e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31,
2010
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or
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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
001-34963
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 including zip code)
617-423-3644
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock $.001 par value per share
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NASDAQ Global Select Market
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Exchange
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
(Registrant is not subject to the requirements of Rule 405
of
Regulation S-T
at this time).
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
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
Act). Yes o No þ
As of June 30, 2010, the last business day of the
registrants most recently completed second fiscal quarter,
there was no established public trading market for the common
stock of the registrant. The registrant completed the initial
public offering of its common stock on November 23, 2010.
The number of shares of common stock, par value $0.001 per
share, outstanding as of March 1, 2011 was 108,801,822.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to
stockholders in connection with the Annual Meeting of
Stockholders are incorporated by reference into Part III.
WHERE YOU CAN
FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements
and other information required by the Securities Exchange Act of
1934, as amended (the Exchange Act), 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.
On our Internet website,
http://www.lpl.com,
we post the following recent filings as soon as reasonably
practicable after they are electronically filed with or
furnished to the SEC: our annual reports on
Form 10-K,
our quarterly reports on
Form 10-Q,
our current reports on
Form 8-K,
and any amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Exchange Act. Hard copies
of all such filings are available free of charge by request via
email (investor.relations@lpl.com), telephone
(617) 897-4574,
or mail (LPL Financial Investor Relations at One Beacon Street,
22nd Floor, Boston, MA 02108). The information contained or
incorporated on our website is not a part of this Annual Report
on
Form 10-K.
When we use the terms LPLIH, we,
us, our, and the firm we
mean LPL Investment Holdings Inc., a Delaware corporation, and
its consolidated subsidiaries, taken as a whole, as well as any
predecessor entities, unless the context otherwise indicates.
SPECIAL NOTE
REGARDING FORWARD-LOOKING STATEMENTS
Item 7 Managements Discussion and
Analysis of Financial Condition and Results of
Operations and other sections of this Annual
Report on
Form 10-K
contain forward-looking statements (regarding future financial
position, budgets, business strategy, projected costs, plans,
objectives of management for future operations, 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 there are important factors that could
cause our actual results, level of activity, performance or
achievements to differ materially from the results, level of
activity, performance or achievements expressed or implied by
the forward-looking statements including, but not limited to,
changes in general economic and financial market conditions,
fluctuations in the value of assets under management, effects of
competition in the financial services industry, changes in the
number of our 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 Part I,
Item 1A Risk Factors.
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. Unless required by law, 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.
PART I
General Corporate
Overview
We provide an integrated platform of proprietary technology,
brokerage and investment advisory services to over 12,400
independent financial advisors and financial advisors at
financial institutions (our advisors) across the
country, enabling them to successfully service their retail
investors with unbiased, conflict-free financial advice. In
addition, we support approximately 4,000 financial advisors with
customized clearing, advisory platforms and technology
solutions. Our singular focus is to support our advisors with
the front, middle and back-office support they need to serve the
large and growing market for independent investment advice,
particularly in the mass affluent market (which we define as
investors with $100,000-$1,000,000 in investable assets). We
believe we are the only company that offers advisors the unique
combination of an integrated technology platform, comprehensive
self-clearing services and full open architecture access to
leading financial products, all delivered in an environment
unencumbered by conflicts from product manufacturing,
underwriting or market making.
For over 20 years we have served the independent advisor
market. We currently support the largest independent advisor
base and the fourth 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 across our locations in Boston, Charlotte
and San Diego.
Our
Business
With our focus and scale, we are not only a beneficiary of the
secular shift among advisors toward independence, but an active
catalyst of this trend. We enable our advisors to provide their
clients with high quality independent financial advice and
investment solutions, and support our advisors in managing the
complexity of their businesses by providing a comprehensive
integrated platform of technology and clearing services. We
provide these services through an open architecture product
platform with no proprietary manufactured products, which
enables an unbiased, conflict-free environment. Additionally, we
offer our advisors the highest average payout ratios among the
five largest U.S. broker-dealers, as ranked by number of
advisors, which we believe provides us with an important
competitive advantage. Our business is dedicated exclusively to
our advisors; we are not a market-maker nor do we offer
investment banking or underwriting services.
The size of our organization and scalability of our solutions
allow us to continually reinvest in our technology and clearing
platforms, tailor our services to the needs of our advisors and
provide them with an attractive value proposition. We believe
that our technology and service platforms allow our advisors to
spend more time with their clients and enhance and grow their
businesses.
Our revenues are derived primarily from commissions and fees
generated by our advisors. We also generate asset-based fees
from our financial product sponsor relationships, our cash sweep
programs and omnibus processing and networking services. Under
our self-clearing platform, we custody the majority of client
assets invested in these products, which includes providing
statements, transaction processing and ongoing account
management for which we receive a fee.
Our Financial
Advisors
Serving clients in communities across the nation, our advisors
build long-term relationships with their clients by guiding them
through the complexities of investment decisions, retirement
solutions, financial planning and wealth-management. We support
the evolution of our advisors businesses over time and
provide a range of solutions as their needs change.
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The relationship with our advisors is embodied in our Commitment
Creed, which serves as a set of guiding principles for our
relationships with our advisors. For more than 20 years it
has been ingrained in our culture and reflects our singular
focus on the advisors we serve. The size and growth of our
business has benefited from this focus. Our advisor base has
grown from 3,596 advisors in 2000 to 12,444 as of
December 31, 2010, representing a Compound Annual Growth
Rate (CAGR) of 13.2%. Our historical advisor growth
rate does not guarantee that we will attract advisors at
comparable rates in the future.
Our advisor base includes independent financial advisors,
registered investment advisors (RIAs) and advisors
at small and mid-sized financial institutions. In order to
license with us, advisors must meet our stringent requirements
which include a thorough review of the advisors education,
experience, credit and compliance history. These advisors are
licensed with our wholly owned subsidiary, LPL Financial LLC
(LPL Financial) and enter into a registered
representative agreement that establishes the duties and
responsibilities of each party. Pursuant to the registered
representative agreement, each advisor makes a series of
representations, including that the advisor will disclose to all
customers and prospective customers that the advisor is acting
as our registered representative, that all orders for securities
will be placed through us, that the advisor will sell only
products we have approved and that the advisor will comply with
LPL policies and procedures as well as securities rules and
regulations. These advisors also agree not to engage in any
outside business activity without prior approval from us and not
to act as an agent for any of our competitors.
In return for a high level of services provided by us,
including, among others, transaction processing and technology
services we provide to the advisors to support their daily
activities, we typically retain a range of 10 to 15 percent
of the commission and advisory fee revenue generated by our
advisors and pay out the remaining 85 to 90 percent to
them. In addition, advisors pay certain fees directly to us
relating to technology and platform access, insurance coverage
and licensing fees. The registered representative agreement is
terminable without cause on 30 days notice and for cause
immediately upon notice.
Our advisors average over 15 years of industry experience.
This substantial industry experience allows us to focus on
enhancing our advisors businesses without the need for
basic training or subsidizing advisors that are new to the
industry. Our independent advisors join us from a broad range of
firms including wirehouses, regional and insurance broker
dealers, banks and other independent firms. Our flexible
business platform allows our advisors to choose the most
appropriate business model to support their clients, whether
they conduct brokerage business, offer brokerage and fee-based
services on our corporate RIA platforms or provide fee-based
services through their own RIAs.
Our independent advisors and RIAs are entrepreneurial
independent contractors who market their services through over
4,200 branch offices. They are primarily located in rural and
suburban areas and as such are viewed as local providers of
independent advice. Approximately 70% of these advisors operate
under their own brand name. We approve and assist these advisors
with their own branding, marketing and promotion.
Among our 12,444 advisors, we believe we are the market leader
in providing support to over 2,400 advisors at more than 750
banks and credit unions seeking to provide a broad array of
services for their financial advisors. For these institutions,
whose core capabilities may not include investment and financial
planning services, or who find the technology, infrastructure
and regulatory requirements to be cost prohibitive, we provide
their financial advisors with the services they need to be
successful, allowing the institutions to focus their energy and
capital on their core businesses.
We also provide support to approximately 4,000 additional
financial advisors who are affiliated and licensed with
insurance companies. These outsourcing arrangements provide
customized clearing, advisory platforms and technology solutions
that enable financial advisors at these insurance companies to
efficiently provide a breadth of services to their client base.
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Our Service
Value Proposition
The core of our business is dedicated to meeting the evolving
needs of our advisors and providing the platform and tools to
grow and enhance the profitability of their businesses. We
support our advisors by providing front, middle and back-office
solutions through the four pillars of our distinct value
proposition: enabling technology, comprehensive clearing and
compliance services, practice management programs and training,
and independent research. The comprehensive and automated nature
of our offering enables our advisors to focus on their clients
while successfully and efficiently managing the complexities of
running their own practice.
Enabling
Technology
We provide our technology and service to advisors through
BranchNet, our proprietary, integrated technology platform that
is server-based and web-accessed. Using the BranchNet
workstation, our advisors effectively manage all critical
aspects of their businesses while remaining highly efficient and
responsive to their clients needs. Time-consuming
processes, such as account opening and management, document
imaging, transaction execution, and account rebalancing, are
automated to improve efficiency and accuracy. Substantially all
of our advisors utilize BranchNet as their core technology
platform. Through BranchNet, our advisors have direct access to
a fully-integrated array of tools and support systems, including:
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comprehensive account lookup for accounts and direct business
data;
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straight-through processing of trade orders and account
maintenance requests and
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secure and reliable data maintenance.
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In addition to the account management capabilities of BranchNet,
the Resource Center, embedded within BranchNet, provides
advisors with access to our research, training, compliance and
support services and the ability to review products and develop
marketing materials, including:
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direct access to financial product information, exclusive
research commentaries, detailed regulatory requirements,
valuable marketing tools, operational details, comprehensive
training and technical support;
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client management and business development tools;
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trading and research tools and
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business management resources.
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Many advisors also subscribe to premium features, such as
performance reporting, financial planning and customized
websites. Select third-party resources have been integrated into
our technology software, enabling seamless access to important
tools, broadening our range of offerings and reducing duplicate
operational functions.
We believe BranchNet allows our advisors to transact and monitor
their business more efficiently, lowering operating costs for
their business. Once on BranchNet, advisors have the ability to
choose which services suit their business plan, purchasing only
the services that are needed to grow their business.
Comprehensive
Clearing and Compliance Services
We custody and clear the majority of our advisors
transactions, providing an enhanced advisor experience and
expedited processing capabilities. Our self-clearing platform
enables us to better control client data, more efficiently
process and report trades, facilitate platform development,
reduce costs and ultimately enhance the quality of the services
we provide our advisors. Our self-clearing platform also enables
us to serve a wider variety of advisors, including RIAs and
hybrid RIAs.
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Because we are self-clearing, we can address all facets of
securities transaction processing, including:
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order routing, trading support, execution and clearing, and
position keeping;
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regulatory and tax compliance and reporting and
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investment accounting and recordkeeping.
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All of these services are backed by our service center and
operations organizations focused on providing timely, accurate
and consistent support, with each employee committed to
delivering best in class service. This shared commitment allows
us to meet our financial advisors and institutions
needs so they can best serve their clients.
In 2010, we launched Service360, a new service paradigm for our
top producing advisors. Service360 offers a wide array of
organizational support, adopting a team-based approach to
service, in which teams are dedicated to a defined set of
advisors. This new service structure was fully implemented in
December 2010, and now services over 6,700 advisors with timely,
accurate and efficient service delivered in a more personal,
relationship-focused manner and with greater accountability and
ownership on the part of the service teams.
We have made sizeable investments in our compliance offering to
enable our advisors to run a fully compliant office. Since 2000,
our commitment of resources and focus on compliance have enabled
us to maintain one of the best regulatory compliance records,
based upon the number of regulatory events reported in the
Financial Industry Regulatory Authoritys
(FINRA) BrokerCheck Reports, among the ten largest
U.S. broker-dealers, ranked by number of advisors. Several
years ago we made the strategic decision to fully integrate our
compliance tools into our technology platform to further enhance
compliance effectiveness and scalability. Approximately
300 employees assist our advisors through:
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training advisors on new products, new FINRA guidelines,
compliance tools, security policies and procedures, anti-money
laundering and best practices;
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review and approval of advertising materials;
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technology-enabled surveillance of trading activities and sales
practices;
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oversight and monitoring of registered investment advisory
activities;
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securities registration, advisory and insurance licensing of
advisors and
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audits of branch offices.
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Practice
Management Programs and Training
Our practice management programs help our advisors enhance and
grow their businesses. Our experience gives us the ability to
benchmark the best practices of successful advisors and develop
customized recommendations to meet the specific needs of an
advisors business and market. Because of our scale, we are
able to dedicate an experienced group of approximately 100
professionals that work with our advisors to build and better
manage their business and client relationships through
one-on-one
consulting as well as group training. In addition, we hold over
130 conferences and group training events annually for the
benefit of our advisors. Our practice management and training
services include:
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personalized business consulting support that helps advisors
enhance the value and operational efficiency of their businesses;
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advisory and brokerage consulting to support advisors in growing
their businesses with our broad range of products and fee-based
offerings, as well as wealth management services to
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assist advisors serving high net worth clients with
comprehensive estate, tax, philanthropic, and financial planning
processes;
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marketing campaigns and consultation to enable advisors to build
awareness of their services and capitalize on opportunities in
their local markets;
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transition services to help advisors establish independent
practices and migrate client accounts to us and
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training programs on topics including technology, use of
advisory platforms and business development.
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Independent
Research
We provide our advisors with integrated access to comprehensive
proprietary research on mutual funds, separate accounts,
insurance and annuities, asset allocation strategies, financial
markets and the economy, among other areas. Our research team
consists of 29 professionals with an average of 12 years of
industry experience, dedicated to providing unbiased and
conflict-free advice. Our research is designed to empower our
advisors to give their clients thoughtful advice in an efficient
manner. In particular, our research facilitates the growth of
our advisory platform through generation of model portfolio and
asset allocation overlay services and the distribution of
packaged solutions. Our research team actively works with our
product due diligence group in screening financial products
offered through our platform. Our lack of proprietary products
or investment banking services helps ensure that our research
remains unbiased and objective.
With a focus on performance, service and transparency, our
research team utilizes a wide spectrum of available tools to
deliver timely perspectives on the ever-changing economic
marketplace and products, enabling advisors to help their
clients understand and adjust to the latest developments.
Through its objective recommendations and portfolio management,
the research group helps advisors meet a broad range of investor
needs effectively. Our research enables advisors to:
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keep abreast of changes in markets and the global economy,
through our daily market update call and email, published
materials, blogs and media presence;
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proactively respond to emerging trends;
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leverage the expertise and experience of our research team in
building individual investment portfolios that are fully
integrated in our technology platform and
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seek specific advice through our ASK (accurate, swift and
knowledgeable) Research Service Desk, a team of research
professionals dedicated exclusively to advisor
investment-research inquiries via phone and email.
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A substantial portion of our research is compliance-approved so
that advisors are able to share it with clients when working
with them to make investment decisions.
Our Economic
Value Proposition
We offer a compelling economic value proposition that is a key
factor in our ability to attract and retain advisors. The
independent channels pay advisors a greater share of brokerage
commissions and advisory fees than the captive
channels generally
80-90%
compared to
30-50%.
Because of our scale and efficient operating model, we offer our
advisors the highest average payout ratios among the ten largest
U.S. broker-dealers, ranked by number of advisors, which we
believe provides us with an important competitive advantage. We
believe our superior technology and service platforms enable our
advisors to operate their practices at a lower cost than other
independent advisors. As a result, we believe owners of
practices associated with us earn meaningfully more pre-tax
profit than owners of practices affiliated with other
independent brokerage firms. We attribute this difference in
profitability in part to lower fixed costs driven by the need
for fewer staff at our associated practices.
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Finally, as business owners, independent financial advisors,
unlike captive advisors, also have the opportunity to build
equity in their own businesses.
We also believe our solutions enable our financial institutions
to be more productive and therefore generate greater
profitability relative to other financial institutions supported
by third party firms.
Our Product
Access
We do not manufacture any financial products. Instead, we
provide our advisors open architecture access to a unique
variety of commission, fee-based, cash and money market products
and services. Our product due diligence group conducts extensive
diligence on substantially all of the new products we offer,
including annuities, real estate investment trusts, alternative
investments and mutual funds. Our platform provides access to
over 8,500 financial products, manufactured by over 400 product
sponsors. Typically, we enter into arrangements with these
product sponsors pursuant to the sponsors standard
distribution agreement.
The sales and administration of these products are facilitated
through BranchNet and Resource Center, which allow our advisors
to access client accounts, product information, asset allocation
models, investment recommendations, and economic insight as well
as perform trade execution.
As of December 31, 2010, advisory and brokerage assets
totaled $315.6 billion, of which $93.0 billion was in
advisory assets. In 2010, brokerage sales were over
$26 billion, including over $9 billion in mutual funds
and $15 billion in annuities. Advisory sales were over
$27 billion, which consisted primarily of mutual funds. As
a result of this scale and significant distribution
capabilities, we can offer leading products and services with
attractive economics to our advisors.
Commission-Based
Products
Commission-based products are those for which we and our
advisors receive an upfront commission and, for certain
products, a trailing commission. Our brokerage offerings include
variable and fixed annuities, mutual funds, general securities,
alternative investments, retirement and 529 education
savings plans, fixed income and insurance. Our insurance
offering is provided through LPL Insurance Associates, Inc.
(LPLIA), a brokerage general agency which provides
personalized advance case design,
point-of-sale
service and product support for a broad range of life,
disability and long-term care products. As of December 31,
2010, the total assets in our commission-based products were
approximately $222.6 billion.
Fee-Based
Advisory Platforms and Support
We have been an innovator in fee-based solutions since the
introduction of our Strategic Asset Management platform in 1991.
Today we have five fee-based advisory platforms that provide
centrally managed or customized solutions from which advisors
can choose to meet the investment needs of their mass affluent
and high net worth clients. The fee structure aligns the
interests of our advisors with their clients, while establishing
a valuable recurring revenue stream for the advisor and for us.
Our fee-based platforms provide access to no-load/load-waived
mutual funds, exchange-traded funds, stocks, bonds, conservative
option strategies, unit investment trusts and no-load,
institutional money managers and multi-manager variable
annuities. We also provide third-party equity research and
asset-management services as well as fee-based advisory and
consulting services to retirement plans. As of December 31,
2010, the total assets in these platforms were
$93.0 billion.
Cash Sweep
Programs
We assist our advisors in managing their clients cash
balances through two primary cash sweep programs depending on
account type: a money market sweep vehicle involving multiple
money market fund providers and an insured bank deposit sweep
vehicle. Our insured bank deposit sweep vehicle
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allocates client cash balances across multiple non-affiliated
banks to provide advisors with up to $1.5 million
($3.0 million joint) of insurance through the Federal
Deposit Insurance Corporation (FDIC). As of
December 31, 2010, the total assets in our cash sweep
programs, which are held within brokerage and advisory accounts,
were approximately $19.1 billion.
In addition to the products above, we also offer trust,
investment management oversight and custodial services for
estates and families through our subsidiary, The Private
Trust Company, N.A. (PTC).
Our Financial
Model
We have a proven track record of strong financial performance.
We have increased our annual Adjusted EBITDA for the past five
consecutive years with only one decline in annual revenue in
2009 in conjunction with the major market downturn. We have
experienced greater variability in our net income primarily due
to amortization of purchased assets and interest expense from
our senior secured credit facilities and subordinated notes, a
result of our merger transaction in 2005 with TPG Capital and
Hellman & Friedman LLC (collectively, the
Majority Holders), and expenses associated with our
acquisition integration and restructuring initiatives. In 2010,
we generated a net loss due to equity issuance and other costs
related to our initial public offering (IPO) that
was completed in the fourth quarter. Accordingly, the
presentation of net income CAGR is not meaningful. Since 2005,
we have grown our net revenues at a 17.2% CAGR, our Adjusted
EBITDA at a 16.9% CAGR and our Adjusted Earnings at a 17.1%
CAGR. Our historical growth rates do not guarantee future
results, levels of activity, performance or achievements. A
reconciliation of non-GAAP measures Adjusted EBITDA and Adjusted
Earnings, to GAAP measures, along with an explanation of these
metrics, is provided in Item 7
Managements Discussion and Analysis.
As we demonstrated during the financial crisis of 2008 and 2009,
our financial model has inherent resilience, and our overall
financial performance is a function of the following favorable
characteristics:
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Our revenues stem from diverse sources, including
advisor-generated commission and advisory fees as well as fees
from product manufacturers, recordkeeping, cash sweep balances
and other ancillary services. They are not concentrated by
advisor, product or geography. For the year ended
December 31, 2010, no single relationship with our
independent advisor practices, banks, credit unions, or
insurance companies accounted for more than 3% of our net
revenues, and no single advisor accounted for more than 1% of
our net revenues.
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Furthermore, a majority of our revenue base is recurring in
nature, with over 60% recurring revenue in 2010.
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Our expenses are primarily variable, as they consist principally
of payouts on advisor-generated revenues.
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Our profit margins are stable and should expand over time
because we actively manage our general and administrative
expenses.
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We are able to operate with low capital expenditures and limited
capital requirements, and as a result our cash flow is not
encumbered.
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We generate substantial free cash flow which we reinvest into
our business.
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We have demonstrated the resilience of our financial model
through market downturns, particularly in the financial crisis
of 2008 and 2009. This inherent resilience is a function of the
following dynamics of our business:
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A significant proportion of our revenues are not correlated with
the equity financial markets, such as software licensing,
account and client fees.
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The variable component of our cost base is directly linked to
revenues generated by our advisors. Furthermore, the payout
percentages are tied to advisor productivity levels.
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Our general and administrative expenses can be actively managed.
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Our Competitive
Strengths
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Significant Scale and Market Leadership
Position. We are an established leader in the
independent advisor market, which is our core business focus.
Our scale enables us to benefit from the following dynamics:
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We actively reinvest in our comprehensive technology platform
and practice support, which further improves the productivity of
our advisors.
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As one of the largest distributors of financial products in the
United States, we are able to obtain attractive economics from
product manufacturers.
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Among the ten largest U.S. broker-dealers by number of
advisors, we offer the highest average payout ratios to our
advisors.
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The combination of our ability to reinvest in the business and
maintain highly competitive payout ratios allows us to attract
and retain advisors successfully. This, in turn, drives our
growth and leads to a virtuous cycle that reinforces our
established scale advantage.
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Unique Value Proposition for Independent
Advisors. We deliver a comprehensive and
integrated suite of products and services to support the
practices of our independent advisors. We believe we are the
only institution that offers a conflict-free, open architecture
and scalable platform. The benefits of our purchasing power lead
to high average payouts and greater economics to our advisors.
Our platform also creates an entrepreneurial opportunity that
empowers independent advisors to build equity in their
businesses. This generates a significant opportunity to attract
and retain highly qualified advisors who are seeking
independence.
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Unique Value Proposition for
Institutions. We provide solutions to
financial institutions, such as regional banks, credit unions
and insurers, who seek to provide a broad array of services for
their customers. We believe many institutions find the
technology, infrastructure and regulatory requirements
associated with delivering financial advice to be
cost-prohibitive. We provide comprehensive solutions that enable
financial advisors at these institutions to offer financial
advice.
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Ability to Profitably Serve the Mass-Affluent
Market. Since inception, our core focus has
been on advisors who serve the mass-affluent market. We have
designed and integrated all aspects of our platforms and
services to profitably meet the needs of these advisors. We
believe there is an attractive opportunity in the mass-affluent
market, in part because wirehouses have not historically focused
on the mass affluent market. We believe our scale position will
sustain and strengthen our competitive advantage in the
mass-affluent market.
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Ability to Serve a Broad Range of Advisor
Models. As a result of our integrated
technology platform and the resulting flexibility, we are able
to attract and retain advisors from multiple channels, including
wirehouses, regional broker-dealers and other independent
broker-dealers. This platform serves a variety of independent
advisor models, including independent financial advisors, RIAs
and hybrid-RIAs. Additionally, we are able to give our advisors
flexibility in choosing how they conduct their business. This
enables us to better retain our existing advisor base by
facilitating their ability to transition among independent
advisor models as preferences evolve within the market. In
addition, although we have grown through our focus on the mass
affluent market, the breadth of our platform has facilitated
growing penetration of the high net worth market. As of
December 31, 2010, our advisors supported accounts with
more than $1 million in assets that in the aggregate
represented $48.2 billion in advisory and brokerage assets,
17.6% of our total. Although our advisors average production is
typically below that of
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some of the wirehouse channel firms, our array of integrated
technology and services can support advisors with significant
production and compete directly with wirehouses.
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Experienced and Committed Senior Management
Team. We have an experienced and committed
senior management team that provides stable and long-standing
leadership for our business. On average, our senior management
has 26 years of industry experience. The team has a track
record of delivery and success as demonstrated in the
companys financial performance through the recent market
downturn. As the current management team has played a
significant role in building out the business, they have a
fundamental and thorough understanding of the operations. The
management team is aligned with stockholders and holds
significant equity ownership in the company.
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Our Sources of
Growth
We expect to increase our revenue and profitability by
benefiting from favorable industry trends and by executing
strategies to accelerate our growth beyond that of the broader
markets in which we operate.
Favorable
Industry Trends
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Growth in Investable Assets. According
to Cerulli Associates, over the next four years, total assets
under management in the United States are anticipated to grow at
8% and retirement assets are expected to grow 6% per year (in
part due to the retirement of the baby boomer generation and the
resulting assets which are projected to flow out of retirement
plans and into individual retirement accounts). In addition,
individual retirement account rollovers are projected to grow
from $4.6 trillion as of 2010 to $6.2 trillion by 2014.
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Increasing Demand for Independent Financial
Advice. Retail investors, particularly in the
mass affluent market, are increasingly seeking financial advice
from independent sources. We are highly focused on helping
independent advisors meet the needs of the mass-affluent market,
which constitutes a significant and underserved portion of
investable assets, according to Cerulli Associates, and we
believe presents significant opportunity for growth.
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Advisor Migration to
Independence. Independent channels are
gaining market share from captive channels. We believe that we
are not just a beneficiary of this secular shift, but an active
catalyst in the movement to independence.
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Macroeconomic Trends. As the
macroeconomic environment continues to stabilize, we anticipate
an appreciation in asset prices and a rise in interest rates
from current, historically low levels. We expect that our
business will benefit from growth in advisory and brokerage
assets as well as increasing asset-based and cash sweep fees.
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LPL-Specific
Growth Opportunities
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Attracting New Advisors to Our
Platform. We intend to grow the number of
advisors either independent or with financial
institutions who are served by our platform. Based
on the number of financial advisors, we have only 3.6% market
share of the approximately 334,000 financial advisors in the
United States, according to Cerulli Associates, and we have the
ability to attract seasoned advisors of any practice size and
from any channel, including wirehouses, regional broker-dealers
and other independent broker-dealers. Additionally, we are able
to support a wide range of business models, including
independent financial advisors, RIAs and hybrid-RIAs. This
flexibility drives sustainable growth in new advisors who seek
to transfer to our platform. We also expect to significantly
expand our developing share of the RIA market.
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Ramp-up
of Newly-Attracted Advisors. We predominately
attract experienced advisors who have established practices. In
our experience, it takes an average of three years for newly
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hired advisors to fully re-establish their practices and
associated revenues. This seasoning process creates accelerated
growth of revenue from new advisors.
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Increasing Productivity of Existing Advisor
Base. The productivity of advisors increases
over time as we enable them to add new clients, gain shares of
their clients investable assets, and expand their existing
practices with additional advisors. We facilitate these
productivity improvements by helping our advisors better manage
their practices in an increasingly complex environment.
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Our Business Model has Inherent Economies of
Scale. The largely fixed costs necessary to
support our advisors delivers higher marginal profitability as
client assets and revenue grow. Historically, this dynamic has
been demonstrated through the growth in our operating margins.
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Opportunistic Pursuit of
Acquisitions. We have a proven history of
expanding our business through opportunistic acquisitions. In
the past six years, we have successfully completed four
transactions. Our scalable business model and operating platform
make us an attractive acquirer in a fragmented market.
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Competition
We believe we offer a unique and dedicated value proposition to
independent financial advisors and financial institutions who
are focused primarily on mass affluent investors. This value
proposition is built upon the delivery of our services through
our scale, independence and integrated technology, which we
believe is not replicated in the industry, and as a result we do
not have any direct competitors to our business model. For
example, because we do not have any proprietary manufacturing
products, we do not view firms that manufacture asset management
products and other financial products as competitors.
We compete to attract and retain experienced and productive
advisors with a variety of financial firms. Within the
independent channel, the industry is highly fragmented,
comprised primarily of small regional firms that rely on
third-party custodians and technology providers to support their
operations. Within the captive wirehouse channel, which tends to
consist of large nationwide firms with multiple lines of
business, competitors include Morgan Stanley Smith Barney LLC;
Merrill Lynch, Pierce, Fenner, & Smith Incorporated; UBS
Financial Services Inc.; Wells Fargo Advisors, LLC; who
typically focus on the highly competitive high net worth
investor market. Competition for advisors also includes regional
firms, such as Edward D. Jones & Co., L.P. and Raymond
James Financial Services, Inc. RIAs, who are licensed directly
with the SEC and not through a broker-dealer, select third-party
firms for custodial services, and competitors include Charles
Schwab & Co. and Fidelity Brokerage Services LLC.
Our competitors who do not offer a complete solution for
advisors are frequently enabled by third-party firms. Pershing
LLC, a subsidiary of Bank of New York Mellon, offers custodial
services to independent firms who are not self-clearing and to
RIAs. Other examples include Albridge Solutions, a subsidiary of
PNC Financial Services LLC, Advent Software, Inc. and
Morningstar, Inc., who provide an array of technology and
research resources.
Our advisors compete for clients with financial advisors of
brokerage firms, banks, insurance companies, asset management
and investment advisory firms. In addition, they also compete
with a number of firms offering direct to investor on-line
financial services and discount brokerage services, such as
Charles Schwab & Co. and Fidelity Brokerage Services
LLC.
Employees
As of December 31, 2010, we had 2,583 full-time
employees. None of our employees are subject to collective
bargaining agreements governing their employment with us. Our
continued growth is dependent, in part, on our ability to
recruit and retain skilled technical sales and professional
personnel. We believe that our relationship with our employees
is strong.
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Our Corporate
Structure
LPL Investment Holdings Inc. is the parent company of our
collective businesses. Our original broker-dealer, LPL
Financial, was formed in 1989. In 2005, investment funds
affiliated with the Majority Holders acquired a majority
ownership stake in LPL Investment Holdings Inc., with the
remaining interest owned primarily by our founders, senior
management and advisors.
In recent years we have grown our business through a number of
opportunistic acquisitions. We strengthened our position as a
leading independent broker-dealer through our acquisition on
June 20, 2007 of Pacific Select Group, LLC (renamed LPL
Independent Advisor Services Group, LLC) and its wholly
owned subsidiaries: Mutual Service Corporation
(MSC), Associated Financial Group, Inc.
(AFG), Associated Securities Corp.
(Associated), Associated Planners Investment
Advisory, Inc. (APIA) and Waterstone Financial
Group, Inc. (WFG) (MSC, AFG, Associated, APIA and
WFG, are collectively referred to herein as the Affiliated
Entities). In September of 2009, we consolidated the
operations of the Affiliated Entities with those of LPL
Financial. The consolidation involved the transfer of securities
licenses of certain registered representatives associated with
the Affiliated Entities and their client accounts. Following the
completion of these transfer activities, the registered
representatives and client accounts that transferred are now
associated with LPL Financial. On February 5, 2011,
Forms BD-W
for Associated and WFG were approved by the SEC and as a result,
Associated and WFG are no longer registered as broker-dealers.
Our acquisitions of UVEST Financial Services Group, Inc.
(UVEST), and IFMG Securities, Inc., Independent
Financial Marketing Group, Inc. and LSC Insurance Agency of
Arizona, Inc. (collectively IFMG) further expanded
our reach in offering financial services through banks, savings
and loan institutions and credit unions nationwide. Our
subsidiary, Independent Advisers Group Corporation
(IAG), offers an investment advisory solution to
insurance companies to support their financial advisors who are
licensed with them. Our subsidiary, LPLIA, operates as a
brokerage general agency which offers life, long-term care and
disability insurance sales and services. Through our subsidiary
PTC we offer trust, investment management oversight and
custodial services for estates and families.
Regulation
The financial services industry is subject to extensive
regulation by U.S. federal and state regulatory agencies
and securities exchanges and by
non-U.S. government
agencies or regulatory bodies and securities exchanges. We take
an active leadership role in the development of the rules and
regulations that govern our industry. Given the recent turmoil
in the financial services industry, we anticipate continued
heightened scrutiny and significant modifications in these rules
and regulations. We strive to be at the forefront of influencing
this change. Throughout our history we have also invested
heavily, with the benefit of our scale, in our compliance
functions to monitor our compliance with the numerous legal and
regulatory requirements applicable to our business.
Broker-Dealer
Regulation
LPL Financial, is a registered broker-dealer with the SEC, a
member of FINRA, a member of various self-regulatory
organizations and a participant in various clearing
organizations including the Depository Trust Company, the
National Securities Clearing Corporation and the Options
Clearing Corporation. LPL Financial is registered as a
broker-dealer in each of the 50 states, the District of
Columbia, Puerto Rico and the U.S. Virgin Islands.
Our subsidiaries UVEST and MSC are also registered
broker-dealers with the SEC, and are members of FINRA. Similar
to LPL Financial, UVEST conducts business on a national basis;
however it acts as an introducing firm, using a third-party firm
for securities clearing and custody functions. Prior to the
consolidation of the Affiliated Entities, MSC also conducted
business on a national basis as an introducing firm, using a
third-party firm for securities clearing and custody functions.
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Broker-dealers are subject to rules and regulations covering all
aspects of the securities business, including sales and trading
practices, public offerings, publication of research reports,
use and safekeeping of clients funds and securities,
capital adequacy, recordkeeping and reporting, and the conduct
of directors, officers and employees. Broker dealers are also
regulated by state securities administrators in those
jurisdictions where they do business. Compliance with many of
the rules and regulations applicable to us involves a number of
risks because rules and regulations are subject to varying
interpretations. Regulators make periodic examinations and
review annual, monthly and other reports on our operations,
track record and financial condition. Violations of rules and
regulations governing a broker dealers actions could
result in censure, penalties and fines, the issuance of
cease-and-desist
orders, the suspension or expulsion from the securities industry
of such broker dealer or its officers or employees, or other
similar adverse consequences. The rules of the Municipal
Securities Rulemaking Board, which are enforced by the SEC and
FINRA, apply to the municipal securities activities of LPL
Financial, UVEST and MSC.
Our margin lending is regulated by the Federal Reserve
Boards restrictions on lending in connection with client
purchases and short sales of securities, and FINRA rules also
require such subsidiaries to impose maintenance requirements on
the value of securities contained in margin accounts. In many
cases, our margin policies are more stringent than these rules.
Significant new rules and regulations are likely to arise as a
result of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, which was enacted in July 2010, including
development by the SEC of a new fiduciary standard of conduct
applicable to broker-dealers and investment advisors. These new
rules and regulations may adversely affect our business by
increasing our costs and exposure to litigation.
Investment
Adviser Regulation
As investment advisers registered with the SEC, our subsidiaries
LPL Financial, UVEST, and IAG are subject to the requirements of
the Investment Advisers Act of 1940, as amended, and the
SECs regulations thereunder, as well as to examination by
the SECs staff. Such requirements relate to, among other
things, fiduciary duties to clients, performance fees,
maintaining an effective compliance program, solicitation
arrangements, conflicts of interest, advertising, limitations on
agency cross and principal transactions between the advisor and
advisory clients, recordkeeping and reporting requirements,
disclosure requirements and general anti-fraud provisions. In
addition, certain of our subsidiaries are subject to ERISA, and
Sections 4975(c)(1)(A), (B), (C) or (D) of the
Internal Revenue Code, and to regulations promulgated
thereunder, insofar as they are a fiduciary under
ERISA with respect to benefit plan clients or otherwise deal
with benefit plan clients. ERISA and applicable provisions of
the Internal Revenue Code, impose certain duties on persons who
are fiduciaries under ERISA, prohibit certain transactions
involving ERISA plan clients (including, without limitation,
employee benefit plans (as defined in Section 3(3) of
ERISA), individual retirement accounts and Keogh plans) and
provide monetary penalties for violations of these prohibitions.
The SEC is authorized to institute proceedings and impose
sanctions for violations of the Advisers Act, ranging from fines
and censure to termination of an investment advisers
registration. Investment advisers also are subject to certain
state securities laws and regulations. Non-compliance with the
Advisers Act or other federal and state securities laws and
regulations could result in investigations, sanctions,
disgorgement, fines or other similar consequences.
Commodities
and Futures Regulation
LPL Financial is licensed as a futures commission merchant
(FCM) and commodity pool operator with the
Commodities Future Trading Commission (CFTC) and is
a member of the National Futures Association (NFA).
Although licensed as a FCM and a commodity pool operator, LPL
Financials futures activities are limited to conducting
business as a guaranteed introducing broker. LPL Financial is
regulated by the CFTC and NFA. Violations of the rules of the
CFTC and the NFA
13
could result in remedial actions including fines, registration
terminations or revocations of exchange memberships. As a
guaranteed introducing broker, LPL Financial clears commodities
and futures products through ADM Investor Services International
Limited (ADM), and all commodities accounts and
related client positions are held by ADM.
Trust Regulation
Through our subsidiary PTC we offer trust, investment management
oversight and custodial services for estates and families. PTC
is chartered as a non-depository national banking association.
As a limited purpose national bank, PTC is regulated and
regularly examined by the Office of the Comptroller of the
Currency (OCC). PTC files reports with the OCC
within 30 days after the conclusion of each calendar
quarter. Because the powers of PTC are limited to providing
fiduciary services and investment advice, it does not have the
power or authority to accept deposits or make loans. For this
reason, trust assets under PTCs management are not insured
by the FDIC.
As PTC is not a bank as defined under the Bank
Holding Company Act of 1956, neither its parent, PTC Holdings,
Inc., nor PTC is regulated by the Board of Governors of the
Federal Reserve System as a bank holding company. However,
because it is subject to regulation by the OCC, PTC is subject
to various laws and regulations enforced by the OCC, such as
capital adequacy, change of control restrictions and regulations
governing fiduciary duties, conflicts of interest, self-dealing
and anti-money laundering. For example, the Change in Bank
Control Act, as implemented by OCC supervisory policy, imposes
restrictions on parties who wish to acquire a controlling
interest in a trust company or the holding company of a trust
company such as LPL Investment Holdings Inc. In general, an
acquisition of 10% or more of our common stock, or an
acquisition of control as defined in OCC
regulations, would require OCC approval. These laws and
regulations are designed to serve specific bank regulatory and
supervisory purposes and are not meant for the protection of
PTC, LPL or its stockholders.
Regulatory
Capital
The SEC, FINRA, OCC, CFTC and the NFA have stringent rules and
regulations with respect to the maintenance of specific levels
of net capital by regulated entities. Generally, a
broker-dealers net capital is net worth plus qualified
subordinated debt less deductions for certain types of assets.
The net capital rule under the Exchange Act requires that at
least a minimum part of a broker-dealers assets be
maintained in a relatively liquid form. Because LPL Financial is
a guaranteed introducing broker for commodities and futures that
is also a registered broker-dealer, CFTC rules require us to
comply with higher net capital requirements of the net capital
rule under the Exchange Act.
The SEC, FINRA and CFTC impose rules that require notification
when net capital falls below certain predefined criteria. These
rules also dictate the ratio of debt to equity in the regulatory
capital composition of a broker-dealer, and constrain the
ability of a broker-dealer to expand its business under certain
circumstances. If a broker-dealer fails to maintain the required
net capital, it may be subject to suspension or revocation of
registration by the applicable regulatory agency, and suspension
or expulsion by these regulators ultimately could lead to the
broker-dealers liquidation. Additionally, the net capital
rule and certain FINRA rules impose requirements that may have
the effect of prohibiting a broker-dealer from distributing or
withdrawing capital, and that require prior notice to the SEC
and FINRA for certain capital withdrawals. All of our
subsidiaries that are subject to net capital rules have been,
and currently are, in compliance with those rules and have net
capital in excess of the minimum requirements.
Anti-Money
Laundering
The USA PATRIOT Act of 2001 (the PATRIOT Act)
contains anti-money laundering and financial transparency laws
and mandates the implementation of various regulations
applicable to broker-dealers, FCMs and other financial services
companies. Financial institutions subject to the PATRIOT
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Act generally must have anti-money laundering procedures in
place, implement specialized employee training programs,
designate an anti-money laundering compliance officer and are
audited periodically by an independent party to test the
effectiveness of compliance. We have established policies,
procedures and systems designed to comply with these regulations.
Privacy
Regulatory activity in the areas of privacy and data protection
continues to grow worldwide and is generally being driven by the
growth of technology and related concerns about the rapid and
widespread dissemination and use of information. We must comply
with these information-related regulations, including, but not
limited to, the 1999 Gramm-Leach-Bliley Act, SEC
Regulation S-P,
the Fair Credit Reporting Act of 1970, as amended, and the 2003
Fair and Accurate Credit Transactions Act, to the extent they
are applicable to us.
Trademarks
LPL
Financial®,
LPL®,
LPL Career
Match®,
the LPL Financial logo, LPL Partners
Program®,
Integrated Advisory
Services®,
Manager Access
Select®,
OMP®
and
BranchNet®
are our registered trademarks. Applications for registered
trademarks are pending for DO IT SMARTER and Manager Access
Network.
Service360tm,
LPL Financial
AdvisorFirsttm,
ClientsFirsttm,
LPL Financial
RolloverNettm
and LPL
Accounttm
are unregistered trademarks that we use as well.
Risks Related to
Our Business and Industry
We depend on
our ability to attract and retain experienced and productive
advisors.
We derive a large portion of our revenues from commissions and
fees generated by our advisors. Our ability to attract and
retain experienced and productive advisors has contributed
significantly to our growth and success, and our strategic plan
is premised upon continued growth in the number of our advisors.
If we fail to attract new advisors or to retain and motivate our
current advisors, our business may suffer.
The market for experienced and productive advisors is highly
competitive, and we devote significant resources to attracting
and retaining the most qualified advisors. In attracting and
retaining advisors, we compete directly with a variety of
financial institutions such as wirehouses, regional
broker-dealers, banks, insurance companies and other independent
broker-dealers. If we are not successful in attracting or
retaining highly qualified advisors, we may not be able to
recover the expense involved in attracting and training these
individuals. There can be no assurance that we will be
successful in our efforts to attract and retain the advisors
needed to achieve our growth objectives.
Our financial
condition and results of operations may be adversely affected by
market fluctuations and other economic factors.
Our financial condition and results of operations may be
adversely affected by market fluctuations and other economic
factors. Significant downturns and volatility in equity and
other financial markets have had and could continue to have an
adverse effect on our financial condition and results of
operations.
General economic and market factors can affect our commission
and fee revenue. For example, a decrease in market levels can:
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reduce new investments by both new and existing clients in
financial products that are linked to the stock market, such as
variable life insurance, variable annuities, mutual funds and
managed accounts;
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reduce trading activity, thereby affecting our brokerage
commissions;
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reduce the value of advisory and brokerage assets, thereby
reducing asset-based fee income and
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motivate clients to withdraw funds from their accounts, reducing
advisory and brokerage assets, advisory fee revenue and
asset-based fee income.
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In addition, because certain of our expenses are fixed, our
ability to reduce them over short periods of time is limited,
which could negatively impact our profitability.
Significant
interest rate changes could affect our profitability and
financial condition.
Our revenues are exposed to interest rate risk primarily from
changes in the interest rates payable to us from banks
participating in our cash sweep program. In the current low
interest rate environment, our revenue from our cash sweep
program has declined and may decline further due to changes in
interest rates or clients moving assets out of our cash sweep
program. We may also be limited in the amount we can reduce
interest rates payable to clients in our cash sweep program and
still offer a competitive return.
Lack of
liquidity or access to capital could impair our business and
financial condition.
Liquidity, or ready access to funds, is essential to our
business. We expend significant resources investing in our
business, particularly with respect to our technology and
service platforms. In addition, we must maintain certain levels
of required capital. As a result, reduced levels of liquidity
could have a significant negative effect on us. Some potential
conditions that could negatively affect our liquidity include:
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illiquid or volatile markets;
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diminished access to debt or capital markets or
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unforeseen cash or capital requirements, adverse legal
settlements or judgments (including, among others, risks
associated with auction rate securities).
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The capital and credit markets continue to experience varying
degrees of volatility and disruption. In some cases, the markets
have exerted downward pressure on availability of liquidity and
credit capacity for businesses similar to ours. Without
sufficient liquidity, we could be required to curtail our
operations, and our business would suffer.
Notwithstanding the self-funding nature of our operations, we
may sometimes be required to fund timing differences arising
from the delayed receipt of client funds associated with the
settlement of client transactions in securities markets. These
timing differences are funded either with internally generated
cash flow or, if needed, with funds drawn under the revolving
credit facility at the holding company,
and/or
uncommitted lines of credit at our broker-dealer subsidiary LPL
Financial.
In the event current resources are insufficient to satisfy our
needs, we may need to rely on financing sources such as bank
debt. The availability of additional financing will depend on a
variety of factors such as
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market conditions;
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the general availability of credit;
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the volume of trading activities;
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the overall availability of credit to the financial services
industry;
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our credit ratings and credit capacity and
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the possibility that our stockholders, advisors or lenders could
develop a negative perception of our long-or short-term
financial prospects if the level of our business activity
decreases due to a market downturn.
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Similarly, our access to funds may be impaired if regulatory
authorities or rating organizations take negative actions
against us.
Disruptions, uncertainty or volatility in the capital and credit
markets may also limit our access to capital required to operate
our business. Such market conditions may limit our ability to
satisfy statutory capital requirements, generate commission, fee
and other market-related revenue to meet liquidity needs and
access the capital necessary to grow our business. As such, we
may be forced to delay raising capital, issue different types of
capital than we would otherwise, less effectively deploy such
capital or bear an unattractive cost of capital, which could
decrease our profitability and significantly reduce our
financial flexibility.
If the
counterparties to the derivative instruments we use to hedge our
interest rate risk default, we may be exposed to risks we had
sought to mitigate.
We use derivative instruments to hedge our interest rate risk.
If our counterparties fail to honor their obligations under the
derivative instruments, we could be subject to the risk of loss
and our hedges of the interest rate risk will be ineffective.
That failure could have an adverse effect on our financial
condition, results of operations and cash flows that could be
material. For the names of key counterparties upon which we
currently rely, see Managements Discussion and
Analysis of Financial Condition and Results of
Operations Quantitative and Qualitative Disclosures
About Risk Interest Rate Risk.
A loss of our
marketing relationships with manufacturers of financial products
could harm our relationship with our advisors and, in turn,
their clients.
We operate on an open architecture product platform with no
proprietary financial products. To help our advisors meet their
clients needs with suitable investment options, we have
relationships with most of the industry-leading providers of
financial and insurance products. We have sponsorship agreements
with some manufacturers of fixed and variable annuities and
mutual funds that, subject to the survival of certain terms and
conditions, may be terminated upon notice. If we lose our
relationships with one or more of these manufacturers, our
ability to serve our advisors and our business may be materially
and adversely affected.
Risks Related to
Our Regulatory Environment
Regulatory
developments and our failure to comply with regulations could
adversely affect our business by increasing our costs and
exposure to litigation, affecting our reputation and making our
business less profitable.
Our business is subject to extensive U.S. regulation and
supervision, including securities and investment advisory
services. The securities industry in the United States is
subject to extensive regulation under both federal and state
laws. Our broker-dealer subsidiary, LPL Financial, is:
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registered as a broker-dealer with the SEC, each of the
50 states, and the District of Columbia, Puerto Rico and
the U.S. Virgin Islands;
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registered as an investment advisor with the SEC;
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a member of FINRA;
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regulated by the CFTC with respect to the futures and
commodities trading activities it conducts as an introducing
broker and
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a member of the NASDAQ Global Select Market (NASDAQ)
and the Chicago Stock Exchange.
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Much of the regulation of broker-dealers has been delegated to
self-regulatory organizations (SROs), namely FINRA
and the Municipal Securities Rulemaking Board
(MSRB). The primary
17
regulators of LPL Financial are FINRA, and for municipal
securities, the MSRB. The CFTC has designated the NFA as LPL
Financials primary regulator for futures and commodities
trading activities.
The SEC, FINRA, CFTC, OCC, various securities and futures
exchanges and other U.S. governmental or regulatory
authorities continuously review legislative and regulatory
initiatives and may adopt new or revised laws and regulations.
There can also be no assurance that other federal or state
agencies will not attempt to further regulate our business.
These legislative and regulatory initiatives may affect the way
in which we conduct our business and may make our business model
less profitable.
Our ability to conduct business in the jurisdictions in which we
currently operate depends on our compliance with the laws, rules
and regulations promulgated by federal regulatory bodies and the
regulatory authorities in each of these jurisdictions. Our
ability to comply with all applicable laws, rules and
regulations is largely dependent on our establishment and
maintenance of compliance, audit and reporting systems and
procedures, as well as our ability to attract and retain
qualified compliance, audit and risk management personnel. While
we have adopted policies and procedures reasonably designed to
comply with all applicable laws, rules and regulations, these
systems and procedures may not be fully effective, and there can
be no assurance that regulators or third parties will not raise
material issues with respect to our past or future compliance
with applicable regulations.
Our profitability could also be affected by rules and
regulations that impact the business and financial communities
generally and, in particular, our advisors clients,
including changes to the laws governing taxation (including the
classification of independent contractor status of our
advisors), electronic commerce, privacy and data protection.
Failure to comply with new rules and regulations, including in
particular, rules and regulations that may arise pursuant to the
Dodd-Frank Wall Street Reform and Consumer Protection Act, could
subject us to regulatory actions or litigation and it could have
a material adverse effect on our business, results of
operations, cash flows or financial condition. In addition, new
rules and regulations could result in limitations on the lines
of business we conduct, modifications to our business practices,
increased capital requirements or additional costs. For example,
the U.S. Department of Labor has issued a proposed rule
that, if adopted as currently proposed, would broaden the
circumstances under which we may be considered a
fiduciary under Section 3(21) of the Employee
Retirement Income Security Act of 1974, as amended
(ERISA).
We are subject
to various regulatory ownership requirements, which, if not
complied with, could result in the restriction of the ongoing
conduct, growth or even liquidation of parts of our
business.
The business activities that we may conduct are limited by
various regulatory agencies. Our membership agreement with FINRA
may be amended by application to include additional business
activities. This application process is time-consuming and may
not be successful. As a result, we may be prevented from
entering new potentially profitable businesses in a timely
manner, or at all. In addition, as a member of FINRA, we are
subject to certain regulations regarding changes in control of
our ownership. Rule 1017 of the National Association of
Securities Dealers (NASD) generally provides, among
other things, that FINRA approval must be obtained in connection
with any transaction resulting in a change in our equity
ownership that results in one person or entity directly or
indirectly owning or controlling 25% or more of our equity
capital. Similarly, the OCC imposes advance approval
requirements for a change of control, and control is presumed to
exist if a person acquires 10% or more of our common stock.
These regulatory approval processes can result in delay,
increased costs
and/or
impose additional transaction terms in connection with a
proposed change of control, such as capital contributions to the
regulated entity. As a result of these regulations, our future
efforts to sell shares or raise additional capital may be
delayed or prohibited.
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We are subject
to various regulatory capital requirements, which, if not
complied with, could result in the restriction of the ongoing
conduct, growth, or even liquidation of parts of our
business.
The SEC, FINRA, CFTC, OCC and NFA have extensive rules and
regulations with respect to capital requirements. As a
registered broker-dealer, LPL Financial is subject to
Rule 15c3-1
(Uniform Net Capital Rule) under the Exchange Act,
and related SRO requirements. The CFTC and NFA also impose net
capital requirements. The Uniform Net Capital Rule specifies
minimum capital requirements that are intended to ensure the
general soundness and liquidity of broker-dealers. Because we
are not a registered broker-dealer, we are not subject to the
Uniform Net Capital Rule. However, our ability to withdraw
capital from our broker-dealer subsidiaries could be restricted,
which in turn could limit our ability to repay debt and redeem
or purchase shares of our outstanding stock. A large operating
loss or charge against net capital could adversely affect our
ability to expand or even maintain our present levels of
business.
Failure to
comply with ERISA regulations could result in penalties against
us.
We are subject to ERISA and Sections 4975(c)(1)(A), (B),
(C) and (D) of the Internal Revenue Code of 1986, as
amended (the Internal Revenue Code), and to
regulations promulgated thereunder, insofar as we act as a
fiduciary under ERISA with respect to benefit plan
clients or otherwise deal with benefit plan clients. ERISA and
applicable provisions of the Internal Revenue Code impose duties
on persons who are fiduciaries under ERISA, prohibit specified
transactions involving ERISA plan clients (including, without
limitation, employee benefit plans (as defined in
Section 3(3) of ERISA), individual retirement accounts and
Keogh plans) and impose monetary penalties for violations of
these prohibitions. Our failure to comply with these
requirements could result in significant penalties against us
that could have a material adverse effect on our business (or,
in a worst case, severely limit the extent to which we could act
as fiduciaries for any plans under ERISA).
Risks Related to
Our Competition
We operate in
an intensely competitive industry, which could cause us to lose
advisors and their assets, thereby reducing our revenues and net
income.
We are subject to competition in all aspects of our business,
including competition for our advisors and their clients, from:
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asset management firms;
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commercial banks and thrift institutions;
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insurance companies;
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other clearing/custodial technology companies and
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brokerage and investment banking firms.
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Many of our competitors have substantially greater resources
than we do and may offer a broader range of services, including
financial products, across more markets. Some operate in a
different regulatory environment than we do which may give them
certain competitive advantages in the services they offer. For
example, certain of our competitors only provide clearing
services and consequently would not have any supervision or
oversight liability relating to actions of their financial
advisors. We believe that competition within our industry will
intensify as a result of consolidation and acquisition activity
and because new competitors face few barriers to entry.
If we fail to continue to attract highly qualified advisors or
advisors licensed with us leave us to pursue other
opportunities, or if current or potential clients of our
advisors decide to use one of our competitors, we could face a
significant decline in market share, commission and fee revenues
and
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net income. If we are required to increase our payout of
commissions and fees to our advisors in order to remain
competitive, our net income could be significantly reduced.
Poor service
or performance of the financial products that we offer or
competitive pressures on pricing of such services or products
may cause clients of our advisors to withdraw their assets on
short notice.
Clients of our advisors control their assets under management
with us. Poor service or performance of the financial products
that we offer or competitive pressures on pricing of such
services or products may result in the loss of accounts. In
addition, we must monitor the pricing of our services and
financial products in relation to competitors and periodically
may need to adjust commission and fee rates, interest rates on
deposits and margin loans and other fee structures to remain
competitive. Competition from other financial services firms,
such as reduced commissions to attract clients or trading volume
or higher deposit rates to attract client cash balances, could
adversely impact our business. The decrease in revenue that
could result from such an event could have a material adverse
effect on our business.
We face
competition in attracting and retaining key
talent.
Our success and future growth depends upon our ability to
attract and retain qualified employees. There is significant
competition for qualified employees in the broker-dealer
industry. We may not be able to retain our existing employees or
fill new positions or vacancies created by expansion or
turnover. The loss or unavailability of these individuals could
have a material adverse effect on our business.
Moreover, our success depends upon the continued services of our
key senior management personnel, including our executive
officers and senior managers. The loss of one or more of our key
senior management personnel, and the failure to recruit a
suitable replacement or replacements, could have a material
adverse effect on our business.
Risks Related to
Our Debt
Our
indebtedness could adversely affect our financial health and may
limit our ability to use debt to fund future capital
needs.
At December 31, 2010, we had total indebtedness of
$1.4 billion. Our level of indebtedness could increase our
vulnerability to general adverse economic and industry
conditions. It could also require us to dedicate a substantial
portion of our cash flow from operations to payments on our
indebtedness, thereby reducing the availability of our cash flow
to fund working capital, capital expenditures and other general
corporate purposes. In addition, our level of indebtedness may
limit our flexibility in planning for changes in our business
and the industry in which we operate, place us at a competitive
disadvantage compared to our competitors that have less debt and
limit our ability to borrow additional funds.
Our ability to make scheduled payments on or to refinance
indebtedness obligations depends on our financial condition and
operating performance, which are subject to prevailing economic
and competitive conditions and to certain financial, business
and other factors beyond our control.
We may not be able to maintain a level of cash flows from
operating activities sufficient to permit us to pay the
principal, premium, if any, and interest on our indebtedness. In
addition, as discussed above, we are limited in the amount of
capital that we can draw from our broker-dealer subsidiaries. If
our cash flows and capital resources are insufficient to fund
our debt service obligations, we could face substantial
liquidity problems and could be forced to sell assets, seek
additional capital or seek to restructure or refinance our
indebtedness. These alternative measures may not be successful
or feasible. Our Third Amended and Restated Credit Agreement
(senior secured credit agreement) restricts our
ability to sell assets. Even if we could consummate those sales,
the proceeds that we
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realize from them may not be adequate to meet any debt service
obligations then due. Furthermore, if an event of default were
to occur with respect to our senior secured credit agreement or
other indebtedness, our creditors could, among other things,
accelerate the maturity of our indebtedness.
In addition, as a result of reduced operating performance or
weaker than expected financial condition, rating agencies could
downgrade our senior unsecured subordinated notes, which would
adversely affect the value of shares of our common stock.
Our senior secured credit agreement permits us to incur
additional indebtedness. Although our senior secured credit
agreement contains restrictions on the incurrence of additional
indebtedness, these restrictions are subject to a number of
significant qualifications and exceptions, and the indebtedness
incurred in compliance with these restrictions could be
substantial. Also, these restrictions do not prevent us from
incurring obligations that do not constitute
indebtedness as defined in our senior secured credit
agreement. To the extent new debt or other obligations are added
to our currently anticipated debt levels, the substantial
indebtedness risks described above would increase.
Restrictions
under certain of our indebtedness may prevent us from taking
actions that we believe would be in the best interest of our
business.
Certain of our indebtedness contain customary restrictions on
our activities, including covenants that may restrict us from:
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incurring additional indebtedness or issuing disqualified stock
or preferred stock;
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paying dividends on, redeeming or repurchasing our capital stock;
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making investments or acquisitions;
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creating liens;
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selling assets;
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restricting dividends or other payments to us;
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guaranteeing indebtedness;
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engaging in transactions with affiliates and
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consolidating, merging or transferring all or substantially all
of our assets.
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We are also required to meet specified financial ratios. These
restrictions may prevent us from taking actions that we believe
would be in the best interest of our business. Our ability to
comply with these restrictive covenants will depend on our
future performance, which may be affected by events beyond our
control. If we violate any of these covenants and are unable to
obtain waivers, we would be in default under the applicable
agreements and payment of the indebtedness could be accelerated.
The acceleration of our indebtedness under one agreement may
permit acceleration of indebtedness under other agreements that
contain cross-default or cross-acceleration provisions. If our
indebtedness is accelerated, we may not be able to repay that
indebtedness or borrow sufficient funds to refinance it. Even if
we are able to obtain new financing, it may not be on
commercially reasonable terms or on terms that are acceptable to
us. If our indebtedness is in default for any reason, our
business could be materially and adversely affected. In
addition, complying with these covenants may also cause us to
take actions that are not favorable to holders of the common
stock and may make it more difficult for us to successfully
execute our business strategy and compete against companies that
are not subject to such restrictions.
Provisions of
our senior secured credit agreement could discourage an
acquisition of us by a third party.
Certain provisions of our senior secured credit agreement could
make it more difficult or more expensive for a third party to
acquire us, and any of our future debt agreements may contain
similar
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provisions. Upon the occurrence of certain transactions
constituting a change of control, all indebtedness under our
senior secured credit agreement may be accelerated and become
due and payable. A potential acquirer may not have sufficient
financial resources to purchase our outstanding indebtedness in
connection with a change of control.
Risks Related to
Our Technology
We rely on
technology in our business, and technology and execution
failures could subject us to losses, litigation and regulatory
actions.
Our business relies extensively on electronic data processing
and communications systems. In addition to better serving our
advisors and clients, the effective use of technology increases
efficiency and enables firms like ours to reduce costs. Our
continued success will depend, in part, upon:
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our ability to successfully maintain and upgrade the capability
of our systems;
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our ability to address the needs of our advisors and their
clients by using technology to provide products and services
that satisfy their demands and
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our ability to retain skilled information technology employees.
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Failure of our systems, which could result from events beyond
our control, or an inability to effectively upgrade those
systems or implement new technology-driven products or services,
could result in financial losses, liability to clients and
damage to our reputation.
Our operations rely on the secure processing, storage and
transmission of confidential and other information in our
computer systems and networks. Although we take protective
measures and endeavor to modify them as circumstances warrant,
the computer systems, software and networks may be vulnerable to
unauthorized access, computer viruses or other malicious code
and other events that could have a security impact. If one or
more of these events occur, this could jeopardize our own, our
advisors or their clients or counterparties
confidential and other information processed, stored in and
transmitted through our computer systems and networks, or
otherwise cause interruptions or malfunctions in our own, our
advisors or their clients, our counterparties
or third parties operations. We may be required to expend
significant additional resources to modify our protective
measures, to investigate and remediate vulnerabilities or other
exposures or to make required notifications, and we may be
subject to litigation and financial losses that are either not
insured or are not fully covered through any insurance we
maintain.
The securities
settlement process exposes us to risks that may expose our
advisors and us to adverse movements in price.
LPL Financial, one of our subsidiaries, provides clearing
services and trade processing for our advisors and their clients
and certain financial institutions. Broker-dealers that clear
their own trades are subject to substantially more regulatory
requirements than brokers that outsource these functions to
third-party providers. Errors in performing clearing functions,
including clerical, technological and other errors related to
the handling of funds and securities held by us on behalf of
clients, could lead to censures, fines or other sanctions
imposed by applicable regulatory authorities as well as losses
and liability in related lawsuits and proceedings brought by our
advisors clients and others. Any unsettled securities
transactions or wrongly executed transactions may expose our
advisors and us to adverse movements in the prices of such
securities.
Our networks
may be vulnerable to security risks.
The secure transmission of confidential information over public
networks is a critical element of our operations. As part of our
normal operations, we maintain and transmit confidential
information about clients of our advisors as well as proprietary
information relating to our business operations. Our application
service provider systems maintain and process confidential data
on behalf of advisors
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and their clients, some of which is critical to our
advisors business operations. If our application service
provider systems are disrupted or fail for any reason, or if our
systems or facilities are infiltrated or damaged by unauthorized
persons, our advisors could experience data loss, financial
loss, harm to reputation and significant business interruption.
If such a disruption or failure occurs, we may be exposed to
unexpected liability, advisors may withdraw their assets, our
reputation may be tarnished and there could be a material
adverse effect on our business.
Our networks may be vulnerable to unauthorized access, computer
viruses and other security problems in the future. We rely on
our advisors to comply with our policies and procedures to
safeguard confidential data. The failure of our advisors to
comply with such policies and procedures could result in the
loss or wrongful use of their clients confidential
information or other sensitive information. In addition, even if
we and our advisors comply with our policies and procedures,
persons who circumvent security measures could wrongfully use
our confidential information or clients confidential
information or cause interruptions or malfunctions in our
operations. Such loss or use could, among other things:
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seriously damage our reputation;
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allow competitors access to our proprietary business information;
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subject us to liability for a failure to safeguard client data;
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result in the termination of relationships with our advisors;
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subject us to regulatory sanctions or burdens, based on the
authority of the SEC and FINRA to enforce regulations regarding
business continuity planning and
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require significant capital and operating expenditures to
investigate and remediate the breach.
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Failure to
maintain technological capabilities, flaws in existing
technology, difficulties in upgrading our technology platform or
the introduction of a competitive platform could have a material
adverse effect on our business.
We depend on highly specialized and, in many cases, proprietary
technology to support our business functions, including among
others:
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securities trading and custody;
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portfolio management;
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customer service;
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accounting and internal financial processes and controls and
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regulatory compliance and reporting.
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In addition, our continued success depends on our ability to
effectively adopt new or adapt existing technologies to meet
client, industry and regulatory demands. We might be required to
make significant capital expenditures to maintain competitive
technology. For example, we believe that our technology
platform, particularly our BranchNet system, is one of our
competitive strengths, and our future success will depend in
part on our ability to anticipate and adapt to technological
advancements required to meet the changing demands of our
advisors. The emergence of new industry standards and practices
could render our existing systems obsolete or uncompetitive. Any
upgrades or expansions may require significant expenditures of
funds and may also cause us to suffer system degradations,
outages and failures. There cannot be any assurance that we will
have sufficient funds to adequately update and expand our
networks, nor can there be any assurance that any upgrade or
expansion attempts will be successful and accepted by our
current and prospective advisors. If our technology systems were
to fail and we were unable to recover in a timely way, we would
be unable to fulfill critical business functions, which could
lead to a loss of advisors and could harm our reputation. A
technological breakdown could also interfere with our ability to
comply with financial reporting and
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other regulatory requirements, exposing us to disciplinary
action and to liability to our advisors and their clients. There
cannot be any assurance that another company will not design a
similar platform that affects our competitive advantage.
Inadequacy or
disruption of our disaster recovery plans and procedures in the
event of a catastrophe could adversely affect our
business.
We have made a significant investment in our infrastructure, and
our operations are dependent on our ability to protect the
continuity of our infrastructure against damage from catastrophe
or natural disaster, breach of security, loss of power,
telecommunications failure or other natural or man-made events.
A catastrophic event could have a direct negative impact on us
by adversely affecting our advisors, employees or facilities, or
an indirect impact on us by adversely affecting the financial
markets or the overall economy. While we have implemented
business continuity and disaster recovery plans and maintain
business interruption insurance, it is impossible to fully
anticipate and protect against all potential catastrophes. If
our business continuity and disaster recovery plans and
procedures were disrupted or unsuccessful in the event of a
catastrophe, we could experience a material adverse interruption
of our operations.
We rely on
outsourced service providers to perform key
functions.
We rely on outsourced service providers to perform certain key
technology, processing and support functions. For example, we
have an agreement with Thomson Reuters BETA Systems, a division
of Thomson Reuters, under which they provide us operational
support, including data processing services for securities
transactions and back office processing support. Any significant
failures by these service providers could cause us to incur
losses and could harm our reputation. If we had to change these
service providers, we would experience a disruption to our
business. Although we believe we have the resources to make such
transitions with minimal disruption, we cannot predict the costs
and time for such conversions. We cannot provide any assurance
that the disruption caused by a change in our service providers
would not have a material adverse affect on our business.
Risks Related to
Our Business Generally
Any damage to
our reputation could harm our business and lead to a loss of
revenues and net income.
We have spent many years developing our reputation for integrity
and superior client service, which is built upon our four
pillars of support for our advisors: enabling technology,
comprehensive clearing and compliance services, practice
management programs and training, and independent research. Our
ability to attract and retain advisors and employees is highly
dependent upon external perceptions of our level of service,
business practices and financial condition. Damage to our
reputation could cause significant harm to our business and
prospects and may arise from numerous sources, including:
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litigation or regulatory actions;
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failing to deliver minimum standards of service and quality;
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compliance failures and
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unethical behavior and the misconduct of employees, advisors or
counterparties.
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Negative perceptions or publicity regarding these matters could
damage our reputation among existing and potential advisors and
employees. Adverse developments with respect to our industry may
also, by association, negatively impact our reputation or result
in greater regulatory or legislative scrutiny or litigation
against us. These occurrences could lead to loss of revenue and
net income.
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Our business
is subject to risks related to litigation, arbitration actions
and governmental and SRO investigations.
We are subject to legal proceedings arising out of our business
operations, including lawsuits, arbitration claims, regulatory,
governmental or SRO subpoenas, investigations and actions and
other claims. Many of our legal claims are client initiated and
involve the purchase or sale of investment securities. In our
investment advisory programs, we have fiduciary obligations that
require us and our advisors to act in the best interests of our
advisors clients. We may face liabilities for actual or
alleged breaches of legal duties to our advisors clients,
in respect of issues related to the suitability of the financial
products we make available in our open architecture product
platform or the investment advice of our advisors based on their
clients investment objectives (including, for example,
auction rate securities or exchange traded funds). In addition,
we, along with other industry participants, are subject to risks
related to litigation and settlements arising from market events
such as the failures in the auction rate securities market. We
may also become subject to claims, allegations and legal
proceedings that we infringe or misappropriate intellectual
property or other proprietary rights of others. In addition, we
may be subject to legal proceedings related to employment
matters, including wage and hour, discrimination or harassment
claims. The outcome of any such actions cannot be predicted, and
a negative outcome in such a proceeding could result in
substantial legal liability, loss of intellectual property
rights and injunctive or other equitable relief against us.
Further, such outcome may cause us significant reputational harm
and could have a material adverse effect on our business,
results of operations, cash flows or financial condition.
Our risk
management policies and procedures may not be fully effective in
mitigating our risk exposure in all market environments or
against all types of risks.
We have adopted policies and procedures to identify, monitor and
manage our operational risk. These policies and procedures,
however, may not be fully effective. Some of our risk evaluation
methods depend upon information provided by others and public
information regarding markets, clients or other matters that are
otherwise accessible by us. In some cases, however, that
information may not be accurate, complete or
up-to-date.
Also, because our advisors work in small, decentralized offices,
additional risk management challenges may exist. If our policies
and procedures are not fully effective or we are not always
successful in capturing all risks to which we are or may be
exposed, we may suffer harm to our reputation or be subject to
litigation or regulatory actions that could have a material
adverse effect on our business and financial condition.
Misconduct and
errors by our employees and our advisors, who operate in a
decentralized-environment, could harm our
business.
Misconduct and errors by our employees and our advisors could
result in violations of law by us, regulatory sanctions
and/or
serious reputational or financial harm. We cannot always prevent
misconduct and errors by our employees and our advisors, and the
precautions we take to prevent and detect these activities may
not be effective in all cases. Prevention and detection among
our advisors, who are not our direct employees and some of whom
tend to be located in small, decentralized offices, present
additional challenges. There cannot be any assurance that
misconduct and errors by our employees and advisors will not
lead to a material adverse effect on our business.
Our insurance
coverage may be inadequate or expensive.
We are subject to claims in the ordinary course of business.
These claims may involve substantial amounts of money and
involve significant defense costs. It is not always possible to
prevent or detect activities giving rise to claims, and the
precautions we take may not be effective in all cases.
We maintain voluntary and required insurance coverage,
including, among others, general liability, property, director
and officer, excess-SIPC, business interruption, errors and
omissions,
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excess entity errors and omissions and fidelity bond insurance.
Recently, premium and deductible costs associated with certain
insurance coverages have increased, coverage terms have become
more restrictive and the number of insurers has decreased. While
we endeavor to purchase coverage that is appropriate to our
assessment of our risk, we are unable to predict with certainty
the frequency, nature or magnitude of claims for direct or
consequential damages. Our business may be negatively affected
if in the future our insurance proves to be inadequate or
unavailable. In addition, insurance claims may harm our
reputation or divert management resources away from operating
our business.
Our business
could be materially adversely affected as a result of the risks
associated with acquisitions and investments.
We may seek to opportunistically acquire businesses that offer
complementary products, services or technologies. These
acquisitions are accompanied by risks. For instance, the
acquisition could have a negative effect on our financial and
strategic position and reputation or the acquired business could
fail to further our strategic goals. We could incur significant
costs when integrating an acquired business and may not be
successful in doing so. We may have a lack of experience in new
markets, products or technologies brought on by the acquisition
and we may have an initial dependence on unfamiliar supply or
distribution partners. The acquisition may create an impairment
of relationships with customers or suppliers of the acquired
business or our advisors or suppliers. All of these and other
potential risks may serve as a diversion of our
managements attention from other business concerns and any
of these factors could have a material adverse effect on our
business.
Changes in
U.S. federal income tax law could make some of the products
distributed by our advisors less attractive to
clients.
Some of the financial products distributed by our advisors, such
as variable annuities, enjoy favorable treatment under current
U.S. federal income tax law. Changes in U.S. federal
income tax law, in particular with respect to variable annuity
products or with respect to tax rates on capital gains or
dividends, could make some of these products less attractive to
clients and, as a result, could have a material adverse effect
on our business, results of operations, cash flows or financial
condition.
Risks Related to
Ownership of Our Common Stock
The Majority
Holders will have the ability to control the outcome of matters
submitted for stockholder approval and may have interests that
differ from those of our other stockholders.
As of December 31, 2010, investment funds affiliated with
the Majority Holders own approximately 62.9% of our common
stock, or 56.2% on a fully diluted basis. The Majority Holders
have significant influence over corporate transactions. So long
as investment funds associated with or designated by the
Majority Holders continue to own a significant amount of the
outstanding shares of our common stock, even if such amount is
less than 50%, the Majority Holders will continue to be able to
strongly influence or effectively control our decisions,
regardless of whether or not other stockholders believe that the
transaction is in their own best interests. Such concentration
of voting power could also have the effect of delaying,
deterring or preventing a change of control or other business
combination that might otherwise be beneficial to our
stockholders. If the Majority Holders enter into a change in
control transaction, certain members of our executive team have
the contractual ability to terminate their employment within the
thirty day period immediately following the twelve month
anniversary of a change in control and receive severance
payments.
In addition, the Majority Holders and their affiliates are in
the business of making investments in companies and may, from
time to time in the future, acquire interests in businesses that
directly or indirectly compete with certain portions of our
business. To the extent the Majority Holders invest in such
other businesses, the Majority Holders may have differing
interests than our other stockholders. The Majority Holders may
also pursue acquisition opportunities that may be complementary
to our business and, as a result, those acquisition
opportunities may not be available to us.
26
The price of
our common stock may be volatile and fluctuate substantially,
which could result in substantial losses for our
investors.
The market price of our common stock is likely to be highly
volatile and may fluctuate substantially due to the following
factors (in addition to the other risk factors described in this
section):
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|
|
actual or anticipated fluctuations in our results of operations;
|
|
|
|
variance in our financial performance from the expectations of
equity research analysts;
|
|
|
|
conditions and trends in the markets we serve;
|
|
|
|
announcements of significant new services or products by us or
our competitors;
|
|
|
|
additions or changes to key personnel;
|
|
|
|
the commencement or outcome of litigation;
|
|
|
|
changes in market valuation or earnings of our competitors;
|
|
|
|
the trading volume of our common stock;
|
|
|
|
future sale of our equity securities;
|
|
|
|
changes in the estimation of the future size and growth rate of
our markets;
|
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|
|
legislation or regulatory policies, practices or actions and
|
|
|
|
general economic conditions.
|
In addition, the stock markets in general have experienced
extreme price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of
the particular companies affected. These broad market and
industry factors may materially harm the market price of our
common stock irrespective of our operating performance. In
addition, in the past, following periods of volatility in the
overall market and the market price of a companys
securities, securities class action litigation has often been
instituted against the affected company. This type of
litigation, if instituted against us, could result in
substantial costs and a diversion of our managements
attention and resources.
We are a
holding company and rely on dividends, distributions and other
payments, advances and transfers of funds from our subsidiaries
to meet our debt service and other obligations.
We have no direct operations and derive all of our cash flow
from our subsidiaries. Because we conduct our operations through
our subsidiaries, we depend on those entities for dividends and
other payments or distributions to meet any existing or future
debt service and other obligations. The deterioration of the
earnings from, or other available assets of, our subsidiaries
for any reason could limit or impair their ability to pay
dividends or other distributions to us. In addition, FINRA
regulations restrict dividends in excess of 10% of a member
firms excess net capital without FINRAs prior
approval. Compliance with this regulation may impede our ability
to receive dividends from LPL Financial.
We currently
do not intend to pay dividends on our common stock and,
consequently, your only opportunity to achieve a return on your
investment is if the price of our common stock
appreciates.
We do not anticipate that we will pay any cash dividends on
shares of our common stock for the foreseeable future.
Furthermore, our senior secured credit agreement places
substantial restrictions on our ability to pay cash dividends.
Any determination to pay dividends in the future will be at the
discretion of our board of directors and will depend on results
of operations, financial condition, contractual restrictions,
restrictions imposed by applicable law and other factors our
board of directors deems relevant. Accordingly, realization of a
gain on your investment will depend on the appreciation
27
of the price of our common stock, which may never occur. Please
see the section titled Dividend Policy for
additional information.
Upon
expiration of
lock-up
agreements between the underwriters and our officers, directors
and certain holders of our common stock in mid-May 2011, a
substantial number of shares of our common stock could be sold
into the public market, which could depress our stock
price.
Our officers, directors and certain holders of our common stock,
options and warrants, holding substantially all of our
outstanding shares of common stock immediately prior to
completion of our IPO, have entered into
lock-up
agreements with our underwriters which prohibit, subject to
certain limited exceptions, the disposal or pledge of, or the
hedging against, any of their common stock or securities
convertible into or exchangeable for shares of common stock for
a period through May 16, 2011, subject to extension in
certain circumstances. Our Stockholders Agreement also restricts
the parties thereto from transferring their shares of common
stock or any securities convertible into or exchangeable or
exercisable for shares of common stock through May 16,
2011. The market price of our common stock could decline as a
result of sales by our stockholders in the market after the
expiration of these
lock-up
periods, or the perception that these sales could occur. After
these
lock-up
periods expire, many of our stockholders will have an
opportunity to sell their stock for the first time. These
factors could also make it difficult for us to raise additional
capital by selling stock.
Anti-takeover
provisions in our certificate of incorporation and bylaws could
prevent or delay a change in control of our
company.
Our certificate of incorporation and our bylaws contain certain
provisions that may discourage, delay or prevent a change in our
management or control over us that stockholders may consider
favorable, including the following, some of which may only
become effective when the Majority Holders collectively own less
than 40% of our outstanding shares of common stock:
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|
the division of our board of directors into three classes and
the election of each class for three-year terms;
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|
the sole ability of the board of directors to fill a vacancy
created by the expansion of the board of directors;
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|
advance notice requirements for stockholder proposals and
director nominations;
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|
limitations on the ability of stockholders to call special
meetings and to take action by written consent;
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|
when the Majority Holders collectively own 50% or less of our
outstanding shares of common stock, the approval of holders of
at least two-thirds of the shares entitled to vote generally on
the making, alteration, amendment or repeal of our certificate
of incorporation or bylaws, will be required to adopt, amend or
repeal our bylaws, or amend or repeal certain provisions of our
certificate of incorporation;
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the required approval of holders of at least two-thirds of the
shares entitled to vote at an election of the directors to
remove directors and, following the classification of the board
of directors, removal only for cause and
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|
the ability of our board of directors to designate the terms of
and issue new series of preferred stock, without stockholder
approval, which could be used to institute a rights plan, or a
poison pill, that would work to dilute the stock ownership or a
potential hostile acquirer, likely preventing acquisitions that
have not been approved by our board of directors.
|
The existence of the foregoing provisions and anti-takeover
measures could limit the price that investors might be willing
to pay in the future for shares of our common stock. They could
also deter potential acquirers of our company, thereby reducing
the likelihood that you could receive a premium for your common
stock in the acquisition.
28
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
Our corporate offices are located in Boston, Massachusetts where
we lease approximately 36,000 square feet of space under a
lease agreement that expires on June 30, 2012, and
approximately 21,000 square feet of space under a lease
agreement that expires on May 31, 2013; in San Diego,
California where we lease approximately 407,000 square feet
of space under lease agreements that expire starting on
May 31, 2012; in Charlotte, North Carolina where we lease a
total of approximately 238,000 square feet of space under
lease agreements expiring on November 30, 2016 and
February 28, 2017.
Our subsidiary PTC, located in Cleveland, Ohio, leases
approximately 6,000 square feet of space under a lease
agreement that expires on March 31, 2012.
We own approximately 4.4 acres of land in San Diego.
We believe that our existing properties are adequate for the
current operating requirements of our business and that
additional space will be available as needed.
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|
Item 3.
|
Legal
Proceedings
|
We are presently and regularly involved in legal proceedings in
the ordinary course of our business, including lawsuits,
arbitration claims, regulatory
and/or
governmental subpoenas, investigations and actions, and other
claims. Many of our legal proceedings are initiated by our
advisors clients and involve the purchase or sale of
investment securities.
In connection with various acquisitions, and under the
applicable purchase and sale agreement, we have received
third-party indemnification for certain legal proceedings and
claims. These matters have been defended and paid directly by
the indemnifying party. On October 1, 2009, our subsidiary,
LPL Holdings, Inc. (LPLH), received written notice
from a third-party indemnitor under a certain purchase and sale
agreement asserting that it is no longer obligated to indemnify
the company for certain claims under the provisions of the
purchase and sale agreement. We believe that this assertion is
without merit and we have commenced litigation to enforce our
indemnity rights. On November 20, 2009, LPLH and three of
its affiliated broker-dealers filed suit to enforce the
indemnitors performance pursuant to the provisions of the
contract. In February 2010, these plaintiffs filed a motion for
summary judgment with the court, which was opposed by the third
party indemnitor. In May 2010, the court heard oral argument on
the motion. In March 2011, the court granted the motion for
summary judgment in all respects, denied all counterclaims by
the third party indemnitor and awarded attorney fees to the
plaintiffs.
In 2010, we settled two arbitrations that involve activities
covered under the third-party indemnification agreement
described above. In connection with these settlements, we have
recorded legal expenses of $8.9 million. We will seek to
recover the costs associated with defending and settling these
matters, plus other costs incurred on matters that we believe
are subject to indemnification.
We believe, based on the information available at this time,
after consultation with counsel, consideration of insurance, if
any, and the indemnifications provided by the third-party
indemnitors, notwithstanding the assertions by an indemnifying
party noted in the preceding paragraphs, that the outcome of
such matters will not have a material adverse impact on our
business, results of operations, cash flows or financial
condition.
We cannot predict at this time the effect that any future legal
proceeding will have on our business. Given the current
regulatory environment and our business operations throughout
the country, it is likely that we will become subject to further
legal proceedings. Our ultimate liability, if any, in connection
with any future such matters is uncertain and is subject to
contingencies not yet known.
|
|
Item 4.
|
Removed
and Reserved
|
29
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Market
Information
The Companys common stock commenced trading on the NASDAQ
under the symbol LPLA on November 18, 2010.
Prior to that time, there was no public market for our common
stock. As of December 31, 2010, we have 1,191 stockholders
of record and 108,714,757 shares of our common stock
outstanding. The following table sets forth the
intra-day
high and low sale prices of the Companys common stock from
the IPO date of November 18, 2010 to December 31,
2010, as reported by the NASDAQ.
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2010
|
|
High
|
|
Low
|
|
Fourth Quarter (beginning November 18, 2010)
|
|
|
37.22
|
|
|
|
31.50
|
|
Performance
Graph
The following graph compares the cumulative total stockholder
return since November 18, 2010, the date our common stock
began trading on the NASDAQ, with the Standard &
Poors 500 Financial Sector Index and the Dow Jones
U.S. Financial Services Index. The graph assumes that the
value of the investment in our common stock and the S&P 500
was $100 on November 18, 2010.
Dividends
We have not paid any dividends on our common stock during the
past four years and we do not currently anticipate declaring or
paying cash dividends on our common stock in the foreseeable
future. We currently intend to retain all of our future
earnings, if any, to finance operations and repay debt. Our
senior secured credit facilities contain restrictions on our
activities, including paying dividends on our capital stock. For
an explanation of these restrictions see Managements
Discussion and Analysis of Financial Condition and Results of
Operations Indebtedness. In addition, FINRA
regulations restrict dividends in excess of 10% of a member
firms excess net capital without FINRAs prior
approval, potentially impeding our ability to receive dividends
from LPL Financial. Any future determination relating to our
dividend policy will be made at the discretion of our board of
directors and will
30
depend on a number of factors, including future earnings,
capital requirements, financial conditions, future prospects,
contractual restrictions and covenants and other factors that
our board of directors may deem relevant.
Equity
Compensation Plan Information
The table below sets forth as of December 31, 2010
information on compensation plans under which our equity
securities are authorized for issuance:
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|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
Number of Securities
|
|
|
|
to be Issued
|
|
|
Weighted Average
|
|
|
Remaining Available
|
|
|
|
upon Exercise of
|
|
|
Exercise Price of
|
|
|
for Future
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
Issuance under Equity
|
|
Plan category
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Compensation Plans
|
|
|
Equity compensation plans approved by security holders
|
|
|
10,253,843
|
|
|
$
|
18.09
|
|
|
|
10,315,678
|
(1)
|
Equity compensation plans not approved by security holders
|
|
|
2,859,647
|
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|
|
0.28
|
|
|
|
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
13,113,490
|
|
|
$
|
14.21
|
|
|
|
10,315,678
|
|
|
|
|
|
|
|
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|
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|
(1) |
|
Includes shares available for future issuance under our 2010
Omnibus Equity Incentive Plan. Following our IPO, grants will no
longer be made under our 2005 Stock Option Plan for Incentive
Stock Options, 2005 Stock Option Plan for Non-Qualified Stock
Options, 2008 Stock Option Plan and Advisor Incentive Plan. |
|
(2) |
|
Pursuant to the terms thereof, there are no securities remaining
for future issuance under the 2008 Nonqualified Deferred
Compensation Plan. In addition, following our IPO, grants will
no longer be made under our Financial Institution Incentive Plan. |
Issuance Under
2008 Nonqualified Deferred Compensation Plan
As of December 31, 2010, we issued and had outstanding
2,823,452 restricted stock units under our 2008 Nonqualified
Deferred Compensation Plan (the Deferred Compensation
Plan). The purpose of the Deferred Compensation Plan is to
permit employees and former employees of the Company and its
subsidiaries that held stock options issued under the 2005
Option Plans that were to expire in 2009 or 2010 to receive
stock units under the Deferred Compensation Plan that are paid
out at a later date in the form of shares of our common stock.
The Deferred Compensation Plan is administered by the Board, or
such other committee as may be appointed by the Board to
administer the Deferred Compensation Plan (the
Administrator). The Administrator has all powers
necessary to administer the Deferred Compensation Plan,
including discretionary authority to determine eligibility for
benefits and to decide claims under the Deferred Compensation
Plan.
Current and former employees of LPLIH and its subsidiaries that
held stock options under the 2005 Option Plans that were
scheduled to expire in 2009 or 2010 (the Expiring
Options) were able to make a one-time election to
participate in the Deferred Compensation Plan. Participants
elected to cancel their Expiring Options and receive stock units
held in an account under the Deferred Compensation Plan. Each
stock unit is a bookkeeping entry of which one stock unit is the
economic equivalent of one share of our common stock. The
Administrator created an account on each participants
behalf to which the participants initial balance was
credited, which will then be converted into stock units. A
participants initial balance was an amount equal to the
fair market value on December 31, 2008 of the shares
underlying the stock options the participant elected to defer,
less the aggregate exercise price of these options. The initial
number of stock units in a participants account equals his
or her initial balance divided by the fair market value of a
share of our common stock on December 31, 2008.
31
A participants account will be adjusted if cash dividends
are paid on our common stock while the participant is a current
employee of LPLIH or its subsidiaries by crediting the account
with an amount equal to the cash dividend paid, multiplied by
the number of stock units in the account on the day the cash
dividend is paid. The amount credited to the account will then
be converted into stock units, calculated by dividing the
aggregate amount credited to the account by the fair market
value of a share of our common stock on the date the dividend is
paid. Fair market value is determined by the Board in good faith.
A participants election to cancel his or her Expiring
Options and receive deferred compensation is not revocable and
cannot be modified. In addition, for those participants that
have made an election, they cannot exercise the Expiring Options
with respect to which the election was made.
A participants account balance will be distributed at the
earliest to occur of: (a) the participants death;
(b) the participants disability; (c) a change in
control of LPLIH, or (d) a date in 2012 to be determined by
the Board. A change in control will occur if, for
example, a person (or persons acting as a group) acquires more
than 50% of the stock of LPLIH or substantially all of
LPLIHs assets are sold. A change in control
does not include an IPO of common stock of LPLIH. With respect
to payments made under (a), (b) and (c) above, the
payments will be made within 90 days of the event that
triggers distribution. With respect to payments made under
(d) above, the payments will be made by December 31,
2012. Distributions will be made in the form of whole shares of
common stock equal to the number of stock units allocated to the
participants account (rounded to the nearest whole number).
Participants are 100% vested in their accounts. However, if a
participant is terminated for cause, the participants
entire account will be forfeited.
The Administrator can amend or terminate the Deferred
Compensation Plan for any purpose, at any time, provided that
the Administrator obtains the consent of participants for any
amendments to the Deferred Compensation Plan that materially and
adversely affect the rights of the participants under the
Deferred Compensation Plan.
Issuance Under
2008 LPL Investment Holdings Inc. Financial Institution
Incentive Plan
As of December 31, 2010, we issued and had outstanding
36,195 warrants to purchase common stock under our 2008 LPL
Investment Holdings Inc. Financial Institution Incentive Plan
(the Financial Institution Incentive Plan). Eligible
participants under this plan include financial institutions in a
position to make a significant contribution to the success of
our firm. The plan is administered by the Board or such other
committee as may be appointed by the Board to administer the
plan. Subject to the approval of our compensation committee, the
Financial Institution Incentive Plan, together with our 2008
Stock Option Plan and our Advisor Incentive Plan, provides for
an allocation of up to 2% of the outstanding stock (determined
at January 1st on a fully diluted basis), with an
additional 2% available on the first anniversary, and an
additional 2.5% available on the second and third anniversaries.
The exercise price of warrants is equal to the fair market value
on the grant date. Warrant awards vest in equal increments of
20.0% over a five-year period and expire on the 10th anniversary
following the date of grant. The Financial Institution Incentive
Plan has not been approved by security holders.
Recent Sales of
Unregistered Securities
None.
Use of Proceeds
from the IPO
In November 2010, we completed the IPO of our common stock
pursuant to a registration statement on
Form S-1,
as amended (File
No. 333-167325)
that was declared effective on November 17, 2010, and a
registration statement pursuant to Rule 462(b) of the
Securities Act of 1933 (File
No. 333-170672).
Under the registration statements, we registered the offering
and sale of
32
an aggregate of 17,223,230 shares of our common stock at a
price of $30.00 per share, as presented below:
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Number of
|
|
|
|
|
|
|
Shares
|
|
|
Aggregate
|
|
|
|
Offered in the
|
|
|
Offering Price
|
|
|
|
IPO
|
|
|
(In thousands)
|
|
|
Common stock offered by selling stockholders
|
|
|
15,657,482
|
|
|
$
|
469,724
|
|
Common stock sold by Company pursuant to the over-allotment
option granted to the underwriters
|
|
|
1,465,748
|
|
|
|
43,972
|
|
Common stock sold by stockholder pursuant to over-allotment
option granted to the underwriters
|
|
|
100,000
|
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
Over-allotment option granted to the underwriters
|
|
|
1,565,748
|
|
|
|
46,972
|
|
|
|
|
|
|
|
|
|
|
Total shares offered in the IPO
|
|
|
17,223,230
|
|
|
$
|
516,696
|
|
|
|
|
|
|
|
|
|
|
Goldman, Sachs & Co., Morgan Stanley, Bank of America
Merrill Lynch and J.P. Morgan acted as joint book running
managers of the offering. The offering commenced on
November 18, 2010 and closed on November 23, 2010. The
sale of shares pursuant to the over-allotment option occurred on
November 23, 2010.
As a result of our IPO, we raised a total of $44.0 million
in gross proceeds, and approximately $33.5 million in net
proceeds after deducting underwriting discounts and commissions
of $5.9 million, and $4.6 million of offering costs
related to the sale of common stock by us and the selling
shareholders. We did not receive any proceeds from the sale of
shares of common stock by the selling stockholders.
On January 31, 2011, we repaid $40.0 million of term
loans under our senior secured credit facilities using net
proceeds received in the IPO, as well as other cash on hand.
33
|
|
Item 6.
|
Selected
Financial Data
|
The following table sets forth our selected historical financial
information for the past five fiscal years. The selected
historical financial information presented below should be read
in conjunction with the information included under the heading
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our consolidated
financial statements and related notes included elsewhere in
this Annual Report on
Form 10-K.
We have derived the consolidated statements of operations data
for the years ended December 31, 2010, 2009 and 2008 and
the consolidated statements of financial condition data as of
December 31, 2010 and 2009 from our audited financial
statements. We have derived the consolidated statements of
operations data for the years ended December 31, 2007 and
2006 and consolidated statements of financial condition data as
of December 31, 2008, 2007 and 2006 from our audited
financial statements not included in this Annual Report on
Form 10-K.
Our historical results for any prior period are not necessarily
indicative of results to be expected in any future period.
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|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006(1)
|
|
Consolidated statements of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
3,113,486
|
|
|
$
|
2,749,505
|
|
|
$
|
3,116,349
|
|
|
$
|
2,716,574
|
|
|
$
|
1,739,635
|
|
Total expenses
|
|
|
3,202,335
|
|
|
|
2,676,938
|
|
|
|
3,023,584
|
|
|
|
2,608,741
|
|
|
|
1,684,769
|
|
(Loss) Income from operations before (benefit from) provision
for income taxes
|
|
|
(88,849
|
)
|
|
|
72,567
|
|
|
|
92,765
|
|
|
|
107,833
|
|
|
|
54,866
|
|
(Benefit from) Provision for income taxes
|
|
|
(31,987
|
)
|
|
|
25,047
|
|
|
|
47,269
|
|
|
|
46,764
|
|
|
|
21,224
|
|
Net (loss) income
|
|
|
(56,862
|
)
|
|
|
47,520
|
|
|
|
45,496
|
|
|
|
61,069
|
|
|
|
33,642
|
|
Per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Earnings per basic share
|
|
$
|
(0.64
|
)
|
|
$
|
0.54
|
|
|
$
|
0.53
|
|
|
$
|
0.72
|
|
|
$
|
0.41
|
|
(Loss) Earnings per diluted share
|
|
$
|
(0.64
|
)
|
|
$
|
0.47
|
|
|
$
|
0.45
|
|
|
$
|
0.62
|
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006(1)
|
|
Consolidated statements of financial condition data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
419,208
|
|
|
$
|
378,594
|
|
|
$
|
219,239
|
|
|
$
|
188,003
|
|
|
$
|
245,163
|
|
Total assets
|
|
|
3,646,167
|
|
|
|
3,336,936
|
|
|
|
3,381,779
|
|
|
|
3,287,349
|
|
|
|
2,797,544
|
|
Total debt(2)
|
|
|
1,386,639
|
|
|
|
1,369,223
|
|
|
|
1,467,647
|
|
|
|
1,451,071
|
|
|
|
1,344,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year Ended December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006(1)
|
|
Other financial and operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA (in thousands)(3)
|
|
$
|
413,113
|
|
|
$
|
356,068
|
|
|
$
|
350,171
|
|
|
$
|
329,079
|
|
|
$
|
247,912
|
|
Adjusted Earnings (in thousands)(3)
|
|
$
|
172,720
|
|
|
$
|
129,556
|
|
|
$
|
108,863
|
|
|
$
|
107,404
|
|
|
$
|
65,372
|
|
Adjusted Earnings per share(3)
|
|
$
|
1.71
|
|
|
$
|
1.32
|
|
|
$
|
1.09
|
|
|
$
|
1.08
|
|
|
$
|
0.68
|
|
Gross margin (in thousands)(4)
|
|
$
|
937,933
|
|
|
$
|
844,926
|
|
|
$
|
953,301
|
|
|
$
|
781,102
|
|
|
$
|
508,530
|
|
Gross margin as a % of net revenue(4)
|
|
|
30.1
|
%
|
|
|
30.7
|
%
|
|
|
30.6
|
%
|
|
|
28.8
|
%
|
|
|
29.2
|
%
|
Number of advisors(5)
|
|
|
12,444
|
|
|
|
11,950
|
|
|
|
11,920
|
|
|
|
11,089
|
|
|
|
7,006
|
|
Advisory and brokerage assets (in billions)(6)
|
|
$
|
315.6
|
|
|
$
|
279.4
|
|
|
$
|
233.9
|
|
|
$
|
283.2
|
|
|
$
|
164.7
|
|
Advisory assets under management (in billions)(7)
|
|
$
|
93.0
|
|
|
$
|
77.2
|
|
|
$
|
59.6
|
|
|
$
|
73.9
|
|
|
$
|
51.1
|
|
Insured cash account balances (in billions)(7)
|
|
$
|
12.2
|
|
|
$
|
11.6
|
|
|
$
|
11.2
|
|
|
$
|
8.6
|
|
|
$
|
5.8
|
|
Money market account balances (in billions)(7)
|
|
$
|
6.9
|
|
|
$
|
7.0
|
|
|
$
|
11.2
|
|
|
$
|
7.4
|
|
|
$
|
3.5
|
|
34
|
|
|
(1) |
|
Financial results as of and for the years ended
December 31, 2010, 2009, 2008 and 2007 include several
broker-dealer acquisitions that occurred in 2007. Consequently,
the results of operations for 2006 may not be directly
comparable to later periods. |
|
(2) |
|
Total debt consists of our senior secured credit facilities,
senior unsecured subordinated notes, revolving line of credit
facility and bank loans payable. |
|
(3) |
|
See Managements Discussion and Analysis of Financial
Condition and Results of Operations How We Evaluate
Growth for an explanation of Adjusted EBITDA, Adjusted
Earnings and Adjusted Earnings per share. |
|
(4) |
|
Gross margin is calculated as net revenues less production
expenses. Production expenses consist of the following expense
categories from our consolidated statements of operations:
(i) commissions and advisory fees and (ii) brokerage,
clearing and exchange. All other expense categories, including
depreciation and amortization, are considered general and
administrative in nature. Because our gross margin amounts do
not include any depreciation and amortization expense, our gross
margin amounts may not be comparable to those of others in our
industry. In 2010, upon closing our IPO in the fourth quarter,
the restriction on approximately 7.4 million shares of
common stock issued to our advisors under the Fifth Amended and
Restated 2000 Stock Bonus Plan was released. Accordingly, we
recorded a share-based compensation charge of
$222.0 million in the fourth quarter of 2010, representing
the offering price of $30.00 per share multiplied by
7.4 million shares. This charge has been classified as
production expense in 2010. Gross margin as calculated for 2010
above does not include this charge for comparability purposes
with previous years shown. |
|
(5) |
|
Number of advisors is defined as those investment professionals
who are licensed to do business with our broker-dealer
subsidiaries. In 2009, we attracted record levels of new
advisors due to the dislocation in the marketplace that impacted
many of our competitors. This record recruitment was offset by
attrition related to the consolidation of the operations of the
Affiliated Entities. Excluding this attrition, we added
750 net new advisors during 2009, representing 6.3% advisor
growth. |
|
(6) |
|
Advisory and brokerage assets are comprised of assets that are
custodied, networked and
non-networked
and reflect market movement in addition to new assets, inclusive
of new business development and net of attrition. |
|
(7) |
|
Advisory assets under management, insured cash account balances
and money market balances are components of advisory and
brokerage assets. |
35
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion of our financial condition and
results of operations should be read in conjunction with our
consolidated financial statements and the notes to those
consolidated financial statements included in Item 8 of
this
Form 10-K.
This discussion contains forward-looking statements that involve
significant risks and uncertainties. As a result of many
factors, such as those set forth under Risk Factors
and elsewhere in this
Form 10-K,
our actual results may differ materially from those anticipated
in these forward-looking statements.
Overview
We provide an integrated platform of proprietary technology,
brokerage and investment advisory services to over 12,400
independent financial advisors and financial advisors at
financial institutions across the country, enabling them to
successfully service their retail investors with unbiased,
conflict-free financial advice. In addition, we support
approximately 4,000 financial advisors with customized clearing,
advisory platforms and technology solutions. Our singular focus
is to support our advisors with the front, middle and
back-office support they need to serve the large and growing
market for independent investment advice, particularly in the
mass affluent market. We believe we are the only company that
offers advisors the unique combination of an integrated
technology platform, comprehensive self-clearing services and
full open architecture access to leading financial products, all
delivered in an environment unencumbered by conflicts from
product manufacturing, underwriting or market making.
Our Sources of
Revenue
Our revenues are derived primarily from fees and commissions
from products and advisory services offered by our advisors to
their clients, a substantial portion of which we pay out to our
advisors, as well as fees we receive from our advisors for use
of our technology, custody and clearing platforms. We also
generate asset-based fees through the distribution of financial
products for a broad range of product manufacturers. Under our
self-clearing platform, we custody the majority of client assets
invested in these financial products, which includes providing
statements, transaction processing and ongoing account
management. In return for these services, mutual funds,
insurance companies, banks and other financial product
manufacturers pay us fees based on asset levels or number of
accounts managed. We also earn fees for margin lending to our
advisors clients.
We track recurring revenue, which we define to include our
revenues from asset-based fees, advisory fees, our trailing
commissions, cash sweep programs and certain transaction and
other fees that are based upon accounts and advisors. Because
recurring revenue is associated with asset balances, it will
fluctuate depending on the market value of the asset balances
and current interest rates. Accordingly, recurring revenue can
be negatively impacted by adverse external market conditions.
However, recurring revenue is meaningful to us despite these
fluctuations because it is not based on transaction volumes or
other activity-based fees, which are more difficult to predict,
particularly in declining or volatile markets.
36
The table below summarizes the sources of our revenue and the
underlying drivers:
|
|
|
|
|
Commissions and Advisory
Fees. Transaction-based commissions and
advisory fees both represent advisor-generated revenue,
generally
85-90% of
which is paid to advisors.
|
|
|
|
|
|
Commissions. Transaction-based
commission revenues represent gross commissions generated by our
advisors, primarily from commissions earned on the sale of
various financial products such as fixed and variable annuities,
mutual funds, general securities, alternative investments and
insurance and can vary from period to period based on the
overall economic environment, number of trading days in the
reporting period and investment activity of our clients. We also
earn trailing commission type revenues (a commission that is
paid over time, such as 12(b)-1 fees) on mutual funds and
variable annuities held by clients of our advisors. Trail
commissions are recurring in nature and are earned based on the
current market value of investment holdings.
|
|
|
|
Advisory Fees. Advisory fee revenues
represent fees charged by us and our advisors to their clients
based on the value of advisory assets. Some of our advisors
conduct their advisory business through separate entities by
establishing their own Registered Investment Advisor
(RIA) pursuant to the Investment Advisers Act of
1940, rather than using our corporate registered RIA. These
stand-alone RIAs engage us for technology, clearing, regulatory
and custody services, as well as access to our investment
advisory platforms. The fee-based production generated by the
stand-alone RIA is earned by the advisor, and accordingly not
included in our advisory fee revenue. We charge fees to
stand-alone RIAs including administrative fees based on the
value of assets within these advisory accounts. Such fees are
included within asset-based fees and transaction and other fees,
as described below.
|
37
|
|
|
|
|
Asset-Based Fees. Asset-based fees are
comprised of fees from cash sweep programs, our financial
product manufacturer sponsorship programs, and omnibus
processing and networking services. Pursuant to contractual
arrangements, uninvested cash balances in our advisors
client accounts are swept into either insured deposit accounts
at various banks or third-party money market funds, for which we
receive fees, including administrative and record-keeping fees
based on account type and the invested balances. In addition, we
receive fees from certain financial product manufacturers in
connection with sponsorship programs that support our marketing
and sales-force education and training efforts. We also earn
fees on mutual fund assets for which we provide administrative
and record-keeping services. Our networking fees represent fees
paid to us by mutual fund and annuity product manufacturers in
exchange for administrative and record-keeping services that we
provide to clients of our advisors. Networking fees are
correlated to the number of positions we administer, not the
value of assets under administration.
|
|
|
|
|
|
Transaction and Other Fees. Revenues
earned from transaction and other fees primarily consist of
transaction fees and ticket charges, subscription fees, IRA
custodian fees, contract and license fees, conference fees and
small/inactive account fees. We charge fees to our advisors and
their clients for executing transactions in brokerage and
fee-based advisory accounts. We earn subscription fees for the
software and technology services provided to our advisors and on
IRA custodial services that we provide for their client
accounts. We charge monthly administrative fees to our advisors.
We charge fees to financial product manufacturers for
participating in our training and marketing conferences and fees
to our advisors and their clients for accounts that do not meet
certain specified thresholds of size or activity. In addition,
we host certain advisor conferences that serve as training,
sales and marketing events in our first and third fiscal
quarters and as a result, we anticipate higher transaction and
other fees resulting from the collection of revenues from
sponsors and advisors, in comparison to other periods.
|
|
|
|
Interest and Other Revenue. Other
revenue includes marketing re-allowances from certain financial
product manufacturers as well as interest income from client
margin accounts and cash equivalents, net of operating interest
expense.
|
Our Operating
Expenses
|
|
|
|
|
Production Expenses. Production
expenses are comprised of the following: gross commissions and
advisory fees that are earned and paid out to advisors based on
the sale of various products and services; production bonuses
for achieving certain levels of production; recognition of
share-based compensation expense from stock options and warrants
granted to advisors and financial institutions based on the fair
value of the awards at each interim reporting period; amounts
designated by advisors as deferred commissions in a
non-qualified deferred compensation plan that are marked to
market at each interim reporting period; and brokerage, clearing
and exchange fees. We refer to these expenses as the production
payout. Substantially all of the production payout
is variable and correlated to the revenues generated by each
advisor.
|
Upon closing of our IPO in the fourth quarter of 2010, the
restriction of approximately 7.4 million shares of common
stock issued to advisors under the Fifth Amended and Restated
2000 Stock Bonus Plan was released. Accordingly, we recorded a
share-based compensation charge of $222.0 million in the
fourth quarter of 2010, representing the offering price of
$30.00 per share multiplied by 7.4 million shares. This
charge has been classified as production expense, but has been
excluded from our production payout for consistency and
comparability to other periods presented.
38
|
|
|
|
|
Compensation and Benefits
Expense. Compensation and benefits expense
includes salaries and wages and related employee benefits and
taxes for our employees (including share-based compensation), as
well as compensation for temporary employees and consultants.
|
|
|
|
General and Administrative
Expenses. General and administrative expenses
include promotional fees, occupancy and equipment,
communications and data processing, regulatory fees, travel and
entertainment and professional services. We host certain advisor
conferences that serve as training, sales and marketing events
in our first and third fiscal quarters and as a result, we
anticipate higher general and administrative expenses in
comparison to other periods.
|
|
|
|
Depreciation and Amortization
Expense. Depreciation and amortization
expense represents the benefits received for using long-lived
assets. Those assets represent significant intangible assets
established through our acquisitions, as well as fixed assets
which include internally developed software, hardware, leasehold
improvements and other equipment.
|
|
|
|
Restructuring Charges. Restructuring
charges represent expenses incurred as a result of our 2009
consolidation of the Affiliated Entities and our strategic
business review committed to and implemented in 2008 to reduce
our cost structure and improve operating efficiencies.
|
|
|
|
Other Expenses. Other expenses include
bank fees, other taxes, bad debt expense and other miscellaneous
expenses. In 2010, other expenses also includes
$8.1 million of transaction costs related to our IPO which
was completed in the fourth quarter, as well as
$8.9 million for legal settlements that related to
pre-acquisition legal matters for certain of our acquired
businesses.
|
How We
Evaluate Growth
We focus on several business and key financial metrics in
evaluating the success of our business relationships and our
resulting financial position and operating performance. Our key
metrics as of and for the years ended December 31, 2010,
2009, and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year Ended
|
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Metrics
|
|
|
|
|
|
|
|
|
|
|
|
|
Advisors(1)
|
|
|
12,444
|
|
|
|
11,950
|
|
|
|
11,920
|
|
Advisory and brokerage assets (in billions)(2)
|
|
$
|
315.6
|
|
|
$
|
279.4
|
|
|
$
|
233.9
|
|
Advisory assets under management (in billions)(3)
|
|
$
|
93.0
|
|
|
$
|
77.2
|
|
|
$
|
59.6
|
|
Net new advisory assets (in billions)(3)(4)
|
|
$
|
8.5
|
|
|
$
|
7.0
|
|
|
|
N/A
|
|
Insured cash account balances (in billions)(3)
|
|
$
|
12.2
|
|
|
$
|
11.6
|
|
|
$
|
11.2
|
|
Money market account balances (in billions)(3)
|
|
$
|
6.9
|
|
|
$
|
7.0
|
|
|
$
|
11.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Metrics
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue growth (decline) from prior year
|
|
|
13.2
|
%
|
|
|
(11.8
|
)%
|
|
|
14.7
|
%
|
Recurring revenue as a % of net revenue(5)
|
|
|
60.7
|
%
|
|
|
57.3
|
%
|
|
|
58.5
|
%
|
Gross margin (in millions)(6)
|
|
$
|
937.9
|
|
|
$
|
844.9
|
|
|
$
|
953.3
|
|
Gross margin as a % of net revenue(6)
|
|
|
30.1
|
%
|
|
|
30.7
|
%
|
|
|
30.6
|
%
|
Net (loss) income (in millions)
|
|
$
|
(56.9
|
)
|
|
$
|
47.5
|
|
|
$
|
45.5
|
|
Adjusted EBITDA (in millions)
|
|
$
|
413.1
|
|
|
$
|
356.1
|
|
|
$
|
350.2
|
|
Adjusted Earnings (in millions)
|
|
$
|
172.7
|
|
|
$
|
129.6
|
|
|
$
|
108.9
|
|
(Loss) Earnings Per Share (diluted)
|
|
$
|
(0.64
|
)
|
|
$
|
0.47
|
|
|
$
|
0.45
|
|
Adjusted Earnings per Share (diluted)
|
|
$
|
1.71
|
|
|
$
|
1.32
|
|
|
$
|
1.09
|
|
|
|
|
(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 license through the
Affiliated Entities related to the consolidation of the
operations of the Affiliated Entities with LPL Financial.
Excluding this attrition, we added 750 new advisors during 2009,
representing 6.3% advisor growth. |
39
|
|
|
(2) |
|
Advisory and brokerage assets are comprised of assets that are
custodied, networked and
non-networked
and reflect market movement in addition to new assets, inclusive
of new business development and net of attrition. |
|
(3) |
|
Advisory assets under management, insured cash account balances,
money market balances and net new advisory assets are components
of advisory and brokerage assets. |
|
(4) |
|
Represents net new advisory assets that are custodied in the
Companys fee-based advisory platforms. Amounts prior to
2009 are not available. |
|
(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. In 2009, we revised our definition
of recurring revenues. Accordingly, prior period amounts have
been recast to reflect this change. |
|
(6) |
|
Gross margin is calculated as net revenues less production
expenses. Production expenses consist of the following expense
categories from our consolidated statements of operations:
(i) commissions and advisory fees and (ii) brokerage,
clearing and exchange. All other expense categories, including
depreciation and amortization, are considered general and
administrative in nature. Because our gross margin amounts do
not include any depreciation and amortization expense, our gross
margin amounts may not be comparable to those of others in our
industry. In 2010, upon closing our IPO in the fourth quarter,
the restriction on approximately 7.4 million shares of
common stock issued to our advisors under the Fifth Amended and
Restated 2000 Stock Bonus Plan was released. Accordingly, we
recorded a share-based compensation charge of
$222.0 million in the fourth quarter of 2010, representing
the offering price of $30.00 per share multiplied by
7.4 million shares. This charge has been classified as
production expense in 2010. Gross margin as calculated for 2010
above does not include this charge for comparability purposes
with previous years shown. |
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.
|
40
Adjusted EBITDA is a non-GAAP measure and does not purport to be
an alternative to net income as a measure of operating
performance or to cash flows from operating activities as a
measure of liquidity. The term Adjusted EBITDA is not defined
under GAAP, and Adjusted EBITDA is not a measure of net income,
operating income or any other performance measure derived in
accordance with GAAP, and is subject to important limitations.
Adjusted EBITDA has limitations as an analytical tool and should
not be considered in isolation or as a substitute for analysis
of our results as reported under GAAP. Some of these limitations
are:
|
|
|
|
|
Adjusted EBITDA does not reflect all cash expenditures, future
requirements for capital expenditures or contractual commitments;
|
|
|
|
Adjusted EBITDA does not reflect changes in, or cash
requirements for, working capital needs and
|
|
|
|
Adjusted EBITDA does not reflect the significant interest
expense, or the cash requirements necessary to service interest
or principal payments, on our debt.
|
In addition, Adjusted EBITDA can differ significantly from
company to company depending on long-term strategic decisions
regarding capital structure, the tax jurisdictions in which
companies operate and capital investments. Because of these
limitations, Adjusted EBITDA should not be considered as a
measure of discretionary cash available to us to invest in our
business. We compensate for these limitations by relying
primarily on the GAAP results and using Adjusted EBITDA as
supplemental information.
Set forth below is a reconciliation from our net (loss) income
to Adjusted EBITDA for the years ended December 31, 2010,
2009 and 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net (loss) income
|
|
$
|
(56,862
|
)
|
|
$
|
47,520
|
|
|
$
|
45,496
|
|
Interest expense
|
|
|
90,407
|
|
|
|
100,922
|
|
|
|
115,558
|
|
Income tax (benefit) expense
|
|
|
(31,987
|
)
|
|
|
25,047
|
|
|
|
47,269
|
|
Amortization of purchased intangible assets and software(1)
|
|
|
43,658
|
|
|
|
59,577
|
|
|
|
61,702
|
|
Depreciation and amortization of all other fixed assets
|
|
|
42,379
|
|
|
|
48,719
|
|
|
|
38,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
87,595
|
|
|
|
281,785
|
|
|
|
309,785
|
|
EBITDA Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense(2)
|
|
|
10,429
|
|
|
|
6,437
|
|
|
|
4,160
|
|
Acquisition and integration related expenses(3)
|
|
|
12,569
|
|
|
|
3,037
|
|
|
|
18,326
|
|
Restructuring and conversion costs(4)
|
|
|
22,835
|
|
|
|
64,078
|
|
|
|
15,122
|
|
Debt amendment and extinguishment costs(5)
|
|
|
38,633
|
|
|
|
|
|
|
|
|
|
Equity issuance and IPO related costs(6)
|
|
|
240,902
|
|
|
|
580
|
|
|
|
|
|
Other(7)
|
|
|
150
|
|
|
|
151
|
|
|
|
3,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total EBITDA Adjustments
|
|
|
325,518
|
(8)
|
|
|
74,283
|
|
|
|
41,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
413,113
|
|
|
$
|
356,068
|
|
|
$
|
350,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents amortization of intangible assets and software as a
result of our purchase accounting adjustments from our merger
transaction in 2005 with the Majority Holders and our 2007
acquisitions of UVEST, the Affiliated Entities and IFMG. |
|
(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. |
41
|
|
|
(3) |
|
Represents acquisition and integration costs primarily as a
result of our 2007 acquisitions of UVEST, the Affiliated
Entities and IFMG. Included in the year ended December 31,
2010, is $8.9 million of expenditures for certain legal
settlements that have not been resolved with the indemnifying
party. See Item 3. Legal Proceedings. |
|
(4) |
|
Represents organizational restructuring charges incurred for
severance and one-time termination benefits, asset impairments,
lease and contract termination fees and other transfer costs. |
|
(5) |
|
Represents debt amendment costs incurred in 2010 for amending
and restating our credit agreement to establish a new term loan
tranche and to extend the maturity of an existing tranche on our
senior credit facilities, and debt extinguishment costs to
redeem our subordinated notes, as well as certain professional
fees incurred. |
|
(6) |
|
Represents equity issuance and related costs for our IPO, which
was completed in the fourth quarter of 2010. For 2009,
$0.6 million of costs that were previously classified as
restructuring and conversion have been reclassified to equity
issuance and IPO related costs to conform to the current period
presentation. Upon closing of the offering, the restriction on
approximately 7.4 million shares of common stock issued to
advisors under our Fifth Amended and Restated 2000 Stock Bonus
Plan was released. Accordingly, the Company recorded a
share-based compensation charge of $222.0 million,
representing the offering price of $30.00 per share multiplied
by 7.4 million shares. |
|
(7) |
|
Represents impairment charges in 2008 for our equity investment
in Blue Frog Solutions, Inc. (See Note 4 of our
consolidated financial statements), other taxes and employment
tax withholding related to a nonqualified deferred compensation
plan. |
|
(8) |
|
The following table shows the adjustments to the revenue and
expense classifications identified in our consolidated
statements of operations used to arrive at our Total EBITDA
Adjustments for the year ended December 31, 2010 (in
thousands): |
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010
|
|
|
|
GAAP
|
|
|
Adjustments
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
Commissions
|
|
$
|
1,620,811
|
|
|
$
|
|
|
Advisory fees
|
|
|
860,227
|
|
|
|
|
|
Asset-based fees
|
|
|
317,505
|
|
|
|
|
|
Transaction and other fees
|
|
|
274,148
|
|
|
|
1,317
|
|
Other
|
|
|
40,795
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
3,113,486
|
|
|
|
1,322
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Production
|
|
|
2,397,535
|
|
|
|
(222,028
|
)
|
Compensation and benefits
|
|
|
308,656
|
|
|
|
(20,760
|
)
|
General and administrative
|
|
|
233,015
|
|
|
|
(7,511
|
)
|
Depreciation and amortization
|
|
|
86,037
|
|
|
|
|
|
Restructuring charges
|
|
|
13,922
|
|
|
|
(13,922
|
)
|
Other
|
|
|
34,826
|
|
|
|
(21,996
|
)
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
3,073,991
|
|
|
|
(286,217
|
)
|
Non-operating interest expense
|
|
|
90,407
|
|
|
|
|
|
Loss on extinguishment of debt
|
|
|
37,979
|
|
|
|
(37,979
|
)
|
Gain on equity method investment
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
3,202,335
|
|
|
|
(324,196
|
)
|
|
|
|
|
|
|
|
|
|
(Loss) income before (benefit from) provision for income
taxes
|
|
$
|
(88,849
|
)
|
|
$
|
325,518
|
|
|
|
|
|
|
|
|
|
|
42
Adjusted
Earnings and Adjusted Earnings per share
Adjusted Earnings represents net income before:
(a) share-based compensation expense, (b) amortization
of intangible assets and software, a component of depreciation
and amortization, resulting from our merger transaction in 2005
with the Majority Holders and our 2007 acquisitions,
(c) acquisition and integration related expenses and
(d) restructuring and conversion costs, (e) debt
amendment and extinguishment costs, (f) equity issuance and
IPO related costs and (g) other. Reconciling items are tax
effected using the income tax rates in effect for the applicable
period, adjusted for any potentially non-deductible amounts.
In reporting our financial and operating results for the years
ended December 31, 2010, 2009 and 2008, we renamed our
non-GAAP performance measures to Adjusted Earnings and Adjusted
Earnings per share (formerly known as Adjusted Net Income and
Adjusted Net Income per share).
Adjusted Earnings per share represents Adjusted Earnings divided
by weighted average outstanding shares on a fully diluted basis.
We prepared Adjusted Earnings and Adjusted Earnings per share to
eliminate the effects of items that we do not consider
indicative of our core operating performance.
We believe that Adjusted Earnings and Adjusted Earnings 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,
and equity issuance and IPO related costs can vary from period
to period and transaction to transaction, expenses associated
with these activities are not considered a key measure of our
operating performance and
|
|
|
|
because amortization expenses can vary substantially from
company to company and from period to period depending upon each
companys financing and accounting methods, the fair value
and average expected life of acquired intangible assets and the
method by which assets were acquired, the amortization of
intangible assets obtained in acquisitions are not considered a
key measure in comparing our operating performance.
|
We have historically not used Adjusted Earnings for internal
management reporting and evaluation purposes; however, we
believe Adjusted Earnings and Adjusted Earnings 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 our investor
and analyst presentations include Adjusted Earnings and Adjusted
Earnings per share.
Adjusted Earnings and Adjusted Earnings 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 Earnings and Adjusted
Earnings 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 Earnings and Adjusted Earnings per share in isolation,
or as substitutes for an analysis of our results as reported
under GAAP. In particular you should consider:
|
|
|
|
|
Adjusted Earnings and Adjusted Earnings per share do not reflect
our cash expenditures, or future requirements for capital
expenditures or contractual commitments;
|
43
|
|
|
|
|
Adjusted Earnings and Adjusted Earnings per share do not reflect
changes in, or cash requirements for, our working capital
needs and
|
|
|
|
Other companies in our industry may calculate Adjusted Earnings
and Adjusted Earnings per share differently than we do, limiting
their usefulness as comparative measures.
|
Management compensates for the inherent limitations associated
with using Adjusted Earnings and Adjusted Earnings per share
through disclosure of such limitations, presentation of our
financial statements in accordance with GAAP and reconciliation
of Adjusted Earnings to the most directly comparable GAAP
measure, net income.
The following table sets forth a reconciliation of net (loss)
income to Adjusted Earnings and Adjusted Earnings per share for
the years ended December 31, 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except per share data)
|
|
|
Net (loss) income
|
|
$
|
(56,862
|
)
|
|
$
|
47,520
|
|
|
$
|
45,496
|
|
After-Tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA Adjustments(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense(2)
|
|
|
8,400
|
|
|
|
5,146
|
|
|
|
3,553
|
|
Acquisition and integration related expenses
|
|
|
7,638
|
|
|
|
1,833
|
|
|
|
11,080
|
|
Restructuring and conversion costs
|
|
|
13,877
|
|
|
|
38,669
|
|
|
|
9,143
|
|
Debt amendment and extinguishment costs
|
|
|
23,477
|
|
|
|
|
|
|
|
|
|
Equity issuance and IPO related costs(3)
|
|
|
149,568
|
|
|
|
350
|
|
|
|
|
|
Other
|
|
|
91
|
|
|
|
91
|
|
|
|
2,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total EBITDA Adjustments
|
|
|
203,051
|
|
|
|
46,089
|
|
|
|
26,045
|
|
Amortization of purchased intangible assets and software(1)
|
|
|
26,531
|
|
|
|
35,947
|
|
|
|
37,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Earnings(4)
|
|
$
|
172,720
|
|
|
$
|
129,556
|
|
|
$
|
108,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Earnings per share(4)(5)
|
|
$
|
1.71
|
|
|
$
|
1.32
|
|
|
$
|
1.09
|
|
Weighted average shares outstanding diluted
|
|
|
100,933
|
|
|
|
98,494
|
|
|
|
100,334
|
|
|
|
|
(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. In April
2010, a step up in basis of $89.1 million for internally
developed software that was established at the time of the 2005
merger transaction became fully amortized, resulting in lower
balances of intangible assets that are amortized. |
|
(2) |
|
Represents the after-tax expense of non-qualified stock options
in which we receive a tax deduction upon exercise, and the full
expense impact of incentive stock options granted to employees
that have vested and qualify for preferential tax treatment and
conversely, we do not receive a tax deduction. Share-based
compensation for vesting of incentive stock options was
$5.3 million, $3.2 million and $2.6 million,
respectively, for the years ended December 31, 2010, 2009
and 2008. |
|
(3) |
|
Represents the after-tax expense of equity issuance and IPO
related costs in which we receive a tax deduction, as well as
the full expense impact of $8.1 million of offering costs
incurred in the fourth quarter of 2010 in which the we do not
receive a tax deduction. |
|
(4) |
|
In reporting our financial and operating results for the years
ended December 31, 2010, 2009 and 2008, we renamed our
non-GAAP performance measures to Adjusted Earnings and Adjusted
Earnings per share (formerly known as Adjusted Net Income and
Adjusted Net Income per share). |
44
|
|
|
(5) |
|
Represents Adjusted Earnings divided by weighted average number
of shares outstanding on a fully diluted basis. Set forth is a
reconciliation of (loss) earnings per share on a fully diluted
basis as calculated in accordance with GAAP to Adjusted Earnings
per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
(Loss) earnings per share diluted
|
|
$
|
(0.64
|
)
|
|
$
|
0.47
|
|
|
$
|
0.45
|
|
Adjustment to include dilutive shares, not included in GAAP loss
per share
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
Adjustment for allocation of undistributed earnings to stock
units
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
After-Tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA Adjustments per share
|
|
|
2.01
|
|
|
|
0.47
|
|
|
|
0.26
|
|
Amortization of purchased intangible assets and software per
share
|
|
|
0.26
|
|
|
|
0.37
|
|
|
|
0.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Earnings per share
|
|
$
|
1.71
|
|
|
$
|
1.32
|
|
|
$
|
1.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic Overview
and Impact of Financial Market Events
Equity markets continued to have positive performance with the
S&P 500 increasing 12.8% from December 31, 2009 to
December 31, 2010. This improvement positively influenced
our advisory and brokerage assets and improved those revenue
sources which are directly driven by asset-based pricing.
In response to the overall economic environment, the central
banks, including the Federal Reserve, have maintained
historically low interest rates which negatively impact our
revenues from client assets in our cash sweep programs. The
average effective rate for federal funds was 0.18% during 2010,
compared to 0.16% in 2009. The average effective rate for
federal funds was 0.19% during the fourth quarter of 2010,
compared to 0.12% for the fourth quarter of 2009.
While our business has improved as a result of the more
favorable equity markets, our outlook on the economic
environment remains cautiously optimistic and we continue our
strategic focus on attractive growth opportunities such as
business development to attract new advisors and through expense
management activities.
Recent
Acquisitions and Divestitures
From time to time we undertake acquisitions
and/or
divestitures based on opportunities in the competitive
landscape. These activities are part of our overall growth
strategy, but can distort comparability when reviewing revenue
and expense trends for periods presented. The following
describes significant acquisition and divestiture activities
that have impacted our 2008, 2009 and 2010 results.
On September 1, 2009, we consolidated the operations of the
Affiliated Entities with those of LPL Financial. The
consolidation involved the transfer of securities licenses of
certain registered representatives associated with the
Affiliated Entities and their client accounts. Following the
consolidation, the registered representatives and client
accounts that were transferred are now associated with LPL
Financial. The consolidation of the Affiliated Entities was
effected to enhance service offerings to our advisors while also
generating efficiencies.
While our acquisition of the Affiliated Entities has contributed
to the overall growth of our base of advisors and related
revenue and market position, the consolidation into LPL
Financial resulted in acquisition integration costs in the form
of personnel costs, system costs and professional fees, as well
as restructuring charges including severance and one-time
termination benefits, lease and contract termination fees, asset
impairments and transfer and conversion costs. See Note 3
of our
45
consolidated financial statements for further discussion on
restructuring costs incurred to date, and total expected
restructuring costs related to our consolidation of the
Affiliated Entities.
On July 14, 2010, we announced a definitive agreement
pursuant to which our subsidiary, LPLH would acquire certain
assets from National Retirement Partners, Inc.
(NRP). In the fourth quarter of 2010, 206 advisors
previously registered with (or licensed through) NRP transferred
their securities and advisory licenses and registrations to LPL
Financial. Approximately 3,800 client accounts with advisory and
brokerage assets of $564.3 million were converted from
NRPs former clearing firm to LPL Financial. The
transaction closed on February 9, 2011.
Results of
Operations
The following discussion presents an analysis of our results of
operations for the years ended December 31, 2010, 2009 and
2008. Where appropriate, we have identified specific events and
changes that affect comparability or trends, and where possible
and practical, have quantified the impact of such items.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Percentage Change
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
10 vs. 09
|
|
|
09 vs. 08
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
$
|
1,620,811
|
|
|
$
|
1,477,655
|
|
|
$
|
1,640,218
|
|
|
|
9.7
|
%
|
|
|
(9.9
|
)%
|
Advisory fees
|
|
|
860,227
|
|
|
|
704,139
|
|
|
|
830,555
|
|
|
|
22.2
|
%
|
|
|
(15.2
|
)%
|
Asset-based fees
|
|
|
317,505
|
|
|
|
272,893
|
|
|
|
352,293
|
|
|
|
16.3
|
%
|
|
|
(22.5
|
)%
|
Transaction and other fees
|
|
|
274,148
|
|
|
|
255,574
|
|
|
|
240,486
|
|
|
|
7.3
|
%
|
|
|
6.3
|
%
|
Other
|
|
|
40,795
|
|
|
|
39,244
|
|
|
|
52,797
|
|
|
|
4.0
|
%
|
|
|
(25.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
3,113,486
|
|
|
|
2,749,505
|
|
|
|
3,116,349
|
|
|
|
13.2
|
%
|
|
|
(11.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
|
|
|
2,397,535
|
|
|
|
1,904,579
|
|
|
|
2,163,048
|
|
|
|
25.9
|
%
|
|
|
(11.9
|
)%
|
Compensation and benefits
|
|
|
308,656
|
|
|
|
270,436
|
|
|
|
343,171
|
|
|
|
14.1
|
%
|
|
|
(21.2
|
)%
|
General and administrative
|
|
|
233,015
|
|
|
|
218,416
|
|
|
|
266,447
|
|
|
|
6.7
|
%
|
|
|
(18.0
|
)%
|
Depreciation and amortization
|
|
|
86,037
|
|
|
|
108,296
|
|
|
|
100,462
|
|
|
|
(20.6
|
)%
|
|
|
7.8
|
%
|
Restructuring charges
|
|
|
13,922
|
|
|
|
58,695
|
|
|
|
14,966
|
|
|
|
(76.3
|
)%
|
|
|
292.2
|
%
|
Other
|
|
|
34,826
|
|
|
|
15,294
|
|
|
|
17,558
|
|
|
|
127.7
|
%
|
|
|
(12.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
3,073,991
|
|
|
|
2,575,716
|
|
|
|
2,905,652
|
|
|
|
19.3
|
%
|
|
|
(11.4
|
)%
|
Non-operating interest expense
|
|
|
90,407
|
|
|
|
100,922
|
|
|
|
115,558
|
|
|
|
(10.4
|
)%
|
|
|
(12.7
|
)%
|
Loss on extinguishment of debt
|
|
|
37,979
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
|
|
*
|
(Gain) loss on equity method investment
|
|
|
(42
|
)
|
|
|
300
|
|
|
|
2,374
|
|
|
|
|
*
|
|
|
(87.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
3,202,335
|
|
|
|
2,676,938
|
|
|
|
3,023,584
|
|
|
|
19.6
|
%
|
|
|
(11.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before (benefit from) provision for income
taxes
|
|
|
(88,849
|
)
|
|
|
72,567
|
|
|
|
92,765
|
|
|
|
|
*
|
|
|
(21.8
|
)%
|
(Benefit from) provision for income taxes
|
|
|
(31,987
|
)
|
|
|
25,047
|
|
|
|
47,269
|
|
|
|
|
*
|
|
|
(47.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(56,862
|
)
|
|
$
|
47,520
|
|
|
$
|
45,496
|
|
|
|
|
*
|
|
|
4.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Not meaningful.
46
Revenues
Commissions
The following table sets forth our commission revenue, by
product category included in our consolidated statements of
operations for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
% Total
|
|
|
2009
|
|
|
% Total
|
|
|
2008
|
|
|
% Total
|
|
|
Variable annuities
|
|
$
|
672,369
|
|
|
|
41.5
|
%
|
|
$
|
551,345
|
|
|
|
37.3
|
%
|
|
$
|
627,021
|
|
|
|
38.2
|
%
|
Mutual funds
|
|
|
457,947
|
|
|
|
28.2
|
%
|
|
|
389,458
|
|
|
|
26.4
|
%
|
|
|
474,948
|
|
|
|
28.9
|
%
|
Fixed annuities
|
|
|
138,753
|
|
|
|
8.6
|
%
|
|
|
225,342
|
|
|
|
15.3
|
%
|
|
|
179,743
|
|
|
|
11.0
|
%
|
Alternative investments
|
|
|
97,606
|
|
|
|
6.0
|
%
|
|
|
77,079
|
|
|
|
5.2
|
%
|
|
|
112,706
|
|
|
|
6.9
|
%
|
Equities
|
|
|
93,961
|
|
|
|
5.8
|
%
|
|
|
86,606
|
|
|
|
5.8
|
%
|
|
|
85,586
|
|
|
|
5.2
|
%
|
Fixed income
|
|
|
85,250
|
|
|
|
5.2
|
%
|
|
|
75,210
|
|
|
|
5.1
|
%
|
|
|
65,309
|
|
|
|
4.0
|
%
|
Insurance
|
|
|
72,297
|
|
|
|
4.5
|
%
|
|
|
69,907
|
|
|
|
4.7
|
%
|
|
|
91,327
|
|
|
|
5.6
|
%
|
Other
|
|
|
2,628
|
|
|
|
0.2
|
%
|
|
|
2,708
|
|
|
|
0.2
|
%
|
|
|
3,578
|
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commission revenue
|
|
$
|
1,620,811
|
|
|
|
100.0
|
%
|
|
$
|
1,477,655
|
|
|
|
100.0
|
%
|
|
$
|
1,640,218
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commission revenue increased by $143.2 million, or 9.7%,
for 2010 compared to 2009. The increase is primarily due to an
increase in trail-based commissions related to improved market
conditions as well as growth in assets eligible for trail
payment. Sales-based commissions also increased as a result of
greater commission-based products activity. Sales-based
commissions from more market sensitive products such as variable
annuities and mutual funds experienced an increase over the
prior year period due to increasing investor confidence. Sales
of certain financial products with more predictable cash flows
such as fixed annuities, which typically increase during periods
of financial uncertainty, decreased during this period,
consistent with the markets recovery.
Commission revenue decreased by $162.6 million, or 9.9%,
for 2009 compared to 2008. Sales-based commissions decreased as
a result of market turbulence and volatility that dampened
client demand for purchases of new financial products,
particularly in the more market sensitive products such as
mutual funds, alternative investments and variable annuities.
This decline was partially offset by increased sales of products
with more predictable cash flows such as fixed annuities and
fixed income securities, which investors normally favor during
periods of uncertain equity markets. Trail commissions also
decreased as a result of the effect of the markets decline
on the underlying assets eligible for trail commissions,
partially offset by additional sales of assets eligible for
trail payment.
Advisory
Fees
Advisory fees increased by $156.1 million, or 22.2%, for
2010 compared to 2009. The increase was primarily due to the
effect of the rebounding market, which resulted in a significant
increase in the value of client assets in advisory programs, as
well as net new advisory assets. For 2010, the S&P 500
index averaged 1,140, up 20.3% from the average of 948 for 2009.
Our advisory assets under management increased 20.5% from
$77.2 billion at December 31, 2009 to
$93.0 billion at December 31, 2010. The increase in
advisory assets was primarily driven by a continued shift toward
a higher percentage of advisory business within our existing
advisor base, as well as by assets from advisors who joined the
firm in 2009 and whose business began to ramp up on our platform
in 2010.
Advisory fees decreased by $126.4 million, or 15.2%, for
2009 compared to 2008. The decrease primarily reflects the
effect of the decline in the equity markets during 2009 as
compared to 2008. For 2009, the S&P 500 index averaged 948,
down 22.3% from the average for 2008. This decrease was
partially offset by increasing net new advisory assets
attributed to new advisory relationships.
47
The following table summarizes the activity within our advisory
assets under management for the periods ended December 30,
2010 and 2009 (in billions):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Beginning balance at January 1
|
|
$
|
77.2
|
|
|
$
|
59.6
|
|
Net new advisory assets
|
|
|
8.5
|
|
|
|
7.0
|
|
Market impacts
|
|
|
7.3
|
|
|
|
10.6
|
|
|
|
|
|
|
|
|
|
|
Ending balance at December 31
|
|
$
|
93.0
|
|
|
$
|
77.2
|
|
|
|
|
|
|
|
|
|
|
Asset-Based
Fees
Asset-based fees increased $44.6 million, or 16.3%, for
2010 compared to 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.
The average for the S&P 500 index increased 20.3% from 2009
to 2010. This increase was offset by lower revenues from our
cash sweep programs, which declined by $0.7 million, or
0.6%, to $119.7 million for the year ended
December 31, 2010 from $120.4 million for the year
ended December 31, 2009, as a result of lower assets in our
cash sweep programs. Assets in our cash sweep programs averaged
$18.5 billion and $20.5 billion for the years ended
December 31, 2010 and 2009, respectively. The decrease of
assets in cash sweep programs is due to the redeployment of cash
balances into other securities as investors and advisors gain
confidence in the market. For the year ended December 31,
2010, the effective federal funds rate averaged 0.18% compared
to 0.16% for the prior year.
Asset-based fees decreased $79.4 million, or 22.5%, for
2009 compared to 2008. This decrease resulted in part from the
decline in the market value of assets included in our various
sponsor and asset-based record- keeping programs, as the average
for the S&P 500 index declined 22.3% from 2008 to 2009.
Asset-based revenues in 2009 were also negatively impacted by
the declining interest rate environment as reflected by the
average effective federal funds rate and its influence on fees
associated with our cash sweep programs. For the year ended
December 31, 2009, the effective federal funds rate
averaged 0.16% compared to 1.92% for the prior year. Assets in
our cash sweep programs averaged $20.5 billion and
$19.3 billion for the years ended December 31, 2009
and 2008, respectively.
Transaction and
Other Fees
Transaction and other fees increased $18.6 million, or
7.3%, for 2010 compared to 2009. This increase is due, in part,
to increased prices and corresponding fees to advisors for
licensing, technology, and professional liability insurance
services of $3.9 million, $3.5 million and
$2.5 million, respectively, and increased revenue of
$2.6 million from additional advisor conferences held in
2010.
Transaction and other fees increased $15.1 million, or
6.3%, for 2009 compared to 2008. This increase was primarily
attributed to increases in our number of advisors and their
client accounts. We also had increases of $6.6 million in
charges to advisors largely for professional liability insurance
premiums and $5.3 million in IRA custodial fees.
Transaction and other fees include revenues from conferences
held for advisors; these revenues declined by $4.4 million
from 2008 to 2009, as we cancelled various conferences as a part
of our cost containment efforts.
Other
Revenue
Other revenue increased $1.6 million, or 4.0%, for 2010
compared to 2009. The increase was primarily attributed to
higher direct investment marketing allowances received from
product sponsors, largely based on sales volumes, which was
offset by unrealized
mark-to-market
losses in securities owned and certain other assets.
48
Other revenue decreased $13.6 million, or 25.7%, for 2009
compared to 2008. The decrease was due primarily to lower
interest revenue from client margin lending activities and to a
lesser extent, by lower interest income earned on our cash
equivalents. Our average client margin balances decreased 33.5%
from $328.3 million in 2008 to $218.3 million in 2009,
reflecting a reduced demand by clients for margin leverage in
reaction to volatility in the equity markets. Margin balances
have typically decreased during periods of declining, volatile
markets such as those experienced beginning in 2008.
Expenses
Production
Expenses
Upon closing of our IPO in the fourth quarter of 2010, the
restriction on approximately 7.4 million shares of common
stock issued to advisors under the Fifth Amended and Restated
2000 Stock Bonus Plan was released. Accordingly, we recorded a
share-based compensation charge of $222.0 million in the
fourth quarter of 2010, representing the offering price of
$30.00 per share multiplied by 7.4 million shares. This
charge has been classified as production expense in 2010.
Excluding this charge, production expenses increased
$271.0 million, or 14.2% for 2010 compared to 2009. This
increase was a result of a 13.7% increase in our commission and
advisory revenues during the same period. Our production payout
averaged 86.3% in 2010 and 85.8% in 2009.
Production expenses decreased $258.5 million, or 11.9%, for
2009 compared to 2008. Commission and advisory revenues declined
$289.0 million, or 11.7%, during the same period, resulting
in a corresponding decrease in our production payout to our
advisors. Our production payout averaged 85.8% in 2009 and 86.3%
in 2008.
Compensation and
Benefits Expense
Compensation and benefits increased $38.2 million, or
14.1%, for 2010 compared to 2009. Expenses in 2010 include
$5.8 million in employer taxes arising from non-qualified
stock option exercises in connection with our IPO. The remaining
increase was primarily attributed to the restoration of certain
employee-related items, including increases in bonus levels and
contributions to employee retirement plans in 2010 that were
reduced in 2009 as a result of our cost management initiatives.
In addition, share-based compensation expense related to
employee stock option awards increased to $10.4 million in
2010, compared to $6.5 million in 2009. Our average number
of full-time employees was 2,517 and 2,430 for 2010 and 2009,
respectively, representing an increase of 3.6%.
Compensation and benefits decreased $72.7 million, or
21.2%, for 2009 compared to 2008. The decrease was primarily
attributed to our ongoing strategic business review and
resulting cost management initiatives. These initiatives, along
with ordinary attrition and retirements, resulted in our average
number of full-time employees declining by 383, or 13.6%, to
2,430 for 2009, compared to 2,813 for 2008. Compensation and
benefits expense in 2009 was further reduced from 2008 levels
due to a reduction in employee related-items including bonuses
and employer contributions to retirement plans.
General and
Administrative Expenses
General and administrative expenses increased by
$14.6 million, or 6.7%, for 2010 compared to 2009. The
increase compared to the prior year was due to the reinstatement
of general and administrative expenses to levels necessary to
support growth and service to our advisors. During 2010, we
restored certain advisor conference services, which contributed
to $6.4 million of the change. Other increases were
primarily due to expenses for travel related costs and licensing
fees that increased by $4.6 million and $1.6 million,
respectively.
General and administrative expenses decreased by
$48.0 million, or 18.0%, for 2009 compared to 2008. The
decrease was primarily attributable to our ongoing strategic
business review and resulting cost reduction measures which led
to decreases of $38.3 million in promotional fees,
49
$8.3 million in occupancy and equipment, $5.8 million
in travel and entertainment and $3.8 million in
communications and data processing.
Depreciation and
Amortization Expense
Depreciation and amortization expense decreased by
$22.3 million, or 20.6%, for 2010 compared to 2009. The
decrease is primarily attributed to a step up in basis of
$89.1 million in our internally developed software that was
established at the time of our 2005 merger transaction and
became fully amortized in April 2010. We recorded
$6.3 million and $19.1 million in amortization expense
for these assets for 2010 and 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 remaining
in those intangible assets that continue to be amortized.
Depreciation and amortization expense increased by
$7.8 million, or 7.8%, for 2009 compared to 2008. The
increase was attributed to capital expenditures made to support
integration efforts related to the Affiliated Entities and the
general growth of our business.
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 $13.9 million in 2010, compared
to $58.7 million in 2009. In 2010, restructuring charges
were incurred for severance and termination benefits of
$2.0 million, contract termination costs of
$5.4 million related to the abandonment of certain lease
facilities, asset impairment charges of $0.8 million, and
$5.7 million in conversion and transfer costs primarily
attributed to advisor retention.
Restructuring charges were $58.7 million in 2009, compared
to $15.0 million in 2008. In 2009, restructuring charges
were incurred for severance and termination benefits of
$9.5 million, contract termination costs of
$15.9 million, asset impairment charges of
$19.9 million and $13.9 million in other expenditures
principally relating to the conversion and transfer of advisors
and their client accounts from the Affiliated Entities to LPL
Financial. These costs were partially offset by
$0.5 million in adjustments that were recorded in the first
half of 2009 for changes in cost estimates associated with
post-employment benefits provided to employees impacted by our
2008 strategic business review.
Other
Expenses
Other expenses increased by $19.5 million, or 127.7%, from
2009 to 2010. The increase is due primarily to $8.1 million
in transaction costs that were expensed at the completion of our
IPO in the fourth quarter of 2010, as well as $8.9 million
for legal settlements that related to pre-acquisition legal
matters for certain of acquired businesses.
Other expenses decreased by $2.3 million, or 12.9%, from
2008 to 2009. The decrease was primarily due to cost reduction
measures.
Interest
Expense
Interest expense includes non-operating interest expense for our
senior secured credit facilities and our senior unsecured
subordinated notes.
Interest expense decreased by $10.5 million, or 10.4%, for
2010 compared with 2009. The reduction in interest expense is
attributed to our debt refinancing in the second quarter of
2010, which included the redemption of our senior unsecured
subordinated notes, resulting in a lower cost of borrowing. In
addition, two of our interest rate swap agreements matured
during 2010, which resulted in interest savings of approximately
$3.8 million.
50
Interest expense decreased by $14.6 million, or 12.7%, for
2009 compared with 2008. The decline reflected lower average
interest rates on our borrowings due in part to a credit rating
upgrade received in the third quarter of 2008, partially offset
by an increase in the average principal amount of debt
outstanding due primarily to borrowings under our revolving
credit facility. Our average outstanding borrowing activity in
the revolving and uncommitted line of credit facilities
increased by $7.8 million from $48.7 million for 2008
compared to $56.5 million for 2009.
Gain or loss on
Equity Method Investment
The loss or gain on equity method investment represents our
share of gains or losses related to our investment in a
privately held technology company.
The gain on equity method investment was $42,000 for 2010
compared to a loss of $0.3 million for 2009.
Loss on equity method investment decreased by $2.1 million,
or 87.4%, for 2009 compared to 2008. The decrease was attributed
to a $1.7 million other than temporary impairment charge
incurred during the second quarter of 2008.
Provision for
Income Taxes
During 2010, we recorded an income tax benefit of
$32.0 million compared to an income tax expense of
$25.0 million for 2009. The 2010 tax benefit was a result
of the net loss resulting from IPO related expenses. Our
effective income tax rates were 36.0% and 34.5% for 2010 and
2009, respectively. Our 2010 effective tax rate reflects
$8.1 million of transaction expenses that are not
deductible for tax purposes, which reduced the tax benefit by
3.2%. Our 2009 effective tax rate reflects a benefit of
approximately 8.0% from a newly enacted change to
Californias income sourcing rules which were enacted in
2009 and effective as of January 1, 2011.
Our provision for income taxes decreased by $22.2 million,
or 47.0%, between 2008 and 2009. The decrease was primarily the
result of a decrease in the effective income tax rate under
GAAP, which was 34.5% for 2009 as compared to 51.0% for 2008, as
well as a decline in pre-tax income due to restructuring charges
that were incurred in 2009. In addition, our 2009 effective tax
rate reflects a benefit from a change to Californias
income sourcing rules, which required that we revalue our
deferred tax liabilities to the rate that will be in effect when
the tax liabilities are utilized.
Liquidity and
Capital Resources
Senior management establishes our liquidity and capital
policies. These policies include senior managements review
of short- and long-term cash flow forecasts, review of monthly
capital expenditures and daily monitoring of liquidity for our
subsidiaries. Decisions on the allocation of capital include
projected profitability and cash flow, risks of the business,
regulatory capital requirements and future liquidity needs for
strategic activities. Our Treasury Department assists in
evaluating, monitoring and controlling the business activities
that impact our financial condition, liquidity and capital
structure and maintains relationships with various lenders. The
objectives of these policies are to support the executive
business strategies while ensuring ongoing and sufficient
liquidity.
51
A summary of changes in cash flow data is provided as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net cash flows (used in) provided by:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(22,914
|
)
|
|
$
|
271,157
|
|
|
$
|
89,277
|
|
Investing activities
|
|
|
(39,192
|
)
|
|
|
(13,724
|
)
|
|
|
(76,202
|
)
|
Financing activities
|
|
|
102,720
|
|
|
|
(98,078
|
)
|
|
|
18,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
40,614
|
|
|
|
159,355
|
|
|
|
31,236
|
|
Cash and cash equivalents beginning of year
|
|
|
378,594
|
|
|
|
219,239
|
|
|
|
188,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of year
|
|
$
|
419,208
|
|
|
$
|
378,594
|
|
|
$
|
219,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash requirements and liquidity needs are primarily funded
through our cash flow from operations and our capacity for
additional borrowing.
Net cash (used in) provided by operating activities includes net
(loss) 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. Net cash used in
operating activities for 2010 was $22.9 million, compared
to net cash provided by operating activities for 2009 and 2008
of $271.2 million and $89.3 million, respectively. In
2010, net cash used in operating activities includes
$93.4 million of excess tax benefits resulting from stock
options exercised related to our IPO, and a $73.8 million
change in tax receivables that arose primarily from a tax
benefit resulting from the release on the restriction on
7.4 million shares of our common stock. Operating assets
and liabilities include balances related to settlement and
funding of client transactions, receivables from product
sponsors and accrued commissions and advisory fees due to our
advisors. Operating assets and liabilities that arise from the
settlement and funding of transactions by our advisors
clients are the principal cause of changes to our net cash from
operating activities and can fluctuate significantly from day to
day and period to period depending on overall trends and client
behaviors.
Net cash used in investing activities for 2010, 2009 and 2008,
totaled $39.2 million, $13.7 million and
$76.2 million, respectively. The increase in 2010 as
compared to 2009 was principally due to an increase of
$14.8 million in capital expenditures and an increase in
restricted cash deposits of $11.4 million. Included in the
deposits of restricted cash in 2010 is $20.0 million to
fund a pending acquisition that was completed in the first
quarter of 2011. The decrease in 2009 as compared to 2008 of
$62.5 million was principally due to a decrease in capital
expenditures of $54.5 million, and acquisition activity of
$13.3 million. Capital expenditures decreased in 2009 in
response to economic conditions and due to the completion in
2008 of capital projects related to our 2007 acquisitions.
Net cash provided by financing activities for 2010 was
$102.7 million, compared to net cash used in financing
activities for 2009 of $98.1 and net cash provided by financing
activities for 2008 of $18.2 million. Cash flows from
financing activities in 2010 include $93.4 million from
excess tax benefits arising from stock options exercised related
to our IPO. Financing activities in 2010 also include
$37.2 million in net proceeds from the sale of stock
pursuant to the over-allotment option exercised by the
underwriters, in connection with our IPO. This activity was
offset in part by the pay down of the principal amount of the
2015 Term Loans of $550.0 million and a premium of
$29.6 million incurred to redeem the 2015 Term Loans, and
proceeds of $566.7 million received from the 2017 Term
Loans during the year ended December 31, 2010. In addition,
$7.2 million of debt issuance costs were paid in 2010. In
2009, the primary use of cash in financing activities was the
$90.0 million pay down of the revolving line of credit
facility.
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
52
capital needs, the payment of all of our obligations and the
funding of anticipated capital expenditures for the foreseeable
future.
Tax Benefit
Analysis
In 2010, upon closing our IPO in the fourth quarter, the
restriction on 7.4 million shares of common stock issued to
our advisors under the Fifth Amended and Restated 2000 Stock
Bonus Plan was released. Accordingly, we recorded a share-based
compensation charge and a corresponding tax deduction of
$222.0 million in the fourth quarter of 2010, representing
the offering price of $30.00 per share multiplied by
7.4 million shares. We were able to take a tax deduction
for the share-based compensation charge, as noted below.
We also expect to realize in connection with our IPO, a tax
deduction of $383.0 million resulting from (a) the
exercise of non-qualified stock options by current and former
employees; (b) the exercise of non-qualified stock options
and warrants by advisors and financial institutions; and
(c) the exercise of incentive stock options and subsequent
sale of common stock resulting in a disqualifying disposition.
As a result of the tax deduction related to the release on the
restriction of shares of common stock held by advisors, as well
as stock option and warrant exercises, we expect the tax
deduction available to be $605.0 million, resulting in
total expected tax benefits in connection with the IPO of
$237.3 million. The aggregate tax deduction generated a net
operating loss (NOL) for tax purposes in 2010. Such
NOLs are available to be applied to prior years operating income
to recover taxes previously paid and are eligible to be carried
forward to offset any future taxable income for federal tax
purposes. Rules regarding carryback and carryforward vary by
state.
The following table shows the tax deduction available and the
tax benefit expected to be realized in connection with the IPO
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
|
|
|
|
Release on the
|
|
|
Option
|
|
|
|
|
|
|
Restriction of
|
|
|
and
|
|
|
|
|
|
|
Shares of
|
|
|
Warrant
|
|
|
|
|
|
|
Common Stock
|
|
|
Exercises
|
|
|
Total
|
|
|
Tax deduction available
|
|
$
|
221,982
|
|
|
$
|
382,990
|
|
|
$
|
604,972
|
|
Tax benefit expected to be realized
|
|
$
|
87,072
|
|
|
$
|
150,228
|
|
|
$
|
237,300
|
|
Tax benefit recorded in 2010 as income tax receivables on the
consolidated statements of financial condition
|
|
$
|
(87,072
|
)
|
|
$
|
(57,474
|
)
|
|
$
|
(144,546
|
)(1)
|
Tax benefit utilized in the fourth quarter of 2010 by not making
a quarterly payment
|
|
|
|
|
|
$
|
(37,534
|
)
|
|
$
|
(37,534
|
)
|
Tax benefit expected to be utilized in future periods through
the use of NOLs from tax deductions resulting from the IPO
|
|
|
|
|
|
$
|
(55,220
|
)
|
|
$
|
(55,220
|
)
|
(1) On January 20, 2011, we received a $45.0 million tax
refund for federal taxes paid in 2010. We anticipate filing a
tax refund in April 2011 for federal taxes paid in 2009 and
2008, and expect to receive refunds of $55.3 million and $44.3
million, respectively.
Operating
Capital Requirements
Our primary requirement for working capital relates to funds we
loan to our advisors clients for trading done on margin
and funds we are required to maintain at clearing organizations
to support these clients trading activities. We require
that our advisors clients deposit funds with us in support
of their trading activities and we hypothecate securities held
as margin collateral, which we in turn use to lend to clients
for margin transactions and deposit with our clearing
organizations. These activities
53
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. These
timing differences are funded either with internally generated
cash flow or, if needed, with funds drawn under the revolving
credit facility at the holding company,
and/or
uncommitted lines of credit at our broker-dealer subsidiary LPL
Financial.
Our registered broker-dealers are subject to the SECs
Uniform Net Capital Rule, which requires the maintenance of
minimum net capital. LPL Financial computes 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 and MSC 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 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.
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
54
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 also maintain a revolving credit facility which is provided
through the senior secured credit facilities. On
January 25, 2010, we amended our senior secured credit
agreement to increase the revolving credit facility from
$100 million to $218.2 million. In connection with
this amendment, we extended the maturity of a
$163.5 million tranche of the revolving credit facility to
June 28, 2013. The remaining $54.7 million tranche
retains its original maturity date of December 28, 2011.
We also maintain two uncommitted lines of credit. One of the
lines has an unspecified limit, and is primarily dependent on
our ability to provide sufficient collateral. The other line 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 an
aggregate 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 December 31, 2010 were 0.375%
for our revolver tranche maturing in 2011 and 0.75% for our
revolver tranche maturing in 2013, but are subject to change
depending on our leverage ratio. We must also pay customary
letter of credit fees.
Prepayments
The senior secured credit facilities (other than the revolving
credit facility) require us to prepay outstanding amounts under
our senior secured term loan facility subject to certain
exceptions, with:
|
|
|
|
|
50% (percentage will be reduced to 25% if our total leverage
ratio is 5.00 or less and to 0% if our total leverage ratio is
4.00 or less) of our annual excess cash flow (as defined in our
senior
|
55
|
|
|
|
|
secured credit agreement) adjusted for, among other things,
changes in our net working capital;
|
|
|
|
|
|
100% of the net cash proceeds of all nonordinary course asset
sales or other dispositions of property, if we do not reinvest
or commit to reinvest those proceeds in assets to be used in our
business or to make certain other permitted investments within
15 months as long as such reinvestment is completed within
180 days and
|
|
|
|
100% of the net cash proceeds of any incurrence of debt, other
than proceeds from debt permitted under the senior secured
credit agreement.
|
The foregoing mandatory prepayments will be applied to scheduled
installments of principal of the senior secured term loan
facility in direct order.
We may voluntarily repay outstanding loans under the senior
secured credit agreement at any time without premium or penalty,
other than customary breakage costs with respect to
LIBOR loans.
Amortization
We are required to repay the loans under the senior secured term
loan facility in equal quarterly installments in aggregate
annual amounts equal to 1% of the original funded principal
amount of such facility, with the balance being payable on the
final maturity date of the facility.
Principal amounts outstanding under the revolving credit
facilities are due and payable in full at maturity.
Guarantee and
Security
The senior secured credit facilities are secured primarily
through pledges of the capital stock in our subsidiaries.
Certain
Covenants and Events of Default
The senior secured credit agreement contains a number of
covenants that, among other things, restrict, subject to certain
exceptions, our ability to:
|
|
|
|
|
incur additional indebtedness;
|
|
|
|
create liens;
|
|
|
|
enter into sale and leaseback transactions;
|
|
|
|
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.
|
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
56
stock option or stock appreciate rights plan, any management or
employee stock ownership plan, stock subscription plan,
employment termination agreement or any employment agreements or
stockholders agreement, in an aggregate amount not to
exceed $5.0 million in any fiscal year plus the amount of
cash proceeds from certain equity issuances to such persons, the
amount of equity interests subject to a certain deferred
compensation plan and the amount of certain key-man life
insurance proceeds, (ii) franchise taxes, general corporate and
operating expenses not to exceed $3.0 million in any fiscal
year, and fees and expenses related to any unsuccessful equity
or debt offering permitted by the senior secured credit
facilities, (iii) tax liabilities to the extent
attributable to our business and our subsidiaries and
(iv) dividends and other distributions in an aggregate
amount not to exceed 50% of our cumulative consolidated net
income available to stockholders at such time so long as at the
time of such payment of dividend or the making of such
distribution, and after giving effect thereto, our leverage
ratio is less than 3.50:1.00.
In addition, our financial covenant requirements include a
leverage ratio test and an interest coverage ratio test. Under
our leverage ratio test, we covenant not to allow the ratio of
our consolidated total debt (as defined in our senior secured
credit agreement) to an adjusted EBITDA reflecting financial
covenants in our senior secured credit facilities (Credit
Agreement Adjusted EBITDA) to exceed certain prescribed
levels set forth in the agreement. Under our interest coverage
ratio test, we covenant not to allow the ratio of our Credit
Agreement Adjusted EBITDA to our consolidated interest expense
(as defined in our senior secured credit agreement) to be less
than certain prescribed levels set forth in the agreement. Each
of our financial ratios is measured at the end of each fiscal
quarter.
Our senior secured credit agreement provides us with a right to
cure in the event we fail to comply with our leverage ratio test
or our interest coverage test. We must exercise this right to
cure within ten days of the delivery of our quarterly
certificate calculating the financial ratio for that quarter.
If we fail to comply with these covenants and are unable to
cure, we could face substantial liquidity problems and could be
forced to sell assets, seek additional capital or seek to
restructure or refinance our indebtedness. These alternative
measures may not be successful or feasible. Our senior secured
credit agreement restricts our ability to sell assets. Even if
we could consummate those sales, the proceeds that we realize
from them may not be adequate to meet any debt service
obligations then due. Furthermore, if an event of default were
to occur with respect to our senior secured credit agreement,
our creditors could, among other things, accelerate the maturity
of our indebtedness. See Risk Factors Our
indebtedness could adversely affect our financial health and may
limit our ability to use debt to fund future capital needs.
As of December 31, 2010, we were in compliance with all of
our covenant requirements.
Our covenant requirements and actual ratios as of
December 31, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
Covenant
|
|
Actual
|
Financial Ratio
|
|
Requirement
|
|
Ratio
|
|
Leverage Test (Maximum)
|
|
|
3.70
|
|
|
|
2.64
|
|
Interest Coverage (Minimum)
|
|
|
2.60
|
|
|
|
4.81
|
|
57
Set forth below is a reconciliation from EBITDA, Adjusted EBITDA
and Credit Agreement Adjusted EBITDA to our net income (loss)
for the years ending December 31, 2010 and
December 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Net (loss) income
|
|
$
|
(56,862
|
)
|
|
$
|
47,520
|
|
Interest expense
|
|
|
90,407
|
|
|
|
100,922
|
|
Income tax (benefit) expense
|
|
|
(31,987
|
)
|
|
|
25,047
|
|
Amortization of purchased intangible assets and software(1)
|
|
|
43,658
|
|
|
|
59,577
|
|
Depreciation and amortization of all other fixed assets
|
|
|
42,379
|
|
|
|
48,719
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
87,595
|
|
|
|
281,785
|
|
EBITDA Adjustments:
|
|
|
|
|
|
|
|
|
Share-based compensation expense(2)
|
|
|
10,429
|
|
|
|
6,437
|
|
Acquisition and integration related expenses(3)
|
|
|
12,569
|
|
|
|
3,037
|
|
Restructuring and conversion costs(4)
|
|
|
22,835
|
|
|
|
64,078
|
|
Debt amendment and extinguishment costs(5)
|
|
|
38,633
|
|
|
|
|
|
Equity issuance and IPO related costs(6)
|
|
|
240,902
|
|
|
|
580
|
|
Other(7)
|
|
|
150
|
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
Total EBITDA Adjustments
|
|
|
325,518
|
|
|
|
74,283
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
|
413,113
|
|
|
|
356,068
|
|
Pro-forma adjustments(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Agreement Adjusted EBITDA
|
|
$
|
413,113
|
|
|
$
|
356,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents amortization of intangible assets and software as a
result of our purchase accounting adjustments from our merger
transaction in 2005 with the Majority Holders and our 2007
acquisitions of UVEST, the Affiliated Entities and IFMG. |
|
(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 UVEST, the Affiliated
Entities and IFMG. Included in the year ended December 31,
2010 are expenditures for certain legal settlements that have
not been resolved with the indemnifying party. See
Item 3. Legal Proceedings. |
|
(4) |
|
Represents organizational restructuring charges incurred for
severance and one-time termination benefits, asset impairments,
lease and contract termination fees and other transfer costs. |
|
(5) |
|
Represents debt amendment costs incurred in 2010 for amending
and restating our credit agreement to establish a new term loan
tranche and to extend the maturity of an existing tranche on our
senior credit facilities, and debt extinguishment costs to
redeem our subordinated notes, as well as certain professional
fees incurred. |
|
(6) |
|
Represents equity issuance and related costs for our IPO, which
was completed in the fourth quarter of 2010. For 2009,
$0.6 million of costs that were previously classified as
restructuring and conversion have been reclassified to equity
issuance and IPO related costs to conform to the current period
presentation. Upon closing of the offering, the restriction on
approximately 7.4 million shares of common stock issued to
advisors under our Fifth Amended and Restated 2000 Stock Bonus
Plan was released. Accordingly, the Company recorded a
share-based compensation charge of $222.0 million,
representing the offering price of $30.00 per share multiplied
by 7.4 million shares. |
|
(7) |
|
Represents excise and other taxes. |
58
|
|
|
(8) |
|
Credit Agreement Adjusted EBITDA excludes pro-forma general and
administrative expenditures from acquisitions, as defined under
the terms of our senior secured credit agreement. There were no
such adjustments for the years ended December 31, 2010 and
2009. |
Interest Rate
Swaps
An interest rate swap is a financial derivative instrument
whereby two parties enter into a contractual agreement to
exchange payments based on underlying interest rates. We use
interest rate swap agreements to hedge the variability on our
floating rate for $210.0 million of our term loan under our
senior secured credit facilities. We are required to pay the
counterparty to the agreement fixed interest payments on a
notional balance and in turn receive variable interest payments
on that notional balance. Payments are settled quarterly on a
net basis. As of December 31, 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
December 31, 2010, the risk of variability on our floating
interest rate is partially mitigated by the client margin loans
on which we carry floating interest rates. At December 31,
2010, our receivables from our advisors clients for margin
loan activity were approximately $233.5 million.
Bank Loans
Payable
We maintain two uncommitted lines of credit at LPL Financial.
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 December 31, 2010.
Off-Balance Sheet
Arrangements
We enter into various off-balance-sheet arrangements in the
ordinary course of business, primarily to meet the needs of our
advisors clients. These arrangements include firm
commitments to extend credit. For information on these
arrangements, see Notes 14 and 20 to our consolidated
financial statements.
Contractual
Obligations
The following table provides information with respect to our
commitments and obligations as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
< 1 Year
|
|
|
1-3 Years
|
|
|
4-5 Years
|
|
|
> 5 Years
|
|
|
|
(In thousands)
|
|
|
Leases and other obligations(1)
|
|
$
|
97,225
|
|
|
$
|
31,380
|
|
|
$
|
41,380
|
|
|
$
|
16,557
|
|
|
$
|
7,908
|
|
Senior secured term loan facilities(2)
|
|
|
1,386,639
|
|
|
|
13,971
|
|
|
|
333,168
|
|
|
|
492,850
|
|
|
|
546,650
|
|
Commitment fee on revolving line of credit(3)
|
|
|
3,086
|
|
|
|
1,364
|
|
|
|
1,722
|
|
|
|
|
|
|
|
|
|
Variable interest payments:(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 Loan Hedged
|
|
|
3,520
|
|
|
|
2,849
|
|
|
|
671
|
|
|
|
|
|
|
|
|
|
2013 Loan Unhedged
|
|
|
12,615
|
|
|
|
3,665
|
|
|
|
8,950
|
|
|
|
|
|
|
|
|
|
2015 Loan Unhedged
|
|
|
93,856
|
|
|
|
21,302
|
|
|
|
42,015
|
|
|
|
30,539
|
|
|
|
|
|
2017 Loan Unhedged
|
|
|
192,779
|
|
|
|
30,525
|
|
|
|
60,205
|
|
|
|
58,889
|
|
|
|
43,160
|
|
Interest rate swap agreements(5)
|
|
|
7,791
|
|
|
|
6,296
|
|
|
|
1,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
1,797,511
|
|
|
$
|
111,352
|
|
|
$
|
489,606
|
|
|
$
|
598,835
|
|
|
$
|
597,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
|
|
|
(1) |
|
Minimum payments have not been reduced by minimum sublease
rental income of $6.5 million due in the future under
noncancelable subleases. Note 14 of our consolidated
financial statements provides further detail on operating lease
obligations and obligations under noncancelable service
contracts. |
|
(2) |
|
Represents principal payments on our senior secured term loan
facilities. See Note 12 of our consolidated financial
statements for further detail. |
|
(3) |
|
Represents commitment fees for unused borrowings on our senior
secured revolving line of credit facility. See Note 12 of
our consolidated financial statements for further detail. |
|
(4) |
|
Our senior secured term loan facilities bear interest at
floating rates. Variable interest payments are shown assuming
the applicable LIBOR rates at December 31, 2010 remain
unchanged. See Note 12 of our consolidated financial
statements for further detail. |
|
(5) |
|
Represents fixed interest payments net of variable interest
received on our interest rate swap agreements. See Note 13
of our consolidated financial statements for further detail. |
As of December 31, 2010, we reflect a liability for
unrecognized tax benefits of $21.1 million, which we have
included in income taxes payable in the 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 December 31, 2010, we
did not adjust prices received from the independent third-party
pricing service. For certificates of deposit and treasury
securities, we utilize market-based inputs including observable
market interest rates that correspond to the remaining
maturities or next interest reset dates.
Critical
Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance
with GAAP, which require management to make estimates, judgments
and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. We
believe that of our critical accounting policies, the following
are noteworthy because they require management to make estimates
regarding matters that are uncertain and susceptible to change
where such change may result in a material adverse impact on our
financial position and reported financial results.
Revenue
Recognition
We record commissions received from mutual funds, annuity,
insurance, equity, fixed income, direct investment, option and
commodity transactions on a trade-date basis. Commissions also
include mutual fund and variable annuity trails, which are
recognized as a percentage of assets under management over the
period for which services are performed. Due to the significant
volume of mutual fund and variable annuity purchases and sales
transacted by financial advisors directly with product
manufacturers, management must estimate a portion of its upfront
commission and trail revenues for each accounting period for
which the proceeds have not yet been received. These estimates
are based on a number of factors including market levels, the
volume of transactions in prior
60
periods and cash receipts in the current period. We record
commissions payable based upon standard payout ratios for each
product as it accrues for commission revenue.
Certain advisors conduct their advisory business through
separate entities by establishing their own Registered
Investment Advisor (RIA) pursuant to the Investment
Advisers Act of 1940, rather than using our corporate registered
RIA. These stand-alone RIAs engage us for technology, clearing,
regulatory and custody services, as well as access to our
investment advisory platforms. The fee-based production
generated by the stand-alone RIA is earned by the advisor, and
accordingly not included in our advisory fee revenue. We charge
administrative fees based on the value of assets within these
advisory accounts, and classify such revenues as asset-based
fees and transaction and other fees.
Legal
Reserves
We record reserves for legal proceedings in accounts payable and
accrued liabilities in our consolidated statements of financial
condition. The determination of these reserve amounts requires
significant judgment on the part of management. We consider many
factors including, but not limited to, the amount of the claim,
the amount of the loss in the clients account, the basis
and validity of the claim, the possibility of wrongdoing on the
part of an advisor, likely insurance coverage, previous results
in similar cases, and legal precedents and case law. Each legal
proceeding is reviewed with counsel in each accounting period
and the reserve is adjusted as deemed appropriate by management.
Any change in the reserve amount is recorded as professional
services in our consolidated statements of operations.
Valuation of
Goodwill and Other Intangibles
We test goodwill for impairment at least annually, or whenever
indications of impairment exist. We test other intangible assets
whenever indications of impairment exist. Impairment exists when
the carrying amount of goodwill exceeds its implied fair value,
resulting in an impairment charge for the excess.
The value of intangible assets, including goodwill, could be
impacted by future adverse changes such as: (i) significant
declines in our operating results, (ii) a significant
decline in the valuation of comparable company stocks,
(iii) a further significant slowdown of the worldwide
economy or industry or (iv) any failure to meet the
performance projections included in our forecasts of future
operating results.
We perform an impairment analysis on our goodwill on an annual
basis on the first day of the fourth fiscal quarter (October 1).
In testing for a potential impairment of goodwill on
October 1, 2010, the estimated fair value of each of our
reporting units was significantly greater than its carrying
value, and therefore we concluded that no amount of goodwill was
impaired. At a reporting unit level, the estimated fair value
was, at a minimum, 2.5 times its carrying value.
The fair value of our reporting units was estimated using the
income approach methodology that includes the discounted cash
flow method, and the market approach methodology that includes
the use of market multiples. The discounted cash flows for each
reporting unit were based on discrete financial forecasts
developed by management for planning purposes and include
significant assumptions about revenue growth, operating margins,
discount rates and capital expenditures. Cash flows beyond the
discrete forecasts were estimated using a terminal value
calculation, which incorporated historical and forecasted
financial trends for each identified reporting unit and
considered long-term earnings growth for publicly traded peer
companies. Future cash flows were discounted to present value by
incorporating the present value techniques discussed in
Financial Accounting Standards Board Concepts Statement 7,
Using Cash Flow Information and Present Value in Accounting
Measurements.
61
In addition, publicly available information regarding peer
companies with comparable market capitalization was also
considered in assessing the reasonableness of cumulative fair
values of our reporting units estimated using the market
approach methodology. In our analysis, we developed appropriate
valuation multiples for each of our reporting units.
Specifically, we considered valuation multiples of our peer
companies including revenue, EBITDA, net income and after-tax
cash flows.
The income approach valuations included reporting unit cash flow
discount rates ranging from 11.9% to 16.3% and terminal growth
rates of 3.0%. Our discount rate represents our weighted average
cost of capital adjusted for company-specific risk premium. The
development of the weighted average cost of capital used in our
estimate of fair value considered current market conditions for
the equity-risk premium and risk-free interest rate, benchmark
capital structures for guideline companies with characteristics
similar to our reporting units, the size and industry of our
reporting units and risks related to the forecast of future
revenues and profitability of our reporting units. The
company-specific risk premium was reduced primarily due to lower
long-term growth and profitability assumptions associated with
the 2011 forecast. The weighted average cost of capital used in
the estimate of fair value in future periods may be impacted by
changes in market conditions (including those of market
participants), as well as the future performance of our
reporting units and is subject to change, based on changes in
specific facts and circumstances.
Significant management judgment is required in the forecasts of
future operating results that are used in the discounted cash
flow method of valuation. The estimates we have used are
consistent with the plans and estimates that we use to manage or
business. It is possible, however, that the plans may change and
estimates used may prove to be inaccurate. Changes in our
planned business operations such as unanticipated competition, a
loss of key personnel, the sale of a reporting unit or a
significant portion of a reporting unit or other unforeseen
developments could result in an impairment of our recorded
goodwill. Changes in forecasted operating results and other
assumptions could materially affect those estimates.
We review our property, equipment, capitalized software and
intangible assets, including goodwill, for indications of
impairment whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. Such events or
changes may include a deterioration in the business climate or a
significant adverse change in the extent or manner in which a
long-lived asset is being used. If the total of projected future
undiscounted cash flows is less than the carrying amount of an
asset, we may need to record an impairment loss based on the
excess of the carrying amount over the fair value of the assets.
We have concluded that no such indications of impairment of
goodwill and other intangibles exist as of December 31,
2010.
Income
Taxes
We estimate income tax expense based on the various
jurisdictions where we conduct business. We must then assess the
likelihood that the deferred tax assets will be realized. A
valuation allowance is established to the extent that it is
more-likely-than-not that such deferred tax assets will not be
realized. When we establish a valuation allowance or modify the
existing allowance in a certain reporting period, we generally
record a corresponding increase or decrease to the provision for
income taxes in the consolidated statements of operations. We
make significant judgments in determining the provision for
income taxes, the deferred tax assets and liabilities and any
valuation allowances recorded against the deferred tax asset.
Changes in the estimate of these taxes occur periodically due to
changes in the tax rates, changes in the business operations,
implementation of tax planning strategies, resolution with
taxing authorities of issues where we have previously taken
certain tax positions and newly enacted statutory, judicial and
regulatory guidance. These changes, when they occur, affect
accrued taxes and can be material to our operating results for
any particular reporting period.
Additionally, we account for uncertain tax positions in
accordance with GAAP. The application of income tax law is
inherently complex. We are required to make many subjective
assumptions and
62
judgments regarding our income tax exposures. Interpretations of
and guidance surrounding income tax laws and regulations change
over time. As such, changes in our subjective assumptions and
judgments can materially affect amounts recognized in our
consolidated financial statements.
Valuation and
Accounting for Financial Derivatives
We periodically use financial derivative instruments, such as
interest rate swap agreements, to protect us against changing
market prices or interest rates and the related impact to our
assets, liabilities, or cash flows. We also evaluate our
contracts and commitments for terms that qualify as embedded
derivatives. All derivatives are reported at their corresponding
fair value in our consolidated statements of financial condition.
Financial derivative instruments expected to be highly effective
hedges against changes in cash flows are designated as such upon
entering into the agreement. At each reporting date, we reassess
the effectiveness of the hedge to determine whether or not it
can continue to use hedge accounting. Under hedge accounting, we
record the increase or decrease in fair value of the derivative,
net of tax impact, as other comprehensive income or losses. If
the hedge is not determined to be a perfect hedge, yet still
considered highly effective, we will calculate the ineffective
portion and record the related change in its fair value as
additional interest income or expense in the consolidated
statements of operations. Amounts accumulated in other
comprehensive income are generally reclassified into earnings in
the same period or periods during which the hedged forecasted
transaction affects earnings.
Share-Based
Compensation
Certain employees, advisors, officers and directors who
contribute to our success participate in various stock option
plans. In addition, certain financial institutions participate
in a warrant plan. Stock options and warrants generally vest in
equal increments over a three to five-year period and expire on
the 10th anniversary following the date of grant.
We recognize share-based compensation expense related to
employee stock option awards in net income based on the
grant-date fair value over the requisite service period of the
individual grants, which generally equals the vesting period. We
account for stock options and warrants awarded to our advisors
and financial institutions based on the fair value of the award
at each interim reporting period. We record the increase in
price of the option or warrant as commission expense during such
period. If the value of our common stock increases over a given
period, this accounting treatment results in additional
commission expense.
As there are no observable market prices for identical or
similar instruments, we estimate fair value using a
Black-Scholes valuation model. We must make assumptions
regarding the number of share-based awards that will be
forfeited. The forfeiture assumption is ultimately adjusted to
the actual forfeiture rate. Therefore, changes in the forfeiture
assumptions do not impact the total amount of expense ultimately
recognized over the vesting period. Rather, different forfeiture
assumptions would only impact the timing of expense recognition
over the vesting period.
63
The following table presents the weighted average assumptions
used by us in calculating the fair value of our stock options
and warrants with the Black-Scholes valuation model for the
years ended December 31, 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Expected life (in years)
|
|
|
6.50
|
|
|
|
7.13
|
|
|
|
6.52
|
|
Expected stock price volatility
|
|
|
49.22
|
%
|
|
|
51.35
|
%
|
|
|
33.78
|
%
|
Expected dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized forfeiture rate
|
|
|
3.00
|
%
|
|
|
4.35
|
%
|
|
|
1.51
|
%
|
Fair value of options
|
|
$
|
17.43
|
|
|
$
|
12.30
|
|
|
$
|
9.96
|
|
Risk-free interest rate
|
|
|
2.70
|
%
|
|
|
2.93
|
%
|
|
|
2.73
|
%
|
The risk-free interest rates are based on the implied yield
available on U.S. Treasury constant maturities in effect at
the time of the grant with remaining terms equivalent to the
respective expected terms of the options. The dividend yield of
zero is based on the fact that we have no present intention to
pay cash dividends. In the future, as we gain historical data
for volatility of our stock and the actual term over which
employees hold our options, expected volatility and the expected
term may change, which could substantially change the grant-date
fair value of future awards of stock options and, ultimately,
compensation recorded on future grants. We estimate the expected
term for our employee option awards using the simplified method
in accordance with Staff Accounting Bulletin 110,
Certain Assumptions Used in Valuation Methods, because we
do not have sufficient relevant historical information to
develop reasonable expectations about future exercise patterns.
We estimate the expected term for stock options and warrants
awarded to our advisors using the contractual term. Expected
volatility is calculated based on companies of similar growth
and maturity and our peer group in the industry in which we do
business because we do not have sufficient historical volatility
data. We will continue to use peer group volatility information
until our historical volatility is relevant to measure expected
volatility for future grants.
We have assumed an annualized forfeiture rate for our stock
options and warrants based on a combined review of industry and
employee turnover data, as well as an analytical review
performed of historical pre-vesting forfeitures occurring over
the previous year. We record additional expense if the actual
forfeiture rate is lower than estimated and record a recovery of
prior expense if the actual forfeiture is higher than estimated.
The expected life was based on our historical stock option
activity. The risk-free interest rate was determined by
reference to the United States Treasury rates with the remaining
term approximating the expected life assumed at the date of
grant.
Recent Accounting
Pronouncements
Refer to Note 2 of our consolidated financial statements
for a discussion of recent accounting standards and
pronouncements.
|
|
Item 7A.
|
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
64
inventory by product type. Our activities to facilitate client
transactions generally involve
mutual fund activities, including dividend reinvestments. The
balances are based upon pending
client activities which are monitored by our broker dealer
support services department. Because
these positions arise from pending client transactions, there
are no specific trading or position
limits. Positions held to meet clearing deposit requirements
consist of U.S. government securities.
The amount of securities deposited depends upon the requirements
of the clearing organization. The
level of securities deposited is monitored by the settlement
area within our broker dealer support
services department. Our research department develops model
portfolios that are used by advisors in developing client
portfolios. We currently maintain 173 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 December 31, 2010, the fair value of our trading
securities owned were $9.3 million. Securities sold but not
yet purchased were $4.8 million at December 31, 2010.
See Note 5 of our consolidated financial statements for
information regarding the fair value of trading securities owned
and securities sold but not yet purchased associated with our
client facilitation activities. See Note 5 of our
consolidated financial statements for information regarding the
fair value of securities held to maturity.
We do not enter into contracts involving derivatives or other
similar financial instruments for trading or proprietary
purposes.
We also have market risk on the fees we earn that are based on
the market value of advisory and brokerage assets, assets on
which trail commissions are paid and assets eligible for sponsor
payments.
Interest Rate
Risk
We are exposed to risk associated with changes in interest
rates. As of December 31, 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 December 31, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
2013 Term Loan (Hedged)(1)
|
|
$
|
210,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
2013 Term Loan (Unhedged)(2)
|
|
|
104,739
|
|
|
|
104
|
|
|
|
259
|
|
|
|
518
|
|
|
|
1,035
|
|
2015 Term Loan (Unhedged)(3)
|
|
|
496,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 Term Loan (Unhedged)(3)
|
|
|
575,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable Rate Debt Outstanding
|
|
$
|
1,386,639
|
|
|
$
|
104
|
|
|
$
|
259
|
|
|
$
|
518
|
|
|
$
|
1,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3-month
LIBOR(4)
|
|
|
0.30
|
%
|
|
|
0.40
|
%
|
|
|
0.55
|
%
|
|
|
0.80
|
%
|
|
|
1.30
|
%
|
|
|
|
(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 |
65
|
|
|
|
|
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 December 31, 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
0.30% or 1.50%, plus an applicable interest rate margin. |
|
(4) |
|
Represents the three-month LIBOR rate at December 31, 2010. |
We offer our advisors and their clients two primary cash sweep
programs that are interest rate sensitive: our insured cash
programs and money market sweep vehicles involving multiple
money market fund providers. Our insured cash 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 insured cash programs, we earn a fee. Our fees
from the insured cash 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 insured cash 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 insured cash 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
December 2010 was 0.18%. A downward change of 10 basis
points in short-term interest rates, if accompanied by a
commensurate change in fees for our insured cash programs, could
result in a decrease of $12.2 million in income before
taxes on an annual basis (assuming that client balances at
December 31, 2010 remain unchanged). Assuming client
balances at December 31, 2010 do not change, each
25 basis point increase in short-term interest rates
between the current federal funds effective rate and
125 basis points, if accompanied by a commensurate change
in fees for our insured cash programs, could result in an
incremental increase of $14.9 million in income before
taxes on an annual basis, after consideration of amounts paid to
clients. 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 years ended December 31, 2010,
2009 and 2008. 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.
66
We are subject to concentration risk if we extend large loans to
or have large commitments with a single counterparty, borrower,
or group of similar counterparties or borrowers (e.g. in the
same industry). Receivables from and payables to clients and
stock borrowing and lending activities are conducted with a
large number of clients and counterparties and potential
concentration is carefully monitored. We seek to limit this risk
through careful review of the underlying business and the use of
limits established by senior management, taking into
consideration factors including the financial strength of the
counterparty, the size of the position or commitment, the
expected duration of the position or commitment and other
positions or commitments outstanding.
Operational
Risk
Operational risk generally refers to the risk of loss resulting
from our operations, including, but not limited to, improper or
unauthorized execution and processing of transactions,
deficiencies in our technology or financial operating systems
and inadequacies or breaches in our control processes. We
operate in diverse markets and are reliant on the ability of our
employees and systems to process a large number of transactions.
These risks are less direct and quantifiable than credit and
market risk, but managing them is critical, particularly in a
rapidly changing environment with increasing transaction
volumes. In the event of a breakdown or improper operation of
systems or improper action by employees or advisors, we could
suffer financial loss, regulatory sanctions and damage to our
reputation. Business continuity plans exist for critical
systems, and redundancies are built into the systems as deemed
appropriate. In order to mitigate and control operational risk,
we have developed and continue to enhance specific policies and
procedures that are designed to identify and manage operational
risk at appropriate levels throughout our organization and
within various departments. These control mechanisms attempt to
ensure that operational policies and procedures are being
followed and that our employees and advisors operate within
established corporate policies and limits.
Risk
Management
We have established various committees of the board of directors
to manage the risks associated with our business. Our Audit
Committee was established for the primary purpose of overseeing
(i) the integrity of our consolidated financial statements,
(ii) our compliance with legal and regulatory requirements
that may impact our consolidated financial statements or
financial operations, (iii) the independent auditors
qualifications and independence and (iv) the performance of
our independent auditor and internal audit function. Our
Compensation Committee was established for the primary purpose
of (i) overseeing our efforts to attract, retain and
motivate members of our senior management team in partnership
with the chief executive officer, (ii) to carry out the
boards overall responsibility relating to the
determination of compensation for all executive officers,
(iii) to oversee all other aspects of our compensation and
human resource policies and (iv) to oversee our management
resources, succession planning and management development
activities. We also have established a Risk Oversight Committee
comprised of a group of senior executives to oversee the
management of our business risks.
In addition to various committees, we have written policies and
procedures that govern the conduct of business by our advisors,
our employees, our relationship with clients and the terms and
conditions of our relationships with product manufacturers. Our
client and advisor policies address the extension of credit for
client accounts, data and physical security, compliance with
industry regulation and codes of ethics to govern employee and
advisor conduct among other matters.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
The Consolidated Financial Statements and Supplementary Data are
included as an annex to this Annual Report on
Form 10-K.
See the Index to Consolidated Financial Statements and
Supplementary Data on
page F-1.
67
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation of
Disclosure Controls and Procedures
Our Disclosure Committee, with the participation of our Chief
Executive Officer and Chief Financial Officer, evaluated the
effectiveness of our disclosure controls and procedures, as
defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended, as of the
end of the period covered by this report. Based on that
evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures as
of the end of the period covered by this report were effective.
Change in
Internal Control over Financial Reporting
There were no changes in our internal control over financial
reporting that occurred during the fourth quarter ended
December 31, 2010, that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
Managements
Annual Report on Internal Control Over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over our financial reporting. Internal
control over financial reporting is defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act as the process designed by, or under the
supervision of, our Chief Executive Officer and Chief Financial
Officer, and effected by our board of directors, management and
other personnel, to provide reasonable assurance regarding the
reliability of our financial reporting and the preparation of
our consolidated financial statements for external purposes in
accordance with generally accepted accounting principles.
Our internal control over financial reporting includes policies
and procedures that pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect transactions
and dispositions of assets; provide reasonable assurances that
transactions are recorded as necessary to permit preparation of
the consolidated financial statements in accordance with
accounting principles generally accepted in the United States,
and that receipts and expenditures are being made only in
accordance with authorizations of management and the directors
of the Company; and provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use
or disposition of the Companys assets that could have a
material effect on our consolidated financial statements.
As of December 31, 2010, management conducted an assessment
of the effectiveness of our internal control over financial
reporting based on the framework established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Based on this assessment, management has determined
that our internal control over financial reporting as of
December 31, 2010 was effective.
Deloitte & Touche LLP, our independent registered
public accounting firm, has issued an audit report appearing on
the following page on the effectiveness of our internal control
over financial reporting as of December 31, 2010.
68
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
LPL Investment Holdings Inc.
Boston, Massachusetts
We have audited the internal control over financial reporting of
LPL Investment Holdings Inc. and subsidiaries (the
Company) as of December 31, 2010, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Companys
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting,
included in the accompanying Managements Annual Report on
Internal Control Over Financial Reporting. Our responsibility is
to express an opinion on the Companys internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel 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. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2010, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements as of and for the year ended
December 31, 2010 of the Company and our report dated
March 9, 2011 expressed an unqualified opinion on those
financial statements.
/s/ Deloitte &
Touche LLP
Costa Mesa, California
March 9, 2011
69
|
|
Item 9B.
|
Other
Information
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
Other than the information relating to our executive officers
provided below, the information required to be furnished
pursuant to this item is incorporated by reference to the
Companys definitive proxy statement for the 2011 Annual
Meeting of Stockholders.
The following table provides certain information about each of
the Companys current executive officers as of the date
this Annual Report on
Form 10-K
has been filed with the SEC:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Mark S. Casady
|
|
|
50
|
|
|
Chief Executive Officer and Chairman of the Board
|
Esther M. Stearns
|
|
|
50
|
|
|
President and Chief Operating Officer
|
Robert J. Moore
|
|
|
49
|
|
|
Chief Financial Officer and Treasurer
|
William E. Dwyer
|
|
|
53
|
|
|
Managing Director, President National Sales and
Marketing
|
Denise M. Abood
|
|
|
49
|
|
|
Managing Director, Human Capital
|
Dan H. Arnold
|
|
|
46
|
|
|
Managing Director and Divisional President, Financial
Institution Services
|
Stephanie L. Brown
|
|
|
58
|
|
|
Managing Director, General Counsel and Secretary
|
Jonathan G. Eaton
|
|
|
52
|
|
|
Managing Director, Custom Clearing Services
|
Christopher F. Feeney
|
|
|
55
|
|
|
Managing Director, Chief Information Officer
|
Mark R. Helliker
|
|
|
47
|
|
|
Managing Director, Broker-Dealer Support Services
|
John J. McDermott
|
|
|
54
|
|
|
Managing Director, Chief Enterprise Risk Officer
|
|
|
|
|
|
|
|
Executive
Officers
Mark S.
Casady Chief Executive Officer and Chairman of the
Board
Mr. Casady is chairman of the board of directors and our
chief executive officer. He joined us in May 2002 as chief
operating officer, became our president in April 2003, and
became our chief executive officer and chairman in December
2005. Before joining our firm, Mr. Casady was managing
director, mutual fund group for Deutsche Asset Management,
Americas formerly Scudder Investments. He joined
Scudder in 1994 and held roles as managing director
Americas; head of global mutual fund group and head of defined
contribution services. He was also a member of the Scudder,
Stevens and Clark Board of Directors and Management Committee.
He is former chairman and a current board member of the Insured
Retirement Institute and serves on FINRAs board of
governors. Mr. Casady received his B.S. from Indiana
University and his M.B.A. from DePaul University.
Esther M.
Stearns President and Chief Operating
Officer
Ms. Stearns has been our president since March 2007 and our
chief operating officer since September 2004. She joined us in
July 1996 as chief information officer. Today, Ms. Stearns
is responsible for oversight of our Broker-Dealer Support
Services, Business Technology Services and Custom Clearing
Services business units, in addition to several Corporate Shared
Services areas, such as Corporate Communication, Human Capital,
Strategic Planning and Sponsor Relations. Prior to joining us,
she was vice president of information systems at Charles
Schwab & Co., Inc., where she worked for 14 years
in a variety of leadership roles. She received her B.A. from the
University of Chicago.
70
Robert J.
Moore Chief Financial Officer and
Treasurer
Mr. Moore joined us in September 2008 as chief financial
officer. He is responsible for formulating financial policy and
planning as well as ensuring the effectiveness of the financial
functions within our firm. He also has oversight of our research
and risk management functions. From
2006-2008,
Mr. Moore served as chief executive officer and chief
financial officer at ABN AMRO North America and LaSalle Bank
Corporation. Before this role, Mr. Moore worked for Diageo
PLC, Europe and Great Britain, in a number of finance management
positions, ultimately serving as chief financial officer.
Mr. Moore serves as an independent board member for Legal
and General Investment Management America. He holds a B.B.A. in
finance from the University of Texas, Austin and a M.M. in
finance, marketing and international business from Northwestern
University and is a Chartered Financial Analyst (CFA).
William E.
Dwyer Managing Director, President
National Sales and Marketing
Mr. Dwyer has served as managing director,
president National Sales and Marketing since
September 2009. He joined us in July 1992 and became managing
director, branch development in January 2004, managing director,
national sales in July 2005, and managing director, president of
Independent Advisor Services in February 2007. Mr. Dwyer is
responsible for the management, satisfaction, retention and
recruitment of our advisors. Mr. Dwyer serves as vice chair
of the Financial Services Institute Board of Directors. He is
also a member of the boards of directors of the Securities
Industry and Financial Markets Association and serves on its
Private Client Services Executive Committee. He received his
B.A. from Boston College.
Denise M.
Abood Managing Director, Human Capital
Ms. Abood has served as managing director since January
2008 and the leader of our Human Capital group since January
2007. In this role, she is responsible for several functions
critical to our firm, including organizational development and
training, human resources, employee recruiting, compensation and
benefits, real estate and facilities, payroll and mail services.
Ms. Abood was formerly chief financial officer for UVEST
(prior to our acquisition of UVEST) where she also led the UVEST
Mortgage Company. Prior to joining UVEST, from
1998-2002,
she held two roles at Wachovia Bank, initially as the chief
financial officer for capital markets services and then as head
of the technology business office. Ms. Abood holds a B.B.A.
from Wittenberg University.
Dan H.
Arnold Managing Director and Divisional President,
Financial Institution Services
Mr. Arnold serves as managing director and divisional
president of our Institution Services business since June 2007.
He is responsible for new business development and business
consulting, as well as for Insurance Associates Incorporated,
which provides insurance solutions for our firm. Mr. Arnold
joined our firm in January 2007 following our acquisition of
UVEST. Prior to joining us, Mr. Arnold worked at UVEST for
13 years, serving most recently as president and chief
operating officer. Mr. Arnold is a graduate of Auburn
University and holds an M.B.A. in finance from Georgia State
University.
Stephanie L.
Brown Managing Director, General Counsel and
Secretary
Ms. Brown joined us in August 1989 and has been responsible
for the Legal Department throughout her tenure. From 1989 to
2004, Ms. Brown was also responsible for our Compliance
organization. Ms. Brown is currently serving as a member of
FINRAs National Adjudicatory Councils Statutory
Disqualification Committee and also as a member of FINRAs
Independent Broker/Dealer and Membership Committees, the SIFMA
Private Client Legal Committee, and the IRI Government Relations
Committee. Ms Brown is also a member representative of the
Financial Services Roundtable as well as a member of the
Financial Services Roundtables Lawyers Council, the
Regulatory Oversight Committee, and the Securities Working
Group. Prior to joining us, Ms. Brown was an
71
associate attorney with the law firm of Kelley Drye &
Warren in Washington, D.C., specializing in corporate and
securities law. Ms. Brown received her B.A. cum laude
from Bryn Mawr College and her J.D. from the Catholic
University of America.
Jonathan G.
Eaton Managing Director, Custom Clearing
Services
Mr. Eaton joined us in June 1997 and became managing
director, Custom Clearing Services in January 2008. He is also
responsible for our Sponsor Relations Group and The Private
Trust Company, N.A. Prior to this position, Mr. Eaton
served as our executive vice president of product marketing.
Before joining us, Mr. Eaton spent 14 years at MFS
Investment Management. His positions at MFS included national
account management, corporate marketing, product development,
and market research. Mr. Eaton attended the University of
Maine.
Christopher F.
Feeney Managing Director, Chief Information
Officer
Mr. Feeney joined us in January 2008 as chief information
officer and managing director for the Business Technology
Services business unit. Mr. Feeney is responsible for
enhancing the technology offerings and support we provide to our
advisors and their clients. From
2005-2007,
Mr. Feeney was global managing director of wealth
management at Thomson Financial. Mr. Feeney was chief
executive officer of Telerate, Inc., from July 2003 until its
sale to Reuters in December 2004. He holds a B.A. in literature
from the State University of New York, Oneonta, and completed
the Securities Industry Institute at the Wharton School.
Mark R.
Helliker Managing Director, Broker-Dealer Support
Services
Mr. Helliker joined us in July 2008 as managing director of
Broker-Dealer Support Services. He is responsible for the
day-to-day
management of operations for advisors and new-advisor
transitions, as well as for enhancing the financial professional
experience. Prior to joining us, Mr. Helliker worked at
Charles Schwab for 10 years, most recently as senior vice
president of Charles Schwab Institutional. Mr. Helliker has
a B.A. in political science from the University of Portsmouth in
England and an M.B.A. in management from San Diego State
University.
John J.
McDermott Managing Director, Chief Enterprise Risk
Officer
Mr. McDermott joined us in July 2009 as managing director
and chief risk officer. In this role, he is focused on
optimizing resources dedicated to risk and compliance across our
firm, building consistency, and continuing to strengthen all
teams with a holistic and strategic approach. Prior to joining
us, Mr. McDermott worked for 35 years at Merrill
Lynch, where he held a series of leadership roles including
global head of compliance and internal audit. Mr. McDermott
has a B.A. from Wesleyan University and a J.D. from Rutgers
University.
The information required by Items 11, 12, 13, and 14 is
incorporated by reference from the Companys definitive
proxy statement for the 2011 Annual Meeting of Stockholders.
72
PART IV
|
|
Item 15.
|
Exhibits and
Financial Statement Schedules
|
(a) Consolidated Financial Statements
Our consolidated financial statements appearing on pages F-1
through F-35 are incorporated herein by reference.
(b) Exhibits
|
|
|
|
|
Exhibit No.
|
|
Description of
Exhibit
|
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation of LPL
Investment Holdings Inc., dated November 23, 2010. (1)
|
|
3
|
.2
|
|
Second Amended and Restated Bylaws of LPL Investment Holdings
Inc. (2)
|
|
4
|
.1
|
|
Stockholders Agreement, dated as of December 28, 2005,
among LPL Investment Holdings Inc., LPL Holdings, Inc. and other
stockholders party thereto. (3)
|
|
4
|
.2
|
|
First Amendment to Stockholders Agreement dated December
28, 2005, among LPL Investment Holdings Inc., LPL Holdings, Inc.
and other stockholders party thereto, dated November 23, 2010.*
|
|
4
|
.3
|
|
Stockholders Agreement among the Company and Hellman
& Friedman Capital Partners IV, L.Pl, Hellman &
Friedman Capital Partners V (Parallel), L.P., Hellman &
Friedman Capital Associates V, L.P. and TPG Partners IV,
L.P., dated November 23, 2010.*
|
|
4
|
.4
|
|
Fifth Amended and Restated LPL Investment Holdings Inc. 2000
Stock Bonus Plan. (4)
|
|
4
|
.5
|
|
Management Stockholders Agreement among the Company,
Stephanie L. Brown, Mark S. Casady, William E. Dwyer III,
Robert J. Moore, and Esther M. Stearns, dated November 23, 2010.*
|
|
10
|
.1
|
|
2005 Stock Option Plan for Incentive Stock Options. (5)
|
|
10
|
.2
|
|
2005 Stock Option Plan for Non-Qualified Stock Options. (5)
|
|
10
|
.3
|
|
Amended and Restated Executive Employment Agreement among Mark
S. Casady, the Company, LPL Holdings, Inc. and LPL Financial
Corporation, dated July 23, 2010. (2)
|
|
10
|
.4
|
|
Amended and Restated Executive Employment Agreement among Esther
M. Stearns, the Company, LPL Holdings, Inc. and LPL Financial
Corporation, dated July 23, 2010. (2)
|
|
10
|
.5
|
|
Amended and Restated Executive Employment Agreement among
William E. Dwyer III, the Company, LPL Holdings, Inc. and LPL
Financial Corporation, dated July 23, 2010. (2)
|
|
10
|
.6
|
|
Executive Employment Agreement between Dan H. Arnold and UVEST
Financial Services Group Inc. dated January 2, 2007. (6)
|
|
10
|
.7
|
|
Amendment dated September 28, 2009 to the Executive Employment
Agreement between Dan H. Arnold and UVEST Financial Services
Group Inc. dated January 2, 2007. (6)
|
|
10
|
.8
|
|
Amended and Restated Executive Employment Agreement among
Stephanie L. Brown, the Company, LPL Holdings, Inc. and LPL
Financial Corporation dated July 23, 2010. (2)
|
|
10
|
.9
|
|
Executive Employment Agreement between Jonathan G. Eaton and LPL
Holdings Inc., dated December 28, 2005. (5)
|
|
10
|
.10
|
|
Executive Employment Agreement among Robert J. Moore, the
Company, LPL Holdings, Inc. and LPL Financial Corporation, dated
July 23, 2010. (2)
|
|
10
|
.11
|
|
Form of Indemnification Agreement. (1)
|
|
10
|
.12
|
|
LPL Investment Holdings Inc. 2008 Stock Option Plan. (7)
|
|
10
|
.13
|
|
Form of LPL Investment Holdings Inc. Stock Option Agreement. (6)
|
|
10
|
.14
|
|
LPL Investment Holdings Inc. 2008 Nonqualified Deferred
Compensation Plan. (8)
|
|
10
|
.15
|
|
LPL Investment Holdings Inc. Advisor Incentive Plan. (9)
|
|
10
|
.16
|
|
LPL Investment Holdings Inc. Financial Institution Incentive
Plan. (6)
|
|
10
|
.17
|
|
LPL Investment Holdings Inc. and Affiliates Corporate Executive
Bonus Plan. (10)
|
73
|
|
|
|
|
Exhibit No.
|
|
Description of
Exhibit
|
|
|
10
|
.18
|
|
Thomson Transaction Services Master Subscription Agreement dated
as of January 5, 2009 between LPL Financial Corporation and
Thomson Financial LLC. (11)
|
|
10
|
.19
|
|
Third Amended and Restated Credit Agreement, dated as of May 24,
2010, by and among LPL Investment Holdings, Inc., LPL Holdings,
Inc., the several lenders from time to time party thereto,
Morgan Stanley Senior Funding, Inc., as Administrative Agent and
Morgan Stanley & Co., as Collateral Agent. (12)
|
|
10
|
.20
|
|
LPL Investment Holdings Inc. 2010 Omnibus Equity Incentive Plan.
(1)
|
|
10
|
.21
|
|
Form of Senior Executive Stock Option Award granted under the
LPL Investment Holdings Inc. 2010 Omnibus Equity Incentive Plan.
(13)
|
|
10
|
.22
|
|
Form of Senior Management Stock Option Award granted under the
LPL Investment Holdings Inc. 2010 Omnibus Equity Incentive Plan.
(13)
|
|
10
|
.23
|
|
LPL Financial LLC Executive Severance Plan, effective as of
November 23, 2010.*
|
|
10
|
.24
|
|
Relocation Bonus Agreement between Mark R. Helliker and LPL
Financial LLC, dated January 25, 2011.*
|
|
21
|
.1
|
|
List of Subsidiaries of LPL Investment Holdings Inc.*
|
|
23
|
.1
|
|
Consent of Deloitte & Touche LLP, independent registered
public accounting firm.*
|
|
31
|
.1
|
|
Certification of the Chief Executive Officer pursuant to Rule
13a-14(a).*
|
|
31
|
.2
|
|
Certification of the Chief Financial Officer pursuant to Rule
13a-14(a).*
|
|
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.*
|
|
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.*
|
|
|
|
* |
|
Filed herewith. |
|
|
|
Confidential treatment requested as to certain portions, which
portions have been omitted and filed separately with the
Securities and Exchange Commission. |
|
(1) |
|
Incorporated by reference to the Amendment No. 2 to the
Registration Statement on
Form S-1
filed on July 9, 2010. |
|
(2) |
|
Incorporated by reference to current report on
Form 8-K
filed on July 23, 2010. |
|
(3) |
|
Incorporated by reference to Amendment No. 1 to the
Registration Statement on Form 10 filed on July 10,
2007. |
|
(4) |
|
Incorporated by reference to the
Form 8-K
filed on December 18, 2008. |
|
(5) |
|
Incorporated by reference to the Registration Statement on
Form 10 filed on April 30, 2007. |
|
(6) |
|
Incorporated by reference to the Registration Statement on
Form S-1
filed on June 4, 2010. |
|
(7) |
|
Incorporated by reference to the
Form 8-K
filed on February 21, 2008. |
|
(8) |
|
Incorporated by reference to the
Form 8-K
filed on November 25, 2008. |
|
(9) |
|
Incorporated by reference to the
Form S-8
on June 5, 2008. |
|
(10) |
|
Incorporated by reference to the Schedule 14A filed on
April 27, 2010. |
|
(11) |
|
Incorporated by reference to Amendment No. 2 to the
Registration Statement on
Form S-1
filed on June 22, 2010. |
|
(12) |
|
Incorporated by reference to the
Form 8-K
filed on May 28, 2010. |
|
(13) |
|
Incorporated by reference to Amendment No. 4 to the
Registration Statement on
Form S-1
filed on November 3, 2010. |
74
SIGNATURE
Pursuant to the requirements of Section 12 of the
Securities Exchange Act of 1934, the registrant has duly caused
this Annual Report on
Form 10-K
to be signed on its behalf by the undersigned, thereunto duly
authorized.
LPL Investment Holdings Inc.
Mark S. Casady
Chief Executive Officer and Chairman
Dated: March 9, 2011
Pursuant to the requirements of the Securities and Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Mark
S. Casady
Mark
S. Casady
|
|
Chief Executive Officer and Chairman
|
|
March 9, 2011
|
|
|
|
|
|
/s/ Robert
J. Moore
Robert
J. Moore
|
|
Chief Financial Officer
|
|
March 9, 2011
|
|
|
|
|
|
/s/ Thomas
D. Lux
Thomas
D. Lux
|
|
Chief Accounting Officer
|
|
March 9, 2011
|
|
|
|
|
|
/s/ Richard
W. Boyce
Richard
W. Boyce
|
|
Director
|
|
March 9, 2011
|
|
|
|
|
|
/s/ John
J. Brennan
John
J. Brennan
|
|
Director
|
|
March 9, 2011
|
|
|
|
|
|
/s/ James
S. Putnam
James
S. Putnam
|
|
Director, Vice-Chairman
|
|
March 9, 2011
|
|
|
|
|
|
/s/ Erik
D. Ragatz
Erik
D. Ragatz
|
|
Director
|
|
March 9, 2011
|
|
|
|
|
|
/s/ James
S. Riepe
James
S. Riepe
|
|
Director
|
|
March 9, 2011
|
|
|
|
|
|
/s/ Richard
P. Schifter
Richard
P. Schifter
|
|
Director
|
|
March 9, 2011
|
75
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Jeffrey
E. Stiefler
Jeffrey
E. Stiefler
|
|
Director
|
|
March 9, 2011
|
|
|
|
|
|
/s/ Allen
R. Thorpe
Allen
R. Thorpe
|
|
Director
|
|
March 9, 2011
|
76
|
|
|
|
|
Exhibit No.
|
|
Description of
Exhibit
|
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation of LPL
Investment Holdings Inc., dated November 23, 2010. (1)
|
|
3
|
.2
|
|
Second Amended and Restated Bylaws of LPL Investment Holdings
Inc. (2)
|
|
4
|
.1
|
|
Stockholders Agreement, dated as of December 28, 2005,
among LPL Investment Holdings Inc., LPL Holdings, Inc. and other
stockholders party thereto. (3)
|
|
4
|
.2
|
|
First Amendment to Stockholders Agreement dated December
28, 2005, among LPL Investment Holdings Inc., LPL Holdings, Inc.
and other stockholders party thereto, dated November 23, 2010.*
|
|
4
|
.3
|
|
Stockholders Agreement among the Company and Hellman
& Friedman Capital Partners IV, L.Pl, Hellman &
Friedman Capital Partners V (Parallel), L.P., Hellman &
Friedman Capital Associates V, L.P. and TPG Partners IV,
L.P., dated November 23, 2010.*
|
|
4
|
.4
|
|
Fifth Amended and Restated LPL Investment Holdings Inc. 2000
Stock Bonus Plan. (4)
|
|
4
|
.5
|
|
Management Stockholders Agreement among the Company,
Stephanie L. Brown, Mark S. Casady, William E. Dwyer III, Robert
J. Moore, and Esther M. Stearns, dated November 23, 2010.*
|
|
10
|
.1
|
|
2005 Stock Option Plan for Incentive Stock Options. (5)
|
|
10
|
.2
|
|
2005 Stock Option Plan for Non-Qualified Stock Options. (5)
|
|
10
|
.3
|
|
Amended and Restated Executive Employment Agreement among Mark
S. Casady, the Company, LPL Holdings, Inc. and LPL Financial
Corporation, dated July 23, 2010. (2)
|
|
10
|
.4
|
|
Amended and Restated Executive Employment Agreement among Esther
M. Stearns, the Company, LPL Holdings, Inc. and LPL Financial
Corporation, dated July 23, 2010. (2)
|
|
10
|
.5
|
|
Amended and Restated Executive Employment Agreement among
William E. Dwyer III, the Company, LPL Holdings, Inc. and LPL
Financial Corporation, dated July 23, 2010. (2)
|
|
10
|
.6
|
|
Executive Employment Agreement between Dan H. Arnold and UVEST
Financial Services Group Inc. dated January 2, 2007. (6)
|
|
10
|
.7
|
|
Amendment dated September 28, 2009 to the Executive Employment
Agreement between Dan H. Arnold and UVEST Financial Services
Group Inc. dated January 2, 2007. (6)
|
|
10
|
.8
|
|
Amended and Restated Executive Employment Agreement among
Stephanie L. Brown, the Company, LPL Holdings, Inc. and LPL
Financial Corporation dated July 23, 2010. (2)
|
|
10
|
.9
|
|
Executive Employment Agreement between Jonathan G. Eaton and LPL
Holdings Inc., dated December 28, 2005. (5)
|
|
10
|
.10
|
|
Executive Employment Agreement among Robert J. Moore, the
Company, LPL Holdings, Inc. and LPL Financial Corporation, dated
July 23, 2010. (2)
|
|
10
|
.11
|
|
Form of Indemnification Agreement. (1)
|
|
10
|
.12
|
|
LPL Investment Holdings Inc. 2008 Stock Option Plan. (7)
|
|
10
|
.13
|
|
Form of LPL Investment Holdings Inc. Stock Option Agreement. (6)
|
|
10
|
.14
|
|
LPL Investment Holdings Inc. 2008 Nonqualified Deferred
Compensation Plan. (8)
|
|
10
|
.15
|
|
LPL Investment Holdings Inc. Advisor Incentive Plan. (9)
|
|
10
|
.16
|
|
LPL Investment Holdings Inc. Financial Institution Incentive
Plan. (6)
|
|
10
|
.17
|
|
LPL Investment Holdings Inc. and Affiliates Corporate Executive
Bonus Plan. (10)
|
|
10
|
.18
|
|
Thomson Transaction Services Master Subscription Agreement dated
as of January 5, 2009 between LPL Financial Corporation and
Thomson Financial LLC. (11)
|
|
10
|
.19
|
|
Third Amended and Restated Credit Agreement, dated as of May 24,
2010, by and among LPL Investment Holdings, Inc., LPL Holdings,
Inc., the several lenders from time to time party thereto,
Morgan Stanley Senior Funding, Inc., as Administrative Agent and
Morgan Stanley & Co., as Collateral Agent. (12)
|
|
10
|
.20
|
|
LPL Investment Holdings Inc. 2010 Omnibus Equity Incentive Plan.
(1)
|
|
10
|
.21
|
|
Form of Senior Executive Stock Option Award granted under the
LPL Investment Holdings Inc. 2010 Omnibus Equity Incentive Plan.
(13)
|
77
|
|
|
|
|
Exhibit No.
|
|
Description of
Exhibit
|
|
|
10
|
.22
|
|
Form of Senior Management Stock Option Award granted under the
LPL Investment Holdings Inc. 2010 Omnibus Equity Incentive Plan.
(13)
|
|
10
|
.23
|
|
LPL Financial LLC Executive Severance Plan, effective as of
November 23, 2010.*
|
|
10
|
.24
|
|
Relocation Bonus Agreement between Mark R. Helliker and LPL
Financial LLC, dated January 25, 2011.*
|
|
21
|
.1
|
|
List of Subsidiaries of LPL Investment Holdings Inc.*
|
|
23
|
.1
|
|
Consent of Deloitte & Touche LLP, independent registered
public accounting firm.*
|
|
31
|
.1
|
|
Certification of the Chief Executive Officer pursuant to Rule
13a-14(a).*
|
|
31
|
.2
|
|
Certification of the Chief Financial Officer pursuant to Rule
13a-14(a).*
|
|
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.*
|
|
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.*
|
|
|
|
* |
|
Filed herewith. |
|
|
|
Confidential treatment requested as to certain portions, which
portions have been omitted and filed separately with the
Securities and Exchange Commission. |
|
(1) |
|
Incorporated by reference to the Amendment No. 2 to the
Registration Statement on
Form S-1
filed on July 9, 2010. |
|
(2) |
|
Incorporated by reference to current report on
Form 8-K
filed on July 23, 2010. |
|
(3) |
|
Incorporated by reference to Amendment No. 1 to the
Registration Statement on Form 10 filed on July 10,
2007. |
|
(4) |
|
Incorporated by reference to the
Form 8-K
filed on December 18, 2008. |
|
(5) |
|
Incorporated by reference to the Registration Statement on
Form 10 filed on April 30, 2007. |
|
(6) |
|
Incorporated by reference to the Registration Statement on
Form S-1
filed on June 4, 2010. |
|
(7) |
|
Incorporated by reference to the
Form 8-K
filed on February 21, 2008. |
|
(8) |
|
Incorporated by reference to the
Form 8-K
filed on November 25, 2008. |
|
(9) |
|
Incorporated by reference to the
Form S-8
on June 5, 2008. |
|
(10) |
|
Incorporated by reference to the Schedule 14A filed on
April 27, 2010. |
|
(11) |
|
Incorporated by reference to Amendment No. 2 to the
Registration Statement on
Form S-1
filed on June 22, 2010. |
|
(12) |
|
Incorporated by reference to the
Form 8-K
filed on May 28, 2010. |
|
(13) |
|
Incorporated by reference to Amendment No. 4 to the
Registration Statement on
Form S-1
filed on November 3, 2010. |
78
LPL INVESTMENT
HOLDINGS INC.
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
The following consolidated financial statements of LPL
Investment Holdings Inc. are included in response to Item 8:
|
|
|
|
|
|
|
Page
|
|
Consolidated Financial Statements
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-8
|
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
LPL Investment Holdings Inc.
Boston, Massachusetts
We have audited the accompanying consolidated statements of
financial condition of LPL Investment Holdings Inc., and
subsidiaries (the Company) as of December 31,
2010 and 2009, and the related consolidated statements of
operations, stockholders equity, and cash flows for each
of the three years in the period ended December 31, 2010.
These consolidated financial statements are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of LPL
Investment Holdings Inc. and subsidiaries as of
December 31, 2010 and 2009, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2010, in conformity with
accounting principles generally accepted in the
United States of America.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
December 31, 2010, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 9, 2011 expressed an
unqualified opinion on the Companys internal control over
financial reporting.
/s/ Deloitte &
Touche LLP
Costa Mesa, California
March 9, 2011
F-2
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Consolidated
Statements of Operations
For the Years
Ended December 31, 2010, 2009 and 2008
(Dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
$
|
1,620,811
|
|
|
$
|
1,477,655
|
|
|
$
|
1,640,218
|
|
|
|
|
|
Advisory fees
|
|
|
860,227
|
|
|
|
704,139
|
|
|
|
830,555
|
|
|
|
|
|
Asset-based fees
|
|
|
317,505
|
|
|
|
272,893
|
|
|
|
352,293
|
|
|
|
|
|
Transaction and other fees
|
|
|
274,148
|
|
|
|
255,574
|
|
|
|
240,486
|
|
|
|
|
|
Interest income, net of interest expense
|
|
|
19,807
|
|
|
|
20,545
|
|
|
|
33,684
|
|
|
|
|
|
Other
|
|
|
20,988
|
|
|
|
18,699
|
|
|
|
19,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
3,113,486
|
|
|
|
2,749,505
|
|
|
|
3,116,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions and advisory fees
|
|
|
2,362,910
|
|
|
|
1,872,478
|
|
|
|
2,132,050
|
|
|
|
|
|
Compensation and benefits
|
|
|
308,656
|
|
|
|
270,436
|
|
|
|
343,171
|
|
|
|
|
|
Depreciation and amortization
|
|
|
86,037
|
|
|
|
108,296
|
|
|
|
100,462
|
|
|
|
|
|
Promotional
|
|
|
69,191
|
|
|
|
61,451
|
|
|
|
99,707
|
|
|
|
|
|
Occupancy and equipment
|
|
|
50,159
|
|
|
|
50,475
|
|
|
|
58,752
|
|
|
|
|
|
Professional services
|
|
|
39,521
|
|
|
|
38,071
|
|
|
|
31,492
|
|
|
|
|
|
Brokerage, clearing and exchange
|
|
|
34,625
|
|
|
|
32,101
|
|
|
|
30,998
|
|
|
|
|
|
Communications and data processing
|
|
|
34,372
|
|
|
|
36,194
|
|
|
|
39,967
|
|
|
|
|
|
Regulatory fees and expenses
|
|
|
26,143
|
|
|
|
23,217
|
|
|
|
21,747
|
|
|
|
|
|
Restructuring charges
|
|
|
13,922
|
|
|
|
58,695
|
|
|
|
14,966
|
|
|
|
|
|
Travel and entertainment
|
|
|
13,629
|
|
|
|
9,008
|
|
|
|
14,782
|
|
|
|
|
|
Other
|
|
|
34,826
|
|
|
|
15,294
|
|
|
|
17,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
3,073,991
|
|
|
|
2,575,716
|
|
|
|
2,905,652
|
|
|
|
|
|
Interest expense from senior credit facilities, subordinated
notes and revolving line of credit
|
|
|
90,407
|
|
|
|
100,922
|
|
|
|
115,558
|
|
|
|
|
|
Loss on extinguishment of debt
|
|
|
37,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gain) loss on equity method investment
|
|
|
(42
|
)
|
|
|
300
|
|
|
|
2,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
3,202,335
|
|
|
|
2,676,938
|
|
|
|
3,023,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS) INCOME BEFORE (BENEFIT FROM) PROVISION FOR INCOME TAXES
|
|
|
(88,849
|
)
|
|
|
72,567
|
|
|
|
92,765
|
|
|
|
|
|
(BENEFIT FROM) PROVISION FOR INCOME TAXES
|
|
|
(31,987
|
)
|
|
|
25,047
|
|
|
|
47,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (LOSS) INCOME
|
|
$
|
(56,862
|
)
|
|
$
|
47,520
|
|
|
$
|
45,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS) EARNINGS PER SHARE (Note 16):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.64
|
)
|
|
$
|
0.54
|
|
|
$
|
0.53
|
|
|
|
|
|
Diluted
|
|
$
|
(0.64
|
)
|
|
$
|
0.47
|
|
|
$
|
0.45
|
|
|
|
|
|
See notes to consolidated financial statements.
F-3
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Consolidated
Statements of Financial
Condition
As of
December 31, 2010 and 2009
(Dollars in thousands, except par value)
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
419,208
|
|
|
$
|
378,594
|
|
Cash and securities segregated under federal and other
regulations
|
|
|
373,634
|
|
|
|
288,608
|
|
Receivables from:
|
|
|
|
|
|
|
|
|
Clients, net of allowance of $655 at December 31, 2010 and
$792 at December 31, 2009
|
|
|
271,051
|
|
|
|
257,529
|
|
Product sponsors, broker-dealers and clearing organizations
|
|
|
203,332
|
|
|
|
171,900
|
|
Others, net of allowances of $6,796 at December 31, 2010
and $6,159 at December 31, 2009
|
|
|
169,391
|
|
|
|
139,317
|
|
Securities owned:
|
|
|
|
|
|
|
|
|
Trading
|
|
|
9,259
|
|
|
|
15,361
|
|
Held-to-maturity
|
|
|
9,563
|
|
|
|
10,454
|
|
Securities borrowed
|
|
|
8,391
|
|
|
|
4,950
|
|
Income taxes receivable
|
|
|
144,041
|
|
|
|
|
|
Fixed assets, net of accumulated depreciation and amortization
of $276,501 at December 31, 2010 and $239,868 at
December 31, 2009
|
|
|
78,671
|
|
|
|
101,584
|
|
Debt issuance costs, net of accumulated amortization of $14,106
at December 31, 2010 and $15,724 at December 31, 2009
|
|
|
23,711
|
|
|
|
16,542
|
|
Goodwill
|
|
|
1,293,366
|
|
|
|
1,293,366
|
|
Intangible assets, net of accumulated amortization of $172,726
at December 31, 2010 and $136,177 at December 31, 2009
|
|
|
560,077
|
|
|
|
597,083
|
|
Other assets
|
|
|
82,472
|
|
|
|
61,648
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,646,167
|
|
|
$
|
3,336,936
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
LIABILITIES:
|
Drafts payable
|
|
$
|
182,489
|
|
|
$
|
125,767
|
|
Payables to clients
|
|
|
383,289
|
|
|
|
493,943
|
|
Payables to broker-dealers and clearing organizations
|
|
|
39,070
|
|
|
|
18,217
|
|
Accrued commissions and advisory fees payable
|
|
|
130,408
|
|
|
|
110,040
|
|
Accounts payable and accrued liabilities
|
|
|
154,586
|
|
|
|
129,898
|
|
Income taxes payable
|
|
|
|
|
|
|
24,226
|
|
Unearned revenue
|
|
|
53,618
|
|
|
|
45,844
|
|
Interest rate swaps
|
|
|
7,281
|
|
|
|
17,292
|
|
Securities sold but not yet purchased at fair value
|
|
|
4,821
|
|
|
|
4,003
|
|
Senior credit facilities and subordinated notes
|
|
|
1,386,639
|
|
|
|
1,369,223
|
|
Deferred income taxes net
|
|
|
130,211
|
|
|
|
147,608
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,472,412
|
|
|
|
2,486,061
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
Common stock, $.001 par value; 600,000,000 shares
authorized; 108,714,757 shares issued and outstanding at
December 31, 2010, and 94,214,762 shares issued and
outstanding at December 31, 2009 of which 7,423,973 are
restricted
|
|
|
109
|
|
|
|
87
|
|
Additional paid-in capital
|
|
|
1,051,722
|
|
|
|
679,277
|
|
Stockholder loans
|
|
|
|
|
|
|
(499
|
)
|
Accumulated other comprehensive loss
|
|
|
(4,496
|
)
|
|
|
(11,272
|
)
|
Retained earnings
|
|
|
126,420
|
|
|
|
183,282
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,173,755
|
|
|
|
850,875
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
3,646,167
|
|
|
$
|
3,336,936
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-4
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Consolidated
Statements of Stockholders Equity
For the Years
Ended December 31, 2010, 2009 and 2008
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Stockholder
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Loans
|
|
|
Loss
|
|
|
Earnings
|
|
|
Equity
|
|
|
BALANCE December 31, 2007
|
|
|
86,250
|
|
|
$
|
86
|
|
|
$
|
664,568
|
|
|
$
|
(1,242
|
)
|
|
$
|
(6,512
|
)
|
|
$
|
90,266
|
|
|
$
|
747,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,496
|
|
|
|
45,496
|
|
Unrealized loss on interest rate swaps, net of tax benefit of
$5,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,986
|
)
|
|
|
|
|
|
|
(8,986
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,510
|
|
Stockholder loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
306
|
|
|
|
|
|
|
|
|
|
|
|
306
|
|
Excess tax benefits from stock options exercised
|
|
|
|
|
|
|
|
|
|
|
668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
668
|
|
Exercise of stock options
|
|
|
286
|
|
|
|
1
|
|
|
|
585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
586
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
4,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,859
|
|
Issuance of restricted stock awards
|
|
|
7,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
144
|
|
|
|
|
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
Repurchase of common stock
|
|
|
(136
|
)
|
|
|
|
|
|
|
(3,783
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,783
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE December 31, 2008
|
|
|
93,968
|
|
|
$
|
87
|
|
|
$
|
670,897
|
|
|
$
|
(936
|
)
|
|
$
|
(15,498
|
)
|
|
$
|
135,762
|
|
|
$
|
790,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,520
|
|
|
|
47,520
|
|
Unrealized gain on interest rate swaps, net of tax expense of
$3,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,226
|
|
|
|
|
|
|
|
4,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,746
|
|
Stockholder loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
437
|
|
|
|
|
|
|
|
|
|
|
|
437
|
|
Exercise of stock options
|
|
|
257
|
|
|
|
|
|
|
|
290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
290
|
|
Excess tax benefits from stock options exercised
|
|
|
|
|
|
|
|
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
8,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,124
|
|
Repurchase of common stock
|
|
|
(10
|
)
|
|
|
|
|
|
|
(181
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(181
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE December 31, 2009
|
|
|
94,215
|
|
|
$
|
87
|
|
|
$
|
679,277
|
|
|
$
|
(499
|
)
|
|
$
|
(11,272
|
)
|
|
$
|
183,282
|
|
|
$
|
850,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56,862
|
)
|
|
|
(56,862
|
)
|
Unrealized gain on interest rate swaps, net of tax expense of
$3,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,776
|
|
|
|
|
|
|
|
6,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50,086
|
)
|
Stockholder loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
499
|
|
|
|
|
|
|
|
|
|
|
|
499
|
|
Revocation of restricted stock awards
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options and warrants
|
|
|
13,039
|
|
|
|
13
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101
|
|
Release on the restriction of stock awards
|
|
|
|
|
|
|
7
|
|
|
|
221,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
221,982
|
|
Excess tax benefits from share-based compensation
|
|
|
|
|
|
|
|
|
|
|
93,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93,445
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
15,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,137
|
|
Issuance of common stock
|
|
|
1,486
|
|
|
|
2
|
|
|
|
41,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE December 31, 2010
|
|
|
108,715
|
|
|
$
|
109
|
|
|
$
|
1,051,722
|
|
|
$
|
|
|
|
$
|
(4,496
|
)
|
|
$
|
126,420
|
|
|
$
|
1,173,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-5
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
For the Years
Ended December 31, 2010, 2009 and 2008
(Dollars in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(56,862
|
)
|
|
$
|
47,520
|
|
|
$
|
45,496
|
|
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits received from retention plans
|
|
|
|
|
|
|
|
|
|
|
4,347
|
|
Depreciation and amortization
|
|
|
86,037
|
|
|
|
108,296
|
|
|
|
100,462
|
|
Amortization of debt issuance costs
|
|
|
4,896
|
|
|
|
3,757
|
|
|
|
3,742
|
|
Impairment of fixed assets
|
|
|
840
|
|
|
|
1,288
|
|
|
|
|
|
Loss on disposal of fixed assets
|
|
|
160
|
|
|
|
329
|
|
|
|
47
|
|
Share-based compensation
|
|
|
237,119
|
|
|
|
8,124
|
|
|
|
4,859
|
|
Excess tax benefits related to share-based compensation
|
|
|
(93,445
|
)
|
|
|
(147
|
)
|
|
|
(668
|
)
|
Provision for bad debts
|
|
|
1,621
|
|
|
|
3,319
|
|
|
|
3,471
|
|
Deferred income tax provision
|
|
|
(21,619
|
)
|
|
|
(41,460
|
)
|
|
|
(26,138
|
)
|
Loss on extinguishment of debt
|
|
|
37,979
|
|
|
|
|
|
|
|
|
|
(Gain) loss on equity method investment
|
|
|
(42
|
)
|
|
|
300
|
|
|
|
2,374
|
|
Impairment of intangible assets
|
|
|
|
|
|
|
18,636
|
|
|
|
|
|
Lease abandonment
|
|
|
5,383
|
|
|
|
6,612
|
|
|
|
|
|
Loan forgiveness
|
|
|
4,359
|
|
|
|
2,072
|
|
|
|
|
|
Other
|
|
|
(118
|
)
|
|
|
(647
|
)
|
|
|
1,815
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and securities segregated under federal and other
regulations
|
|
|
(85,026
|
)
|
|
|
52,967
|
|
|
|
(145,764
|
)
|
Receivables from clients
|
|
|
(13,522
|
)
|
|
|
38,268
|
|
|
|
114,833
|
|
Receivables from product sponsors, broker-dealers and clearing
organizations
|
|
|
(31,432
|
)
|
|
|
59,500
|
|
|
|
(71,247
|
)
|
Receivables from others
|
|
|
(35,546
|
)
|
|
|
(50,937
|
)
|
|
|
423
|
|
Securities owned
|
|
|
6,297
|
|
|
|
(3,832
|
)
|
|
|
2,542
|
|
Securities borrowed
|
|
|
(3,441
|
)
|
|
|
(4,346
|
)
|
|
|
8,434
|
|
Other assets
|
|
|
(3,877
|
)
|
|
|
(8,061
|
)
|
|
|
(6,687
|
)
|
Drafts payable
|
|
|
56,722
|
|
|
|
(28,664
|
)
|
|
|
27,287
|
|
Payables to clients
|
|
|
(110,654
|
)
|
|
|
30,932
|
|
|
|
56,334
|
|
Payables to broker-dealers and clearing organizations
|
|
|
20,853
|
|
|
|
(3,517
|
)
|
|
|
(26,191
|
)
|
Accrued commissions and advisory fees payable
|
|
|
20,368
|
|
|
|
9,713
|
|
|
|
(26,257
|
)
|
Accounts payable and accrued liabilities
|
|
|
15,279
|
|
|
|
(236
|
)
|
|
|
26,628
|
|
Income taxes receivable/payable
|
|
|
(73,835
|
)
|
|
|
12,092
|
|
|
|
2,301
|
|
Unearned revenue
|
|
|
7,774
|
|
|
|
9,186
|
|
|
|
(4,239
|
)
|
Securities sold but not yet purchased
|
|
|
818
|
|
|
|
93
|
|
|
|
(8,927
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(22,914
|
)
|
|
|
271,157
|
|
|
|
89,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(23,095
|
)
|
|
|
(8,313
|
)
|
|
|
(62,812
|
)
|
Proceeds from disposal of fixed assets
|
|
|
|
|
|
|
200
|
|
|
|
|
|
Purchase of securities classified as
held-to-maturity
|
|
|
(5,392
|
)
|
|
|
(3,746
|
)
|
|
|
(7,732
|
)
|
F-6
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows (Continued)
(Dollars in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Proceeds from maturity of securities classified as
held-to-maturity
|
|
|
6,200
|
|
|
|
3,700
|
|
|
|
7,600
|
|
Proceeds from the sale of equity investment
|
|
|
|
|
|
|
31
|
|
|
|
|
|
Deposits of restricted cash
|
|
|
(24,121
|
)
|
|
|
(12,759
|
)
|
|
|
|
|
Release of restricted cash
|
|
|
7,216
|
|
|
|
7,163
|
|
|
|
|
|
Acquisitions, net of existing cash balance
|
|
|
|
|
|
|
|
|
|
|
(13,258
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(39,192
|
)
|
|
|
(13,724
|
)
|
|
|
(76,202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (repayment of) proceeds from revolving line of credit
|
|
|
|
|
|
|
(90,000
|
)
|
|
|
25,000
|
|
Repayment of senior credit facilities
|
|
|
(12,584
|
)
|
|
|
(8,424
|
)
|
|
|
(8,424
|
)
|
Proceeds from senior credit facilities
|
|
|
566,700
|
|
|
|
|
|
|
|
|
|
Redemption of subordinated notes
|
|
|
(579,563
|
)
|
|
|
|
|
|
|
|
|
Payment of debt amendment costs
|
|
|
(7,181
|
)
|
|
|
(372
|
)
|
|
|
|
|
Excess tax benefits related to share-based compensation
|
|
|
93,445
|
|
|
|
147
|
|
|
|
668
|
|
Repayment of stockholder loans
|
|
|
|
|
|
|
462
|
|
|
|
114
|
|
Proceeds from stock options and warrants exercised
|
|
|
101
|
|
|
|
290
|
|
|
|
586
|
|
Issuance of common stock
|
|
|
41,802
|
|
|
|
|
|
|
|
4,000
|
|
Repurchase of common stock
|
|
|
|
|
|
|
(181
|
)
|
|
|
(3,783
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
102,720
|
|
|
|
(98,078
|
)
|
|
|
18,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
40,614
|
|
|
|
159,355
|
|
|
|
31,236
|
|
CASH AND CASH EQUIVALENTS Beginning of year
|
|
|
378,594
|
|
|
|
219,239
|
|
|
|
188,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS End of year
|
|
$
|
419,208
|
|
|
$
|
378,594
|
|
|
$
|
219,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
92,888
|
|
|
$
|
101,128
|
|
|
$
|
116,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
63,387
|
|
|
$
|
54,919
|
|
|
$
|
71,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONCASH DISCLOSURES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures purchased through short-term credit
|
|
$
|
4,023
|
|
|
$
|
2,640
|
|
|
$
|
1,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in unrealized gain (loss) on interest rate
swaps, net of tax expense (benefit)
|
|
$
|
6,776
|
|
|
$
|
4,226
|
|
|
$
|
(8,986
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount on proceeds from senior credit facilities recorded as
debt issuance costs
|
|
$
|
13,300
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired
|
|
|
|
|
|
|
|
|
|
$
|
17,556
|
|
Cash paid for common stock acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional consideration for post-closing payments
|
|
|
|
|
|
|
|
|
|
|
(13,258
|
)
|
Common stock issued for acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities assumed
|
|
|
|
|
|
|
|
|
|
$
|
4,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-7
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
|
|
1.
|
Organization and
Description of the Company
|
LPL Investment Holdings Inc. (LPLIH), a Delaware
holding corporation, together with its consolidated subsidiaries
(collectively, the Company) provides an integrated
platform of proprietary technology, brokerage and investment
advisory services to independent financial advisors and
financial advisors at financial institutions (collectively
advisors) in the United States of America. Through
its proprietary technology, custody and clearing platforms, the
Company provides access to diversified financial products and
services enabling its advisors to offer independent financial
advice and brokerage services to retail investors (their
clients).
On December 28, 2005, LPL Holdings, Inc.
(LPLH), and its subsidiaries were acquired through a
merger transaction with BD Acquisition Inc., a wholly owned
subsidiary of LPLIH (previously named BD Investment Holdings,
Inc.). LPLIH was formed by investment funds affiliated with TPG
Capital and Hellman & Friedman LLC (collectively, the
Majority Holders). The acquisition was accomplished
through the merger of BD Acquisition Inc. with and into LPLH,
with LPLH being the surviving entity (the
Acquisition). The Acquisition was financed by a
combination of borrowings under the Companys senior credit
facilities, the issuance of senior unsecured subordinated notes
and direct and indirect equity investments from the Majority
Holders, co-investors, management and the Companys
advisors.
Description of Our Subsidiaries LPLH,
a Massachusetts holding corporation, owns 100% of the issued and
outstanding common stock of LPL Financial LLC (LPL
Financial), UVEST Financial Services Group, Inc.
(UVEST), LPL Independent Advisor Services Group LLC
(IASG), Independent Advisers Group Corporation
(IAG) and LPL Insurance Associates, Inc.
(LPLIA). LPLH is also the majority stockholder in
PTC Holdings, Inc. (PTCH), and owns 100% of the
issued and outstanding voting common stock. As required by the
Office of the Comptroller of the Currency, members of the Board
of Directors of PTCH own shares of nonvoting common stock in
PTCH.
LPL Financial, headquartered in Boston, San Diego and
Charlotte, is a clearing broker-dealer and an investment adviser
that principally transacts business as an agent for its advisors
and financial institutions on behalf of their clients in a broad
array of financial products and services. LPL Financial is
licensed to operate in all 50 states, Washington D.C. and
Puerto Rico.
UVEST, headquartered in Charlotte, is an introducing
broker-dealer and investment adviser that provides independent,
nonproprietary third-party brokerage and advisory services to
banks, credit unions and other financial institutions. UVEST is
licensed to operate in all 50 states and Washington D.C.
IASG is a holding company for Mutual Service Corporation
(MSC), Associated Financial Group, Inc.
(AFG), Associated Securities Corp., Inc.
(Associated), Associated Planners Investment
Advisory, Inc. (APIA) and Waterstone Financial
Group, Inc. (WFG) (together, the Affiliated
Entities). On July 10, 2009, the Company committed to
a corporate restructuring plan to consolidate the operations of
the Affiliated Entities with those of LPL Financial. Prior to
the consolidation of operations, the Affiliated Entities engaged
primarily in introducing brokerage and advisory transactions to
unaffiliated third-party clearing broker-dealers. The Affiliated
Entities ceased operations as active broker-dealers on
September 14, 2009 and the securities licenses of advisors
associated with the Affiliated Entities who elected to transfer,
as well as their respective client accounts which had previously
cleared through a third-party platform, were transferred to the
LPL Financial clearing platform. Following the completion of
these transfer activities, advisors and client accounts
previously associated with the Affiliated Entities are
associated with LPL Financial. The Affiliated Entities had no
active employees, advisors or client accounts as of
December 31, 2010. Associated and WFG have withdrawn their
registration with the Financial Industry Regulatory
Authoritys (FINRA) effective February 5,
2011, and MSC expects to withdraw its registrations with FINRA
and has maintained
F-8
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
sufficient capital to carry out any remaining activities during
the interim. See Note 3 for further discussion.
IAG is a registered investment adviser which offers an
investment advisory platform for clients of advisors working for
other financial institutions.
LPLIA operates as a brokerage general agency, which offers life,
long-term care and disability insurance sales and services.
PTCH is a holding company for The Private Trust Company,
N.A. (PTC). PTC is chartered as a non-depository
limited purpose national bank, providing a wide range of trust,
investment management oversight and custodial services for
estates and families. PTC also provides Individual Retirement
Account custodial services for LPL Financial.
|
|
2.
|
Summary of
Significant Accounting Policies
|
Basis of Presentation These
consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United
States of America (GAAP), which require the Company
to make estimates and assumptions regarding the valuation of
certain financial instruments, intangible assets, allowance for
doubtful accounts, valuation of stock compensation, accruals for
liabilities, income taxes, revenue and expense accruals, and
other matters that affect the consolidated financial statements
and related disclosures. Actual results could differ materially
from those estimates under different assumptions or conditions
and the differences may be material to the consolidated
financial statements. Certain reclassifications were made to
previously reported amounts in the consolidated financial
statements and notes thereto to make them consistent with the
current period presentation. The Company has evaluated
subsequent events up to and including the date these
consolidated financial statements were issued.
Consolidation These consolidated
financial statements include the accounts of LPLIH and its
subsidiaries. Intercompany transactions and balances have been
eliminated. Equity investments in which the Company exercises
significant influence but does not exercise control and is not
the primary beneficiary are accounted for using the equity
method.
Revenue
Recognition Policies:
Commission The Company records commissions
received from mutual funds, annuity, insurance, equity, fixed
income, direct investment, option and commodity transactions on
a trade-date basis. Commissions also include mutual fund and
variable annuity trails, which are recognized as earned. Due to
the significant volume of mutual fund and variable annuity
purchases and sales transacted by advisors directly with product
manufacturers, management estimates its trail revenues and
upfront commission for each accounting period for which the
proceeds have not yet been received. These estimates are based
on a number of factors, primarily on market levels and the
volume of similar transactions in prior periods. The amount of
such accruals are shown as commissions receivable from product
sponsors and others (see Note 7) included in the
caption, receivables from product sponsors, broker-dealers and
clearing organizations in the consolidated statements of
financial condition. The Company also records commissions
payable based upon standard payout ratios for each product as it
accrues for commission revenue.
Advisory and Asset-Based Fees The Company
charges investment advisory fees based on an advisors
portfolio value, generally at the beginning of each quarter.
Advisory fees collected in advance are recorded as unearned
revenue and are recognized ratably over the period in which such
fees are earned. Advisory fees collected in arrears are recorded
as earned. Asset-based fees are comprised of fees from cash
sweep programs, financial product manufacturer sponsorship
programs,
F-9
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
and omnibus processing and networking services and are recorded
and recognized ratably over the period in which services are
provided.
Certain advisors conduct their advisory business through
separate entities by establishing their own Registered
Investment Advisor (RIA) pursuant to the Investment
Advisers Act of 1940, rather than using the Companys
corporate registered RIA. These stand-alone RIAs engage the
Company for technology, clearing, regulatory and custody
services, as well as access to the Companys investment
advisory platforms. The fee-based production generated by the
stand-alone RIA is earned by the advisor, and accordingly not
included in the Companys advisory fee revenue. The Company
charges fees to stand-alone RIAs including administrative fees
based on the value of assets within these advisory accounts.
Such fees are included within asset-based fees and transaction
and other fees on the consolidated statements of operations, as
described below.
Transaction and Other Fees The Company
charges transaction fees for executing noncommissionable
transactions in client accounts. Transaction related charges are
recognized on a trade-date basis. Other fees relate to services
provided and other account charges generally outlined in the
Companys agreements with its clients, advisors and
financial institutions. Such fees are recognized as services are
performed or as earned, as applicable. In addition, the Company
offers various software-related products, for which fees are
charged on a subscription basis and are recognized over the
subscription period.
Interest Income, Net of Interest Expense The
Company earns interest income from its cash equivalents and
client margin balances, less interest expense on related
transactions. Because interest expense incurred in connection
with cash equivalents and client margin balances is completely
offset by revenue on related transactions, the Company considers
such interest to be an operating expense. Interest expense from
operations for the years ended December 31, 2010, 2009 and
2008 did not exceed $1.0 million in any fiscal year
presented.
Compensation and Benefits The Company
records compensation and benefits for all cash and deferred
compensation, benefits and related taxes as earned by its
employees. Compensation and benefits expense also includes fees
earned by temporary employees and contractors who perform
similar services to those performed by the Companys
employees, primarily software development and project management
activities. Temporary employee and contractor services of
$21.8 million, $18.0 million, and $36.9 million
were incurred during the years ended December 31, 2010,
2009, and 2008, respectively.
Share-Based Compensation 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 individual grants, which
generally equals the vesting period. The Company accounts for
stock options and warrants awarded to its advisors and financial
institutions based on the fair value of the award at each
interim reporting period.
Income Taxes In preparing the
consolidated financial statements, the Company estimates income
tax expense based on various jurisdictions where it conducts
business. The Company must then assess the likelihood that the
deferred tax assets will be realized. A valuation allowance is
established to the extent that it is more-likely-than-not that
such deferred tax assets will not be realized. When the Company
establishes a valuation allowance or modifies the existing
allowance in a certain reporting period, the Company generally
records a corresponding increase or decrease to tax expense in
the consolidated statements of operations. Management makes
significant judgments in determining the provision for income
taxes, the deferred tax assets and liabilities, and any
valuation allowances recorded against the deferred tax asset.
Changes in the estimate of these taxes occur periodically due to
changes in the tax rates, changes in the business operations,
implementation of
F-10
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
tax planning strategies, resolution with taxing authorities of
issues where the Company had previously taken certain tax
positions and newly enacted statutory, judicial and regulatory
guidance. These changes could have a material effect on the
Companys consolidated statements of financial condition,
operations or cash flows in the period or periods in which they
occur.
The Company recognizes the tax effects of a position in the
financial statements only if it is more-likely-than-not to be
sustained based solely on its technical merits, otherwise no
benefits of the position are to be recognized. The
more-likely-than-not threshold must continue to be met in each
reporting period to support continued recognition of a benefit.
Moreover, each tax position meeting the recognition threshold is
required to be measured as the largest amount that is greater
than 50 percent likely to be realized upon ultimate
settlement with a taxing authority that has full knowledge of
all relevant information. See Note 11 for additional detail
regarding the Companys uncertain tax positions.
Employee Health Care Self-Insurance
The Company is partially self-insured for
benefits paid under employee healthcare programs. Self-insurance
estimates are determined with the assistance of insurance
actuaries, based on historical experience and trends related to
claims and payments, information provided by the insurance
broker, and industry experience. The Company has coverage for
excess losses on either an individual or an aggregate case
basis. Estimates of future claim costs are recorded on an
undiscounted basis, and are recognized as a liability within
accounts payable and accrued liabilities in the consolidated
statements of financial condition.
Cash and Cash Equivalents Cash and
cash equivalents are composed of interest and
noninterest-bearing deposits, money market funds and
U.S. government obligations that meet the definition of a
cash equivalent. Cash equivalents are highly liquid investments,
with original maturities of less than 90 days that are not
required to be segregated under federal or other regulations.
Cash and Securities Segregated Under Federal and Other
Regulations Certain subsidiaries of the
Company are subject to requirements related to maintaining cash
or qualified securities in a segregated reserve account for the
exclusive benefit of its customers in accordance with SEC
Rule 15c3-3
and other regulations.
Receivables From and Payables to Clients
Receivables from and payables to clients
includes amounts due on cash and margin transactions. The
Company extends credit to its clients to finance their purchases
of securities on margin. The Company receives income from
interest charged on such extensions of credit. The Company pays
interest on certain client free credit balances held pending
investment. Loans to clients are generally fully collateralized
by client securities, which are not included in the consolidated
statements of financial condition.
To the extent that margin loans and other receivables from
clients are not fully collateralized by client securities,
management establishes an allowance that it believes is
sufficient to cover any probable losses. When establishing this
allowance, management considers a number of factors, including
its ability to collect from the client
and/or the
clients advisor and the Companys historical
experience in collecting on such transactions.
The following schedule reflects the Companys activity in
providing for an allowance for uncollectible amounts due from
clients for the years ended December 31, 2010 and 2009 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Beginning balance January 1
|
|
$
|
792
|
|
|
$
|
972
|
|
Charge-offs net of recoveries
|
|
|
(137
|
)
|
|
|
(180
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance December 31
|
|
$
|
655
|
|
|
$
|
792
|
|
|
|
|
|
|
|
|
|
|
F-11
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Receivables From Product Sponsors, Broker-Dealers and
Clearing Organizations Receivables from
product sponsors, broker-dealers and clearing organizations
primarily consists of commission and transaction-related
receivables.
Receivables From Others Receivables
from others primarily consists of other accrued fees from
product sponsors and advisors. The Company periodically extends
credit to its advisors in the form of recruiting loans,
commission advances, and other loans. The decisions to extend
credit to advisors are generally based on either the
advisors credit history, their ability to generate future
commissions, or both. Management maintains an allowance for
uncollectible amounts using an aging analysis that takes into
account the advisors registration status and the specific
type of receivable. The aging thresholds and specific
percentages used represent managements best estimates of
probable losses. Management monitors the adequacy of these
estimates through periodic evaluations against actual trends
experienced.
The following schedule reflects the Companys activity in
providing for an allowance for uncollectible amounts due from
others for the years ended December 31, 2010 and 2009 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Beginning balance January 1
|
|
$
|
6,159
|
|
|
$
|
4,076
|
|
Provision for bad debts(1)
|
|
|
1,621
|
|
|
|
3,319
|
|
Charge-offs net of recoveries
|
|
|
(984
|
)
|
|
|
(1,236
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance December 31
|
|
$
|
6,796
|
|
|
$
|
6,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the year ended December 31, 2009, the Company has
classified $0.3 million of the provision for bad debt as
restructuring charges with the consolidated statements of
operations. |
Classification and Valuation of Certain Investments
The classification of an investment
determines its accounting treatment. The Company generally
classifies its investments in debt and equity instruments
(including mutual funds, annuities, corporate bonds, government
bonds and municipal bonds) as trading securities, except for
government notes held by PTC, which are classified as
held-to-maturity
based on managements intent and ability to hold them to
maturity. The Company has not classified any investments as
available-for-sale.
Investment classifications are subject to ongoing review and can
change. Securities classified as trading are carried at fair
value, while securities classified as
held-to-maturity
are carried at cost or amortized cost. When possible, the fair
value of securities is determined by obtaining quoted market
prices. The Company also makes estimates about the fair value of
investments and the timing for recognizing losses based on
market conditions and other factors. If its estimates change,
the Company may recognize additional losses. Both unrealized and
realized gains and losses on trading securities are recognized
in other revenue on a net basis in the consolidated statements
of operations.
Securities Owned and Sold But Not Yet Purchased
Securities owned and securities sold but not
yet purchased are reflected on a trade-date basis at market
value with realized and unrealized gains and losses being
recorded in other revenue in the consolidated statements of
operations. Interest income is accrued as earned and dividends
are recorded on the ex-dividend date.
U.S. government notes are carried at amortized cost and
classified as
held-to-maturity,
as the Company has both the intent and ability to hold them to
maturity. Interest income is accrued as earned. Premiums and
discounts are amortized, using a method that approximates the
effective yield method, over the term of the security and
recorded as an adjustment to the investment yield.
F-12
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Securities Borrowed and Loaned
Securities borrowed and securities loaned
are accounted for as collateralized financings and are recorded
at the amount of the cash provided for securities borrowed
transactions and cash received for securities loaned (generally
in excess of market values). The adequacy of the collateral
deposited for securities borrowed is continuously monitored and
adjusted when considered necessary to minimize the risk
associated with this activity. At December 31, 2010 and
December 31, 2009, the Company had $8.4 million and
$5.0 million, respectively, in securities borrowed. The
collateral received for securities loaned is generally cash and
is adjusted daily through the Depository
Trust Companys (DTC) net settlement
process, and securities loaned is included in payable to
broker-dealers and clearing organizations in the consolidated
statements of financial condition. Securities loaned generally
represent client securities that can be pledged under standard
margin loan agreements. At December 31, 2010 and
December 31, 2009, the Company had $8.1 million and
$7.2 million, respectively, of pledged securities loaned
under the DTC Stock Borrow Program.
Fixed Assets Furniture, equipment,
computers, purchased software, capitalized software and
leasehold improvements are recorded at historical cost, net of
accumulated depreciation and amortization. Depreciation is
recognized using the straight-line method over the estimated
useful lives of the assets. Furniture, equipment, computers and
purchased software are depreciated over a period of three to
seven years. Automobiles have depreciable lives of five years.
Leasehold improvements are amortized over the lesser of their
useful lives or the terms of the underlying leases. Management
reviews fixed assets for impairment whenever events or changes
in circumstances indicate the carrying amount of the assets may
not be recoverable. In 2010, the Company recorded a fixed asset
impairment charge of $0.6 million for certain fixed assets
that were attributed to the Affiliated Entities business, whose
use has since been discontinued, as well as $0.2 million
related to fixed assets at the abandoned lease locations.
Software Development Costs Software
development costs are charged to operations as incurred.
Software development costs include costs incurred in the
development and enhancement of software used in connection with
services provided by the Company that do not otherwise qualify
for capitalization.
The costs of internally developed software that qualify for
capitalization are capitalized as fixed assets and subsequently
amortized over the estimated useful life of the software, which
is generally three years. The costs of internally developed
software are included in fixed assets at the point at which the
conceptual formulation, design and testing of possible software
project alternatives are complete and management authorizes and
commits to funding the project. The Company does not capitalize
pilot projects and projects where it believes that the future
economic benefits are less than probable.
Reportable Segment The Companys
internal reporting is organized into three service channels;
Independent Advisor Services, Institution Services and Custom
Clearing Services, which are designed to enhance the services
provided to its advisors and financial institutions. These
service channels qualify as individual operating segments, but
are aggregated and viewed as one single reportable segment due
to their similar economic characteristics, products and
services, production and distribution process, regulatory
environment and quantitative thresholds.
Goodwill, Intangible Assets and Trademarks and Trade Names
The Company classifies intangible assets
into three categories: (1) intangible assets with definite
lives subject to amortization, (2) intangible assets with
indefinite lives not subject to amortization and
(3) goodwill. The Company determines the useful lives of
identifiable intangible assets after considering the specific
facts and circumstances related to each intangible asset.
Factors considered when determining useful lives
F-13
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
include the contractual term of any agreement, the history of
the asset, the Companys long-term strategy for the use of
the asset, any laws or other local regulations which could
impact the useful life of the asset, and other economic factors,
including competition and specific market conditions. Intangible
assets that are deemed to have definite lives are amortized, on
a straight-line basis, over their useful lives, generally
ranging from 5 20 years. See Note 9 for
further discussion.
When facts and circumstances indicate that the carrying value of
definite-lived intangible assets may not be recoverable, the
Company assesses the recoverability of the carrying value by
preparing estimates of future cash flows. The Company recognizes
an impairment loss if the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the
carrying amount. The impairment loss recognized is the amount by
which the carrying amount exceeds the fair value. The Company
uses a variety of methodologies to determine the fair value of
these assets, including discounted cash flow models, which are
consistent with the assumptions the Company believes
hypothetical marketplace participants would use. For the year
ended December 31, 2009, the Company recorded a
$17.5 million charge for the impairment of advisor and
financial institution relationship intangible assets which is
included in restructuring charges within the consolidated
statements of operations. See Notes 3 and 9 for further
discussion. No impairment occurred for the years ended
December 31, 2010 and 2008.
The Company tests intangible assets determined to have
indefinite useful lives, including trademarks trade names and
goodwill, for impairment annually, or more frequently if events
or circumstances indicate that assets might be impaired. The
Company performs these annual impairment reviews as of the first
day of the fourth quarter (October 1). The Company uses a
variety of methodologies in conducting impairment assessments of
indefinite-lived intangible assets, including, but not limited
to, discounted cash flow models, which are based on the
assumptions the Company believes hypothetical marketplace
participants would use. For indefinite-lived intangible assets,
other than goodwill, if the carrying amount exceeds the fair
value, an impairment charge is recognized in an amount equal to
that excess. For the year ended December 31, 2009, the
Company recorded a $1.1 million charge for the impairment
of trademarks and trade names which is included in restructuring
charges within the consolidated statements of operations. See
Notes 3 and 9 for further discussion. No impairment
occurred for the years ended December 31, 2010 and 2008.
The Company performs impairment tests of goodwill at the
reporting unit level, which represent its operating segments.
There were no changes to the Companys reporting units in
2010. The goodwill impairment test consists of a two-step
process, if necessary. The first step is to compare the fair
value of a reporting unit to its carrying value, including
goodwill. The Company typically uses income approach methodology
to determine the fair value of a reporting unit, which includes
the discounted cash flow method and the market approach
methodology that includes the use of market multiples. The
assumptions used in these models are consistent with those the
Company believes hypothetical marketplace participants would
use. If the fair value of the reporting unit is less than its
carrying value, the second step of the impairment test must be
performed in order to determine the amount of impairment loss,
if any. The second step compares the implied fair value of the
reporting unit goodwill with the carrying amount of that
goodwill. If the carrying amount of the reporting units
goodwill exceeds its implied fair value, an impairment charge is
recognized in an amount equal to that excess. The loss
recognized cannot exceed the carrying amount of goodwill. No
impairment occurred for the years ended December 31, 2010,
2009 and 2008.
F-14
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Deferred Loan Issuance and Amendment Costs
Debt issuance and amendment costs have been
capitalized and are being amortized as additional interest
expense over the expected terms of the related debt agreements.
Equity Method Investment The
Companys equity method investment is accounted for under
the equity method when it exerts significant influence and
ownership does not exceed 50% of the common stock. The Company
records the investment at cost in the consolidated statements of
financial condition and adjusts the carrying amount of the
investment to recognize its share of earnings or losses while
recording such earnings or losses within the consolidated
statements of operations.
Drafts Payable Drafts payable
represent checks drawn against the Company that have not yet
cleared through the bank. At December 31, 2010, the Company
had amounts drawn of $168.0 million related to client
activities, and $14.5 million of corporate overdrafts.
Legal Reserves The Company records
reserves for legal proceedings in accounts payable and accrued
liabilities in the statements of financial condition. The
determination of these reserve amounts requires significant
judgment on the part of management. Management considers many
factors including, but not limited to, future legal expenses,
the amount of the claim, the amount of the loss in the
clients account, the basis and validity of the claim, the
possibility of wrongdoing on the part of advisors and financial
institutions, likely insurance coverage, previous results in
similar cases, and legal precedents and case law. Each legal
proceeding is reviewed with counsel in each accounting period
and the reserve is adjusted as deemed appropriate by management.
Any change in the reserve amount is recorded as professional
services in the consolidated statements of operations.
Derivative Instruments and Hedging Activities
The Company uses interest rate swap
agreements to protect itself against changing interest rates and
the related impact to the Companys cash flows. The Company
also evaluates its contracts and commitments for terms that
qualify as embedded derivatives. All derivatives are reported at
their corresponding fair value in the Companys
consolidated statements of financial condition.
Financial derivative instruments expected to be highly effective
hedges against changes in cash flows are designated as such upon
entering into the agreement. At each reporting date, the Company
reassesses the effectiveness of the hedge to determine whether
or not it can continue to use hedge accounting. Under hedge
accounting, the Company records the increase or decrease in fair
value of the derivative, net of tax impact, as other
comprehensive income or loss. If the hedge is not determined to
be a perfect hedge, yet is still considered highly effective,
the Company will calculate the ineffective portion and record
the related change in its fair value as additional interest
income or expense in the consolidated statements of operations.
Amounts accumulated in other comprehensive income (loss) are
reclassified into earnings in the same period or periods during
which the hedged forecasted transaction affects earnings.
Fair Value of Financial Instruments
The Companys financial assets and
liabilities are carried at fair value or at amounts that,
because of their short-term nature, approximate current fair
value, with the exception of its indebtedness. The Company
carries its indebtedness at amortized cost and measures the
implied fair value of its debt instruments using trading levels
obtained from a third-party service provider. As of
December 31, 2010, the carrying amount and fair value of
the Companys indebtedness was approximately
$1,387 million and $1,390 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 5 for additional detail regarding
the Companys fair value measurements.
Commitments and Contingencies The
Company recognizes liabilities for contingencies when analysis
indicates it is both probable that a liability has been incurred
and the amount of loss
F-15
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
can be reasonably estimated. When a range of probable loss can
be estimated, the Company accrues the most likely amount.
Comprehensive (Loss) Income The
Companys comprehensive (loss) income is composed of net
income and the effective portion of the unrealized gains
(losses) on financial derivatives in cash flow hedge
relationships, net of related tax effects.
Recently Issued Accounting Pronouncements
Recent accounting pronouncements or changes
in accounting pronouncements during the year ended
December 31, 2010, that are of significance, or potential
significance, to the Company are discussed below.
In January 2010, the Financial Accounting Standards Board
(FASB) 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. The adoption of ASU
2010-6 did
not have a material impact on the Companys consolidated
financial statements.
Strategic
Business Review Initiative
On December 29, 2008, the Company committed to and
implemented an organizational restructuring plan intended to
reduce its cost structure and improve operating efficiencies,
which resulted in a reduction in its overall workforce of
approximately 250 employees. In accordance with the FASB
Accounting Standards Codification (ASC) Topic 420,
Accounting for Costs Associated with Exit or Disposal
Activities, the Company has recorded severance and one-time
involuntary termination benefit accruals in accounts payable and
accrued liabilities within the consolidated statements of
financial condition. The Company completed this initiative and
expects to pay all costs by April 2011.
The following table summarizes the balance of accrued expenses
related to the strategic business review and the changes in the
accrued amounts as of and for the year ended December 31,
2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
Cumulative
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Costs
|
|
|
|
December 31,
|
|
|
Costs
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Incurred
|
|
|
|
2009
|
|
|
Incurred(1)
|
|
|
Payments
|
|
|
Non-cash
|
|
|
2010
|
|
|
to Date(2)
|
|
|
Severance and benefits
|
|
$
|
1,996
|
|
|
$
|
43
|
|
|
$
|
(1,442
|
)
|
|
$
|
|
|
|
$
|
597
|
|
|
$
|
14,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represent changes in the
Companys estimates for the cost of providing post
employment benefits to employees impacted by its restructuring
activities.
|
|
(2)
|
|
At December 31, 2010,
cumulative costs incurred to date represent the total expected
costs.
|
Consolidation
of Affiliated Entities Initiative
On July 10, 2009, the Company committed to a corporate
restructuring plan that consolidated the operations of the
Affiliated Entities with LPL Financial. This restructuring was
effected to enhance service offerings to financial advisors
while also generating efficiencies. The Company expects total
costs associated with the initiative to be approximately
$77.3 million. The Company incurred the majority of these
costs and anticipates recognizing the remaining costs by
December 2013; however,
F-16
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
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 2010, the Company deposited an additional
$4.1 million into the escrow accounts and withdrew
$7.2 million. These escrow accounts are considered
restricted cash and included in other assets within the
consolidated statements of financial condition.
The Company recognized charges related to the early termination
and abandonment of certain lease arrangements offset by
estimates for
sub-lease
efforts. The Company also recorded non-cash charges for the
impairment of fixed assets associated with the operations of the
affiliated entities and 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 following table summarizes the balance of accrued expenses
and the changes in the accrued amounts as of and for the year
ended December 31, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
|
|
|
Cumulative
|
|
|
Total
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Costs
|
|
|
Expected
|
|
|
|
December 31,
|
|
|
Costs
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Incurred
|
|
|
Restructuring
|
|
|
|
2009
|
|
|
Incurred
|
|
|
Payments
|
|
|
Non-cash
|
|
|
2010
|
|
|
to Date
|
|
|
Costs
|
|
|
Severance and benefits
|
|
$
|
2,759
|
|
|
$
|
2,034
|
|
|
$
|
(3,717
|
)
|
|
$
|
(456
|
)
|
|
$
|
620
|
|
|
$
|
11,470
|
|
|
$
|
11,470
|
|
Lease and contract termination fees
|
|
|
7,458
|
|
|
|
5,340
|
|
|
|
(4,071
|
)
|
|
|
224
|
|
|
|
8,951
|
|
|
|
21,259
|
|
|
|
21,359
|
|
Asset impairments
|
|
|
|
|
|
|
840
|
|
|
|
|
|
|
|
(840
|
)
|
|
|
|
|
|
|
20,764
|
|
|
|
20,764
|
|
Conversion and transfer costs
|
|
|
304
|
|
|
|
5,665
|
|
|
|
(1,963
|
)
|
|
|
(3,797
|
)
|
|
|
209
|
|
|
|
19,548
|
|
|
|
23,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,521
|
|
|
$
|
13,879
|
|
|
$
|
(9,751
|
)
|
|
$
|
(4,869
|
)
|
|
$
|
9,780
|
|
|
$
|
73,041
|
|
|
$
|
77,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
Equity Method
Investment
|
On May 11, 2007, the Company acquired for
$5.0 million, an approximate 22.6% ownership interest in
Blue Frog Solutions, Inc. (Blue Frog). This
investment provides the Company with a strategic ownership
interest in one of its vendors that provides technology for
variable annuity order entry and monitoring. The Company follows
the equity method of accounting, as it has the ability to
exercise significant influence over operating and financial
policies, primarily through a representation on the Board of
Directors. The Company has classified its equity method
investment within other assets in the consolidated statements of
financial condition, and has recognized its share of earnings or
losses in the consolidated statements of operations in loss on
equity method investment. Such earnings did not exceed
$0.1 million for the year ended December 31, 2010
compared to a loss of $0.3 million for the year ended
December 31, 2009.
In June 2008, the Company determined that an other than
temporary impairment existed due to the recapitalization of Blue
Frog by an outside investor. Accordingly, the Company recognized
an impairment loss of $1.7 million, representing the
difference in the carrying value of its investment compared with
the per share value implied by the transaction. Such loss is
calculated on the consolidated statements of operations as a
loss on equity method investment. The Company has retained a
13.9% ownership interest and a seat on the Board of Directors.
F-17
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
5.
|
Fair Value
Measurements
|
Fair value is defined as the exchange price that would be
received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market
participants at the measurement date. Inputs used to measure
fair value are prioritized within a three-level fair value
hierarchy. This hierarchy requires entities to maximize the use
of observable inputs and minimize the use of unobservable
inputs. The three levels of inputs used to measure fair value
are as follows:
|
|
|
|
|
Level 1 Quoted prices in active
markets for identical assets or liabilities.
|
|
|
|
Level 2 Observable inputs other
than quoted prices included in Level 1, such as quoted
prices for similar assets and liabilities in active markets;
quoted prices for identical or similar assets and liabilities in
markets that are not active; or other inputs that are observable
or can be corroborated by observable market data.
|
|
|
|
Level 3 Unobservable inputs that
are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities. This
includes certain pricing models, discounted cash flow
methodologies and similar techniques that use significant
unobservable inputs.
|
The Companys fair value measurements are evaluated within
the fair value hierarchy, based on the nature of inputs used to
determine the fair value at the measurement date. At
December 31, 2010, the Company had the following financial
assets and liabilities that are measured at fair value on a
recurring basis:
Cash Equivalents The Companys
cash equivalents include money market funds, which are short
term in nature with readily determinable values derived from
active markets.
Securities Segregated Under Federal and Other
Regulations The Companys segregated
accounts contain U.S. treasury securities that are short
term in nature with readily determinable values derived from
quoted prices in active markets.
Securities Owned and Securities Sold But Not Yet
Purchased The Companys trading
securities consist of house account model portfolios for the
purpose of benchmarking the performance of its fee based
advisory platforms and temporary positions resulting from the
processing of client transactions. Examples of these securities
include money market funds, U.S. treasuries, mutual funds,
certificates of deposit, traded equity securities and debt
securities.
The Company uses prices obtained from independent third-party
pricing services to measure the fair value of its trading
securities. Prices received from the pricing services are
validated using various methods including comparison to prices
received from additional pricing services, comparison to
available quoted market prices and review of other relevant
market data including implied yields of major categories of
securities. In general, these quoted prices are derived from
active markets for identical assets or liabilities. When quoted
prices in active markets for identical assets and liabilities
are not available, the quoted prices are based on similar assets
and liabilities or inputs other than the quoted prices that are
observable, either directly or indirectly. For certificates of
deposit and treasury securities, the Company utilizes
market-based inputs including observable market interest rates
that correspond to the remaining maturities or the next interest
reset dates. At December 31, 2010, the Company did not
adjust prices received from the independent third-party pricing
services.
Other Assets The Companys other
assets include deferred compensation plan assets that are
invested in money market funds and mutual funds which are
actively traded and valued based on quoted market prices in
active markets.
F-18
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
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.
There have been no transfers of assets or liabilities between
fair value measurement classifications during the years ended
December 31, 2010 and 2009.
The following table summarizes the Companys financial
assets and financial liabilities measured at fair value on a
recurring basis at December 31, 2010 (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 December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
279,048
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
279,048
|
|
Securities owned trading:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
316
|
|
|
|
|
|
|
|
|
|
|
|
316
|
|
Mutual funds
|
|
|
7,300
|
|
|
|
|
|
|
|
|
|
|
|
7,300
|
|
Equity securities
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
Debt securities
|
|
|
|
|
|
|
516
|
|
|
|
|
|
|
|
516
|
|
U.S. treasury obligations
|
|
|
1,010
|
|
|
|
|
|
|
|
|
|
|
|
1,010
|
|
Certificates of deposit
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities owned trading
|
|
|
8,643
|
|
|
|
616
|
|
|
|
|
|
|
|
9,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
17,175
|
|
|
|
|
|
|
|
|
|
|
|
17,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
304,866
|
|
|
$
|
616
|
|
|
$
|
|
|
|
$
|
305,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold but not yet purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
|
$
|
4,563
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,563
|
|
Equity securities
|
|
|
204
|
|
|
|
|
|
|
|
|
|
|
|
204
|
|
Debt securities
|
|
|
|
|
|
|
54
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities sold but not yet purchased
|
|
|
4,767
|
|
|
|
54
|
|
|
|
|
|
|
|
4,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
|
|
|
|
|
7,281
|
|
|
|
|
|
|
|
7,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value
|
|
$
|
4,767
|
|
|
$
|
7,335
|
|
|
$
|
|
|
|
$
|
12,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain assets and liabilities are not measured at fair value on
an ongoing basis but are subject to fair value measurement in
certain circumstances, for example, when evidence of impairment
exists. During the year ended December 31, 2010, the
Company recorded asset impairment charges of $0.6 million
for certain fixed assets that were determined to have no
estimated fair value. The fair value was determined based on the
loss of future expected cash flows of the discontinued use of
F-19
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
assets attributed to the Affiliated Entities business. The
Company has determined that the impairment qualifies as a
non-recurring Level 3 measurement under the fair value
hierarchy.
The following table summarizes the Companys financial
assets and financial liabilities measured at fair value on a
recurring basis at December 31, 2009 (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 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2009, the Company
recorded asset impairment charges of $18.6 million for
certain intangible assets that were determined to have no
estimated fair value (see Note 9). The fair value was
determined based on the loss of future expected cash flows for
advisors who were not retained as a result of the consolidation
of the Affiliated Entities, as well as the discontinued use of
certain brand names and logos and their lack of marketability.
The Company has determined that the impairment qualifies as a
non-recurring Level 3 measurement under the fair value.
F-20
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
6.
|
Held-to-Maturity
Securities
|
The Company holds certain investments in securities including
U.S. government notes. The Company has both the intent and
the ability to hold these investments to maturity and classifies
them as such. Interest income is accrued as earned. Premiums and
discounts are amortized using a method that approximates the
effective yield method over the term of the security and are
recorded as an adjustment to the investment yield.
The amortized cost, gross unrealized gains and fair value of
securities
held-to-maturity
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Value
|
|
|
At December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government notes
|
|
$
|
9,563
|
|
|
$
|
69
|
|
|
$
|
9,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 December 31, 2010, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 Year
|
|
1-2 Years
|
|
Total
|
|
U.S. government notes at amortized cost
|
|
$
|
6,049
|
|
|
$
|
3,514
|
|
|
$
|
9,563
|
|
U.S. government notes- at fair value
|
|
$
|
6,075
|
|
|
$
|
3,557
|
|
|
$
|
9,632
|
|
|
|
7.
|
Receivables from
Product Sponsors, Broker-Dealers and Clearing Organizations and
Payables to Broker-Dealers and Clearing Organizations
|
Receivables from product sponsors, broker-dealers and clearing
organizations and payables to broker-dealers and clearing
organizations were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Receivables:
|
|
|
|
|
|
|
|
|
Commissions receivable from product sponsors and others
|
|
$
|
114,829
|
|
|
$
|
102,920
|
|
Receivable from clearing organizations
|
|
|
65,501
|
|
|
|
49,793
|
|
Receivable from broker-dealers
|
|
|
12,507
|
|
|
|
12,195
|
|
Securities
failed-to-deliver
|
|
|
10,495
|
|
|
|
6,992
|
|
|
|
|
|
|
|
|
|
|
Total receivables
|
|
$
|
203,332
|
|
|
$
|
171,900
|
|
|
|
|
|
|
|
|
|
|
Payables:
|
|
|
|
|
|
|
|
|
Securities loaned
|
|
$
|
8,113
|
|
|
$
|
7,239
|
|
Securities
failed-to-receive
|
|
|
11,425
|
|
|
|
5,495
|
|
Payable to broker-dealers
|
|
|
1,023
|
|
|
|
2,787
|
|
Payable to clearing organizations
|
|
|
18,509
|
|
|
|
2,696
|
|
|
|
|
|
|
|
|
|
|
Total payables
|
|
$
|
39,070
|
|
|
$
|
18,217
|
|
|
|
|
|
|
|
|
|
|
F-21
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
LPL Financial clears commodities transactions for its customers
through another broker-dealer on a fully disclosed basis. The
amount payable to broker-dealers relates to the aforementioned
transactions and is collateralized by securities owned by LPL
Financial.
The components of fixed assets were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Internally developed software
|
|
$
|
206,002
|
|
|
$
|
193,682
|
|
Computers and software
|
|
|
84,241
|
|
|
|
82,459
|
|
Leasehold improvements
|
|
|
41,772
|
|
|
|
41,559
|
|
Furniture and equipment
|
|
|
16,585
|
|
|
|
17,180
|
|
Property
|
|
|
6,572
|
|
|
|
6,572
|
|
|
|
|
|
|
|
|
|
|
Total fixed assets
|
|
|
355,172
|
|
|
|
341,452
|
|
Accumulated depreciation and amortization
|
|
|
(276,501
|
)
|
|
|
(239,868
|
)
|
|
|
|
|
|
|
|
|
|
Fixed assets net
|
|
$
|
78,671
|
|
|
$
|
101,584
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense for fixed assets was
$49.0 million, $69.3 million and $60.2 million
for the years ended December 31, 2010, 2009 and 2008,
respectively.
On September 15, 2009, and in conjunction with the
Companys consolidation initiative, intangible assets
residing at the Affiliated Entities were transferred to LPL
Financial. This exchange has occurred between entities under
common control and accordingly, the Company transferred advisor
relationship and sponsor relationship intangible assets at their
approximate carrying amounts of $30.9 million and
$11.9 million, respectively. There was no change in the
useful lives of the intangible assets, which continue to be
amortized over a period of 10 to 20 years.
At the time of consolidation, a portion of the advisor
relationships and trademarks and trade names of the Affiliated
Entities were determined to have no future economic benefit.
Accordingly, the Company recorded impairment charges of
$16.1 million for advisor relationships and
$1.1 million for trademarks and trade names. In the fourth
quarter of 2009, the Company recorded an additional impairment
charge of $1.4 million for advisor relationships. The
impairment of advisor relationships was determined based upon
the attrition of advisors and their related revenue streams
during the period of consolidation. The impairment of trademarks
and trade names was based upon the discontinued use of brand
names and logos of the Affiliated Entities. The Company has
recorded the asset impairments as restructuring charges (see
Note 3) and has classified them as such on its
consolidated statements of operations.
F-22
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The components of intangible assets as of December 31, 2010
and 2009 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Value
|
|
|
Amortization
|
|
|
Value
|
|
|
At December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Definite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Advisor and financial institution relationships
|
|
$
|
458,424
|
|
|
$
|
(116,687
|
)
|
|
$
|
341,737
|
|
Product sponsor relationships
|
|
|
231,930
|
|
|
|
(55,255
|
)
|
|
|
176,675
|
|
Trust client relationships
|
|
|
2,630
|
|
|
|
(784
|
)
|
|
|
1,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total definite-lived intangible assets
|
|
$
|
692,984
|
|
|
$
|
(172,726
|
)
|
|
$
|
520,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademark and trade name
|
|
|
|
|
|
|
|
|
|
|
39,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
|
|
|
|
|
|
|
$
|
560,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amortization expense of intangible assets was
$37.0 million, $39.0 million and $40.3 million
for the years ended December 31, 2010, 2009 and 2008,
respectively. Amortization expense for each of the fiscal years
ended December 2011 through 2015 and thereafter is estimated as
follows (in thousands):
|
|
|
|
|
2011
|
|
$
|
36,840
|
|
2012
|
|
|
36,548
|
|
2013
|
|
|
35,927
|
|
2014
|
|
|
35,927
|
|
2015
|
|
|
35,927
|
|
Thereafter
|
|
|
339,089
|
|
|
|
|
|
|
Total
|
|
$
|
520,258
|
|
|
|
|
|
|
F-23
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
10.
|
Accounts Payable
and Accrued Liabilities
|
Accounts payable and accrued liabilities were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Accounts payable accruals
|
|
$
|
56,377
|
|
|
$
|
47,145
|
|
Accrued net payroll
|
|
|
44,401
|
|
|
|
36,203
|
|
Legal accrual
|
|
|
17,602
|
|
|
|
13,715
|
|
Advisor deferred compensation plan liability
|
|
|
16,542
|
|
|
|
12,305
|
|
Deferred rent
|
|
|
11,391
|
|
|
|
14,121
|
|
Other accrued liabilities
|
|
|
8,273
|
|
|
|
6,409
|
|
|
|
|
|
|
|
|
|
|
Total payables
|
|
$
|
154,586
|
|
|
$
|
129,898
|
|
|
|
|
|
|
|
|
|
|
The Companys (benefit from) provision for income taxes was
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Current (benefit) provision:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(6,316
|
)
|
|
$
|
53,757
|
|
|
$
|
61,498
|
|
State
|
|
|
(4,052
|
)
|
|
|
12,750
|
|
|
|
11,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current (benefit) provision
|
|
|
(10,368
|
)
|
|
|
66,507
|
|
|
|
73,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(17,877
|
)
|
|
|
(24,360
|
)
|
|
|
(25,385
|
)
|
State
|
|
|
(3,742
|
)
|
|
|
(17,100
|
)
|
|
|
(753
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred benefit
|
|
|
(21,619
|
)
|
|
|
(41,460
|
)
|
|
|
(26,138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Benefit from) Provision for income taxes
|
|
$
|
(31,987
|
)
|
|
$
|
25,047
|
|
|
$
|
47,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the U.S. federal statutory income tax
rates to the Companys effective income tax rates is set
forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Federal statutory income tax rates
|
|
|
(35.0
|
)%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income taxes net of federal benefit
|
|
|
(5.7
|
)
|
|
|
(3.9
|
)
|
|
|
7.8
|
|
Share-based compensation
|
|
|
1.5
|
|
|
|
1.5
|
|
|
|
1.0
|
|
Uncertain tax positions
|
|
|
(0.1
|
)
|
|
|
1.8
|
|
|
|
3.6
|
|
Non-deductible expenses
|
|
|
0.7
|
|
|
|
0.6
|
|
|
|
1.6
|
|
Change in valuation allowance
|
|
|
|
|
|
|
0.1
|
|
|
|
1.2
|
|
Transaction costs
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
Research and development credits
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
(0.5
|
)
|
Other
|
|
|
0.6
|
|
|
|
(0.6
|
)
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rates
|
|
|
(36.0
|
)%
|
|
|
34.5
|
%
|
|
|
51.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys 2009 effective tax rate reflects a benefit of
approximately 8% from a newly enacted change to
Californias income sourcing rules that took effect on
January 1, 2011. This change required the Company to
revalue its deferred tax liabilities to the rate that is in
effect when the tax
F-24
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
liabilities are utilized. The current effective tax rate
includes $8.1 million in transaction expenses, which are
not deductible for tax purposes.
The components of the net deferred tax liabilities included in
the consolidated statements of financial condition were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
State taxes
|
|
$
|
10,507
|
|
|
$
|
15,019
|
|
Reserves for litigation, vacation, and bonuses
|
|
|
26,539
|
|
|
|
24,030
|
|
Unrealized gain on interest rate swaps
|
|
|
2,786
|
|
|
|
5,675
|
|
Deferred rent
|
|
|
4,557
|
|
|
|
5,649
|
|
Share-based compensation
|
|
|
8,091
|
|
|
|
6,905
|
|
Provision for bad debts
|
|
|
7,495
|
|
|
|
2,849
|
|
Net operating losses
|
|
|
107
|
|
|
|
172
|
|
Other
|
|
|
1,625
|
|
|
|
1,841
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
61,707
|
|
|
|
62,140
|
|
Valuation allowance
|
|
|
(1,323
|
)
|
|
|
(1,340
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
60,384
|
|
|
|
60,800
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Amortization of intangible assets and trademarks and trade names
|
|
|
(179,590
|
)
|
|
|
(191,108
|
)
|
Depreciation of fixed assets
|
|
|
(11,005
|
)
|
|
|
(17,300
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(190,595
|
)
|
|
|
(208,408
|
)
|
|
|
|
|
|
|
|
|
|
Deferred income taxes net
|
|
$
|
(130,211
|
)
|
|
$
|
(147,608
|
)
|
|
|
|
|
|
|
|
|
|
As a result of certain realization requirements of ASC Topic
718, Compensation Stock Compensation, the
table of deferred tax assets and liabilities shown above does
not include certain federal and state net operating loss
carryovers and other federal credit carryforwards that arose
directly from tax deductions related to equity compensation in
excess of share-based compensation recognized for financial
reporting. To the extent that the Company utilizes all of these
tax attributes in the future to reduce income taxes payable, the
Company will record an increase to additional paid-in capital of
$55.2 million. The Company uses with and without
ordering for purposes of determining when excess tax
benefits have been realized.
At January 1, 2010, the Company had gross unrecognized tax
benefits of $22.0 million. Of this total, $2.1 million
represents amounts acquired during the Companys
acquisition of the Affiliated Entities. The acquired
unrecognized tax benefits will have no impact on the
Companys annual effective tax rate as these are fully
indemnified by the seller in accordance with the purchase and
sale agreement. At January 1, 2010, the Company had
recorded a receivable from the seller in the amount of
$2.1 million, which is included in other assets in the
accompanying consolidated statements of financial condition. Of
the remaining $19.9 million, $14.4 million (net of the
federal benefit on state issues) represents the amount of
unrecognized tax benefits that, if recognized, would favorably
affect the effective income tax rate in any future periods.
F-25
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The following table reflects a reconciliation of the beginning
and ending balances of the total amounts of gross unrecognized
tax benefits including interest and penalties (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Balance Beginning of year
|
|
$
|
21,958
|
|
|
$
|
20,258
|
|
|
$
|
15,139
|
|
Increases related to acquired tax positions
|
|
|
111
|
|
|
|
142
|
|
|
|
969
|
|
Increases related to current year tax positions
|
|
|
4,076
|
|
|
|
4,066
|
|
|
|
6,480
|
|
Reductions as a result of a lapse of the applicable statute of
limitations related to acquired tax positions
|
|
|
(858
|
)
|
|
|
(627
|
)
|
|
|
(596
|
)
|
Reductions as a result of a lapse of the applicable statute of
limitations related to prior period tax positions
|
|
|
(4,230
|
)
|
|
|
(1,881
|
)
|
|
|
(1,734
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance End of year
|
|
$
|
21,057
|
|
|
$
|
21,958
|
|
|
$
|
20,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010, the Company had gross unrecognized
tax benefits of $21.1 million. Of this total,
$1.3 million represents amounts acquired due to the
Companys acquisition of the Affiliated Entities. The
acquired unrecognized tax benefits will have no impact on the
Companys annual effective tax rate as these are fully
indemnified by the seller in accordance with the purchase and
sale agreement. At December 31, 2010, the Company has
recorded a receivable from seller in the amount of
$1.3 million, which is included in other assets in the
accompanying consolidated statements of financial condition. Of
the remaining $19.8 million, $14.3 million (net of the
federal benefit on state issues) represents the amount of
unrecognized tax benefits that, if recognized, would favorably
affect the effective income tax rate in any future periods.
The Company accrues interest and penalties related to
unrecognized tax benefits in its provision for income taxes
within the consolidated statements of financial condition. At
January 1, 2010, the Company had $1.9 million accrued
for interest and $3.4 million accrued for penalties. At
December 31, 2010, the liability for unrecognized tax
benefits included accrued interest of $2.0 million and
penalties of $3.3 million. Tax expense for the year ended
December 31, 2010 includes interest expense of
$0.1 million.
The Company and its subsidiaries file income tax returns in the
federal jurisdiction, as well as most state jurisdictions, and
are subject to routine examinations by the respective taxing
authorities. The Company has concluded all federal and state
income tax matters for years through 2005.
The tax years of 2006 to 2010 remain open to examination by
major taxing jurisdictions to which the Company is subject. In
the next 12 months, it is reasonably possible that the
Company expects a reduction in unrecognized tax benefits of
$5.7 million primarily related to the statute of
limitations expiration in various state jurisdictions.
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 amended and
restated 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 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).
F-26
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The applicable margin for borrowings with respect to the
(a) 2013 Term Loans is currently 0.75% for base rate
borrowings and 1.75% for LIBOR borrowings and could change
depending on the Companys credit rating; (b) 2015
Term Loans is currently 1.75% for base rate borrowings and 2.75%
for LIBOR borrowings, and (c) 2017 Term Loans is currently
2.75% for base rate borrowings and 3.75% for LIBOR borrowings.
The LIBOR Rate with respect to the 2015 Term Loans and the 2017
Term Loans shall in no event be less than 1.50%.
Borrowings under the Companys senior secured term loan
facilities bear interest at a base rate equal to either one,
two, three, six, nine or twelve-month LIBOR plus the applicable
margin, or an alternative base rate (ABR) plus the
applicable margin. The ABR is equal to the greater of the prime
rate or the effective federal funds rate plus
1/2
of 1.00% for the 2013 Term Loans and the greater of the prime
rate, effective federal funds rate plus
1/2
of 1.00%, or 2.50% for the 2015 Term Loans and the 2017 Term
Loans. The senior secured credit facilities are subject to
certain financial and nonfinancial covenants. As of
December 31, 2010 and 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 credit facility from $100.0 million to
$218.2 million, $10.0 million of which is being used
to support the issuance of an irrevocable letter of credit for
its subsidiary, PTC. As a result of the amendment, the Company
paid $2.8 million in debt issuance costs, which have been
capitalized within the consolidated statements of financial
condition and are being amortized as additional interest expense
over the expected term of the related debt agreement. The
Company also extended the maturity of a $163.5 million
tranche of the revolving credit facility to June 28, 2013,
while the remaining $54.7 million tranche retains its
original maturity date of December 28, 2011. The tranche
maturing in 2013 is priced at LIBOR + 3.50% with a commitment
fee of 0.75%. The tranche maturing in 2011 maintains its
previous pricing of LIBOR + 2.00% with a commitment fee of
0.375%. There was no outstanding balance on the revolving
facility at December 31, 2010.
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 consolidated statements of operations.
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 December 31, 2010 or December 31, 2009.
F-27
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The Companys outstanding borrowings were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 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
|
|
|
|
2.05%
|
(1)
|
|
$
|
400,000
|
|
|
|
2.00%
|
(6)
|
Unhedged:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 Term Loans
|
|
|
6/28/2013
|
|
|
|
104,739
|
|
|
|
2.01%
|
(2)
|
|
|
419,223
|
|
|
|
2.00%
|
(7)
|
2015 Term Loans
|
|
|
6/25/2015
|
|
|
|
496,250
|
|
|
|
4.25%
|
(3)
|
|
|
|
|
|
|
|
|
2017 Term Loans
|
|
|
6/28/2017
|
|
|
|
575,650
|
|
|
|
5.25%
|
(4)
|
|
|
|
|
|
|
|
|
Senior unsecured subordinated notes
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
550,000
|
|
|
|
10.75%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings
|
|
|
|
|
|
|
1,386,639
|
|
|
|
|
|
|
|
1,369,223
|
|
|
|
|
|
Less current borrowings (maturities within 12 months)
|
|
|
|
|
|
|
13,971
|
|
|
|
|
|
|
|
8,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings net of current portion
|
|
|
|
|
|
$
|
1,372,668
|
|
|
|
|
|
|
$
|
1,360,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As of December 31, 2010, the
variable interest rate for the hedged portion of the 2013 Term
Loans is based on the three-month LIBOR of 0.30%, plus the
applicable interest rate margin of 1.75%.
|
|
(2)
|
|
As of December 31, 2010, the
variable interest rate for the unhedged portion of the 2013 Term
Loans is based on the one-month LIBOR of 0.26%, plus the
applicable interest rate margin of 1.75%.
|
|
(3)
|
|
As of December 31, 2010, the
variable interest rate for the unhedged portion of the 2015 Term
Loans is based on the greater of the one-month LIBOR of 0.26% or
1.50%, plus the applicable interest rate margin of 2.75%.
|
|
(4)
|
|
As of December 31, 2010, the
variable interest rate for the unhedged portion of the 2017 Term
Loans is based on the greater of the one-month LIBOR of 0.26% or
1.50%, plus the applicable interest rate margin of 3.75%.
|
|
(5)
|
|
On June 22, 2010, the Company
redeemed its 2015 Notes, which had an original maturity date of
December 15, 2015.
|
|
(6)
|
|
As of December 31, 2009, the
variable interest rate for the hedged portion of the 2013 Term
Loans is based on the three-month LIBOR of 0.25%, plus the
applicable interest rate margin of 1.75%.
|
|
(7)
|
|
As of December 31, 2009, the
variable interest rate for the unhedged portion of the 2013 Term
Loans is based on the three-month LIBOR of 0.25% plus the
applicable interest rate margin of 1.75%.
|
The following summarizes borrowing activity in the revolving and
uncommitted line of credit facilities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Average balance outstanding
|
|
$
|
2,074
|
|
|
$
|
56,472
|
|
|
$
|
48,725
|
|
Weighted-average interest rate
|
|
|
1.16
|
%
|
|
|
2.41
|
%
|
|
|
4.74
|
%
|
F-28
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The minimum calendar year payments and maturities of the senior
secured borrowings as of December 31, 2010 are as follows
(in thousands):
|
|
|
|
|
2011
|
|
$
|
13,971
|
|
2012
|
|
|
13,971
|
|
2013
|
|
|
319,197
|
|
2014
|
|
|
10,800
|
|
2015
|
|
|
482,050
|
|
Thereafter
|
|
|
546,650
|
|
|
|
|
|
|
Total
|
|
$
|
1,386,639
|
|
|
|
|
|
|
An interest rate swap is a financial derivative instrument
whereby two parties enter into a contractual agreement to
exchange payments based on underlying interest rates. The
Company uses interest rate swap agreements to hedge the
variability on its floating rate senior secured term loan. The
Company is required to pay the counterparty to the agreement
fixed interest payments on a notional balance and in turn,
receives variable interest payments on that notional balance.
Payments are settled quarterly on a net basis.
The following table summarizes information related to the
Companys interest rate swaps as of December 31, 2010
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
|
|
|
|
|
Notional
|
|
Fixed
|
|
Receive
|
|
Fair
|
|
Maturity
|
Balance
|
|
Pay Rate
|
|
Rate(1)
|
|
Value
|
|
Date
|
|
|
$145,000
|
|
|
|
4.83%
|
|
|
|
0.30%
|
|
|
|
$(3,235)
|
|
|
|
June 30, 2011
|
|
|
65,000
|
|
|
|
4.85%
|
|
|
|
0.30%
|
|
|
|
(4,046)
|
|
|
|
June 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$210,000
|
|
|
|
|
|
|
|
|
|
|
|
$(7,281)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The variable receive rate reset on the last day of the period,
based on the applicable three-month LIBOR. The effective rate
from September 30, 2010 through December 30, 2010, was
0.29%. As of December 31, 2010, the effective rate was
0.30%. |
The interest rate swap agreements qualify for hedge accounting
and have been designated as cash flow hedges against specific
payments due on the Companys senior secured term loan. As
of December 31, 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 consolidated statements of
financial condition. The Company has recorded net unrealized
gains of $10.0 million and $8.1 million for the years
ended December 31, 2010 and 2009, respectively, to
accumulated other comprehensive loss related to the change in
the fair value of its interest rate swap agreements. The
Company has reclassified $13.4 million and
$16.6 million to interest expense from accumulated other
comprehensive loss for the years ended December 31, 2010
and 2009, respectively. Based on current interest rate
assumptions and assuming no additional interest rate swap
agreements are entered into, the Company expects to reclassify
$9.5 million, or $6.1 million after tax, from other
comprehensive loss as additional interest expense over the next
12 months.
F-29
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
14.
|
Commitments and
Contingencies
|
Leases The Company leases certain
office space and equipment at its headquarter locations under
various operating leases. These leases are generally subject to
scheduled base rent and maintenance cost increases, which are
recognized on a straight-line basis over the period of the
leases.
Service Contracts The Company is party
to certain long-term contracts for systems and services that
enable back office trade processing and clearing for its product
and service offerings. One agreement, for clearing services,
contains no minimum annual purchase commitment, but the
agreement provides for certain penalties should the Company fail
to maintain a certain threshold of client accounts.
Future minimum payments under leases, lease commitments and
other noncancellable contractual obligations with remaining
terms greater than one year as of December 31, 2010, are as
follows (in thousands):
|
|
|
|
|
2011
|
|
$
|
31,380
|
|
2012
|
|
|
25,235
|
|
2013
|
|
|
16,145
|
|
2014
|
|
|
9,400
|
|
2015
|
|
|
7,157
|
|
Thereafter
|
|
|
7,908
|
|
|
|
|
|
|
Total(1)
|
|
$
|
97,225
|
|
|
|
|
|
|
|
|
|
(1) |
|
Minimum payments have not been reduced by minimum sublease
rental income of $6.5 million due in the future under
noncancelable subleases. |
Total rental expense for all operating leases was approximately
$17.1 million, $20.1 million and $22.1 million
for the years ended December 31, 2010, 2009 and 2008,
respectively.
Guarantees The Company occasionally
enters into certain types of contracts that contingently require
it to indemnify certain parties against third-party claims. The
terms of these obligations vary and, because a maximum
obligation is not explicitly stated, the Company has determined
that it is not possible to make an estimate of the amount that
it could be obligated to pay under such contracts.
The Companys subsidiaries provide guarantees to securities
clearing houses and exchanges under their standard membership
agreements, which require a member to guarantee the performance
of other members. Under these agreements, if a member becomes
unable to satisfy its obligations to the clearing houses and
exchanges, all other members would be required to meet any
shortfall. The Companys liability under these arrangements
is not quantifiable and may exceed the cash and securities it
has posted as collateral. However, the potential requirement for
the Company to make payments under these agreements is remote.
Accordingly, no liability has been recognized for these
transactions.
Loan Commitments From time to time,
the Company makes loans to its advisors, primarily to newly
recruited advisors to assist in the transition process. Due to
timing differences, the Company may make commitments to issue
such loans prior to actually funding them. These commitments are
generally contingent upon certain events occurring, including
but not limited to the advisor joining the Company, and may be
forgivable. The Company had no significant unfunded commitments
at December 31, 2010.
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
F-30
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
cases in which claimants seek substantial or indeterminate
damages, the Company cannot predict with certainty what the
eventual loss or range of loss related to such matters will be.
The Company recognizes a legal liability when it believes it is
probable a liability has occurred and the amount can be
reasonably estimated. Defense costs are expensed as incurred and
classified as professional services within the consolidated
statements of operations. 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, LPLH received written notice from a
third-party indemnitor under a certain purchase and sale
agreement asserting that it is no longer obligated to indemnify
the Company for certain claims under the provisions of the
purchase and sale agreement. The Company believes that this
assertion is without merit and has commenced litigation to
enforce its indemnity rights. On November 20, 2009, LPLH
and three of its affiliated broker-dealers, filed suit to
enforce the indemnitors performance pursuant to the
provisions of the contract. In February 2010, the plaintiffs
filed a motion for summary judgment with the court, which was
opposed by the third party indemnitor. In May 2010, the court
heard oral argument on the motion and see Note 22 for
further discussion on this matter.
During the third quarter of 2010, the Company settled two
arbitrations that involve activities covered under the
third-party indemnification agreement described above. In
connection with these settlements, the Company has recorded
legal expenses of $8.9 million. These legal expenses have
been included in professional services within the consolidated
statements of operations. The Company will seek to recover the
costs associated with defending and settling these matters, plus
other costs incurred on matters that the Company believes are
subject to the indemnification. The remaining claims outstanding
for which the indemnifying party is disputing its obligation
involve alleged damages that are not material to the
Companys consolidated statements of financial condition,
operations or cash flows.
The Company believes, based on the information available at this
time, after consultation with counsel, consideration of
insurance, if any, and indemnifications provided by the
third-party indemnitors, notwithstanding the assertions by an
indemnifying party noted in the preceding paragraphs, that the
outcome will not have a material adverse impact on consolidated
statements of financial condition, operations or cash flows.
Other Commitments As of
December 31, 2010, the Company had received collateral
primarily in connection with client margin loans with a market
value of approximately $326.9 million, which it can sell or
repledge. Of this amount, approximately $167.4 million has
been pledged or sold as of December 31, 2010;
$145.8 million was pledged to banks in connection with
unutilized secured margin lines of credit, $13.5 million
was pledged with client-owned securities to the Options Clearing
Corporation, and $8.1 million was loaned to the DTC through
participation in its Stock Borrow Program. As of
December 31, 2009, the Company had received collateral
primarily in connection with client margin loans with a market
value of approximately $227.9 million, which it can sell or
repledge. Of this amount, approximately $158.8 million has
been pledged or sold as of December 31, 2009;
$141.6 million was pledged to banks in connection with
unutilized secured margin lines of credit, $10.0 million
was pledged with client-owned securities to the Options Clearing
Corporation, and $7.2 million was loaned to the DTC through
participation in its Stock Borrow Program.
F-31
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
In August of 2007, pursuant to agreements with a large global
insurance company, LPL Financial began providing brokerage,
clearing and custody services on a fully disclosed basis;
offering its investment advisory programs and platforms; and
providing technology and additional processing and related
services to its advisors and their clients. The terms of the
agreements are five years, subject to additional
24-month
extensions. Termination fees may be payable by a terminating or
breaching party depending on the specific cause of termination.
|
|
15.
|
Share-Based
Compensation
|
Stock Option
and Warrant Plans
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
$10.3 million, $6.5 million and $4.6 million of
share-based compensation related to the vesting of employee
stock option awards during the years ended December 31,
2010, 2009 and 2008, respectively, which is included in
compensation and benefits on the consolidated statements of
operations. As of December 31, 2010, total unrecognized
compensation cost related to non-vested share-based compensation
arrangements granted was $53.0 million, which is expected
to be recognized over a weighted-average period of
4.14 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 $4.7 million,
$1.6 million, and $0.3 million of share-based
compensation during the years ended December 31, 2010, 2009
and 2008, respectively, related to the vesting of stock options
and warrants awarded to its advisors and financial institutions,
which is classified within commission and advisory fees on the
consolidated statements of operations. As of December 31,
2010, total unrecognized compensation cost related to non-vested
share-based compensation arrangements granted was
$12.2 million for advisors and financial institutions,
which is expected to be recognized over a weighted-average
period of 3.37 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 years ended December 31, 2010,
2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
Expected life (in years)
|
|
|
6.50
|
|
|
|
7.13
|
|
|
|
6.52
|
|
Expected stock price volatility
|
|
|
49.22
|
%
|
|
|
51.35
|
%
|
|
|
33.78
|
%
|
Expected dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized forfeiture rate
|
|
|
3.00
|
%
|
|
|
4.35
|
%
|
|
|
1.51
|
%
|
Fair value of options
|
|
$
|
17.43
|
|
|
$
|
12.30
|
|
|
$
|
9.96
|
|
Risk-free interest rate
|
|
|
2.70
|
%
|
|
|
2.93
|
%
|
|
|
2.73
|
%
|
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
F-32
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Assumptions Used in Valuation Methods, because the
Company does not have sufficient relevant historical information
to develop reasonable expectations about future exercise
patterns. The Company estimates the expected term for stock
options and warrants awarded to advisors and financial
institutions using the contractual term. Expected volatility is
calculated based on companies of similar growth and maturity and
the Companys peer group in the industry in which the
Company does business because the Company does not have
sufficient historical volatility data. The Company will continue
to use peer group volatility information until historical
volatility of the Company is available to measure expected
volatility for future grants. In the future, as the Company
gains historical data for volatility of its own stock and the
actual term over which stock options and warrants are held,
expected volatility and the expected term may change, which
could substantially change the grant-date fair value of future
awards of stock options and warrants and, ultimately,
compensation recorded on future grants.
The Company has assumed an annualized forfeiture rate for its
stock options and warrants based on a combined review of
industry, employee and advisor turnover data, as well as an
analytical review performed of historical pre-vesting
forfeitures occurring over the previous year. The Company
records additional expense if the actual forfeiture rate is
lower than estimated and records a recovery of prior expense if
the actual forfeiture is higher than estimated.
The following table summarizes the Companys activity in
its stock option and warrant plans for the years ended
December 31, 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Weighted-
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Number of
|
|
|
Average
|
|
|
Term
|
|
|
Value
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
(Years)
|
|
|
(In thousands)
|
|
|
Outstanding December 31, 2007
|
|
|
21,748,080
|
|
|
|
2.46
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,936,206
|
|
|
|
27.55
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(286,968
|
)
|
|
|
2.04
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(3,319,035
|
)
|
|
|
2.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2008
|
|
|
20,078,283
|
|
|
|
4.87
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
3,209,361
|
|
|
|
21.32
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(256,795
|
)
|
|
|
1.13
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(328,380
|
)
|
|
|
21.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2009
|
|
|
22,702,469
|
|
|
|
6.99
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,804,759
|
|
|
|
33.79
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(13,883,847
|
)
|
|
|
1.85
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(344,329
|
)
|
|
|
22.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2010
|
|
|
10,279,052
|
|
|
$
|
18.12
|
|
|
|
6.66
|
|
|
$
|
187,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable December 31, 2010
|
|
|
4,954,868
|
|
|
$
|
8.95
|
|
|
|
4.43
|
|
|
$
|
135,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-33
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The following table summarizes information about outstanding
stock options and warrants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
Total
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Life
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
Range of Exercise
Prices
|
|
Shares
|
|
|
(Years)
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
At December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1.35 $2.38
|
|
|
3,350,900
|
|
|
|
2.96
|
|
|
$
|
1.69
|
|
|
|
3,350,900
|
|
|
$
|
1.69
|
|
$10.30 $19.74
|
|
|
896,294
|
|
|
|
7.92
|
|
|
|
18.38
|
|
|
|
198,992
|
|
|
|
16.91
|
|
$21.60 $22.08
|
|
|
2,053,100
|
|
|
|
8.42
|
|
|
|
22.02
|
|
|
|
519,040
|
|
|
|
21.94
|
|
$23.02 $27.80
|
|
|
2,242,775
|
|
|
|
7.52
|
|
|
|
26.55
|
|
|
|
885,936
|
|
|
|
26.99
|
|
$30.00 $34.61
|
|
|
1,735,983
|
|
|
|
9.98
|
|
|
|
34.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,279,052
|
|
|
|
6.66
|
|
|
$
|
18.12
|
|
|
|
4,954,868
|
|
|
$
|
8.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
Nonqualified Deferred Compensation Plan
On November 19, 2008, the Company established an unfunded,
unsecured deferred compensation plan to permit employees and
former employees that held non-qualified stock options issued
under the 2005 Stock Option Plan for Incentive Stock Options and
2005 Stock Option Plan for Non-qualified Stock Options that were
to expire in 2009 and 2010, to receive stock units under the
2008 Nonqualified Deferred Compensation Plan. Stock units
represent the right to receive one share of common stock.
Distribution will occur at the earliest of (a) a date in
2012 to be determined by the Board of Directors; (b) a
change in control of the Company; or (c) death or
disability of the participant. Issuance of stock units, which
occurred in December 2008, is not taxable for federal and state
income tax purposes until the participant receives a
distribution under the deferred compensation plan. At
December 31, 2010, the Company had 2,823,452 stock units
outstanding under the 2008 Nonqualified Deferred Compensation
Plan.
Initial Public
Offering
In 2008, certain advisors were issued 7.4 million shares of
common stock. Transferability of the shares was restricted until
the completion of a change in control event or an initial public
offering (IPO). The Company has accounted for
restricted shares granted to its advisors by measuring such
grants at their then-current lowest aggregate value. Since the
value of the award was contingent upon the Companys
decision to sell itself or issue its common stock to the public
through an IPO, the aggregate value had been zero until such
event had occurred.
On November 17, 2010, the Company sold shares of common
stock in an IPO. Upon closing of the IPO, the Company recorded a
share-based compensation charge of $222.0 million,
representing the IPO price of $30.00 per share multiplied by
7.4 million shares that were issued and outstanding at the
time of the offering, which is classified within commission and
advisory fees on the consolidated statements of operations. The
Company was able to take a tax deduction for the share-based
compensation charge, as noted below.
The Company also expects to realize in connection with the IPO,
a $383.0 million tax deduction resulting from (a) the
exercise of non-qualified stock options by current and former
employees of the Company and (b) the exercise of incentive
stock options by current employees of the Company, and
subsequent sale of common stock, resulting in a disqualifying
disposition.
F-34
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
As a result of the tax deduction related to the release of the
restriction of shares of common stock held by advisors, as well
as option and warrant exercises; the Company is in a net
operating loss position for income tax reporting purposes.
Accordingly, in the fourth quarter of 2010, the Company
recognized a tax benefit of $144.5 million representing the
anticipated refund of taxes paid in 2008, 2009 and the first
three quarters of 2010. Such amount has been recorded as tax
receivables on the consolidated statements of financial
condition.
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 and December 22, 2010, the Company
issued 6,408 and 4,284, respectively, of restricted stock awards
to certain of its directors at a fair value of $23.41 and $35.61
per share, respectively. A summary of the status of the
Companys restricted stock awards under the Director Plan
as of and for the year ending December 31, 2010 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Number of
|
|
|
Grant-Date
|
|
|
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
|
|
|
Nonvested at January 1, 2010
|
|
|
|
|
|
$
|
|
|
|
|
|
|
Granted
|
|
|
10,692
|
|
|
|
28.30
|
|
|
|
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at December 31, 2010
|
|
|
10,692
|
|
|
$
|
28.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. Based upon the Companys history
of termination of non-employee directors, management has assumed
zero forfeitures for restricted stock awards. The Company
recognized $0.1 million of share-based compensation related
to the vesting of restricted stock awards granted to its
directors during the year ended December 31, 2010, which is
included in compensation and benefits on the consolidated
statements of operations. As of December 31, 2010, total
unrecognized compensation cost was $0.2 million, which is
expected to be recognized over a weighted-average remaining
period of 1.64 years.
Share
Reservations
As of December 31, 2010, the Company had approximately
10.3 million of authorized unissued shares reserved for
issuance upon exercise and conversion of outstanding awards.
In calculating (loss) 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
F-35
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
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 (loss) income used to compute basic and
diluted earnings per share for the years noted was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income, as reported
|
|
$
|
(56,862
|
)
|
|
$
|
47,520
|
|
|
$
|
45,496
|
|
Less: allocation of undistributed earnings to stock units
|
|
|
|
|
|
|
(919
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income, for computing basic earnings per share
|
|
$
|
(56,862
|
)
|
|
$
|
46,601
|
|
|
$
|
45,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income, as reported
|
|
$
|
(56,862
|
)
|
|
$
|
47,520
|
|
|
$
|
45,496
|
|
Less: allocation of undistributed earnings to stock units
|
|
|
|
|
|
|
(810
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income, for computing diluted earnings per share
|
|
$
|
(56,862
|
)
|
|
$
|
46,710
|
|
|
$
|
45,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the weighted average number of shares
outstanding used to compute basic and diluted earnings per share
for the years noted was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Basic weighted average number of shares outstanding
|
|
|
89,441
|
|
|
|
86,649
|
|
|
|
86,447
|
|
Dilutive common share equivalents
|
|
|
|
|
|
|
11,845
|
|
|
|
13,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average number of shares outstanding
|
|
|
89,441
|
|
|
|
98,494
|
|
|
|
100,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted (loss) earnings per share for the years noted
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Basic (loss) earnings per share
|
|
$
|
(0.64
|
)
|
|
$
|
0.54
|
|
|
$
|
0.53
|
|
Diluted (loss) earnings per share
|
|
$
|
(0.64
|
)
|
|
$
|
0.47
|
|
|
$
|
0.45
|
|
Basic weighted average shares outstanding and diluted weighted
average shares outstanding were the same for the year ended
December 31, 2010, because the effect of potential shares
of common stock was anti-dilutive since the Company generated a
net loss.
F-36
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
The computation of diluted earnings per share excluded stock
options and warrants to purchase 3,162,901 shares,
3,443,146 shares and 2,076,762 shares for the years
ended December 31, 2010, 2009 and 2008, respectively,
because the effect would have been anti-dilutive.
|
|
17.
|
Employee and
Advisor Benefit Plans
|
The Company participates in a 401(k) defined contribution plan
sponsored by LPL Financial. All employees meeting minimum age
and length of service requirements are eligible to participate.
The Company has an employer matching program whereby employer
contributions were made to the 401(k) plan. For 2010,
contributions were made in an amount equal to the lesser of 40%
of the amount designated by the employee for withholding or 4%
of the employees eligible compensation. For 2009,
contributions were made in an amount equal to the lesser of 20%
of the amount designated by the employee for withholding or 2%
of the employees eligible compensation. For 2008,
contributions were made in an amount equal to the lesser of 50%
of the amount designated by the employee for withholding or 5%
of the employees eligible compensation. The Companys
total cost under the 401(k) plan was $3.5 million,
$1.7 million and $4.8 million for the years ended
December 31, 2010, 2009 and 2008, respectively.
On January 1, 2008, the Company adopted a non-qualified
deferred compensation plan for the purpose of attracting and
retaining advisors who operate, for tax purposes, as independent
contractors, by providing an opportunity for participating
advisors to defer receipt of a portion of their gross
commissions generated primarily from commissions earned on the
sale of various products. The deferred compensation plan has
been fully funded to date by participant contributions. Plan
assets are invested in mutual funds, which are held by the
Company in a Rabbi Trust. The liability for benefits accrued
under the non-qualified deferred compensation plan totaled
$16.5 million at December 31, 2010, which is included
in accounts payable and accrued liabilities in the consolidated
statements of financial condition. The cash values of the
related trust assets was $16.2 million at December 31,
2010, which is measured at fair value and included in other
assets in the consolidated statements of financial condition.
Certain employees and advisors of the Companys
subsidiaries participated in non-qualified deferred compensation
plans (the Plans) that permitted participants to
defer portions of their compensation and earn interest on the
deferred amounts. The Plans have been closed to new participants
and no contributions have been made since the acquisition date.
Plan assets are held by the Company in a Rabbi Trust and
accounted for in the manner described above. As of
December 31, 2010, the Company has recorded assets of
approximately $1.0 million and liabilities of
$1.1 million, which are included in other assets and
accounts payable and accrued liabilities, respectively, in the
consolidated statements of financial condition.
|
|
18.
|
Related Party
Transactions
|
AlixPartners, LLP (AlixPartners), a company
majority-owned by one of the Companys majority
stockholders, provides services pursuant to an agreement for
interim management and consulting. The Company paid
$0.6 million and $4.2 million to AlixPartners during
the years ended December 31, 2009 and 2008, respectively.
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 years ended
December 31, 2010, 2009 and 2008, the Company earned
$2.3 million, $1.5 million and $1.6 million,
respectively, in fees from Artisan. Additionally, as of
December 31, 2010 and 2009, Artisan owed the Company
$0.6 million and $0.5 million, respectively,
F-37
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
which is included in receivables from product sponsors,
broker-dealers and clearing organizations on the 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 years ended
December 31, 2010, 2009 and 2008, the Company earned
$0.2 million, $0.4 million, and $0.3 million,
respectively, in fees from American Beacon. Additionally, as of
December 31, 2009, American Beacon owed the Company
$0.1 million, which is included in receivables from product
sponsors, broker-dealers and clearing organizations on the
consolidated statements of financial condition.
One of the Companys majority stockholders owns a minority
interest in XOJET, Inc. (XOJET), which provides
chartered aircraft services. The Company paid $1.4 million
to XOJET during the year ended December 31, 2010.
Certain entities affiliated with SunGard Data Systems Inc.
(SunGard), a company majority-owned by one of the
Companys majority stockholders, provide data center
recovery services. The Company paid $0.3 million and
$0.5 million to SunGard during the years ended
December 31, 2010 and 2009, respectively.
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
$1.1 million, $0.8 million and $0.3 million to
Blue Frog for such services during the years ended
December 31, 2010, 2009 and 2008, respectively. As of
December 31, 2010, the Company had a payable to Blue Frog
of $0.7 million, which is included in accounts payable and
accrued liabilities on the consolidated statements of financial
condition.
TPG Capital (TPG), one of the Companys
majority stockholders, provided certain consulting services. The
Company paid $0.3 million to TPG during the year ended
December 31, 2010.
In conjunction with the acquisition of UVEST Financial Services
Group, Inc. (UVEST), the Company made full-recourse
loans to certain members of UVESTs 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 December 31,
2009, outstanding stockholder loans, which are reported as a
deduction from stockholders equity, were
$0.5 million. At December 31, 2010, there were no
loans outstanding.
An immediate family member of one of the Companys
executive officers, is an executive officer of CresaPartners LLC
(CresaPartners). CresaPartners provides the Company
and its subsidiaries real estate advisory, transaction and
project management services. The Company paid $0.1 million
to CresaPartners during the year ended December 31, 2010.
|
|
19.
|
Net
Capital/Regulatory Requirements
|
The Companys registered broker-dealers are subject to the
SECs Uniform Net Capital Rule
(Rule 15c3-1
under the Securities Exchange Act of 1934), which requires the
maintenance of minimum net capital, as defined. Net capital is
calculated for each broker-dealer subsidiary individually.
Excess net capital of one broker-dealer subsidiary may not be
used to offset a net capital deficiency of another broker-dealer
subsidiary. Net capital and the related net capital requirement
may fluctuate on a daily basis.
F-38
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
Net capital and net capital requirements for the Companys
broker-dealer subsidiaries as of December 31, 2010 are
presented in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
Minimum
|
|
|
|
|
|
|
Net
|
|
|
Net Capital
|
|
|
Excess Net
|
|
|
|
Capital
|
|
|
Required
|
|
|
Capital
|
|
|
LPL Financial LLC
|
|
$
|
95,362
|
|
|
$
|
6,416
|
|
|
$
|
88,946
|
|
UVEST Financial Services Group, Inc.
|
|
|
7,884
|
|
|
|
1,451
|
|
|
|
6,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
103,246
|
|
|
$
|
7,867
|
|
|
$
|
95,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In connection with the consolidation of the Affiliated Entities;
Associated and WFG have withdrawn their registration with FINRA
effective February 5, 2011, and are no longer subject to
net capital filing requirements. MSC expects to withdraw its
registration with FINRA and has maintained sufficient capital to
carry out any remaining activities during the interim. At
December 31, 2010, MSC had a net capital of
$8.7 million, which was $8.2 million in excess of its
minimum required net capital.
LPL Financial is a clearing broker-dealer and UVEST is an
introducing broker-dealer.
PTC is also subject to various regulatory capital requirements.
Failure to meet minimum capital requirements can initiate
certain mandatory and possible additional discretionary actions
by regulators that, if undertaken, could have a direct material
effect on the Companys consolidated financial statements.
As of December 31, 2010, the Companys registered
broker-dealers and PTC have met all capital adequacy
requirements to which it is subject.
The Company operates in a highly regulated industry. Applicable
laws and regulations restrict permissible activities and
investments. These policies require compliance with various
financial and customer-related regulations. The consequences of
noncompliance can include substantial monetary and nonmonetary
sanctions. In addition, the Company is also subject to
comprehensive examinations and supervision by various
governmental and self-regulatory agencies. These regulatory
agencies generally have broad discretion to prescribe greater
limitations on the operations of a regulated entity for the
protection of investors or public interest. Furthermore, where
the agencies determine that such operations are unsafe or
unsound, fail to comply with applicable law, or are otherwise
inconsistent with the laws and regulations or with the
supervisory policies, greater restrictions may be imposed.
|
|
20.
|
Financial
Instruments with Off-Balance-Sheet Credit Risk and
Concentrations of Credit Risk
|
LPL Financials client securities activities are transacted
on either a cash or margin basis. In margin transactions, LPL
Financial extends credit to the client, subject to various
regulatory and internal margin requirements, collateralized by
cash and securities in the clients account. As clients
write options contracts or sell securities short, LPL Financial
may incur losses if the clients do not fulfill their obligations
and the collateral in the clients accounts is not
sufficient to fully cover losses that clients may incur from
these strategies. To control this risk, LPL Financial monitors
margin levels daily and clients are required to deposit
additional collateral, or reduce positions, when necessary.
LPL Financial is obligated to settle transactions with brokers
and other financial institutions even if its clients fail to
meet their obligation to LPL Financial. Clients are required to
complete their transactions on the settlement date, generally
three business days after the trade date. If clients do not
fulfill their contractual obligations, LPL Financial may incur
losses. LPL Financial has established
F-39
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
procedures to reduce this risk by generally requiring that
clients deposit cash
and/or
securities into their account prior to placing an order.
LPL Financial may at times maintain inventories in equity
securities on both a long and short basis that are recorded on
the consolidated statements of financial condition at market
value. While long inventory positions represent LPL
Financials ownership of securities, short inventory
positions represent obligations of LPL Financial to deliver
specified securities at a contracted price, which may differ
from market prices prevailing at the time of completion of the
transaction. Accordingly, both long and short inventory
positions may result in losses or gains to LPL Financial as
market values of securities fluctuate. To mitigate the risk of
losses, long and short positions are
marked-to-market
daily and are continuously monitored by LPL Financial.
UVEST is engaged in buying and selling securities and other
financial instruments for clients of advisors. Such transactions
are introduced and cleared through a third-party clearing firm
on a fully disclosed basis. While introducing broker-dealers
generally have less risk than clearing firms, their clearing
agreements expose them to credit risk in the event that their
clients dont fulfill contractual obligations with the
clearing broker-dealer.
The Affiliated Entities were engaged in buying and selling
securities and other financial instruments for clients of
advisors. Such transactions were introduced and cleared through
a third-party clearing firm on a fully disclosed basis. These
firms no longer conduct such activities. The registered
representatives and their client accounts have either
transitioned or are in the process of transitioning to LPL
Financial or to new firms.
|
|
21.
|
Selected
Quarterly Financial Data
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
(In thousands)
|
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Revenues
|
|
$
|
743,452
|
|
|
$
|
790,185
|
|
|
$
|
759,988
|
|
|
$
|
819,972
|
|
Net revenues
|
|
|
743,406
|
|
|
|
790,161
|
|
|
|
759,964
|
|
|
|
819,955
|
|
Gross margin(1)(2)
|
|
|
230,204
|
|
|
|
233,623
|
|
|
|
234,336
|
|
|
|
239,770
|
|
Net income (loss)
|
|
$
|
25,554
|
|
|
$
|
8,000
|
|
|
$
|
26,144
|
|
|
$
|
(116,560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
(In thousands)
|
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Revenues
|
|
$
|
643,040
|
|
|
$
|
669,366
|
|
|
$
|
702,378
|
|
|
$
|
734,906
|
|
Net revenues
|
|
|
642,978
|
|
|
|
669,317
|
|
|
|
702,326
|
|
|
|
734,884
|
|
Gross margin(1)
|
|
|
200,447
|
|
|
|
205,329
|
|
|
|
221,144
|
|
|
|
218,006
|
|
Net income (loss)
|
|
$
|
14,797
|
|
|
$
|
15,581
|
|
|
$
|
(1,456
|
)
|
|
$
|
18,598
|
|
|
|
|
(1) |
|
Gross margin is calculated as net revenues less production
expenses. Production expenses consist of the following expense
categories from the consolidated statements of operations:
(i) commissions and advisory fees and (ii) brokerage,
clearing and exchange. All other expense categories, including
depreciation and amortization, are considered general and
administrative in nature. Because the Companys gross
margin amounts do not include any depreciation and amortization
expense, the gross margin amounts may not be comparable to those
of others in the Companys industry. |
F-40
LPL INVESTMENT
HOLDINGS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
(2) |
|
In 2010, upon closing of the Companys IPO in the fourth
quarter, the restriction on approximately 7.4 million
shares of common stock issued to its advisors under the Fifth
Amended and Restated 2000 Stock Bonus Plan was released.
Accordingly, the Company recorded a share-based compensation
charge of $222.0 million in the fourth quarter of 2010,
representing the offering price of $30.00 per share multiplied
by 7.4 million shares. This charge has been classified as
production expense in 2010. Gross margin as calculated for 2010
above does not include this charge for comparability purposes
with previous years shown. |
On January 20, 2011, the Company received a
$45.0 million tax refund for federal taxes paid in 2010.
On January 31, 2011, the Company repaid $40.0 million
of term loans under its senior secured credit facilities using
net proceeds received in the IPO, as well as other cash on hand.
On March 4, 2011, the Company received notification from the
court that its motion for summary judgment that was filed in
February 2010, and that is described above in Note 14, has
been granted in all respects and that all counterclaims by the
third party indemnitor have been denied.
******
F-41