e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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(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 June 30, 2010
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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
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For the transition period
from to
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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
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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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 July 28, 2010 was 94,243,073.90.
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
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Item 1.
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Financial
Statements
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Three Months Ended
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Six Months Ended
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June 30,
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June 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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$
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420,169
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$
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367,431
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$
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809,141
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$
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714,651
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Advisory fees
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215,146
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161,463
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421,476
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325,368
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Asset-based fees
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77,436
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67,739
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148,886
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130,393
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Transaction and other fees
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68,132
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61,609
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135,495
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122,947
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Interest income, net of operating interest expense
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4,906
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4,993
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9,777
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10,387
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Other
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4,372
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6,082
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8,792
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8,549
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Net revenues
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790,161
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669,317
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1,533,567
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1,312,295
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EXPENSES:
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Commissions and advisory fees
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547,296
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455,921
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1,052,158
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890,623
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Compensation and benefits
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74,822
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64,841
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148,397
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131,819
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Depreciation and amortization
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22,110
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27,277
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47,700
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54,672
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Promotional
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11,294
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12,974
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25,644
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25,616
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Occupancy and equipment
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11,745
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11,817
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23,763
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24,262
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Professional services
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13,468
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8,571
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23,267
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16,937
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Brokerage, clearing and exchange
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9,242
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8,067
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17,582
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15,896
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Communications and data processing
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8,290
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8,357
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16,816
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17,543
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Regulatory fees and expenses
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6,529
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5,442
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12,677
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10,916
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Restructuring charges
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4,622
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(197
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)
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8,571
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(524
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)
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Travel and entertainment
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3,224
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2,340
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5,620
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4,098
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Other
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3,274
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5,643
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8,051
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9,363
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Total operating expenses
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715,916
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611,053
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1,390,246
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1,201,221
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Non-operating interest expense
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27,683
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26,032
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52,019
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51,973
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Loss on extinguishment of debt
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37,979
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37,979
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(Gain) loss on equity method investment
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(45
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)
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84
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(21
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168
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Total expenses
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781,533
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637,169
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1,480,223
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1,253,362
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INCOME BEFORE PROVISION FOR INCOME TAXES
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8,628
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32,148
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53,344
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58,933
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PROVISION FOR INCOME TAXES
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628
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16,567
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19,790
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28,555
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NET INCOME
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$
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8,000
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$
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15,581
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$
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33,554
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$
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30,378
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EARNINGS PER SHARE (Note 12):
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Basic
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$
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0.09
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$
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0.18
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$
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0.38
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$
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0.34
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Diluted
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$
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0.08
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$
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0.16
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$
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0.33
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$
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0.30
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|
|
|
|
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See notes to unaudited condensed consolidated financial
statements.
1
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June 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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$
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402,741
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$
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378,594
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Cash and securities segregated under federal and other
regulations
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257,250
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288,608
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Receivables from:
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Clients, net of allowance of $646 at June 30, 2010 and $792
at December 31, 2009
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266,179
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257,529
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Product sponsors, broker-dealers and clearing organizations
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170,208
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171,900
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Others, net of allowances of $8,480 at June 30, 2010 and
$6,159 at December 31, 2009
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146,372
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|
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139,317
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Securities owned:
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Trading(1)
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18,145
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15,361
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Held-to-maturity
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9,069
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10,454
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Securities borrowed
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1,653
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4,950
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Fixed assets, net of accumulated depreciation and amortization
of $257,715 at June 30, 2010 and $239,868 at
December 31, 2009
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76,291
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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 $154,240
at June 30, 2010 and $136,177 at December 31, 2009
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578,563
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597,083
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Debt issuance costs, net of accumulated amortization of $11,560
at June 30, 2010 and $15,724 at December 31, 2009
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26,257
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16,542
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Other assets
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69,216
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61,648
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Total assets
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$
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3,315,310
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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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$
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132,238
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$
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125,767
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Payables to clients
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|
417,803
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|
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|
493,943
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Payables to broker-dealers and clearing organizations
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|
|
24,881
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|
|
|
18,217
|
|
Accrued commissions and advisory fees payable
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|
|
121,231
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|
|
|
110,040
|
|
Accounts payable and accrued liabilities
|
|
|
176,923
|
|
|
|
175,742
|
|
Income taxes payable
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|
|
5,447
|
|
|
|
24,226
|
|
Interest rate swaps
|
|
|
10,858
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|
|
|
17,292
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|
Securities sold but not yet purchased at market value
|
|
|
2,591
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|
|
|
4,003
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|
Senior credit facilities and subordinated notes
|
|
|
1,393,625
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|
|
|
1,369,223
|
|
Deferred income taxes net
|
|
|
131,850
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|
|
|
147,608
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|
|
|
|
|
|
|
|
|
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Total liabilities
|
|
|
2,417,447
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|
|
|
2,486,061
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|
|
|
|
|
|
|
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STOCKHOLDERS EQUITY:
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Common stock, $.001 par value; 200,000,000 shares
authorized; 94,267,644 shares issued and outstanding at
June 30, 2010 of which 7,430,381 are restricted, and
94,214,762 shares issued and outstanding at
December 31, 2009 of which 7,423,973 are restricted
|
|
|
87
|
|
|
|
87
|
|
Additional paid-in capital
|
|
|
687,590
|
|
|
|
679,277
|
|
Stockholder loans
|
|
|
(51
|
)
|
|
|
(499
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)
|
Accumulated other comprehensive loss
|
|
|
(6,599
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)
|
|
|
(11,272
|
)
|
Retained earnings
|
|
|
216,836
|
|
|
|
183,282
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
897,863
|
|
|
|
850,875
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
3,315,310
|
|
|
$
|
3,336,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $11,051 and $7,797 pledged to clearing organizations at
June 30, 2010 and December 31, 2009, respectively. |
See notes to unaudited condensed consolidated financial
statements.
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common
|
|
|
Paid-In
|
|
|
Stockholder
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Stockholders
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Loans
|
|
|
Income (Loss)
|
|
|
Earnings
|
|
|
Equity
|
|
|
BALANCE December 31, 2008
|
|
$
|
87
|
|
|
$
|
670,897
|
|
|
$
|
(936
|
)
|
|
$
|
(15,498
|
)
|
|
$
|
135,762
|
|
|
$
|
790,312
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,378
|
|
|
|
30,378
|
|
Unrealized gain on interest rate swaps, net of tax expense of
$1,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,428
|
|
|
|
|
|
|
|
3,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,806
|
|
Exercise of stock options
|
|
|
|
|
|
|
165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
165
|
|
Tax benefits from share-based compensation
|
|
|
|
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147
|
|
Stockholder loans
|
|
|
|
|
|
|
|
|
|
|
450
|
|
|
|
|
|
|
|
|
|
|
|
450
|
|
Share-based compensation
|
|
|
|
|
|
|
2,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,783
|
|
Repurchase of 10,000 shares of common stock
|
|
|
|
|
|
|
(181
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(181
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE June 30, 2009
|
|
$
|
87
|
|
|
$
|
673,811
|
|
|
$
|
(486
|
)
|
|
$
|
(12,070
|
)
|
|
$
|
166,140
|
|
|
$
|
827,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE December 31, 2009
|
|
$
|
87
|
|
|
$
|
679,277
|
|
|
$
|
(499
|
)
|
|
$
|
(11,272
|
)
|
|
$
|
183,282
|
|
|
$
|
850,875
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,554
|
|
|
|
33,554
|
|
Unrealized gain on interest rate swaps, net of tax expense of
$1,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,673
|
|
|
|
|
|
|
|
4,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,227
|
|
Exercise of stock options
|
|
|
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
|
|
Tax benefits from share-based compensation
|
|
|
|
|
|
|
226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
226
|
|
Stockholder loans
|
|
|
|
|
|
|
|
|
|
|
448
|
|
|
|
|
|
|
|
|
|
|
|
448
|
|
Share-based compensation
|
|
|
|
|
|
|
7,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,568
|
|
Issuance of 20,000 shares of common stock
|
|
|
|
|
|
|
468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE June 30, 2010
|
|
$
|
87
|
|
|
$
|
687,590
|
|
|
$
|
(51
|
)
|
|
$
|
(6,599
|
)
|
|
$
|
216,836
|
|
|
$
|
897,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial
statements.
3
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
33,554
|
|
|
$
|
30,378
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Noncash items:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
47,700
|
|
|
|
54,672
|
|
Amortization of debt issuance costs
|
|
|
2,350
|
|
|
|
1,871
|
|
Impairment of fixed assets
|
|
|
840
|
|
|
|
|
|
Loss on extinguishment of debt
|
|
|
37,979
|
|
|
|
|
|
Share-based compensation
|
|
|
7,568
|
|
|
|
2,783
|
|
Provision for bad debts
|
|
|
2,567
|
|
|
|
1,895
|
|
Deferred income tax provision
|
|
|
(17,519
|
)
|
|
|
(16,333
|
)
|
Loan forgiveness
|
|
|
2,788
|
|
|
|
|
|
Other
|
|
|
326
|
|
|
|
271
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Cash and securities segregated under federal and other
regulations
|
|
|
31,358
|
|
|
|
123,459
|
|
Receivables from clients
|
|
|
(8,558
|
)
|
|
|
41,407
|
|
Receivables from product sponsors, broker-dealers and clearing
organizations
|
|
|
1,692
|
|
|
|
83,532
|
|
Receivables from others
|
|
|
(12,045
|
)
|
|
|
(21,131
|
)
|
Securities owned
|
|
|
(3,250
|
)
|
|
|
(4,853
|
)
|
Securities borrowed
|
|
|
3,297
|
|
|
|
(414
|
)
|
Other assets
|
|
|
(5,877
|
)
|
|
|
(12,664
|
)
|
Drafts payable
|
|
|
6,471
|
|
|
|
(56,948
|
)
|
Payables to clients
|
|
|
(76,140
|
)
|
|
|
(104,745
|
)
|
Payables to broker-dealers and clearing organizations
|
|
|
6,664
|
|
|
|
1,107
|
|
Accrued commissions and advisory fees payable
|
|
|
11,191
|
|
|
|
6,082
|
|
Accounts payable and accrued liabilities
|
|
|
33
|
|
|
|
(13,094
|
)
|
Income taxes payable
|
|
|
(18,553
|
)
|
|
|
5,711
|
|
Securities sold but not yet purchased
|
|
|
(1,412
|
)
|
|
|
(1,208
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
53,024
|
|
|
|
121,778
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
(3,652
|
)
|
|
$
|
(3,636
|
)
|
Proceeds from the disposal of fixed assets
|
|
|
|
|
|
|
135
|
|
Purchase of securities classified as
held-to-maturity
|
|
|
(2,008
|
)
|
|
|
(2,242
|
)
|
Proceeds from maturity of securities classified as
held-to-maturity
|
|
|
3,350
|
|
|
|
2,200
|
|
Deposits of restricted cash
|
|
|
(3,016
|
)
|
|
|
|
|
Release of restricted cash
|
|
|
2,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(2,721
|
)
|
|
|
(3,543
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from senior credit facilities
|
|
|
566,700
|
|
|
|
|
|
Redemption of subordinated notes
|
|
|
(579,563
|
)
|
|
|
|
|
Repayment of senior credit facilities
|
|
|
(5,598
|
)
|
|
|
(4,212
|
)
|
Payment of debt issuance costs
|
|
|
(7,181
|
)
|
|
|
|
|
Payment of deferred transaction costs
|
|
|
(1,259
|
)
|
|
|
|
|
Repayment of stockholder loans
|
|
|
|
|
|
|
462
|
|
Proceeds from stock options exercised
|
|
|
51
|
|
|
|
165
|
|
Excess tax benefits from share-based compensation
|
|
|
226
|
|
|
|
147
|
|
Issuance of common stock
|
|
|
468
|
|
|
|
|
|
Repurchase of common stock
|
|
|
|
|
|
|
(181
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(26,156
|
)
|
|
|
(3,619
|
)
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
24,147
|
|
|
|
114,616
|
|
CASH AND CASH EQUIVALENTS Beginning of period
|
|
|
378,594
|
|
|
|
219,239
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS End of period
|
|
$
|
402,741
|
|
|
$
|
333,855
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
54,436
|
|
|
$
|
52,102
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
56,201
|
|
|
$
|
40,020
|
|
|
|
|
|
|
|
|
|
|
NONCASH DISCLOSURES:
|
|
|
|
|
|
|
|
|
Capital expenditures purchased through short-term credit
|
|
$
|
1,224
|
|
|
$
|
210
|
|
|
|
|
|
|
|
|
|
|
Increase in unrealized gain on interest rate swaps, net of tax
expense
|
|
$
|
4,673
|
|
|
$
|
3,428
|
|
|
|
|
|
|
|
|
|
|
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
|
|
1.
|
Organization and
Description of the Company
|
LPL Investment Holdings Inc. (LPLIH), a Delaware
holding corporation, together with its consolidated subsidiaries
(collectively, the Company) provides an integrated
platform of proprietary technology, brokerage and investment
advisory services to independent financial advisors and
financial advisors at financial institutions (collectively
advisors) in the United States. Through its
proprietary technology, custody and clearing platforms, the
Company provides access to diversified financial products and
services enabling its advisors to offer independent financial
advice and brokerage services to retail investors (their
clients).
Quarterly Reporting The unaudited
condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). These unaudited condensed
consolidated financial statements reflect all adjustments that
are, in the opinion of management, necessary for a fair
statement of the results for the interim periods presented.
These adjustments are of a normal recurring nature. The
Companys results for any interim period are not
necessarily indicative of results for a full year or any other
interim period. Certain reclassifications were made to
previously reported amounts in the unaudited condensed
consolidated financial statements and notes thereto to make them
consistent with the current period presentation.
The unaudited condensed consolidated financial statements do not
include all information and notes necessary for a complete
presentation of financial position, results of operations and
cash flows in conformity with generally accepted accounting
principles in the United States of America (GAAP).
Accordingly, these financial statements should be read in
conjunction with the Companys audited consolidated
financial statements and the related notes for the year ended
December 31, 2009, contained in the Companys Annual
Report on
Form 10-K
as filed with the SEC. The Company has evaluated subsequent
events up to and including the date these unaudited condensed
consolidated financial statements were issued.
Consolidation These unaudited
condensed consolidated financial statements include the accounts
of LPLIH and its subsidiaries. Intercompany transactions and
balances have been eliminated. Equity investments in which the
Company exercises significant influence but does not exercise
control and is not the primary beneficiary are accounted for
using the equity method.
Use of Estimates The preparation of
the unaudited condensed consolidated financial statements in
conformity with GAAP requires the Company to make estimates and
judgments that affect the reported amounts of assets and
liabilities, revenue and expenses and related disclosures of
contingent assets and liabilities. On an on-going basis, the
Company evaluates estimates, including those related to revenue
and related expense recognition, asset impairment, valuation of
accounts receivable, contingencies and litigation, and valuation
and recognition of share-based payments. These accounting
policies are stated in the notes to the audited consolidated
financial statements for the year ended December 31, 2009,
contained in the Annual Report on
Form 10-K
as filed with the SEC. These estimates are based on the
information that is currently available and on various other
assumptions that the Company believes to be reasonable under the
circumstances. Actual results could vary from these estimates
under different assumptions or conditions and the differences
may be material to the unaudited condensed consolidated
financial statements.
Reportable Segment The Companys
internal reporting is organized into three business channels;
Independent Advisor Services, Institution Services and Custom
Clearing Services, which are designed to enhance the services
provided to its advisors and financial institutions. These
channels qualify as individual operating segments, but are
aggregated and viewed as one single
6
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
reportable segment due to their similar economic
characteristics, products and services, production and
distribution process, regulatory environment and quantitative
thresholds.
Fair Value of Financial Instruments
The Companys financial assets and
liabilities are carried at fair value or at amounts that,
because of their short-term nature, approximate current fair
value, with the exception of its indebtedness. The Company
carries borrowings on its senior secured credit facilities and
unsecured subordinated notes at amortized cost. As of
June 30, 2010, the carrying amount and fair value of these
borrowings were approximately $1,394 million and
$1,351 million, respectively. As of December 31, 2009,
the carrying amount and fair value was approximately
$1,369 million and $1,278 million, respectively. See
Note 4 for additional detail regarding the Companys
fair value measurements.
Recently Issued Accounting Pronouncements
Recent accounting pronouncements or changes
in accounting pronouncements during the six months ended
June 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.
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 six months ended June 30,
2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Balance
|
|
|
|
|
|
|
|
|
Accrued Balance
|
|
|
Cumulative
|
|
|
|
at December 31,
|
|
|
Costs
|
|
|
|
|
|
at June 30,
|
|
|
Costs Incurred
|
|
|
|
2009
|
|
|
Incurred(1)
|
|
|
Payments
|
|
|
2010
|
|
|
to Date(2)
|
|
|
Severance and benefits
|
|
$
|
1,996
|
|
|
$
|
21
|
|
|
$
|
(941
|
)
|
|
$
|
1,076
|
|
|
$
|
14,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 June 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 $73.8 million. The
Company has incurred the majority of these costs and anticipates
recognizing the remaining costs by December 2013; however,
adjustments may occur due to estimates of abandoned lease
obligations with terms that extend through 2018.
The Company paid charges related to the conversion and transfer
of certain advisors associated with the Affiliated Entities and
their client accounts. Following the completion of these
transfer activities, the registered representatives and client
accounts that transferred are associated with LPL Financial. In
2009, as a condition for the regulatory approval of the
transfer, the Affiliated Entities were required to deposit
$12.8 million into escrow accounts pending the resolution
of certain matters, of which $7.3 million was released.
During the first half of 2010, the Company was required to
deposit an additional $3.0 million into the escrow accounts
and $2.6 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 six
months ended June 30, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
Cumulative
|
|
|
Total
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Costs
|
|
|
Expected
|
|
|
|
December 31,
|
|
|
Costs
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
Incurred
|
|
|
Restructuring
|
|
|
|
2009
|
|
|
Incurred
|
|
|
Payments
|
|
|
Non-cash
|
|
|
2010
|
|
|
to Date
|
|
|
Costs
|
|
|
Severance and benefits
|
|
$
|
2,759
|
|
|
$
|
2,052
|
|
|
$
|
(3,343
|
)
|
|
$
|
(456
|
)
|
|
$
|
1,012
|
|
|
$
|
11,488
|
|
|
$
|
11,488
|
|
Lease and contract termination fees
|
|
|
7,458
|
|
|
|
2,347
|
|
|
|
(2,260
|
)
|
|
|
80
|
|
|
|
7,625
|
|
|
|
18,266
|
|
|
|
18,490
|
|
Asset impairments
|
|
|
|
|
|
|
840
|
|
|
|
|
|
|
|
(840
|
)
|
|
|
|
|
|
|
20,764
|
|
|
|
20,764
|
|
Conversion and transfer costs
|
|
|
304
|
|
|
|
3,311
|
|
|
|
(900
|
)
|
|
|
(2,288
|
)
|
|
|
427
|
|
|
|
17,194
|
|
|
|
23,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,521
|
|
|
$
|
8,550
|
|
|
$
|
(6,503
|
)
|
|
$
|
(3,504
|
)
|
|
$
|
9,064
|
|
|
$
|
67,712
|
|
|
$
|
73,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
8
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
entities to maximize the use of observable inputs and minimize
the use of unobservable inputs. The three levels of inputs used
to measure fair value are as follows:
|
|
|
|
|
Level 1 Quoted prices in active
markets for identical assets or liabilities.
|
|
|
|
Level 2 Observable inputs other
than quoted prices included in Level 1, such as quoted
prices for similar assets and liabilities in active markets;
quoted prices for identical or similar assets and liabilities in
markets that are not active; or other inputs that are observable
or can be corroborated by observable market data.
|
|
|
|
Level 3 Unobservable inputs that
are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities. This
includes certain pricing models, discounted cash flow
methodologies and similar techniques that use significant
unobservable inputs.
|
The Companys fair value measurements are evaluated within
the fair value hierarchy, based on the nature of inputs used to
determine the fair value at the measurement date. At
June 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
June 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 six months
ended June 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 June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
262,746
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
262,746
|
|
Securities segregated under federal and other regulations
|
|
|
254,255
|
|
|
|
|
|
|
|
|
|
|
|
254,255
|
|
Securities owned trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
164
|
|
|
|
|
|
|
|
|
|
|
|
164
|
|
Mutual funds
|
|
|
6,429
|
|
|
|
|
|
|
|
|
|
|
|
6,429
|
|
Debt securities
|
|
|
|
|
|
|
302
|
|
|
|
|
|
|
|
302
|
|
U.S. treasury obligations
|
|
|
11,050
|
|
|
|
|
|
|
|
|
|
|
|
11,050
|
|
Certificates of deposit
|
|
|
|
|
|
|
200
|
|
|
|
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities owned trading
|
|
|
17,643
|
|
|
|
502
|
|
|
|
|
|
|
|
18,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
15,341
|
|
|
|
|
|
|
|
|
|
|
|
15,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
549,985
|
|
|
$
|
502
|
|
|
$
|
|
|
|
$
|
550,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold but not yet purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
$
|
2,431
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,431
|
|
U.S. treasury obligations
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
69
|
|
Certificates of deposit
|
|
|
|
|
|
|
45
|
|
|
|
|
|
|
|
45
|
|
Debt securities
|
|
|
|
|
|
|
46
|
|
|
|
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities sold but not yet purchased
|
|
|
2,500
|
|
|
|
91
|
|
|
|
|
|
|
|
2,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
|
|
|
|
10,858
|
|
|
|
|
|
|
|
10,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
|
$
|
2,500
|
|
|
$
|
10,949
|
|
|
$
|
|
|
|
$
|
13,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
11
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
The amortized cost, gross unrealized gains and fair value of
securities
held-to-maturity
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Fair Value
|
|
|
At June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government notes
|
|
$
|
9,069
|
|
|
$
|
62
|
|
|
$
|
9,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 30, 2010 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 Year
|
|
|
1-3 Years
|
|
|
Total
|
|
|
U.S. government notes at amortized cost
|
|
$
|
2,504
|
|
|
$
|
6,565
|
|
|
$
|
9,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government notes at fair value
|
|
$
|
2,509
|
|
|
$
|
6,622
|
|
|
$
|
9,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of intangible assets as of June 30, 2010 and
December 31, 2009 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Value
|
|
|
Amortization
|
|
|
Value
|
|
|
At June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Definite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Advisor and financial institution relationships
|
|
$
|
458,424
|
|
|
$
|
(104,153
|
)
|
|
$
|
354,271
|
|
Product sponsor relationships
|
|
|
231,930
|
|
|
|
(49,369
|
)
|
|
|
182,561
|
|
Trust client relationships
|
|
|
2,630
|
|
|
|
(718
|
)
|
|
|
1,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total definite-lived intangible assets
|
|
$
|
692,984
|
|
|
$
|
(154,240
|
)
|
|
$
|
538,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademark and trade name
|
|
|
|
|
|
|
|
|
|
|
39,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
|
|
|
|
|
|
$
|
578,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $18.5 million for the three and six
months ended June 30, 2010, respectively, and
$10.0 million and $19.9 million for the three and six
months ended June 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
|
|
$
|
18,486
|
|
2011
|
|
|
36,840
|
|
2012
|
|
|
36,548
|
|
2013
|
|
|
35,927
|
|
2014
|
|
|
35,927
|
|
Thereafter
|
|
|
375,016
|
|
|
|
|
|
|
Total
|
|
$
|
538,744
|
|
|
|
|
|
|
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 7.3% and 51.5% for the three months ended
June 30, 2010 and 2009, respectively, and 37.1% and 48.5%
for the six months ended June 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.
The Company reported a low effective income tax rate for the
three months ended June 30, 2010, due to a favorable state
apportionment ruling covering the current and previous years and
due to the revision of certain settlement contingencies for
prior periods. The ruling and the revision to settlement
contingencies resulted in reductions to the Companys
effective income tax rate of 27.8% and 9.6% for the three months
ended June 30, 2010, and reductions of 4.5% and 1.5% for
the six months ended June 30, 2010, respectively. Excluding
the impact of these reductions, the Companys effective tax
rate would have been 44.7% and 43.1% for the three and six month
periods ending June 30, 2010, respectively.
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
13
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
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
June 30, 2010 and December 31, 2009, the Company was
in compliance with such covenants. The Company may voluntarily
repay outstanding loans under its senior secured credit
facilities at any time without premium or penalty, other than
customary breakage costs with respect to LIBOR loans.
Senior Secured Credit Facilities Revolving
Line of Credit On January 25, 2010, the
Company amended its senior secured credit facilities to increase
the revolving 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 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 facility at June 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 June 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 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
|
|
|
|
2.28
|
%(1)
|
|
$
|
400,000
|
|
|
|
2.00
|
%(6)
|
Unhedged:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 Term Loans
|
|
6/28/2013
|
|
|
106,325
|
|
|
|
2.10
|
%(2)
|
|
|
419,223
|
|
|
|
2.00
|
%(7)
|
2015 Term Loans
|
|
6/25/2015
|
|
|
498,750
|
|
|
|
4.25
|
%(3)
|
|
|
|
|
|
|
|
|
2017 Term Loans
|
|
6/28/2017
|
|
|
578,550
|
|
|
|
5.25
|
%(4)
|
|
|
|
|
|
|
|
|
Senior unsecured subordinated notes
|
|
(5)
|
|
|
|
|
|
|
|
|
|
|
550,000
|
|
|
|
10.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings
|
|
|
|
|
1,393,625
|
|
|
|
|
|
|
|
1,369,223
|
|
|
|
|
|
Less current borrowings (maturities within 12 months)
|
|
|
|
|
13,971
|
|
|
|
|
|
|
|
8,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings net of current portion
|
|
|
|
$
|
1,379,654
|
|
|
|
|
|
|
$
|
1,360,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of June 30, 2010, the variable interest rate for the
hedged portion of the 2013 Term Loans is based on the
three-month LIBOR of 0.53%, plus the applicable interest rate
margin of 1.75%. |
|
(2) |
|
As of June 30, 2010, the variable interest rate for the
unhedged portion of the 2013 Term Loans is based on the
one-month LIBOR of 0.35%, plus the applicable interest rate
margin of 1.75%. |
|
(3) |
|
As of June 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 0.53% or 1.50%, plus the applicable
interest rate margin of 2.75%. |
|
(4) |
|
As of June 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 0.53% 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%. |
15
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
The following summarizes borrowing activity in the revolving and
uncommitted line of credit facilities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Average balance outstanding
|
|
$
|
40
|
|
|
$
|
91,268
|
|
|
$
|
4,104
|
|
|
$
|
90,634
|
|
Weighted-average interest rate
|
|
|
1.50
|
%
|
|
|
2.41
|
%
|
|
|
1.16
|
%
|
|
|
2.43
|
%
|
The minimum calendar year payments and maturities of the senior
secured borrowings as of June 30, 2010 are as follows (in
thousands):
|
|
|
|
|
2010 remainder
|
|
$
|
6,986
|
|
2011
|
|
|
13,971
|
|
2012
|
|
|
13,971
|
|
2013
|
|
|
319,197
|
|
2014
|
|
|
10,800
|
|
Thereafter
|
|
|
1,028,700
|
|
|
|
|
|
|
Total
|
|
$
|
1,393,625
|
|
|
|
|
|
|
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 June 30, 2010 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
|
|
|
|
|
|
|
Notional
|
|
|
Fixed
|
|
|
Receive
|
|
|
Fair
|
|
|
Maturity
|
Balance
|
|
|
Pay Rate
|
|
|
Rate(1)
|
|
|
Value
|
|
|
Date
|
|
$
|
145,000
|
|
|
|
4.83
|
%
|
|
|
0.53
|
%
|
|
$
|
(5,945
|
)
|
|
June 30, 2011
|
|
65,000
|
|
|
|
4.85
|
%
|
|
|
0.53
|
%
|
|
|
(4,913
|
)
|
|
June 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
210,000
|
|
|
|
|
|
|
|
|
|
|
$
|
(10,858
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The variable receive rate reset on the last day of the period,
based on the applicable three-month LIBOR. The effective rate
from March 31, 2010 through June 29, 2010 was 0.29%.
As of June 30, 2010, the effective rate was 0.53%. |
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 June 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
$4.3 million and $8.7 million from other comprehensive
loss as additional
16
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
interest expense for the three and six months ended
June 30, 2010, respectively, and $4.2 million and
$8.1 million for the three and six months ended
June 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
$9.0 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.
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 June 30, 2010 are as
follows (in thousands):
|
|
|
|
|
Years ending December 31
|
|
|
|
|
2010 remainder
|
|
$
|
14,947
|
|
2011
|
|
|
30,620
|
|
2012
|
|
|
24,002
|
|
2013
|
|
|
15,554
|
|
2014
|
|
|
8,765
|
|
Thereafter
|
|
|
15,065
|
|
|
|
|
|
|
Total(1)
|
|
$
|
108,953
|
|
|
|
|
|
|
|
|
|
(1) |
|
Minimum payments have not been reduced by minimum sublease
rental income of $0.8 million due in the future under
noncancellable subleases. |
Total rental expense for all operating leases was approximately
$4.1 million and $8.5 million for the three and six
months ended June 30, 2010, respectively, and
$5.0 million and $10.3 million for the three and six
months ended June 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.
17
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
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 June 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.
In connection with various acquisitions, and pursuant to the
purchase and sale agreements, the Company has received
third-party indemnification for certain legal proceedings and
claims. These matters have been defended and paid directly by
the indemnifying party.
On October 1, 2009, LPL Holdings, Inc., a subsidiary of the
Company, received written notice from a third-party indemnitor
under a certain purchase and sale agreement asserting that it is
no longer obligated to indemnify the Company for certain claims
under the provisions of the purchase and sale agreement. The
Company believes that this assertion is without merit and has
commenced litigation to enforce its indemnity rights.
Additionally, the Company may settle certain legal claims before
they are resolved with the indemnifying party.
The Company believes, based on the information available at this
time, after consultation with counsel, consideration of
insurance, if any, and the indemnifications provided by the
third-party indemnitors, notwithstanding the assertions by an
indemnifying party noted in the preceding paragraph, that the
outcome of such matters will not have a material adverse impact
on unaudited condensed consolidated statements of financial
condition, income or cash flows.
Other Commitments As of June 30,
2010, the Company had received collateral primarily in
connection with client margin loans with a market value of
approximately $313.0 million, which it can sell or
repledge. Of this amount, approximately $160.2 million has
been pledged or sold as of June 30, 2010;
$138.2 million was pledged to banks in connection with
unutilized secured margin lines of credit, $11.1 million
was pledged with client-owned securities to the Options Clearing
Corporation, and $10.9 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
18
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
to additional
24-month
extensions. Termination fees may be payable by a terminating or
breaching party depending on the specific cause of termination.
|
|
11.
|
Share-Based
Compensation
|
Certain employees, advisors, officers and directors who
contribute to the success of the Company participate in various
stock option plans. In addition, certain financial institutions
participate in a warrant plan. Stock options and warrants
generally vest in equal increments over a three- to five-year
period and expire on the 10th anniversary following the
date of grant.
The Company recognizes share-based compensation expense related
to employee stock option awards based on the grant date fair
value over the requisite service period of the award, which
generally equals the vesting period. The Company recognized
$4.8 million and $2.3 million of share-based
compensation related to the vesting of employee stock option
awards during the six months ended June 30, 2010 and 2009,
respectively, which is included in compensation and benefits on
the unaudited condensed consolidated statements of income. As of
June 30, 2010, total unrecognized compensation cost related
to non-vested share-based compensation arrangements granted was
$30.5 million, which is expected to be recognized over a
weighted-average period of 3.67 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 $2.8 million and
$0.5 million of share based compensation during the six
months ended June 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 June 30, 2010,
total unrecognized compensation cost related to non-vested
share-based compensation arrangements granted was
$14.7 million for advisors and financial institutions,
which is expected to be recognized over a weighted-average
period of 3.87 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 six months ended June 30, 2010
and 2009:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
Expected life (in years)
|
|
|
6.51
|
|
|
|
7.75
|
|
Expected stock price volatility
|
|
|
50.31
|
%
|
|
|
47.09
|
%
|
Expected dividend yield
|
|
|
|
|
|
|
|
|
Annualized forfeiture rate
|
|
|
4.99
|
%
|
|
|
3.77
|
%
|
Fair value of options
|
|
$
|
12.36
|
|
|
$
|
10.73
|
|
Risk-free interest rate
|
|
|
2.79
|
%
|
|
|
3.04
|
%
|
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
19
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
continue to use peer group volatility information until
historical volatility of the Company is available to measure
expected volatility for future grants. In the future, as the
Company gains historical data for volatility of its own stock
and the actual term over which stock options and warrants are
held expected volatility and the expected term may change, which
could substantially change the grant-date fair value of future
awards of stock options and warrants and, ultimately,
compensation recorded on future grants.
The Company has assumed an annualized forfeiture rate for its
stock options and warrants based on a combined review of
industry and employee turnover data, as well as an analytical
review performed of historical pre-vesting forfeitures occurring
over the previous year. The Company records additional expense
if the actual forfeiture rate is lower than estimated and
records a recovery of prior expense if the actual forfeiture is
higher than estimated.
The following table summarizes the Companys activity in
its stock option and warrant plans for the six months ended
June 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
|
|
|
(26,474
|
)
|
|
|
1.92
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(148,297
|
)
|
|
|
23.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2010
|
|
|
22,596,474
|
|
|
$
|
6.94
|
|
|
|
4.49
|
|
|
$
|
634,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable June 30, 2010
|
|
|
18,299,828
|
|
|
$
|
3.17
|
|
|
|
3.52
|
|
|
$
|
582,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1.07 $2.38
|
|
|
17,159,620
|
|
|
|
3.23
|
|
|
$
|
1.74
|
|
|
|
17,159,620
|
|
|
$
|
1.74
|
|
$10.30 $19.74
|
|
|
945,714
|
|
|
|
8.40
|
|
|
|
18.30
|
|
|
|
208,807
|
|
|
|
16.75
|
|
$21.60 $22.08
|
|
|
2,154,650
|
|
|
|
8.93
|
|
|
|
22.02
|
|
|
|
162,390
|
|
|
|
21.60
|
|
$23.02 $27.80
|
|
|
2,336,490
|
|
|
|
8.02
|
|
|
|
26.57
|
|
|
|
769,011
|
|
|
|
27.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,596,474
|
|
|
|
4.49
|
|
|
$
|
6.94
|
|
|
|
18,299,828
|
|
|
$
|
3.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
Nonqualified Deferred Compensation Plan
On November 19, 2008, the Company established an unfunded,
unsecured deferred compensation plan to permit employees and
former employees that hold non-qualified stock options issued
under the 2005 Stock Option Plan for Incentive Stock Options and
2005 Stock Option Plan for Non-qualified Stock Options that were
to expire in 2009 and 2010, to receive stock units under the
2008 Nonqualified Deferred Compensation Plan. Stock units
represent the right to receive one share of
20
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
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 June 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. Consequently, on December 28, 2008,
the Company issued 7,423,973 restricted shares. These restricted
shares are entitled to vote but may not be sold, assigned or
transferred and are not entitled to receive dividends or
non-cash distributions, until either a sale of the Company that
constitutes a change in control or an initial public offering.
The Company accounts for restricted shares granted to its
advisors by measuring such grants at their then-current lowest
aggregate value. Since the value is contingent upon the
Companys decision to sell itself or issue its common stock
to the public through a registered initial public offering, the
current aggregate value will be zero until such event occurs.
Upon the occurrence of such an event, the Company will record
the par value, additional paid in capital and expense based on
the number of restricted shares under the stock bonus plan
multiplied by the fair market value determined at the event date.
Director
Restricted Stock Plan
In March 2010, the Company established a Director Restricted
Stock Plan (the Director Plan). Eligible
participants include non-employee directors who are in a
position to make a significant contribution to the success of
the Company. Restricted stock awards vest on the second
anniversary of the date of grant and upon termination of
service, unvested awards shall immediately be forfeited. On
March 15, 2010, the Company issued 6,408 restricted stock
awards to certain of its directors at a fair value of $23.41 per
share. A summary of the status of the Companys restricted
stock awards under the Director Plan as of and for the six
months ending June 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 June 30, 2010
|
|
|
6,408
|
|
|
$
|
23.41
|
|
|
|
|
|
|
|
|
|
|
21
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
The Company accounts for restricted stock awards granted to its
non-employee directors by measuring such awards at their grant
date fair value. Share-based compensation expense is recognized
ratably over the requisite service period, which generally
equals the vesting period. As of June 30, 2010, total
unrecognized compensation cost was $0.2 million, which is
expected to be recognized over a weighted-average remaining
period of 1.71 years.
In calculating earnings per share using the two-class method,
the Company is required to allocate a portion of its earnings to
employees that hold stock units that contain non-forfeitable
rights to dividends or dividend equivalents under its 2008
Nonqualified Deferred Compensation Plan. Basic earnings per
share is computed by dividing income less earnings attributable
to employees that hold stock units under the 2008 Nonqualified
Deferred Compensation Plan by the basic weighted average number
of shares outstanding. Diluted earnings per share is computed in
a manner similar to basic earnings per share, except the
weighted average number of shares outstanding is increased to
include the dilutive effect of outstanding stock options,
warrants and other stock-based awards.
A reconciliation of the income used to compute basic and diluted
earnings per share for the periods noted was as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
|
For the Six
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, as reported
|
|
$
|
8,000
|
|
|
$
|
15,581
|
|
|
$
|
33,554
|
|
|
$
|
30,378
|
|
Less: allocation of undistributed earnings to stock units
|
|
|
(130
|
)
|
|
|
(285
|
)
|
|
|
(544
|
)
|
|
|
(667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, for computing basic earnings per share
|
|
$
|
7,870
|
|
|
$
|
15,296
|
|
|
$
|
33,010
|
|
|
$
|
29,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, as reported
|
|
$
|
8,000
|
|
|
$
|
15,581
|
|
|
$
|
33,554
|
|
|
$
|
30,378
|
|
Less: allocation of undistributed earnings to stock units
|
|
|
(113
|
)
|
|
|
(251
|
)
|
|
|
(477
|
)
|
|
|
(590
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, for computing diluted earnings per share
|
|
$
|
7,887
|
|
|
$
|
15,330
|
|
|
$
|
33,077
|
|
|
$
|
29,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Six
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Basic weighted average number of shares outstanding
|
|
|
86,812
|
|
|
|
86,586
|
|
|
|
86,806
|
|
|
|
86,564
|
|
Dilutive common share equivalents
|
|
|
12,675
|
|
|
|
11,915
|
|
|
|
12,442
|
|
|
|
11,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average number of shares outstanding
|
|
|
99,487
|
|
|
|
98,501
|
|
|
|
99,248
|
|
|
|
98,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
Basic and diluted earnings per share for the periods noted was
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
|
For the Six
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Basic earnings per share
|
|
$
|
0.09
|
|
|
$
|
0.18
|
|
|
$
|
0.38
|
|
|
$
|
0.34
|
|
Diluted earnings per share
|
|
$
|
0.08
|
|
|
$
|
0.16
|
|
|
$
|
0.33
|
|
|
$
|
0.30
|
|
|
|
13.
|
Related Party
Transactions
|
Alix Partners, LLP (Alix Partners), 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 Alix Partners during the six months ended
June 30, 2009.
One of the Companys majority stockholders owns a minority
interest in Artisan Partners Limited Partnership
(Artisan), which pays fees in exchange for product
distribution and record-keeping services. During the six months
ended June 30, 2010 and 2009, the Company earned
$1.2 million and $0.6 million, respectively, in fees
from Artisan. Additionally, as of June 30, 2010 and
December 31, 2009, Artisan owed the Company
$0.6 million and $0.5 million, respectively, which is
included in receivables from product sponsors, broker-dealers
and clearing organizations on the unaudited condensed
consolidated statements of financial condition.
American Beacon Advisor, Inc. (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 six months ended
June 30, 2010 and 2009, the Company earned
$0.1 million and $0.2 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. There was no
material receivable balance due from American Beacon as of
June 30, 2010.
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 six months ended June 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 six month periods ended June 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 six
months ended June 30, 2010 and 2009, respectively.
In conjunction with the acquisition of UVEST Financial Services
Group, Inc. (UVEST), the Company made full-recourse
loans to certain members of management (also selling
stockholders), most of whom are now stockholders of the Company.
In February 2010, the Company forgave approximately
$0.4 million to a stockholder. As of June 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.
23
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
|
|
14.
|
Net
Capital/Regulatory Requirements
|
The Companys registered broker-dealers are subject to the
SECs Uniform Net Capital Rule
(Rule 15c3-1
under the Securities Exchange Act of 1934), which requires the
maintenance of minimum net capital, as defined. Net capital is
calculated for each broker-dealer subsidiary individually.
Excess net capital of one broker-dealer subsidiary may not be
used to offset a net capital deficiency of another broker-dealer
subsidiary. Net capital and the related net capital requirement
may fluctuate on a daily basis.
Net capital and net capital requirements for the Companys
broker-dealer subsidiaries as of June 30, 2010 are
presented in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
|
|
|
|
|
Net
|
|
|
Net Capital
|
|
|
Excess Net
|
|
|
|
Capital
|
|
|
Required
|
|
|
Capital
|
|
|
LPL Financial Corporation
|
|
$
|
78,065
|
|
|
$
|
5,860
|
|
|
$
|
72,205
|
|
UVEST Financial Services Group, Inc.
|
|
|
11,071
|
|
|
|
1,613
|
|
|
|
9,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
89,136
|
|
|
$
|
7,473
|
|
|
$
|
81,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 30, 2010, Associated, MSC and WFG had net capital
of $1.8 million, $12.3 million and $0.8 million,
respectively, which was $1.6 million, $12.0 million
and $0.7 million, respectively, in excess of their minimum
net capital requirements.
LPL Financial is a clearing broker-dealer and UVEST is an
introducing broker-dealer. Prior to the cessation of operations,
Associated, MSC and WFG were introducing broker-dealers.
PTC is also subject to various regulatory capital requirements.
Failure to meet minimum capital requirements can initiate
certain mandatory and possible additional discretionary actions
by regulators that, if undertaken, could have a direct material
effect on the Companys unaudited condensed consolidated
financial statements. As of June 30, 2010 and
December 31, 2009, the Company and PTC have met all capital
adequacy requirements to which it is subject.
The Company operates in a highly regulated industry. Applicable
laws and regulations restrict permissible activities and
investments. These policies require compliance with various
financial and 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
24
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited) (Continued)
that clients may incur from these strategies. To control this
risk, LPL Financial monitors margin levels daily and clients are
required to deposit additional collateral, or reduce positions,
when necessary.
LPL Financial is obligated to settle transactions with brokers
and other financial institutions even if its clients fail to
meet their obligation to LPL Financial. Clients are required to
complete their transactions on the settlement date, generally
three business days after the trade date. If clients do not
fulfill their contractual obligations, LPL Financial may incur
losses. LPL Financial has established procedures to reduce this
risk by generally requiring that clients deposit cash
and/or
securities into their account prior to placing an order.
LPL Financial may at times maintain inventories in equity
securities on both a long and short basis that are recorded on
the unaudited condensed consolidated statements of financial
condition at market value. While long inventory positions
represent LPL Financials ownership of securities, short
inventory positions represent obligations of LPL Financial to
deliver specified securities at a contracted price, which may
differ from market prices prevailing at the time of completion
of the transaction. Accordingly, both long and short inventory
positions may result in losses or gains to LPL Financial as
market values of securities fluctuate. To mitigate the risk of
losses, long and short positions are
marked-to-market
daily and are continuously monitored by LPL Financial.
UVEST is engaged in buying and selling securities and other
financial instruments for clients of advisors and financial
institutions. Such transactions are introduced and cleared
through a third-party clearing firm on a fully disclosed basis.
While introducing broker-dealers generally have less risk than
clearing firms, their clearing agreements expose them to credit
risk in the event that their clients dont fulfill
contractual obligations with the clearing broker-dealer.
The Affiliated Entities were engaged in buying and selling
securities and other financial instruments for clients of
advisors. Such transactions were introduced and cleared through
a third-party clearing firm on a fully disclosed basis. These
firms no longer conduct such activities. The registered
representatives and their client accounts have either
transitioned or are in the process of transitioning to LPL
Financial or to new firms.
On July 14, 2010, the Company announced a definitive
agreement to acquire certain assets from National Retirement
Partners, Inc. (NRP). NRPs advisors offer
products and services to retirement plan sponsors and
participants and comprehensive financial services to high net
worth individuals. Through this asset purchase, NRPs
independent advisors will have the opportunity to join LPL
Financial.
This transaction will further enhance the capabilities and
presence of LPL Financial in group retirement plans, while
providing unique benefits for both NRP advisors who join LPL
Financial as well as for existing LPL Financial advisors.
The consideration for the transaction consists of a payment on
the closing date of $27.0 million, subject to an escrow for
specified matters, and a contingent payment to be made on the
third anniversary of closing of approximately 25%-30% of the
amount by which the gross trailing twelve-month commission and
fee revenues relating to the business exceed an agreed upon
performance target. Upon completion of this transaction, certain
NRP employees will join LPL Financial. NRP has agreed to
indemnify the Company for breaches of representations and
warranties and covenants, as well as pre-closing actions or
omissions. The transaction is expected to close in the fourth
quarter of 2010, subject to customary closing conditions
including regulatory approvals.
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 over 4,000 financial advisors
with customized clearing, advisory platforms and technology
solutions. Our singular focus is to support our advisors with
the front, middle and back-office support they need to serve the
large and growing market for independent investment advice,
particularly in the mass affluent market. We believe we are the
only company that offers advisors the unique combination of an
integrated technology platform, comprehensive self-clearing
services and full open architecture access to leading financial
products, all delivered in an environment unencumbered by
conflicts from product manufacturing, underwriting or market
making.
For over 20 years we have served the independent advisor
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 other fees. 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. We also earn trailing commission type revenues (a
commission that is paid over time, such as 12(b)-1 fees) on
mutual funds and variable annuities held by clients of our
advisors. Trail commissions are recurring in nature and are
earned based on the current market value of investment holdings.
|
|
|
|
Advisory Fees. Advisory fee revenues
represent fees charged by us and our advisors to their clients
based on the value of advisory assets.
|
|
|
|
|
|
Asset-Based Fees. Asset-based fees are
comprised of fees from cash sweep programs, our financial
product manufacturer sponsorship programs, and
sub-transfer
agency and networking services. Pursuant to contractual
arrangements, uninvested cash balances in our advisors
client accounts are swept into either insured deposit accounts
at various banks or third-party money market funds, for which we
receive fees, including administrative and record-keeping fees
based on account type and the invested balances. In addition, we
receive fees from certain financial product manufacturers in
connection with sponsorship programs that support
|
27
|
|
|
|
|
our marketing and sales-force education and training efforts. We
also earn fees on mutual fund assets for which we provide
administrative and record-keeping services as a
sub-transfer
agent. Our networking fees represent fees paid to us by mutual
fund and annuity product manufacturers in exchange for
administrative and record-keeping services that we provide to
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.
|
|
|
|
Interest and Other Revenue. Other
revenue includes marketing re-allowances from certain financial
product manufacturers as well as interest income from client
margin accounts and cash equivalents, net of operating interest
expense.
|
Our Operating
Expenses
|
|
|
|
|
Production Expenses. Production
expenses consist of commissions and advisory fees as well as
brokerage, clearing and exchange fees. We pay out the majority
of commissions and advisory fees received from sales or services
provided by our advisors. Substantially all of these payouts are
variable and correlated to the revenues generated by each
advisor.
|
|
|
|
Compensation and Benefits
Expense. Compensation and benefits expense
includes salaries and wages and related employee benefits and
taxes for our employees (including share-based compensation), as
well as compensation for temporary employees and consultants.
|
|
|
|
General and Administrative
Expenses. General and administrative expenses
include promotional fees, occupancy and equipment,
communications and data processing, regulatory fees, travel and
entertainment and professional services.
|
|
|
|
Depreciation and Amortization
Expense. Depreciation and amortization
expense represents the benefits received for using long-lived
assets. Those assets represent significant intangible assets
established through our acquisitions, as well as fixed assets
which include internally developed software, hardware, leasehold
improvements and other equipment.
|
|
|
|
Restructuring Charges. Restructuring
charges represent expenses incurred as a result of our 2009
consolidation of the Affiliated Entities and our strategic
business review committed to 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 key financial and business 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 six months ended
June 30, 2010 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
|
|
(unaudited)
|
|
|
|
|
|
Business Metrics
|
|
|
|
|
|
|
|
|
|
|
|
|
Advisors(1)
|
|
|
12,066
|
|
|
|
12,489
|
|
|
|
(3.4
|
)%
|
Advisory and brokerage assets(2) (in billions)
|
|
$
|
276.9
|
|
|
$
|
259.0
|
|
|
|
6.9
|
%
|
Advisory assets under management(3) (in billions)
|
|
$
|
78.9
|
|
|
$
|
65.3
|
|
|
|
20.8
|
%
|
Net new advisory assets(4) (in billions)
|
|
$
|
3.9
|
|
|
$
|
2.6
|
|
|
|
50.0
|
%
|
Insured cash account balances(3) (in billions)
|
|
$
|
11.8
|
|
|
$
|
11.5
|
|
|
|
2.6
|
%
|
Money market account balances(3) (in billions)
|
|
$
|
7.2
|
|
|
$
|
9.3
|
|
|
|
(22.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
For the
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Financial Metrics
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue growth (decline) from prior period
|
|
|
18.1
|
%
|
|
|
(17.8
|
)%
|
|
|
16.9
|
%
|
|
|
(18.7
|
)%
|
Recurring revenue as a % of net revenue(5)
|
|
|
59.3
|
%
|
|
|
55.3
|
%
|
|
|
59.7
|
%
|
|
|
55.2
|
%
|
Gross margin(6) (in millions)
|
|
$
|
233.6
|
|
|
$
|
205.3
|
|
|
$
|
463.8
|
|
|
$
|
405.8
|
|
Gross margin as a % of net revenue(6)
|
|
|
29.6
|
%
|
|
|
30.7
|
%
|
|
|
30.2
|
%
|
|
|
30.9
|
%
|
Net income (in millions)
|
|
$
|
8.0
|
|
|
$
|
15.6
|
|
|
$
|
33.6
|
|
|
$
|
30.4
|
|
Adjusted EBITDA (in millions)
|
|
$
|
109.9
|
|
|
$
|
89.7
|
|
|
$
|
215.3
|
|
|
$
|
171.6
|
|
Adjusted Net Income (in millions)
|
|
$
|
46.4
|
|
|
$
|
27.5
|
|
|
$
|
87.5
|
|
|
$
|
52.8
|
|
|
|
|
(1) |
|
Advisors are defined as those investment professionals who are
licensed to do business with our broker-dealer subsidiaries. In
2009, we attracted record levels of new advisors due to the
dislocation in the marketplace that impacted many of our
competitors. This record recruitment was offset, however, by the
attrition of approximately 720 advisors licensed through the
Affiliated Entities related to the consolidation of the
operations of the Affiliated Entities. Excluding this attrition,
we added 297 new advisors during 2009, representing 2.5% advisor
growth. |
|
(2) |
|
Advisory and brokerage assets are comprised of assets that are
custodied, networked and
non-networked
and reflect market movement in addition to new assets, inclusive
of recruiting and net of attrition. |
|
(3) |
|
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. |
29
|
|
|
|
|
Because our gross margin amounts do not include any depreciation
and amortization expense, our gross margin amounts may not be
comparable to those of others in our industry. |
Adjusted
EBITDA
Adjusted EBITDA is defined as EBITDA (net income plus interest
expense, income tax expense, depreciation and amortization),
further adjusted to exclude certain non-cash charges and other
adjustments set forth below. We present Adjusted EBITDA because
we consider it an important measure of our performance. Adjusted
EBITDA is a useful financial metric in assessing our operating
performance from period to period by excluding certain items
that we believe are not representative of our core business,
such as certain material non-cash items and other adjustments.
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.
|
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
30
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 six months ended June 30,
2010 and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three
|
|
|
For the Six
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Net income
|
|
$
|
8,000
|
|
|
$
|
15,581
|
|
|
$
|
33,554
|
|
|
$
|
30,378
|
|
Interest expense
|
|
|
27,683
|
|
|
|
26,032
|
|
|
|
52,019
|
|
|
|
51,973
|
|
Income tax expense
|
|
|
628
|
|
|
|
16,567
|
|
|
|
19,790
|
|
|
|
28,555
|
|
Amortization of purchased intangible assets and
software(1)
|
|
|
10,938
|
|
|
|
15,123
|
|
|
|
25,049
|
|
|
|
30,246
|
|
Depreciation and amortization of all other fixed assets
|
|
|
11,172
|
|
|
|
12,154
|
|
|
|
22,651
|
|
|
|
24,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
58,421
|
|
|
|
85,457
|
|
|
|
153,063
|
|
|
|
165,578
|
|
EBITDA Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense(2)
|
|
|
2,239
|
|
|
|
1,047
|
|
|
|
4,775
|
|
|
|
2,272
|
|
Acquisition and integration related expenses(3)
|
|
|
3,377
|
|
|
|
839
|
|
|
|
3,517
|
|
|
|
1,661
|
|
Restructuring and conversion costs(4)
|
|
|
7,306
|
|
|
|
2,285
|
|
|
|
15,285
|
|
|
|
2,026
|
|
Debt amendment and extinguishment costs(5)
|
|
|
38,484
|
|
|
|
|
|
|
|
38,605
|
|
|
|
|
|
Other(6)
|
|
|
37
|
|
|
|
37
|
|
|
|
75
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total EBITDA Adjustments
|
|
|
51,443
|
|
|
|
4,208
|
|
|
|
62,257
|
|
|
|
6,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
109,864
|
|
|
$
|
89,665
|
|
|
$
|
215,320
|
|
|
$
|
171,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 primarily as a
result of our 2007 acquisitions of the Affiliated Entities and
IFMG. |
|
(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. |
|
(6) |
|
Represents excise and other taxes. |
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
31
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.
|
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.
32
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 Six
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Net income
|
|
$
|
8,000
|
|
|
$
|
15,581
|
|
|
$
|
33,554
|
|
|
$
|
30,378
|
|
After-Tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA Adjustments(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense(2)
|
|
|
1,870
|
|
|
|
866
|
|
|
|
3,880
|
|
|
|
1,898
|
|
Acquisition and integration related expenses
|
|
|
2,052
|
|
|
|
506
|
|
|
|
2,137
|
|
|
|
1,002
|
|
Restructuring and conversion costs
|
|
|
4,440
|
|
|
|
1,378
|
|
|
|
9,263
|
|
|
|
1,222
|
|
Debt amendment and extinguishment costs
|
|
|
23,387
|
|
|
|
|
|
|
|
23,460
|
|
|
|
|
|
Other
|
|
|
22
|
|
|
|
22
|
|
|
|
46
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total EBITDA Adjustments
|
|
|
31,771
|
|
|
|
2,772
|
|
|
|
38,786
|
|
|
|
4,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of purchased intangible assets and
software(1)
|
|
|
6,647
|
|
|
|
9,120
|
|
|
|
15,177
|
|
|
|
18,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income
|
|
$
|
46,418
|
|
|
$
|
27,473
|
|
|
$
|
87,517
|
|
|
$
|
52,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income per share(3)
|
|
$
|
0.47
|
|
|
$
|
0.28
|
|
|
$
|
0.88
|
|
|
$
|
0.54
|
|
Weighted average shares outstanding diluted
|
|
|
99,487
|
|
|
|
98,501
|
|
|
|
99,248
|
|
|
|
98,235
|
|
|
|
|
(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. The
effective tax rate for three months ended June 30, 2010 and
2009 represents the actual tax rate whereas the effective tax
rate for the six months ended June 30, 2010 and 2009
represents a blended rate. |
|
(2) |
|
Represents the after-tax vesting of non-qualified stock options
in which we receive a tax deduction upon exercise, and the full
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 $0.6 million, respectively, for the
three months ended June 30, 2010 and 2009, and
$2.5 million and $1.3 million, respectively, for the
six months ended June 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
|
|
|
|
|
|
|
Months
|
|
|
For the Six
|
|
|
|
Ended
|
|
|
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Earnings per share (diluted)
|
|
$
|
0.08
|
|
|
$
|
0.16
|
|
|
$
|
0.33
|
|
|
$
|
0.30
|
|
Adjustment for allocation of undistributed earnings to stock
units
|
|
|
|
|
|
|
|
|
|
|
0.01
|
|
|
|
0.01
|
|
After-Tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA Adjustments per share
|
|
|
0.32
|
|
|
|
0.03
|
|
|
|
0.39
|
|
|
|
0.04
|
|
Amortization of purchased intangible assets and software per
share
|
|
|
0.07
|
|
|
|
0.09
|
|
|
|
0.15
|
|
|
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income per share
|
|
$
|
0.47
|
|
|
$
|
0.28
|
|
|
$
|
0.88
|
|
|
$
|
0.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
Economic Overview
and Impact of Financial Market Events
During the first six months of 2010, the equity markets
continued to be positive 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 1,135 during the second quarter of 2010, 27.1% above
the comparable prior year period. For the six months ended
June 30, 2010, the S&P 500 daily average was 1,129, an
increase of 32.7% over the average for the six months ended
June 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. During
the second quarter of 2010, the overall trend of the equity
markets was downward as the S&P index closed at its high of
1,217 on April 23, and dropped 15.3% during the remainder
of the quarter to close at 1,031, due to continued economic
concerns and weak consumer confidence.
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 second quarter
of 2010, compared to 0.18% for the second quarter of 2009. For
the six months ended June 30, 2010 and 2009, the average
effective rates for federal funds were 0.16% and 0.18%,
respectively. 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 six months ended June 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
|
|
|
|
|
Six Months
|
|
|
|
|
|
Ended June 30,
|
|
|
|
|
Ended June 30,
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
|
(In thousands)
|
|
|
|
|
(In thousands)
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
$
|
420,169
|
|
|
$
|
367,431
|
|
|
|
14.4%
|
|
|
$
|
809,141
|
|
|
$
|
714,651
|
|
|
|
13.2%
|
|
Advisory fees
|
|
|
215,146
|
|
|
|
161,463
|
|
|
|
33.2%
|
|
|
|
421,476
|
|
|
|
325,368
|
|
|
|
29.5%
|
|
Asset-based fees
|
|
|
77,436
|
|
|
|
67,739
|
|
|
|
14.3%
|
|
|
|
148,886
|
|
|
|
130,393
|
|
|
|
14.2%
|
|
Transaction and other fees
|
|
|
68,132
|
|
|
|
61,609
|
|
|
|
10.6%
|
|
|
|
135,495
|
|
|
|
122,947
|
|
|
|
10.2%
|
|
Other
|
|
|
9,278
|
|
|
|
11,075
|
|
|
|
(16.2)%
|
|
|
|
18,569
|
|
|
|
18,936
|
|
|
|
(1.9)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
790,161
|
|
|
|
669,317
|
|
|
|
18.1%
|
|
|
|
1,533,567
|
|
|
|
1,312,295
|
|
|
|
16.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
|
556,538
|
|
|
|
463,988
|
|
|
|
19.9%
|
|
|
|
1,069,740
|
|
|
|
906,519
|
|
|
|
18.0%
|
|
Compensation and benefits
|
|
|
74,822
|
|
|
|
64,841
|
|
|
|
15.4%
|
|
|
|
148,397
|
|
|
|
131,819
|
|
|
|
12.6%
|
|
General and administrative
|
|
|
54,550
|
|
|
|
49,501
|
|
|
|
10.2%
|
|
|
|
107,787
|
|
|
|
99,372
|
|
|
|
8.5%
|
|
Depreciation and amortization
|
|
|
22,110
|
|
|
|
27,277
|
|
|
|
(18.9)%
|
|
|
|
47,700
|
|
|
|
54,672
|
|
|
|
(12.8)%
|
|
Restructuring charges
|
|
|
4,622
|
|
|
|
(197
|
)
|
|
|
*
|
|
|
|
8,571
|
|
|
|
(524
|
)
|
|
|
*
|
|
Other
|
|
|
3,274
|
|
|
|
5,643
|
|
|
|
(42.0)%
|
|
|
|
8,051
|
|
|
|
9,363
|
|
|
|
(14.0)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
715,916
|
|
|
|
611,053
|
|
|
|
17.2%
|
|
|
|
1,390,246
|
|
|
|
1,201,221
|
|
|
|
15.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating interest expense
|
|
|
27,683
|
|
|
|
26,032
|
|
|
|
6.3%
|
|
|
|
52,019
|
|
|
|
51,973
|
|
|
|
0.1%
|
|
Loss on extinguishment of debt
|
|
|
37,979
|
|
|
|
|
|
|
|
*
|
|
|
|
37,979
|
|
|
|
|
|
|
|
*
|
|
(Gain) loss on equity method investment
|
|
|
(45
|
)
|
|
|
84
|
|
|
|
*
|
|
|
|
(21
|
)
|
|
|
168
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
781,533
|
|
|
|
637,169
|
|
|
|
22.7%
|
|
|
|
1,480,223
|
|
|
|
1,253,362
|
|
|
|
18.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
8,628
|
|
|
|
32,148
|
|
|
|
(73.2)%
|
|
|
|
53,344
|
|
|
|
58,933
|
|
|
|
(9.5)%
|
|
Provision for income taxes
|
|
|
628
|
|
|
|
16,567
|
|
|
|
(96.2)%
|
|
|
|
19,790
|
|
|
|
28,555
|
|
|
|
(30.7)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,000
|
|
|
$
|
15,581
|
|
|
|
(48.7)%
|
|
|
$
|
33,554
|
|
|
$
|
30,378
|
|
|
|
10.5 %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 30,
2010 and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
% Total
|
|
2009
|
|
% Total
|
|
Change
|
|
% Change
|
|
Variable annuities
|
|
|
$172,755
|
|
|
|
41.1%
|
|
|
|
$127,602
|
|
|
|
34.7%
|
|
|
|
$45,153
|
|
|
|
35.4%
|
|
Mutual funds
|
|
|
117,254
|
|
|
|
27.9%
|
|
|
|
93,693
|
|
|
|
25.5%
|
|
|
|
23,561
|
|
|
|
25.1%
|
|
Fixed annuities
|
|
|
39,202
|
|
|
|
9.3%
|
|
|
|
69,351
|
|
|
|
18.9%
|
|
|
|
(30,149)
|
|
|
|
(43.5)%
|
|
Alternative investments
|
|
|
26,179
|
|
|
|
6.2%
|
|
|
|
19,007
|
|
|
|
5.2%
|
|
|
|
7,172
|
|
|
|
37.7%
|
|
Equities
|
|
|
25,034
|
|
|
|
6.0%
|
|
|
|
22,942
|
|
|
|
6.2%
|
|
|
|
2,092
|
|
|
|
9.1%
|
|
Fixed income
|
|
|
20,943
|
|
|
|
5.0%
|
|
|
|
19,531
|
|
|
|
5.3%
|
|
|
|
1,412
|
|
|
|
7.2%
|
|
Insurance
|
|
|
18,216
|
|
|
|
4.4%
|
|
|
|
14,676
|
|
|
|
4.0%
|
|
|
|
3,540
|
|
|
|
24.1%
|
|
Other
|
|
|
586
|
|
|
|
0.1%
|
|
|
|
629
|
|
|
|
0.2%
|
|
|
|
(43)
|
|
|
|
(6.8)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commission revenue
|
|
|
$420,169
|
|
|
|
100.0%
|
|
|
|
$367,431
|
|
|
|
100.0%
|
|
|
|
$52,738
|
|
|
|
14.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commission revenue increased by $52.7 million, or 14.4%,
for the three months ended June 30, 2010 compared with
2009. In comparison to the prior year, trail-based commissions
increased significantly as a result of improved market
conditions as well as growth in assets eligible for trail
payment. Sales-based commissions also increased as a result of
greater commission-based products activity. Sales-based
commissions from more market sensitive products such as mutual
funds and variable annuities experienced an increase over the
prior year period due to increasing investor confidence. Sales
of 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.
The following table sets forth our commission revenue by product
category included in our unaudited condensed consolidated
statements of income for the six months ended June 30, 2010
and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
% Total
|
|
2009
|
|
% Total
|
|
Change
|
|
% Change
|
|
Variable annuities
|
|
|
$328,447
|
|
|
|
40.6%
|
|
|
|
$257,045
|
|
|
|
36.0%
|
|
|
|
$71,402
|
|
|
|
27.8%
|
|
Mutual funds
|
|
|
232,255
|
|
|
|
28.7%
|
|
|
|
176,515
|
|
|
|
24.7%
|
|
|
|
55,740
|
|
|
|
31.6%
|
|
Fixed annuities
|
|
|
73,090
|
|
|
|
9.0%
|
|
|
|
129,504
|
|
|
|
18.1%
|
|
|
|
(56,414)
|
|
|
|
(43.6)%
|
|
Equities
|
|
|
49,140
|
|
|
|
6.1%
|
|
|
|
44,043
|
|
|
|
6.1%
|
|
|
|
5,097
|
|
|
|
11.6%
|
|
Alternative investments
|
|
|
46,197
|
|
|
|
5.7%
|
|
|
|
36,328
|
|
|
|
5.1%
|
|
|
|
9,869
|
|
|
|
27.2%
|
|
Fixed income
|
|
|
41,955
|
|
|
|
5.2%
|
|
|
|
35,168
|
|
|
|
4.9%
|
|
|
|
6,787
|
|
|
|
19.3%
|
|
Insurance
|
|
|
36,894
|
|
|
|
4.6%
|
|
|
|
34,762
|
|
|
|
4.9%
|
|
|
|
2,132
|
|
|
|
6.1%
|
|
Other
|
|
|
1,163
|
|
|
|
0.1%
|
|
|
|
1,286
|
|
|
|
0.2%
|
|
|
|
(123)
|
|
|
|
(9.6)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commission revenue
|
|
|
$809,141
|
|
|
|
100.0%
|
|
|
|
$714,651
|
|
|
|
100.0%
|
|
|
|
$94,490
|
|
|
|
13.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2010, commission revenue
increased by $94.5 million, or 13.2%, 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 mutual funds and variable
annuities 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 $53.7 million, or 33.2%, for the
three months ended June 30, 2010 compared with 2009. For
the six months ended June 30, 2010, advisory fees increased
$96.1 million, or 29.5%, compared to the prior year period.
The increase was primarily due to the effect of the rebounding
market, which prompted a significant increase on the value of
client assets in advisory programs. Our advisory assets under
management increased 20.8% from $65.3 billion at
June 30, 2009 to $78.9 billion at June 30, 2010.
The following table summarizes the activity within our advisory
assets under management for the six months ended June 30,
3010 and 3009 (in billions):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Beginning balance at January 1
|
|
$
|
77.2
|
|
|
$
|
59.6
|
|
Net new advisory assets
|
|
|
3.9
|
|
|
|
2.6
|
|
Market impacts
|
|
|
(2.2
|
)
|
|
|
3.1
|
|
|
|
|
|
|
|
|
|
|
Ending balance at June 30
|
|
$
|
78.9
|
|
|
$
|
65.3
|
|
|
|
|
|
|
|
|
|
|
Asset-Based
Fees
Asset-based fees increased by $9.7 million, or 14.3%, for
the three months ended June 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. Revenues from our cash sweep
programs for the three months ended June 30, 2010 declined
by $3.3 million, or 10.0% from the three months ended
June 30, 2009 due to a decrease in assets held in our cash
sweep programs and the depressed interest rate environment as
reflected by the average effective federal funds rate and its
influence on fees associated with our cash sweep programs. For
the three months ended June 30, 2010, the effective federal
funds rate averaged 0.19% compared to 0.18% for the three months
ended June 30, 2009. Assets in our cash sweep programs
averaged $18.6 billion and $21.3 billion for the three
months ended June 30, 2010 and 2009, respectively.
Asset-based fees increased by $18.5 million, or 14.2%, for
the six months ended June 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. Revenues from our cash sweep
programs for the six months ended June 30, 2010 declined by
$8.8 million, or 13.6% from the six months ended
June 30, 2009 due to a decrease in assets held in our cash
sweep programs and the depressed interest rate environment as
reflected by the average effective federal funds rate and its
influence on fees associated with our cash sweep programs. For
the six months ended June 30, 2010, the effective federal
funds rate averaged 0.16% compared to 0.18% for the six months
ended June 30, 2009. Assets in our cash sweep programs
averaged $18.5 billion and $21.9 billion for the six
months ended June 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 $6.5 million, or 10.6%, for
the three months ended June 30, 2010 compared with 2009.
This increase is largely due to increased prices and
corresponding fees to advisors for licensing and professional
liability insurance services of $1.4 million and
$1.8 million, respectively.
Transaction and other fees increased by $12.5 million, or
10.2%, for the six months ended June 30, 2010 compared with
2009. This increase is due, in part, to a $2.0 million
increase in revenues earned from advisor conferences held in
2010; these conferences were not held in 2009 due
37
to market conditions. In addition, charges to advisors for
licensing and professional liability insurance services
increased by $2.7 million and $3.5 million,
respectively, in 2010 as compared to 2009 due to increases in
pricing for such services.
Other
Revenue
Other revenue decreased by $1.8 million, or 16.2%, for the
three months ended June 30, 2010 compared with 2009. The
decrease was primarily attributed to unrealized
mark-to-market
losses in securities owned and certain other assets, which were
offset by higher direct investment marketing allowances received
from product sponsor programs, largely based on the market
values of the underlying assets.
For the six months ended June 30, 2010, other revenue
decreased $0.4 million, or 1.9%, 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 unrealized
mark-to-market
losses 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 the market values of the underlying assets.
Expenses
Production
Expenses
Production expenses increased by $92.6 million, or 19.9%,
for the three months ended June 30, 2010 compared with
2009. This increase was correlated with our commission and
advisory revenues, which increased by 20.1% during the same
period. Our production payout averaged 86.1% for the three
months ended June 30, 2010 and 86.2% for the three months
ended June 30, 2009.
Production expenses increased by $163.2 million, or 18.0%,
for the six months ended June 30, 2010 compared with 2009.
This increase was a result of an 18.3% increase in our
commission and advisory revenues during the same period. Our
production payout averaged 85.5% for the six months ended
June 30, 2010 and 85.6% for the six months ended
June 30, 2009.
Compensation and
Benefits
Compensation and benefits increased by $10.0 million, or
15.4%, for the three months ended June 30, 2010 compared
with 2009. The increase was primarily attributed to the
restoration of certain employee-related items, including
increases in bonus levels and employer contributions to our
retirement plans in the current year period that were suspended
in 2009 as a result of our cost management initiatives. Our
average number of full-time employees was 2,502 and 2,433 for
the three months ended June 30, 2010 and 2009, respectively.
For the six months ended June 30, 2010, compensation and
benefits increased $16.6 million, or 12.6%, 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 employer contributions to our
retirement plans in the current year period that were suspended
in 2009 as a result of our cost management initiatives. Our
average number of full-time employees was 2,483 and 2,448 for
the six months ended June 30, 2010 and 2009, respectively.
General and
Administrative Expenses
General and administrative expenses increased by
$5.0 million, or 10.2%, for the three months ended
June 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.
38
For the six months ended June 30, 2010, general and
administrative expenses increased $8.4 million, or 8.5%,
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 half of 2010, we
reinstated certain advisor conference services, which increased
general and administrative expenses by $5.8 million.
Depreciation and
Amortization
Depreciation and amortization expense decreased by
$5.2 million, or 18.9%, for the three months ended
June 30, 2010 compared with 2009. For the six months ended
June 30, 2010, depreciation and amortization decreased by
$7.0 million, or 12.8%, compared to the same period in the
prior year. The decrease in both the three and six 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
$1.6 million and $6.3 million in amortization expense
for these assets for the three and six month ended June 30,
2010, respectively, and $4.8 million and $9.6 million
for the corresponding periods in 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 $4.6 million for the three
months ended June 30, 2010. For the six months ended
June 30, 2010, restructuring charges were
$8.6 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 $3.3 million in other expenditures
principally relating to the conversion and transfer of advisors
and their client accounts from the Affiliated Entities to LPL
Financial. In the first half of 2009, we recorded
$0.5 million in adjustments that reduced previously
estimated restructuring charges related to our 2008 strategic
business review.
Other
Expenses
Other expenses decreased by $2.4 million, or 42.0%, for the
three months ended June 30, 2010 compared with 2009. For
the six months ended June 30, 2010, other expenses
decreased $1.3 million, or 14.0%, compared to the prior
year period. The decrease in expense is primarily due to
reductions in customer account write-offs and other cost
reductions.
Interest
Expense
Interest expense includes non-operating interest expense for our
senior secured credit facilities and our senior unsecured
subordinated notes.
Interest expense increased by $1.7 million, or 6.3%, for
the three months ended June 30, 2010 compared with 2009.
For the six months ended June 30, 2010, interest expense
increased approximately $0.1 million, or 0.1%, compared to
the same period in the prior year. The increase for the three
and six month periods was primarily due to the 30 day
redemption period of our senior unsecured subordinated notes.
During that time, interest was incurred on $550.0 million
under our senior unsecured subordinated notes as well as on our
2017 Term Loans.
39
Loss on
Extinguishment of Debt
Loss on extinguishment of debt was $38.0 million for the
three and six month periods ended June 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 associated
with the subordinated notes.
Gain or Loss on
Equity Method Investment
The gain or loss on equity method investment represents our
share of gains or losses related to our investment in a
privately held technology company.
The gain on equity method investment for the three and six month
periods ended June 30, 2010 was approximately
$0.1 million. Loss on equity method investment was
$0.1 million and $0.2 million for the three and six
months ended June 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 June 30, 2010, we recorded
income tax expense of $0.6 million compared with an income
tax expense of $16.6 million for the three months ended
June 30, 2009. Our effective income tax rate was 7.3% and
51.5% for the three months ended June 30, 2010 and 2009,
respectively. We reported a low effective income tax rate for
the three months ended June 30, 2010, due to a favorable
state apportionment ruling covering the current and previous
years and due to the revision of certain settlement
contingencies for prior periods. For the three month period
ended June 30, 2010, the ruling resulted in reductions of
27.8% and the revision to settlement contingencies resulted in
reductions of 9.6%, respectively, to our effective income tax
rate. Excluding the impact of these reductions, our effective
tax rate would have been 44.7% for the three month period ended
June 30, 2010.
During the six months ended June 30, 2010, we recorded
income tax expense of $19.8 million compared with an income
tax expense of $28.6 million for the six months ended
June 30, 2009. Our effective income tax rate was 37.1% and
48.5% for the six months ended June 30, 2010 and 2009,
respectively. We reported a low effective income tax rate for
the six months ended June 30, 2010, due to a favorable
state apportionment ruling covering the current and previous
years and due to the revision of certain settlement
contingencies for prior periods. For the six month period ended
June 30, 2010, the ruling resulted in reductions of 4.5%
and the revision to settlement contingencies resulted in
reductions of 1.5%, respectively, to our effective income tax
rate. Excluding the impact of these reductions, our effective
tax rate would have been 43.1% for the six month period ended
June 30, 2010.
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
40
controlling the business activities that impact our financial
condition, liquidity and capital structure and maintains
relationships with various lenders. The objectives of these
policies are to support the executive business strategies while
ensuring ongoing and sufficient liquidity.
A summary of changes in cash flow data is provided as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Net cash flows (used in) provided by:
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
53,024
|
|
|
$
|
121,778
|
|
Investing activities
|
|
|
(2,721
|
)
|
|
|
(3,543
|
)
|
Financing activities
|
|
|
(26,156
|
)
|
|
|
(3,619
|
)
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
24,147
|
|
|
|
114,616
|
|
Cash and cash equivalents beginning of period
|
|
|
378,594
|
|
|
|
219,239
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of period
|
|
$
|
402,741
|
|
|
$
|
333,855
|
|
|
|
|
|
|
|
|
|
|
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 six
months ended June 30, 2010 was $53.0 million, compared
to net cash provided by operating activities of
$121.8 million for the six months ended June 30, 2009.
Net cash used in investing activities for the six months ended
June 30, 2010 and June 30, 2009 totaled
$2.7 million and $3.5 million, respectively. The
decrease for the six months ended June 30, 2010 as compared
to the six months ended June 30, 2009 was principally due
to an increase in proceeds from securities held to maturity in
the current year period.
Net cash used in financing activities for the six months ended
June 30, 2010 and June 30, 2009, was
$26.2 million and $3.6 million, respectively. The
increase in cash used in financing activities for the six months
ended June 30, 2010 as compared to the prior year period is
primarily related to the redemption of $579.6 million of
our senior unsecured subordinated notes, offset by
$566.7 million of proceeds received from our 2017 Term
Loans. In addition, we paid $7.2 million in debt issuance
costs in the current year period.
We believe that based on current levels of operations and
anticipated growth, cash flow from operations, together with
other available sources of funds, will be adequate to satisfy
our working capital needs, the payment of all of our obligations
and the funding of anticipated capital expenditures for the
foreseeable future.
Operating
Capital Requirements
Our primary requirement for working capital relates to funds we
loan to our advisors clients for trading done on margin
and funds we are required to maintain at clearing organizations
to support 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
41
to clients for margin transactions and deposit with our clearing
organizations. These activities account for the majority of our
working capital requirements, which are primarily funded
directly or indirectly by our advisors clients. Our other
working capital needs are primarily limited to regulatory
capital requirements and software development, which we have
satisfied in the past from internally generated cash flows.
Notwithstanding the self-funding nature of our operations, we
may sometimes be required to fund timing differences arising
from the delayed receipt of client funds associated with the
settlement of client transactions in securities markets.
Historically, these timing differences were funded either with
internally generated cash flow or, if needed, with funds drawn
under short-term borrowing facilities, including both committed
unsecured lines of credit and uncommitted lines of credit
secured by client securities. LPL Financial, one of our
broker-dealer subsidiaries, utilizes uncommitted lines secured
by client securities to fund margin loans and other client
transaction- related timing differences.
Our registered broker-dealers are subject to the SECs
Uniform Net Capital Rule, which requires the maintenance of
minimum net capital. LPL Financial and Associated compute net
capital requirements under the alternative method, which
requires firms to maintain minimum net capital, as defined,
equal to the greater of $250,000 or 2% of aggregate debit
balances arising from client transactions plus 1% of net
commission payable, as defined. LPL Financial is also subject to
the CFTCs minimum financial requirements, which require
that it maintain net capital, as defined, equal to 4% of
customer funds required to be segregated pursuant to the
Commodity Exchange Act, less the market value of certain
commodity options, all as defined. UVEST, MSC and WFG all
compute net capital requirements under the aggregate
indebtedness method, which requires firms to maintain minimum
net capital, as defined, of not less than 6.67% of aggregate
indebtedness plus 1% of net commission payable, also as defined.
Our subsidiary, 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 June 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;
|
|
|
|
create liens;
|
|
|
|
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;
|
|
|
|
prepay certain subordinated indebtedness;
|
|
|
|
engage in certain transactions with affiliates;
|
|
|
|
amend material agreements governing certain subordinated
indebtedness; and
|
|
|
|
change our lines of business.
|
44
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 June 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 June 30, 2010 and December 31, 2009
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
Covenant
|
|
|
Actual
|
|
|
Covenant
|
|
|
Actual
|
|
Financial Ratio
|
|
Requirement
|
|
|
Ratio
|
|
|
Requirement
|
|
|
Ratio
|
|
|
Leverage Test (Maximum)
|
|
|
4.10
|
|
|
|
2.99
|
|
|
|
4.60
|
|
|
|
3.42
|
|
Interest Coverage (Minimum)
|
|
|
2.35
|
|
|
|
4.09
|
|
|
|
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 June 30, 2010 and
December 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(unaudited)
|
|
|
Net income
|
|
$
|
50,696
|
|
|
$
|
47,520
|
|
Interest expense
|
|
|
100,968
|
|
|
|
100,922
|
|
Income tax expense
|
|
|
16,282
|
|
|
|
25,047
|
|
Amortization of purchased intangible assets and software(1)
|
|
|
54,380
|
|
|
|
59,577
|
|
Depreciation and amortization of all other fixed assets
|
|
|
46,944
|
|
|
|
48,719
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
269,270
|
|
|
|
281,785
|
|
EBITDA Adjustments:
|
|
|
|
|
|
|
|
|
Share-based compensation expense(2)
|
|
|
8,940
|
|
|
|
6,437
|
|
Acquisition and integration related expenses(3)
|
|
|
4,893
|
|
|
|
3,037
|
|
Restructuring and conversion costs(4)
|
|
|
77,917
|
|
|
|
64,658
|
|
Debt amendment and extinguishment costs(5)
|
|
|
38,605
|
|
|
|
|
|
Other(6)
|
|
|
151
|
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
Total EBITDA Adjustments
|
|
|
130,506
|
|
|
|
74,283
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
|
399,776
|
|
|
|
356,068
|
|
Pro-forma adjustments(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Agreement Adjusted EBITDA
|
|
$
|
399,776
|
|
|
$
|
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 primarily as a
result of our 2007 acquisitions of the Affiliated Entities and
IFMG. |
|
(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
June 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
46
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 June 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 June 30, 2010, the risk of variability on
our floating interest rate is partially mitigated by the client
margin loans on which we carry floating interest rates. At
June 30, 2010, our receivables from our advisors
clients for margin loan activity were approximately
$223.6 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 June 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 June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
< 1
|
|
|
1-3
|
|
|
4-5
|
|
|
> 5
|
|
|
|
Total
|
|
|
Year
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
|
|
(In thousands)
|
|
|
Leases and other obligations(1)
|
|
$
|
108,953
|
|
|
$
|
30,257
|
|
|
$
|
47,089
|
|
|
$
|
20,038
|
|
|
$
|
11,569
|
|
Senior secured term loan facilities(2)
|
|
|
1,393,625
|
|
|
|
13,972
|
|
|
|
345,553
|
|
|
|
490,350
|
|
|
|
543,750
|
|
Commitment fee on revolving line of credit(3)
|
|
|
3,770
|
|
|
|
1,366
|
|
|
|
2,404
|
|
|
|
|
|
|
|
|
|
Variable interest payments:(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 Term Loan (Hedged)
|
|
|
6,367
|
|
|
|
4,862
|
|
|
|
1,505
|
|
|
|
|
|
|
|
|
|
2013 Term Loan (Unhedged)
|
|
|
14,035
|
|
|
|
2,236
|
|
|
|
11,799
|
|
|
|
|
|
|
|
|
|
2015 Term Loan (Unhedged)
|
|
|
104,676
|
|
|
|
21,411
|
|
|
|
62,996
|
|
|
|
20,269
|
|
|
|
|
|
2017 Term Loan (Unhedged)
|
|
|
208,283
|
|
|
|
30,680
|
|
|
|
90,270
|
|
|
|
58,662
|
|
|
|
28,671
|
|
Interest rate swap agreements(5)
|
|
|
12,010
|
|
|
|
9,156
|
|
|
|
2,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
1,851,719
|
|
|
$
|
113,940
|
|
|
$
|
564,470
|
|
|
$
|
589,319
|
|
|
$
|
583,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Minimum payments have not been reduced by minimum sublease
rental income of $0.8 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. |
47
|
|
|
(4) |
|
Our senior secured term loan facilities bear interest at
floating rates. Variable interest payments are shown assuming
the applicable LIBOR rates at June 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 June 30, 2010, we reflect a liability for
unrecognized tax benefits of $22.6 million, which we have
included in income taxes payable on the unaudited condensed
consolidated statements of financial condition. This amount has
been excluded from the contractual obligations table because we
are unable to reasonably predict the ultimate amount or timing
of future tax payments.
Fair Value of
Financial Instruments
We use fair value measurements to record certain financial
assets and liabilities at fair value and to determine fair value
disclosures.
We use prices obtained from an independent third-party pricing
service to measure the fair value of our trading securities. We
validate prices received from the pricing service using various
methods including, comparison to prices received from additional
pricing services, comparison to available market prices and
review of other relevant market data including implied yields of
major categories of securities. At June 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
48
clearing deposit requirements consist of US Government
securities. The amount of securities deposited depend 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 June 30, 2010 and December 31, 2009, the fair value
of our trading securities owned were $18.1 million and
$15.4 million, respectively. Securities sold but not yet
purchased were $2.6 million and $4.0 million
respectively, at June 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 June 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 June 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)
|
|
|
106,325
|
|
|
|
106
|
|
|
|
266
|
|
|
|
532
|
|
|
|
1,063
|
|
2015 Term Loan (Unhedged)(3)
|
|
|
498,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
167
|
|
2017 Term Loan (Unhedged)(3)
|
|
|
578,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable Rate Debt Outstanding
|
|
$
|
1,393,625
|
|
|
$
|
106
|
|
|
$
|
266
|
|
|
$
|
532
|
|
|
$
|
1,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3-month
LIBOR(4)
|
|
|
0.53
|
%
|
|
|
0.63
|
%
|
|
|
0.78
|
%
|
|
|
1.03
|
%
|
|
|
1.53
|
%
|
49
|
|
|
(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 June 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
0.53% or 1.50%, plus an applicable interest rate margin. |
|
(4) |
|
Represents the three-month LIBOR rate at June 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 fees. The
average Federal Reserve effective federal funds rate for June
2010 was 0.18%. 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 $11.8 million on
an annual basis (assuming that client balances at June 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 six months ended June 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
50
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.
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 financial
advisors and institutions, our employees, our relationship with
clients and the terms and conditions of our relationships with
product manufacturers. Our client and financial advisor and
institution 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 financial
advisor and institution 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.
51
Change in
Internal Control over Financial Reporting
There were no changes in our internal control over financial
reporting that occurred during the second quarter ended
June 30, 2010, that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
|
|
Item 1.
|
Legal
Proceedings
|
Information regarding the Companys legal proceedings is
set forth under Business Legal
Proceedings in the Companys Registration Statement
on Form S-1, as amended.
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 5.
|
Other
Information
|
None.
|
|
|
|
|
|
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: August 4, 2010
|
|
By:
|
|
/s/ Mark
S. Casady
|
|
|
|
|
|
|
|
|
|
Mark S. Casady
|
|
|
|
|
Chairman and Chief Executive Officer
|
|
|
|
|
|
Date: August 4, 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.
Mark S. Casady
Chief Executive Officer
(Principal Executive Officer)
Date: August 4, 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.
Robert J. Moore
Chief Financial Officer
(Principal Financial Officer)
Date: August 4, 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 June 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.
Mark S. Casady
Chief Executive Officer
(Principal Executive Officer)
Date: August 4, 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 June 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.
Robert J. Moore
Chief Financial Officer
(Principal Financial Officer)
Date: August 4, 2010