
majority stockholders, provides services pursuant to an agreement for interim management and
consulting. The Company paid $0.6 million to AlixPartners during the nine months ended September
30, 2009.
22
LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
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 nine months ended September 30, 2010 and 2009, the Company
earned $1.7 million and $1.0 million, respectively, in fees from Artisan. Additionally, as of
September 30, 2010 and December 31, 2009, Artisan owed the Company $0.5 million, 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. (American 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 nine months ended September 30, 2010 and 2009, the Company earned $0.1 million
and $0.3 million, respectively, in fees from American Beacon. Additionally, as of December 31,
2009, American Beacon owed the Company $0.1 million, 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 $0.9 million to XOJET during the nine
months ended September 30, 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 $0.2 million to SunGard during both of the nine month periods ended
September 30, 2010 and 2009.
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 $0.9 million and $0.7 million to Blue Frog for such services during
the nine months ended September 30, 2010 and 2009, respectively. As of September 30, 2010, the
Company had a payable to Blue Frog of $0.2 million, which is included in accounts payable and
accrued liabilities on the unaudited condensed consolidated statement of financial condition.
In conjunction with the acquisition of UVEST Financial Services Group, Inc. (UVEST), the
Company made full-recourse loans to certain members UVEST 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 September 30, 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.
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
September 30, 2010 are presented in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum |
|
|
|
|
|
|
Net |
|
|
Net Capital |
|
|
Excess Net |
|
|
|
Capital |
|
|
Required |
|
|
Capital |
|
LPL Financial Corporation |
|
$ |
109,904 |
|
|
$ |
6,360 |
|
|
$ |
103,544 |
|
UVEST Financial Services Group, Inc. |
|
|
10,232 |
|
|
|
1,564 |
|
|
|
8,668 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
120,136 |
|
|
$ |
7,924 |
|
|
$ |
112,212 |
|
|
|
|
|
|
|
|
|
|
|
23
LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
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 September 30, 2010, Associated,
MSC and WFG had aggregate net capital of $12.7 million, which was
$12.1 million in excess of the 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 September 30, 2010 and December 31, 2009, the
Companys registered broker-dealers 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 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 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 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. Such transactions are introduced and cleared through a third-party clearing firm on a
fully
24
LPL INVESTMENT HOLDINGS INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued)
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.
25
|
|
|
Item 2. |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
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 (our advisors), enabling them to successfully service their
retail investors with unbiased, conflict-free financial advice. In
addition, we support approximately 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 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 2,500 employees in our Boston, Charlotte and San Diego locations.
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 the 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 revenues from asset-based fees,
advisory fees, our trailing commissions, cash sweep programs and certain transaction and other fees
that are based upon accounts and advisors. 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.
26
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 and can vary from period to period
based on the overall economic environment, number of trading days in the reporting
period and investment activity of our clients. 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 omnibus processing 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. Our networking fees represent
fees paid to us by mutual fund and annuity product manufacturers in exchange for
administrative |
27
|
|
|
and record-keeping services that we provide to 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 do not meet certain specified
thresholds of size or activity. In addition, we host certain advisor conferences that serve
as training, sales and marketing events in our first and third fiscal quarters and as a
result, we anticipate higher transaction and other fees resulting from the collection of
revenues from sponsors and advisors, in comparison to other periods. |
|
|
|
|
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. We host certain advisor
conferences that serve as training, sales and marketing events in our first and third quarters and as a result, we anticipate higher general
and administrative expenses in comparison to other periods. |
|
|
|
|
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 improve
operating efficiencies. |
|
|
|
|
Other Expenses. Other expenses include bank fees, other taxes, bad debt expense and
other miscellaneous expenses. |
28
How We Evaluate Growth
We focus on several business and key financial metrics in evaluating the success of our
business relationships and our resulting financial position and operating performance. Our key
metrics as of and for the three and nine months ended September 30, 2010 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
% Change |
|
|
|
(unaudited) |
|
|
|
|
|
Business Metrics |
|
|
|
|
|
|
|
|
|
|
|
|
Advisors(1) |
|
|
12,017 |
|
|
|
12,027 |
|
|
|
(0.1 |
)% |
Advisory and brokerage assets(2) (in billions) |
|
$ |
293.3 |
|
|
$ |
268.9 |
|
|
|
9.1 |
% |
Advisory assets under management(3) (in billions) |
|
$ |
86.2 |
|
|
$ |
72.6 |
|
|
|
18.7 |
% |
Net new advisory assets(4) (in billions) |
|
$ |
5.8 |
|
|
$ |
4.5 |
|
|
|
28.9 |
% |
Insured cash account balances(3) (in billions) |
|
$ |
11.7 |
|
|
$ |
11.4 |
|
|
|
2.6 |
% |
Money market account balances(3) (in billions) |
|
$ |
6.9 |
|
|
$ |
7.5 |
|
|
|
(8.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
For the |
|
|
|
Three Months |
|
|
Nine Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
(unaudited) |
|
|
|
|
|
Financial Metrics |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue growth (decline) from prior period |
|
|
8.2 |
% |
|
|
(12.1 |
)% |
|
|
13.8 |
% |
|
|
(16.5 |
)% |
Recurring revenue as a % of net revenue(5) |
|
|
61.2 |
% |
|
|
58.0 |
% |
|
|
60.2 |
% |
|
|
56.2 |
% |
Gross margin(6) (in millions) |
|
$ |
234.3 |
|
|
$ |
221.1 |
|
|
$ |
698.2 |
|
|
$ |
626.9 |
|
Gross margin as a % of net revenue(6) |
|
|
30.8 |
% |
|
|
31.5 |
% |
|
|
30.4 |
% |
|
|
31.1 |
% |
Net income (loss) (in millions) |
|
$ |
26.1 |
|
|
$ |
(1.5 |
) |
|
$ |
59.7 |
|
|
$ |
28.9 |
|
Adjusted EBITDA (in millions) |
|
$ |
98.6 |
|
|
$ |
89.6 |
|
|
$ |
314.0 |
|
|
$ |
261.2 |
|
Adjusted Net Income (in millions) |
|
$ |
40.5 |
|
|
$ |
34.7 |
|
|
$ |
128.0 |
|
|
$ |
87.5 |
|
|
|
|
(1) |
|
Advisors are defined as those investment professionals who are
licensed to do business with our broker-dealer subsidiaries. We
consolidated the operations of the Affiliated Entities with LPL
Financial in the third quarter of 2009, which resulted in attrition of
138 advisors in the fourth quarter of 2009. Excluding this attrition,
we have added 128 new advisors during the twelve months ended September 30, 2010. |
|
(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 new business development and net
of attrition. |
|
(3) |
|
Advisory assets under management, insured cash account balances and
money market account balances are components of advisory and brokerage
assets. |
|
(4) |
|
Represents client asset inflows, less total client asset outflows,
from client accounts within our advisory platforms. |
|
(5) |
|
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. |
|
(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. |
29
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.
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, debt
refinancing, 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 our employees. |
Adjusted EBITDA is a non-GAAP measure as defined by Regulation G under the Securities Act of
1933, as amended (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. |
30
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.
Set forth below is a reconciliation from our net income to Adjusted EBITDA for the three and
nine months ended September 30, 2010 and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
|
For the Nine |
|
|
|
Months Ended |
|
|
Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
(unaudited) |
|
|
|
|
|
Net income (loss) |
|
$ |
26,144 |
|
|
$ |
(1,456 |
) |
|
$ |
59,698 |
|
|
$ |
28,922 |
|
Interest expense |
|
|
19,511 |
|
|
|
24,626 |
|
|
|
71,530 |
|
|
|
76,599 |
|
Income tax expense (benefit) |
|
|
19,868 |
|
|
|
(5,029 |
) |
|
|
39,658 |
|
|
|
23,526 |
|
Amortization of purchased intangible assets and
software(1) |
|
|
9,352 |
|
|
|
14,915 |
|
|
|
34,401 |
|
|
|
45,161 |
|
Depreciation and amortization of all other fixed assets |
|
|
10,420 |
|
|
|
12,009 |
|
|
|
33,071 |
|
|
|
36,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
|
85,295 |
|
|
|
45,065 |
|
|
|
238,358 |
|
|
|
210,643 |
|
EBITDA Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense(2) |
|
|
2,853 |
|
|
|
1,640 |
|
|
|
7,628 |
|
|
|
3,912 |
|
Acquisition and integration related expenses(3) |
|
|
6,268 |
|
|
|
728 |
|
|
|
9,785 |
|
|
|
2,389 |
|
Restructuring and conversion costs(4) |
|
|
4,153 |
|
|
|
42,135 |
|
|
|
19,438 |
|
|
|
44,161 |
|
Debt amendment and extinguishment costs(5) |
|
|
28 |
|
|
|
|
|
|
|
38,633 |
|
|
|
|
|
Other(6) |
|
|
36 |
|
|
|
38 |
|
|
|
112 |
|
|
|
114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total EBITDA Adjustments |
|
|
13,338 |
|
|
|
44,541 |
|
|
|
75,596 |
|
|
|
50,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
98,633 |
|
|
$ |
89,606 |
|
|
$ |
313,954 |
|
|
$ |
261,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents amortization of intangible assets and software as a result
of our purchase accounting adjustments from our merger transaction in
2005 and our 2007 acquisitions of UVEST, the Affiliated Entities and
IFMG Securities, Inc., Independent Financial Marketing Group, Inc. and
LSC Insurance Agency of Arizona, Inc. (together, IFMG). |
|
(2) |
|
Represents share-based compensation expense related to vested stock
options awarded to employees and non-executive directors based on the
grant date fair value under the Black-Scholes valuation model. |
|
(3) |
|
Represents acquisition and integration costs resulting from our 2007
acquisitions of the Affiliated Entities and IFMG. Included in the
three and nine months ended September 30, 2010, are expenditures for
certain legal settlements that have not been resolved with the
indemnifying party. See Litigation in Note 10 of our unaudited
condensed consolidated financial statements for further discussion on
legal settlements. |
|
(4) |
|
Represents organizational restructuring charges incurred in 2010 and
2009 for severance and one-time termination benefits, asset
impairments, lease and contract termination fees and other transfer
costs. |
|
(5) |
|
Represents debt amendment costs incurred in 2010 for amending and
restating our credit agreement to establish a new term loan tranche
and to extend the maturity of an existing tranche on our senior credit
facilities, and debt extinguishment costs to redeem our subordinated
notes, as well as certain professional fees incurred. |
|
(6) |
|
Represents excise and other taxes. |
31
Adjusted Net Income and Adjusted Net Income per share
Adjusted Net Income represents net income before: (a) share-based compensation expense,
(b) amortization of purchased intangible assets and software resulting from our 2005 merger
transaction and our 2007 acquisitions of UVEST, the Affiliated Entities and IFMG, (c) acquisition
and integration related expenses, (d) restructuring and conversion costs, (e) debt amendment and
extinguishment costs and (f) other. 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.
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, debt
refinancing, 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 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, in the event we become publically traded, 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. |
32
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.
The following table sets forth a reconciliation of net income to Adjusted Net Income and
Adjusted Net Income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three |
|
|
For the Nine |
|
|
|
Months Ended |
|
|
Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands, except per share data) |
|
|
|
|
|
|
|
(unaudited) |
|
|
|
|
|
Net income (loss) |
|
$ |
26,144 |
|
|
$ |
(1,456 |
) |
|
$ |
59,698 |
|
|
$ |
28,922 |
|
After-Tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA Adjustments(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense(2) |
|
|
2,257 |
|
|
|
1,308 |
|
|
|
6,137 |
|
|
|
3,206 |
|
Acquisition and integration related expenses |
|
|
3,809 |
|
|
|
439 |
|
|
|
5,946 |
|
|
|
1,441 |
|
Restructuring and conversion costs |
|
|
2,549 |
|
|
|
25,407 |
|
|
|
11,812 |
|
|
|
26,629 |
|
Debt amendment and extinguishment costs |
|
|
17 |
|
|
|
|
|
|
|
23,477 |
|
|
|
|
|
Other |
|
|
22 |
|
|
|
23 |
|
|
|
68 |
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total EBITDA Adjustments |
|
|
8,654 |
|
|
|
27,177 |
|
|
|
47,440 |
|
|
|
31,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of purchased intangible assets and
software(1) |
|
|
5,728 |
|
|
|
8,994 |
|
|
|
20,905 |
|
|
|
27,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income |
|
$ |
40,526 |
|
|
$ |
34,715 |
|
|
$ |
128,043 |
|
|
$ |
87,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income per share(3) |
|
$ |
0.41 |
|
|
$ |
0.35 |
|
|
$ |
1.29 |
|
|
$ |
0.89 |
|
Weighted average shares outstanding diluted |
|
|
99,612 |
|
|
|
98,703 |
|
|
|
99,303 |
|
|
|
98,527 |
|
|
|
|
(1) |
|
EBITDA Adjustments and amortization of purchased intangible assets and
software 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 the after-tax expense of non-qualified stock options in
which we receive a tax deduction upon exercise, and the full expense
impact of incentive stock options granted to employees that have
vested and qualify for preferential tax treatment and conversely, we
do not receive a tax deduction. Share-based compensation for vesting
of incentive stock options was $1.3 million and $0.8 million,
respectively, for the three months ended September 30, 2010 and 2009,
and $3.8 million and $2.1 million, respectively, for the nine months
ended September 30, 2010 and 2009. |
|
(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 |
|
|
For the Nine |
|
|
|
Months Ended |
|
|
Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
(unaudited) |
|
|
|
|
|
Earnings (loss) per share diluted |
|
$ |
0.26 |
|
|
$ |
(0.02 |
) |
|
$ |
0.59 |
|
|
$ |
0.29 |
|
Adjustment for allocation of undistributed earnings to
stock units |
|
|
|
|
|
|
|
|
|
|
0.01 |
|
|
|
0.01 |
|
After-Tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA Adjustments per share |
|
|
0.09 |
|
|
|
0.28 |
|
|
|
0.48 |
|
|
|
0.32 |
|
Amortization of purchased intangible assets and
software per share |
|
|
0.06 |
|
|
|
0.09 |
|
|
|
0.21 |
|
|
|
0.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income per share |
|
$ |
0.41 |
|
|
$ |
0.35 |
|
|
$ |
1.29 |
|
|
$ |
0.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
Economic Overview and Impact of Financial Market Events
During the first nine months of 2010, the equity markets continued to have a positive
performance relative to the comparable prior year period. This improvement from the market lows
that occurred in March of 2009 is reflected in the daily S&P 500, which averaged 1,096 during the
third quarter of 2010, 10.0% above the comparable prior year period. For the nine months ended
September 30, 2010, the S&P 500 daily average was 1,118, an increase of 24.2% over the average for
the nine months ended September 30, 2009. This rebound has positively influenced our advisory and
brokerage assets and improved those revenue sources which are directly driven by asset-based
pricing. Despite the recovery from the market lows in the first quarter of 2009, the market and
economic environment continue to be uncertain due to continued economic concerns and weak consumer
confidence. During the third quarter of 2010, concerns about the sustainability of economic growth,
particularly in the United States, led to a decline in the overall market levels, as the S&P 500
daily average for the third quarter was 3.4% lower than the average for the second
quarter of 2010. The concerns about economic prospects, and the declining markets, led to lower
investor activities.
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 0.19% in the third quarter of 2010, compared to 0.15% for the
third quarter of 2009. For both the nine months ended September 30, 2010 and 2009, the average
effective rates for federal funds were 0.17%. 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 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 expense management activities.
34
Results of Operations
The following discussion presents an analysis of our results of operations for the three and
nine months ended September 30, 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 |
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
% Change |
|
2010 |
|
|
2009 |
|
|
% Change |
|
|
(In thousands) |
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions |
|
$ |
385,273 |
|
|
$ |
370,249 |
|
|
|
4.1 |
% |
|
$ |
1,194,414 |
|
|
$ |
1,084,900 |
|
|
|
10.1 |
% |
Advisory fees |
|
|
212,344 |
|
|
|
182,141 |
|
|
|
16.6 |
% |
|
|
633,820 |
|
|
|
507,509 |
|
|
|
24.9 |
% |
Asset-based fees |
|
|
81,599 |
|
|
|
70,894 |
|
|
|
15.1 |
% |
|
|
230,485 |
|
|
|
201,287 |
|
|
|
14.5 |
% |
Transaction and other
fees |
|
|
70,243 |
|
|
|
68,764 |
|
|
|
2.2 |
% |
|
|
205,738 |
|
|
|
191,711 |
|
|
|
7.3 |
% |
Other |
|
|
10,505 |
|
|
|
10,278 |
|
|
|
2.2 |
% |
|
|
29,074 |
|
|
|
29,214 |
|
|
|
(0.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
|
759,964 |
|
|
|
702,326 |
|
|
|
8.2 |
% |
|
|
2,293,531 |
|
|
|
2,014,621 |
|
|
|
13.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production |
|
|
525,628 |
|
|
|
481,182 |
|
|
|
9.2 |
% |
|
|
1,595,368 |
|
|
|
1,387,701 |
|
|
|
15.0 |
% |
Compensation and benefits |
|
|
74,627 |
|
|
|
66,337 |
|
|
|
12.5 |
% |
|
|
223,024 |
|
|
|
198,156 |
|
|
|
12.5 |
% |
General and
administrative |
|
|
68,798 |
|
|
|
65,787 |
|
|
|
4.6 |
% |
|
|
176,585 |
|
|
|
165,159 |
|
|
|
6.9 |
% |
Depreciation and
amortization |
|
|
19,772 |
|
|
|
26,924 |
|
|
|
(26.6 |
)% |
|
|
67,472 |
|
|
|
81,596 |
|
|
|
(17.3 |
)% |
Restructuring charges |
|
|
1,863 |
|
|
|
42,219 |
|
|
|
|
* |
|
|
10,434 |
|
|
|
41,695 |
|
|
|
|
* |
Other |
|
|
3,750 |
|
|
|
1,640 |
|
|
|
128.7 |
% |
|
|
11,801 |
|
|
|
11,003 |
|
|
|
7.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating
expenses |
|
|
694,438 |
|
|
|
684,089 |
|
|
|
1.5 |
% |
|
|
2,084,684 |
|
|
|
1,885,310 |
|
|
|
10.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating interest
expense |
|
|
19,511 |
|
|
|
24,626 |
|
|
|
(20.8 |
)% |
|
|
71,530 |
|
|
|
76,599 |
|
|
|
(6.6 |
)% |
Loss on extinguishment
of debt |
|
|
|
|
|
|
|
|
|
|
|
* |
|
|
37,979 |
|
|
|
|
|
|
|
|
* |
Loss (gain) on equity
method investment |
|
|
3 |
|
|
|
96 |
|
|
|
|
* |
|
|
(18 |
) |
|
|
264 |
|
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
713,952 |
|
|
|
708,811 |
|
|
|
0.7 |
% |
|
|
2,194,175 |
|
|
|
1,962,173 |
|
|
|
11.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before
provision for (benefit
from) income taxes |
|
|
46,012 |
|
|
|
(6,485 |
) |
|
|
|
* |
|
|
99,356 |
|
|
|
52,448 |
|
|
|
89.4 |
% |
Provision for (benefit
from) income taxes |
|
|
19,868 |
|
|
|
(5,029 |
) |
|
|
|
* |
|
|
39,658 |
|
|
|
23,526 |
|
|
|
68.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
26,144 |
|
|
$ |
(1,456 |
) |
|
|
|
* |
|
$ |
59,698 |
|
|
$ |
28,922 |
|
|
|
106.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
Revenues
Commissions
The following table sets forth our commission revenue by product category included in our
unaudited condensed consolidated statements of income for the three months ended September 30, 2010
and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
% Total |
|
2009 |
|
|
% Total |
|
Change |
|
|
% Change |
Variable annuities |
|
$ |
161,729 |
|
|
|
42.0 |
% |
|
$ |
139,880 |
|
|
|
37.8 |
% |
|
$ |
21,849 |
|
|
|
15.6 |
% |
Mutual funds |
|
|
105,302 |
|
|
|
27.3 |
% |
|
|
99,644 |
|
|
|
26.9 |
% |
|
|
5,658 |
|
|
|
5.7 |
% |
Fixed annuities |
|
|
33,103 |
|
|
|
8.6 |
% |
|
|
53,525 |
|
|
|
14.4 |
% |
|
|
(20,422 |
) |
|
|
(38.2 |
)% |
Alternative investments |
|
|
25,876 |
|
|
|
6.7 |
% |
|
|
18,178 |
|
|
|
4.9 |
% |
|
|
7,698 |
|
|
|
42.3 |
% |
Equities |
|
|
19,644 |
|
|
|
5.1 |
% |
|
|
22,116 |
|
|
|
6.0 |
% |
|
|
(2,472 |
) |
|
|
(11.2 |
)% |
Fixed income |
|
|
21,060 |
|
|
|
5.5 |
% |
|
|
20,524 |
|
|
|
5.5 |
% |
|
|
536 |
|
|
|
2.6 |
% |
Insurance |
|
|
18,044 |
|
|
|
4.7 |
% |
|
|
15,772 |
|
|
|
4.3 |
% |
|
|
2,272 |
|
|
|
14.4 |
% |
Other |
|
|
515 |
|
|
|
0.1 |
% |
|
|
610 |
|
|
|
0.2 |
% |
|
|
(95 |
) |
|
|
(15.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commission revenue |
|
$ |
385,273 |
|
|
|
100.0 |
% |
|
$ |
370,249 |
|
|
|
100.0 |
% |
|
$ |
15,024 |
|
|
|
4.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commission revenue increased by $15.0 million, or 4.1%, for the three months ended September
30, 2010 compared with 2009. The increase is due to an increase in trail-based commissions
resulting from the improved market conditions as well as growth in assets eligible for trail
payment. Declines in sales-based commissions in fixed annuities and equities were substantially
offset by increased sales-based commissions in variable annuities and alternative investments. The
decline in sales-based commissions on fixed annuities reflects lower investor demand for
longer-term interest-rate sensitive products, while the decline in commissions on equity trades
resulted from a reduction in investor equity trading during the third quarter of 2010 in response
to lower levels of equity trading due to continued uncertainty and
market volatility and consistent with overall industry trends.
The following table sets forth our commission revenue by product category included in our
unaudited condensed consolidated statements of income for the nine months ended September 30, 2010
and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
% Total |
|
2009 |
|
|
% Total |
|
Change |
|
|
% Change |
Variable annuities |
|
$ |
490,176 |
|
|
|
41.0 |
% |
|
$ |
396,925 |
|
|
|
36.6 |
% |
|
$ |
93,251 |
|
|
|
23.5 |
% |
Mutual funds |
|
|
337,557 |
|
|
|
28.3 |
% |
|
|
276,159 |
|
|
|
25.5 |
% |
|
|
61,398 |
|
|
|
22.2 |
% |
Fixed annuities |
|
|
106,193 |
|
|
|
8.9 |
% |
|
|
183,029 |
|
|
|
16.9 |
% |
|
|
(76,836 |
) |
|
|
(42.0 |
)% |
Alternative investments |
|
|
72,073 |
|
|
|
6.0 |
% |
|
|
54,506 |
|
|
|
5.0 |
% |
|
|
17,567 |
|
|
|
32.2 |
% |
Equities |
|
|
68,784 |
|
|
|
5.8 |
% |
|
|
66,159 |
|
|
|
6.0 |
% |
|
|
2,625 |
|
|
|
4.0 |
% |
Fixed income |
|
|
63,015 |
|
|
|
5.3 |
% |
|
|
55,692 |
|
|
|
5.1 |
% |
|
|
7,323 |
|
|
|
13.1 |
% |
Insurance |
|
|
54,938 |
|
|
|
4.6 |
% |
|
|
50,534 |
|
|
|
4.7 |
% |
|
|
4,404 |
|
|
|
8.7 |
% |
Other |
|
|
1,678 |
|
|
|
0.1 |
% |
|
|
1,896 |
|
|
|
0.2 |
% |
|
|
(218 |
) |
|
|
(11.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commission revenue |
|
$ |
1,194,414 |
|
|
|
100.0 |
% |
|
$ |
1,084,900 |
|
|
|
100.0 |
% |
|
$ |
109,514 |
|
|
|
10.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months September 30, 2010, commission revenue increased by $109.5 million, or
10.1%, compared with 2009. The increase is primarily due to an increase in trail-based commissions
related to improved market conditions as well as growth in assets eligible for trail payment.
Sales-based commissions also increased as a result of greater commission-based products activity.
Sales-based commissions from more market sensitive products such as variable annuities and mutual
funds experienced an increase over the prior year period due to increasing investor confidence.
Sales of certain financial products with more predictable cash flows such as fixed annuities, which
typically increase during periods of financial uncertainty, decreased during this period,
consistent with the markets recovery.
36
Advisory Fees
Advisory fees increased by $30.2 million, or 16.6%, for the three months ended September 30,
2010 compared with 2009. For the nine months ended September 30, 2010, advisory fees increased
$126.3 million, or 24.9%, compared to the prior year period. The increase was primarily due to the
effect of the rebounding market, which resulted in a significant increase in the value of client
assets in advisory programs. Our advisory assets under management increased 18.7% from $72.6
billion at September 30, 2009 to $86.2 billion at September 30, 2010.
The following table summarizes the activity within our advisory assets under management for
the nine months ended September 30, 2010 and 2009 (in billions):
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Beginning balance at January 1 |
|
$ |
77.2 |
|
|
$ |
59.6 |
|
Net new advisory assets |
|
|
5.8 |
|
|
|
4.5 |
|
Market impacts |
|
|
3.2 |
|
|
|
8.5 |
|
|
|
|
|
|
|
|
Ending balance at September 30 |
|
$ |
86.2 |
|
|
$ |
72.6 |
|
|
|
|
|
|
|
|
Asset-Based Fees
Asset-based fees increased by $10.7 million, or 15.1%, for the three months ended September
30, 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. In addition, revenues from our cash sweep
programs increased by $2.4 million, or 8.1%, to $31.9 million for the three months ended September
30, 2010 from $29.5 million for the three months ended September 30, 2009. This was primarily
driven by an increase in the interest rate as reflected by the average effective federal funds rate
and its influence on fees associated with assets in our cash sweep programs. For the three months
ended September 30, 2010, the effective federal funds rate averaged 0.19% compared to 0.15% for the
three months ended September 30, 2009. Assets in our cash sweep programs averaged $18.7 billion and
$19.5 billion for the three months ended September 30, 2010 and 2009, respectively.
Asset-based fees increased by $29.2 million, or 14.5%, for the nine months ended September 30,
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. This increase was offset by lower revenues from our cash
sweep programs, which declined by $6.4 million, or 6.8%, to $87.5 million for the nine months ended
September 30, 2010 from $93.9 million for the nine months ended September 30, 2009, as a result of
lower assets in our cash sweep programs. Assets in our cash sweep programs averaged $18.6 billion
and $21.1 billion for the nine months ended September 30, 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 $1.5 million, or 2.2%, for the
three months ended September 30, 2010 compared with 2009. This increase is due to increased
revenues earned from advisor conferences of $0.7 million and increased prices and corresponding
fees to advisors for licensing and IRA custodial services of $0.7 million and $1.0 million,
respectively. These increases are partially offset by a reduction in transactional revenue of $1.1
million.
Transaction and other fees increased by $14.0 million, or 7.3%, for the nine months ended
September 30, 2010 compared with 2009. This increase is due, in part, to increased revenues earned
from advisor conferences of $2.7 million and increases in charges to advisors for licensing of $3.4
million and professional liability insurance services of $1.6 million, in 2010 as compared to 2009
due to increases in pricing for such services.
37
Other Revenue
Other revenue increased by $0.2 million, or 2.2%, for the three months ended September 30,
2010 compared with 2009. The increase was primarily attributed to higher direct investment
marketing allowances received from product sponsors, largely based on sales volumes, which was
offset by lower unrealized mark-to-market gains in securities owned and certain other assets.
For the nine months ended September 30, 2010, other revenue decreased $0.1 million, or 0.5%,
compared with the same period in the prior year. The decrease was due primarily to lower interest
revenue from client margin lending activities and interest earned on our cash equivalents, as well
as lower unrealized mark-to-market gains in securities owned and certain other assets. These decreases
were partially offset by higher direct investment marketing allowances received from product
sponsor programs, largely based on sales volumes.
Expenses
Production Expenses
Production expenses increased by $44.4 million, or 9.2%, for the three months ended September
30, 2010 compared with 2009. This increase was correlated with our commission and advisory
revenues, which increased by 8.2% during the same period. Our production payout averaged 86.6% for
the three months ended September 30, 2010 and 85.6% for the three months ended September 30, 2009.
Production expenses increased by $207.7 million, or 15.0%, for the nine months ended September
30, 2010 compared with 2009. This increase was a result of an 14.8% increase in our commission and
advisory revenues during the same period. Our production payout averaged 85.8% for the nine months
ended September 30, 2010 and 85.6% for the nine months ended September 30, 2009.
Compensation and Benefits
Compensation and benefits increased by $8.3 million, or 12.5%, for the three months ended
September 30, 2010 compared with 2009. The increase was primarily attributed to the restoration of
certain employee-related items, including increases in bonus levels and contributions to employee
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 2,540 and 2,416 for the three
months ended September 30, 2010 and 2009, respectively.
For the nine months ended September 30, 2010, compensation and benefits increased $24.9
million, or 12.5%, compared to the prior year period. The increase was primarily attributed to the
restoration of certain employee-related items, including increases in bonus levels and
contributions to employee 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 2,502
and 2,438 for the nine months ended September 30, 2010 and 2009, respectively.
General and Administrative Expenses
General and administrative expenses increased by $3.0 million, or 4.6%, for the three months
ended September 30, 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
strategic business review. As market conditions improved, we cautiously reinstated certain levels
of general and administrative expenses that are necessary to support growth and service to our
advisors. For the three months ended September 30, 2010, increases in certain advisor conference
services contributed to $1.6 million in additional general and administrative expenses.
38
For the nine months ended September 30, 2010, general and administrative expenses increased
$11.4 million, or 6.9%, compared to the prior year period. The increase compared to the prior year
was due to the reinstatement of certain levels of general and administrative expenses necessary to
support growth and service to our advisors. During the first nine months of 2010, increases in
certain advisor conference services contributed to additional general and administrative expenses
of $8.4 million.
Depreciation and Amortization
Depreciation and amortization expense decreased by $7.2 million, or 26.6%, for the three
months ended September 30, 2010 compared with 2009. For the nine months ended September 30, 2010,
depreciation and amortization decreased by $14.1 million, or 17.3%, compared to the same period in
the prior year. The decrease in both the three and nine month periods is primarily attributed to a
step up in basis of $89.1 million in our internally developed software that was established at the
time of our 2005 merger transaction and became fully amortized in April 2010. We recorded $6.3
million in amortization expense for these assets for the nine months ended September 30, 2010. We
recorded $4.8 million and $14.4 million in amortization expense for these assets for the three and
nine months ended September 30, 2009, respectively. In addition, we recorded asset impairments of
$19.9 million in the third and fourth quarter of 2009 in the consolidation of our Affiliated
Entities, which resulted in lower balances in those intangible assets that are amortized.
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 in 2008 to reduce our cost
structure and improve operating efficiencies.
Restructuring charges were $1.9 million for the three months ended September 30, 2010. For the
nine months ended September 30, 2010, restructuring charges were $10.4 million, which includes
charges incurred for severance and termination benefits of $2.1 million, contract termination costs
of $2.4 million, asset impairment charges of $0.8 million and $5.1 million in other expenditures
principally relating to the conversion and transfer of advisors and their client accounts from the
Affiliated Entities to LPL Financial.
Restructuring charges were $42.2 and $41.7 million for the three and nine months ended
September 30, 2009, respectively. In the third quarter of 2009, restructuring charges were incurred
for severance and termination benefits of $6.3 million, contract termination costs of $8.5 million,
asset impairment write-offs of $17.9 million and $9.5 million in other expenditures principally
relating to the conversion and transfer of registered representatives and client accounts from the
Affiliated Broker-Dealers to LPL Financial. These costs were 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 restructuring activities.
Other Expenses
Other expenses increased by $2.1 million, or 128.7%, for the three months ended September 30,
2010 compared with 2009. For the nine months ended September 30, 2010, other expenses increased
$0.1 million, or 7.3%, compared to the prior year period. The increase in both the three and nine
month periods ended September 30, 2010 is primarily due to an increase in reserves for unsecured
client accounts.
Interest Expense
Interest expense includes non-operating interest expense for our senior secured credit
facilities and our senior unsecured subordinated notes.
39
Interest expense decreased by $5.1 million, or 20.8%, for the three months ended September 30,
2010 compared with 2009. For the nine months ended September 30, 2010, interest expense decreased
approximately $5.1 million, or 6.6%, compared to the same period in the prior year. The
reduction in interest expense for the three and nine months ended
September 30, 2010 is mainly attributed
to our debt refinancing in the second quarter of 2010, which included the redemption of our
senior unsecured subordinated notes, resulting in a lower cost of borrowing.
Loss on Extinguishment of Debt
Loss on extinguishment of debt was $38.0 million for the nine month periods ended September
30, 2010. In May 2010, we amended and restated our credit agreement to establish a new term loan
tranche and to extend the maturity of an existing tranche on our senior credit facilities. In June
2010, we redeemed our senior unsecured subordinated notes with the proceeds from our new term loan
tranche, and recorded a $29.6 million charge. In addition, we wrote off $6.9 million of unamortized
debt issuance costs and incurred $1.5 million in professional fees associated with the subordinated
notes.
Loss or gain on Equity Method Investment
The loss or gain on equity method investment represents our share of gains or losses related
to our investment in a privately held technology company.
The loss or gain on equity method investment for the three and nine month periods ended
September 30, 2010 did not exceed $0.1 million. Loss on equity method investment was $0.1 million
and $0.3 million for the three and nine months ended September 30, 2009, respectively.
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.
The effective income tax rates reflect the impact of state taxes, settlement contingencies and
expenses that are not deductible for tax purposes.
During the three months ended September 30, 2010, we recorded income tax expense of $19.9
million compared with an income tax benefit of $5.0 million for the three months ended September
30, 2009. Our effective income tax rate was 43.2% and 77.5% for the three months ended September
30, 2010 and 2009, respectively.
Restructuring charges associated with the consolidation of our Affiliated Entities
significantly reduced net income for the three months ended September 30,
2009. As a result, the resolution of adjustments required to be recorded in the quarter, had a
greater impact on our effective tax rate, which led to a relatively high effective tax rate for
that three month period.
During the nine months ended September 30, 2010, we recorded income tax expense of $39.7
million compared with an income tax expense of $23.5 million for the nine months ended September
30, 2009. Our effective income tax rate was 39.9% and 44.9% for the nine months ended September 30,
2010 and 2009, respectively.
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
40
maintains relationships with various lenders. The
objectives of these policies are to support the executive business strategies while ensuring
ongoing and sufficient liquidity.
A summary of changes in cash flow data is provided as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Net cash flows (used in) provided by: |
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
107,821 |
|
|
$ |
107,455 |
|
Investing activities |
|
|
(12,276 |
) |
|
|
(19,073 |
) |
Financing activities |
|
|
(31,592 |
) |
|
|
(62,132 |
) |
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
63,953 |
|
|
|
26,250 |
|
Cash and cash equivalents beginning of period |
|
|
378,594 |
|
|
|
219,239 |
|
|
|
|
|
|
|
|
Cash and cash equivalents end of period |
|
$ |
442,547 |
|
|
$ |
245,489 |
|
|
|
|
|
|
|
|
Cash requirements and liquidity needs are primarily funded through our cash flow from
operations and our capacity for additional borrowing.
Net cash 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 provided by operating activities for the nine months ended September 30, 2010
was $107.8 million, compared to net cash provided by operating activities of $107.5 million for the
nine months ended September 30, 2009.
Net cash used in investing activities for the nine months ended September 30, 2010 and
September 30, 2009 totaled $12.3 million and $19.1 million, respectively. The decrease for the nine
months ended September 30, 2010 as compared to the nine months ended September 30, 2009 was
principally due to a decline in deposits of restricted cash. During the nine months ended September
30, 2009, $12.8 million of restricted cash was deposited into escrow accounts pending certain
matters as a condition of regulatory approval for the transfer of advisors and client accounts to
LPL Financial from the Affiliated Entities, compared to net deposits of $1.2 million of restricted cash
during the nine months ended September 30, 2010.
Net cash used in financing activities for the nine months ended September 30, 2010 and
September 30, 2009, was $31.6 million and $62.1 million, respectively. The revolving line of credit
facility was paid down during the nine months ended September 30, 2009, and there were no
additional borrowings on the facility in the current year period. This activity was offset in part
by the net impact of the redemption of $579.6 million of senior unsecured subordinated notes, and
proceeds of $566.7 million received from the 2017 Term Loans during the nine months ended September
30, 2010. In addition, $7.2 million of debt issuance costs have been paid during the nine months ended September 30, 2010.
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.
41
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 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
Commodity Futures Trading Commissions 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, 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 unaudited
condensed 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 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.
42
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 redeem 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. The redemption price of the senior unsecured subordinated notes was 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 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 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 had a limit of
$100 million, which was 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 $210 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 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 September
30, 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.
43
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 under our 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; |
|
|
|
enter into sale and leaseback transactions; |
|
|
|
engage in mergers or consolidations; |
|
|
|
sell or transfer assets; |
|
|
|
pay dividends and distributions or repurchase our capital stock; |
|
|
|
|
make investments, loans or advances; |
44
|
|
|
prepay certain subordinated indebtedness; |
|
|
|
engage in certain transactions with affiliates; |
|
|
|
amend material agreements governing certain subordinated indebtedness; and |
|
|
|
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.
As of September 30, 2010 and December 31, 2009, we were in compliance with all of our covenant
requirements.
Our covenant requirements and pro forma ratios for the twelve month period ended September 30,
2010 and December 31, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010 |
|
|
December 31, 2009 |
|
|
|
Covenant |
|
|
Actual |
|
|
Covenant |
|
|
Actual |
|
Financial Ratio |
|
Requirement |
|
|
Ratio |
|
|
Requirement |
|
|
Ratio |
|
Leverage Test (Maximum) |
|
|
3.90 |
|
|
|
2.81 |
|
|
|
4.60 |
|
|
|
3.42 |
|
Interest Coverage (Minimum) |
|
|
2.50 |
|
|
|
4.46 |
|
|
|
2.15 |
|
|
|
3.81 |
|
45
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 September 30, 2010 and December 31,
2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(unaudited) |
|
Net income |
|
$ |
78,296 |
|
|
$ |
47,520 |
|
Interest expense |
|
|
95,853 |
|
|
|
100,922 |
|
Income tax expense |
|
|
41,179 |
|
|
|
25,047 |
|
Amortization of purchased intangible assets and software(1) |
|
|
48,817 |
|
|
|
59,577 |
|
Depreciation and amortization of all other fixed assets |
|
|
45,355 |
|
|
|
48,719 |
|
|
|
|
|
|
|
|
EBITDA |
|
|
309,500 |
|
|
|
281,785 |
|
EBITDA Adjustments: |
|
|
|
|
|
|
|
|
Share-based compensation expense(2) |
|
|
10,153 |
|
|
|
6,437 |
|
Acquisition and integration related expenses(3) |
|
|
10,433 |
|
|
|
3,037 |
|
Restructuring and conversion costs(4) |
|
|
39,935 |
|
|
|
64,658 |
|
Debt amendment and extinguishment costs(5) |
|
|
38,633 |
|
|
|
|
|
Other(6) |
|
|
149 |
|
|
|
151 |
|
|
|
|
|
|
|
|
Total EBITDA Adjustments |
|
|
99,303 |
|
|
|
74,283 |
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
|
408,803 |
|
|
|
356,068 |
|
Pro-forma adjustments(7) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Agreement Adjusted EBITDA |
|
$ |
408,803 |
|
|
$ |
356,068 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents amortization of intangible assets and software as a result
of our purchase accounting adjustments from our merger transaction in
2005 and our 2007 acquisitions of UVEST, the Affiliated Entities and
IFMG. |
|
(2) |
|
Represents share-based compensation expense related to vested stock
options awarded to employees and non-executive directors based on the
grant date fair value under the Black-Scholes valuation model. |
|
(3) |
|
Represents acquisition and integration costs resulting from our 2007
acquisitions of the Affiliated Entities and IFMG. Included in the
three and nine months ended September 30, 2010, are expenditures for
certain legal settlements that have not been resolved with the
indemnifying party. See Litigation in Note 10 of our unaudited
condensed consolidated financial statements for further discussion on
legal settlements. |
|
(4) |
|
Represents organizational restructuring charges incurred in 2009 and
2010 for severance and one-time termination benefits, assets
impairments, lease and contract termination fees and other transfer
costs. |
|
(5) |
|
Represents debt amendment costs incurred in 2010 for amending and
restating our credit agreement to establish a new term loan tranche
and to extend the maturity of an existing tranche on our senior credit
facilities, and debt extinguishment costs to redeem our subordinated
notes. |
|
(6) |
|
Represents excise and other taxes. |
|
(7) |
|
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 September 30, 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 $210.0 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 notional balance. Payments are settled quarterly on a net basis. As of September
30, 2010, we assessed our interest rate swaps as being highly effective and we expect them to
continue to be highly effective. While approximately $1.2 billion of our term loan remains unhedged
as of September 30, 2010, the risk of variability on our floating interest rate is partially
mitigated by the client margin loans on which we carry
46
floating interest rates. At September 30, 2010, our receivables from our advisors clients for
margin loan activity were approximately $234.2 million.
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. Both lines
were utilized in 2010 and 2009; however, there were no balances outstanding at September 30, 2010
or December 31, 2009.
Off-Balance Sheet Arrangements and Contractual Obligations
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 10 and 15 to our unaudited
condensed consolidated financial statements.
The following table provides information with respect to our commitments and obligations as of
September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
< 1 |
|
|
1-3 |
|
|
4-5 |
|
|
> 5 |
|
|
|
Total |
|
|
Year |
|
|
Years |
|
|
Years |
|
|
Years |
|
|
|
(In thousands) |
|
Leases and other obligations(1) |
|
$ |
103,052 |
|
|
$ |
31,270 |
|
|
$ |
44,075 |
|
|
$ |
18,006 |
|
|
$ |
9,701 |
|
Senior secured term loan facilities(2) |
|
|
1,390,132 |
|
|
|
13,971 |
|
|
|
344,761 |
|
|
|
489,100 |
|
|
|
542,300 |
|
Commitment fee on revolving line of
credit(3) |
|
|
3,426 |
|
|
|
1,366 |
|
|
|
2,060 |
|
|
|
|
|
|
|
|
|
Variable interest payments:(4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 Term Loan (Hedged) |
|
|
4,592 |
|
|
|
3,587 |
|
|
|
1,005 |
|
|
|
|
|
|
|
|
|
2013 Term Loan (Unhedged) |
|
|
13,094 |
|
|
|
2,913 |
|
|
|
10,181 |
|
|
|
|
|
|
|
|
|
2015 Term Loan (Unhedged) |
|
|
99,259 |
|
|
|
21,356 |
|
|
|
62,834 |
|
|
|
15,069 |
|
|
|
|
|
2017 Term Loan (Unhedged) |
|
|
200,521 |
|
|
|
30,603 |
|
|
|
90,037 |
|
|
|
58,506 |
|
|
|
21,375 |
|
Interest rate swap agreements(5) |
|
|
10,253 |
|
|
|
7,995 |
|
|
|
2,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations |
|
$ |
1,824,329 |
|
|
$ |
113,061 |
|
|
$ |
557,211 |
|
|
$ |
580,681 |
|
|
$ |
573,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Minimum payments have not been reduced by minimum sublease rental
income of $0.7 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) |
|
Represents principal payments on our senior secured term loan
facilities. See Note 8 of our unaudited condensed consolidated
financial statements for further detail. |
|
(3) |
|
Represents commitment fees for unused borrowings on our senior secured
revolving line of credit facility. See Note 8 of our unaudited
condensed consolidated financial statements for further detail. |
|
(4) |
|
Our senior secured term loan facilities bear interest at floating
rates. Variable interest payments are shown assuming the applicable
LIBOR rates at September 30, 2010 remain unchanged. See Note 8 of our
unaudited condensed consolidated financial statements for further
detail. |
|
(5) |
|
Represents fixed interest payments net of variable interest received
on our interest rate swap agreements. See Note 9 of our unaudited
condensed consolidated financial statements for further detail. |
As of September 30, 2010, we reflect a liability for unrecognized tax benefits of $22.9
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.
47
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 September 30, 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
We have disclosed in our consolidated financial statements and in Managements Discussion and
Analysis of Financial Condition and Results of Operations included in our Registration Statement
on Form S-1, filed on June 4, 2010, as amended, those accounting policies that we consider to be
significant in determining our results of operations and financial condition. There have been no
material changes to those policies that we consider to be significant since the filing of our
Registration Statement on Form S-1, as amended. The accounting principles used in preparing our
unaudited condensed consolidated financial statements conform in all material respects to GAAP.
Recent Accounting Pronouncements
Refer to Note 2 of our unaudited condensed consolidated financial statements for a discussion
of recent accounting standards and pronouncements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk
We maintain trading securities owned and securities sold but not yet purchased in order to
facilitate client transactions, to meet a portion of our clearing deposit requirements at various
clearing organizations, and to track the performance of our research models. 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 activities to facilitate client transactions generally
involve mutual fund activities, including dividend reinvestments. The balances are based upon
pending client activities which are monitored by our broker dealer support services department.
Because these positions arise from pending client transactions, there are no specific trading or
position limits. Positions held to meet clearing deposit requirements consist of US Government
securities. The amount of securities deposited depends upon the requirements of the clearing
organization. The level of securities deposited is monitored by the settlement area with broker
dealer support services. Our research department develops model portfolios that are used by
advisors in developing client portfolios. We currently maintain 171 accounts, based on model
portfolios. At the time the portfolio is developed, we purchase the securities in that model
portfolio in an amount equal to the account minimum for a client. Account minimums vary by product
and can range from $10,000 to $50,000 per model. We utilize these positions to track the
performance of the research department. The limits on this activity are based at the inception of
each new model.
At September 30, 2010 and December 31, 2009, the fair value of our trading securities owned
were $18.6 million and $15.4 million, respectively. Securities sold but not yet purchased were $2.7
million and
48
$4.0 million respectively, at September 30, 2010 and December 31, 2009. See Note 4 of our
unaudited condensed 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 5 of our unaudited condensed 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 September 30, 2010,
all of the outstanding debt under our senior secured credit facilities, $1.4 billion, was subject
to floating 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 portion ($210.0 million) of our senior secured indebtedness. While the unhedged portion
of our senior secured debt is subject to increases in interest rates, we do not believe that a
short-term change in interest rates would have a material impact on our income before taxes.
The following table summarizes the impact of increasing interest rates on our interest expense
from the variable portion of our debt outstanding at September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at |
|
|
Annual Impact of an Interest Rate Increase of |
|
|
|
Variable Interest |
|
|
10 Basis |
|
|
25 Basis |
|
|
50 Basis |
|
|
100 Basis |
|
Senior Secured Term Loans |
|
Rates |
|
|
Points |
|
|
Points |
|
|
Points |
|
|
Points |
|
|
|
(Dollars in thousands) |
|
2013 Term Loan (Hedged)(1) |
|
$ |
210,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
2013 Term Loan (Unhedged)(2) |
|
|
105,532 |
|
|
|
104 |
|
|
|
261 |
|
|
|
522 |
|
|
|
1,043 |
|
2015 Term Loan (Unhedged)(3) |
|
|
497,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 Term Loan (Unhedged)(3) |
|
|
577,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable Rate Debt Outstanding |
|
$ |
1,390,132 |
|
|
$ |
104 |
|
|
$ |
261 |
|
|
$ |
522 |
|
|
$ |
1,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3-month LIBOR(4) |
|
|
0.29 |
% |
|
|
0.39 |
% |
|
|
0.54 |
% |
|
|
0.79 |
% |
|
|
1.29 |
% |
|
|
|
(1) |
|
Represents the portion of our 2013 Term Loan that is hedged by interest rate swap
agreements, which have been designated as cash flow hedges against specific payments
due on the 2013 Term Loan. Accordingly, any interest rate differential is reflected in
an adjustment to interest expense over the term of the interest rate swap agreements. |
|
(2) |
|
Represents the unhedged portion of our 2013 Term Loan outstanding at September 30, 2010. |
|
(3) |
|
The variable interest rate for our 2015 Term Loan and our 2017 Term Loan is based on
the greater of the three-month LIBOR of 0.29% or 1.50%, plus an applicable interest
rate margin. |
|
(4) |
|
Represents the three-month LIBOR rate at September 30, 2010. |
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
49
fees. The average Federal Reserve effective federal funds rate for September 2010 was 0.19%. 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 $11.7 million on an annual basis (assuming that client balances at September 30, 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 during the nine months
ended September 30, 2010 or 2009. We monitor exposure to industry sectors and individual securities
and perform analyses on a regular basis in connection with our margin lending activities.
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.
50
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 and Human
Resources 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 our senior-most 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.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our Disclosure Committee, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and procedures, as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as
of the end of the period covered by this report. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the
end of the period covered by this report were effective.
Change in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during
the third quarter ended September 30, 2010, that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
51
PART II OTHER INFORMATION
Item 1. Legal Proceedings
During
the third quarter of 2010, the Company settled two arbitrations that
involve activities covered under the third-party indemnification
agreement described in Note 10 to our Condensed Consolidated
Financial Statements (Unaudited) included herein. In connection with
these settlements, the Company has recorded legal expenses of $8.9
million during the nine months ended September 30, 2010, of which
$5.6 million has been recorded in the third quarter of 2010. The
Company will seek to recover the costs associated with defending and
settling these matters, plus other costs incurred on matters that the
Company believes are subject to the indemnification.
Item 1A. Risk Factors
Information regarding the Companys risks is set forth under Risk Factors in the Companys
Registration Statement on Form S-1, as amended.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Reserved
Item 5. Other Information
None.
Item 6. Exhibits
|
|
|
3.1
|
|
Certificate of Incorporation of LPL Investment Holdings Inc. is incorporated by
reference to Exhibit 3.1 to the Registration Statement on Form 10 filed on April 30,
2007. |
3.2
|
|
Amendment to the Certificate of Incorporation of LPL Investment Holdings Inc. dated
December 20, 2005 is incorporated by reference to Exhibit 3.2 to the Registration
Statement on Form 10 filed on April 30, 2007. |
3.3
|
|
Amendment to the Certificate of Incorporation of LPL Investment Holdings Inc. dated
March 10, 2006 is incorporated by reference to Exhibit 3.3 to the Registration Statement
on Form 10 filed on April 30, 2007. |
3.4
|
|
Certificate of Amendment of Certificate of Incorporation of LPL Investment Holdings Inc.
dated December 26, 2007 is incorporated by reference to Exhibit 3.1 to the Current
Report on Form 8-K filed on January 4, 2008. |
3.5
|
|
Certificate of Correction of Certificate of Amendment of Certificate of Incorporation of
LPL Investment Holdings Inc. dated March 31, 2008 is incorporated by reference to
Exhibit 3.5 to the Annual Report on Form 10-K filed on March 31, 2008. |
3.6
|
|
Amended and Restated Bylaws of LPL Investment Holdings Inc. is incorporated by reference
to Exhibit 3.1 to the Current Report on Form 8-K filed on June 3, 2008. |
31.1
|
|
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) (filed herewith). |
31.2
|
|
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) (filed herewith). |
32.1
|
|
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). |
32.2
|
|
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). |
52
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
LPL Investment Holdings Inc.
|
|
Date: October 29, 2010 |
By: |
/s/ Mark S. Casady
|
|
|
Mark S. Casady |
|
|
Chairman and Chief Executive Officer |
|
|
|
|
Date: October 29, 2010 |
By: |
/s/ Robert J. Moore
|
|
|
Robert J. Moore |
|
|
Chief Financial Officer |
53
exv31w1
Exhibit 31.1
CERTIFICATIONS
I, Mark S. Casady, certify that:
1. I have reviewed this Form 10-Q of LPL Investment Holdings Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15(d)-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared;
(b) Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our 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;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrants internal control over
financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting.
|
|
|
|
|
|
|
|
/s/ Mark S. Casady
|
|
Mark S. Casady |
|
Chief Executive Officer
(Principal Executive Officer) |
|
Date: October 29, 2010
exv31w2
Exhibit 31.2
CERTIFICATIONS
I, Robert J. Moore, certify that:
1. I have reviewed this Form 10-Q of LPL Investment Holdings Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15(d)-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared;
(b) Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our 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;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrants internal control over
financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting.
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/s/ Robert J. Moore
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Robert J. Moore |
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Chief Financial Officer
(Principal Financial Officer) |
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Date: October 29, 2010
exv32w1
Exhibit 32.1
Certification Pursuant to 18 U.S.C. Section 1350
In connection with the Quarterly Report of LPL Investment Holdings Inc. (the Company) on
Form 10-Q for the quarterly period ended September 30, 2010 as filed with the Securities and
Exchange Commission (the SEC) on or about the date hereof (the Report), I, Mark S. Casady,
Chief Executive Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
A signed original of this written statement has been provided to the Company and will be
retained by the Company and furnished to the SEC or its staff upon request.
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/s/ Mark S. Casady
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Mark S. Casady |
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Chief Executive Officer
(Principal Executive Officer) |
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Date: October 29, 2010
exv32w2
Exhibit 32.2
Certification Pursuant to 18 U.S.C. Section 1350
In connection with the Quarterly Report of LPL Investment Holdings Inc. (the Company) on
Form 10-Q for the quarterly period ended September 30, 2010 as filed with the Securities and
Exchange Commission (the SEC) on or about the date hereof (the Report), I, Robert J. Moore,
Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
A signed original of this written statement has been provided to the Company and will be
retained by the Company and furnished to the SEC or its staff upon request.
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/s/ Robert J. Moore
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Robert J. Moore |
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Chief Financial Officer
(Principal Financial Officer) |
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Date: October 29, 2010