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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001-32878
(Commission File Number)
PENSON WORLDWIDE,
INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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6211
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75-2896356
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification No.)
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1700 Pacific Avenue, Suite 1400
Dallas, Texas 75201
(214) 765-1100
(Address, including zip
code, and telephone number, including area code, of the
registrants principal executive offices)
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, par value $0.01 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 o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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
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
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 if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
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. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the registrants common stock
held by non-affiliates as of June 30, 2010 (the last
business day of the registrants most recently completed
second fiscal quarter) was $86,553,301.
The number of outstanding shares of the registrants Common
Stock, $0.01 par value, as of March 1, 2011 was
28,492,249.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of registrants Definitive Proxy Statement
relating to its 2011 annual meeting of stockholders are
incorporated by reference into Part III.
PENSON
WORLDWIDE, INC.
Form 10-K
For the Fiscal Year Ended December 31, 2010
TABLE OF CONTENTS
Penson and the Penson logo are our trademarks. Other
service marks, trademarks and trade names referred to in this
annual report are the property of their respective owners.
Basis of
Presentation
In this Annual Report on
Form 10-K,
the term Penson refers to Penson Worldwide, Inc., a
Delaware corporation and its subsidiaries on a consolidated
basis. Unless otherwise indicated, all references in this report
to the Company, Penson, we,
us and our refer to Penson Worldwide,
Inc. and our subsidiaries.
Penson Worldwide, Inc. (PWI) is a holding company
incorporated in Delaware. The Company conducts business through
its wholly owned subsidiary SAI Holdings, Inc.
(SAI). SAI conducts business through its principal
direct and indirect operating subsidiaries, Penson Financial
Services, Inc. (PFSI), Penson Financial Services
Canada Inc. (PFSC), Penson Financial Services Ltd.
(PFSL), Nexa Technologies, Inc. (Nexa),
Penson Futures, formerly known as Penson GHCO (Penson
Futures), Penson Asia Limited (Penson Asia)
and Penson Financial Services Australia Pty Ltd
(PFSA). Through these operating subsidiaries, the
Company provides securities and futures clearing services
including integrated trade execution, foreign exchange trading,
custody services, trade settlement, technology services, risk
management services, customer account processing and customized
data processing services. The Company also participates in
margin lending and securities lending and borrowing
transactions, primarily to facilitate clearing and financing
activities.
PFSI is a broker-dealer registered with the Securities and
Exchange Commission (SEC), a member of the New York
Stock Exchange (NYSE) and a member of the Financial
Industry Regulatory Authority (FINRA), and is
licensed to do business in all fifty states of the United States
of America and certain territories. PFSC is an investment dealer
registered in all provinces and territories in Canada and is a
dealer member of the Investment Industry Regulatory Organization
of Canada (IIROC). PFSL provides settlement services
to the London financial community and is regulated by the
Financial Services Authority (FSA) and is a member
of the London Stock Exchange. Penson Futures is a registered
Futures Commission Merchant (FCM) with the Commodity
Futures Trading Commission (CFTC) and is a member of
the National Futures Association (NFA), various
futures exchanges and is regulated in the United Kingdom by the
FSA. PFSA holds an Australian Financial Services License and is
a market participant of the Australian Securities Exchange
(ASX) and a clearing participant of the Australian
Clearing House.
As of the date of this Annual Report, Penson has one class of
common stock and one class of convertible preferred stock. The
common stock is currently held by public shareholders and
certain directors, officers and employees of the Company. None
of the preferred stock is issued and outstanding. As used in
this Annual Report, the term common stock means the
common stock, and the term preferred stock means the
convertible preferred stock, in each case unless otherwise
specified.
Special
Note Regarding Forward-Looking Statements
This Annual Report and the information contained herein include
forward-looking statements that involve both risk and
uncertainty and that may not be based on current or historical
fact. Although we believe our expectations to be accurate,
forward-looking statements are subject to known and unknown
risks and uncertainties that could cause actual results to
differ materially from those expressed or implied by such
statements. Factors that could cause or contribute to such
differences include but are not limited to:
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interest rate fluctuations;
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general economic conditions and the effect of economic
conditions on consumer confidence;
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reduced margin loan balances maintained by our customers;
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fluctuations in overall market trading volume;
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our ability to successfully implement new product offerings;
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our ability to obtain future credit on favorable terms;
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reductions in per transaction clearing fees;
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legislative and regulatory changes;
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monetary and fiscal policy changes and other actions by the
Board of Governors of the Federal Reserve System (Federal
Reserve);
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our ability to attract and retain customers and key
personnel; and
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those risks detailed from time to time in our press releases and
periodic filings with the SEC.
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Forward-looking statements can be identified by the use of
forward-looking words such as believes,
expects, hopes, may,
will, plans, intends,
estimates, could, should,
would, continue, seeks,
pro forma, or anticipates or other
similar words (including their use in the negative), or by
discussions of future matters such as the development of new
technology, integration of acquisitions, possible changes in our
regulatory environment and other statements that are not
historical. Additional important factors that may cause our
actual results to differ from our projections are detailed later
in this report under the section entitled Risk
Factors. You should not place undue reliance on any
forward-looking statements, which speak only as of the date
hereof. Except as required by law, we undertake no obligation to
publicly update or revise any forward-looking statement.
2
Glossary
of selected terms
Algorithmic traders means firms or
individuals that engage in algorithmic trading,
defined below.
Algorithmic trading means the automatic
generation of size and timing of orders based on preset
parameters, occurs largely as a result of complex computational
models and is often highly if not totally automated (i.e.,
trading does not necessarily require the intervention of a live
trader but is generated by computers). Such trading is at times
referred to as black box trading.
ASP refers to Application Service
Provider, which means a licensor of software products that
hosts such products on its own proprietary or leased hardware
and offers customer service relating to such products to the
licensee.
Back-end trading software means software
programs that interface between the clearing firm, exchange or
ECN, and the trader using front-end trading software.
Clearing means the verification of
information between two counterparties (e.g. brokers) in a
securities transaction and the subsequent settlement of that
transaction, either as a book-entry transfer or through physical
delivery of certificates, in exchange for payment. Clearing is
the procedure by which an organization acts as an intermediary
and assumes the role of buyer and seller for transactions in
order to reconcile orders between transacting parties. Clearing
enables the matching of buy and sell orders in a market and,
typically, provides for more efficient markets as parties can
make transfers to a clearing agent rather than to each
individual party with whom they have transacted.
Clearing firm means the firm that provides
clearing, custody, settlement
and/or other
services to correspondents and, at times, to customers. Clearing
firms may or may not provide technology products and services
such as front-end trading software and data.
Client means both correspondents and other
customers who may not utilize our clearing, futures or
securities products and services but which may, for example, use
solely technology products and services.
Correspondent means entities (e.g.,
broker-dealers) that use our clearing firms respective
regulated securities
and/or
futures record keeping, custody
and/or
settlement services as opposed to only using technology products
and services. Our typical correspondent is a firm that
introduces its customers to our clearing firms for clearing,
custody
and/or
settlement services.
Custody means when a party has taken legal
responsibility to hold another partys assets such as
physical securities. Custody services are the safe-keeping and
managing of another partys assets, as well as customer
account maintenance and customized data processing services.
Customers means the customers of our
Correspondents. Customers of our correspondents may be
individuals or entities and may have an institutional or retail
focus.
Direct access or Direct market
access means when a front-end trading application
permits the trader to select the market destination on which
execution is desired and the order is transmitted completely
electronically without human intervention.
Electronic Communications Network or
ECN means an electronic system that matches
buy and sell orders typically via computerized systems.
Execution routing means the sending of
securities orders to exchanges and other market destinations
such as market makers through the use of telecommunications
infrastructure combined with proprietary or third party trading
software.
FCM means futures commission merchant (which
is similar to a broker-dealer but operates in the futures arena).
Front-end trading software means software
programs used by traders to access trading information and
execute trades, and that interface with back-end software
systems that communicate with the clearing firm, exchange or
ECN. Level II trading software (see definition below) is a
form of front-end trading software.
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Level I market information means the
most basic information available about a stock consisting
principally of the bid and ask price and last trade data.
Level I trading software means a
front-end trading software system designed to provide access to
Level I market information for use in online trading.
Level II market information means
information from multiple exchanges and other markets for the
same security type.
Level II trading software means a
front-end trading software system designed to provide access to
Level II market information for use in active online
trading and which enables a trader to select a specific exchange
or market across various markets.
Online trading means trading via electronic
means (typically via the Internet). Direct access trading, for
example, is often viewed as a subset or a type of online trading.
Settlement means the conclusion of a
securities transaction in which a broker-dealer pays for
securities bought for a customer or delivers securities sold and
receives payment from the buyers broker-dealer.
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PART I
Overview
We are a leading provider of a broad range of critical
securities and futures processing infrastructure products and
services to the global financial services industry. Our products
and services include securities and futures clearing and
execution, financing and cash management technology and other
related offerings, and we provide tools and services to support
trading in multiple markets, asset classes and currencies.
Unlike most other major clearing providers, we are not
affiliated with a large financial institution and we generally
do not compete with our clients in other lines of business. We
believe that our position as the leading independent provider in
Canada, Australia and the United States is a significant
differentiating factor relative to our competitors. We supply a
flexible offering of infrastructure and related products and
services to our clients, available both on an unbundled basis
and as a fully-integrated platform encompassing all of our
products and services. We believe our ability to integrate our
technology offerings into our products and services is a key
advantage in our effort to expand our sales and attract new
clients.
Clearing is the verification of information between two parties
in a securities or futures transaction and the subsequent
settlement of that transaction, either as a book-entry transfer
or through physical delivery of certificates, in exchange for
payment. Custody services are the safe-keeping and managing of
another partys assets, such as physical securities, as
well as customer account maintenance and customized data
processing services. Clients for whom we provide securities
clearing and custody services are generally referred to as our
correspondents.
Since starting our business in 1995 with three correspondents,
we have grown to be a leading provider of clearing services.
Based on the number of correspondents as of December 31,
2010, we are the largest independent clearing broker in the
U.S., and among the top two clearing brokers overall in the
U.S., the largest independent clearing broker in Canada, the
largest independent clearing broker in Australia and the second
largest in the U.K. We have grown both organically and through
acquisitions. As of December 31, 2010, we had 430 active
correspondents worldwide, compared to 290 correspondents as of
December 31, 2009. As of December 31, 2010, our
pipeline of new correspondents under contract was 30, the
majority of which we expect to begin clearing with us by
June 30, 2011.
With operations based in the U.S., Canada, U.K., Asia and
Australia, we have established a worldwide presence primarily
focused on the global markets for equities, options, futures,
fixed income and foreign exchange products. We believe that
international markets offer an important target market as
certain characteristics of the U.S. market, including
significant increases in retail, self-directed and online
trading, and increased trading volumes and executions, continue
to expand globally. We are organized into operating segments
based on geographic regions (See Note 22 to our
consolidated financial statements).
Our non-interest revenues include: fees from our correspondents
for transaction processing and clearing; fees for providing
technology solutions; and fees for providing other non-trading
activities and services, including execution services, trade
aggregation, prime brokerage, foreign exchange and fixed income.
Clearing and commission fees are based principally on the number
of trades we process. We also earn licensing and development
fees from clients for their use of our technology solutions.
Our interest revenues are generated from customer-related
balances and from our stock borrowing transactions. Interest
revenues from customers are generated from margin lending,
securities lending and the reinvestment of customer funds. We
also derive net interest revenue from our stock conduit
borrowing activities, which consist of borrowing securities from
one broker-dealer and lending the same securities to another
broker-dealer on a matched book basis.
For the year ended December 31, 2010, we generated net
revenues of $288.3 million. Clearing and commission fees,
net interest income, technology revenues and other revenues
comprised 53%, 24%, 7% and 16% of our net revenues,
respectively. Approximately 40% of our securities correspondents
generate both clearing and technology revenue. In addition, some
of our customers generate revenue from both securities and
futures trading, and trade in
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multiple global markets. The following table represents the
percentages of net revenues and total correspondents by
correspondent type:
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Percentage of Net
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Percentage of Total
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Correspondent Type
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Revenues
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Correspondents
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Direct market access
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14.4
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8.8
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Retail
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15.5
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36.2
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Online
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15.7
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7.8
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Institutional
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17.0
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%
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30.4
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Other
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37.4
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16.8
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The Other category consists of broker-dealers trading on a
proprietary basis, broker-dealers specializing in option
trading, futures trading, hedge funds, algorithmic traders and
financial technology firms. See also Part II, Item 7,
Managements Discussion and Analysis of Financial
Condition and Results of Operations, for more information.
As an integral part of our securities clearing relationships, we
maintain a significant margin lending business with our
correspondents and their customers. Under these margin lending
arrangements, we extend credit to our correspondents and their
customers so that they may purchase securities on margin. As is
typical in margin lending arrangements, we extend credit for a
portion of the purchase price of the securities, which is
collateralized by existing securities and cash in the accounts
of our correspondents and their customers. We also earn interest
income from both our securities and futures operations by
investing customers cash and we engage in securities
lending activities as a means of financing our business and
generating additional interest income. Over the past year, our
net interest revenues increased from $65.9 million in 2009
to $68.5 million in 2010, representing approximately 23%
and 24% of our aggregate net revenues, respectively.
Clients
Currently, our principal clients are online, direct access,
institutional and traditional retail brokers. We are
increasingly adding large banks, institutional brokers,
financial technology companies and securities exchanges as
clients. Online broker-dealers principally enable investors to
perform trades through the broker via the Internet through
browser-based technology. Direct access broker-dealers
principally provide investors with dedicated software which
executes orders through direct exchange interfaces and provides
real-time high speed Level II market information.
Traditional retail brokers usually engage in agency trades for
their customers, which may or may not be online. Institutional
brokers and hedge funds typically engage in algorithmic trading
or other proprietary trading strategies for their own account
or, at times, agency trades for others. Our bank clients
typically are
non-U.S. entities
making purchases for their brokerage operations. The type of
financial technology client that would most likely use our
products and services is a financial data content or trading
software firm that purchases our data or combines its offerings
with our trading software. Through our acquisitions of
Goldenberg Hehmeyer and Co. (GHCO) and First Capitol
Group LLC (FCG) in 2007,which both operate within
Penson Futures, we added a number of futures related clients,
including introducing brokers, non-clearing FCMs, commercial
customers, customers who engage in hedging and risk management
activities and other customers who trade futures and other
instruments.
We have made significant investments in our U.S. and
international data and execution infrastructure, as well as
various types of multi-currency and multi-lingual trading
software. We provide what we believe to be a flexible offering
of infrastructure products and services to our clients,
available both on an unbundled basis and as a fully-integrated
solution. Our technology offerings are typically private-labeled
to emphasize the clients branding. We seek to put our
clients interests first and we believe our position as the
leading independent provider of U.S. securities clearing
services is a significant differentiating factor. We believe we
are well-positioned to take advantage of our significant
investments in technology infrastructure to expand sales of our
products and services to these and many other clients worldwide.
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Industry
trends
We believe that the market for securities and futures processing
products and services is influenced by several significant
industry trends creating continuing opportunities for us to
expand our business, including:
Shift to outsourced solutions. Broker-dealers
and many FCMs are continuing to outsource their clearing
functions. In addition, firms in the global securities and
investment industry are expanding their use of third-party
technology to manage their securities trading infrastructure.
Increase in trading in multiple
markets. Investors increasingly seek to trade in
multiple markets, asset classes and currencies at once. The
technological challenges associated with clearing, settlement,
and custody in multiple geographies, currencies, and asset
classes are prompting correspondents to seek the most
comprehensive and sophisticated service providers. We have
sought to capitalize on this trend by expanding our product
offering into high growth areas such as the futures market,
where we have significantly expanded since early 2007. Net
revenues from our futures product offering comprised
approximately 10% and 11% of total net revenues in 2010 and 2009.
Industry consolidation. Although the
significant effort and potential business disruption associated
with conversion to a new clearing firm may discourage some
correspondents from switching service providers, consolidation
among clearing service providers has led to forced conversions.
These conversions result in opportunities for correspondents to
seek competing offers and, thus, for service providers to
solicit new correspondents business without having to
overcome the threshold issue of converting from an incumbent. We
believe we have benefited from industry consolidation by
attracting correspondents as a result of the acquisitions of
major competitors by larger financial institutions and acquiring
other firms.
Demand for increased reporting capabilities and integrated
technology solutions. Clients are increasingly
demanding products that seamlessly integrate front, middle and
back-office systems and allow for near real-time updating of
account status and margin balances. Our ability to meet these
demands makes us a preferred processing firm for correspondents
in the growing algorithmic trading and hedge fund sectors.
Opportunities in the Canadian, European, Asian and Australian
markets. The securities and investments
industries outside of the U.S., including those in Canada,
Europe, Asia and Australia have followed many of the same trends
as the U.S. market. Many industry participants are now
requiring the same complex and sophisticated clearing and
execution services that are common in the U.S. In addition,
clearing firms in these markets are less likely to own trading
applications, creating opportunities for the sale of Nexas
products. We opened our first Asian office in Hong Kong in the
first quarter of 2007 and an office in Tokyo during 2008 in
order to expand our Asian operations. Our Asian operations are
currently focused on marketing our technology products. We
launched our Australian office in the second quarter of 2009,
and began clearing operations there in December, 2009. We
recently acquired execution contracts for 34 Australian
correspondents and we currently have 48 Australian
correspondents. We expect significant growth opportunities in
Australian markets in 2011.
Our
product offering
Clearing
and related services
As a securities and futures processing infrastructure provider,
Pensons services include securities and futures clearing
and settlement, execution, custody, account maintenance, data
processing services, and technology services. Clearing is the
verification of information and matching between two parties in
a securities or futures transaction which is followed by the
subsequent settlement of that transaction in exchange for
payment or margin deposit. Custody services are the safe-keeping
and managing of another partys assets, such as securities,
as well as customer account maintenance and customized data
processing services. Clients for whom we provide securities
clearing and custody services are generally referred to as our
correspondents or introducing brokers.
We also provide commodity risk management and other services to
certain of our futures customers.
We have made substantial investments in the development of
customized data processing systems that we use to provide these
back-office services to our correspondents on an
integrated, efficient and cost-effective basis,
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allowing us to process a high volume of transactions without
sacrificing stability and reliability. In 2010, we processed an
average of 1.3 million equity transactions,
1.4 million equity options contracts and 492,000 futures
contracts per day. Our products and services reduce the need for
our correspondents to make significant capital investments in a
clearing infrastructure and allow them to focus on their core
business competencies. These systems also enable our
correspondents to provide customized, timely transaction and
account information to their customers, and to monitor the risk
level of their customers on a real-time basis. We have found
that our comprehensive suite of advanced technology solutions is
often an important factor in winning new correspondents.
As an integral part of our securities clearing relationships, we
maintain a significant margin lending business with most of our
correspondents and their customers. Under these margin lending
arrangements, we extend credit to our correspondents and their
customers so that they may purchase securities on margin. As is
typical in margin lending arrangements, we extend credit for a
portion of the purchase price of the securities, which is
collateralized by existing securities and cash in the accounts
of our correspondents and their customers. We also earn interest
income from both our securities and futures operations by
investing customers cash and we engage in securities
lending activities as a means of financing our business and
generating additional interest income.
Technology
and data products
An important component of our business strategy is to identify
and deploy technologies relevant to our target markets. Our
technology and data product offerings, which are principally
developed and marketed through our Nexa subsidiary, include
customizable front-end trading platforms, a comprehensive
database of real-time and historical U.S. and international
equities, options and futures trade data, and order-management
services. This technology embedded in our securities and futures
processing infrastructure has enhanced our capacity to handle an
increasing volume of transactions without a corresponding
increase in personnel. We use our proprietary technology and
technology licensed from third parties to provide customized,
detailed account information to our clients. Our technology is
critical to our vision of providing a flexible and comprehensive
offering of products and services to our clients. Our technology
revenues generally include revenues from software development
and customization of products and features, but our technology
products are designed to generate substantial subscription-based
revenues. The majority of our technology revenues is recurring
in nature and is generated by correspondents under contracts
that generally have initial terms of two years.
Our
competitive strengths
Established
market position as the largest independent provider of
correspondent clearing services in our primary
markets.
We have grown organically and through acquisitions to become the
leading global independent provider of securities clearing
services in our primary markets with 430 active correspondents
in the U.S., Canadian, Asian, Australian and U.K. markets, which
includes 59 futures correspondents as of December 31, 2010.
As of December 31, 2010 (based on the number of
correspondents), we were the largest independent clearing
broker-dealer in the U.S., Canada and Australia, as well as the
second largest clearing broker in the U.K. Furthermore, as of
December 31, 2010 (based on the number of correspondents),
we are also the second largest clearing broker in the
U.S. overall. Unlike most other major clearing service
providers, we are not affiliated with a large financial
institution and we generally do not compete with our clients in
other lines of business. We believe our position as the leading
independent provider of securities clearing services in our
primary markets is a significant differentiating factor.
Fully-integrated
securities-processing and technology solutions.
We are a leading provider of infrastructure to financial
intermediaries, offering integrated solutions with the ability
to address all major securities-processing needs. Through the
integration of our own technology across all of our products and
services, we have been able to expand our client base and
increase our revenue from existing clients. Our products and
services facilitate trading in multiple markets, asset classes
and currencies, with integrated execution, clearing and
settlement solutions. It is our belief that, while some clients
are willing to obtain these
8
products from multiple vendors, many will determine that it is
easier to obtain solutions with lower integration costs and
risks from one provider that can also address the regulatory
requirements of their business.
Flexible
services and infrastructure.
We provide a broad offering of infrastructure, technology and
data products and services to our clients, available both on an
unbundled basis and as a fully-integrated solution. We work
closely with each of our clients to tailor the set of products
and services appropriate for their individual needs.
Highly
attractive and diversified client base.
Our client base comprises the following
categories: online, direct market access,
institutional, retail and algorithmic, options, futures, foreign
exchange and other. For the year ended December 31, 2010,
no single category of correspondent represented more than 17% of
total net revenues. In addition, no single correspondent
represented more than 6.8% of net revenue, with our top ten
correspondents constituting 26.1% of our net revenues. As
previously announced, we will be losing a significant amount of
the revenues generated from our largest correspondent during
2011; however, we believe we will be able to replace a
substantial portion of that revenue from new correspondents we
have signed. Additionally, we have diversified our client base
internationally through our operations in Canada, the U.K.,
Australia and Asia, and by asset class through expanding our
operations into the futures business and foreign exchange
businesses, among others.
Scalable,
recurring revenue model.
Our business benefits from a highly scalable platform that is
capable of processing significant additional volume with limited
incremental increases in our expenses. We receive a recurring
stream of revenues based on the trading volumes of each of our
correspondents with a low marginal cost to process transactions.
We typically maintain two- to three-year exclusive contracts
with our correspondents. Furthermore, there are typically high
switching costs as the transition from one provider of clearing
services to another is disruptive to a correspondents
business. In addition, a significant portion of our technology
revenues are based on ASP arrangements with clients, linked to
transactions and users. Thus, we become even more indispensable
to our clients by not only licensing them our software but by
also providing them with hardware to run our products along with
related support services.
Proven
and highly motivated management team.
With an average of 31 years of industry experience and
holding a substantial equity interest in Penson, our Executive
Committee has the proven ability to manage our business through
all stages of the business cycle. Roger J. Engemoen, Jr.,
and Philip A. Pendergraft, our Chairman and Chief Executive
Officer, respectively, founded our business in 1995 and have
built it to its current position. Daniel P. Son, co-founder of
our company, resigned his position as President of the Company
effective September 1, 2010, but continues to serve the
Company as a
non-executive
vice chairman of the Board, and is expected to provide
consulting services in 2011 pursuant to a contract entered into
between PWI and Holland Consulting, LLC, a company controlled by
Mr. Son.
Business
strategies
Leverage
existing platform to expand our product offerings and client
base.
We believe our infrastructure provides a leading
fully-integrated securities clearing and technology product
package to our core market, and additional products can be
offered and new clients can be added with minimal marginal cost.
Using this infrastructure, we intend to expand our client base
by:
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Focusing on high-volume direct access and online
broker-dealers and the futures trading
industry. We will continue to market our clearing
services to the growing futures trading, direct access and
online
broker-dealer
markets and on margin lending as a core complementary service.
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Further expanding our client base in the institutional and
retail brokerage markets. We are expanding our
focus on the traditional institutional and retail brokerage
industry. Many institutional and retail brokers in the
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U.S. have outsourced their clearing functions, and we
believe this trend is continuing internationally, which creates
opportunities for us globally. We are also targeting these firms
for our technology products and services, which we believe will
increase as we finalize the transition to Broadridges
systems. See Business Strategic
Acquisitions for a description of the Ridge acquisition.
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Expanding our client base in the quantitative trading
sector. Our technology products enable us to
increasingly market our services to the rapidly growing
quantitative trading sector. This sector is among the most
significant drivers of growth in the overall securities markets
and we intend to increase our focus on this market sector.
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Expanding our futures business. Our purchase
of GHCO in February, 2007 was a significant step in expanding
our futures clearing operations and our purchase of FCG in
November, 2007 gives us the ability to expand our futures
offering to clients that need risk management and other services.
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Expand offering of portfolio
margining. Portfolio margining allows us to
extend margin lending to cover a higher percentage of the
purchase price of securities than the percentage required under
Regulation T based on a risk calculation model approved by
the SEC. We approve our correspondents internally for portfolio
margining based on several factors including account size, net
capital, regulatory background and margin experience. At
December 31, 2010, we had 881 portfolio margining accounts
with a weighted average balance of approximately
$123.9 million in the fourth quarter of 2010.
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Expand offering of foreign exchange
products. In 2009, we launched our foreign
exchange product, which provides our customers a focused
traditional and technology-based center of competency in both
deliverable and non-deliverable foreign exchange. Our foreign
exchange product is traditionally used by correspondents to
facilitate international transactions in equities and bonds.
These services can be accessed through direct contact with our
foreign exchange department or through our electronic trading
platform.
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Expanding
our operations internationally.
We believe our ability to service clients internationally will
become more important as investors increasingly trade on a
global basis. In addition, we intend to expand our margin
lending business internationally. Our presence in the
non-U.S. markets
gives us several opportunities to pursue additional revenues
across our product and service offerings. It allows us to better
serve our correspondents who are
U.S.-based
by helping facilitate their growth and providing them with
greater access to international markets. It also gives us
greater access to the potential customer base in those local
markets. We opened our first Asian office in Hong Kong in the
first quarter of 2007 and an office in Tokyo in 2008. We
expanded our offering of technology products in Asian markets in
2009 and 2010 and intend to continue expansion into the Asian
markets in 2011. We launched PFSA in the second quarter of 2009,
and began clearing operations there in December 2009. We expect
significant growth opportunities in the Australian markets in
2011.
Enhance
revenue potential of each client relationship.
Our growth model includes selling additional products to our
existing clients. Many of our correspondents currently only
utilize our securities clearing services, but we maintain a
broad product suite across geographies that provides us with a
significant opportunity to cross-sell our execution, futures,
foreign exchange and technology services to our current base of
correspondents.
Capitalize
on industry trends.
We are positioned to benefit from several broad industry trends,
including internationalization of trading activity,
consolidation among service providers, and increased demand for
trading infrastructure that supports multiple products on the
same computer terminal, including equities, options, futures and
foreign exchange as well as increased outsourcing of
securities-processing.
10
Pursue
accretive acquisitions.
Through our past acquisitions, we have grown internationally,
expanded our product base and added correspondents. As of
December 31, 2010, we had successfully integrated our
acquisition of the clearing contracts of Ridge
Clearing & Outsourcing Solutions, Inc.
(Ridge), our most significant acquisition to date.
While we will continue to invest in developing and enhancing our
existing business solutions, we also may pursue accretive
acquisitions that will expand our technology product offerings,
our clearing service capability and our client base.
Securities
processing
Our securities and futures processing infrastructure products
and services are principally marketed under the
Penson brand name. Penson Worldwide, Inc. is the
ultimate parent company for the businesses that provide these
products and services in each geographic market we serve.
Clearing
and related operations
United
States
We generally provide securities clearing services to our
correspondents in the U.S. on a fully-disclosed basis. In a
fully-disclosed clearing transaction, the identity of the
correspondents customer is known to us, and we are known
to them, and we maintain the customers account and perform
a variety of services as agent for the correspondent.
Our U.S. securities clearing broker is PFSI, which is
registered with the SEC and is a member of the following: New
York Stock Exchange, NYSE Alternext, Chicago Board Options
Exchange, Chicago Stock Exchange, International Securities
Exchange, NASDAQ, NYSE ARCA Equities Exchange, NYSE ARCA Options
Exchange, Philadelphia Stock Exchange, OneChicago, DTC,
Euroclear, ICMA, MSRB, FINRA, NSCC, Options Clearing Corp., and
Securities Investor Protection Corporation (SIPC)
and is a participant in the Boston Options Exchange
(BOX).
With respect to futures transactions, Penson Futures provides
our clearing and execution services for futures and FCG, which
now operates as a division of Penson Futures, provides risk
management and consultation services for some of our futures
clients. Penson Futures is regulated by the CFTC, the NFA and
the FSA and is a member of the Chicago Board of Trade, the
Chicago Mercantile Exchange, the Kansas City Board of Trade,
London International Financial Futures Exchange, the Minneapolis
Grain Exchange, the Clearing Corporation, and the London
Clearinghouse.
Canada
PFSC provides clearing services in accordance with the rules and
regulations of Canadas provincial and territorial
securities regulators and IIROC. Canada has four types of
approved clearing models and our Canadian operation is approved
to act as a carrying broker for all of these. We concentrate
primarily on providing services to Type 2 and Type 3
correspondent brokers. As a Type 2 or 3 carrying broker, our key
responsibilities may include the trading of securities for
customers accounts and for the correspondents
principal business, making deliveries and settlements of cash
and securities in connection with such trades, holding
securities
and/or cash
of customers and of the correspondent and preparing and
delivering directly to customers documents as required by
applicable law and regulatory requirements with respect to the
trades cleared by us, including confirmation of trades, monthly
statements summarizing transactions for the preceding month and,
for inactive accounts, quarterly statements of securities and
money balances held by us for customers.
PFSC is our Canadian clearing broker and provides
fully-disclosed and omnibus clearing services to the Canadian
markets. In an omnibus relationship, the identity of the end
customer is not always known to us. PFSC is a member
participating organization or subscriber of the Toronto Stock
Exchange, the Montreal Exchange, the TSX Venture Exchange and
various other Canadian marketplaces including alternative
trading systems. PFSC is a member of the Canadian Investor
Protection Fund and is regulated by the IIROC and the securities
regulatory authorities of each province and territory in Canada.
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United
Kingdom
In the U.K. we offer a broad range of securities clearing
services through PFSL, our U.K. clearing broker, including:
Model A and Model B clearing and settlement, Euroclear, global
custody, customized data processing, regulatory reporting,
execution, and portfolio management and modeling systems. In
Model A clearing, we provide a purely administrative back-office
service and act as agent for our correspondents customers,
and supply these customers with the information needed to settle
their transactions. Model B clearing provides the authority to
process transactions under a fully-disclosed clearing model
similar to the U.S. Under Model B clearing, we assume the
positions and therefore full liability for the clearing and
settlement of the trades. All of our correspondents in the U.K.
are categorized as Professional Clients under FSA Rules. PFSL is
a member of the London Stock Exchange and is authorized and
regulated by the FSA.
Asia
We opened Penson Asia, our first Asian office, in Hong Kong in
the first quarter of 2007 and an office in Tokyo in 2008. We
entered into a number of technology services agreements with
correspondents primarily related to North American and U.K.
securities through our Penson Asia office in 2010, and expect to
further expand our Asian business in 2011.
Australia
We launched PFSA, our clearing broker in Australia in the second
quarter of 2009, and began clearing operations there in
December, 2009. PFSA provides clearing and settlement services
to, among others, broker dealers, Australian Securities Exchange
members and Australian Financial Service License holders.
Clearing arrangements are made on a fully disclosed basis, are
generally three to five years in term and are typically
exclusive. PFSA holds an Australian Financial Services License
and is a market participant of the ASX and a clearing
participant of the Australian Clearing House.
Internet
account portfolio information services
We have created customized software solutions to enable our
correspondents and their customers to review their account
portfolio information through the Internet. Through the use of
our internally developed technology, combined with technology
licensed from third parties, we are able to update the account
portfolios of our correspondents customers as securities
transactions are executed and cleared. A customer is able to
access detailed and personalized information about his account,
including current buying power, trading history and account
balances. Further, our solution allows a customer to download
brokerage account information into Quicken, a personal financial
management software program, and other financial and spreadsheet
applications so that all financial data can be integrated.
Holding
and safeguarding securities and cash deposits
We hold and safeguard securities and cash deposits of our
correspondents customers, which require us to take legal
responsibility for those assets. Many of our correspondents do
not have the ability to hold securities and cash deposits due to
regulatory requirements that require that the holder must comply
with the net capital rules of the SEC and other regulators with
respect to these activities.
Securities
borrowing and lending
We lend securities that we hold for our correspondents and their
customers to other broker-dealers as a means of financing our
business and facilitating transactions. We also engage in
conduit activities where we borrow securities from one
broker-dealer and lend the same securities to another
broker-dealer. This lending is permitted under and governed by
SEC rules. See Government regulation and
Regulation of securities lending and borrowing. All
of our securities borrowing and lending activities are performed
under a standard form of securities lending agreement, which
governs each partys rights to mark securities to market.
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Proprietary
trading
Certain of our subsidiaries engage in limited forms of
proprietary trading. This trading includes computerized trading
and non-automated trading strategies involving short-term
proprietary positions in exchange traded equities and options,
derivatives, foreign currencies, fixed income and other
securities, In general, these strategies involve relatively
short-term market exposure and are typically undertaken in
conjunction with hedging strategies and the use of derivative
contracts designed to mitigate the risk associated with these
proprietary positions. These activities in the aggregate are
insignificant to revenues and pretax income (loss).
Futures
products
In addition to the futures clearing services provided by Penson
Futures, the FCG division of Penson Futures provides retail,
risk management and consultation services for certain of our
futures clients.
Technology
and data products
An important component of our business strategy is to identify
and to deploy technologies relevant to our target markets. The
technology embedded in our securities and futures processing
infrastructure has enhanced our capacity to handle an increasing
volume of transactions without a corresponding increase in
personnel. We use our proprietary technology and technology
licensed from third parties to provide customized, detailed
account information to our clients. To increase our processing
capacity, we moved our U.S. securities clearing operations
to a dedicated processing platform provided by SunGard in the
first quarter of 2009. We intend to move our Canadian and
U.S. operations to Broadridges systems during 2011
and our UK operations during 2012. Our technology is critical to
our vision of providing a flexible and comprehensive offering of
products and services to our clients.
Our technology and data product offerings include customizable
front-end trading platforms, a comprehensive database of
historic U.S. and international equities, options and
futures trade data, and order-management services. Our approach
to the development and acquisition of technology has allowed us
to create an evolving suite of products that provides specific
solutions to meet our clients individual requirements. We
also provide risk management and consultation services to our
futures customers through the FCG division of our Penson Futures
subsidiary.
Nexa provides our clients with innovative trading management
technology with a global perspective. Nexa specializes in direct
access trading technology and provides complete online brokerage
solutions, including direct access trading applications,
browser-based trading interfaces, back-office order management
systems, market data feeds, historical data, and execution
technology services, generally on a license-fee basis.
Nexas FastPath product provides a full suite of Financial
Information Exchange (FIX) gateway solutions for
clients who require global connectivity, high throughput and
reliability. FIX execution solutions allow clients to
automatically transmit, receive or cancel advanced-order types,
execution reports, order status, positions, liquidity flags and
account balances. Clients can connect using their own front-end
or back-office applications or utilize applications available
from Nexa. We generally provide our solutions to our clients on
a private-labeled basis to emphasize the clients branding.
Nexas products, such as Omni Pro, Axis Pro, and Meridian,
are designed to accommodate various market segments by providing
different trading platforms and functionality to users. Most of
our front-end products benefit from several important features
such as the ability to trade equities, options and futures and
to have unified risk management for trading across multiple
asset classes.
Although there is a significant market for front-end trading
platforms that is independent of the market for clearing
services, we have found that our ability to integrate our
technology-related products with our clearing services provides
clients with another compelling reason to use Penson for their
clearing needs. We believe this broader, integrated offering is
a significant factor in our conversion of client prospects into
actual clients.
Our technology revenues generally include revenues from software
development, customization of products and features and
licensing fees, but our technology products are designed to
generate subscription-based revenue
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over time. Our technology revenues decreased over the last year
from $23.8 million in 2009 to $20.4 million in 2010.
Institutional
and active retail front-end trading software
Nexa has developed and is continuing to expand various front-end
trading software products. We offer several products that are
oriented towards different market segments. Omni Pro is a
Level II trading platform oriented to professional traders
and provides broker-dealer administrative modules. Level II
software enables the trader, among other things, to view prices
for the same security across various markets and to select the
desired market for order execution. Axis Pro is a multi-currency
Level II trading platform focused on active retail traders.
Meridian is a Level I trading platform for less intensive
applications for the active retail trader. Both Axis Pro and
Meridian are offered with broker-dealer administrative modules
that allow broker-dealers to monitor customer buying power and
other regulatory compliance tasks, and to provide a repository
for customer information.
All of our front-end products benefit from a number of
compelling features such as the ability to trade equities,
options and futures and have unified risk management for trading
across these products. Many of our clearing competitors do not
have similar systems that effect trades in all such instruments
with similar risk mitigation capabilities. There is a dynamic
market for front-end trading platforms that is independent of
the market for our clearing services. However, we have found
that our ability to offer these products provides our clients
with another compelling reason to use our clearing and other
products and services and is at times important in our
conversion of client prospects into actual clients.
Global
execution infrastructure
Nexa has built significant proprietary software and licensed
certain software and telecommunications services to enable our
clients to use our technology infrastructure to send orders for
securities to all major North American exchanges, ECNs and
market destinations. Our clients can choose to use our execution
infrastructure, independent of our other services, or to opt for
a bundled solution combining technology products together with
clearing and settlement. This allows us to access a
differentiated market segment for clients that clear with
another firm or are self-clearing, but which do not have a
similar infrastructure capability. In particular, because our
network has been designed to maximize speed of execution, our
offerings are very attractive to algorithmic traders for whom
speed is essential to successful implementation of their trading
strategies. Our infrastructure required significant time and
investment to build and very few of our clearing competitors
offer anything that is directly comparable.
Global
data products
We believe it is critical to provide our clients with global
trade data solutions. Nexa provides research-quality, historical
intraday time series data plus real-time data feeds for the
commodity and equity markets. Our suite of data products was
significantly enhanced by our acquisition of the Tick Data
assets in January 2005. Its database of historical intraday
equities, options and futures data from exchanges in North
America, Europe and Asia is presented
tick-by-tick
and is delivered in a compressed, proprietary format. The
database of historical cash index data contains the most widely
followed equity indices. Nexa also offers TickStream, a fully
customized, low latency, real-time market data feed. Data is
delivered through a
simple-to-use
application program interface (API) and powered by
advanced ticker plants that have multiple direct connections to
global exchanges. While these products do not currently generate
material revenues, we provide data to over 3,000 clients, which
we believe provides significant opportunities for cross-selling
our other products and services.
Nexa has also built its own data ticker plant to access data
from most U.S. and many foreign exchanges and market
centers. We have also licensed certain foreign data from other
sources. The result is a very comprehensive offering of
real-time, delayed and historical data that we can market to our
clients. As with the international execution hub, our clients
can use our data solutions together with, or independent of, our
other products and services. This enables us to compete with
major securities data providers to offer comprehensive data
solutions. Furthermore, historical data offerings are not
offered by most data services providers or clearing firm
competitors and enable us to serve new client segments such as
algorithmic traders and hedge funds to which we have had
relatively less historical exposure through our clearing
operations.
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Key
licensed technology and proprietary customization
We license a software program called Phase3 from SunGard. Phase3
is an online, real-time data processing system for securities
transactions. Phase3 performs the core settlement functions with
industry clearing and depository organizations. To increase our
processing capacity, we moved our U.S. securities clearing
operations to a dedicated processing platform provided by
SunGard in the first quarter of 2009. We have built a
significant amount of proprietary software around Phase3 which
allows us to customize Phase3 to meet each of our clients
unique needs. This customization increases the reliability and
efficiency of our data processing model and permits us to
process trades more quickly than if we relied on Phase3 alone.
This customization also offers our clients more flexible access
to information regarding their accounts, including the ability
to:
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see critical information in real-time on a continuously updated
basis;
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manage their buying power across different accounts containing
diverse instruments such as equities, options and futures, and;
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receive highly customized reports relating to their activity.
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The above-noted products are principally used by our
U.S. securities clearing subsidiary but, in many cases,
enable our
non-U.S. customers,
both through our
non-U.S. affiliates
and directly, to access leading-edge products and services when
trading in the U.S. markets. We offer third party software
that we have licensed that we believe offers an increased
variety of settlement and clearing applications, to certain of
our Canadian correspondents who trade futures products. We
currently process the trading activity of the correspondents we
acquired from Ridge principally using Broadridges systems,
and we intend to transition the remainder of our
U.S. operations to Broadridges systems during 2011.
We completed the conversion of our Canadian operations to
Broadridges systems in February, 2011. We anticipate this
transition will expand our product offering to include, among
other things, the outsourcing of certain of our
correspondents operations. We intend to transition our
U.K. operations to Broadridges systems in 2012. See
Business Strategic Acquisitions for a
description of the proposed Broadridge transaction.
Sales and
marketing
We focus our sales and marketing efforts in the
U.S. primarily on the direct access and online sectors, but
also focus on the algorithmic trading and hedge fund sectors of
the global securities and investment industry. We are
aggressively marketing execution-only services to the global
financial services market domestically and through our foreign
subsidiaries. We have capitalized on this opportunity by
implementing cross-border and multi-currency trade processing
capabilities.
We participate in industry conferences and trade shows and seek
to differentiate our company from our competitors based on our
reputation as an independent provider of a technology-focused
integrated execution, clearing and settlement solution and based
on our ability to support trading in multiple markets, multiple
investment products and multiple currencies.
We generally enter into standard clearing agreements with our
securities correspondents for an initial term of two years,
though many of our contracts are for much longer terms. During
the contract period, we provide clearing services based on a
schedule of fees determined by the nature of the financial
instrument traded and the volume of the securities cleared. In
some cases our standard contract will also include minimum
monthly clearing charge requirements. Subsequent to the initial
term, these contracts typically allow the correspondent to
cancel our services upon providing us with 45 days written
notice. Futures clearing contracts between us and our
correspondents are generally terminable on 30 days notice.
Futures clearing contracts directly between us and our customers
are generally terminable at will.
As of December 31, 2010, we had 430 active correspondents
worldwide, consisting of 371 active securities clearing
correspondents and 59 active futures clearing correspondents. Of
the 371 active securities clearing correspondents, 278 are
located in the U.S., while our U.K., Canadian and Australian
clearing operations provide services to 16, 29 and 48
correspondents, respectively. Before conducting business with a
correspondent, we review a variety of factors relating to the
prospective correspondent, including the correspondents
experience in the
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securities industry, its financial condition and the personal
backgrounds of the key principals of the firm. We seek to
establish relationships with correspondents whose management
teams and operations we believe will be successful in the
long-term, so that we may benefit from increased clearing volume
and margin lending activity as the businesses of our
correspondents grow.
Strategic
acquisitions
We have engaged in a number of acquisitions that have
facilitated our ability to expand our client base and provide
leading-edge technology infrastructure as well as to open
international markets, positioning us to pursue a strategy of
combining our increasingly global securities offerings with
enhanced technology offerings on a multi-instrument,
multi-currency, international platform. To date, none of our
acquisitions have exceeded the defined significant subsidiary
thresholds pursuant to
Section 1-02(w)
of SEC
Regulation S-X.
On November 2, 2009, the Company entered into an asset
purchase agreement (Ridge APA) to acquire the
clearing and execution business of Ridge Clearing &
Outsourcing Solutions, Inc. (Ridge) from Ridge and
Broadridge Financial Solutions, Inc. (Broadridge),
Ridges parent company. The acquisition closed on
June 25, 2010, and under the terms of the Ridge APA, as
later amended, the Company paid $35.2 million. The
acquisition date fair value of consideration transferred was
$31.9 million, consisting of 2.5 million shares of PWI
common stock with a fair value of $14.6 million (based on
our closing share price of $5.95 on that date) and a
$20.6 million five-year subordinated note (the Ridge
Seller Note) with an estimated fair value of
$17.3 million on that date (see Note 14 to our
consolidated financial statements for a description of the Ridge
Seller Note discount), payable by the Company bearing interest
at an annual rate equal to
90-day LIBOR
plus 5.5%.
The Company recorded a liability of $4.1 million
attributable to the estimated fair value of contingent
consideration to be paid 14 months and 19 months after
closing (subject to extension in the event the dispute
resolution procedures set forth in the Ridge APA are invoked).
The amount of contingent consideration ultimately payable will
be added to the Ridge Seller Note. The contingent consideration
is primarily composed of two categories. The first category
includes a group of correspondents that had not generated at
least six months of revenue as of May 31, 2010 (Stub
Period Correspondents). Twelve months after closing a
calculation will be performed to adjust the estimated annualized
revenues as of May 31, 2010 to the actual annualized
revenues based on a six-month review period as defined in the
Ridge APA (Stub Period Revenues). The Ridge Seller
Note will be adjusted 14 months after closing based on .9
times the difference between the estimated and actual annualized
revenues. As of December 31, 2010 all of the correspondents
in this category had generated at least six months of revenues.
The Company reduced its contingent consideration liability by
$.3 million, which is included in other expenses in the
consolidated statements of operations for the year ended
December 31, 2010. The second category includes a group of
correspondents that had not yet begun generating revenues
(Non-revenue Correspondents) as of May 31,
2010. A calculation will be performed 15 months after
closing to determine the annualized revenues, based on a
six-month review period, for each such non revenue correspondent
(Non-revenue Correspondent Revenues). The Ridge
Seller Note will be adjusted 19 months after closing by an
amount equal to .9 times the Non-revenue Correspondent Revenues.
The estimated undiscounted range of outcomes for this category
is $4.0 million to $5.0 million. There is no limit to
the consideration to be paid.
The Company recorded goodwill of $15.9 million, intangibles
of $20.1 million and a discount on the Ridge Seller Note of
$3.3 million. The qualitative factors that make up the
recorded goodwill include value associated with an assembled
workforce, value attributable to enhanced revenues related to
various products and services offered by the Company and
synergies associated with cost reductions from the elimination
of certain fixed costs as well as economies of scale resulting
from the additional correspondents. The goodwill is included in
the United States segment. A portion of the recorded goodwill
associated with the contingent consideration may not be
deductible for tax purposes if future payments are less than the
$4.1 million initially recorded. The tax goodwill will be
deductible for tax purposes over a period of 15 years. The
Company has incurred acquisition related costs of approximately
$5.3 million with $3.7 million and $1.6 million,
respectively recognized in the years ended December 31,
2010 and 2009. Net revenues of $26.4 million and net income
of approximately $1.5 million from Ridge were included in
the consolidated statement of operations as of the date of the
acquisition for the year ended December 31, 2010. The
Company estimates that net revenues would have been
$312.9 million for the year ended December 31, 2010,
respectively compared to $337.2 million and
$345.8 million, respectively for the years ended
December 31, 2009
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and 2008, and net income (loss) would have been
$(19.0) million for the year ended December 31, 2010
compared to $17.3 million and $12.8 million,
respectively for the years ended December 31, 2009 and 2008
had the acquisition occurred as of January 1, 2008.
In November 2007, our subsidiary Penson Futures acquired all of
the assets of FCG, an FCM and a leading provider of technology
products and services to futures traders, and assigned the
purchased membership interest to GHP1 effective immediately
thereafter. We closed the transaction in November, 2007 and paid
approximately $9.4 million in cash and approximately
150,000 shares of common stock valued at approximately
$2.2 million to the previous owners of FCG. In addition,
the Company agreed to pay an annual earnout in cash for the
following three-year period based on average net income, subject
to certain adjustments including cost of capital, for the
acquired business. The Company paid approximately
$8.7 million related to the first year of the earnout
period. The Company did not make an earnout payment related to
the second or third year of the earnout period. The Company
finalized the acquisition valuation during the third quarter of
2008 and recorded goodwill of approximately $4.0 million
and intangibles of approximately $7.6 million. FCG
currently conducts business as a division of Penson Futures.
In November 2006, the Company entered into a definitive
agreement to acquire the partnership interests of Chicago-based
GHCO, a leading international futures clearing and execution
firm. The Company closed the transaction on February 16,
2007 and paid approximately $27.9 million, including cash
and approximately 139,000 shares of common stock valued at
approximately $3.9 million to the previous owners of GHCO.
Goodwill of approximately $2.8 million and intangibles of
approximately $1.0 million were recorded in connection with
the acquisition. In addition, the Company agreed to pay
additional consideration in the form of an earnout over the next
three years, in an amount equal to 25% of Penson Futures
pre-tax earnings, as defined in the purchase agreement executed
with the previous owners of GHCO. The Company did not make an
earnout payment related to the first or second years of the
integrated Penson Futures business. The Company paid
approximately $1.1 million related to the third year of the
earnout in July 2010.
In November 2006, the Company acquired the clearing business of
Schonfeld Securities LLC (Schonfeld), a New
York-based securities firm. The Company closed the transaction
in November 2006 and in January 2007, the Company issued
approximately 1.1 million shares of common stock valued at
approximately $28.3 million to the previous owners of
Schonfeld as partial consideration for the assets acquired of
which approximately $14.8 million was recorded as goodwill
and approximately $13.5 million as intangibles. In
addition, the Company agreed to pay an annual earnout of stock
and cash over a four-year period that commenced on June 1,
2007, based on net income, as defined in the asset purchase
agreement (Schonfeld Asset Purchase Agreement), for
the acquired business. On April 22, 2010, SAI and PFSI
entered into a letter agreement (the Letter
Agreement) with Schonfeld Group Holdings LLC
(SGH), Schonfeld, and Opus Trading Fund LLC
(Opus) that amends and clarifies certain terms of
the Schonfeld Asset Purchase Agreement. The Letter Agreement,
among other things, for purpose of determining the total payment
due to Schonfeld under the earnout provision of the Schonfeld
Asset Purchase Agreement: (i) removes the payment cap;
(ii) clarifies that PFSI has no obligation to compress
tickets across subaccounts (unless PFSI does so for other of its
correspondents at a later date); and (iii) reduces the
SunGard synergy credit from $2.9 million to
$1.5 million in 2010 and $1.0 million in 2011. The
Letter Agreement also assigns all of Schonfelds
responsibilities under the Schonfeld Asset Purchase Agreement to
its parent company, SGH, and extends the initial term of
Opuss portfolio margining agreement with PFSI from
April 30, 2017 to April 30, 2019.
A payment of approximately $26.6 million was paid in
connection with the first year earnout that ended May 31,
2008 and approximately $25.5 million was paid in connection
with the second year of the earnout that ended May 31,
2009. At December 31, 2010, a liability of approximately
$20.5 million was accrued as result of the third year of
the earnout ended May 31, 2010 ($15.2 million) and the
first seven months of the year four earnout, which we do not
expect to pay prior to the second half of 2011
($5.3 million). This balance is included in other
liabilities in the consolidated statement of financial
condition. The offset of this liability, goodwill, is included
in other assets. In January, 2011, the Company and SGH entered
into a letter agreement setting the amount due for the third
year earnout at $6.0 million due to the provisions in
various agreements related to the Schonfeld transaction,
including the termination/compensation agreement, which reduced
the amount that we are required to pay under the Schonfeld Asset
Purchase Agreement. This will result in a reduction in goodwill
and other liabilities of $9.2 million in the first quarter of
2011. The letter agreement also stipulated that the third year
earnout will be paid evenly over a 12 month period
commencing on September 1, 2011.
17
Competition
The market for securities clearing and margin lending services
is highly competitive. We expect competition to continue and
intensify in the future. We encounter direct competition from
firms that offer services to direct access and online brokers.
Some of these competitors include Goldman Sachs
Execution & Clearing, L.P.; Pershing LLC, a member of
BNY Securities Group; National Financial Services LLC, a
Fidelity Investments company; Merrill Lynch & Co.,
Inc., a subsidiary of Bank of America; MF Global Ltd. (formerly
Man Financial) and RJ OBrien & Associates LLC.
We also encounter competition from other clearing firms that
provide clearing and execution services to the securities
industry. Most of our competitors are affiliated with large
financial institutions.
We believe that the principal competitive factors affecting the
market for our clearing and margin lending services are breadth
of services, technology, financial strength, client service and
price. Based on managements experience, we believe that we
presently compete effectively with respect to most of these
factors.
Some of our competitors have significantly greater financial,
technical, marketing and other resources than we have. Some of
our competitors offer a wider range of services and products
than we offer and have greater name recognition and more
extensive client bases. These competitors may be able to respond
more quickly to new or evolving opportunities, technologies and
client requirements than we can and may be able to undertake
more extensive promotional activities and offer more attractive
terms to clients. Recent advancements in computing and
communications technology are substantially changing the means
by which securities transactions are effected and processed,
including more access online to a wide variety of services and
information, and have created a demand for more sophisticated
levels of client service. The provision of these services may
entail considerable cost without an offsetting increase in
revenues. Moreover, current and potential competitors have
established or may establish cooperative relationships among
themselves or with third parties or may consolidate to enhance
their services and products. New competitors or alliances among
competitors may emerge and they may acquire significant market
share. Additionally, large firms that currently perform their
own clearing functions may decide to start marketing their
clearing services to other firms.
In addition to companies that provide clearing services to our
target markets, we are subject to the risk that one or more of
our correspondents may elect to perform their clearing functions
themselves. The option to convert to self-clearing operations
may be attractive due to the fact that as the transaction volume
of the correspondent increases, the cost of implementing the
necessary infrastructure for self-clearing may eventually be
offset by the elimination of per-transaction processing fees
that would otherwise be paid to a clearing firm. Additionally,
performing their own clearing services allows self-clearing
firms to retain customer free credit balances and securities for
use in margin lending activities. In order to make a clearing
arrangement with us more attractive to these high-volume
broker-dealers, we may offer such firms transaction volume
discounts or other incentives.
We are also subject to the risk that one or more of our
correspondents may be acquired by a firm which is already self
clearing, or clears through another broker-dealer. Our largest
correspondent, thinkorswim, was acquired by TD Ameritrade in
2009. We anticipate that approximately two-thirds of the
business we currently clear for thinkorswim will be converted to
TD Ameritrade in 2011.
Intellectual
property and other proprietary rights
Despite the precautions we take to protect our intellectual
property rights, it is possible that third parties may copy or
otherwise obtain and use our proprietary technology without
authorization or otherwise infringe upon our proprietary rights.
It is also possible that third parties may independently develop
technologies similar to ours. It may be difficult for us to
police unauthorized use of our intellectual property. In
addition, litigation may be necessary in the future to enforce
our intellectual property rights, to protect our trade secrets,
to determine the validity and scope of the proprietary rights of
others, or to defend against claims of infringement or
invalidity.
We have incurred litigation expenses related to the protection
of our intellectual property in the past, and are continuing to
do so with respect to the Realtime Data proceedings (See
Legal Proceedings for a description of these
proceedings). Intellectual property claims, with or without
merit, are time consuming to defend, often result in costly
litigation, can divert managements attention and resources
and may require us to enter into royalty or licensing agreements.
18
Government
regulation
The securities and financial services industries generally are
subject to extensive regulation in the U.S. and elsewhere.
As a matter of public policy, regulatory bodies in the
U.S. and the rest of the world are charged with, among
other things, safeguarding the integrity of the securities and
other financial markets and with protecting the interests of
customers participating in those markets, not with protecting
the interests of creditors or the shareholders of regulated
entities (such as Penson).
In the U.S., the securities and futures industry is subject to
regulation under both federal and state laws. At the federal
level, the SEC regulates the securities industry, while the CFTC
regulates the futures industry. These federal agencies along
with NYSE, FINRA, NFA, the various stock and futures exchanges
and other self regulatory organizations (SROs)
require strict compliance with their rules and regulations.
Companies that operate in these industries are subject to
regulation concerning many aspects of their business, including
trade practices, capital structure, record retention,
money-laundering prevention, and the supervision of the conduct
of directors, officers and employees. Failure to comply with any
of these laws, rules or regulations could result in censure,
fines, the issuance of
cease-and-desist
orders, the suspension or termination of the operations of the
Company or the suspension or disqualification of our directors,
officers or employees. In the ordinary course of our operations,
we and some of our officers and other employees have been
subject to claims arising from the violation of such laws, rules
and regulations.
As a registered broker-dealer, PFSI is required by law to belong
to the Securities Investor Protection Corporation
(SIPC). In the event of a members insolvency,
the SIPC Fund provides protection for customer accounts up to
$500,000 per customer, with a limitation of $100,000 on claims
for cash balances.
In addition, we have subsidiaries in the U.K., Australia and
Canada that are involved in the securities and financial
services industries and may expand our business into other
countries in the future. To expand our services internationally,
we will have to comply with the regulatory controls of each
country in which we conduct business.
The securities and financial services industry in many foreign
countries is heavily regulated. The varying compliance
requirements of these different regulatory jurisdictions and
other factors may limit our ability to expand internationally.
Due to its focus on technology products, which are generally not
subject to the regulatory regimes applicable to securities
trading, Penson Asia is not subject to many of the same
restrictions that apply to our U.K., Australia and Canada
subsidiaries.
The regulatory environment in which we operate is subject to
change. Additional regulation, changes in existing laws and
rules, or changes in interpretations or enforcement of existing
laws and rules often directly affect the method of operation and
profitability of securities firms.
Dodd-Frank
Wall Street Reform and Consumer Protection Act
Recent market and economic conditions have led to the enactment
of new legislation and other proposals for changes in the
regulation of the financial services industry. On July 21,
2010, President Obama signed the Dodd-Frank Wall Street Reform
and Consumer Protection Act, or the Dodd-Frank Act,
into law. While certain provisions of the Dodd-Frank Act will be
effective immediately, many other provisions will be effective
only following extended transition periods of varying lengths.
Therefore, it is impractical at present to forecast the
comprehensive effects of the legislation. The Dodd-Frank Act
also mandates the preparation of studies on a wide range of
issues, which could lead to additional legislation or regulatory
changes. This legislation makes extensive changes to the laws
regulating financial services firms and requires significant
rule-making. The legislation and regulation of financial
institutions, both domestically and internationally, include
calls to increase capital and liquidity requirements; limit the
size and types of the activities permitted; and increase taxes
on some institutions.
Regulation
of clearing activities
We provide clearing services in the U.S., Canada, Australia and
Europe through our subsidiaries. Broker-dealers and FCMs that
clear their own trades are subject to substantially more
regulatory requirements than brokers that rely on others to
perform those functions. 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 customers
19
and broker-dealers, 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 clients, the customers of our clients and others.
Due to our provision of futures clearing services in addition to
securities clearing services, we are also subject to additional
regulatory requirements, including those of the CFTC, NFA and
futures exchange regulations in various jurisdictions. As a
result, we must comply with an increased amount of regulatory
requirements and face additional liabilities if we are not able
to comply with the regulatory environment. We also provide
sponsored access to certain entities, which allows those
entities to submit trades to certain exchanges through our
market participant identification (MPID). Through the provision
of sponsored access, we have been able to substantially increase
our volumes on certain exchanges. The increased volume often
allows us to achieve certain pricing discounts, which we
generally share with our sponsored participants. We are
responsible for any trades submitted by those entities that use
our MPID. Recently, the SEC and certain domestic and foreign
SROs have increased scrutiny of sponsored access programs. To
the extent any additional regulations are enacted with respect
to sponsored access in any jurisdiction where we provide
sponsored access, we will be required to follow such regulations
which may result in our limiting or eliminating the use of this
service. Even if we are able to continue to offer this service,
we may have to incur substantial costs related to implementation
of risk controls with low latency to comply with new regulations.
Regulation
of securities lending and borrowing
We engage in securities lending and borrowing services with
other broker-dealers by lending the securities that we hold for
our correspondents and their customers to other broker-dealers,
by borrowing securities from other broker-dealers to facilitate
our customer transaction activity, or by borrowing securities
from one broker-dealer and lending the same securities to
another broker-dealer. Within the U.S., these types of
securities lending and borrowing arrangements are governed by
the SEC and the rules of the Federal Reserve. The following is
what we believe to be a descriptive summary of some important
SEC and Federal Reserve rules that govern these types of
activities, but it is not intended to be an exhaustive list of
the regulations that govern these types of activities.
Our securities lending and borrowing activities are primarily,
although not exclusively, transacted through our
U.S. broker-dealer subsidiary, which is subject to the
SECs net capital rule and customer protection rule. The
net capital rule, which specifies minimum net capital
requirements for registered broker-dealers, is designed to
ensure that broker-dealers will have adequate resources,
including a percentage of liquid assets, to fund expenses of a
self or court supervised liquidation. See
Business Government regulation and
Regulatory capital requirements. While the net
capital rule is designed to ensure that the broker-dealer has
adequate resources to pay liquidation expenses, the objective of
the SECs customer protection rule is to ensure that
investment property of the firms customers will be
available to be distributed to customers in liquidation. The
customer protection rule operates to protect both customer funds
and customer securities. To protect customer securities, the
customer protection rule requires that broker-dealers promptly
obtain possession or control of customers fully-paid
securities free of any lien. However, broker-dealers may lend or
borrow customers securities purchased on margin or
customers fully paid securities, if the broker-dealer
provides collateral exceeding the market value of the securities
it borrowed and makes certain other disclosures to the customer.
With respect to customer funds, the customer protection rule
requires broker-dealers to make deposits into an account held
only for the benefit of customers (reserve account)
based on its computation of the reserve formula. The reserve
formula requires that broker-dealers compare the amount of funds
it has received from customers or through the use of their
securities (credits) to the amount of funds the firm
has used to finance customer activities (debits). In
this manner, the customer protection rule ensures that the
broker-dealers securities lending and borrowing activities
do not impact the amount of funds available to customers in the
event of liquidation.
SEC
Rules 8c-1
and 15c2-1 under the Exchange Act (the hypothecation
rules) set forth requirements relating to the borrowing or
lending of customers securities. The hypothecation rules
prohibit us from borrowing or lending customers securities in
situations where (1) the securities of one customer will be
held together with securities of another customer, without first
obtaining the written consent of each customer; (2) the
securities of a customer will be held together with securities
owned by a person or entity that is not a customer; or
(3) the securities of a customer will be subject to a lien
for an amount in excess of the aggregate indebtedness of all
customers securities.
20
Regulation T was issued by the Federal Reserve pursuant to
the Exchange Act in part to regulate the borrowing and lending
of securities by broker-dealers, as well as to regulate the
extension of credit by broker-dealers. With respect to
securities borrowing and lending, Regulation T requires
that a borrowing or lending of securities by a broker-dealer be
for a proper purpose, i.e. for the purpose of making
delivery of the securities in the case of short sales, failure
to receive securities required to be delivered, or other similar
situations. If a broker-dealer reasonably anticipates a short
sale or fail transaction, a borrowing may be made by the
broker-dealer up to one settlement cycle in advance of trade
date.
Regulation T also regulates payment requirements for
transactions in customer cash accounts and the level of credit
extended in customer margin accounts. A broker-dealer may extend
credit to a customer in a margin account only against collateral
consisting of cash or margin-eligible securities, as defined in
the Exchange Act or margin securities, as defined in
Regulation T. Under Regulation T, the current required
initial margin for a long position in a margin equity security
is 50 percent of the current market value of the security.
The required margin for a short position is 150 percent of
the current market value of the security. Maintenance margin
requirements are set in accordance with the rules of the SROs.
However, we may require the deposit of a higher percentage of
the value of equity securities purchased on margin. Securities
borrowed transactions are extensions of credit in that the
securities lender generally receives cash collateral that
exceeds the market value of the securities that were lent. In
the National Securities Markets Improvements Act of 1996, the
U.S. Congress amended section 7(c) of the Exchange Act
to exempt certain broker-dealers from the Federal Reserves
credit regulations. Recently, the SEC and other SROs have
approved new rules permitting portfolio margining that have the
effect of permitting increased margin on securities and other
assets held in portfolio margin accounts relative to
non-portfolio accounts. We began offering portfolio margining to
our clients in the second quarter of 2007 and had 881 portfolio
margin accounts as of December 31, 2010.
With respect to such securities borrowing and lending,
Regulation SHO issued under the Exchange Act generally
prohibits, among other things, a broker-dealer from accepting a
short sale order unless either the broker-dealer has already
borrowed the security, has entered into a bona-fide arrangement
to borrow the security or has reasonable grounds to
believe that the security can be borrowed so that it can be
delivered on the date delivery is due and has documented
compliance with this requirement. Rule 204 under the
Exchange Act requires broker-dealers and clients to make
delivery on short sales effected in the U.S. no later than
T+3. Under Rule 204, a clearing broker-dealer that does not
purchase or borrow securities to cover any fail position as of
the opening of trading on T+4 is subject to a borrowing penalty
for each security that the clearing-broker fails to deliver
(subject to the allocation provision noted below). The borrowing
penalty will apply until the clearing broker-dealer purchases a
sufficient amount of the security to make full delivery on the
fail position and that purchase clears and settles. If a
clearing broker-dealer becomes subject to the borrowing penalty,
the penalty will prohibit the clearing broker-dealer from
effecting short sales for its own account or for that of any
correspondent broker-dealer or customer unless the clearing
broker-dealer has borrowed the securities in question or has
entered into a bona-fide arrangement to borrow the
securities. Clearing broker-dealers are permitted to reasonably
allocate the close-out requirement to a correspondent
broker-dealer that is responsible for the fail position.
Accordingly, if we have a fail position that we are unable to
timely cover, or where the fail position was the responsibility
of one of our correspondent broker-dealers and we cannot
allocate the close-out responsibility to it, we would be subject
to the borrowing penalty. We could remain subject to the
borrowing penalty until such time as we have purchased a
sufficient amount of the security to make full delivery on the
fail position and that purchase has cleared and settled, which
generally is three business days after the purchase. Due to the
requirements of Rule 204, our costs associated with
securities borrowings to facilitate customer short selling may
continue to increase and the scope of our securities lending
business may significantly decrease, which may adversely affect
our operations and financial condition.
Failure to maintain the required net capital, accurately compute
the reserve formula or comply with Regulation T, portfolio
margining rules or Regulation SHO may subject us to
suspension or revocation of registration by the SEC and
suspension or expulsion by NYSE, FINRA and other regulatory
bodies and, if not cured, could ultimately require our
U.S. broker-dealer subsidiarys liquidation. A change
in the net capital rule, the customer protection rule,
Regulation T or the portfolio margining rules or the
imposition of new rules could adversely impact our ability to
engage in securities lending and borrowing.
21
Regulation
of internet activities
Our business, both directly and indirectly, relies extensively
on the Internet and other electronic communications gateways. To
date, the use of the Internet has been relatively free from
regulatory restraints. However, the governmental agencies within
the U.S. and elsewhere are beginning to address regulatory
issues that may arise in connection with the use of the
Internet. Accordingly, new regulations or interpretations may be
adopted that change our own and our correspondents
abilities to transact business through the Internet or other
electronic communications gateways.
Regulatory
capital requirements
As a registered broker-dealer and member of NYSE and FINRA, PFSI
is subject to the SECs net capital rule. The net capital
rule, which specifies minimum net capital requirements for
registered broker-dealers, is designed to measure the general
financial integrity and liquidity of a broker-dealer and
requires that at least a minimum part of its assets be kept in
relatively liquid form. Among deductions from net capital are
adjustments that are commonly called haircuts, which
reflect the possibility of a decline in the market value of firm
inventory prior to disposition.
Failure to maintain the required net capital would require us to
cease securities activities during any period where we did not
meet minimum levels of net capital and may subject us to
suspension or revocation of registration by the SEC and
suspension or expulsion by NYSE, FINRA and other regulatory
bodies and, if not cured, could ultimately require liquidation
of our U.S. clearing operations. The net capital rule
prohibits payments of dividends, redemption of stock, the
prepayment of subordinated indebtedness and the making of any
unsecured advance or loan to a stockholder, employee or
affiliate, if such payment would reduce our net capital below
required levels. Finally, NYSE and FINRA rules prevent a
broker-dealer from expanding its business or permit NYSE or
FINRA to require reductions in the broker-dealers business
for broker-dealers experiencing financial or operational
difficulties.
The net capital rule also requires notice to regulators with
respect to certain capital withdrawals and provides that the SEC
may restrict any capital withdrawal, including the withdrawal of
equity capital, or unsecured loans or advances to stockholders,
employees or affiliates, if such capital withdrawal, together
with all other net capital withdrawals during a
30-day
period, exceeds 30% of excess net capital and the SEC concludes
that the capital withdrawal may be detrimental to the financial
integrity of the broker-dealer. In addition, the net capital
rule provides that the total outstanding principal amount of a
broker-dealers indebtedness under specified subordination
agreements, the proceeds of which are included in its net
capital, may not exceed 70% of the sum of the outstanding
principal amount of all subordinated indebtedness included in
net capital, par or stated value of capital stock, paid in
capital in excess of par, retained earnings and other capital
accounts for a period in excess of 90 days.
A change in the net capital rule, the imposition of new rules or
any unusually large charges against net capital could limit some
of our operations that require the intensive use of capital and
also could restrict our ability to withdraw capital from PFSI,
which in turn could limit our ability to pay dividends, repay or
repurchase debt, including the 8.00% Senior Convertible
Notes due 2014, the 12.50% Senior Second Lien Notes due
2017, the Amended and Restated Credit Facility and the Ridge
Seller Note, or repurchase shares of outstanding stock. A
significant operating loss or any unusually large charge against
net capital could adversely affect our ability to expand or even
maintain our present levels of business.
Our U.K. subsidiary is subject to FSA rules that require it to
maintain adequate financial resources (including both capital
resources and liquidity resources) in order to meet its
liabilities as they fall due. The current capital resources
requirement for the subsidiary is approximately
£3.8 million although the capital resources
requirement will vary depending on the current expenditure,
liabilities and risks incurred or assumed. Capital resources may
be constituted by eligible share capital and eligible
subordinated debt. The subsidiary must constantly monitor
compliance with its financial resource requirements, regularly
submit financial reports to the FSA (monthly) and report any
breach of the financial resource requirements to the FSA. A
breach of the financial resource requirements may result in
disciplinary action against the subsidiary for which it may
receive a financial penalty, or where the breach is serious, a
suspension or cessation of the subsidiarys business and a
withdrawal of the subsidiarys authorization to conduct
investment business in whole or in part. The imposition of FSA
disciplinary sanctions, the temporary suspension of business or
the partial revocation of the subsidiarys authorization to
conduct investment
22
business may severely damage the reputation of the subsidiary
and result in diminution of earnings. The revocation of the
subsidiarys authorization to conduct investment business
in the U.K. may result in a discontinuation of our U.K.
operations and the loss of its revenues.
PFSC is a member of IIROC, an approved participant with the
Montreal Exchange, a participating organization of the Toronto
Stock Exchange and a member of the TSX Venture Exchange and
various Canadian alternative trading systems. PFSC is subject to
rules, including those of IIROC, relating to the maintenance of
capital. IIROC regulates the maintenance of capital by dealer
members by requiring that investment dealers periodically
calculate their risk adjusted capital (RAC) in
accordance with a prescribed formula which is intended to ensure
that members will be in a position to meet their liabilities as
they become due.
A dealer members RAC is calculated by starting with its
net allowable assets, which are assets that are conservatively
valued with emphasis on liquidity, and excluding assets that
cannot be disposed of in a short time frame or whose current
realizable value is not readily known, net of all liabilities,
and deducting the applicable minimum capital and margin
requirements, adding tax recoveries, if any, and subtracting the
members securities concentration charge.
Furthermore, IIROC rules provide for an early warning
system which is designed to provide advance warning of a dealer
member encountering financial difficulties. Various parameters
based on prescribed calculations involving the dealer
members RAC are designed to identify dealer members with
capital adequacy problems. If any of the parameters are
violated, several sanctions or restrictions are imposed on the
dealer member. These sanctions, which may include the early
filing of a monthly financial report, a written explanation to
IIROC from the Chief Executive Officer and Chief Financial
Officer, a description of the resolution, or an
on-site
visit by an examiner, are designed to reduce further financial
deterioration and prevent a subsequent capital deficiency.
Failure of a member to maintain the required risk adjusted
capital as calculated in accordance with applicable IIROC
requirements can result in further sanctions such as monetary
penalties, suspension or other sanctions, including expulsion of
the dealer member.
PFSA holds an Australian Financial Services License and is a
market participant of the ASX and is an ASX Clear participant .
As such, PFSA is subject to, amongst other things, the rules
established by the ASX and ASX Clear governing the minimum risk
based capital requirements for participants in the ASX and ASX
Clear. The ASX Clear capital requirements establish minimum core
liquid capital requirements and minimum requirements for a
participants liquid capital as compared to a number of
different risk based metrics which make up the
participants total risk requirement. The risk requirements
vary depending on the operations undertaken by the participant.
A participants core liquid capital is based principally on
a participants equity and retained profits, while the
liquid capital adjusts core liquid capital to take account of
reserves and in certain cases subordinated debt and preferred
stock. Currently, participants, including PFSA, are required to
maintain a core liquid capital of at least AUD$10 million.
The core liquid capital requirement for third party clearing
participants such as PFSA will increase to AUD$20 million
on January 1, 2012. ASX Clear participants are also
required to maintain a ratio of their liquid capital to total
risk requirements of greater than 1.2 and a ratio of total
option risk margin to liquid capital of less than 2.0. In the
event that this ratio is 2.0 or more the participant is required
to deposit funds to reduce the ratio and such funds may then not
be withdrawn until the ratio is below 1.8. PFSA is currently in
compliance with the minimum capital requirements established by
ASX Clear which are applicable to it and regularly calculates
its core liquid capital, liquid capital, total risk requirements
and other applicable metrics to monitor ongoing compliance with
the minimum capital requirements established by ASX Clear.
Our futures clearing business is subject to the capital and
segregation rules of the CFTC, NFA, and futures exchanges in the
U.S. and the FSA and futures exchanges in the U.K. If we
fail to maintain the required capital or violate the customer
segregation rules, we may be subject to monetary fines and the
suspension or revocation of our license to clear futures
contracts and carry customer accounts. Any interruption in our
ability to continue this business would impact our revenues and
profitability.
The regulatory capital requirements that affect our regulated
subsidiaries are stringent and subject to significant and
uncontrollable change. Our inability to comply with any of the
current requirements or any future changes to these requirements
could cause us to suffer significant financial loss.
23
Margin
risk management
Our margin lending activities expose our capital to significant
risks. These risks include, but are not limited to, absolute and
relative price movements, price volatility and changes in
liquidity, over which we have virtually no control.
We attempt to minimize the risks inherent in our margin lending
activities by retaining in our margin lending agreements the
ability to adjust margin requirements as needed and by
exercising a high degree of selectivity when accepting new
correspondents. When determining whether to accept a new
correspondent, we evaluate, among other factors, the
correspondents experience in the industry, its financial
condition and the background of the principals of the firm. In
addition, we have multiple layers of protection, including the
balances in customers accounts, correspondents
commissions on deposit, clearing deposits and equity in
correspondent firms, in the event that a correspondent or one of
its customers does not deliver payment for our services. We also
maintain a bad debt reserve.
Our customer agreements and fully-disclosed clearing agreements
require industry arbitration in the event of a dispute.
Arbitration is generally less expensive and more timely than
dispute resolution through the court system. Although we attempt
to minimize the risk associated with our margin lending
activities, there is no assurance that the assumptions on which
we base our decisions will be correct or that we are in a
position to predict factors or events which will have an adverse
impact on any individual customer or issuer, or the securities
markets in general.
Local
regulations
PFSI is a broker-dealer authorized to conduct business in all
50 states, the District of Columbia and Puerto Rico under
applicable local securities regulations. PFSC is authorized to
conduct business in all major provinces and territories in
Canada.
Employees
As of December 31, 2010, we had 985 employees, of whom
416 were employed in clearing operations, 275 in technology
support and development, 60 in sales and marketing and 234 in
finance and administration. Of our 985 employees, 689 are
employed in the U.S., 58 in the U.K., 196 in Canada, 10 in Asia
and 32 in Australia. Our employees are not represented by any
collective bargaining organization or covered by a collective
bargaining agreement. We believe that our relationship with our
employees is good.
Our continued success depends largely on our ability to attract
and retain highly skilled personnel. Competition for such
personnel is intense, and should we be unable to recruit and
retain the necessary personnel, the development, sale and
performance of new or enhanced services would likely be delayed
or prevented. In addition, difficulties we encounter in
attracting and retaining qualified personnel may result in
higher than anticipated salaries, benefits and recruiting costs,
which could adversely affect our business.
Public
reporting
Once filed with the SEC, our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act are available
free of charge at www.penson.com. The information found on our
website is not part of this or any other report we file with or
furnish to the SEC. Any materials we file with the SEC may be
read and copied at the SECs Public Reference Room at
100 F Street, NE, Washington, D.C. 20549. The SEC
maintains a website at www.sec.gov that contains the reports we
file with the SEC. We also make available on our website, free
of charge, our Code of Business Conduct and Ethics, our
Corporate Business Principles and Governance Guidelines, and the
charters for our Nominating and Corporate Governance, Audit and
Compensation Committees. Any stockholder who so requests may
obtain a printed copy of any of these documents, free of charge,
by writing to us at 1700 Pacific Avenue, Suite 1400,
Dallas, Texas 75201, Attention: Corporate Secretary.
24
Many factors could have an effect on PWIs financial
condition, cash flows and results of operations. We are subject
to various risks resulting from changing economic,
environmental, political, industry, business and financial
conditions. The principal factors are described below.
Risks
related to our business and our industry
We
face substantial competition from other securities and
commodities processing and infrastructure firms, which could
harm our financial performance and reduce our market
share.
The market for securities and futures processing infrastructure
products and services is rapidly evolving and highly
competitive. We compete with a number of firms that provide
similar products and services to our market. Our competitors
include Goldman Sachs Execution & Clearing, L.P.;
Pershing LLC, a member of BNY Securities Group; National
Financial Services LLC, a Fidelity Investments company; Merrill
Lynch & Co., Inc., a subsidiary of Bank of America; MF
Global Ltd. (formerly Man Financial) and RJ Obrien &
Associates LLC. Many of our competitors have significantly
greater financial, technical, marketing and other resources than
we have. Some of our competitors also offer a wider range of
services and financial products than we do and have greater name
recognition and more extensive client bases than ours. These
competitors may be able to respond more quickly to new or
changing opportunities, technologies and client requirements and
may be able to undertake more extensive promotional activities,
offer more attractive terms to clients and adopt more aggressive
pricing policies than ours. There can be no assurance that we
will be able to compete effectively with current or future
competitors. If we fail to compete effectively, our market share
could decrease and our business, financial condition and
operating results could be materially harmed.
Increased competition has contributed to the decline in net
clearing revenue per transaction that we have experienced in
recent years and may continue to create downward pressure on our
net clearing revenue per transaction. In the past, we have
responded to the decline in net clearing revenue by reducing our
expenses, but if the decline continues, we may be unable to
reduce our expenses at a comparable rate. Our failure to reduce
expenses comparably would reduce our profit margins.
We
depend on a limited number of clients for a significant portion
of our clearing revenues.
Our ten largest current clients accounted for approximately
26.1% of our total net revenues for the year ended
December 31, 2010, while no client accounted for more than
6.8% of net revenues. The loss of even a small number of these
clients at any one time could cause our revenues to decline. As
previously announced, we will be losing a significant amount of
the revenues generated from our largest correspondent during
2011; however, we believe we will be able to replace a
substantial portion of that revenue from new correspondents we
have signed. Our clearing contracts generally have an initial
term of two years, and allow the correspondent to cancel our
services upon providing us with 45 days of notice, in most
cases after the expiration of the fixed term. Many of our
futures clearing contracts with correspondents may be terminated
with a
30-day
notice. Our clearing contracts with these correspondents can
also terminate automatically if we are suspended from any of the
national exchanges of which we are a member for failure to
comply with the rules or regulations thereof. In past periods,
we have experienced temporary declines in our revenues when
large clients have switched to other service providers. There
can be no assurance that our largest clients will continue to
use our products and services.
Our
clearing operations could expose us to legal liability for
errors in performing clearing functions and improper activities
of our correspondents.
Any intentional failure or negligence in properly performing our
clearing functions or any mishandling of funds and securities
held by us on behalf of our correspondents and their customers
could lead to censures, fines or other sanctions by applicable
authorities as well as actions in tort brought by parties who
are financially harmed by those failures or mishandlings. Any
litigation that arises as a result of our clearing operations
could harm our reputation and cause us to incur substantial
expenses associated with litigation and damage awards that could
exceed our liability insurance by unknown but significant
amounts. In the normal course of business, we purchase and sell
securities as both principal and agent. If another party to the
transaction fails to fulfill its contractual
25
obligations, we may incur a loss if the market value of the
security is different from the contract amount of the
transaction.
In the past, clearing firms in the U.S. have been held
liable for failing to take action upon the receipt of customer
complaints, failing to know about the suspicious activities of
correspondents or their customers under circumstances where they
should have known, and even aiding and abetting, or causing, the
improper activities of their correspondents. Although our
correspondents provide us with indemnity under our contracts, we
cannot assure you that our procedures will be sufficient to
properly monitor our correspondents or protect us from liability
for the acts of our correspondents under current laws and
regulations or that securities industry regulators will not
enact more restrictive laws or regulations or change their
interpretations of current laws and regulations. If we fail to
implement proper procedures or fail to adapt our existing
procedures to new or more restrictive regulations, we may be
subject to liability that could result in substantial costs to
us and distract our management from our business.
Our
provision of sponsored and direct market access could expose us
to legal liabilities for trading activity by third
parties
We provide sponsored access to certain entities, which allows
those entities to submit trades to certain exchanges through our
market participant identification (MPID). We are responsible for
any trades submitted by those entities that use our MPID. In
addition, we provide certain of our correspondents with direct
market access to various exchanges. Recently, the SEC and
certain domestic and foreign SROs have increased scrutiny and
enacted stringent regulation of sponsored and direct market
access providers. If we cannot or do not adequately assess and
successfully control the risks involved with all of the trading
activities of our correspondents, we may be unable to protect
ourselves from those risks. Though we have indemnification
provisions in our contracts with each of those entities, given
the increased regulatory scrutiny in this area, these
indemnification provisions may not adequately protect us from
liabilities incurred due to our provision of these services. We
will be required to follow such regulations as soon as they
become effective, which may limit or eliminate our provision of
these services and could adversely affect our revenues and
profitability. Even if we are able to continue to offer this
service, we may have to incur substantial costs related to
implementation of risk controls with low latency to comply with
new regulations.
Market
weaknesses and lower trading volumes may negatively affect our
results of operations and profitability.
We are subject to risks as a result of volume fluctuations in
the securities and futures markets. A prolonged period of market
weakness and low trading volumes could adversely impact the
business of our customers and our business. There is a direct
correlation between the volume of our customers trading
activity and our results of operations. If our customers
trading activity decreases, we expect that it would have a
negative impact on our results of operations and profitability.
We, along with other participants in the equity and futures
markets, have experienced a substantial decrease in trading
volumes over the most recent quarters that has materially
adversely affected our profitability during such time.
Continuing
low, short-term interest rates have negatively impacted the
profitability of our margin lending business.
The profitability of our margin lending activities depends to a
great extent on the difference between interest income earned on
margin loans and investments of customer cash and the interest
expense paid on customer cash balances and borrowings. While
they are not linearly connected, if short-term interest rates
fall, we generally expect to receive a smaller gross interest
spread, causing the profitability of our margin lending and
other interest-sensitive revenue sources to decline. Recent
decreases in short-term interest rates have contributed to a
decrease in our profitability and will continue to do so while
lower rates continue to be in effect. Assuming constant customer
balances, we expect that a 25 basis point change in the
federal funds rate would affect our pre-tax income by
approximately $1.3 million per quarter.
Short-term interest rates are highly sensitive to factors that
are beyond our control, including general economic conditions
and the policies of various governmental and regulatory
authorities. In particular, decreases in the federal funds rate
by the Federal Reserve usually lead to decreasing interest rates
in the U.S., which generally lead to a
26
decrease in the gross spread we earn. This is most significant
when the federal funds rate is on the lower end of its
historical range, as it is today. Interest rates in Canada, the
U.K. and Australia are also subject to fluctuations based on
governmental policies and economic factors and these
fluctuations could also affect the profitability of our margin
lending operations in these markets.
Our
margin lending business subjects us to credit risks and if we
are unable to liquidate an investors securities when the
margin collateral becomes insufficient, the profitability of our
business may suffer.
We provide margin loans to investors; therefore, we are subject
to risks inherent in extending credit. As of December 31,
2010, our receivables from customers and correspondents were
$2.3 billion, which predominantly reflected margin loans.
The Company generally recognizes interest income on an accrual
basis as it is earned. At December 31, 2010 and 2009, the
Company had approximately $97.4 million and $52.4 million in
receivables, respectively, primarily from customers and
correspondents, that were substantially collateralized and
considered collectable, for which interest income was being
recorded only when received. Our credit risks include the risk
that the value of the collateral we hold could fall below the
amount of an investors indebtedness. This risk is
especially great when the market is rapidly declining.
Agreements with margin account investors permit us to liquidate
their securities with or without prior notice in the event that
the amount of margin collateral becomes insufficient. Despite
those agreements and our house policies with respect to margin,
which may be more restrictive than is required under applicable
laws and regulations, we may be unable to liquidate the
customers securities for various reasons, including:
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the pledged securities may not be actively traded;
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there may be an undue concentration of securities
pledged; or
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an order to stop transfer by the issuer of securities may be
issued with regard to pledged securities.
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In the U.S., our margin lending is subject to the margin rules
of the Federal Reserve, NYSE and FINRA, whose rules generally
permit margin loans of up to 50% of the value of the securities
collateralizing the margin account loan at the time the loan is
made, subject to requirements that the customer deposit
additional securities or cash in its accounts so that the
customers equity in the account is at least 25% of the
value of the securities in the account. We are also subject to
rules and regulations in Canada and the U.K. with regard to our
margin lending activities in those markets. In certain
circumstances, we may provide a higher degree of margin leverage
to our correspondents with respect to their proprietary trading
businesses than otherwise permitted by the margin rules
described above based on an exemption for correspondents that
purchase a class of preferred stock of PFSI. In addition, for
our portfolio margining accounts, we are able to extend
substantially more credit than permitted by the margin rules
described above to approved customers pursuant to a risk formula
adopted by the SEC. As a result, we may increase the risks
otherwise associated with margin lending with respect to these
correspondent and customer accounts.
We
rely, in part, on third parties to provide and support the
software and systems we use to provide our services. Any
interruption or cessation of service by these third parties
could harm our business.
We have contracted with SunGard Data Systems and, more recently,
Broadridge to provide a major portion of the software and
systems necessary for our execution and clearing services. On
September 25, 2008, we entered into an amendment to our
current agreement with SunGard that requires SunGard to provide
a dedicated processing platform for the processing of our
U.S. clearing operations. Our current agreement with
SunGard will expire in February, 2014, but can be terminated by
SunGard upon written notice in the event that we breach the
agreement. In the past, we have experienced limited processing
delays, occasional hardware and software outages with third
party service providers, including SunGard. Any major
interruption in our ability to process our transactions through
SunGard or Broadridge would harm our relationships with our
clients and impact our growth. We also license many additional
generally available software packages. Failures in any of these
applications could also harm our business operations. We rely on
similar systems for other subsidiaries, problems with each of
which could cause similar problems and results in us suffering
significant financial harm.
We rely on SunGard, Broadridge and other third parties to
enhance their current products, develop new products on a timely
and cost-effective basis, and respond to emerging industry
standards and other technological changes. Now that we have
converted our Canadian operations and as we continue to
transition our United States operations to Broadridges
27
systems, we expect to be able to rely on Broadridge to be able
to provide similar future product developments for our U.S.,
U.K. and Canadian securities operations. See
Business Strategic Acquisitions for a
description of the Broadridge transaction. Certain of our
subsidiaries will continue to use SunGard to provide the
software and systems necessary to provide services to our
clients, including Penson Futures. SunGards provision of a
dedicated processing platform allowed us to process our
increased U.S. trade volume in 2010 and we expect to be
able to continue to increase or U.S. trade volume after
converting to Broadridges systems in 2011 and beyond. If
in the future, however, enhancements or upgrades of third-party
software and systems cannot be integrated with our technologies
or if the technologies on which we rely fail to respond to
industry standards or technological changes, we may be required
to redesign our proprietary systems. Software products may
contain defects or errors, especially when first introduced or
when new versions or enhancements are released. The inability of
third parties to supply us with software or systems on a
reliable, timely basis or to allocate sufficient capacity to
meet our trading volume requirements could harm relationships
with our clients and our ability to achieve our projected level
of growth.
Our
anticipated transition of certain support services to Ridge and
Broadridge may involve unforeseen delays, costs or technological
complications. If we are unable to transition our services
efficiently to Broadridge, we may experience interruptions or
difficulties with respect to the services Broadridge is expected
to provide.
We have signed a technology services and outsourcing agreement
with Broadridge whereby Broadridge is expected to replace
SunGard and our PFSL service providers as our provider of
certain software and systems necessary for our execution and
clearing services. See Business Strategic
Acquisitions for a description of the Broadridge
transaction. We completed the conversion of our Canadian
operations to Broadridge in February, 2011. We anticipate
completing the transition of our U.S. and PFSL operations
to those software and systems over the next one to two years.
Any delays, technology issues or unexpected costs could
substantially impair our ability to continue to provide clearing
and execution services to our clients that could cause us to
suffer material financial loss. In addition, there can be no
guarantees that we will not experience additional issues with
respect to processing delays, hardware and software outages, or
other service issues with Broadridge than we experience with our
current providers. Any additional processing delays or issues we
experience could impair our ability to provide services to our
clients, which could impact our growth and cause significant
financial loss.
Our
products and services, and the products and services provided to
us by third parties, may infringe upon intellectual property
rights of third parties, and any infringement claims could
require us to incur substantial costs, distract our management
or prevent us from conducting our business.
Although we attempt to avoid infringing upon known proprietary
rights of third parties and typically incorporate
indemnification provisions in any agreements where we license
third party software, we are subject to the risk of claims
alleging infringement of third-party proprietary rights and have
incurred litigation expenses in the past, and are continuing to
incur expenses due to the ongoing Realtime Data case, related to
our defense of our intellectual property rights. If we infringe
upon the rights of third parties through use of our proprietary
software or software licensed to us by third parties, we may be
unable to obtain licenses to use those or similar rights on
commercially reasonable terms. In either of these events, we
would need to undertake substantial reengineering to continue
offering our services and may not be successful. In addition,
any claim of infringement could cause us to incur additional,
substantial costs defending the claim, even if the claim is
invalid, and could distract our management from our business.
Furthermore, a party making such a claim could secure a judgment
that requires us to pay substantial damages. A judgment could
also include an injunction or other court order that could
prevent us from conducting our business.
We may
not be able to protect our intellectual property rights against
unauthorized use and infringement by third parties, and our
failure to do so may weaken our competitive position, and any
legal claim we seek to pursue may require us to incur
substantial cost and distract management and us from conducting
our business.
Despite the precautions we take to protect our intellectual
property rights, it is possible that third parties may copy or
otherwise obtain and use our proprietary technology without
authorization or otherwise infringe upon our proprietary rights.
It is also possible that third parties may independently develop
technologies similar to ours. It may be difficult for us to
police unauthorized use of our intellectual property. We cannot
be certain that our
28
intellectual property rights are sufficiently protected against
unauthorized use and infringement by third parties, and our
failure to do so may weaken our competitive position. In
addition, litigation may be necessary in the future to enforce
our intellectual property rights and to protect our trade
secrets, which may require us to incur substantial cost and
distract our management and us from conducting our business. See
also Business Intellectual property and other
proprietary rights.
If our
clients account information is misappropriated, we may be
held liable or suffer harm to our reputation.
Increased public attention regarding the corporate use of
personal information has led to increasingly complex legislation
and regulations intended to strengthen data protection,
information security and consumer privacy. The law in these
areas is not consistent or settled. While we employ what we
believe to be a high degree of care in protecting our
clients confidential information, if third parties
penetrate our network security or otherwise misappropriate our
clients personal or account information, or we were to
otherwise release any such confidential information without our
clients permission, unintentionally or otherwise, we could
be subject to liability arising from claims related to
impersonation or similar fraud claims or other misuse of
personal information, as well as suffer harm to our reputation.
To effect secure transmissions of confidential information over
computer systems and the Internet, we rely on encryption and
authentication technology. While we periodically test the
integrity and security of our systems, we cannot assure you that
our efforts to maintain the confidentiality of our clients
account information will be successful.
Internet security concerns have been a barrier to the acceptance
of online trading, and any well-publicized compromise of
security could hinder the growth of the online brokerage
industry. We cannot assure you that advances in computer
capabilities, new discoveries in the field of cryptography or
other events or developments will not result in a compromise or
breach of the technology we use to protect clients
transactions and account data. We may incur significant costs to
protect against the threat of network or Internet security
breaches or to alleviate problems caused by such breaches.
Our
risk management policies and procedures may leave us exposed to
unidentified risks or an unanticipated level of
risk.
We seek to control our risk exposure through a risk management
framework that is designed to monitor, identify and measure the
types of risk we face. While our management believes that our
risk management framework effectively evaluates and manages the
financial, operational, market, credit and other risks we face,
risk management tools, no matter how well designed, have
inherent limitations, which could cause them to be ineffective.
As a result, we face the risk of losses, including losses
resulting from firm errors, customer defaults or fraud.
Unexpectedly large or rapid movements or disruptions in one or
more markets may cause adverse changes in securities values,
decreases in liquidity and trading positions and increased
volatility, all of which could increase our risk exposure to our
customers and to other third parties. In addition, while we
monitor every customer account that is less than fully
collateralized with liquid securities daily, our risk controls
may not be able to protect us from substantial losses in those
accounts. If our risk management tools are unable to control our
risk exposure, we may suffer material losses or suffer other
adverse consequences that could impair our ability to continue
our operations.
We may
be subject to material litigation proceedings that could cause
us significant reputational harm and financial
loss.
We are subject from
time-to-time
to legal claims or regulatory matters involving stockholder,
customer, and other issues on a global basis, based on our
activity or the activity of our correspondents. As described in
Item 3: Legal Proceedings, we are currently
engaged in a number of litigation matters. These matters include
our involvement in a bankruptcy proceeding concerning Sentinel
Management Group, Inc. (Sentinel), which is
described in detail in Item 3. The bankruptcy trustee in
this matter is seeking the return of pre- and post-bankruptcy
petition transfers made to Penson Futures and Penson Financial
Futures, Inc. (PFFI), a subsidiary of PWI, to which
we have objected. We intend to vigorously defend this position,
but we are not able to predict the outcome of this dispute at
this time. In the event that Penson Futures and PFFI are
obligated to return a substantial portion of previously
distributed funds to the Sentinel estate, it could have a
material adverse effect on our operating results for
29
the period in which the payment is made. In addition, we are
currently involved in a matter regarding Nexas use of
certain intellectual property rights. An unfavorable outcome in
that matter may require us to terminate use of certain
intellectual property we currently employ, or to license such
intellectual property at a high cost.
Litigation generally is subject to inherent uncertainties, and
unfavorable rulings can occur. An unfavorable ruling in any
matter could include monetary damages or, in cases for which
injunctive relief is sought, an injunction prohibiting us from
providing clearing or technology services. If we were to receive
an unfavorable ruling in a matter, our business and results of
operations could suffer significant reputational and financial
loss.
Any
slowdown or failure of our computer or communications systems
could subject us to liability for losses suffered by our clients
or their customers.
Our services depend on our ability to store, retrieve, process
and manage significant databases, and to receive and process
securities and futures orders through a variety of electronic
media. Our principal computer equipment and software systems,
including backup systems, are maintained at various locations in
Texas, Chicago, Boston, New Jersey, Minnesota, Toronto,
Montreal, Sydney and London. Our systems or any other systems in
the trading process could slow down significantly or fail for a
variety of reasons, including:
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computer viruses or undetected errors in our internal software
programs or computer systems;
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inability to rapidly monitor all intraday trading activity;
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inability to effectively resolve any errors in our internal
software programs or computer systems once they are detected;
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heavy stress placed on our systems during peak trading
times; or
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power or telecommunications failure, fire, tornado or any other
natural disaster.
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While we continue to monitor system loads and performance and
implement system upgrades to handle predicted increases in
trading volume and volatility, we cannot assure you that we will
be able to accurately predict future volume increases or
volatility or that our systems will be able to accommodate these
volume increases or volatility without failure or degradation.
Any significant degradation or failure of our computer systems,
communications systems or any other systems in the clearing or
trading processes could cause the customers of our clients to
suffer delays in the execution of their trades. These delays
could cause substantial losses for our clients or their
customers and could subject us to claims and losses, including
litigation claiming fraud or negligence, damage our reputation,
increase our service costs, cause us to lose revenues or divert
our technical resources.
If our
operational systems and infrastructure fail to keep pace with
our anticipated growth, we may experience operating
inefficiencies, client dissatisfaction and lost revenue
opportunities.
We have experienced significant growth in our client base,
business activities and the number of our employees. The growth
of our business and expansion of our client base has placed, and
will continue to place, a significant strain on our management
and operations. We believe that our current and anticipated
future growth will require the implementation of new and
enhanced communications and information systems, the training of
personnel to operate these systems and the expansion and upgrade
of core technologies. While many of our systems are designed to
accommodate additional growth without redesign or replacement,
we may nevertheless need to make significant investments in
additional hardware and software to accommodate growth. In
addition, we cannot assure you that we will be able to
accurately predict the timing or rate of this growth or expand
and upgrade our systems and infrastructure on a timely basis.
In addition, the scope of procedures for assuring compliance
with applicable rules and regulations has changed as the size
and complexity of our business has increased. We have
implemented and continue to implement formal compliance
procedures to respond to these changes and the impact of our
growth. Our future operating results will depend on our ability:
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to improve our systems for operations, financial controls, and
communication and information management;
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to refine our compliance procedures and enhance our compliance
oversight; and
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to recruit, train, manage and retain our employees.
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Our growth has required and will continue to require increased
investments in management personnel and systems, financial
systems and controls and office facilities. In the absence of
continued revenue growth, the costs associated with these
investments would cause our operating margins to decline from
current levels. We cannot assure you that we will be able to
manage or continue to manage our recent or future growth
successfully. If we fail to manage our growth, we may experience
operating inefficiencies, dissatisfaction among our client base
and lost revenue opportunities.
A
failure in the operational systems of third parties could
significantly disrupt our business and cause
losses.
We face the risk of operational failure, termination or capacity
constraints of any of the clearing agents, exchanges, clearing
houses or other financial intermediaries we use to facilitate
our securities transactions. In recent years, there has been
significant consolidation among clearing agents, exchanges,
clearing houses and other financial intermediaries, which has
increased our exposure to operational failure, termination or
capacity constraints of the particular financial intermediaries
that we use and could affect our ability to find adequate and
cost-effective alternatives in the event of any such failure,
termination or constraint. Any such failure, termination or
constraint could adversely affect our ability to effect
transactions, service our clients and manage our exposure to
risk.
If we
are unable to respond to the demands of our existing and new
clients, our ability to reach our revenue goals or maintain our
profitability could be diminished.
The global securities and futures industry is characterized by
increasingly complex infrastructures and products, new and
changing business models and rapid technological changes. Our
clients needs and demands for our products and services
evolve with these changes. For example, an increasing number of
our clients are from market segments including hedge funds,
algorithmic traders and direct access customers who demand
increasingly sophisticated products. Our future success will
depend, in part, on our ability to respond to our clients
demands for new services, products and technologies on a timely
and cost-effective basis, to adapt to technological advancements
and changing standards and to address the increasingly
sophisticated requirements of our clients.
Our
existing correspondents may choose to perform their own clearing
services as their operations grow, in which case we would lose
the revenues generated by such correspondents.
We market our clearing services to our existing correspondents
on the strength of our ability to process transactions and
perform related back-office functions at a lower cost than the
correspondents could perform these functions themselves. As our
correspondents operations grow, they often consider the
option of performing clearing functions themselves, in a process
referred to in the securities industry as
self-clearing. As the transaction volume of a
correspondent grows, the cost of implementing the necessary
infrastructure for self-clearing may eventually be offset by the
elimination of per-transaction processing fees that would
otherwise be paid to a clearing firm. Additionally, performing
their own clearing services allows self-clearing firms to retain
their customers margin balances, free credit balances and
securities for use in margin lending activities. If our clients
choose to self-clear, we would lose their revenue and our
business could be adversely affected.
We are also subject to the risk that one or more of our
correspondents may be acquired by a firm which is already self
clearing, or clears through another broker-dealer. Our largest
correspondent, thinkorswim, was acquired by TD Ameritrade in
2009. We anticipate that approximately two-thirds of the
business we currently clear for thinkorswim will be converted to
TD Ameritrade in 2011.
Our
ability to sell our services and grow our business could be
significantly impaired if we lose the services of key
personnel.
Our business is highly dependent on a small number of key
executive officers. We have entered into compensation agreements
with various personnel, but we do not have employment agreements
with most of our employees. The loss of the services of any of
the key personnel or the inability to identify, hire, train and
retain other qualified personnel in the future could harm our
business. Competition for key personnel and other highly
qualified technical and managerial personnel in the securities
and futures processing infrastructure industry is intense, and
there is no assurance that we would be able to recruit
management personnel to replace these individuals in a timely
manner, or at all, on acceptable terms.
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We may
face risks associated with potential future acquisitions that
could reduce our profitability or hinder our ability to
successfully expand our operations.
Over the past few years, our business strategy has included
engaging in acquisitions which have facilitated our ability to
provide technology infrastructure and establish a presence in
international markets. We have completed five acquisitions since
2006, including the acquisitions of GHCO and FCG in 2007 that
significantly expanded our futures business. Additionally we
completed the acquisition of substantially all of Ridges
contracts with its securities clearing clients in June, 2010. In
the future, we may acquire additional businesses or technologies
as part of our growth strategy. We cannot assure you that we
will be able to successfully integrate future acquisitions,
which potentially involve the following risks:
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diversion of managements time and attention to the
negotiation of the acquisitions;
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difficulties in assimilating acquired businesses, technologies,
operations and personnel including, but not limited to, the
increased trade volume of acquired businesses;
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the need to modify financial and other systems and to add
management resources;
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assumption of unknown liabilities of the acquired businesses;
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unforeseen difficulties in the acquired operations and
disruption of our ongoing business;
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dilution to our existing stockholders due to the issuance of
equity securities that may make it difficult for us to raise
capital from equity financing in the future;
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possible adverse short-term effects on our cash flows or
operating results; and
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possible accounting charges due to impairment of goodwill or
other purchased intangible assets.
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Failure to manage our acquisitions to avoid these risks could
harm our business, financial condition and operating results.
Our
ability to borrow a limited amount of funds under our Amended
and Restated Credit Facility may adversely affect our liquidity
and our results of operations.
Currently, we have the capacity to borrow up to $25,000 under
the Amended and Restated Credit Facility. While we believe we
are in a very solid financial position, and our broker-dealer
subsidiaries continue to have access to capital to finance
day-to-day
operations through separate secured facilities, the relatively
limited current availability under this facility could adversely
affect us if we have an unanticipated need for additional
capital and cannot obtain capital, or can only obtain capital on
terms that are not favorable to us, from other sources when such
funds are required. While we believe that we would be able to
find alternative sources of capital should we need to raise
additional funds, we cannot guarantee that we will be able to do
so or that we will be able to do so on terms that are
sufficiently favorable or in a timely manner.
Covenants
in our credit agreement and certain other debt instruments
restrict our business in many ways.
Our Amended and Restated Credit Facility, the Notes and other
outstanding debt instruments include various covenants that
limit our ability to engage in specified types of transactions.
These covenants limit our ability to, among other things: incur
additional indebtedness, pay dividends on our capital stock or
redeem, repurchase or retire our capital stock or prepay certain
indebtedness, make investments, make capital expenditures,
engage in certain transactions with our affiliates, enter into
acquisitions, consolidate, merge or sell assets, incur liens and
change the business conducted by us and our subsidiaries.
In addition, the Amended and Restated Credit Facility contains
covenants that require us to maintain specified financial ratios
and satisfy other financial condition tests. Our Amended and
Restated Credit Facility and the Notes also require that PFSI
maintain net regulatory capital of at least 5.5% of its
aggregate debt balances. Our ability to meet those financial
ratios and tests can be affected by events beyond our control,
and we may not be able to meet those tests. A breach of any of
these covenants could result in a default under the Amended and
Restated Credit Facility, the Notes and other outstanding debt
instruments.
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Our Amended and Restated Credit Facility, the Notes and other
outstanding debt instruments include various events of default.
Upon the occurrence of an event of default under the Amended and
Restated Credit Facility the Notes or other outstanding debt
instruments, the lenders could elect to declare all amounts
outstanding under such credit facility to be immediately due and
payable and terminate all commitments to extend further credit.
If the obligations under our Amended and Restated Credit
Facility, the Notes or the Convertible Notes were accelerated,
we may not have sufficient assets to repay the amounts
outstanding thereunder which would have a material adverse
effect on us.
Our
revenues may decrease due to declines in trading volume, market
prices, liquidity of securities markets or proprietary trading
activity.
We generate revenues primarily from transaction processing fees
we earn from our clearing operations and interest income from
our margin lending activities and interest earned by investing
customers cash. These revenue sources are substantially
dependent on customer trading volumes, market prices and
liquidity of securities markets. Over the past several years the
U.S. and foreign securities markets have experienced
significant volatility. Sudden or gradual but sustained declines
in market values of securities can result in:
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reduced trading activity;
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illiquid markets;
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declines in the market values of securities carried by our
customers and correspondents;
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the failure of buyers and sellers of securities to fulfill their
settlement obligations;
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reduced margin loan balances of investors; and
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increases in claims and litigation.
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The occurrence of any of these events would likely result in
reduced revenues and decreased profitability from our clearing
operations and margin lending activities.
Certain of our subsidiaries engage in proprietary trading
activities. Please see our discussion in
Business Securities-processing and
Proprietary trading. Historically these activities
have accounted for a very small portion of our total revenues
and net income/loss. With respect to most of such trading, we
endeavor to limit our exposure to markets through, among other
means, employing hedging strategies and by limiting the period
of time that we have market exposure. However, we are not
completely protected against market risk from such trading at
any particular point in time and proprietary trading risks could
adversely impact operating results in a specific financial
period.
Continued
market instability could negatively affect our operations and
financial condition.
As a financial services provider, our business is sensitive to
conditions in the global financial markets and economic
conditions generally, as well as to the soundness of particular
financial services institutions with which we transact business.
Among other things, national and international markets have
continued through 2010 to suffer significant turmoil initially
caused by a sharp downturn in markets for mortgage-related
securities and non-investment grade debt securities and loans.
Several large financial institutions including, without
limitation, commercial banks, insurance companies, and brokerage
firms, have either filed for bankruptcy or been the subject of
governmental intervention in the form of loans, equity infusions
or direct government ownership in receivership. Others have been
sold in whole or in part to third parties. Financial services
institutions that deal with each other are often interrelated as
a result of trading, clearing, counterparty, or other
relationships. As a result, a default or failure by, or even
concerns about the stability or liquidity of, one or more
financial services institutions could lead to significant
market-wide liquidity problems, or losses or defaults by other
institutions, including us. In addition, our operations may
suffer to the extent that ongoing market volatility causes
individuals and institutional traders and other market
participants to curtail or forego trading activities, which
could adversely affect our operations and financial conditions.
33
Our
significant
non-U.S.
operation exposes us to global exchange rate fluctuations that
could impact our profitability.
We are exposed to market risk through commercial and financial
operations. Our market risk consists principally of exposure to
fluctuations in currency exchange and interest rates. As we
conduct a significant portion of our operations outside the
U.S., fluctuations in currencies of other countries, especially
the British Pound and the Canadian and Australian dollars, may
materially affect our operating results. As we continue to
expand our business operations globally, our exposure to
fluctuations in currencies of other countries will continue to
increase.
We do not typically use financial instruments to hedge our
income statement exposure to foreign currency fluctuations. A
substantial portion of our revenues and cost of operating
expenses are denominated in currencies other than the
U.S. dollar. In our consolidated financial statements, we
translate our local currency financial results into
U.S. dollars based on average exchange rates prevailing
during a reporting period and financial position based on the
exchange rate at the end of that period. During times of a
strengthening U.S. dollar, at a constant level of business,
our reported international revenues, earnings, assets and
liabilities will be reduced because the local currency will
translate into fewer U.S. dollars.
Given the volatility of exchange rates, we may not be able to
manage our currency transaction
and/or
translation risks effectively, or volatility in currency
exchange rates may expose our financial condition or results of
operations to significant additional risk.
Requirements
to close out fails resulting from short sales could increase our
costs and adversely affect our securities lending
business.
We are subject to Rule 204 under the Exchange Act, which
requires clearing broker-dealers to make delivery on short sales
effected in the U.S. no later than T+3. Under
Rule 204, clearing broker-dealers that do not purchase or
borrow securities to cover certain fail positions as of the
opening of trading on T+4 are subject to a borrowing penalty for
each security that the clearing-broker fails to deliver (subject
to the allocation provision noted below). The borrowing penalty,
which requires pre-borrowing in connection with short sales,
will apply until the clearing broker purchases a sufficient
amount of the security to make full delivery on the fail
position and that purchase clears and settles. If a clearing
broker becomes subject to the borrowing penalty, the penalty
will prohibit the clearing broker from effecting short sales in
that security for its own account or for that of any introducing
broker or customer unless the clearing broker has borrowed the
securities in question or has entered into a bona fide
arrangement to borrow the securities. Clearing broker-dealers
are permitted to reasonably allocate the close-out requirement
to an introducing broker that is responsible for the fail
position. As the clearing broker-dealer, if we are unable to
timely cover a fail position and cannot allocate the close-out
responsibility to the broker-dealer that is responsible for the
fail position, we would be subject to the borrowing penalty
until such time as we have purchased a sufficient amount of the
security to make full delivery on the fail position and that
purchase has cleared and settled, which generally is three
business days after the purchase. Foreign jurisdictions in which
we operate also have restrictions on short selling. Because of
the requirements of Rule 204 and foreign restrictions on
short selling, our costs associated with handling short sales,
including the costs associated with closing out fail positions
and borrowing securities to facilitate short selling may
increase significantly. In addition, if we become subject to the
borrowing penalty, our customers may be less likely to use our
securities lending department for short sale transactions and
the scope of our securities lending business may significantly
decrease, which will adversely affect our operations and
financial condition.
On February 24, 2010, the SEC adopted additional
restrictions on short selling stock. These restrictions, known
as the alternative uptick rule, restrict short selling in
securities that have dropped more than 10% in one day. These
changes and potential future regulatory changes related to
short-selling of securities may have a negative impact on our
ability to earn the spreads we have historically collected.
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General
economic and political conditions and broad trends in business
and finance that are beyond our control may contribute to
reduced levels of activity in the securities markets, which
could result in lower revenues from our business
operations.
Trading volume, market prices and liquidity are affected by
general national and international economic and political
conditions and broad trends in business and finance that result
in changes in volume and price levels of securities
transactions. These factors include:
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the availability of short-term and long-term funding and capital;
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the level and volatility of interest rates;
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legislative and regulatory changes;
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currency values and inflation; and
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national, state and local taxation levels affecting securities
transactions.
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These factors are beyond our control and may contribute to
reduced levels of activity in the securities markets. Our
largest source of revenues has historically been revenues from
clearing operations, which are largely driven by the volume of
trading activities of the customers of our correspondents and
proprietary trading by our correspondents. Our margin lending
revenues and technology revenues are also impacted by changes in
the trading activities of our correspondents and customers.
Accordingly, any significant reduction in activity in the
securities markets would likely result in lower revenues from
our business operations.
Our
quarterly revenue and operating results are subject to
significant fluctuations.
Our quarterly revenue and operating results may fluctuate
significantly in the future due to a number of factors,
including:
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changes in the proportion of clearing operations revenues and
interest income;
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the lengthy sales and integration cycle with new correspondents;
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the gain or loss of business from a correspondent;
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changes in per-transaction clearing fees;
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changes in bad debt expense from margin lending as compared to
historical levels;
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changes in the rates we charge for margin loans, changes in the
rates we pay for cash deposits we hold on behalf of our
correspondents and their customers and changes in the rates at
which we can invest such cash deposits;
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changes in the market price of securities and our ability to
manage related risks;
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fluctuations in overall market trading volume;
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the relative success
and/or
failure of third party clearing competitors, many of which have
increasingly larger resources than we have as a result of recent
consolidation in our industry;
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the relative success
and/or
failure of third party technology competitors including, without
limitation, competitors to our Nexa business;
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our ability to manage personnel, overhead and other
expenses; and
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the amount and timing of capital expenditures.
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Our expense structure is based on historical expense levels and
the expected levels of demand for our clearing, margin lending
and other services. If demand for our services declines, we may
be unable to adjust our cost structure on a timely basis in
order to achieve profitability.
Due to the foregoing factors,
period-to-period
comparisons of our historical revenues and operating results are
not necessarily meaningful, and you should not rely upon such
comparisons as indicators of future performance. We
35
also cannot assure you that we will be able to sustain the rates
of revenue growth we have experienced in the past, or improve
our operating results.
Our
involvement in futures and options markets subjects us to risks
inherent in conducting business in those markets.
We principally clear futures and options contracts on behalf of
our correspondents and their respective customers. Trading in
futures and options contracts is generally more highly leveraged
than trading in other types of securities. This additional
leverage increases the risk associated with trading in futures
and options contracts, which in turn raises the risk that a
correspondent, introducing broker, or customer may not be able
to fully repay its creditors, including us, if it experiences
losses in its futures and options contract trading business.
We may
not be able to or determine not to hedge our foreign exchange
risk.
As a foreign exchange trade dealer, we enter into currency
transactions with certain of our institutional clients or other
institutions using modeled prices that we determine and may seek
to hedge our risk by executing similar transactions on the
various exchanges or electronic communication networks of which
we are a participant. While we expect to be able to limit our
risk in our transactions with our clients through hedging
transactions on exchanges or ECNs or through other counterparty
relationships, there is no guarantee that we will be able to
enter into these transactions at prices similar to those which
we entered into with our clients. In addition, while we may
intend to enter into the hedging transactions after we enter
into a transaction with our client or the relevant institution,
it is possible that currency prices could fluctuate before we
are able to enter into such hedging transactions or, for other
reasons, we may determine not to hedge such risk.
The
securities and futures businesses are highly dependent on
certain market centers that may be targets of
terrorism.
Our business is dependent on exchanges and market centers being
able to process trades. Terrorist activities in September 2001
caused the U.S. securities markets to close for four days.
This impacted our revenue and profitability for that period of
time. If future terrorist incidents cause interruption of market
activity, our revenues and profits may be negatively impacted.
Extreme market volatility may cause investors to avoid
participation in equity markets, which could lead to
substantially reduced trading volumes.
On May 6, 2010, the Dow Jones Industrial Average plunged
over 900 points and then rapidly rebounded. This Flash
Crash caused many investors and traders to reduce their
trading activity in equity markets, or to suspend all trading
activity. Any further market disruptions that cause investors
and traders to reduce trading activity could lead to
significantly reduced trading volumes, which could adversely
affect our revenue and profitability.
Risks
related to government regulation
All
aspects of our business are subject to extensive government
regulation. If we fail to comply with these regulations, we may
be subject to disciplinary or other action by regulatory
organizations, and we could suffer significant reputational and
financial loss.
The securities industry in the U.S. is subject to extensive
regulation under both federal and state laws. In addition to
these laws, we must comply with rules and regulations of the
SEC, NYSE, FINRA, the CFTC, the NFA, various stock and futures
exchanges, state securities commissions and other regulatory
bodies charged with safeguarding the integrity of the securities
markets and other financial markets and protecting the interests
of investors participating in these markets. Broker-dealers and
FCMs are subject to regulations covering all aspects of the
securities and futures businesses, including:
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sales methods;
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trade practices among broker-dealers and FCMs;
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use and safekeeping of investors funds and securities;
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capital structure;
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margin lending;
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record keeping;
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conduct of directors, officers and employees; and
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supervision of investor accounts.
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Our ability to comply with these regulations depends largely on
the establishment and maintenance of an effective compliance
system as well as our ability to attract and retain qualified
compliance personnel. We could be subject to disciplinary or
other actions due to claimed non-compliance with these
regulations in the future and even for the claimed
non-compliance of our correspondents with such regulations. If a
claim of non-compliance is made by a regulatory authority, the
efforts of our management could be diverted to responding to
such a claim and we could be subject to a range of possible
consequences, including the payment of fines and the suspension
of one or more portions of our business. Additionally, our
clearing contracts generally include automatic termination
provisions which are triggered in the event we are suspended
from any of the national exchanges of which we are a member for
failure to comply with the rules or regulations thereof.
We and certain of our officers and employees have been subject
to claims of non-compliance in the past, and may be subject to
claims and legal proceedings in the future.
We also operate clearing and related businesses in the U.K.,
Canada and Australia and execute transactions in global markets.
These
non-U.S. businesses
are also heavily regulated. To the extent that different
regulatory regimes impose inconsistent or iterative requirements
on the conduct of our business, we will face complexity and
additional costs in our compliance efforts. In addition, as we
expand into new
non-U.S. markets
with which we may have relatively less experience, there is a
risk that our lack of familiarity with the regulations impacting
such markets may affect our performance and results.
The
regulatory environment in which we operate has experienced
increasing scrutiny by regulatory authorities in recent years
and further changes in legislation or regulations may affect our
ability to conduct our business or reduce our
profitability.
The legislative and regulatory environment in which we operate
has undergone significant change in the past and may undergo
further change in the future. The CFTC, SEC, NYSE, FINRA, NFA,
various securities or futures exchanges and other U.S. and
foreign governmental or regulatory authorities continuously
review legislative and regulatory initiatives and may adopt new
or revised laws and regulations. These legislative and
regulatory initiatives may affect the way in which we conduct
our business and may make our business less profitable. Changes
in the interpretation or enforcement of existing laws and
regulations by those entities may also adversely affect our
business. Certain regulatory authorities have been more likely
in recent years to commence enforcement actions against
companies in our industry and penalties and fines sought by
certain regulatory authorities have increased substantially in
recent years.
In addition, because our industry is heavily regulated,
regulatory approval may be required prior to expansion of our
business activities. We may not be able to obtain the necessary
regulatory approvals for any desired expansion. Even if
approvals are obtained, they may impose restrictions on our
business and could require us to incur significant compliance
costs or adversely affect the development of business activities
in affected markets.
Recently
enacted financial reform legislation and related regulations may
negatively affect our business activities, results of operations
and profitability.
While certain provisions of the Dodd-Frank Act will be effective
immediately, many other provisions will be effective only
following extended transition periods of varying lengths.
Therefore, it is impractical at present to forecast the
comprehensive effects of the legislation. The Dodd-Frank Act
also mandates the preparation of studies on a wide range of
issues, which could lead to additional legislation or regulatory
changes. This legislation makes extensive changes to the laws
regulating financial services firms and requires significant
rule-making. The legislation and regulation of financial
institutions, both domestically and internationally, include
calls to increase capital and liquidity requirements, limit the
size and types of the activities permitted and increase taxes on
some institutions.
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While we are currently assessing the impact that these
initiatives will have directly on our business, we are also
assessing the indirect effect on us due to the impact on certain
of our customers. As a result of the effect of these new
legislative and regulatory changes on our customers, our revenue
may materially decrease, our ability to pursue certain business
opportunities may be limited, we may be required to change
certain of our business practices, we may incur significant
additional costs and we may otherwise have our business
adversely affected. If we do not comply with current or future
legislation and regulations that apply to our operations, we may
be subject to fines, penalties or material restrictions on our
businesses in the jurisdiction where the violation occurred.
Accordingly, we cannot provide assurance that any such new
legislation or regulation would not have an adverse effect on
our business, results of operations, profitability or financial
condition.
If we
do not maintain the capital levels required by regulations, we
may be subject to fines, suspension, revocation of registration
or expulsion by regulatory authorities.
We are subject to stringent rules imposed by the SEC, NYSE,
FINRA, and various other regulatory agencies which require
broker-dealers to maintain specific levels of net capital. Net
capital is the net worth of a broker-dealer, less deductions,
for other types of assets including assets not readily
convertible into cash and specified percentages of a
broker-dealers proprietary securities positions. If we
fail to maintain the required net capital, we may be subject to
suspension or revocation of registration by the SEC and
suspension or expulsion by NYSE
and/or
FINRA, which, if not cured, could ultimately lead to our
liquidation. If the net capital rules are changed or expanded,
or if there is an unusually large charge against our net
capital, we might be required to limit or discontinue our
clearing and margin lending operations that require the
intensive use of capital. In addition, our ability to withdraw
capital from our subsidiaries could be restricted, which in turn
could limit our ability to pay dividends, repay or repurchase
debt, including the notes, at the parent company level and
redeem or purchase shares of our outstanding stock, if
necessary. A large operating loss or charge against net capital
could impede our ability to expand or even maintain our present
volume of business.
Our futures clearing business is subject to the capital and
segregation rules of the NFA and CFTC. If we fail to maintain
the required capital, or if we violate the customer segregation
rules, we may be subject to monetary fines, and the suspension
or revocation of our license to clear futures contracts. Any
interruption in our ability to continue this business would
impact our revenues and profitability.
Outside of the U.S., we are subject to other regulatory capital
requirements. Our U.K. subsidiary is subject to capital adequacy
rules that require our subsidiary to maintain stockholders
equity and qualifying subordinated loans at specified minimum
levels. If we fail to maintain the required regulatory capital,
we may be subject to fine, suspension or revocation of our
license with the FSA. If our license is suspended or revoked or
if the capital adequacy requirements are changed or expanded, we
may be required to discontinue our U.K. operations, which could
result in diminished revenues.
As a member of IIROC, an approved participant with the Montreal
Exchange, a participating organization with the Toronto Stock
Exchange and a member of the TSX Venture Exchange and various
Canadian alternative trading systems, PFSC is subject to the
rules and policies of IIROC and other rules relating to the
maintenance of regulatory capital. Specifically, to ensure that
the IIROC members will be able to meet liabilities as they
become due, IIROC requires its investment dealer members to
periodically calculate their risk adjusted capital in accordance
with a prescribed formula. If PFSC fails to maintain the
required risk adjusted capital, it may be subject to monetary
sanctions, suspensions or other sanctions, including expulsion
as a member. If PFSC is sanctioned or expelled or if the risk
adjusted capital requirements are changed or expanded, PFSC may
be required to discontinue operations in Canada, which could
result in diminished revenues.
PFSA holds an Australian Financial Services License and is a
market participant of the ASX and is an ASX Clear participant.
As such, PFSA is subject to, amongst other things, the rules
established by the ASX and ASX Clear governing the minimum risk
based capital requirements for participants in the ASX and ASX
Clear. The ASX Clear capital requirements establish minimum core
liquid capital requirements and minimum requirements for a
participants liquid capital as compared to a number of
different risk based metrics which make up the
participants total risk requirement. The risk requirements
vary depending on the operations undertaken by the participant.
A participants core liquid capital is based principally on
a participants equity and retained profits, while the
liquid capital adjusts core liquid capital to take account of
reserves and in certain cases subordinated debt and preferred
38
stock. If PFSA should fail to comply with the requirements of
these various measures of capital, we may be required to
discontinue our Australian operations, which could result in
diminished revenues.
In addition, some of the investments we make in our business may
impact our regulatory capital. We have made large investments
into Nexa and expect to continue to do so in the future.
Investments in non-regulated subsidiaries and increases in
illiquid assets, including unsecured customer accounts decrease
the capital available for our regulated subsidiaries. If we
experience increased levels of unsecured and partially secured
accounts in the future, we could suffer significant financial
loss.
Procedures
and requirements of the USA PATRIOT Act may expose us to
significant costs or penalties.
As participants in the financial services industry, our
subsidiaries are subject to laws and regulations, including the
USA PATRIOT Act of 2001, which require that they know certain
information about their customers and monitor transactions for
suspicious financial activities. The cost of complying with the
PATRIOT Act and related laws and regulations is significant. We
may face particular difficulties in identifying our
international customers, gathering the required information
about them and monitoring their activities. We face risks that
our policies, procedures, technology and personnel directed
toward complying with the PATRIOT Act are insufficient and that
we could be subject to significant criminal and civil penalties
due to noncompliance. Such penalties could have a material
adverse effect on our business, financial condition and
operating results and cash flows.
Risks
related to our corporate structure
Our
discontinued operations expose us to legal and other
risks.
In May, 2006, we completed the disposal by split off of certain
non-core business operations that were placed into the
subsidiaries of a newly formed holding company known as SAMCO
Holdings, Inc. (SAMCO). Our then existing stockholders exchanged
$10.4 million of SAMCO net assets and $7.3 million of
cash for 1.0 million Penson shares. The split off
transaction was structured to be tax free to the Company and our
stockholders, and the net assets were distributed at net book
value. Though there was substantial common ownership between the
Company and SAMCO, we did not retain any ownership interest in
SAMCO, which is operated independently. Although the split off
transaction occurred over three years ago, we may incur future
liabilities related to the operations of the SAMCO entities. Due
to the Companys indirect ownership of the SAMCO entities
prior to our initial public offering we may be exposed to
additional liabilities beyond what we may ordinarily encounter
in our typical customer relationships.
Provisions
in our certificate of incorporation and bylaws and under
Delaware law may prevent or frustrate a change in control or a
change in management that stockholders believe is
desirable.
Provisions of our certificate of incorporation and bylaws may
discourage, delay or prevent a merger, acquisition or other
change in control that stockholders may consider favorable,
including transactions in which our stockholders might otherwise
receive a premium for their shares. These provisions may also
prevent or frustrate attempts by our stockholders to replace or
remove our management. These provisions include:
|
|
|
|
|
a classified board of directors;
|
|
|
|
limitations on the removal of directors;
|
|
|
|
advance notice requirements for stockholder proposals and
nominations of directors at meetings of our
stockholders; and
|
|
|
|
the inability of stockholders to act by written consent or to
call special meetings.
|
In addition, our Board of Directors has the ability 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 of a potential hostile acquirer, effectively
preventing acquisitions that have not been approved by our Board
of Directors.
The affirmative vote of the holders of at least 75% of our
shares of capital stock entitled to vote is necessary to amend
or repeal the above provisions of our certificate of
incorporation. In addition, absent approval of our Board of
39
Directors, our bylaws may only be amended or repealed by the
affirmative vote of the holders of at least 75% of our shares of
capital stock entitled to vote.
In addition, Section 203 of the Delaware General
Corporation Law prohibits a publicly held Delaware corporation
from engaging in a business combination with an interested
stockholder, generally a person which together with its
affiliates owns or within the last three years has owned 15% of
our voting stock, for a period of three years after the date of
the transaction in which the person became an interested
stockholder, unless the business combination is approved in a
prescribed manner. Accordingly, Section 203 may discourage,
delay or prevent a change in control of our Company.
Risks
related to our requirements as a public company
Our
stockholders could be harmed if our management and larger
stockholders use their influence in a manner adverse to other
stockholders interests.
At the date of this report, our executive officers, directors
and 5% stockholders beneficially own, in the aggregate,
approximately 52.7% of our outstanding common stock. As a
result, these stockholders may have the ability to control all
fundamental matters affecting us, including the election of the
majority of the board of directors and approval of significant
corporate transactions. This concentration of ownership may also
delay or prevent a change in our control even if beneficial to
stockholders. The interests of these stockholders with respect
to such matters could conflict with the interests of public
stockholders.
The
price of our common stock may be volatile.
Since the completion of our initial public offering in May 2006,
the price at which our common stock has traded has been subject
to significant fluctuation. The price of our common stock may
continue to be volatile in the future and could be subject to
wide fluctuations in response to:
|
|
|
|
|
reductions in market prices or volume;
|
|
|
|
changes in securities or other government regulations;
|
|
|
|
quarterly variations in operating results;
|
|
|
|
our technological capabilities to accommodate any future growth
in our operations or clients;
|
|
|
|
announcements of technological innovations, new products,
services, significant contracts, acquisitions or joint ventures
by us or our competitors;
|
|
|
|
issuance and sales of our securities in financing
transactions; and
|
|
|
|
changes in financial estimates and recommendations by securities
analysts or our failure to meet or exceed analyst estimates.
|
As a result, shareholders may be unable to sell their stock at
or above the price they paid for it.
Our
internal control over financial reporting may not be effective
and our independent registered public accounting firm may not be
able to provide an attestation report as to their effectiveness,
which could have a significant and adverse effect on our
business and reputation.
We are continuously evaluating our internal controls over
financial reporting in order to allow management to report on,
and our independent registered public accounting firm to attest
to, our internal controls over financial reporting, as required
by Section 404 of the Sarbanes-Oxley Act of 2002, as
amended (Sarbanes-Oxley Act) and rules and
regulations of the SEC thereunder, which we refer to as
Section 404. While we have not identified material
weaknesses to date, we may from time to time identify conditions
that may result in material weaknesses.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None
40
Description
of property
Our headquarters are located in Dallas, Texas, under a lease
that expires in June 2016. This lease covers approximately
94,690 square feet at our headquarters, and our fixed rent
is approximately $134,000 per month. We have one five-year
option to extend the lease at the prevailing market rate. We
sublease approximately 18,000 square feet of this space to
SAMCO Holdings. In addition, our Canadian subsidiary leases
approximately 42,420 square feet in the Montreal and
Toronto. We also lease additional office space at locations in
California, Illinois, New York, Minnesota, Wisconsin, Texas,
London, Hong Kong, Tokyo, Sydney and other locations to support
our operations. We believe that our present facilities, together
with our current options to extend lease terms and occupy
additional space, are adequate for our current needs.
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|
Item 3.
|
Legal
Proceedings
|
In re Sentinel Management Group, Inc. is a
Chapter 11 bankruptcy case filed on August 17, 2007 in
the U.S. Bankruptcy Court for the Northern District of
Illinois by Sentinel. Prior to the filing of this action, Penson
Futures and PFFI held customer segregated accounts with Sentinel
totaling approximately $36 million. Sentinel subsequently
sold certain securities to Citadel Equity Fund, Ltd. and Citadel
Limited Partnership. On August 20, 2007, the Bankruptcy
Court authorized distributions of 95 percent of the
proceeds Sentinel received from the sale of those securities to
certain FCM clients of Sentinel, including Penson Futures and
PFFI. This distribution to the Penson Futures and PFFI customer
segregated accounts along with a distribution received
immediately prior to the bankruptcy filing totaled approximately
$25.4 million.
On May 12, 2008, a committee of Sentinel creditors,
consisting of a majority of non-FCM creditors, together with the
trustee appointed to manage the affairs and liquidation of
Sentinel (the Sentinel Trustee), filed with the
Court their proposed Plan of Liquidation (the Committee
Plan) and on May 13, 2008 filed a Disclosure
Statement related thereto. The Committee Plan allows the
Sentinel Trustee to seek the return from FCMs, including Penson
Futures and PFFI, of a portion of the funds previously
distributed to their customer segregated accounts. On
June 19, 2008, the Court entered an order approving the
Disclosure Statement over objections by Penson Futures, PFFI and
others. On September 16, 2008, the Sentinel Trustee filed
suit against Penson Futures and PFFI along with several other
FCMs that received distributions to their customer segregated
accounts from Sentinel. The suit against Penson Futures and PFFI
seeks the return of approximately $23.6 million of
post-bankruptcy petition transfers and approximately
$14.4 million of pre-bankruptcy petition transfers. The
suit also seeks to declare that the funds distributed to the
customer segregated accounts of Penson Futures and PFFI by
Sentinel are the property of the Sentinel bankruptcy estate
rather than the property of customers of Penson Futures and PFFI.
On December 15, 2008, over the objections of Penson Futures
and PFFI, the court entered an order confirming the Committee
Plan, and the Committee Plan became effective on
December 17, 2008. On January 7, 2009 Penson Futures
and PFFI filed their answer and affirmative defenses to the suit
brought by the Sentinel Trustee. Also on January 7, 2009,
Penson Futures, PFFI and a number of other FCMs that had placed
customer funds with Sentinel filed motions with the federal
district court for the Northern District of Illinois,
effectively asking the federal district court to remove the
Sentinel suits against the FCMs from the bankruptcy court and
consolidate them with other Sentinel related actions pending in
the federal district court. On April 8, 2009, the Sentinel
Trustee filed an amended complaint, which added a claim for
unjust enrichment. Following an unsuccessful attempt to dismiss
that claim on September 1, 2009, the Court denied the
motion for reconsideration without prejudice. On
September 11, 2009, Penson Futures and PFFI filed their
amended answer and amended affirmative defenses to the Sentinel
Trustees amended complaint. On October 28, 2009, the
federal district court for the Northern District of Illinois
granted the motions of Penson Futures, PFFI, and certain other
FCMs requesting removal of the matters referenced above
from the bankruptcy court, thereby removing these matters to the
federal district court.
On February 23, 2011, the federal district court held a
continued status hearing, during which Penson Futures, PFFI and
the Sentinel Trustee agreed that coordinated discovery with
respect to the Sentinel suits against the Company and other FCMs
was still proceeding. No trial date has been set.
41
In one of the actions brought by the Sentinel Trustee against an
FCM whose customer segregated accounts received similar
distributions to those made to the customer segregated accounts
of Penson Futures and PFFI, the Sentinel Trustee has brought a
motion for summary judgment on certain counts asserted against
such FCM that may implicate the claims brought by the Sentinel
Trustee against the Company. There is no date set for the
resolution of that motion.
The Company believes that the Court was correct in ordering the
prior distributions and Penson Futures and PFFI intend to
continue to vigorously defend their position. However, there can
be no assurance that any actions by Penson Futures or PFFI will
result in a limitation or avoidance of potential repayment
liabilities. In the event that Penson Futures and PFFI are
obligated to return all previously distributed funds to the
Sentinel Estate, any losses the Company might suffer would most
likely be partially mitigated as it is likely that Penson
Futures and PFFI would share in the funds ultimately disbursed
by the Sentinel Estate.
Various Claimants v. Penson Financial Services, Inc., et
al. On July 18, 2006, three claimants filed
separate arbitration claims with the NASD (which is now known as
FINRA) against PFSI related to the sale of certain
collateralized mortgage obligations by SAMCO Financial Services,
Inc. (SAMCO Financial), a former correspondent of
PFSI, to its customers. In the ensuing months, additional
arbitration claims were filed against PFSI and certain of our
directors and officers based upon substantially similar
underlying facts. These claims generally allege, among other
things, that SAMCO Financial, in its capacity as broker, and
PFSI, in its capacity as the clearing broker, failed to
adequately supervise certain registered representatives of SAMCO
Financial, and otherwise acted improperly in connection with the
sale of these securities during the time period from
approximately June, 2004 to May, 2006. Claimants have generally
requested compensation for losses incurred through the
depreciation in market value or liquidation of the
collateralized mortgage obligations, interest on any losses
suffered, punitive damages, court costs and attorneys
fees. In addition to the arbitration claims, on March 21,
2008, Ward Insurance Company, Inc., et al, filed a claim against
PFSI and Roger J. Engemoen, Jr., the Companys
Chairman of the Board, in the Superior Court of California,
County of San Diego, Central District, based upon
substantially similar facts. The Company has now settled, or
agreed in principle to settle, all claims with respect to this
matter of which the Company is aware. No further claims based on
this matter are expected at this time.
Mr. Engemoen, the Companys Chairman of the Board, is
the Chairman of the Board, and beneficially owns approximately
52% of the outstanding stock, of SAMCO Holdings, Inc., the
holding company of SAMCO Financial and SAMCO Capital Markets,
Inc. (SAMCO Holdings, Inc. and its affiliated companies are
referred to as the SAMCO Entities). Certain of the
SAMCO Entities received certain assets from the Company when
those assets were split-off immediately prior to the
Companys initial public offering in 2006 (the
Split-Off). In connection with the Split-Off and
through contractual and other arrangements, certain of the SAMCO
Entities have agreed to indemnify the Company and its affiliates
against liabilities that were incurred by any of the SAMCO
Entities in connection with the operation of their businesses,
either prior to or following the Split-Off. During the third
quarter of 2008, the Companys management determined that,
based on the financial condition of the SAMCO Entities,
sufficient risk existed with respect to the indemnification
protections to warrant a modification of these arrangements with
the SAMCO Entities, as described below.
On November 5, 2008, the Company entered into a settlement
agreement with certain of the SAMCO Entities pursuant to which
the Company received a limited personal guaranty from
Mr. Engemoen of certain of the indemnification obligations
of various SAMCO Entities with respect to claims related to the
underlying facts described above, and, in exchange, the Company
agreed to limit the aggregate indemnification obligations of the
SAMCO Entities with respect to certain matters described above
to $2,965,243. Unpaid indemnification obligations of $800,000
were satisfied prior to February 15, 2009. Of the $800,000
obligation, $86,000 was satisfied through a setoff against an
obligation owed to the SAMCO Entities by PFSI, with the balance
paid in cash prior to December 31, 2009. Effective as of
December 31, 2009, the Company and the SAMCO entities
entered into an amendment to the settlement agreement, whereby
SAMCO Holdings, Inc. agreed to pay an additional $133,333 on the
last business day of each of the first six calendar months of
2010 (a total of $800,000). SAMCO Holdings, Inc. has fully
satisfied its obligations under the amendment. The SAMCO
Entities remain responsible for the payment of their own defense
costs and any claims from any third parties not expressly
released under the settlement agreement, irrespective of amounts
paid to indemnify the Company. The settlement agreement only
relates to the matters described above and does not alter the
indemnification obligations of the SAMCO Entities with respect
to unrelated matters.
42
To account for liabilities related to the aforementioned claims
that may be borne by the Company, we recorded a pre-tax charge
of $2.35 million in the third quarter of 2008 and a
$1.0 million in the second quarter of 2010. The Company
does not anticipate further liabilities with respect to this
matter.
Realtime Data, LLC d/b/a IXO v. Thomson Reuters et
al. In July and August 2009, Realtime Data, LLC
(Realtime) filed lawsuits against the Company and
Nexa (along with numerous other financial institutions,
exchanges, and financial data providers) in the United States
District Court for the Eastern District of Texas in consolidated
cases styled Realtime Data, LLC d/b/a IXO v. Thomson
Reuters et al. Realtime alleges, among other things, that the
defendants activities infringe upon patents allegedly
owned by Realtime, including our use of certain types of data
compression to transmit or receive market data. Realtime is
seeking both damages for the alleged infringement as well as a
permanent injunction enjoining the defendants from continuing
infringing activity. Discovery with respect to this matter is
proceeding.
A trial of Realtimes claims is now tentatively scheduled
for July 9, 2012. Based on its investigation to date and
advice from legal counsel, the Company believes that resolution
of these claims will not result in any material adverse effect
on its business, financial condition, or results of operation.
Nevertheless, the Company has incurred and will likely continue
to incur significant expense in defending against these claims,
and there can be no assurance that future liability will be
avoided.
In the general course of business, the Company and certain of
its officers have been named as defendants in other various
pending lawsuits and arbitration and regulatory proceedings.
These other claims allege violation of federal and state
securities laws, among other matters. The Company believes that
resolution of these claims will not result in any material
adverse effect on its business, financial condition, or results
of operation.
PART II
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|
Item 5.
|
Market
for the Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
|
Market
information
The common stock of the Company has been traded on the NASDAQ
Global Select Market under the symbol PNSN since the
Companys initial public offering on May 16, 2006.
Prior to that time there was no public market for the
Companys common stock or other securities.
The following table sets forth the high and low closing sales
prices of our common stock, for the periods indicated.
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|
|
|
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|
Price Range
|
|
|
High
|
|
Low
|
|
2010
|
|
|
|
|
|
|
|
|
Quarter ended March 31, 2010
|
|
$
|
10.48
|
|
|
$
|
7.87
|
|
Quarter ended June 30, 2010
|
|
$
|
10.42
|
|
|
$
|
5.64
|
|
Quarter ended September 30, 2010
|
|
$
|
5.95
|
|
|
$
|
4.56
|
|
Quarter ended December 31, 2010
|
|
$
|
5.40
|
|
|
$
|
4.53
|
|
2009
|
|
|
|
|
|
|
|
|
Quarter ended March 31, 2009
|
|
$
|
8.43
|
|
|
$
|
4.02
|
|
Quarter ended June 30, 2009
|
|
$
|
12.04
|
|
|
$
|
6.73
|
|
Quarter ended September 30, 2009
|
|
$
|
11.74
|
|
|
$
|
8.37
|
|
Quarter ended December 31, 2009
|
|
$
|
11.07
|
|
|
$
|
8.56
|
|
43
Holders
No shares of the Companys preferred stock are issued and
outstanding. As of February 22, 2011, there were 48 holders
of record of our common stock. By including persons holding
shares in brokerage accounts under street names, however, we
estimate our shareholder base to be approximately 2,673 as of
February 22, 2011.
Dividend
policy
We currently intend to retain any earnings to develop and expand
our business and do not anticipate paying cash dividends in the
foreseeable future. Any future determination with respect to the
payment of dividends will be at the discretion of our Board of
Directors and will depend upon, among other things, our
operating results, financial condition and regulatory capital
requirements, the terms of then-existing indebtedness, general
business conditions and other factors our Board of Directors
deems relevant.
Our Board of Directors may, at any time, modify or revoke our
dividend policy on our common stock.
Under Delaware law, our Board of Directors may declare dividends
only to the extent of our surplus (which is defined
as total assets at fair market value minus total liabilities,
minus statutory capital), or if there is no surplus, out of our
net profits for the then current
and/or
immediately preceding fiscal year. The value of a
corporations assets can be measured in a number of ways
and may not necessarily equal their book value. The value of our
capital may be adjusted from time to time by our Board of
Directors but in no event will be less than the aggregate par
value of our issued stock. Our Board of Directors may base this
determination on our consolidated financial statements, a fair
valuation of our assets or another reasonable method. Our Board
of Directors will seek to assure itself that the statutory
requirements will be met before actually declaring dividends. In
future periods, our Board of Directors may seek opinions from
outside valuation firms to the effect that our solvency or
assets are sufficient to allow payment of dividends, and such
opinions may not be forthcoming. If we sought and were not able
to obtain such an opinion, we likely would not be able to pay
dividends. In addition, pursuant to the terms of our preferred
stock (were any to be issued), we would be prohibited from
paying a dividend on our common stock unless all payments due
and payable under the preferred stock have been made.
PWIs
purchases of its equity securities
The following table sets forth the repurchases we made during
the three months ended December 31, 2010 for shares
withheld to cover tax-withholding requirements relating to the
vesting of restricted stock units issued to employees pursuant
to the Companys shareholder-approved stock incentive plan:
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|
|
|
|
|
|
|
|
|
|
Total Number
|
|
|
|
|
|
|
of Shares
|
|
|
Average Price
|
|
Period
|
|
Repurchased
|
|
|
Paid per Share
|
|
|
October
|
|
|
7,449
|
|
|
$
|
5.15
|
|
November
|
|
|
11,297
|
|
|
|
5.10
|
|
December
|
|
|
9,344
|
|
|
|
4.89
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
28,090
|
|
|
$
|
5.05
|
|
|
|
|
|
|
|
|
|
|
On December 6, 2007, our Board of Directors authorized us
to purchase up to $12.5 million of our common stock in open
market purchases and privately negotiated transactions. The plan
is set to expire after $12.5 million of our common stock is
purchased. No shares were repurchased under this plan in the
fourth quarter of 2010. The maximum number of shares that could
have been purchased under this plan for the months of October,
November and December 2010 was 910,417, 919,343 and 958,824
respectively based on the remaining dollar amount authorized
divided by the average purchase price in the month.
Recent
sales of unregistered securities
None.
44
Stock
Performance Graph
Cumulative Total Return to Stockholders
Penson Worldwide, Inc., NASDAQ Composite Index and NASDAQ
Financial Stocks Index
% Return to Stockholders, May 16, 2006 to December 31,
2010
Total
Return Performance
This comparison is based on a return assuming $100 invested
May 16, 2006 in Penson Worldwide, Inc. Common Stock, the
NASDAQ Composite Index and the NASDAQ Financial Stocks Index,
assuming the reinvestment of all dividends. May 16, 2006 is
the date the Companys Common Stock commenced trading on
the NASDAQ Global Select Market.
The above Stock Performance Graph and related information shall
not be deemed soliciting material or to be
filed with the Securities and Exchange Commission,
nor shall such information be incorporated by reference into any
future filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934, each as amended, except to the extent that
the Company specifically incorporates it by reference into such
filing.
45
|
|
Item 6.
|
Selected
Financial Data
|
The following table sets forth summary consolidated financial
data for our company for the periods indicated below. The
summary consolidated statements of operations data for the three
years ended December 31, 2010 and the summary consolidated
balance sheet data as of December 31, 2010 and 2009 has
been derived from our audited consolidated financial statements
included elsewhere in this document, and should be read in
conjunction with the Managements discussion and
analysis of financial condition and results of operations
section below and our consolidated financial statements and the
accompanying notes included in this Annual Report on pages F-2
through F-39. The consolidated statements of operations data for
the years ended December 31, 2007 and 2006 and the
consolidated balance sheet data as of December 31, 2008,
2007 and 2006, all of which are set forth below, are based on
the Companys historical audited consolidated financial
statements and the underlying accounting records.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
|
|
|
|
Consolidated statement of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
288,348
|
|
|
$
|
289,881
|
|
|
$
|
293,170
|
|
|
$
|
264,725
|
|
|
$
|
198,189
|
|
Total expenses
|
|
|
317,564
|
|
|
|
264,045
|
|
|
|
276,521
|
|
|
|
222,767
|
|
|
|
160,611
|
|
Income (loss) from continuing operations before income taxes
|
|
|
(29,216
|
)
|
|
|
25,836
|
|
|
|
16,649
|
|
|
|
41,958
|
|
|
|
37,578
|
|
Income tax expense (benefit)
|
|
|
(9,369
|
)
|
|
|
9,825
|
|
|
|
5,993
|
|
|
|
15,125
|
|
|
|
13,299
|
|
Income (loss) from continuing operations
|
|
|
(19,847
|
)
|
|
|
16,011
|
|
|
|
10,656
|
|
|
|
26,833
|
|
|
|
24,279
|
|
Income from discontinued operations, net of tax(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(19,847
|
)
|
|
$
|
16,011
|
|
|
$
|
10,656
|
|
|
$
|
26,833
|
|
|
$
|
24,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share from continuing operations
|
|
$
|
(.73
|
)
|
|
$
|
.63
|
|
|
$
|
.42
|
|
|
$
|
1.02
|
|
|
$
|
1.07
|
|
Earnings per share from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share
|
|
$
|
(.73
|
)
|
|
$
|
.63
|
|
|
$
|
.42
|
|
|
$
|
1.02
|
|
|
$
|
1.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share from continuing operations
|
|
$
|
(.73
|
)
|
|
$
|
.63
|
|
|
$
|
.42
|
|
|
$
|
1.00
|
|
|
$
|
1.05
|
|
Earnings per share from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share
|
|
$
|
(.73
|
)
|
|
$
|
.63
|
|
|
$
|
.42
|
|
|
$
|
1.00
|
|
|
$
|
1.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic and
diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
27,034
|
|
|
|
25,373
|
|
|
|
25,217
|
|
|
|
26,232
|
|
|
|
22,689
|
|
Diluted
|
|
|
27,034
|
|
|
|
25,591
|
|
|
|
25,416
|
|
|
|
26,817
|
|
|
|
23,058
|
|
|
|
|
(1) |
|
Concurrent with our public offering, we split off certain
non-core business operations into SAMCO Holdings, a newly formed
company which gives effect to a capital contribution to SAMCO in
an amount equal to the difference between the net book value of
the division to be split off, as of such date, and the value of
the 1,041,667 shares of our common stock to be exchanged in
the split off. Except as otherwise indicated, financial
information presented sets forth the results of operations and
balance sheet data of the entities split off as discontinued
operations. |
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
|
(In thousands)
|
|
Consolidated balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
138,614
|
|
|
$
|
48,643
|
|
|
$
|
38,825
|
|
|
$
|
120,923
|
|
|
$
|
103,054
|
|
Total assets
|
|
|
10,254,184
|
|
|
|
7,251,075
|
|
|
|
5,539,195
|
|
|
|
7,846,977
|
|
|
|
4,644,390
|
|
Notes payable
|
|
|
259,729
|
|
|
|
132,769
|
|
|
|
75,000
|
|
|
|
55,000
|
|
|
|
10,000
|
|
Total stockholders equity
|
|
|
300,921
|
|
|
|
298,902
|
|
|
|
264,467
|
|
|
|
265,428
|
|
|
|
211,784
|
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion and analysis should be read in
conjunction with Part II, Item 6 Selected
Financial Data and our audited consolidated financial
statements and the related notes included elsewhere in this
annual report on
Form 10-K.
This discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ
materially from those anticipated in the forward-looking
statements as a result of certain factors including the risks
discussed in Item 1A Risk Factors,
Special Note Regarding Forward-Looking Statements
and elsewhere in this annual report on
Form 10-K.
Market
and Economic Conditions in 2010
Much of the economic uncertainty of 2008 and 2009 continued to
have an effect on the securities and credit markets in 2010.
|
|
|
|
|
The Federal Reserve maintained its low interest rate policy,
setting the targeted federal funds rate at 0.25%. In 2008, the
targeted federal funds rate fell from an average of 3.22% in the
first quarter to an average of 1.06% in the fourth quarter,
averaging 2.09% for the year. Since then, it has remained at
0.25%.
|
|
|
|
After rising 7% from year end 2009, to a first half high of
11,205 in April 2010, the Dow Jones Industrial Average fell 14%,
to the years low of 9,686 in July 2010, and then rebounded
20%, to a high for the year of 11,585 at December 29, 2010.
For the year, the Dow increased 11%.
|
|
|
|
Average daily volume in equities in the US fell 5% during 2010,
to 8.1 billion shares, from 8.5 billion shares in
2009, largely due to the aftermath of the May 6, 2010
Flash Crash. This event caused the Dow Jones
Industrial Average to plunge over 900 points and then rapidly
rebound. From that day through August 2010, investors withdrew
nearly $57 billion from US stock mutual funds, the most
during any four-month period since 2008, according to the
Investment Company Institute. Third quarter 2010 average daily
trading volumes declined 27% as compared to the second quarter
2010 and 19% relative to the third quarter of 2009.
|
|
|
|
The Chicago Board Options Exchange Volatility Index
(VIX), a popular measure of implied stock market
volatility, fell 16% to a three-year low of 17.4 in April 2010
from 21.2 in December 2009. It increased 80% to the years
high of 31.9 in May 2010 following the
May 6th Flash Crash, and then steadily
declining 45% to 17.6 in December 2010.
|
|
|
|
Short interest activity declined modestly in 2010. The average
number of shares sold short among New York Stock Exchange listed
companies fell 1%, to 13.8 billion in 2010, from
14.0 billion in 2009.
|
|
|
|
Margin debt rebounded. Aggregate debits in securities margin
accounts of New York Stock Exchange member organizations
increased 24%, to an average of $249.3 billion in 2010,
from $200.4 billion in 2009.
|
|
|
|
In July, the Dodd-Frank Act became effective. While it did not
include any specific provisions aimed at the clearing industry,
it is generally believed that when the final rules are
determined by the various regulatory agencies, there will be a
broad impact on the securities industry.
|
|
|
|
Congress passed, and the President signed, the Tax Relief,
Unemployment Insurance Reauthorization and Job Creation Act of
2010, extending most of the existing tax cuts, including those
on dividends and capital gains, for another two years.
|
47
Market
and Economic Conditions in 2009
The financial crisis of 2008 continued to have an effect on the
securities and credit markets in 2009.
|
|
|
|
|
The Federal Reserve maintained its low interest rate policy. For
all of 2009, the targeted federal funds rate was set at 0.25%.
In 2008, the targeted federal funds rate fell from an average of
3.22% in the first quarter to an average of 1.06% in the fourth
quarter, averaging 2.09% for the year.
|
|
|
|
After falling 25% from year end 2008, to a low of 6,547 in early
March 2009, the Dow Jones Industrial Average rebounded 61%, to
end 2009 at 10,428.
|
|
|
|
The VIX, the ticker symbol for the Chicago Board Options
Exchange Volatility Index, a popular measure of implied stock
market volatility, fell fairly steadily. In December 2009, it
averaged 21, down 60% from 52 in December 2008.
|
|
|
|
Short interest declined. The average number of shorted shares of
New York Stock Exchange listed companies fell 7%, to
14.5 billion in 2009, from 15.6 billion in 2008.
|
|
|
|
Margin debt fell. Aggregate debits in securities margin accounts
of New York Stock Exchange member organizations declined 30%, to
$200.4 billion in 2009, from $285.2 billion in 2008.
|
|
|
|
There were no major regulatory changes that broadly affected the
securities industry in 2009. However, government and regulatory
officials in the U.S. did discuss increased restrictions on
shorting stocks and sponsored access, and taxing securities
transactions as well as raising taxes on capital gains.
|
Market
and Economic Conditions in 2008
During 2008, financial and credit market dislocations, and the
recession, caused increased volatility and rapid changes among a
wide variety of financial indicators and markets:
|
|
|
|
|
The Federal Reserve lowered the targeted federal funds rate by
approximately 400 basis points to approximately .25% at
December 31, 2008 from 4.25% at December 31, 2007.
|
|
|
|
The VIX, the ticker symbol for the Chicago Board Options
Exchange Volatility Index, a popular measure of implied stock
market volatility, reached an intraday high of more than 89 in
October 2008, versus an average of about 19 since 1990.
|
|
|
|
In September and October of 2008, the U.S., U.K. and other
countries implemented a series of temporary and other, more
lasting restrictions on the short sales of shares of financial
service companies.
|
|
|
|
New York Stock Exchange short interest, which, as a percentage
of total shares outstanding at month end, reached a high of 4.86
in July 2008, an increase of 43% from December 2007, and,
following the implemented restrictions, declined 26%, to 3.59 in
December 2008.
|
|
|
|
The Dow Jones Industrial Average closed at 8,778 on
December 31, 2008, having previously reached a low of 7,392
in November 2008, from a high for the year of 13,338 in January
2008.
|
|
|
|
Consolidated NASDAQ trading volume increased 47%, to 2.3
trillion shares in 2008, from 1.5 trillion shares in 2007.
|
|
|
|
Margin debt on NYSE stocks declined 42%, to $187 billion in
December 2008, from $323 billion in December 2007.
|
Overview
We are a leading provider of a broad range of critical
securities and futures processing infrastructure products and
services to the global financial services industry. Our products
and services include securities and futures clearing and
execution, financing and cash management technology, foreign
exchange services and other related offerings, and we provide
tools and services to support trading in multiple markets, asset
classes and currencies.
48
Since starting our business in 1995 with three correspondents,
we have grown to serve approximately 371 active securities
clearing correspondents and 59 futures clearing correspondents
as of December 31, 2010. Our net revenues were
approximately $288.3 million in 2010, $289.9 million
in 2009 and $293.2 million in 2008, and consist primarily
of transaction processing fees earned from our clearing
operations and net interest income earned from our margin
lending activities, from investing customers cash and from
stock lending activities. Our clearing and commission fees are
based principally on the number of trades we clear. We receive
interest income from financing the securities purchased on
margin by the customers of our correspondents. We also earn
licensing and development revenues from fees we charge to our
clients for their use of our technology solutions.
Fiscal
2010 Highlights
|
|
|
|
|
On June 25, 2010, we closed our acquisition of the clearing
and execution services business of Ridge Clearing &
Outsourcing Solutions, Inc.
|
|
|
|
On May 6, 2010, we sold $200 million 12.5% senior
second lien secured notes due May 15, 2017.
|
|
|
|
On May 6, 2010, we signed a new three-year $75 million
revolving credit facility. We signed an amendment to the credit
facility on October 29, 2010, which revised certain
financial covenants and provided additional availability of
funds under the facility.
|
|
|
|
We increased our correspondent count to 430 as of
December 31, 2010.
|
|
|
|
Our interest earning average daily balances reached a record
$8.1 billion for the three months ended December 31,
2010.
|
|
|
|
As of December 31, 2010, our PFSA subsidiary which began
clearing operations in December 2009, had 48 correspondents and
was profitable for the fourth quarter of 2010.
|
Acquisition
of Ridge
On November 2, 2009, the Company entered into an asset
purchase agreement (Ridge APA) to acquire the
clearing and execution business of Ridge Clearing &
Outsourcing Solutions, Inc. (Ridge) from Ridge and
Broadridge Financial Solutions, Inc. (Broadridge),
Ridges parent company. The acquisition closed on
June 25, 2010, and under the terms of the Ridge APA, as
later amended, the Company paid $35.2 million. The
acquisition date fair value of consideration transferred was
$31.9 million, consisting of 2.5 million shares of PWI
common stock with a fair value of $14.6 million (based on
our closing share price of $5.95 on that date) and a
$20.6 million five-year subordinated note (the Ridge
Seller Note) with an estimated fair value of
$17.3 million on that date (see Note 14 to our
consolidated financial statements for a description of the Ridge
Seller Note discount), payable by the Company bearing interest
at an annual rate equal to
90-day LIBOR
plus 5.5%.
The Company recorded a liability of $4.1 million
attributable to the estimated fair value of contingent
consideration to be paid 14 months and 19 months after
closing (subject to extension in the event the dispute
resolution procedures set forth in the Ridge APA are invoked).
The amount of contingent consideration ultimately payable will
be added to the Ridge Seller Note. The contingent consideration
is primarily composed of two categories. The first category
includes a group of correspondents that had not generated at
least six months of revenue as of May 31, 2010 (Stub
Period Correspondents). Twelve months after closing a
calculation will be performed to adjust the estimated annualized
revenues as of May 31, 2010 to the actual annualized
revenues based on a six-month review period as defined in the
Ridge APA (Stub Period Revenues). The Ridge Seller
Note will be adjusted 14 months after closing based on .9
times the difference between the estimated and actual annualized
revenues. As of December 31, 2010 all of the correspondents
in this category had generated at least six months of revenues.
The Company reduced its contingent consideration liability by
$.3 million, which is included in other expenses in the
consolidated statements of operations for the year ended
December 31, 2010. The second category includes a group of
correspondents that had not yet begun generating revenues
(Non-revenue Correspondents) as of May 31,
2010. A calculation will be performed 15 months after
closing to determine the annualized revenues, based on a
six-month review period, for each such non revenue correspondent
(Non-revenue Correspondent Revenues). The Ridge
Seller Note will be adjusted 19 months after closing by an
amount equal to .9 times the Non-
49
revenue Correspondent Revenues. The estimated undiscounted range
of outcomes for this category is $4.0 million to
$5.0 million. There is no limit to the consideration to be
paid.
The Company recorded goodwill of $15.9 million, intangibles
of $20.1 million and a discount on the Ridge Seller Note of
$3.3 million. The qualitative factors that make up the
recorded goodwill include value associated with an assembled
workforce, value attributable to enhanced revenues related to
various products and services offered by the Company and
synergies associated with cost reductions from the elimination
of certain fixed costs as well as economies of scale resulting
from the additional correspondents. The goodwill is included in
the United States segment. A portion of the recorded goodwill
associated with the contingent consideration may not be
deductible for tax purposes if future payments are less than the
$4.1 million initially recorded. The tax goodwill will be
deductible for tax purposes over a period of 15 years. The
Company has incurred acquisition related costs of approximately
$5.3 million with $3.7 million and $1.6 million,
respectively recognized in the years ended December 31,
2010 and 2009. Net revenues of $26.4 million and net income
of approximately $1.5 million from Ridge were included in
the consolidated statement of operations as of the date of the
acquisition for the year ended December 31, 2010. The
Company estimates that net revenues would have been
$312.9 million for the year ended December 31, 2010,
respectively compared to $337.2 million and
$345.8 million, respectively for the years ended
December 31, 2009 and 2008, and net income (loss) would
have been $(19.0) million for the year ended
December 31, 2010 compared to $17.3 million and
$12.8 million, respectively for the years ended
December 31, 2009 and 2008 had the acquisition occurred as
of January 1, 2008.
Acquisition
of FCG
In November 2007, our subsidiary Penson Futures acquired all of
the assets of FCG, an FCM and a leading provider of technology
products and services to futures traders, and assigned the
purchased membership interest to GHP1 effective immediately
thereafter. We closed the transaction in November, 2007 and paid
approximately $9.4 million in cash and approximately
150,000 shares of common stock valued at approximately
$2.2 million to the previous owners of FCG. In addition,
the Company agreed to pay an annual earnout in cash for the
following three-year period based on average net income, subject
to certain adjustments including cost of capital, for the
acquired business. The Company paid approximately
$8.7 million related to the first year of the earnout
period. The Company did not make an earnout payment related to
the second or third year of the earnout period. The Company
finalized the acquisition valuation during the third quarter of
2008 and recorded goodwill of approximately $4.0 million
and intangibles of approximately $7.6 million. FCG
currently conducts business as a division of Penson Futures.
Acquisition
of GHCO
In November 2006, the Company entered into a definitive
agreement to acquire the partnership interests of Chicago-based
GHCO, a leading international futures clearing and execution
firm. The Company closed the transaction on February 16,
2007 and paid approximately $27.9 million, including cash
and approximately 139,000 shares of common stock valued at
approximately $3.9 million to the previous owners of GHCO.
Goodwill of approximately $2.8 million and intangibles of
approximately $1.0 million were recorded in connection with
the acquisition. In addition, the Company agreed to pay
additional consideration in the form of an earnout over the next
three years, in an amount equal to 25% of Penson Futures
pre-tax earnings, as defined in the purchase agreement executed
with the previous owners of GHCO. The Company did not make an
earnout payment related to the first or second years of the
integrated Penson Futures business. The Company paid
approximately $1.1 million related to the third year of the
earnout in July 2010.
Acquisition
of Schonfeld
In November 2006, the Company acquired the clearing business of
Schonfeld Securities LLC (Schonfeld), a New
York-based securities firm. The Company closed the transaction
in November 2006 and in January 2007, the Company issued
approximately 1.1 million shares of common stock valued at
approximately $28.3 million to the previous owners of
Schonfeld as partial consideration for the assets acquired of
which approximately $14.8 million was recorded as goodwill
and approximately $13.5 million as intangibles. In
addition, the Company agreed to pay an annual earnout of stock
and cash over a four-year period that commenced on June 1,
2007, based on net income,
50
as defined in the asset purchase agreement (Schonfeld
Asset Purchase Agreement), for the acquired business. On
April 22, 2010, SAI and PFSI entered into a letter
agreement (the Letter Agreement) with Schonfeld
Group Holdings LLC (SGH), Schonfeld, and Opus
Trading Fund LLC (Opus) that amends and
clarifies certain terms of the Schonfeld Asset Purchase
Agreement. The Letter Agreement, among other things, for purpose
of determining the total payment due to Schonfeld under the
earnout provision of the Schonfeld Asset Purchase Agreement:
(i) removes the payment cap; (ii) clarifies that PFSI
has no obligation to compress tickets across subaccounts (unless
PFSI does so for other of its correspondents at a later date);
and (iii) reduces the SunGard synergy credit from
$2.9 million to $1.5 million in 2010 and
$1.0 million in 2011. The Letter Agreement also assigns all
of Schonfelds responsibilities under the Schonfeld Asset
Purchase Agreement to its parent company, SGH, and extends the
initial term of Opuss portfolio margining agreement with
PFSI from April 30, 2017 to April 30, 2019.
A payment of approximately $26.6 million was paid in
connection with the first year earnout that ended May 31,
2008 and approximately $25.5 million was paid in connection
with the second year of the earnout that ended May 31,
2009. At December 31, 2010, a liability of approximately
$20.5 million was accrued as result of the third year of
the earnout ended May 31, 2010 ($15.2 million) and the
first seven months of the year four earnout, which we do not
expect to pay prior to the second half of 2011
($5.3 million). This balance is included in other
liabilities in the consolidated statement of financial
condition. The offset of this liability, goodwill, is included
in other assets. In January, 2011, the Company and SGH entered
into a letter agreement setting the amount due for the third
year earnout at $6.0 million due to the provisions in
various agreements related to the Schonfeld transaction,
including the termination/compensation agreement, which reduced
the amount that we are required to pay under the Schonfeld Asset
Purchase Agreement. This will result in a reduction in goodwill
and other liabilities of $9.2 million in the first quarter of
2011. The letter agreement also stipulated that the third year
earnout will be paid evenly over a 12 month period
commencing on September 1, 2011.
Financial
overview
Net
revenues
Revenues
We generate revenues from most clients in several different
categories. Clients generating revenues for us from clearing
transactions almost always also generate significant interest
income from related balances. Revenues from clearing
transactions are driven largely by the volume of trading
activities of the customers of our correspondents and
proprietary trading by our correspondents. Our average clearing
revenue per trade is a function of numerous pricing elements
that vary based on individual correspondent volumes, customer
mix, and the level of margin debit balances and credit balances.
Our clearing revenue fluctuates as a result of these factors as
well as changes in trading volume. We focus on maintaining the
profitability of our overall correspondent relationships,
including the clearing revenue from trades and net interest from
related customer margin balances, and by reducing associated
variable costs. We collect the fees for our services directly
from customer accounts when trades are processed. We only remit
commissions charged by our correspondents to them after
deducting our charges.
We often refer to our interest income as Interest,
gross to distinguish this category of revenue from
Interest, net that is generally used in our
industry. Interest, gross is generated by charges to customers
or correspondents on margin balances and interest earned by
investing customers cash, and therefore these revenues
fluctuate based on the volume of our total margin loans
outstanding, the volume of the cash balances we hold for our
correspondents customers, the rates of interest we can
competitively charge on margin loans and the rates at which we
can invest such balances. We also earn interest from our stock
borrowing and lending activities.
Technology revenues consist of transactional, development and
licensing revenues generated by Nexa. A significant portion of
these revenues are collected directly from clearing customers
along with other charges for clearing services as described
above. Most development revenues and some transaction revenues
are collected directly from clients and are reflected as
receivables until they are collected.
Other revenues include charges assessed directly to customers
for certain transactions or types of accounts, trade aggregation
and profits from proprietary trading activities, including
foreign exchange transactions and fees charged to our
correspondents customers. Subject to certain exceptions,
our clearing brokers in the U.S., Canada, the U.K. and Australia
each generate these types of transactions.
51
Revenues from clearing and commission fees represented 53%, 50%
and 51% of our total net revenues for the years ended
December 31, 2010, 2009 and 2008, respectively.
Interest
expense from securities operations
Interest expense is incurred in our daily operations in
connection with interest we pay on credit balances we hold and
on short-term borrowings we enter into to fund activities of our
correspondents and their customers. We have two primary sources
of borrowing: commercial banks and stock lending institutions.
Regulations differ by country as to how operational needs can be
funded, but we often find that stock loans that are secured with
customer or correspondent securities as collateral can be
obtained at a lower rate of interest than loans from commercial
banks. Operationally, we review cash requirements each day and
borrow the requirements from the most cost effective source.
Net interest income represented 24%, 23% and 26% of our total
net revenues for years ended December 31, 2010, 2009 and
2008, respectively.
Expenses
Employee
compensation and benefits
Our largest category of expense is the compensation and benefits
that we pay to our employees, which includes salaries, bonuses,
group insurance, contributions to benefit programs, stock
compensation and other related employee costs. These costs vary
by country according to the local prevailing wage standards. We
utilize technology whenever practical to limit the number of
employees and thus keep costs competitive. In the U.S., a
majority of our employees are located in cities where employee
costs are lower than where our largest competitors primarily
operate. A portion of total employee compensation is paid in the
form of bonuses and performance-based compensation. As a result,
depending on the performance of particular business units and
the overall Company performance, total employee compensation and
benefits could vary materially from period to period.
Other
operating expenses
Expenses incurred to process trades include floor brokerage,
exchange and clearance fees, and those expenses tend to vary
significantly with the level of trading activity. The related
data processing and communication costs vary less with the level
of trading activity. Occupancy and equipment expenses include
lease expenses for office space, computers and other equipment
that we require to operate our businesses. Other expenses
include legal, regulatory, professional consulting, accounting,
travel and miscellaneous expenses. In addition, as a public
company, we incur additional costs for external advisers such as
legal, accounting, auditing and investor relations services.
Profitability
of services provided
Management records revenue for the clearing operations and
technology business separately. We record expenses in the
aggregate as many of these expenses are attributable to multiple
business activities. As such, net profitability before tax is
determined in the aggregate. We also separately record interest
income and interest expense to determine the overall
profitability of this activity.
52
Results
of operations
The following table summarizes our operating results as a
percentage of net revenues for each of the periods shown.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Clearing and commission fees
|
|
|
53
|
%
|
|
|
50
|
%
|
|
|
51
|
%
|
Technology
|
|
|
7
|
%
|
|
|
8
|
%
|
|
|
8
|
%
|
Interest, gross
|
|
|
32
|
%
|
|
|
35
|
%
|
|
|
57
|
%
|
Other revenues
|
|
|
16
|
%
|
|
|
19
|
%
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
108
|
%
|
|
|
112
|
%
|
|
|
131
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense from securities operations
|
|
|
8
|
%
|
|
|
12
|
%
|
|
|
31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
41
|
%
|
|
|
39
|
%
|
|
|
39
|
%
|
Floor brokerage exchange and clearance fees
|
|
|
14
|
%
|
|
|
11
|
%
|
|
|
9
|
%
|
Communications and data processing
|
|
|
21
|
%
|
|
|
16
|
%
|
|
|
13
|
%
|
Occupancy and equipment
|
|
|
11
|
%
|
|
|
10
|
%
|
|
|
10
|
%
|
Correspondent asset loss
|
|
|
|
|
|
|
|
|
|
|
9
|
%
|
Other expenses
|
|
|
12
|
%
|
|
|
11
|
%
|
|
|
13
|
%
|
Interest expense on long-term debt
|
|
|
11
|
%
|
|
|
4
|
%
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
110
|
%
|
|
|
91
|
%
|
|
|
94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(10
|
)%
|
|
|
9
|
%
|
|
|
6
|
%
|
Income tax expense (benefit)
|
|
|
(3
|
)%
|
|
|
3
|
%
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(7
|
)%
|
|
|
6
|
%
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of years ended December 31, 2010 and December 31,
2009
Overview
Results of operations declined for the year ended
December 31, 2010 compared to the year ended
December 31, 2009. Clearing and commission fees increased
$8.1 million and net interest revenues increased
$2.6 million while technology revenues decreased
$3.4 million and other revenues decreased
$8.9 million. The addition of the Ridge business in June
2010 resulted in higher clearing and commission fees of
$16.2 million and higher net interest revenues of
$7.1 million resulting in decreases to both revenue
categories when compared to our existing business in 2009. The
decline in clearing and commission fees resulted from weaker
equity and options volumes in the U.S. and Canada. These
declines were offset by higher futures volumes and higher equity
volumes in the U.K. and the addition of PFSA, our Australian
clearing business which began clearing for its first
correspondent in December 2009. The volume declines followed the
trend across the industry with equity average daily volumes in
the U.S. down over 12% and options average daily volumes
down over 8%. The decline in net interest revenues is primarily
attributed to lower net spreads which were offset in part by
higher average balances. We also incurred higher operating
expenses, primarily in employee compensation and benefits,
communications and data processing, floor brokerage, exchange
and clearance fees and interest expense on long-term debt. These
higher costs are attributable to the aforementioned Ridge
acquisition, $6.1 million in severance charges and higher
levels of long-term debt associated with the $200 million
debt offering completed in the second quarter of 2010 and the
$20.6 million Ridge Seller Note offset by a
$110 million reduction in our revolving credit facility
during the second quarter 2010 ($88.5 million as of
December 31, 2009).
53
Operating results declined $35.4 million for 2010 as
compared to 2009, for our U.S., Canadian and U.K. operating
businesses. Our U.S. operating subsidiaries experienced a
decrease in operating profits of approximately
$25.8 million due to lower net interest income, lower
technology revenues, higher expenses related to communications
and data processing, floor brokerage, exchange and clearance
fees due to lower industry rebates and higher interest expense
on long-term debt. Our Canadian business experienced an
operating profit of $2.0 million for 2010 compared to an
operating profit of $10.4 million for 2009 due primarily to
lower clearing and commission fees due to lower equity volumes
from the loss of a major correspondent as well as its conversion
to the Broadridge system which impacted the addition of new
business. The U.K. business incurred an operating loss of
$8.2 million in the current year compared to an operating
loss of $7.1 million in the prior year due primarily to
higher operating expenses. PFSA incurred an operating loss of
approximately $2.7 million in 2010 compared to an operating
loss of $1.4 million in 2009. PFSA began clearing
operations for its first correspondent in December, 2009 and
became profitable in the fourth quarter of 2010.
The above factors resulted in an operating loss for the year
ended December 31, 2010 compared to an operating profit for
the year ended December 31, 2009.
The following is a summary of the increases (decreases) in the
categories of net revenues and expenses for the year ended
December 31, 2010 compared to the year ended
December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
Change
|
|
|
Change from
|
|
|
|
Amount
|
|
|
Previous Year
|
|
|
|
(In thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Clearing and commission fees
|
|
$
|
8,143
|
|
|
|
5.6
|
|
Technology
|
|
|
(3,374
|
)
|
|
|
(14.2
|
)
|
Interest:
|
|
|
|
|
|
|
|
|
Interest on asset based balances
|
|
|
4,396
|
|
|
|
6.0
|
|
Interest on conduit borrows
|
|
|
(14,382
|
)
|
|
|
(57.4
|
)
|
Money market
|
|
|
535
|
|
|
|
23.1
|
|
|
|
|
|
|
|
|
|
|
Interest, gross
|
|
|
(9,451
|
)
|
|
|
(9.4
|
)
|
Other revenue
|
|
|
(8,861
|
)
|
|
|
(16.1
|
)
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
(13,543
|
)
|
|
|
(4.2
|
)
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
Interest expense on liability based balances
|
|
|
(464
|
)
|
|
|
(3.0
|
)
|
Interest on conduit loans
|
|
|
(11,546
|
)
|
|
|
(61.5
|
)
|
|
|
|
|
|
|
|
|
|
Interest expense from securities operations
|
|
|
(12,010
|
)
|
|
|
(35.0
|
)
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
(1,533
|
)
|
|
|
(.5
|
)
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
6,648
|
|
|
|
5.9
|
|
Floor brokerage, exchange and clearance fees
|
|
|
7,977
|
|
|
|
24.6
|
|
Communications and data processing
|
|
|
14,826
|
|
|
|
32.6
|
|
Occupancy and equipment
|
|
|
2,774
|
|
|
|
9.4
|
|
Other expenses
|
|
|
809
|
|
|
|
2.4
|
|
Interest expense on long-term debt
|
|
|
20,485
|
|
|
|
198.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,519
|
|
|
|
20.3
|
|
54
Net
revenues
Net revenues decreased $1.5 million, or .5%, to
$288.3 million from the year ended December 31, 2009
to the year ended December 31, 2010. The decrease is
primarily attributed to the following:
Clearing and commission fees increased approximately
$8.1 million, or 5.6%, to $153.2 million during this
same period. This increase is attributable to clearing and
commission fees of approximately $16.2 million related to
the Ridge acquisition, approximately $6.2 million from PFSA
which began clearing in December 2009, approximately
$3.8 million from our futures business and $.2 million
in the U.K offset by a decrease of approximately
$10.1 million associated with our existing securities
clearing businesses in the U.S and $8.5 million in Canada.
The increase in clearing and commission fees in our futures
business is attributable to higher futures volumes. The decrease
in clearing and commission fees is primarily due to lower equity
volumes in Canada from the loss of a major Canadian
correspondent and lower equity and option volumes in the U.S
during the second half of 2010.
Technology revenue decreased $3.4 million, or 14.2%, to
$20.4 million due to lower licensing fees of approximately
$2.6 million due to the expiration of a licensing contract,
lower development revenues of approximately $.5 million and
lower recurring revenues of approximately $.3 million.
Interest, gross decreased $9.5 million or 9.4%, to
$90.8 million during the year ended December 31, 2010
compared to the year ended December 31, 2009. Interest
revenues from customer balances increased $4.9 million or
6.6% to $80.1 million due to an increase in our average
daily interest earning assets of $1.6 billion or 30.6% to
$6.7 billion offset by a decrease in our average daily
interest rate of 27 basis points or 19.0% to 1.15%.
Interest from our stock conduit borrows operations decreased
$14.4 million or 57.4% to $10.7 million, as a result
of a decrease in our average daily interest rate of
221 basis points or 55.1% to 1.80% and a decrease in our
average daily assets of approximately $31.6 million, or
5.0% to $593.4 million.
Other revenue decreased $8.9 million, or 16.1%, to
$46.2 million primarily due to decreases in execution
services revenues of $4.3 million and $1.8 million
decrease in our trade aggregation business resulting from lower
volumes, a decrease of approximately $4.1 million in equity
and foreign exchange trading as well as a $4.8 million of
investment income in 2009 related to the sale of LCH.Clearnet
stock offset primarily by increased account servicing fees of
approximately $6.6 million.
Interest expense from securities operations decreased
$12.0 million, or 35.0%, to $22.3 million from the
year ended December 31, 2009 to the year ended
December 31, 2010. Interest expense from clearing
operations decreased approximately $.5 million, or 3.0%, to
$15.0 million due to a 9 basis point or 26.5% decrease
in our average daily interest rate to .25% offset by an increase
in our average daily balances on our short-term obligations of
$1.5 billion, or 32.6%, to $6.1 billion.
Interest from our stock conduit loans decreased
$11.5 million, or 61.5% to $7.2 million due to a
179 basis point decrease, or 59.5% in our average daily
interest rate to 1.22% and a $30.3 million, or 4.9%
decrease in our average daily balances to $592.7 million.
Interest, net increased from $65.9 million for the year
ended December 31, 2009 to $68.5 million for the year
ended December 31, 2010. This increase was due to higher
customer balances attributable to our Ridge acquisition as well
a higher correspondent count from our existing businesses offset
by a lower interest rate spread of 18 basis points on
customer balances and 42 basis points on conduit balances
as well as slightly lower conduit balances.
Employee
compensation and benefits
Total employee costs increased $6.6 million, or 5.9%, to
$119.7 million from the year ended December 31, 2009
to the year ended December 31, 2010, primarily due to
severance charges of approximately $6.1 million and
$.9 million of costs related to future outsourcing
resulting from our recent Ridge acquisition (see Note 28 to
our consolidated financial statements) and a program to reduce
overhead as a result of the current market environment,
$2.6 million associated with our PFSA subsidiary and
$1.8 million associated with the Ridge acquisition offset
by lower incentive-based compensation expense of approximately
$1.7 million and lower continuing employee costs from a
lower headcount. Employee headcount decreased by 46 as a result
of reductions in force offset by increases in headcount at PFSA
of 11 and 30 employees associated with the Ridge
acquisition. Employee headcount was 985 as of December 31,
2010.
55
Floor
brokerage, exchange and clearance fees
Floor brokerage, exchange and clearance fees increased
$8.0 million, or 24.6%, to $40.4 million for the year
ended December 31, 2010 from the year ended
December 31, 2009, due to higher equity, options and
futures volumes, a change in mix, lower industry rebates and the
addition of the Ridge business and PFSA.
Communication
and data processing
Total expenses for our communication and data processing
requirements increased $14.8 million, or 32.6%, to
$60.3 million from the year ended December 31, 2009 to
the year ended December 31, 2010 due primarily to the
addition of the Ridge business on June 25, 2010 and PFSA
which began clearing operations in December 2009.
Occupancy
and equipment
Total expenses for occupancy and equipment increased
$2.8 million, or 9.4%, to $32.2 million from the year
ended December 31, 2009 to the year ended December 31,
2010 primarily due to increased software amortization
attributable to new computer systems and the addition of the
Ridge business and PFSA.
Other
expenses
Other expenses increased $.8 million, or 2.4%, to
$34.2 million from the year ended December 31, 2009 to
the year ended December 31, 2010, primarily due to
$3.0 million of costs associated with the closing of the
Ridge acquisition compared to $1.4 million in 2009,
$1.1 million in higher legal expenses incurred to conclude
certain outstanding litigation, higher professional fees
associated with our Broadridge conversion and the addition of
our PFSA subsidiary, offset by lower expense controls in all
other categories.
Interest
expense on long-term debt
Interest expense on long-term debt increased $20.5 million
from $10.3 million for the year ended December 31,
2009 to $30.8 million for the year ended December 31,
2010 resulting primarily from approximately $17.0 million
associated with our senior second lien secured notes issued on
May 6, 2010, $3.4 million of additional interest
expense associated with our senior convertible notes issued on
June 3, 2009, $.9 million related to the Ridge Seller
Note offset by approximately $.9 million lower interest
costs on our revolving credit facility. These higher interest
costs are associated with higher interest rates and higher
average balances as compared to the prior year.
Provision
for income taxes
Income tax benefit, based on an effective income tax rate of
approximately 32.1%, was $9.4 million for the year ended
December 31, 2010 as compared to an effective tax rate of
38.0% and income tax expense of $9.8 million for the year
ended December 31, 2009. The lower effective income tax
rate is primarily due to current period losses and items
deducted for books that are not deductible for tax primarily
attributable to stock-based compensation that create additional
taxable income.
Net
income (loss)
As a result of the foregoing, we incurred a net loss of
$19.8 million for the year ended December 31, 2010
compared to net income of $16.0 million for the year ended
December 31, 2009.
Comparison
of years ended December 31, 2009 and December 31,
2008
Overview
Results of operations declined for the year ended
December 31, 2009 compared to the year ended
December 31, 2008 primarily due to lower clearing and
commission fees, lower net interest revenue, higher floor
brokerage, exchange and clearance fees due to the timing of
rebates received in the prior year and higher communications and
data processing fees resulting from a move to SunGards
latest generation system consisting of equipment dedicated to
our U.S. clearing business, partially offset by higher
technology and other revenues. Technology revenues increased
56
due to licensing revenue for the current year that did not begin
until the third quarter of 2008. The decline in net interest
earned is a result of higher customer average paying balances,
lower average balances in our conduit business and lower
interest spreads on our customer balances in the current period
as compared to the year ago period, offset slightly by higher
interest rate spreads on our conduit business and higher
customer average earning balances. Results of operations from
our U.S., Canadian and U.K. operating businesses were
$69.5 million in 2009 as compared to $49.6 million in
2008. This increase was a result of the correspondent asset loss
related to the unsecured receivable from Evergreen Capital
Partners, Inc. in 2008 (see Note 26 to our consolidated
financial statements).
Our U.S. operating subsidiaries experienced an increase in
operating profits of approximately $4.3 million due
primarily to higher other revenues and higher technology revenue
offset by lower net interest income, higher floor brokerage,
exchange and clearance fees and higher communications and data
processing costs. Our Canadian business experienced an operating
profit of $10.4 million for the year ended
December 31, 2009 compared to an operating loss of
$9.6 million for the year ended December 31, 2008.
This increase is primarily due to the previously mentioned
correspondent asset loss in 2008, offset by lower net interest
income and higher floor brokerage, exchange and clearance fees.
The U.K. incurred an operating loss of $7.1 million in the
current period compared to an operating loss of
$2.7 million in the year ago period, due primarily to the
loss of the contracts for difference business, lower net
interest income and additional data processing expenses of
approximately $1 million related to the transition to a new
back office system.
The above factors resulted in higher operating income for the
year ended December 31, 2009 compared to the year ended
December 31, 2008.
The following is a summary of the increases (decreases) in the
categories of net revenues and expenses for the year ended
December 31, 2009 compared to the year ended
December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
Change
|
|
|
Change from
|
|
|
|
Amount
|
|
|
Previous Year
|
|
|
|
(In thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Clearing and commission fees
|
|
$
|
(5,509
|
)
|
|
|
(3.7
|
)
|
Technology
|
|
|
1,602
|
|
|
|
7.2
|
|
Interest:
|
|
|
|
|
|
|
|
|
Interest on asset based balances
|
|
|
(36,723
|
)
|
|
|
(33.5
|
)
|
Interest on conduit borrows
|
|
|
(24,410
|
)
|
|
|
(49.3
|
)
|
Money market
|
|
|
(4,405
|
)
|
|
|
(65.5
|
)
|
|
|
|
|
|
|
|
|
|
Interest, gross
|
|
|
(65,538
|
)
|
|
|
(39.5
|
)
|
Other revenue
|
|
|
9,736
|
|
|
|
21.5
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
(59,709
|
)
|
|
|
(15.6
|
)
|
Interest expense:
|
|
|
|
|
|
|
|
|
Interest expense on liability based balances
|
|
|
(36,295
|
)
|
|
|
(70.1
|
)
|
Interest on conduit loans
|
|
|
(20,125
|
)
|
|
|
(51.7
|
)
|
|
|
|
|
|
|
|
|
|
Interest expense from securities operations
|
|
|
(56,420
|
)
|
|
|
(62.2
|
)
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
(3,289
|
)
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
(614
|
)
|
|
|
(0.5
|
)
|
Floor brokerage, exchange and clearance fees
|
|
|
6,267
|
|
|
|
24.0
|
|
Communications and data processing
|
|
|
6,176
|
|
|
|
15.7
|
|
Occupancy and equipment
|
|
|
530
|
|
|
|
1.8
|
|
Vendor related asset impairment
|
|
|
(3
|
)
|
|
|
(0.4
|
)
|
Correspondent asset loss
|
|
|
(26,421
|
)
|
|
|
(100.0
|
)
|
Other expenses
|
|
|
(4,901
|
)
|
|
|
(13.1
|
)
|
Interest expense on long-term debt
|
|
|
6,490
|
|
|
|
168.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,476
|
)
|
|
|
(4.5
|
)
|
|
|
|
|
|
|
|
|
|
57
Net
revenues
Net revenues decreased $3.3 million, or 1.1%, to
$289.9 million from the year ended December 31, 2008
to the year ended December 31, 2009. The decrease is
primarily attributed to the following:
Clearing and commission fees decreased $5.5 million, or
3.7%, to $145.0 million during this same period primarily
due to a lower volume of equity and futures transactions,
partially offset by an increase in options contracts.
Technology revenue increased $1.6 million, or 7.2%, to
$23.8 million primarily due to approximately
$.6 million in licensing revenue and higher recurring
revenue of $3.2 million, offset by lower development
revenue of $2.2 million resulting from a decline in new
projects resulting from the current economic conditions.
Interest, gross decreased $65.5 million or 39.5%, to
$100.2 million in 2009 compared to 2008. Interest revenues
from customer balances decreased $41.1 million or 35.4% to
$75.2 million as our average daily interest rate decreased
98 basis points or 40.8% to 1.42% (during this same period
the average federal funds rate decreased 184 basis points)
offset by an increase in our average daily interest earning
assets of $552.6 million, or 12.1% to $5.1 billion.
Interest from our stock conduit borrows operations decreased
$24.4 million or 49.3% to $25.1 million, due to
decrease in our average daily assets of $842.5 million or
57.4% to $625.0 million, offset by an increase in our
average daily interest rate of approximately 64 basis
points, or 19.0% to 4.01%.
Other revenue increased $9.7 million, or 21.5%, to
$55.1 million due to increased revenues of
$1.0 million from our trade aggregation business in the
U.S, increased execution services revenues of $5.1 million
and investment income of $4.8 million related to the sale
of LCH.Clearnet stock obtained as part of the February 2007 GHCO
acquisition, offset by decreases in foreign exchange trading.
Interest expense from securities operations decreased
$56.4 million, or 62.2%, to $34.3 million from the
year ended December 31, 2008 to the year ended
December 31, 2009. Interest expense from clearing
operations decreased approximately $36.3 million, or 70.1%,
to $15.5 million due to a 99 basis point or 74.4%
decrease in our average daily interest rate to .34%, offset by
an increase in our average daily balances of our short-term
obligations of $724.4 million, or 18.7%, to
$4.6 billion.
Interest from our stock conduit loans decreased
$20.1 million, or 51.7% to $18.8 million due to a
$835.4 million, or 57.3% decrease in our average daily
balances to $623.0 million, offset by a 34 basis point
increase, or 12.7% in our average daily interest rate to 3.01%.
Interest, net decreased from $75.1 million for the year
ended December 31, 2008 to $65.9 million for the year
ended December 31, 2009. This decrease was due to a higher
ratio of customer interest paying balances to interest earning
balances combined with significantly lower conduit balances,
offset slightly by a higher interest rate spread of one basis
point on customer balances and 30 basis points on conduit
balances.
Employee
compensation and benefits
Total employee costs decreased $0.6 million, or 0.5%, to
$113.1 million from the year ended December 31, 2008
to the year ended December 31, 2009, primarily due to lower
incentive-based compensation expense, partially offset by
$.8 million of severance costs in the first quarter.
Employee count remained fairly constant, decreasing slightly to
1,031 as of December 31, 2009 from 1,058 at
December 31, 2008.
Floor
brokerage, exchange and clearance fees
Floor brokerage, exchange and clearance fees increased
$6.3 million, or 24.0% to $32.4 million for the year
ended December 31, 2009 from the year ended
December 31, 2008, primarily due to lower industry rebates
received in 2009 as compared to 2008. These expenses also
reflected increased fees due to higher option volumes, offset in
part by lower futures volumes.
58
Communications
and data processing
Total expenses for our communication and data processing
requirements increased $6.2 million, or 15.7%, to
$45.4 million from the year ended December 31, 2008 to
the year ended December 31, 2009. This increase reflects
costs associated with additional data processing capacity
resulting from a move to SunGards latest generation system
consisting of equipment dedicated to our U.S. clearing
business and approximately $1 million related to the
transition to a new back office system.
Occupancy
and equipment
Total expenses for occupancy and equipment increased
$0.5 million, or 1.8%, to $29.4 million from the year
ended December 31, 2008 to the year ended December 31,
2009. This increase is primarily related to increased rental
expense associated with our occupancy leases.
Correspondent
asset loss
In the fourth quarter of 2008 the Company recorded a charge of
approximately $26.4 million, net of estimated recoveries
and professional fees related to nonpayment of an unsecured
receivable as a result of a number of transactions involving
listed Canadian equity securities by Evergreen Capital Partners,
Inc. See Note 26 to our consolidated financial statements.
PFSC has now obtained from Evergreens bankruptcy estate an
assignment of Evergreens claims against certain of
Evergreens customers, and in June, 2009, PFSC commenced
legal proceedings against, among others, those customers of
Evergreen in an attempt to recover lost funds.
Other
expenses
Other expenses decreased $4.9 million, or 13.1%, to
$32.5 million from the year ended December 31, 2008 to
the year ended December 31, 2009. The decrease relates to
the $2.4 million litigation charge recorded in the quarter
ended September 30, 2008 (see Part I, Item 3.
Legal Proceedings) as well as lower travel expenses,
legal and consulting fees.
Interest
expense on long-term debt
Interest expense on long-term debt increased $6.5 million,
from $3.8 million for the year ended December 31, 2008
to $10.3 million for the year ended December 31, 2009,
as a result of additional interest expense of approximately
$4.4 million associated with our senior convertible notes
issued on June 3, 2009 ($2.8 million cash interest)
and higher interest expense on our revolving credit facility due
to higher interest rates and higher average balances.
Income
tax expense
Income tax expense, based on an effective income tax rate of
approximately 38.0%, was $9.8 million for the year ended
December 31, 2009 as compared to an effective tax rate of
36.0% and income tax expense of $6.0 million for the year
ended December 31, 2008. This increase is attributable to a
higher operating profit in the current year combined with a
higher effective tax rate. The higher effective tax rate is
primarily attributable to international trade tax credits in
Canada in the prior year offset by a lower ratio of state and
local taxes.
Net
income
As a result of the foregoing, net income increased to
$16.0 million for the year ended December 31, 2009
from $10.7 million for the year ended December 31,
2008.
Liquidity
and capital resources
Operating Liquidity Our clearing
broker-dealer subsidiaries typically finance their operating
liquidity needs through secured bank lines of credit and through
secured borrowings from stock lending counterparties in the
59
securities business, which we refer to as stock
loans. Most of our borrowings are driven by the activities
of our clients or correspondents, primarily the purchase of
securities on margin by those parties. As of December 31,
2010, we had seven uncommitted lines of credit with seven
financial institutions for the purpose of facilitating our
clearing business as well as the activities of our customers and
correspondents. Five of these lines of credit permitted us to
borrow up to an aggregate of approximately $325.4 million
while two lines had no stated limit. As of December 31,
2010, we had approximately $338.1 million in short-term
bank loans outstanding, which left approximately
$229.8 million available under our lines of credit with
stated limitations.
As noted above, our clearing broker businesses also have the
ability to borrow through stock loan arrangements. There are no
specific limitations on our borrowing capacities pursuant to our
stock loan arrangements. Borrowings under these arrangements
bear interest at variable rates based on various factors
including market conditions and the types of securities loaned,
are secured primarily by our customers margin account
securities, and are repayable on demand. At December 31,
2010, we had approximately $619.8 million in borrowings
under stock loan arrangements, the majority of which relates to
our customer activities.
As a result of our customers and correspondents
aforementioned activities, our operating cash flows may vary
from year to year.
Capital Resources PWI provides capital to its
subsidiaries. PWI has the ability to obtain capital through
equipment leases, typically secured by the equipment itself and
through the Amended and Restated Credit Facility. Currently we
have the capacity to borrow up to $25 million under our
Amended and Restated Credit Facility. As of December 31,
2010, the Company had no borrowings outstanding on this line of
credit. On June 3, 2009, the Company issued
$60 million aggregate principal amount of 8.00% Senior
Convertible Notes due 2014. The net proceeds from the sale of
the convertible notes were approximately $56.2 million
after initial purchaser discounts and other expenses. On
May 6, 2010, the Company issued $200 million aggregate
principal amount of 12.5% senior second lien secured notes,
due May 15, 2017. The net proceeds from the sale of the
senior second lien secured notes were approximately
$193.3 million after initial purchaser discounts and other
expenses. The Company used a part of the net proceeds of the
sale to pay down approximately $110 million outstanding on
its previous Credit Facility, to provide working capital to
support the correspondents the Company acquired from Ridge and
for other general corporate purposes. Concurrent with the
closing of its Notes offering, the Company paid off its existing
Credit Facility and entered into the Amended and Restated Credit
Facility. Our obligations under the Amended and Restated Credit
Facility are supported by a guaranty from SAI and PHI and a
pledge by the Company, SAI and PHI of equity interests of
certain of our subsidiaries. The Amended and Restated Credit
Facility is scheduled to mature on May 6, 2013.
We incur a significant amount of interest on our outstanding
debt obligations. In 2010, we paid $2.2 in interest under our
Amended and Restated Credit Facility and predecessor facility,
$4.8 million in interest under our Senior Convertible
Notes, $13.1 million in interest under our Senior Second
Lien Secured Notes (estimated to be $25 million per year
beginning in 2011) and $.3 million in interest under
the Ridge Seller Note. We expect to continue to pay a
significant amount of interest under these debt instruments in
2011 and for the next several years. Our significant debt
obligations may restrict our ability to effectively utilize the
capital available to us, and may adversely affect our business
or operations.
On November 18, 2009, we filed a registration statement on
Form S-3,
which was declared effective by the SEC on December 17,
2009. We may utilize the registration statement in connection
with our capital raising; however, we cannot guarantee that we
will be able to issue debt or equity securities on terms
acceptable to the Company.
As a holding company, we access the earnings of our operating
subsidiaries through the receipt of dividends from these
subsidiaries. Some of our subsidiaries are subject to the
requirements of securities regulators in their respective
countries relating to liquidity and capital standards, which may
serve to limit funds available for the payment of dividends to
the holding company.
Our principal U.S. broker-dealer subsidiary, PFSI, is
subject to the SEC Uniform Net Capital Rule
(Rule 15c3-1),
which requires the maintenance of a minimum net capital. PFSI
elected to use the alternative method, permitted by
Rule 15c3-1,
which requires PFSI to maintain minimum net capital, as defined,
equal to the
60
greater of $250,000 or 2% of aggregate debit balances, as
defined in the SECs Reserve Requirement Rule
(Rule 15c3-3).
At December 31, 2010, PFSI had net capital of
$139.5 million, which was $96.5 million in excess of
its required net capital of $43.0 million.
Our Penson Futures, PFSL, PFSC and PFSA subsidiaries are also
subject to minimum financial and capital requirements. These
requirements are not material either individually or
collectively to the consolidated financial statements as of
December 31, 2010. All subsidiaries were in compliance with
their minimum financial and capital requirements as of
December 31, 2010.
Contractual
obligations
We have contractual obligations to make future payments under
long-term debt and long-term non-cancelable lease agreements and
have contingent commitments under a variety of commercial
arrangements. See Note 20 to our consolidated financial
statements for further information regarding our commitments and
contingencies. There were no amounts outstanding under
repurchase agreements at December 31, 2010. The table below
shows our contractual obligations and commitments as of
December 31, 2010, including our payments due by period:
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|
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|
|
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|
|
|
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|
|
|
|
|
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|
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|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
13 Years
|
|
|
45 Years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
|
Long-term debt obligations and accrued interest(1)
|
|
$
|
284,478
|
|
|
$
|
3,900
|
|
|
$
|
|
|
|
$
|
80,578
|
|
|
$
|
200,000
|
|
Capital lease obligations
|
|
|
8,064
|
|
|
|
5,425
|
|
|
|
2,639
|
|
|
|
|
|
|
|
|
|
Operating lease obligations
|
|
|
24,026
|
|
|
|
5,702
|
|
|
|
8,768
|
|
|
|
5,245
|
|
|
|
4,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
316,568
|
|
|
$
|
15,027
|
|
|
$
|
11,407
|
|
|
$
|
85,823
|
|
|
$
|
204,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The long-term debt obligations and accrued interest consists of
our 12.50% Senior Second Lien Secured Notes due 2017 and
accrued interest of $203,195, 8.00% Senior Convertible
Notes due 2014 and accrued interest of $60,400 and our Ridge
Seller Note and accrued interest of $20,883. Only interest
accrued at December 31, 2010 has been included. |
As of December 31, 2010 the Company had accrued income tax
liabilities for uncertain tax positions of approximately
$1.2 million. These liabilities have not been presented in
the table above due to uncertainty as to amounts and timing
regarding future payments.
Off-balance
sheet arrangements
We do not have any relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as
structured finance or special purpose entities, which are
established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes.
See Note 16 to the consolidated financial statements for
information on off-balance sheet arrangements and Note 24
to the consolidated financial statements for information on
exchange member guarantees.
Critical
accounting policies
Our discussion and analysis of our financial condition and
results of operations are based on our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the U.S. The
preparation of these consolidated financial statements requires
us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses. We review
our estimates on an on-going basis. We base our estimates on our
experience and on various other assumptions that we believe to
be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions.
While our significant accounting policies are described in more
detail in the notes to the consolidated financial statements, we
believe the accounting policies that require management to make
assumptions and estimates involving significant judgment are
those relating to revenue recognition, fair value, software
development and the valuation of stock-based compensation.
61
Revenue
recognition
Revenues from clearing transactions are recorded in the
Companys consolidated financial statements on a trade date
basis. Cash received in advance of revenue recognition is
recorded as deferred revenue.
There are three major types of technology revenues:
(1) completed products that are processing transactions
every month generate revenues per transaction which are
recognized on a trade date basis; (2) these same completed
products may also generate monthly terminal charges for the
delivery of data or processing capability that are recognized in
the month to which the charges apply; (3) technology
development services are recognized when the service is
performed or under the terms of the technology development
contract as described below. Interest and other revenues are
recorded in the month that they are earned.
To date, the majority of our technology development contracts
have not required significant production, modification or
customization such that the service element of our overall
relationship with the client generally does meet the criteria
for separate accounting under the FASB Codification. All of our
products are fully functional when initially delivered to our
clients, and any additional technology development work that is
contracted for is as outlined below. Technology development
contracts generally cover only additional work that is performed
to modify existing products to meet the specific needs of
individual customers. This work can range from cosmetic
modifications to the customer interface (private labeling) to
custom development of additional features requested by the
client. Technology revenues arising from development contracts
are recorded on a
percentage-of-completion
basis based on outputs unless there are significant
uncertainties preventing the use of this approach in which case
a completed contract basis is used. The Companys revenue
recognition policy is consistent with applicable revenue
recognition guidance in the FASB Codification and Staff
Accounting Bulletin No. 104, Revenue Recognition
(SAB 104).
Fair
value
Fair value is defined as the exit price that would be received
to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
The Companys financial assets and liabilities are
primarily recorded at fair value.
In determining fair value, the Company uses various valuation
approaches, including market, income
and/or cost
approaches. The fair value model establishes a hierarchy which
prioritizes the inputs to valuation techniques used to measure
fair value. This hierarchy increases the consistency and
comparability of fair value measurements and related disclosures
by maximizing the use of observable inputs and minimizing the
use of unobservable inputs by requiring that observable inputs
be used when available. Observable inputs reflect the
assumptions market participants would use in pricing the assets
or liabilities based on market data obtained from sources
independent of the Company. Unobservable inputs reflect the
Companys own assumptions about the assumptions market
participants would use in pricing the asset or liability
developed based on the best information available in the
circumstances. The hierarchy prioritizes the inputs into three
broad levels based on the reliability of the inputs as follows:
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Level 1 Inputs are quoted prices in active
markets for identical assets or liabilities that the Company has
the ability to access at the measurement date. Assets and
liabilities utilizing Level 1 inputs include corporate
equity, U.S. Treasury and money market securities.
Valuation of these instruments does not require a high degree of
judgment as the valuations are based on quoted prices in active
markets that are readily and regularly available.
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|
Level 2 Inputs other than quoted prices in
active markets that are either directly or indirectly observable
as of the measurement date, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be
corroborated by observable market data for substantially the
full term of the assets or liabilities. Assets and liabilities
utilizing Level 2 inputs include certificates of deposit,
term deposits, corporate debt securities and Canadian government
obligations. These financial instruments are valued by quoted
prices that are less frequent than those in active markets or by
models that use various assumptions that are derived from or
supported by data that is generally observable in the
marketplace. Valuations in this category are inherently less
reliable than quoted market prices due to
|
62
|
|
|
|
|
the degree of subjectivity involved in determining appropriate
methodologies and the applicable underlying assumptions.
|
|
|
|
|
|
Level 3 Valuations based on inputs that are
unobservable and not corroborated by market data. The Company
does not currently have any financial instruments utilizing
Level 3 inputs. These financial instruments have
significant inputs that cannot be validated by readily
determinable data and generally involve considerable judgment by
management.
|
See Note 6 to our consolidated financial statements for a
description of the financial assets carried at fair value.
Software
development
Costs associated with software developed for internal use are
capitalized based on the applicable guidance in the FASB
Codification. Capitalized costs include external direct costs of
materials and services consumed in developing or obtaining
internal-use software and payroll for employees directly
associated with, and who devote time to, the development of the
internal-use software. Costs incurred in development and
enhancement of software that do not meet the capitalization
criteria, such as costs of activities performed during the
preliminary and post- implementation stages, are expensed as
incurred. Costs incurred in development and enhancements that do
not meet the criteria to capitalize are activities performed
during the application development stage such as designing,
coding, installing and testing. The critical estimate related to
this process is the determination of the amount of time devoted
by employees to specific stages of internal-use software
development projects. We review any impairment of the
capitalized costs on a periodic basis.
Goodwill
Goodwill is tested for impairment annually or more frequently if
an event or circumstance indicates that an impairment loss may
have been incurred. Application of the goodwill impairment test
requires judgment, including the identification of reporting
units, assignment of assets and liabilities to reporting units,
assignment of goodwill to reporting units, and determination of
the fair value of each reporting unit.
We review goodwill for impairment utilizing a two-step process.
The first step of the impairment test requires a comparison of
the fair value of each of our reporting units to the respective
carrying value. If the carrying value of a reporting unit is
less than its fair value, no indication of impairment exists and
a second step is not performed. If the carrying amount of a
reporting unit is higher than its fair value, there is an
indication that an impairment may exist and a second step must
be performed. In the second step, the impairment is computed by
comparing the implied fair value of the reporting units
goodwill with the carrying amount of the goodwill. If the
carrying amount of the reporting units goodwill is greater
than the implied fair value of its goodwill, an impairment loss
must be recognized for the excess and charged to operations.
At December 31, 2010, our goodwill totaled
$141.5 million. Our assessment is based upon a discounted
cash flow analysis and analysis of our market capitalization.
The estimate of cash flow is based upon, among other things,
certain assumptions about expected future operating performance
and an appropriate discount rate determined by our management.
Our estimates of discounted cash flows may differ from actual
cash flows due to, among other things, economic conditions,
changes to our business model or changes in operating
performance. Significant differences between these estimates and
actual cash flows could materially adversely affect our future
financial results. These factors increase the risk of
differences between projected and actual performance that could
impact future estimates of fair value of all reporting units. We
conducted our annual impairment test of goodwill as of
October 1, 2010. As a result of this test we determined
that no adjustment to the carrying value of goodwill for any
reporting units was required.
Stock-based
compensation
The Companys accounting for stock-based employee
compensation plans focuses primarily on accounting for
transactions in which an entity exchanges its equity instruments
for employee services, and carries forward prior guidance for
share-based payments for transactions with non-employees. Under
the modified prospective transition method, the Company is
required to recognize compensation cost, after the effective
date, for the portion of all
63
previously granted awards that were not vested, and the vested
portion of all new stock option grants and restricted stock. The
compensation cost is based upon the original grant-date fair
market value of the grant. The Company recognizes expense
relating to stock-based compensation on a straight-line basis
over the requisite service period which is generally the vesting
period. Forfeitures of unvested stock grants are estimated and
recognized as a reduction of expense.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosure about Market Risk
|
Prior to the fourth quarter of 2007, we did not have material
exposure to reductions in the targeted federal funds rate.
Beginning in the fourth quarter of 2007, there were significant
decreases in these rates. We encountered a 50 basis point
decrease in the federal funds rate in the fourth quarter of
2007. Actual rates fell approximately 400 basis points
during 2008, to a federal funds rate of approximately .25% as of
December 31, 2008, which is the current rate as of
December 31, 2010. Based upon the December quarter average
customer balances, assuming no increase, and adjusting for the
timing of these rate reductions, we believe that each
25 basis point increase or decrease will affect pretax
income by approximately $1.3 million per quarter. Despite
such interest rate changes, we do not have material exposure to
commodity price changes or similar market risks. Accordingly, we
have not entered into any derivative contracts to mitigate such
risk. In addition, we do not maintain material inventories of
securities for sale, and therefore are not subject to equity
price risk.
We extend margin credit and leverage to our correspondents and
their customers, which is subject to various regulatory and
clearing firm margin requirements. Margin credit is
collateralized by cash and securities in the customers
accounts. Our directors and executive officers and their
associates, including family members, from time to time may be
or may have been indebted to one or more of our operating
subsidiaries or one of their respective correspondents or
introducing brokers, as customers, in connection with margin
account loans. Such indebtedness is in the ordinary course of
business, is on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for
comparable transactions with unaffiliated third parties who are
not our employees and does not involve more than normal risk of
collectability or present other unfavorable features. Leverage
involves securing a large potential future obligation with a
proportional amount of cash or securities. The risks associated
with margin credit and leverage increase during periods of fast
market movements or in cases where leverage or collateral is
concentrated and market movements occur. During such times,
customers who utilize margin credit or leverage and who have
collateralized their obligations with securities may find that
the securities have a rapidly depreciating value and may not be
sufficient to cover their obligations in the event of
liquidation. Although we monitor margin balances on an
intra-day
basis in order to control our risk exposure, we are not able to
eliminate all risks associated with margin lending.
We are also exposed to credit risk when our correspondents
customers execute transactions, such as short sales of options
and equities, which can expose them to risk beyond their
invested capital. We are indemnified and held harmless by our
correspondents from certain liabilities or claims, the use of
margin credit, leverage and short sales of their customers.
However, if our correspondents do not have sufficient regulatory
capital to cover such conditions, we may be exposed to
significant off-balance sheet risk in the event that collateral
requirements are not sufficient to fully cover losses that
customers may incur and those customers and their correspondents
fail to satisfy their obligations. Our account level margin
credit and leverage requirements meet or exceed those required
by Regulation T of the Board of Governors of the Federal
Reserve, or similar regulatory requirements in other
jurisdictions. The SEC and other self-regulated organizations
(SROs) have approved new rules permitting portfolio
margining that have the effect of permitting increased leverage
on securities held in portfolio margin accounts relative to
non-portfolio accounts. We began offering portfolio margining to
our clients in 2007. We intend to continue to meet or exceed any
account level margin credit and leverage requirements mandated
by the SEC, other SROs, or similar regulatory requirements in
other jurisdictions as we expand the offering of portfolio
margining to our clients.
The profitability of our margin lending activities depends to a
great extent on the difference between interest income earned on
margin loans and investments of customer cash and the interest
expense paid on customer cash balances and borrowings. If
short-term interest rates fall, we generally expect to receive a
smaller gross interest spread, causing the profitability of our
margin lending and other interest-sensitive revenue sources to
decline. Short-term interest rates are highly sensitive to
factors that are beyond our control, including general economic
conditions
64
and the policies of various governmental and regulatory
authorities. In particular, decreases in the federal funds rate
by the Federal Reserve System usually lead to decreasing
interest rates in the U.S., which generally lead to a decrease
in the gross spread we earn. This is most significant when the
federal funds rate is on the low end of its historical range, as
is the case now. Interest rates in Canada, Europe and Australia
are also subject to fluctuations based on governmental policies
and economic factors and these fluctuations could also affect
the profitability of our margin lending operations in these
markets.
Given the volatility of exchange rates, we may not be able to
manage our currency transaction
and/or
translation risks effectively, or volatility in currency
exchange rates may expose our financial condition or results of
operations to a significant additional risk.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
The Companys consolidated financial statements and
supplementary data are included in pages F-2 through F-41 of
this Annual Report on
Form 10-K.
See accompanying Item 15. Exhibits and Financial
Statement Schedules and Index to the consolidated
financial statements on
page F-1.
Quarterly
results of operations (unaudited)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dec. 31,
|
|
|
Sep. 30,
|
|
|
Jun. 30,
|
|
|
Mar. 31,
|
|
|
Dec. 31,
|
|
|
Sep. 30,
|
|
|
Jun. 30,
|
|
|
Mar. 31,
|
|
Quarter Ended
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clearing and commission fees
|
|
$
|
42,901
|
|
|
$
|
37,818
|
|
|
$
|
38,103
|
|
|
$
|
34,366
|
|
|
$
|
34,826
|
|
|
$
|
36,911
|
|
|
$
|
38,183
|
|
|
$
|
35,125
|
|
Technology
|
|
|
5,167
|
|
|
|
4,661
|
|
|
|
5,207
|
|
|
|
5,384
|
|
|
|
5,410
|
|
|
|
6,266
|
|
|
|
6,452
|
|
|
|
5,665
|
|
Interest, gross
|
|
|
27,105
|
|
|
|
22,995
|
|
|
|
20,078
|
|
|
|
20,590
|
|
|
|
22,246
|
|
|
|
25,096
|
|
|
|
30,841
|
|
|
|
22,036
|
|
Other
|
|
|
11,768
|
|
|
|
9,345
|
|
|
|
12,575
|
|
|
|
12,554
|
|
|
|
19,266
|
|
|
|
12,551
|
|
|
|
11,809
|
|
|
|
11,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
86,941
|
|
|
|
74,819
|
|
|
|
75,963
|
|
|
|
72,894
|
|
|
|
81,748
|
|
|
|
80,824
|
|
|
|
87,285
|
|
|
|
74,303
|
|
Interest expense from securities operations
|
|
|
6,924
|
|
|
|
5,024
|
|
|
|
4,854
|
|
|
|
5,467
|
|
|
|
7,328
|
|
|
|
8,601
|
|
|
|
10,804
|
|
|
|
7,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
80,017
|
|
|
|
69,795
|
|
|
|
71,109
|
|
|
|
67,427
|
|
|
|
74,420
|
|
|
|
72,223
|
|
|
|
76,481
|
|
|
|
66,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
29,063
|
|
|
|
31,125
|
|
|
|
31,927
|
|
|
|
27,634
|
|
|
|
27,780
|
|
|
|
27,204
|
|
|
|
29,188
|
|
|
|
28,929
|
|
Floor brokerage, exchange and clearance fees
|
|
|
11,395
|
|
|
|
10,320
|
|
|
|
9,559
|
|
|
|
9,088
|
|
|
|
7,666
|
|
|
|
8,544
|
|
|
|
8,759
|
|
|
|
7,416
|
|
Communications and data processing
|
|
|
18,935
|
|
|
|
17,802
|
|
|
|
12,134
|
|
|
|
11,397
|
|
|
|
11,572
|
|
|
|
11,745
|
|
|
|
11,568
|
|
|
|
10,557
|
|
Occupancy and equipment
|
|
|
8,278
|
|
|
|
8,181
|
|
|
|
7,928
|
|
|
|
7,804
|
|
|
|
7,385
|
|
|
|
7,422
|
|
|
|
7,365
|
|
|
|
7,245
|
|
Other expenses
|
|
|
7,746
|
|
|
|
8,018
|
|
|
|
11,676
|
|
|
|
6,725
|
|
|
|
8,823
|
|
|
|
7,652
|
|
|
|
7,700
|
|
|
|
9,181
|
|
Interest expense on long-term debt
|
|
|
9,530
|
|
|
|
9,315
|
|
|
|
7,429
|
|
|
|
4,555
|
|
|
|
4,303
|
|
|
|
3,480
|
|
|
|
1,876
|
|
|
|
685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84,947
|
|
|
|
84,761
|
|
|
|
80,653
|
|
|
|
67,203
|
|
|
|
67,529
|
|
|
|
66,047
|
|
|
|
66,456
|
|
|
|
64,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(4,930
|
)
|
|
|
(14,966
|
)
|
|
|
(9,544
|
)
|
|
|
224
|
|
|
|
6,891
|
|
|
|
6,176
|
|
|
|
10,025
|
|
|
|
2,744
|
|
Income tax expense (benefit)
|
|
|
(1,726
|
)
|
|
|
(5,552
|
)
|
|
|
(2,176
|
)
|
|
|
85
|
|
|
|
2,550
|
|
|
|
2,309
|
|
|
|
3,910
|
|
|
|
1,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(3,204
|
)
|
|
$
|
(9,414
|
)
|
|
$
|
(7,368
|
)
|
|
$
|
139
|
|
|
$
|
4,341
|
|
|
$
|
3,867
|
|
|
$
|
6,115
|
|
|
$
|
1,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share basic
|
|
$
|
(0.11
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
0.01
|
|
|
$
|
0.17
|
|
|
$
|
0.15
|
|
|
$
|
0.24
|
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share diluted
|
|
$
|
(0.11
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
0.01
|
|
|
$
|
0.17
|
|
|
$
|
0.15
|
|
|
$
|
0.24
|
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic
|
|
|
28,394
|
|
|
|
28,295
|
|
|
|
25,830
|
|
|
|
25,573
|
|
|
|
25,491
|
|
|
|
25,411
|
|
|
|
25,329
|
|
|
|
25,260
|
|
Weighted average shares outstanding diluted
|
|
|
28,394
|
|
|
|
28,295
|
|
|
|
25,830
|
|
|
|
25,704
|
|
|
|
25,651
|
|
|
|
25,765
|
|
|
|
25,614
|
|
|
|
25,300
|
|
65
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Managements
evaluation of disclosure controls and procedures
Our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness
of the design and operation of our disclosure controls and
procedures (as that term is defined in
Rule 13a-15(e)
of the Exchange Act) as of the end of the period covered by this
annual report. Based on that evaluation, our management,
including our Chief Executive Officer and our Chief Financial
Officer, concluded that our disclosure controls and procedures
were effective in recording, processing, summarizing and
reporting information required to be disclosed by us in reports
that we file or submit under the Exchange Act, within the time
periods specified by the SECs rules and regulations.
Changes
in internal control over financial reporting
There have been no changes in our internal controls or in other
factors that have materially affected, or are reasonably likely
to materially affect, our internal controls over financial
reporting during the quarter ended December 31, 2010.
Managements
report on internal control over financial reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined by
Rules 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act of 1934, as amended. Our
internal control over financial reporting is designed 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.
Because of inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Projections
of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal
control over financial reporting as of December 31, 2010.
In making this assessment, we used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated Framework.
Based on our assessment, management concluded that, as of
December 31, 2010, we have maintained effective internal
control over financial reporting.
The Companys independent registered public accounting firm
has audited the Companys internal control over financial
reporting as of December 31, 2010 as stated in their report.
Inherent
limitation of the effectiveness of internal control
A control system, no matter how well conceived, implemented and
operated, can provide only reasonable, not absolute, assurance
that the objectives of the internal control system are met.
Because of such inherent limitations, no evaluation of controls
can provide absolute assurance that all control issues, if any,
within a company or any division of a company have been detected.
|
|
Item 9B.
|
Other
Information
|
None.
66
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information required by this Item 10 is incorporated
herein by reference from the section captioned Corporate
Governance, and Section 16(a) Beneficial
Ownership Reporting Compliance of the Companys
definitive proxy statement for the 2011 annual meeting of
stockholders to be filed not later than April 30, 2011 with
the SEC pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (the 2011 Proxy
Statement).
|
|
Item 11.
|
Executive
Compensation
|
The information required by this Item 11 is incorporated by
reference from the section captioned Executive
Compensation of the 2011 Proxy Statement.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Equity
compensation plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities to
|
|
|
Weighted-Average
|
|
|
|
|
|
|
be Issued Upon Exercise
|
|
|
Exercise Price of
|
|
|
Number of Securities
|
|
|
|
of Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
Remaining Available
|
|
Plan Category
|
|
Warrants and Rights(a)
|
|
|
Warrants and Rights
|
|
|
for Future Issuance
|
|
|
Equity Compensation Plans Approved by Security Holders(b)
|
|
|
1,188,380
|
|
|
$
|
14.33
|
|
|
|
2,507,927
|
|
Equity Compensation Plans Not Approved By Security Holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,188,380
|
|
|
$
|
14.33
|
|
|
|
2,507,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes shares issuable for unvested restricted stock units. |
|
(b) |
|
Includes shares issuable pursuant to the Penson Worldwide, Inc.
Amended and Restated 2000 Stock Incentive Plan, of which there
were 2,440,978 shares remaining available for future
issuance and the Penson Worldwide, Inc. 2005 Employee Stock
Purchase Plan of which there were 66,949 shares remaining
available for future issuance. |
Other information required by this Item 12 is incorporated
by reference from the section captioned Security Ownership
of Certain Beneficial Owners and Management of the 2011
Proxy Statement.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information required by this Item 13 is incorporated by
reference from the section captioned Certain Relationships
and Related Party Transactions of the 2011 Proxy Statement.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information required by this Item 14 is incorporated by
reference from the section captioned Ratification of
Independent Registered Public Accounting Firm of the 2011
Proxy Statement.
67
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
1. Financial statements.
The reports of our independent registered public accounting firm
and our consolidated financial statements are listed below and
begin on
page F-1
of this Annual Report on
Form 10-K.
|
|
|
|
|
|
|
Page
|
|
|
Number
|
|
|
|
|
F-2
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-8
|
|
2. Financial statement schedules.
Schedule I Condensed Financial Information of
Registrant has been incorporated into the notes to the
consolidated financial statements.
All other schedules for which provision is made in the
applicable accounting regulations of the SEC are not required
under the related instructions or are inapplicable, and
therefore have been omitted.
3. Exhibit list.
The exhibits required to be furnished pursuant to Item 15
are listed in the Exhibit Index filed herewith, which
Exhibit Index is incorporated herein by reference.
68
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
the report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PENSON WORLDWIDE, INC.
|
|
|
|
By:
|
/s/ PHILIP
A. PENDERGRAFT
|
Name: Philip A. Pendergraft
|
|
|
|
Title:
|
Chief Executive Officer
|
Date: March 3, 2011
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons in
the capacities and on the dates indicated:
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ ROGER
J. ENGEMOEN, JR.
Roger
J. Engemoen, Jr.
|
|
Chairman
|
|
March 3, 2011
|
|
|
|
|
|
/s/ PHILIP
A. PENDERGRAFT
Philip
A. Pendergraft
|
|
Chief Executive Officer
(Principal Executive Officer)
and Director
|
|
March 3, 2011
|
|
|
|
|
|
/s/ DANIEL
P. SON
Daniel
P. Son
|
|
Non Executive Vice Chairman and Director
|
|
March 3, 2011
|
|
|
|
|
|
/s/ KEVIN
W. MCALEER
Kevin
W. McAleer
|
|
Executive Vice President & Chief Financial Officer
(Principal Financial
and Accounting Officer)
|
|
March 3, 2011
|
|
|
|
|
|
/s/ JAMES
S. DYER
James
S. Dyer
|
|
Director
|
|
March 3, 2011
|
|
|
|
|
|
/s/ DAVID
JOHNSON
David
Johnson
|
|
Director
|
|
March 3, 2011
|
|
|
|
|
|
/s/ THOMAS
R. JOHNSON
Thomas
R. Johnson
|
|
Director
|
|
March 3, 2011
|
|
|
|
|
|
/s/ DAVID
M. KELLY
David
M. Kelly
|
|
Director
|
|
March 3, 2011
|
|
|
|
|
|
/s/ DAVID
A. REED
David
A. Reed
|
|
Director
|
|
March 3, 2011
|
69
Index to
consolidated financial statements
|
|
|
|
|
Penson Worldwide, Inc. consolidated financial statements:
|
|
|
|
|
|
|
|
F-2
|
|
Consolidated Financial Statements:
|
|
|
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-8
|
|
F-1
Report of
independent registered public accounting firm
Board of Directors and Stockholders
Penson Worldwide, Inc.
Dallas, Texas
We have audited the accompanying consolidated statements of
financial condition of Penson Worldwide, Inc. (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
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these 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, 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, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Penson Worldwide, Inc. at December 31, 2010 and
2009, and the results of its operations and its 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 also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Penson Worldwide, Inc.s internal control over financial
reporting 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 (COSO) and our report
dated March 3, 2011, expressed an unqualified opinion thereon.
BDO USA, LLP
Dallas, Texas
March 3, 2011
F-2
Report of
independent registered public accounting firm
Board of Directors and Stockholders
Penson Worldwide, Inc.
Dallas, Texas
We have audited Penson Worldwide, Inc.s (the
Company) internal control over financial reporting
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 COSO criteria). 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 Item 9A, Managements 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, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included 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 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 its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that 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, Penson Worldwide, Inc. maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2010, based on the COSO
criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated statements of financial condition of Penson
Worldwide, Inc. 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 and our report
dated March 3, 2011 expressed an unqualified opinion
thereon.
BDO USA, LLP
Dallas, Texas
March 3, 2011
F-3
Penson
Worldwide, Inc.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands,
|
|
|
|
except par values)
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
138,614
|
|
|
$
|
48,643
|
|
Cash and securities segregated under federal and
other regulations (including securities at fair value of $14,197
at December 31, 2010 and $0 at December 31, 2009)
|
|
|
5,407,645
|
|
|
|
3,605,651
|
|
Receivable from broker-dealers and clearing organizations
(including securities at fair value of $2,498 at
December 31, 2010 and $5,149 at December 31, 2009)
|
|
|
257,036
|
|
|
|
225,130
|
|
Receivable from customers, net
|
|
|
2,209,373
|
|
|
|
1,038,796
|
|
Receivable from correspondents
|
|
|
129,208
|
|
|
|
74,992
|
|
Securities borrowed
|
|
|
1,050,682
|
|
|
|
1,271,033
|
|
Securities owned, at fair value
|
|
|
201,195
|
|
|
|
223,480
|
|
Deposits with clearing organizations (including securities at
fair value of $213,015 at December 31, 2010 and $356,582 at
December 31, 2009)
|
|
|
423,156
|
|
|
|
433,243
|
|
Property and equipment, net
|
|
|
37,743
|
|
|
|
34,895
|
|
Other assets
|
|
|
399,532
|
|
|
|
295,212
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
10,254,184
|
|
|
$
|
7,251,075
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Payable to broker-dealers and clearing organizations
|
|
$
|
128,536
|
|
|
$
|
336,056
|
|
Payable to customers
|
|
|
7,498,626
|
|
|
|
5,038,338
|
|
Payable to correspondents
|
|
|
469,542
|
|
|
|
249,659
|
|
Short-term bank loans
|
|
|
338,110
|
|
|
|
113,213
|
|
Notes payable
|
|
|
259,729
|
|
|
|
132,769
|
|
Securities loaned
|
|
|
1,015,351
|
|
|
|
898,957
|
|
Securities sold, not yet purchased, at fair value
|
|
|
115,916
|
|
|
|
97,308
|
|
Accounts payable, accrued and other liabilities
|
|
|
127,453
|
|
|
|
85,873
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
9,953,263
|
|
|
|
6,952,173
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
Preferred stock, $0.01 par value, 10,000 shares
authorized; none issued and outstanding as of December 31,
2010 and 2009
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 100,000 shares
authorized; 32,054 issued and 28,454 outstanding as of
December 31, 2010; 29,022 issued and 25,548 outstanding as
of December 31, 2009
|
|
|
321
|
|
|
|
290
|
|
Additional paid-in capital
|
|
|
278,469
|
|
|
|
258,375
|
|
Accumulated other comprehensive income, net
|
|
|
4,367
|
|
|
|
1,748
|
|
Retained earnings
|
|
|
72,635
|
|
|
|
92,482
|
|
Treasury stock, at cost; 3,600 shares at December 31,
2010; 3,474 shares at December 31, 2009
|
|
|
(54,871
|
)
|
|
|
(53,993
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
300,921
|
|
|
|
298,902
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
10,254,184
|
|
|
$
|
7,251,075
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
Penson
Worldwide, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Clearing and commission fees
|
|
$
|
153,188
|
|
|
$
|
145,045
|
|
|
$
|
150,554
|
|
Technology
|
|
|
20,419
|
|
|
|
23,793
|
|
|
|
22,191
|
|
Interest, gross
|
|
|
90,768
|
|
|
|
100,219
|
|
|
|
165,757
|
|
Other
|
|
|
46,242
|
|
|
|
55,103
|
|
|
|
45,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
310,617
|
|
|
|
324,160
|
|
|
|
383,869
|
|
Interest expense from securities operations
|
|
|
22,269
|
|
|
|
34,279
|
|
|
|
90,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
288,348
|
|
|
|
289,881
|
|
|
|
293,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
119,749
|
|
|
|
113,101
|
|
|
|
113,715
|
|
Floor brokerage, exchange and clearance fees
|
|
|
40,362
|
|
|
|
32,385
|
|
|
|
26,118
|
|
Communications and data processing
|
|
|
60,268
|
|
|
|
45,442
|
|
|
|
39,266
|
|
Occupancy and equipment
|
|
|
32,191
|
|
|
|
29,417
|
|
|
|
28,887
|
|
Correspondent asset loss
|
|
|
|
|
|
|
|
|
|
|
26,421
|
|
Other expenses
|
|
|
34,165
|
|
|
|
33,356
|
|
|
|
38,260
|
|
Interest expense on long-term debt
|
|
|
30,829
|
|
|
|
10,344
|
|
|
|
3,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
317,564
|
|
|
|
264,045
|
|
|
|
276,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(29,216
|
)
|
|
|
25,836
|
|
|
|
16,649
|
|
Income tax expense (benefit)
|
|
|
(9,369
|
)
|
|
|
9,825
|
|
|
|
5,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(19,847
|
)
|
|
$
|
16,011
|
|
|
$
|
10,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share basic
|
|
$
|
(0.73
|
)
|
|
$
|
0.63
|
|
|
$
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share diluted
|
|
$
|
(0.73
|
)
|
|
$
|
0.63
|
|
|
$
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares basic
|
|
|
27,034
|
|
|
|
25,373
|
|
|
|
25,217
|
|
Weighted average common shares diluted
|
|
|
27,034
|
|
|
|
25,591
|
|
|
|
25,416
|
|
See accompanying notes to consolidated financial statements
F-5
Penson
Worldwide, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Stock
|
|
|
Common stock
|
|
|
Paid-In
|
|
|
Treasury
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Stockholders
|
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stock
|
|
|
Income (loss)
|
|
|
Earnings
|
|
|
Equity
|
|
|
|
(In thousands)
|
|
|
Balance, December 31, 2007
|
|
$
|
|
|
|
|
25,543
|
|
|
$
|
282
|
|
|
$
|
238,253
|
|
|
$
|
(45,886
|
)
|
|
$
|
6,964
|
|
|
$
|
65,815
|
|
|
$
|
265,428
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,656
|
|
|
|
10,656
|
|
Foreign currency translation adjustments, net of tax of $6,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,989
|
)
|
|
|
|
|
|
|
(9,989
|
)
|
Repurchase of treasury stock
|
|
|
|
|
|
|
(714
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,431
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,431
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
188
|
|
|
|
2
|
|
|
|
4,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,523
|
|
Exercise of stock options
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
168
|
|
Excess tax deficiency from stock-based compensation plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(459
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(459
|
)
|
Purchases of stock under the employee stock purchase plan
|
|
|
|
|
|
|
110
|
|
|
|
1
|
|
|
|
999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
Issuance of common stock
|
|
|
|
|
|
|
44
|
|
|
|
1
|
|
|
|
570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
|
|
|
|
25,207
|
|
|
|
286
|
|
|
|
244,052
|
|
|
|
(53,317
|
)
|
|
|
(3,025
|
)
|
|
|
76,471
|
|
|
|
264,467
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,011
|
|
|
|
16,011
|
|
Foreign currency translation adjustments, net of tax of $3,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,773
|
|
|
|
|
|
|
|
4,773
|
|
Repurchase of treasury stock
|
|
|
|
|
|
|
(77
|
)
|
|
|
|
|
|
|
|
|
|
|
(676
|
)
|
|
|
|
|
|
|
|
|
|
|
(676
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
275
|
|
|
|
3
|
|
|
|
5,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,087
|
|
Excess tax deficiency from stock-based compensation plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(473
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(473
|
)
|
Purchases of stock under the employee stock purchase plan
|
|
|
|
|
|
|
108
|
|
|
|
1
|
|
|
|
655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
656
|
|
Equity component of the conversion feature attributable to
senior convertible notes, net of tax of $5,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,822
|
|
Issuance of common stock
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
|
|
|
|
25,548
|
|
|
|
290
|
|
|
|
258,375
|
|
|
|
(53,993
|
)
|
|
|
1,748
|
|
|
|
92,482
|
|
|
|
298,902
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,847
|
)
|
|
|
(19,847
|
)
|
Foreign currency translation adjustments, net of tax of $1,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,619
|
|
|
|
|
|
|
|
2,619
|
|
Repurchase of treasury stock
|
|
|
|
|
|
|
(126
|
)
|
|
|
|
|
|
|
|
|
|
|
(878
|
)
|
|
|
|
|
|
|
|
|
|
|
(878
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
469
|
|
|
|
5
|
|
|
|
4,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,986
|
|
Exercise of stock options
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
|
|
Excess tax deficiency from stock-based compensation plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32
|
)
|
Purchases of stock under the employee stock purchase plan
|
|
|
|
|
|
|
86
|
|
|
|
1
|
|
|
|
471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
472
|
|
Issuance of common stock
|
|
|
|
|
|
|
2,456
|
|
|
|
25
|
|
|
|
14,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
$
|
|
|
|
|
28,454
|
|
|
$
|
321
|
|
|
$
|
278,469
|
|
|
$
|
(54,871
|
)
|
|
$
|
4,367
|
|
|
$
|
72,635
|
|
|
$
|
300,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
F-6
Penson
Worldwide, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(19,847
|
)
|
|
$
|
16,011
|
|
|
$
|
10,656
|
|
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
20,789
|
|
|
|
19,158
|
|
|
|
20,247
|
|
Deferred income taxes
|
|
|
(593
|
)
|
|
|
5,131
|
|
|
|
977
|
|
Stock-based compensation
|
|
|
4,986
|
|
|
|
5,087
|
|
|
|
4,523
|
|
Debt discount accretion
|
|
|
3,658
|
|
|
|
1,534
|
|
|
|
|
|
Debt issuance costs
|
|
|
1,805
|
|
|
|
1,081
|
|
|
|
|
|
Contingent consideration accretion
|
|
|
201
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and securities segregated under federal and
other regulations
|
|
|
(1,800,563
|
)
|
|
|
(1,195,735
|
)
|
|
|
(1,005,993
|
)
|
Net receivable/payable with customers
|
|
|
1,277,676
|
|
|
|
1,072,964
|
|
|
|
736,513
|
|
Net receivable/payable with correspondents
|
|
|
155,490
|
|
|
|
142,377
|
|
|
|
(63,611
|
)
|
Securities borrowed
|
|
|
231,536
|
|
|
|
(293,329
|
)
|
|
|
1,089,050
|
|
Securities owned
|
|
|
32,722
|
|
|
|
235,270
|
|
|
|
(234,799
|
)
|
Deposits with clearing organizations
|
|
|
12,028
|
|
|
|
(103,306
|
)
|
|
|
(35,589
|
)
|
Other assets
|
|
|
18,624
|
|
|
|
(43,318
|
)
|
|
|
92,189
|
|
Net receivable/payable with broker-dealers and clearing
organizations
|
|
|
(241,887
|
)
|
|
|
65,517
|
|
|
|
449,542
|
|
Securities loaned
|
|
|
115,671
|
|
|
|
56,452
|
|
|
|
(882,064
|
)
|
Securities sold, not yet purchased
|
|
|
12,981
|
|
|
|
40,418
|
|
|
|
(25,495
|
)
|
Accounts payable, accrued and other liabilities
|
|
|
(47,383
|
)
|
|
|
(12,353
|
)
|
|
|
8,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(222,106
|
)
|
|
|
12,959
|
|
|
|
164,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Business combinations, net of cash acquired
|
|
|
(1,921
|
)
|
|
|
(32,262
|
)
|
|
|
(33,370
|
)
|
Purchases of property and equipment
|
|
|
(20,359
|
)
|
|
|
(21,741
|
)
|
|
|
(19,031
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(22,280
|
)
|
|
|
(54,003
|
)
|
|
|
(52,401
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of senior second lien secured notes
|
|
|
193,294
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of convertible notes
|
|
|
|
|
|
|
56,200
|
|
|
|
|
|
Proceeds from revolving credit facility
|
|
|
31,500
|
|
|
|
50,000
|
|
|
|
20,000
|
|
Repayments of revolving credit facility
|
|
|
(120,000
|
)
|
|
|
(36,500
|
)
|
|
|
|
|
Net borrowing (repayments) on short-term bank loans
|
|
|
224,722
|
|
|
|
(20,905
|
)
|
|
|
(196,380
|
)
|
Exercise of stock options
|
|
|
88
|
|
|
|
|
|
|
|
168
|
|
Excess tax benefit from stock-based compensation plans
|
|
|
48
|
|
|
|
27
|
|
|
|
75
|
|
Purchase of treasury stock
|
|
|
(878
|
)
|
|
|
(676
|
)
|
|
|
(7,431
|
)
|
Issuance of common stock
|
|
|
472
|
|
|
|
656
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
329,246
|
|
|
|
48,802
|
|
|
|
(182,568
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash
|
|
|
5,111
|
|
|
|
2,060
|
|
|
|
(11,326
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
89,971
|
|
|
|
9,818
|
|
|
|
(82,098
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
48,643
|
|
|
|
38,825
|
|
|
|
120,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
138,614
|
|
|
$
|
48,643
|
|
|
$
|
38,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest payments
|
|
$
|
26,054
|
|
|
$
|
10,633
|
|
|
$
|
18,277
|
|
Income tax payments
|
|
$
|
6,632
|
|
|
$
|
3,807
|
|
|
$
|
19,639
|
|
Supplemental disclosure of non-cash activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in connection with the Ridge acquisition
|
|
$
|
14,611
|
|
|
$
|
|
|
|
$
|
|
|
Note issued in connection with the Ridge acquisition
|
|
$
|
20,578
|
|
|
$
|
|
|
|
$
|
|
|
See accompanying notes to consolidated financial statements.
F-7
Penson
Worldwide, Inc.
(In
thousands, except per share data or where noted)
Organization and Business Penson Worldwide,
Inc. (PWI or the Company) is a holding
company incorporated in Delaware. The Company conducts business
through its wholly owned subsidiary SAI Holdings, Inc.
(SAI). SAI conducts business through its principal
direct and indirect wholly owned operating subsidiaries, Penson
Financial Services, Inc. (PFSI), Penson Financial
Services Canada Inc. (PFSC), Penson Financial
Services Ltd. (PFSL), Nexa Technologies, Inc.
(Nexa), Penson Futures (Penson Futures),
Penson Asia Limited (Penson Asia) and Penson
Financial Services Australia Pty Ltd (PFSA). Through
these operating subsidiaries, the Company provides securities
and futures clearing services including integrated trade
execution, clearing and custody services, trade settlement,
technology services, risk management services, customer account
processing and customized data processing services. The Company
also participates in margin lending and securities borrowing and
lending transactions, primarily to facilitate clearing and
financing activities.
As of the date of this Annual Report, PWI has one class of
common stock and one class of convertible preferred stock. The
common stock is currently held by public shareholders and
certain directors, officers and employees of the Company. None
of the preferred stock is issued and outstanding. As used in
this Annual Report, the term common stock means the
common stock, and the term preferred stock means the
convertible preferred stock, in each case unless otherwise
specified.
The accompanying consolidated financial statements include the
accounts of PWI and its wholly owned subsidiary SAI. SAIs
wholly owned subsidiaries include among others, PFSI, Nexa,
Penson Execution Services, Inc., GHP1, Inc. (GHP1),
which includes its direct and indirect subsidiaries GHP2, LLC
(GHP2), and Penson Futures and Penson Holdings, Inc.
(PHI), which includes its subsidiaries PFSC, PFSL,
Penson Asia and PFSA. All significant intercompany transactions
and balances have been eliminated in consolidation.
In connection with the delivery of products and services to its
correspondents, clients and customers, the Company manages its
revenues and related expenses in the aggregate. As such, the
Company evaluates the performance of its business activities,
such as clearing and commission, technology, interest income
along with the associated interest expense as one integrated
activity.
The Companys cost infrastructure supporting its business
activities varies by activity. In some instances, these costs
are directly attributable to one business activity and sometimes
to multiple activities. As such, in assessing the performance of
its business activities, the Company does not consider these
costs separately, but instead, evaluates performance in the
aggregate along with the related revenues. Therefore, the
Companys pricing considers both the direct and indirect
costs associated with transactions related to each business
activity, the client relationship and the demand for the
particular product or service in the marketplace. As a result,
the Company does not manage or capture the costs associated with
the products or services sold, or its general and administrative
costs by revenue line.
|
|
2.
|
Summary
of significant accounting policies
|
Securities Transactions Proprietary
securities transactions are recorded at fair value on a
trade-date basis. Profit and loss arising from all securities
transactions entered into from the account and risk of the
Company are recorded on a trade-date basis. Customer securities
transactions are reported on a settlement-date basis. Amounts
receivable and payable for securities transactions that have not
reached their contractual settlement date are recorded net on
the consolidated statements of financial condition. All such
pending transactions were settled after December 31, 2010
without any material adverse effect on the Companys
financial condition.
Securities Lending Activities Securities
borrowed and securities loaned transactions are reported as
collateralized financings and are recorded at the amount of cash
collateral advanced or received. Securities borrowed
transactions occur when the Company deposits cash with the
lender in exchange for borrowing securities. With respect to
securities loaned, the Company receives in cash an amount
generally in excess of the fair value of
F-8
Penson
Worldwide, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
securities loaned. The Company monitors the fair value of
securities borrowed and loaned on a daily basis, with additional
collateral obtained or refunded as necessary.
Reverse Repurchase and Repurchase Agreements
The Company enters into transactions involving purchases of
securities under agreements to resell (reverse repurchase
agreements) or sales of securities under agreements to
repurchase (repurchase agreements), which are
accounted for as collateralized financings except where the
Company does not have an agreement to sell (or purchase) the
same or substantially the same securities before maturity at a
fixed or determinable price. It is the policy of the Company to
obtain possession of collateral with a market value equal to or
in excess of the principal amount loaned under reverse
repurchase agreements. To ensure that the market value of the
underlying collateral remains sufficient, collateral is
generally valued daily and the Company may require
counterparties to deposit additional collateral or may return
collateral pledged when appropriate. Reverse repurchase
agreements are carried at the amounts at which the securities
were initially acquired plus accrued interest. Repurchase
agreements are carried at the amounts at which the securities
were initially sold plus accrued interest.
Revenue Recognition Revenues from clearing
transactions are recorded in the Companys consolidated
financial statements on a trade-date basis. Commissions are
recorded on a trade-date basis as customer transactions occur.
Cash received in advance of revenue recognition is recorded as
deferred revenue.
There are three major types of technology revenues:
(1) completed products that are processing transactions
every month generate revenues per transaction which are
recognized on a trade date basis; (2) these same completed
products may also generate monthly terminal charges for the
delivery of data or processing capability which are recognized
in the month to which the charges apply; (3) technology
development services are recognized when the service is
performed or under the terms of the technology development
contract as described below. Interest and other revenues are
recorded in the month that they are earned.
To date, the majority of our technology development contracts
have not required significant production, modification or
customization such that the service element of our overall
relationship with the client generally does meet the criteria
for separate accounting under the Financial Accounting Standards
Board (FASB) Accounting Standards Codification
(FASB Codification). All of our products are fully
functional when initially delivered to our clients, and any
additional technology development work that is contracted for is
recognized as revenue as outlined below. Technology development
contracts generally cover only additional work that is performed
to modify existing products to meet the specific needs of
individual customers. This work can range from cosmetic
modifications to the customer interface (private labeling) to
custom development of additional features requested by the
client. Technology revenues arising from development contracts
are recorded on a
percentage-of-completion
basis based on outputs unless there are significant
uncertainties preventing the use of this approach in which case
a completed contract basis is used. The Companys revenue
recognition policy is consistent with applicable revenue
recognition guidance in the FASB Codification and Staff
Accounting Bulletin No. 104, Revenue Recognition
(SAB 104).
Income Taxes Income taxes are accounted for
under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. The Company
recognizes the effect of income tax positions only if those
positions are more likely than not of being sustained.
Recognized income tax positions are measured at the largest
amount that is greater than 50% likely of being realized.
Changes in recognition or measurement are reflected in the
period in which the change in judgment occurs.
F-9
Penson
Worldwide, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
Property and Equipment Property and equipment
are stated at cost. Depreciation is computed over the estimated
useful lives, generally 3 to 7 years, of the assets using
the straight-line method for financial reporting and accelerated
methods for income tax purposes. The Company periodically
reviews the carrying value of its long-lived assets for possible
impairment. In managements opinion, there was no
impairment of such assets at December 31, 2010 or 2009.
Goodwill Goodwill represents the excess
purchase price over the fair value of all tangible and
identifiable intangible net assets acquired in a business
acquisition. Substantially all of the Companys goodwill is
deductible for tax purposes. The Company complies with the
relevant guidance in the FASB Codification for accounting for
goodwill which requires, among other things, that companies no
longer amortize goodwill and instead sets forth methods to
periodically evaluate goodwill for impairment. The Company
conducts on at least an annual basis a review of its reporting
units assets and liabilities to determine whether the
goodwill is impaired. The goodwill impairment test is a two-step
test. Under the first step, fair value of the reporting unit is
compared with its carrying value (including goodwill). If the
fair value of the reporting unit is less than its carrying
value, an indication of goodwill impairment exists for the
reporting unit and the enterprise must perform step two of the
impairment test. Under step two, an impairment loss is
recognized for any excess of the carrying amount of the
reporting units goodwill over the implied fair value of
that goodwill. The implied fair value of the goodwill is
determined by allocating the fair value of the reporting unit in
a manner similar to a purchase price allocation. The residual
fair value after this allocation is the implied fair value of
the reporting unit goodwill. Fair value of the reporting unit is
determined using a discounted cash flow analysis. If the fair
value of the reporting unit exceeds its carrying value, step two
does not need to be performed. The Company conducted its annual
impairment during the fourth quarter of 2010 and 2009 and in
managements opinion; there was no impairment of such
assets at December 31, 2010 or 2009. The changes in
goodwill during 2010 and 2009 were as follows:
|
|
|
|
|
Balance, December 31, 2008
|
|
$
|
94,887
|
|
Goodwill acquired
|
|
|
17,936
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
112,823
|
|
Goodwill acquired
|
|
|
28,724
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
$
|
141,547
|
|
|
|
|
|
|
All goodwill acquired in 2009 and 2010 was related to the United
States operating segment. Goodwill is included in other assets
in the consolidated statements of financial condition.
Intangibles Intangibles consisted of the
following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
2010
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
Customer related intangible assets
|
|
$
|
41,029
|
|
|
$
|
6,249
|
|
|
$
|
34,780
|
|
Purchased technology
|
|
|
14,082
|
|
|
|
13,742
|
|
|
|
340
|
|
Other
|
|
|
2,760
|
|
|
|
363
|
|
|
|
2,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
57,871
|
|
|
$
|
20,354
|
|
|
$
|
37,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
2009
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
Customer related intangible assets
|
|
$
|
20,007
|
|
|
$
|
3,762
|
|
|
$
|
16,245
|
|
Purchased technology
|
|
|
14,082
|
|
|
|
13,094
|
|
|
|
988
|
|
Other
|
|
|
2,760
|
|
|
|
251
|
|
|
|
2,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
36,849
|
|
|
$
|
17,107
|
|
|
$
|
19,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-10
Penson
Worldwide, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
Customer related intangible assets represents customer contracts
obtained as part of acquired businesses and are amortized on a
straight-line basis over their estimated useful lives, ranging
from 10 to 15 years. Purchased technology represents
software and technology intangible assets acquired as part of
acquired businesses and are amortized over their estimated
useful lives, generally five years. Other is related primarily
to the efutures.com domain name acquired with First Capitol
Group LLC (FCG) which has an indefinite life and a
non-compete agreement with an estimated useful life of
11 years. Intangible assets are included in other assets.
Amortization expense related to intangible assets was
approximately $3,247, $3,136 and $4,132 in 2010, 2009 and 2008,
respectively. The Company estimates that amortization expense
will be approximately $4,081 in 2011, $3,744 in 2012, $3,729 in
2013 and 2014 and $3,718 in 2015.
Financing Costs Financing costs associated
with the Companys debt financing arrangements are
capitalized and amortized over the life of the related debt in
compliance with the effective interest method of the FASB
Codification.
Operating Leases Rent expense is provided on
operating leases evenly over the applicable lease periods taking
into account rent holidays. Amortization of leasehold
improvements is provided evenly over the lesser of the estimated
useful life or expected lease terms.
Stock-Based Compensation The Companys
accounting for stock-based employee compensation plans focuses
primarily on accounting for transactions in which an entity
exchanges its equity instruments for employee services, and
carries forward prior guidance for share-based payments for
transactions with non-employees. The compensation cost is based
upon the original grant-date fair value of the grant. The
Company recognizes expense relating to stock-based compensation
on a straight-line basis over the requisite service period which
is generally the vesting period. Forfeitures of unvested stock
grants are estimated and recognized as a reduction of expense.
Managements Estimates and Assumptions
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts
of revenues and expenses during the period. Actual results could
differ from those estimates. The Company reviews all significant
estimates affecting the consolidated financial statements on a
recurring basis and records the effect of any necessary
adjustments prior to their issuance.
Cash and Cash Equivalents The Company
considers cash equivalents to be highly liquid investments with
original maturities of less than 90 days that are not held
for sale in the ordinary course of business. Assets segregated
for regulatory purposes are not included as cash and cash
equivalents for purposes of the consolidated statements of cash
flows because such assets are segregated for the benefit of
customers only.
Securities Owned and Securities Sold, Not Yet
Purchased The Company has classified its
investments in securities owned and securities sold, not yet
purchased as trading and has reported those
investments at their fair values in the consolidated statements
of financial condition. Unrealized gains or losses are included
in earnings.
Fair Value of Financial Instruments The
financial instruments of the Company are reported on the
consolidated statements of financial condition at fair values,
or at carrying amounts that approximate fair values because of
the short maturity of the instruments. See Note 6 for a
description of financial instruments carried at fair value.
Allowance for Doubtful Accounts The Company
generally does not lend money to customers or correspondents
except on a fully collateralized basis. When the value of that
collateral declines, the Company has the right to demand
additional collateral. In cases where the collateral loses its
liquidity, the Company might also demand personal guarantees or
guarantees from other parties. In valuing receivables that
become less than fully collateralized/unsecured balances, the
Company compares the market value of the collateral and any
additional guarantees to the balance of the loan outstanding and
evaluates the collectability based on various qualitative
F-11
Penson
Worldwide, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
factors. To the extent that the collateral, the guarantees and
any other rights the Company has against the customer or the
related introducing broker are not sufficient to cover any
potential losses, then the Company records an appropriate
allowance for doubtful accounts. In the ordinary course of
business the Company carries less than fully
collateralized/unsecured balances for which no allowance has
been recorded due to the Companys judgment that the
amounts are collectable. The Company monitors every account that
is less than fully collateralized with liquid securities every
day. The Company reviews all such accounts on a monthly basis to
determine if a change in the allowance for doubtful accounts is
necessary. This specific,
account-by-account
review is supplemented by the risk management procedures that
identify positions in illiquid securities and other market
developments that could affect accounts that otherwise appear to
be fully collateralized. The corporate and local country risk
management officers monitor market developments on a daily
basis. The Company maintains an allowance for doubtful accounts
that represents amounts, in the judgment of management,
necessary to adequately absorb losses from known and inherent
losses in outstanding receivables. Provisions made to this
allowance are charged to operations based on anticipated
recoverability. . The changes in the allowance for doubtful
accounts during 2010, 2009 and 2008 were as follows:
|
|
|
|
|
Balance, December 31, 2007
|
|
$
|
6,493
|
|
Bad debt expense
|
|
|
2,302
|
|
Write-offs
|
|
|
(635
|
)
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
8,160
|
|
Bad debt expense
|
|
|
1,752
|
|
Write-offs
|
|
|
(207
|
)
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
9,705
|
|
Bad debt expense
|
|
|
5,185
|
|
Write-offs
|
|
|
(713
|
)
|
|
|
|
|
|
Balance, December 31, 2010
|
|
$
|
14,177
|
|
|
|
|
|
|
Software Costs and Expenses Costs associated
with software developed for internal use are capitalized based
on guidance in the FASB Codification. Capitalized costs include
external direct costs of materials and services consumed in
developing or obtaining internal-use software and payroll for
employees directly associated with, and who devote time to, the
development of the internal-use software. Costs incurred in
development and enhancement of software that do not meet the
capitalization criteria, such as costs of activities performed
during the preliminary and post-implementation stages, are
expensed as incurred. Costs incurred in development and
enhancements that do not meet the criteria to capitalize are
activities performed during the application development stage
such as designing, coding, installing and testing. The critical
estimate related to this process is the determination of the
amount of time devoted by employees to specific stages of
internal-use software development projects. The Company reviews
any impairment of the capitalized costs on a periodic basis. The
Company amortizes such costs over the estimated useful life of
the software, which is three to five years once the software has
been placed in service. The Company capitalized software
development costs of approximately $5,611, $6,880 and $5,491 in
2010, 2009 and 2008 respectively. Amortization expense related
to capitalized software development costs was approximately
$4,821, $2,543 and $719 for the years ended December 31,
2010, 2009 and 2008, respectively.
Net Income (Loss) Per Share Net income (loss)
per common share is computed by dividing net income (loss)
applicable to common shares by the weighted average number of
common shares outstanding during each period presented. Basic
earnings (loss) per share exclude any dilutive effects of any
potential common shares. Diluted net income (loss) per share
considers the impact of potentially dilutive common shares,
unless the inclusion of such shares would have an antidilutive
effect.
F-12
Penson
Worldwide, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
Foreign Currency Translation Adjustments The
Company has, in consolidation, translated the account balances
of PFSL, PFSC, Penson Asia and PFSA from their functional
currency to U.S. Dollars, the Companys reporting
currency. Translation gains and losses are recorded as an
accumulated balance, net of tax, in the consolidated statements
of stockholders equity. See Note 15. Gains or losses
resulting from remeasurement of foreign currency transactions
are included in net income (loss).
Reclassifications The Company has
reclassified certain prior period amounts to conform to the
current years presentation. The reclassifications had no
effect on the consolidated statements of operations or
stockholders equity as previously reported.
Acquisition
of Ridge
On November 2, 2009, the Company entered into an asset
purchase agreement (Ridge APA) to acquire the
clearing and execution business of Ridge Clearing &
Outsourcing Solutions, Inc. (Ridge) from Ridge and
Broadridge Financial Solutions, Inc. (Broadridge),
Ridges parent company. The acquisition closed on
June 25, 2010, and under the terms of the Ridge APA, as
later amended, the Company paid $35,189. The acquisition date
fair value of consideration transferred was $31,912, consisting
of 2,456 shares of PWI common stock with a fair value of
$14,611 (based on our closing share price of $5.95 on that date)
and a $20,578 five-year subordinated note (the Ridge
Seller Note) with an estimated fair value of $17,301 on
that date (see Note 14 for a description of the Ridge
Seller Note discount), payable by the Company bearing interest
at an annual rate equal to
90-day LIBOR
plus 5.5%.
The Company recorded a liability of $4,089 attributable to the
estimated fair value of contingent consideration to be paid
14 months and 19 months after closing (subject to
extension in the event the dispute resolution procedures set
forth in the Ridge APA are invoked). The amount of contingent
consideration ultimately payable will be added to the Ridge
Seller Note. The contingent consideration is primarily composed
of two categories. The first category includes a group of
correspondents that had not generated at least six months of
revenue as of May 31, 2010 (Stub Period
Correspondents). Twelve months after closing a calculation
will be performed to adjust the estimated annualized revenues as
of May 31, 2010 to the actual annualized revenues based on
a six-month review period as defined in the Ridge APA
(Stub Period Revenues). The Ridge Seller Note will
be adjusted 14 months after closing based on .9 times the
difference between the estimated and actual annualized revenues.
As of December 31, 2010 all of the correspondents in this
category had generated at least six months of revenues. The
Company reduced its contingent consideration liability by $343,
which is included in other expenses in the consolidated
statements of operations for the year ended December 31,
2010. The second category includes a group of correspondents
that had not yet begun generating revenues (Non-revenue
Correspondents) as of May 31, 2010. A calculation
will be performed 15 months after closing to determine the
annualized revenues, based on a six-month review period, for
each such non revenue correspondent (Non-revenue
Correspondent Revenues). The Ridge Seller Note will be
adjusted 19 months after closing by an amount equal to .9
times the Non-revenue Correspondent Revenues. The estimated
undiscounted range of outcomes for this category is $4,000 to
$5,000. There is no limit to the consideration to be paid.
The Company recorded goodwill of $15,901, intangibles of $20,100
and a discount on the Ridge Seller Note of $3,277. The
qualitative factors that make up the recorded goodwill include
value associated with an assembled workforce, value attributable
to enhanced revenues related to various products and services
offered by the Company and synergies associated with cost
reductions from the elimination of certain fixed costs as well
as economies of scale resulting from the additional
correspondents. The goodwill is included in the United States
segment. A portion of the recorded goodwill associated with the
contingent consideration may not be deductible for tax purposes
if future payments are less than the $4,089 initially recorded.
The tax goodwill will be deductible for tax purposes over a
period of 15 years. The Company has incurred acquisition
related costs of $5,251 with $3,625 and $1,626, respectively
recognized in the years ended December 31, 2010 and 2009.
Net revenues of $26,426 and net income of approximately $1,458
from Ridge were included in the consolidated statement of
operations as of the date of the
F-13
Penson
Worldwide, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
acquisition for the year ended December 31, 2010. The
Company estimates that net revenues would have been $312,921 for
the year ended December 31, 2010, respectively compared to
$337,233 and $345,802, respectively for the years ended
December 31, 2009 and 2008, and net income (loss) would
have been $(18,957) for the year ended December 31, 2010
compared to $17,260 and $12,824, respectively for the years
ended December 31, 2009 and 2008 had the acquisition
occurred as of January 1, 2008.
Acquisition
of First Capitol Group, LLC
In November 2007, our subsidiary Penson Futures acquired all of
the assets of FCG, an FCM and a leading provider of technology
products and services to futures traders, and assigned the
purchased membership interest to GHP1 effective immediately
thereafter. We closed the transaction in November, 2007 and paid
approximately $9,400 in cash and approximately 150 shares
of common stock valued at approximately $2,200 to the previous
owners of FCG. In addition, the Company agreed to pay an annual
earnout in cash for the following three-year period based on
average net income, subject to certain adjustments including
cost of capital, for the acquired business. The Company paid
approximately $8,700 related to the first year of the earnout
period. The Company did not make an earnout payment related to
the second or third year of the earnout period. The Company
finalized the acquisition valuation during the third quarter of
2008 and recorded goodwill of approximately $4,000 and
intangibles of approximately $7,600. FCG currently conducts
business as a division of Penson Futures.
Acquisition
of GHCO
In November 2006, the Company entered into a definitive
agreement to acquire the partnership interests of Chicago-based
GHCO, a leading international futures clearing and execution
firm. The Company closed the transaction on February 16,
2007 and paid approximately $27,900, including cash and
approximately 139 shares of common stock valued at
approximately $3,900 to the previous owners of GHCO. Goodwill of
approximately $2,800 and intangibles of approximately $1,000
were recorded in connection with the acquisition. In addition,
the Company agreed to pay additional consideration in the form
of an earnout over the next three years, in an amount equal to
25% of Penson Futures pre-tax earnings, as defined in the
purchase agreement executed with the previous owners of GHCO.
The Company did not make an earnout payment related to the first
or second years of the integrated Penson Futures business. The
Company paid $1,072 related to the third year of the earnout in
July 2010.
Acquisition
of the clearing business of Schonfeld Securities,
LLC
In November 2006, the Company acquired the clearing business of
Schonfeld Securities LLC (Schonfeld), a New
York-based securities firm. The Company closed the transaction
in November 2006 and in January 2007, the Company issued
approximately 1,100 shares of common stock valued at
approximately $28,300 to the previous owners of Schonfeld as
partial consideration for the assets acquired of which
approximately $14,800 was recorded as goodwill and approximately
$13,500 as intangibles. In addition, the Company agreed to pay
an annual earnout of stock and cash over a four-year period that
commenced on June 1, 2007, based on net income, as defined
in the asset purchase agreement (Schonfeld Asset Purchase
Agreement), for the acquired business. On April 22,
2010, SAI and PFSI entered into a letter agreement (the
Letter Agreement) with Schonfeld Group Holdings LLC
(SGH), Schonfeld, and Opus Trading Fund LLC
(Opus) that amends and clarifies certain terms of
the Schonfeld Asset Purchase Agreement. The Letter Agreement,
among other things, for purpose of determining the total payment
due to Schonfeld under the earnout provision of the Schonfeld
Asset Purchase Agreement: (i) removes the payment cap;
(ii) clarifies that PFSI has no obligation to compress
tickets across subaccounts (unless PFSI does so for other of its
correspondents at a later date); and (iii) reduces the
SunGard synergy credit from $2,900 to $1,450 in 2010 and $1,000
in 2011. The Letter Agreement also assigns all of
Schonfelds responsibilities under the Schonfeld Asset
Purchase Agreement to its parent company, SGH, and extends the
initial term of Opuss portfolio margining agreement with
PFSI from April 30, 2017 to April 30, 2019.
F-14
Penson
Worldwide, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
A payment of approximately $26,600 was paid in connection with
the first year earnout that ended May 31, 2008 and
approximately $25,500 was paid in connection with the second
year of the earnout that ended May 31, 2009. At
December 31, 2010, a liability of $20,516 was accrued as
result of the third year of the earnout ended May 31, 2010
($15,184) and the first seven months of the year four earnout,
which the Company does not expect to pay prior to the second
half of 2011 ($5,332). This balance is included in other
liabilities in the consolidated statements of financial
condition. The offset of this liability, goodwill, is included
in other assets. In January, 2011, the Company and SGH entered
into a letter agreement setting the amount due for the third
year earnout at $6.0 million due to the provisions in
various agreements related to the Schonfeld transaction,
including the termination/compensation agreement, which reduced
the amount that the Company is required to pay under the
Schonfeld Asset Purchase Agreement. This will result in a
reduction in goodwill and other liabilities of $9,184 in the
first quarter of 2011. The letter agreement also stipulated that
the third year earnout will be paid evenly over a 12 month
period commencing on September 1, 2011.
|
|
5.
|
Computation
of net income (loss) per share
|
The following is a reconciliation of the numerators and
denominators of the basic and diluted earnings per common share
computation (EPS). Common stock equivalents related
to stock options are excluded from the diluted EPS calculation
if their effect would be anti-dilutive to EPS.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(19,847
|
)
|
|
$
|
16,011
|
|
|
$
|
10,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic
|
|
|
27,034
|
|
|
|
25,373
|
|
|
|
25,217
|
|
Incremental shares from outstanding stock options
|
|
|
|
|
|
|
26
|
|
|
|
33
|
|
Incremental shares from non-vested restricted stock units
|
|
|
|
|
|
|
101
|
|
|
|
12
|
|
Shares issuable
|
|
|
|
|
|
|
18
|
|
|
|
154
|
|
Convertible debt
|
|
|
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and common share
equivalents diluted
|
|
|
27,034
|
|
|
|
25,591
|
|
|
|
25,416
|
|
Basic earnings (loss) per common share
|
|
$
|
(0.73
|
)
|
|
$
|
0.63
|
|
|
$
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share
|
|
$
|
0.73
|
)
|
|
$
|
0.63
|
|
|
$
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009 and 2008 stock options and restricted
stock units totaling 1,272 and 1,565, respectively were excluded
from the computation of diluted EPS as their effect would have
been anti-dilutive. For periods with a net loss, basic weighted
average shares are used for diluted calculations because all
stock options and unvested restricted stock units outstanding
are considered anti-dilutive.
|
|
6.
|
Fair
value of financial instruments
|
Fair value is defined as the exit price that would be received
to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
In determining fair value, the Company uses various valuation
techniques, including market, income
and/or cost
approaches. The fair value model establishes a hierarchy which
prioritizes the inputs to valuation techniques used to measure
fair value. This hierarchy increases the consistency and
comparability of fair value measurements and related disclosures
by maximizing the use of observable inputs and minimizing the
use of unobservable inputs by requiring that observable inputs
be used when available. Observable inputs reflect the
assumptions market participants would use in pricing the assets
or liabilities based on market data obtained from sources
independent of the Company. Unobservable inputs reflect the
Companys own assumptions about the assumptions market
participants would use
F-15
Penson
Worldwide, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
in pricing the asset or liability developed based on the best
information available in the circumstances. The hierarchy
prioritizes the inputs into three broad levels based on the
reliability of the inputs as follows:
|
|
|
|
|
Level 1 Inputs are quoted prices in active
markets for identical assets or liabilities that the Company has
the ability to access at the measurement date. Valuation of
these instruments does not require a high degree of judgment as
the valuations are based on quoted prices in active markets that
are readily and regularly available.
|
|
|
|
Level 2 Inputs other than quoted prices in
active markets that are either directly or indirectly observable
as of the measurement date, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be
corroborated by observable market data for substantially the
full term of the assets or liabilities. These financial
instruments are valued by quoted prices that are less frequent
than those in active markets or by models that use various
assumptions that are derived from or supported by data that is
generally observable in the marketplace. Valuations in this
category are inherently less reliable than quoted market prices
due to the degree of subjectivity involved in determining
appropriate methodologies and the applicable underlying
assumptions.
|
|
|
|
Level 3 Valuations based on inputs that are
unobservable and not corroborated by market data. The Company
does not currently have any financial instruments utilizing
Level 3 inputs. These financial instruments have
significant inputs that cannot be validated by readily
determinable data and generally involve considerable judgment by
management.
|
The following is a description of the valuation techniques
applied to the Companys major categories of assets and
liabilities measured at fair value on a recurring basis:
U.S.
government and agency securities
U.S. government securities are valued using quoted market
prices in active markets. Accordingly, U.S. government
securities are categorized in Level 1 of the fair value
hierarchy.
U.S. agency securities consist of agency issued debt and
are valued using quoted market prices in active markets. As such
these securities are categorized in Level 1 of the fair
value hierarchy.
Canadian
government obligations
Canadian government securities include both Canadian federal
obligations and Canadian provincial obligations. These
securities are valued using quoted market prices. These bonds
are generally categorized in Level 2 of the fair value
hierarchy as the price quotations are not always from active
markets.
Corporate
equity
Corporate equity securities represent exchange-traded securities
and are generally valued based on quoted prices in active
markets. These securities are categorized in Level 1 of the
fair value hierarchy.
Corporate
debt
Corporate bonds are generally valued using quoted market prices.
Corporate bonds are generally classified in Level 2 of the
fair value hierarchy as prices are not always from active
markets.
Listed
option contracts
Listed options are exchange traded and are generally valued
based on quoted prices in active markets and are categorized in
Level 1 of the fair value hierarchy.
F-16
Penson
Worldwide, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
Certificates
of deposit and term deposits
The fair value of certificates of deposits and term deposits is
estimated using third-party quotations. These deposits are
categorized in Level 2 of the fair value hierarchy.
Money
market
Money market funds are generally valued based on quoted prices
in active markets. These securities are categorized in
Level 1 of the fair value hierarchy.
The following tables summarizes by level within the fair value
hierarchy Cash and securities segregated under
federal and other regulations, Receivable from
broker-dealers and clearing organizations,
Securities owned, at fair value, Deposits with
clearing organizations and Securities sold, not yet
purchased, at fair value as of December 31, 2010 and
2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
Level 1
|
|
|
Level 2
|
|
|
Total
|
|
|
Cash and securities segregated under federal and
other regulations
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
|
$
|
6,197
|
|
|
$
|
|
|
|
$
|
6,197
|
|
Money market
|
|
|
8,000
|
|
|
|
|
|
|
|
8,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,197
|
|
|
$
|
|
|
|
$
|
14,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivable from broker-dealers and clearing organizations
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
|
$
|
2,498
|
|
|
$
|
|
|
|
$
|
2,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,498
|
|
|
$
|
|
|
|
$
|
2,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities owned
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate equity
|
|
$
|
290
|
|
|
$
|
|
|
|
$
|
290
|
|
Listed option contracts
|
|
|
168
|
|
|
|
|
|
|
|
168
|
|
Corporate debt
|
|
|
|
|
|
|
79,404
|
|
|
|
79,404
|
|
Certificates of deposit and term deposits
|
|
|
|
|
|
|
24,432
|
|
|
|
24,432
|
|
U.S. government and agency securities
|
|
|
49,997
|
|
|
|
|
|
|
|
49,997
|
|
Canadian government obligations
|
|
|
|
|
|
|
46,904
|
|
|
|
46,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
50,455
|
|
|
$
|
150,740
|
|
|
$
|
201,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits with clearing organizations
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
|
$
|
203,843
|
|
|
$
|
|
|
|
$
|
203,843
|
|
Money market
|
|
|
9,172
|
|
|
|
|
|
|
|
9,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
213,015
|
|
|
$
|
|
|
|
$
|
213,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold, not yet purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate equity
|
|
$
|
264
|
|
|
$
|
|
|
|
$
|
264
|
|
Listed option contracts
|
|
|
287
|
|
|
|
|
|
|
|
287
|
|
U.S. government and agency securities
|
|
|
90,870
|
|
|
|
|
|
|
|
90,870
|
|
Canadian government obligations
|
|
|
|
|
|
|
24,495
|
|
|
|
24,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
91,421
|
|
|
$
|
24,495
|
|
|
$
|
115,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-17
Penson
Worldwide, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
Level 1
|
|
|
Level 2
|
|
|
Total
|
|
|
Receivable from broker-dealers and clearing organizations
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
|
$
|
5,149
|
|
|
$
|
|
|
|
$
|
5,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,149
|
|
|
$
|
|
|
|
$
|
5,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities owned
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate equity
|
|
$
|
2,021
|
|
|
$
|
|
|
|
$
|
2,021
|
|
Listed option contracts
|
|
|
127
|
|
|
|
|
|
|
|
127
|
|
Corporate debt
|
|
|
|
|
|
|
70,398
|
|
|
|
70,398
|
|
Certificates of deposit and term deposits
|
|
|
|
|
|
|
26,368
|
|
|
|
26,368
|
|
U.S. government and agency securities
|
|
|
73,775
|
|
|
|
|
|
|
|
73,775
|
|
Canadian government obligations
|
|
|
|
|
|
|
33,691
|
|
|
|
33,691
|
|
Money market
|
|
|
17,100
|
|
|
|
|
|
|
|
17,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
93,023
|
|
|
$
|
130,457
|
|
|
$
|
223,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits with clearing organizations
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
|
$
|
261,050
|
|
|
$
|
|
|
|
$
|
261,050
|
|
Money market
|
|
|
95,532
|
|
|
|
|
|
|
|
95,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
356,582
|
|
|
$
|
|
|
|
$
|
356,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold, not yet purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate equity
|
|
$
|
16
|
|
|
$
|
|
|
|
$
|
16
|
|
Listed option contracts
|
|
|
228
|
|
|
|
|
|
|
|
228
|
|
Corporate debt
|
|
|
|
|
|
|
63,850
|
|
|
|
63,850
|
|
Canadian government obligations
|
|
|
|
|
|
|
33,214
|
|
|
|
33,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
244
|
|
|
$
|
97,064
|
|
|
$
|
97,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and securities segregated under U.S. federal and other
regulations totaled $5,407,645 at December 31, 2010. Cash
and securities segregated under federal and other regulations by
PFSI totaled $4,731,780 at December 31, 2010. Of this
amount, $4,614,056 was segregated for the benefit of customers
under
Rule 15c3-3
of the Securities and Exchange Commission, against a requirement
as of December 31, 2010 of $4,671,095. An additional
deposit of $116,000 was made on January 4, 2011 as allowed
by
Rule 15c3-3.
The remaining balance of $117,724 at year end relates to the
Companys election to compute a reserve requirement for
Proprietary Accounts of Introducing Broker-Dealers
(PAIB), as defined against a requirement as of
December 31, 2010 of $92,034. The PAIB is completed in
order for each correspondent firm that uses the Company as its
clearing broker-dealer to classify its assets held by the
Company as allowable assets in the correspondents net
capital calculation. In addition, $745,418, including $424,042
in cash and securities, was segregated for the benefit of
customers by Penson Futures to Commodity Futures Trading
Commission Rule 1.20. Finally, $130,844 was segregated
under similar Canadian regulations by PFSC and $120,979 was
segregated under similar regulations in the United Kingdom by
PFSL. At December 31, 2009, $3,605,651 was segregated for
the benefit of customers under U.S. federal and other
regulations and similar Canadian and United Kingdom regulations.
F-18
Penson
Worldwide, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
|
|
8.
|
Receivable
from and payable to broker-dealers and clearing
organizations
|
Amounts receivable from and payable to broker-dealers and
clearing organizations consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Receivable:
|
|
|
|
|
|
|
|
|
Securities failed to deliver
|
|
$
|
64,233
|
|
|
$
|
62,613
|
|
Receivable from clearing organizations
|
|
|
192,803
|
|
|
|
162,517
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
257,036
|
|
|
$
|
225,130
|
|
|
|
|
|
|
|
|
|
|
Payable:
|
|
|
|
|
|
|
|
|
Securities failed to receive
|
|
$
|
60,767
|
|
|
$
|
51,695
|
|
Payable to clearing organizations
|
|
|
67,769
|
|
|
|
284,361
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
128,536
|
|
|
$
|
336,056
|
|
|
|
|
|
|
|
|
|
|
Receivables from broker-dealers and clearing organizations
include amounts receivable for securities failed to deliver,
amounts receivable from clearing organizations relating to open
transactions, good-faith and margin deposits, and
floor-brokerage receivables.
Payables to broker-dealers and clearing organizations include
amounts payable for securities failed to receive, amounts
payable to clearing organizations on open transactions, and
floor-brokerage payables. In addition, the net receivable or
payable arising from unsettled trades is reflected in these
categories.
|
|
9.
|
Receivable
from and payable to customers and correspondents
|
Receivable from and payable to customers and correspondents
include amounts due on cash and margin transactions. Securities
owned by customers and correspondents are held as collateral for
receivables. Such collateral is not reflected in the
consolidated financial statements. Payable to correspondents
also includes commissions due on customer transactions.
The Company generally nets receivables and payables related to
its customers transactions on a counterparty basis
pursuant to master netting or customer agreements. It is the
Companys policy to settle these transactions on a net
basis with its counterparties. The Company generally recognizes
interest income on an accrual basis as it is earned. At
December 31, 2010 and 2009, the Company had approximately
$97,427 and $52,420 in receivables, respectively, primarily from
customers and correspondents, that were substantially
collateralized and considered collectable, for which interest
income was being recorded only when received.
F-19
Penson
Worldwide, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
|
|
10.
|
Securities
owned and securities sold, not yet purchased
|
Securities owned and securities sold, not yet purchased consist
of trading and investment securities at fair value as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Securities Owned:
|
|
|
|
|
|
|
|
|
Corporate equity
|
|
$
|
290
|
|
|
$
|
2,021
|
|
Listed option contracts
|
|
|
168
|
|
|
|
127
|
|
Corporate debt
|
|
|
79,404
|
|
|
|
70,398
|
|
Certificates of deposit and term deposits
|
|
|
24,432
|
|
|
|
26,368
|
|
U.S. federal and agency securities
|
|
|
49,997
|
|
|
|
73,775
|
|
Canadian government obligations
|
|
|
46,904
|
|
|
|
33,691
|
|
Money market
|
|
|
|
|
|
|
17,100
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
201,195
|
|
|
$
|
223,480
|
|
|
|
|
|
|
|
|
|
|
Securities Sold, Not Yet Purchased:
|
|
|
|
|
|
|
|
|
Corporate equity
|
|
$
|
264
|
|
|
$
|
16
|
|
Listed option contracts
|
|
|
287
|
|
|
|
228
|
|
Corporate debt
|
|
|
|
|
|
|
63,850
|
|
U.S. federal and agency securities
|
|
|
90,870
|
|
|
|
|
|
Certificates of deposit and term deposits
|
|
|
|
|
|
|
33,214
|
|
Canadian government obligations
|
|
|
24,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
115,916
|
|
|
$
|
97,308
|
|
|
|
|
|
|
|
|
|
|
|
|
11.
|
Reverse
repurchase and repurchase agreements
|
At December 31, 2010 the Company held reverse repurchase
agreements of $224,469. Approximately $132,669 of reverse
repurchase agreements included in other assets was
collateralized by Canadian government obligations and corporate
debt with a fair value of approximately $133,034. Additionally
the Company held reverse repurchase agreements of $91,800
included in cash and securities segregated under federal and
other regulations, collateralized by U.S. federal and
agency securities with a fair value of $91,840. At
December 31, 2009 the Company held reverse repurchase
agreements of $117,485 collateralized by Canadian government
obligations and corporate debt with a fair value of
approximately $117,485 and included in other assets. There were
no repurchase agreements outstanding at December 31, 2010
and 2009.
F-20
Penson
Worldwide, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
|
|
12.
|
Property
and equipment
|
Property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Equipment
|
|
$
|
42,251
|
|
|
$
|
33,729
|
|
Software
|
|
|
73,364
|
|
|
|
61,925
|
|
Furniture
|
|
|
5,217
|
|
|
|
5,146
|
|
Leasehold improvements
|
|
|
6,938
|
|
|
|
6,825
|
|
Other
|
|
|
1,919
|
|
|
|
1,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129,689
|
|
|
|
109,451
|
|
Less accumulated depreciation and amortization
|
|
|
91,946
|
|
|
|
74,556
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
37,743
|
|
|
$
|
34,895
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization is provided over the estimated
useful lives of the assets using the straight-line method for
financial reporting and accelerated methods for income tax
purposes. Depreciation and amortization is generally provided
over three to seven years for equipment and other, over three
years for software, over five years for furniture and over the
lesser of the estimated useful life or lease term from three to
twelve years for leasehold improvements. Depreciation and
amortization expense for the years ended December 31, 2010,
2009 and 2008 was approximately $17,542, $15,965 and $15,990,
respectively.
|
|
13.
|
Short-term
bank loans
|
At December 31, 2010 and 2009, the Company had $338,110 and
$113,213, respectively in short-term bank loans outstanding with
weighted average interest rates of approximately 1.1% and 1.2%,
respectively. As of December 31, 2010 the Company had seven
uncommitted lines of credit with seven financial institutions.
Five of these lines of credit permitted the Company to borrow up
to an aggregate of approximately $325,437 while two lines do not
have specified borrowing limits. The fair value of short-term
bank loans approximates their carrying values.
The Company also has the ability to borrow under stock loan
arrangements. At December 31, 2010 and 2009, the Company
had $619,833 and $411,162, respectively, in stock loan with no
specific limitations on additional stock loan capacities. These
arrangements bear interest at variable rates based on various
factors including market conditions and the types of securities
loaned, are secured primarily by our customers margin
account securities, and are repayable on demand. The fair value
of these borrowings approximates their carrying values. The
remaining balance in securities loaned relates to the
Companys conduit stock loan business.
F-21
Penson
Worldwide, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
Notes Payable consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
8.00% Senior Convertible Notes with a principal amount of
$60,000, unsecured. Payable in full in June 2014
|
|
$
|
47,141
|
|
|
$
|
44,269
|
|
12.50% Senior Second Lien Secured Notes with a principal
amount of $200,000. Payable in full in May 2017
|
|
|
195,024
|
|
|
|
|
|
Bank credit line up to $100,000, unsecured, with a variable rate
of interest that approximated 7.0% at December 31, 2009.
Paid in full in May 2010
|
|
|
|
|
|
|
88,500
|
|
Ridge Seller Note with a principal amount of $20,578, unsecured,
with a variable rate of interest that approximated 5.8% at
December 31, 2010. Payable in full in June 2015
|
|
|
17,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
259,729
|
|
|
$
|
132,769
|
|
|
|
|
|
|
|
|
|
|
Senior
convertible notes
On June 3, 2009, the Company issued $60,000 aggregate
principal amount of 8.00% Senior Convertible Notes due 2014
(the Convertible Notes). The $60,000 aggregate
principal amount of Convertible Notes includes $10,000 issued in
connection with the exercise in full by the initial purchasers
of their over-allotment option. The net proceeds from the sale
of the convertible notes were approximately $56,200 after
initial purchaser discounts and other expenses.
The Convertible Notes bear interest at a rate of 8.0% per year.
Interest on the Convertible Notes is payable semi-annually in
arrears on June 1 and December 1 of each year, beginning
December 1, 2009. The Convertible Notes will mature on
June 1, 2014, subject to earlier repurchase or conversion.
Holders may convert their Convertible Notes at their option at
any time prior to the close of business on the business day
immediately preceding the maturity date for such Convertible
Notes under the following circumstances: (1) during any
fiscal quarter (and only during such fiscal quarter), if the
last reported sale price of the Companys common stock for
at least 20 trading days in the period of 30 consecutive trading
days ending on the last trading day of the immediately preceding
fiscal quarter is equal to or more than 120% of the conversion
price of the Convertible Notes on the last day of such preceding
fiscal quarter; (2) during the five
business-day
period after any five consecutive
trading-day
period in which the trading price per $1,000 (in whole dollars)
principal amount of the Convertible Notes for each day of that
period was less than 98% of the product of the last reported
sale price of the Companys common stock and the conversion
rate of the Convertible Notes on each such day; (3) upon
the occurrence of specified corporate transactions, including
upon certain distributions to holders of the Companys
common stock and certain fundamental changes, including changes
of control and dispositions of substantially all of the
Companys assets; and (4) at any time beginning on
March 1, 2014. Upon conversion, the Company will pay or
deliver, at the Companys option, cash, shares of the
Companys common stock or a combination thereof. The
initial conversion rate for the Convertible Notes was
101.9420 shares of the Companys common stock per
$1,000 (in whole dollars) principal amount of Convertible Notes
(6,117 shares), equivalent to an initial conversion price
of approximately $9.81 per share of common stock. Such
conversion rate will be subject to adjustment in certain events,
but will not be adjusted for accrued or additional interest. The
Company has received consent from its stockholders to issue up
to 6,117 shares of its common stock to satisfy its payment
obligations upon conversion of the Convertible Notes.
Following certain corporate transactions, the Company will
increase the applicable conversion rate for a holder who elects
to convert its Convertible Notes in connection with such
corporate transactions by a number of additional shares of
common stock. The Company may not redeem the Convertible Notes
prior to their stated maturity date. If the Company undergoes a
fundamental change, holders may require the Company to
repurchase all or a portion of
F-22
Penson
Worldwide, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
the holders Convertible Notes for cash at a price equal to
100% of the principal amount of the Convertible Notes to be
purchased, plus any accrued and unpaid interest, including any
additional interest, to, but excluding, the fundamental change
purchase date.
The Convertible Notes are unsecured obligations of the Company
and contain customary covenants, such as reporting of annual and
quarterly financial results, and restrictions on certain
mergers, consolidations and changes of control. The Convertible
Notes also contain customary events of default, including
failure to pay principal or interest, breach of covenants,
cross-acceleration to other debt in excess of $20,000,
unsatisfied judgments of $20,000 or more and bankruptcy events.
The Convertible Notes contain no financial covenants.
The Company was required to separately account for the liability
and equity components of the Convertible Notes in a manner that
reflected the Companys nonconvertible debt borrowing rate
at the date of issuance. The Company allocated $8,822, net of
tax of $5,593, of the $60,000 principal amount of the
Convertible Notes to the equity component, which represents a
discount to the debt and is being amortized into interest
expense using the effective interest method through June 1,
2014. Accordingly, the Companys effective interest rate on
the Convertible Notes was 15.0%. The Company is recognizing
interest expense during the twelve months ending May 2011 on the
Convertible Notes in an amount that approximates 15.0% of
$47,700, the liability component of the Convertible Notes at
June 1, 2010. The Convertible Notes were further discounted
by $2,850 for fees paid to the initial purchasers. These fees
are being accreted and other debt issuance costs are being
amortized into interest expense over the life of the Convertible
Notes. The interest expense recognized for the Convertible Notes
in the twelve months ended May 2011 and subsequent periods will
be greater as the discount is accreted and the effective
interest method is applied. The Company recognized interest
expense of $4,800, $2,773 and $0, related to the coupon, $2,301,
$1,201 and $0 related to the conversion feature and $714, $417
and $0 related to various issuance costs for the years ended
December 31, 2010, 2009 and 2008, respectively.
The fair value of the Convertible Notes was estimated using a
discounted cash flow analysis based on our current borrowing
rate for an instrument with similar terms (currently 12.5%). At
December 31, 2010, the estimated fair value of the
Convertible Notes was $52,677.
Senior
second lien secured notes
On May 6, 2010, the Company issued $200,000 aggregate
principal amount of its 12.50% Senior Second Lien Secured
Notes due 2017 (the Notes). The Notes bear interest
at a rate of 12.5% per year and are guaranteed by SAI and PHI.
The Notes are secured, on a second lien basis, by a pledge by
PWI, SAI and PHI of the equity interests of certain of
PWIs subsidiaries. The Notes were issued pursuant to an
Indenture dated as of May 6, 2010 with U.S. Bank
National Association as Trustee and Collateral Agent (the
Trustee) and a Second Lien Pledge Agreement dated as
of May 6, 2010 with the Trustee. The rights of the Trustee
pursuant to the Second Lien Pledge Agreement are subject to an
Intercreditor Agreement entered between PWI, the Trustee and the
Administrative Agent for the Companys senior secured
credit facility.
The Notes contain customary representations and covenants, such
as reporting of annual and quarterly financial results, and
restrictions, among other things, on indebtedness, liens,
certain restricted payments and investments, asset sales,
certain mergers, consolidations and changes of control. The
Notes also contain customary events of default, including
failure to pay principal or interest, breach of covenants,
cross-acceleration to other debt in excess of $20,000,
unsatisfied judgments of $20,000 or more and bankruptcy events.
Pursuant to the Notes PFSI is required to maintain net
regulatory capital of at least 5.5% of its aggregate debt
balances.
The Company used a part of the proceeds of the sale to pay down
approximately $110,000 outstanding on its revolving credit
facility (see discussion below), and used the balance of the
proceeds to provide working capital, among other things, to
support the correspondents the Company acquired from Ridge and
for other general corporate purposes.
F-23
Penson
Worldwide, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
The Company recorded a discount of $5,500 for the costs
associated with the initial purchasers. These costs and other
debt issuance costs are being amortized into interest expense
over the life of the Notes. For the years ended
December 31, 2010, 2009 and 2008 the Company recognized
interest expense of $16,319, $0 and $0 related to the coupon and
$638, $0 and $0 related to various issuance costs. The fair
value of the Notes was estimated using a discounted cash flow
analysis based on our current borrowing rate for an instrument
with similar terms (currently 12.5%). At December 31, 2010,
the estimated fair value of the Notes was approximately $200,000.
Revolving
credit facility
On May 1, 2009, the Company signed a secured revolving
credit facility (the Credit Facility) with a
syndicate of financial institutions. The Credit Facility was
subsequently amended on May 27, 2009, September 22,
2009, November 2, 2009 and April 1, 2010. The
April 1, 2010 amendment to the Credit Facility, among other
things, extended the maturity of the Credit Facility to
September 30, 2010, increased the aggregate commitments of
the Lenders to $125,000 and revised certain financial covenants
in the Credit Facility. On May 6, 2010, the Company repaid
the Credit Facility and concurrently with such repayment entered
into a second amended and restated credit agreement (the
Amended and Restated Credit Facility) with Regions
Bank, as Administrative Agent, Swing Line Lender and Letter of
Credit Issuer, the lenders party thereto and other parties
thereto. The Amended and Restated Credit Facility provides for a
$75,000 committed revolving credit facility and the lenders
have, additionally, provided the Company with an uncommitted
option to increase the principal amount of the facility to up to
$125,000. The Companys obligations under the Amended and
Restated Credit Facility are supported by a guaranty from SAI
and PHI and a pledge by the Company, SAI and PHI of equity
interests of certain of the Companys subsidiaries. The
Amended and Restated Credit Facility is scheduled to mature on
May 6, 2013. The Amended and Restated Credit Facility
contains customary representations, and affirmative and negative
covenants such as reporting of annual and quarterly financial
results, and restrictions, among other things, on indebtedness,
liens, investments, certain restricted payments, asset sales,
certain mergers, consolidations and changes of control. The
Amended and Restated Credit Facility also contains customary
events of default, including failure to pay principal or
interest, breach of covenants, cross-defaults to other debt in
excess of $10,000, unsatisfied judgments of $10,000 or more and
certain bankruptcy events. Pursuant to the Amended and Restated
Credit Facility PFSI is required to maintain net regulatory
capital of at least 5.5% of its aggregate debt balances. The
Company is also required to comply with several financial
covenants, including a minimum consolidated tangible net worth,
minimum fixed charges coverage ratio, maximum consolidated
leverage ratio, minimum liquidity requirement and maximum
capital expenditures. On October 29, 2010, we entered into
an amendment to the Amended and Restated Credit Facility (the
First Amendment). The First Amendment, among other
things, revises certain financial covenants in the Amended and
Restated Credit Facility and provides for the addition of a
minimum consolidated EBITDA covenant. The First Amendment also
provides additional availability under the facility in certain
circumstances. Currently, the Company has the capacity to borrow
up to $25,000 under the Amended and Restated Credit Facility. As
of December 31, 2010, the Amended and Restated Credit
Facility was undrawn.
Ridge
seller note
On June 25, 2010, in connection with the acquisition of the
clearing and execution business of Ridge, the Company issued a
$20,578 five-year subordinated note due June 25, 2015 (the
Ridge Seller Note), payable by PWI bearing interest
at an annual rate equal to
90-day LIBOR
plus 5.5% to be paid quarterly (5.80% at December 31,
2010). The principal amount of the Ridge Seller Note is subject
to adjustment in accordance with the terms of the Ridge APA (see
Note 2). The Ridge Seller Note is unsecured and contains
certain covenants, including certain reporting and notice
requirements, restrictions on certain liens, guarantees by
subsidiaries, prepayments of the Convertible Notes and certain
mergers and consolidations. The Ridge Seller Note also contains
customary events of default, including failure to pay principal
or interest, breach of covenants, changes of control,
cross-acceleration to other debt in excess of $50,000, certain
bankruptcy events and certain terminations of the Companys
Master Services Agreement with Broadridge. The Ridge Seller Note
contains no financial covenants.
F-24
Penson
Worldwide, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
The Company determined that the stated rate of interest of the
note was below the rate the Company could have obtained in the
open market. The Company estimated that the interest rate it
could obtain in the open market was
90-day LIBOR
plus 9.6% (10.14% at June 25, 2010). The Company recorded a
discount of $3,277, which resulted in an estimated fair value of
$17,301 at issuance. The interest expense recognized for the
Ridge Seller Note in the twelve months ending June 30, 2011
and subsequent periods will be greater as the discount is
accreted and the effective interest method is applied. For the
years ended December 31, 2010, 2009 and 2008, respectively,
the Company recognized interest expense of $619, $0 and $0
related to the coupon and $263, $0 and $0 related to the
discount. The fair value of the Ridge Seller Note approximated
its carrying value of $17,560 as of December 31, 2010.
Approximate future annual maturities of the Companys notes
payable at December 31, 2010 are listed below:
|
|
|
|
|
|
|
Amount
|
|
|
2011
|
|
$
|
|
|
2012
|
|
|
|
|
2013
|
|
|
|
|
2014
|
|
|
60,000
|
|
2015
|
|
|
20,578
|
|
Thereafter
|
|
|
200,000
|
|
|
|
|
|
|
|
|
$
|
280,578
|
|
|
|
|
|
|
The following table details the Companys share activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Treasury
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Stock
|
|
|
Balance, December 31, 2007
|
|
|
|
|
|
|
25,543
|
|
|
|
2,683
|
|
Issuance of common stock
|
|
|
|
|
|
|
44
|
|
|
|
|
|
Repurchase of treasury stock
|
|
|
|
|
|
|
(714
|
)
|
|
|
714
|
|
Stock-based compensation
|
|
|
|
|
|
|
188
|
|
|
|
|
|
Purchases under the employee stock purchase plan
|
|
|
|
|
|
|
110
|
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
|
|
|
|
25,207
|
|
|
|
3,397
|
|
Issuance of common stock
|
|
|
|
|
|
|
35
|
|
|
|
|
|
Repurchase of treasury stock
|
|
|
|
|
|
|
(77
|
)
|
|
|
77
|
|
Stock-based compensation
|
|
|
|
|
|
|
275
|
|
|
|
|
|
Purchases under the employee stock purchase plan
|
|
|
|
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
|
|
|
|
25,548
|
|
|
|
3,474
|
|
Issuance of common stock
|
|
|
|
|
|
|
2,456
|
|
|
|
|
|
Repurchase of treasury stock
|
|
|
|
|
|
|
(126
|
)
|
|
|
126
|
|
Stock-based compensation
|
|
|
|
|
|
|
469
|
|
|
|
|
|
Purchases under the employee stock purchase plan
|
|
|
|
|
|
|
86
|
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
|
|
|
|
|
28,454
|
|
|
|
3,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-25
Penson
Worldwide, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
Additional
paid-in capital
During the years ended December 31, 2010 and 2009, the
Company did not grant any stock options and granted 407 and 207
restricted stock units (RSUs) with a fair value of
$3,384 and $1,336, respectively. As a result, additional paid-in
capital increased by $4,981 and $5,084 during the years ended
December 31, 2010 and 2009, respectively to reflect the
amortization of the fair value of the stock options and RSUs.
This increase included $153 and $218 of expense related to
features of the employee stock purchase plan (see Note 19).
Comprehensive
income (loss)
Comprehensive income (loss), which is displayed in the
consolidated statements of stockholders equity, represents
net income (loss) plus the results of certain stockholders
equity changes not reflected in the consolidated statements of
operations.
The after-tax components of accumulated other comprehensive
income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net income (loss)
|
|
$
|
(19,847
|
)
|
|
$
|
16,011
|
|
|
$
|
10,656
|
|
Foreign currency translation gain (loss)
|
|
|
2,619
|
|
|
|
4,773
|
|
|
|
(9,989
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
(17,228
|
)
|
|
$
|
20,784
|
|
|
$
|
667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The exchange rates used in the translation of amounts into
U.S. dollars are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Canadian Dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of operations
|
|
$
|
0.99
|
|
|
$
|
0.88
|
|
|
$
|
0.95
|
|
Balance sheet
|
|
|
1.01
|
|
|
|
0.95
|
|
|
|
0.82
|
|
British Pounds
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of operations
|
|
$
|
1.54
|
|
|
$
|
1.56
|
|
|
$
|
1.85
|
|
Balance sheet
|
|
|
1.57
|
|
|
|
1.61
|
|
|
|
1.44
|
|
Australian Dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of operations
|
|
$
|
0.96
|
|
|
$
|
0.90
|
|
|
$
|
|
|
Balance sheet
|
|
|
1.02
|
|
|
|
0.90
|
|
|
|
|
|
The rate used to translate asset and liability accounts is the
exchange rate in effect at the balance sheet date. The rate used
to translate statement of operations accounts is the weighted
average exchange rate in effect during the period.
Dividends
The Company does not currently pay dividends on its common
shares and there are no preferred shares outstanding.
|
|
16.
|
Financial
instruments with off-balance sheet risk
|
In the normal course of business, the Company purchases and
sells securities as both principal and agent. If another party
to the transaction fails to fulfill its contractual obligation,
the Company may incur a loss if the market value of the security
is different from the contract amount of the transaction.
F-26
Penson
Worldwide, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
The Company deposits customers margin account securities
with lending institutions as collateral for borrowings. If a
lending institution does not return a security, the Company may
be obligated to purchase the security in order to return it to
the customer. In such circumstances, the Company may incur a
loss equal to the amount by which the market value of the
security on the date of nonperformance exceeds the value of the
loan from the institution.
In the event a customer fails to satisfy its obligations, the
Company may be required to purchase or sell financial
instruments at prevailing market prices to fulfill the
customers obligations. The Company seeks to control the
risks associated with its customer activities by requiring
customers to maintain margin collateral in compliance with
various regulatory and internal guidelines. The Company monitors
required margin levels on an
intra-day
basis and, pursuant to such guidelines, requires customers to
deposit additional collateral or to reduce positions when
necessary. Although the Company monitors margin balances on an
intra-day
basis in order to control our risk exposure, the Company is not
able to eliminate all risks associated with margin lending.
Securities purchased under agreements to resell are
collateralized by U.S. government or
U.S. government-guaranteed securities. Such transactions
may expose the Company to off-balance-sheet risk in the event
such borrowers do not repay the loans and the value of
collateral held is less than that of the underlying contract
amount. A similar risk exists on Canadian government securities
purchased under agreements to resell that are a part of other
assets. These agreements provide the Company with the right to
maintain the relationship between market value of the collateral
and the contract amount of the receivable.
The Companys policy is to regularly monitor its market
exposure and counterparty risk. The Company does not anticipate
nonperformance by counterparties and maintains a policy of
reviewing the credit standing of all parties, including
customers, with which it conducts business.
For customers introduced on a fully-disclosed basis by other
broker-dealers, the Company has the contractual right of
recovery from such introducing broker-dealers in the event of
nonperformance by the customer.
In addition, the Company has sold securities that it does not
currently own and will therefore be obligated to purchase such
securities at a future date. The Company has recorded these
obligations in the financial statements at December 31,
2010, at fair values of the related securities and may incur a
loss if the fair value of the securities increases subsequent to
December 31, 2010.
|
|
17.
|
Related
party transactions
|
The Companys chairman, Mr. Engemoen, is a significant
stockholder (directly or indirectly) in, and serves as the
Chairman of the Board for, SAMCO Holdings, Inc.
(SAMCO), which owns all of the outstanding stock or
equity interests, as applicable, of each of SAMCO Financial
Services, Inc. (SAMCO Financial), SAMCO Capital
Markets, Inc. (SAMCO Capital Markets), and SAMCO-BD,
LLC (SAMCO-BD). SAMCO and its affiliated entities
are referred to as the SAMCO Entities. The Company
currently provides technology support and other similar services
to SAMCO and provides clearing services, including margin
lending, to the customers of SAMCO Capital Markets. The Company
had provided clearing and margin lending services to customers
of SAMCO Financial prior to SAMCO Financials termination
of its broker-dealer status on December 31, 2006.
On July 18, 2006, three claimants filed separate
arbitration claims with the NASD (which is now known as FINRA)
against PFSI related to the sale of certain collateralized
mortgage obligations by SAMCO Financial Services, Inc.
(SAMCO Financial) to its customers. In the ensuing
months, additional arbitration claims were filed against PFSI
and certain of our directors and officers based upon
substantially similar underlying facts. These claims generally
allege, among other things, that SAMCO Financial, in its
capacity as broker, and PFSI, in its capacity as the clearing
broker, failed to adequately supervise certain registered
representatives of SAMCO Financial, and otherwise acted
improperly in connection with the sale of these securities
during the time period from approximately June 2004 to May 2006.
Claimants have generally requested compensation for losses
incurred through the depreciation in market value or liquidation
of the collateralized mortgage obligations, interest on any
F-27
Penson
Worldwide, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
losses suffered, punitive damages, court costs and
attorneys fees. In addition to the arbitration claims, on
March 21, 2008, Ward Insurance Company, Inc., et al, filed
a claim against PFSI and Roger J. Engemoen, Jr., the
Companys Chairman of the Board, in the Superior Court of
California, County of San Diego, Central District, based
upon substantially similar facts. The Company has now settled,
or agreed in principle to settle, all claims with respect to
this matter of which the Company is aware. No further claims
based on this matter are expected at this time.
Mr. Engemoen, the Companys Chairman of the Board, is
the Chairman of the Board, and beneficially owns approximately
52% of the outstanding stock, of SAMCO Holdings, Inc., the
holding company of SAMCO Financial and SAMCO Capital Markets,
Inc. (SAMCO Holdings, Inc. and its affiliated companies are
referred to as the SAMCO Entities). Certain of the
SAMCO Entities received certain assets from the Company when
those assets were split-off immediately prior to the
Companys initial public offering in 2006 (the
Split-Off). In connection with the Split-Off and
through contractual and other arrangements, certain of the SAMCO
Entities have agreed to indemnify the Company and its affiliates
against liabilities that were incurred by any of the SAMCO
Entities in connection with the operation of their businesses,
either prior to or following the Split-Off. During the third
quarter of 2008, the Companys management determined that,
based on the financial condition of the SAMCO Entities,
sufficient risk existed with respect to the indemnification
protections to warrant a modification of these arrangements with
the SAMCO Entities, as described below.
On November 5, 2008, the Company entered into a settlement
agreement with certain of the SAMCO Entities pursuant to which
the Company received a limited personal guaranty from
Mr. Engemoen of certain of the indemnification obligations
of various SAMCO Entities with respect to claims related to the
underlying facts described above, and, in exchange, the Company
agreed to limit the aggregate indemnification obligations of the
SAMCO Entities with respect to certain matters described above
to $2,965. Unpaid indemnification obligations of $800 were
satisfied prior to February 15, 2009. Of the $800
obligation, $86 was satisfied through a setoff against an
obligation owed to the SAMCO Entities by PFSI, with the balance
paid in cash by December 31, 2009. Effective as of
December 31, 2009, the Company and the SAMCO entities
entered into an amendment to the settlement agreement, whereby
SAMCO Holdings, Inc. agreed to pay an additional $133 on the
last business day of each of the first six calendar months of
2010 (a total of $800). SAMCO Holdings, Inc. fully satisfied its
obligations under the amendment. The SAMCO Entities remain
responsible for the payment of their own defense costs and any
claims from any third parties not expressly released under the
settlement agreement, irrespective of amounts paid to indemnify
the Company. The settlement agreement only relates to the
matters described above and does not alter the indemnification
obligations of the SAMCO Entities with respect to unrelated
matters.
To account for liabilities related to the aforementioned claims
that may be borne by the Company, a pre-tax charge of $2,350 was
recorded in the third quarter of 2008 and $1.0 million in
the second quarter of 2010. The Company does not anticipate
further liabilities with respect to this matter.
In the general course of business, the Company and certain of
its officers have been named as defendants in other various
pending lawsuits and arbitration and regulatory proceedings.
These other claims allege violation of federal and state
securities laws, among other matters. The Company believes that
resolution of these claims will not result in any material
adverse effect on its business, financial condition, or results
of operation.
Technology support and similar services are provided to SAMCO
pursuant to the terms of a Transition Services Agreement entered
into between the Company and SAMCO on May 16, 2006. That
agreement was entered into at arms length and the Company
believes it to be on market terms. Clearing services are
provided to SAMCO Capital Markets pursuant to the terms of a
clearing agreement entered into between the Company and SAMCO
Capital Markets on May 19, 2005, as amended effective
December 31, 2009. That agreement, as amended, was also
entered into at arms length and is similar to clearing
agreements the Company enters into from time to time with other
similarly situated correspondents. The Company believes the
terms to be no more favorable to SAMCO Capital Markets than what
the Company would offer similarly situated correspondents. In
2009 the Company generated $105 in revenue from providing
technology support and similar services to SAMCO and
approximately $241 in revenue from the Companys clearing
relationship with SAMCO Capital Markets.
F-28
Penson
Worldwide, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
The Company sublets space to SAMCO Capital Markets at the
Companys principal offices at 1700 Pacific Avenue in
Dallas, Texas and at One Penn Plaza, in New York, NY. For each
sublease, SAMCO Capital Markets is required to pay the
percentage of the rental expense the Company incurs equal to the
percentage of space SAMCO Capital Markets occupies. The Company
believes each sublease to be on market terms. In 2010, for
occupying the 20th floor of the Companys Dallas
office, SAMCO Capital Markets made payments totaling $122 the
landlord of that property. For occupying a portion of
Suite 5120 in the Companys New York office, SAMCO
Capital Markets made payments totaling $169 to the landlord of
that property.
Mr. Thomas R. Johnson, a member of the Companys Board
of Directors, is also a member of the board of directors and the
President, CEO and a stockholder of Call Now, Inc. (Call
Now), a publicly traded company. Over the past several
years, the Company has, through PFSI, its U.S. securities
clearing broker-dealer subsidiary, extended margin credit to
Call Now, among other of the Companys related parties.
Such credit has been extended in the ordinary course of
business, on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for
comparable transactions with unaffiliated third parties and had
not involved more than normal risk of collectability or
presented other unfavorable features.
The Companys management recently determined that certain
municipal bonds underlying Call Nows margin position had
suffered reduced liquidity, and began working with Call Now to
restructure the margin loan. As part of the restructuring, on
February 25, 2010, Call Now converted $13,922 of its
outstanding margin loan into a Promissory Note in favor of the
Company accumulating interest at a rate of 10% per year. On
September, 16, 2010 the Promissory Note was amended and restated
to reflect an additional temporary advance of $400 and certain
changes consequent upon such advance. The additional advance was
repaid on November 12, 2010, together with certain
additional prepayments of principal and accrued interest in an
aggregate amount of $1,006. The outstanding principal amount of
the Promissory Note as of December 31, 2010, was $13,322
and the largest balance that Call Now has owed under the
Promissory Note, including accrued interest, was $15,330. While
the Companys management anticipates that all amounts
currently due under the Promissory Note will be collected
pursuant to the terms of the Promissory Note, effective
January 1, 2011, management has determined to record
interest income from Call Now obligations only on interest
payments received. The unpaid principal balance of the
Promissory Note, together with all accrued and unpaid interest,
is due no later than February 25, 2012. Should Call Now
default on its obligations under the Promissory Note, the
Company may declare the principal balance together with all
accrued and unpaid interest to be immediately due and payable.
In connection with the Promissory Note, Call Now has assigned to
the Company certain of its economic interests and in connection
with the Promissory Note, pledged its interest in certain
partnerships together with all assets held in the Call Now
margin account to serve as additional collateral securing the
loan. Mr. Thomas Johnson has no interest in the Call Now
margin account or the Promissory Note, except to the extent of
his approximately 4.7% ownership interest in Call Now.
Mr. Johnson abstained from voting on all matters on behalf
of the Company.
Effective September 1, 2010, we entered into a consulting
agreement with Holland Consulting, LLC, a company controlled by
our former president, Mr. Daniel P. Son. The consulting
agreement was filed as Exhibit 10.2 to
Form 10-Q,
which was filed with the Securities and Exchange Commission on
November 9, 2010. Pursuant to the terms of the consulting
agreement, Mr. Son will provide consulting services through
December 31, 2012, at a rate of approximately $15 per
month. We believe we entered into the consulting agreement on
market terms, given Mr. Sons expertise in our
industry and his knowledge of our companys operations. In
2010, the Company paid approximately $58 to Holland Consulting,
LLC for consulting services rendered by Mr. Son.
|
|
18.
|
Employee
benefit plan
|
The Company sponsors a defined contribution 401(k) employee
benefit plan (the Plan) that covers substantially
all U.S. employees. Under the Plan, the Company may make a
discretionary contribution. All U.S. employees are eligible
to participate in the Plan, based on meeting certain age and
term of employment
F-29
Penson
Worldwide, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
requirements. The Company contributed approximately $2,020,
$1,963 and $1,278 during 2010, 2009 and 2008, respectively.
|
|
19.
|
Stock-based
compensation
|
The Company grants awards of stock options and restricted stock
units (RSUs) under the Amended and Restated 2000
Stock Incentive Plan, as amended in May 2009 (the 2000
Stock Incentive Plan), under which 4,722 shares of
common stock have been authorized for issuance. Of this amount,
options and RSUs to purchase 2,281 shares of common stock,
net of forfeitures have been granted and 2,441 shares
remain available for future grants at December 31, 2010.
The Company also provides an employee stock purchase plan
(ESPP).
The 2000 Stock Incentive Plan includes three separate programs:
(1) the discretionary option grant program under which
eligible individuals in the Companys employ or service
(including officers, non-employee board members and consultants)
may be granted options to purchase shares of common stock of the
Company; (2) the stock issuance program under which such
individuals may be issued shares of common stock directly or
stock awards that vest over time, through the purchase of such
shares or as a bonus tied to the performance of services; and
(3) the automatic grant program under which grants will
automatically be made at periodic intervals to eligible
non-employee board members. The Companys Board of
Directors or its Compensation Committee may amend or modify the
2000 Stock Incentive Plan at any time, subject to any required
stockholder approval.
Stock
options
During 2010, 2009 and 2008 the Company did not grant any stock
options to employees.
The Company recorded compensation expense relating to options of
approximately $501, $1,197 and $1,521 during the years ended
December 31, 2010, 2009 and 2008, respectively.
A summary of the Companys stock option activity is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Intrinsic
|
|
|
|
Number of
|
|
|
Average
|
|
|
Contractual
|
|
|
Value of In-the
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Term
|
|
|
Money Options
|
|
|
|
|
|
|
(In whole dollars)
|
|
|
(In years)
|
|
|
|
|
|
Outstanding, December 31, 2007
|
|
|
1,169
|
|
|
$
|
17.10
|
|
|
|
5.79
|
|
|
$
|
946
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(36
|
)
|
|
|
4.72
|
|
|
|
|
|
|
|
|
|
Forfeited, cancelled or expired
|
|
|
(105
|
)
|
|
|
18.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2008
|
|
|
1,028
|
|
|
$
|
17.35
|
|
|
|
4.78
|
|
|
$
|
206
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited, cancelled or expired
|
|
|
(96
|
)
|
|
|
19.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2009
|
|
|
932
|
|
|
$
|
17.13
|
|
|
|
3.91
|
|
|
$
|
290
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(21
|
)
|
|
|
4.22
|
|
|
|
|
|
|
|
|
|
Forfeited, cancelled or expired
|
|
|
(144
|
)
|
|
|
17.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2010
|
|
|
767
|
|
|
$
|
17.36
|
|
|
|
3.05
|
|
|
$
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2010
|
|
|
757
|
|
|
$
|
17.31
|
|
|
|
3.04
|
|
|
$
|
34
|
|
F-30
Penson
Worldwide, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
The aggregate intrinsic value of the options exercised during
the years ended December 31, 2010, 2009 and 2008 was $100,
$0 and $367. At December 31, 2010 and 2009 2008, the
Company had approximately $49 and $492 of total unrecognized
compensation expense, net of estimated forfeitures, related to
stock option plans that will be recognized over the weighted
average period of .51 and .81 years, respectively. Cash
received from stock option exercises totaled approximately $88,
$0 and $168 during the years ended December 31, 2010, 2009
and 2008, respectively.
Restricted
stock units
A summary of the Companys Restricted Stock Unit activity
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Units
|
|
|
Fair Value
|
|
|
Term
|
|
|
Value
|
|
|
|
|
|
|
(In whole dollars)
|
|
|
(In years)
|
|
|
|
|
|
Outstanding, December 31, 2007
|
|
|
390
|
|
|
$
|
17.39
|
|
|
|
2.6
|
|
|
$
|
5,596
|
|
Granted
|
|
|
599
|
|
|
|
10.07
|
|
|
|
|
|
|
|
|
|
Vested and issued
|
|
|
(188
|
)
|
|
|
15.22
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(52
|
)
|
|
|
17.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2008
|
|
|
749
|
|
|
$
|
12.06
|
|
|
|
2.9
|
|
|
$
|
5,704
|
|
Granted
|
|
|
207
|
|
|
|
6.72
|
|
|
|
|
|
|
|
|
|
Vested and issued
|
|
|
(275
|
)
|
|
|
12.76
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(107
|
)
|
|
|
10.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2009
|
|
|
574
|
|
|
$
|
10.17
|
|
|
|
2.4
|
|
|
$
|
5,202
|
|
Granted
|
|
|
407
|
|
|
|
8.32
|
|
|
|
|
|
|
|
|
|
Vested and issued
|
|
|
(441
|
)
|
|
|
9.92
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(119
|
)
|
|
|
9.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2010
|
|
|
421
|
|
|
$
|
8.83
|
|
|
|
2.1
|
|
|
$
|
2,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded compensation expense relating to restricted
stock units of approximately $4,166, $3,672 and $2,818 during
the years ended December 31, 2010, 2009 and 2008,
respectively. There is approximately $3,118 and $4,806 of
unamortized compensation expense, net of estimated forfeitures,
related to unvested restricted stock units outstanding at
December 31, 2010 and 2009, respectively.
Employee
stock purchase plan
In July 2005, the Companys Board of Directors adopted the
ESPP, designed to allow eligible employees of the Company to
purchase shares of common stock, at semiannual intervals,
through periodic payroll deductions. A total of 313 shares
of common stock were initially reserved under the ESPP. The
share reserve will automatically increase on the first trading
day of January each calendar year, beginning in calendar year
2007, by an amount equal to 1% of the total number of
outstanding shares of common stock on the last trading day in
December in the prior calendar year. Under the current plan, no
such annual increase may exceed 63 shares.
The ESPP may have a series of offering periods, each with a
maximum duration of 24 months. Offering periods will begin
at semi-annual intervals as determined by the plan
administrator. Individuals regularly expected to work more than
20 hours per week for more than five calendar months per
year may join an offering period on the start date of that
period. However, employees may participate in only one offering
period at a time. Participants may contribute 1% to 15% of their
annual compensation through payroll deductions, and the
accumulated deductions will be applied to the purchase of shares
on each semi-annual purchase date. The purchase price per share
shall be
F-31
Penson
Worldwide, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
determined by the plan administrator at the start of each
offering period and shall not be less than 85% of the lower of
the fair market value per share on the start date of the
offering period in which the participant is enrolled or the fair
market value per share on the semi-annual purchase date. The
plan administrator shall have the discretionary authority to
establish the maximum number of shares of common stock
purchasable per participant and in total by all participants in
that particular offering period. The Companys Board of
Directors or its Compensation Committee may amend, suspend or
terminate the ESPP at any time, and the ESPP will terminate no
later than the last business day of June 2015. As of
December 31, 2010, 563 shares of common stock had been
reserved and 496 shares of common stock had been purchased
by employees pursuant to the ESPP plan. The Company recognized
expense of $153, $218 and $184 for the years ended
December 31, 2010, 2009 and 2008, respectively.
Other
In connection with severance payments made to two senior
executives, 30 shares of PWI common stock were issued
resulting in stock-based compensation expense of $166 for the
year ended December 31, 2010.
|
|
20.
|
Commitments
and contingencies
|
The Company has obligations under capital and operating leases
with initial noncancelable terms in excess of one year. Minimum
non-cancelable lease payments required under operating and
capital leases for the years subsequent to December 31,
2010, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Operating
|
|
|
|
Leases
|
|
|
Leases
|
|
|
2011
|
|
$
|
5,425
|
|
|
$
|
5,702
|
|
2012
|
|
|
2,143
|
|
|
|
4,738
|
|
2013
|
|
|
496
|
|
|
|
4,030
|
|
2014
|
|
|
|
|
|
|
2,833
|
|
2015
|
|
|
|
|
|
|
2,412
|
|
2016 and thereafter
|
|
|
|
|
|
|
4,311
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,064
|
|
|
$
|
24,026
|
|
|
|
|
|
|
|
|
|
|
The Company has recorded assets under capital leases, included
in property and equipment in the consolidated statements of
financial condition, with net balances of $7,049 of equipment
and $1,047 of software at December 31, 2010 and $5,914 of
equipment and $1,946 of software at December 31, 2009. The
related capital lease obligations are included in accounts
payable, accrued and other liabilities on the consolidated
statements of financial condition.
Rent expense for the years ended December 31, 2010, 2009
and 2008 was $7,443, $6,325 and $5,838, respectively.
From time to time, we are involved in other legal proceedings
arising in the ordinary course of business relating to matters
including, but not limited to, our role as clearing broker for
our correspondents. In some instances, but not all, where we are
named in arbitration proceedings solely in our role as the
clearing broker for our correspondents, we are able to pass
through expenses related to the arbitration to the correspondent
involved in the arbitration (see Note 17).
Under its bylaws, the Company has agreed to indemnify its
officers and directors for certain events or occurrences arising
as a result of the officer or directors serving in such
capacity. The Company has entered into indemnification
agreements with each of its directors that require us to
indemnify our directors to the extent permitted under our bylaws
and applicable law. Although management is not aware of any
claims, the maximum potential amount of future payments the
Company could be required to make under these indemnification
agreements is unlimited. However, the Company has a directors
and officer liability insurance policy that limits
F-32
Penson
Worldwide, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
its exposure and enables it to recover a portion of any future
amounts paid. As a result of its insurance policy coverage, the
Company believes the estimated fair value of these
indemnification agreements is minimal and has no liabilities
recorded for these agreements as of December 31, 2010.
Income (loss) before income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Income (loss) before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
(30,398
|
)
|
|
$
|
14,975
|
|
|
$
|
25,993
|
|
Non-U.S.
|
|
|
1,182
|
|
|
|
10,861
|
|
|
|
(9,344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(29,216
|
)
|
|
$
|
25,836
|
|
|
$
|
16,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for (benefit from) income taxes consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(9,196
|
)
|
|
$
|
1,125
|
|
|
$
|
8,804
|
|
State
|
|
|
1,054
|
|
|
|
354
|
|
|
|
617
|
|
Non-U.S.
|
|
|
(634
|
)
|
|
|
3,215
|
|
|
|
(4,405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,776
|
)
|
|
|
4,694
|
|
|
|
5,016
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(995
|
)
|
|
$
|
4,557
|
|
|
$
|
930
|
|
State
|
|
|
(66
|
)
|
|
|
543
|
|
|
|
110
|
|
Non-U.S.
|
|
|
468
|
|
|
|
31
|
|
|
|
(63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(593
|
)
|
|
|
5,131
|
|
|
|
977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(9,369
|
)
|
|
$
|
9,825
|
|
|
$
|
5,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The differences in income tax provided and the amounts
determined by applying the statutory rate to income (loss)
before income taxes results from the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Federal statutory income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Lower tax rates applicable to
non-U.S.
earnings
|
|
|
2.0
|
|
|
|
(2.1
|
)
|
|
|
(2.4
|
)
|
International trade tax credit
|
|
|
1.6
|
|
|
|
|
|
|
|
(4.8
|
)
|
State and local income taxes, net of U.S. federal income tax
benefits
|
|
|
(2.2
|
)
|
|
|
2.3
|
|
|
|
5.2
|
|
Stock-based compensation
|
|
|
(3.1
|
)
|
|
|
2.2
|
|
|
|
3.4
|
|
Other, net
|
|
|
(1.2
|
)
|
|
|
0.6
|
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32.1
|
%
|
|
|
38.0
|
%
|
|
|
36.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred taxes are determined based on temporary differences
between the financial statement and income tax bases of assets
and liabilities as measured by the enacted tax rates, which will
be in effect when these differences reverse. Valuation
allowances recorded on the balance sheet dates are necessary in
cases where management
F-33
Penson
Worldwide, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
believes that it is more likely than not that some portion or
all of the deferred tax assets will not be realized. As of
December 31, 2010, the Company had a federal net operating
loss of $24,835, all of which may be carried back to recover
taxes paid in 2008 and 2009. The Company also has state net
operating loss carry forwards and loss carry forwards in certain
foreign jurisdictions as of December 31, 2010. Management
has determined that a valuation allowance of $1,275 and $0 was
necessary at December 31, 2010 and 2009, respectively. The
Company expects that certain timing differences will be
reversing in the future which will further limit
U.S. federal income taxes expected to be paid. Deferred
taxes are included in accounts payable, accrued and other
liabilities as of December 31, 2010 and 2009.
Deferred
income taxes consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Current deferred taxes:
|
|
|
|
|
|
|
|
|
Bad debt allowance
|
|
$
|
3,495
|
|
|
$
|
2,158
|
|
Accrued expenses
|
|
|
2,291
|
|
|
|
|
|
Prepaid assets
|
|
|
(751
|
)
|
|
|
(690
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,035
|
|
|
$
|
1,468
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred taxes:
|
|
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
$
|
1,275
|
|
|
$
|
|
|
Fixed asset basis differences
|
|
|
(4,656
|
)
|
|
|
(2,890
|
)
|
Intangible assets
|
|
|
(5,865
|
)
|
|
|
(3,155
|
)
|
Stock-based compensation
|
|
|
2,046
|
|
|
|
1,824
|
|
Equity component of the conversion feature attributable to
senior convertible notes
|
|
|
(4,103
|
)
|
|
|
(4,968
|
)
|
Other
|
|
|
278
|
|
|
|
(137
|
)
|
Valuation allowance
|
|
|
(1,275
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(12,300
|
)
|
|
$
|
(9,326
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(7,265
|
)
|
|
$
|
(7,858
|
)
|
|
|
|
|
|
|
|
|
|
The Company and its subsidiaries file income tax returns in the
U.S. federal jurisdiction, and various states and foreign
jurisdictions. With limited exceptions, the Company is no longer
subject to U.S. federal, state and local, or
non-U.S. income
tax examinations by tax authorities for years before 2005. The
Company does not anticipate the results of any open examinations
would result in a material change to its financial position.
F-34
Penson
Worldwide, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
The Company adopted the amended provisions of ASC Topic 740,
Income Taxes, on January 1, 2007. As a result of the
implementation, the Company recognized a $580 increase to
liabilities for uncertain tax positions. This increase was
accounted for as a cumulative adjustment to retained earnings on
the consolidated statements of financial condition. A
reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:
|
|
|
|
|
Balance at December 31, 2007
|
|
|
826
|
|
Additions based on tax positions related to the current year
|
|
|
657
|
|
Reductions for tax positions of prior years
|
|
|
(526
|
)
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
957
|
|
Additions based on tax positions related to the current year
|
|
|
230
|
|
Reductions for tax positions of prior years
|
|
|
(191
|
)
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
996
|
|
Additions based on tax positions related to the current year
|
|
|
79
|
|
Additions for tax positions of prior years
|
|
|
148
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
1,223
|
|
|
|
|
|
|
The Company recognizes accrued interest and penalties related to
unrecognized tax benefits in income taxes. The Company
recognized penalties and interest of approximately $161, $83 and
$111 respectively, for the years ended December 31, 2010,
2009 and 2008 and had accrued approximately $564 and $403 for
the payment of penalties and interest at December 31, 2009
and 2008, respectively. The reserves for uncertain tax positions
are included in accounts payable, accrued and other liabilities
as of December 31, 2010 and 2009.
The Company is organized into operating segments based on
geographic regions. These operating segments have been
aggregated into three reportable segments; United States, Canada
and Other. The Company evaluates the performance of its
operating segments based upon operating income (loss) before
unusual and non-recurring items. The following table summarizes
selected financial information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
|
|
|
|
|
|
|
December 31, 2010
|
|
States
|
|
Canada
|
|
Other
|
|
Consolidated
|
|
Revenues
|
|
$
|
244,959
|
|
|
$
|
46,412
|
|
|
$
|
19,246
|
|
|
$
|
310,617
|
|
Interest, net
|
|
|
62,553
|
|
|
|
4,092
|
|
|
|
1,854
|
|
|
|
68,499
|
|
Income (loss) before tax
|
|
|
(30,398
|
)
|
|
|
2,043
|
|
|
|
(861
|
)
|
|
|
(29,216
|
)
|
Net income (loss)
|
|
|
(21,194
|
)
|
|
|
2,505
|
|
|
|
(1,158
|
)
|
|
|
(19,847
|
)
|
Segment assets
|
|
|
8,474,114
|
|
|
|
1,481,780
|
|
|
|
298,290
|
|
|
|
10,254,184
|
|
Goodwill and intangibles
|
|
|
177,307
|
|
|
|
538
|
|
|
|
1,219
|
|
|
|
179,064
|
|
Capital expenditures
|
|
|
14,104
|
|
|
|
5,219
|
|
|
|
1,036
|
|
|
|
20,359
|
|
Depreciation and amortization
|
|
|
14,589
|
|
|
|
1,444
|
|
|
|
1,509
|
|
|
|
17,542
|
|
Amortization of intangibles
|
|
|
3,232
|
|
|
|
|
|
|
|
15
|
|
|
|
3,247
|
|
F-35
Penson
Worldwide, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
|
|
|
|
|
|
|
December 31, 2009
|
|
States
|
|
Canada
|
|
Other
|
|
Consolidated
|
|
Revenues
|
|
$
|
260,064
|
|
|
$
|
52,404
|
|
|
$
|
11,692
|
|
|
$
|
324,160
|
|
Interest, net
|
|
|
60,710
|
|
|
|
3,649
|
|
|
|
1,581
|
|
|
|
65,940
|
|
Income before tax
|
|
|
14,975
|
|
|
|
10,442
|
|
|
|
419
|
|
|
|
25,836
|
|
Net income
|
|
|
8,396
|
|
|
|
7,285
|
|
|
|
330
|
|
|
|
16,011
|
|
Segment assets
|
|
|
5,918,739
|
|
|
|
1,122,703
|
|
|
|
209,633
|
|
|
|
7,251,075
|
|
Goodwill and intangibles
|
|
|
131,715
|
|
|
|
538
|
|
|
|
312
|
|
|
|
132,565
|
|
Capital expenditures
|
|
|
18,435
|
|
|
|
1,272
|
|
|
|
2,034
|
|
|
|
21,741
|
|
Depreciation and amortization
|
|
|
13,346
|
|
|
|
1,120
|
|
|
|
1,556
|
|
|
|
16,022
|
|
Amortization of intangibles
|
|
|
3,136
|
|
|
|
|
|
|
|
|
|
|
|
3,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
|
|
|
|
|
|
|
December 31, 2008
|
|
States
|
|
Canada
|
|
Other
|
|
Consolidated
|
|
Revenues
|
|
$
|
291,643
|
|
|
$
|
71,302
|
|
|
$
|
20,924
|
|
|
$
|
383,869
|
|
Interest, net
|
|
|
61,535
|
|
|
|
11,365
|
|
|
|
2,158
|
|
|
|
75,058
|
|
Income (loss) before tax
|
|
|
25,993
|
|
|
|
(9,554
|
)
|
|
|
210
|
|
|
|
16,649
|
|
Net income (loss)
|
|
|
15,532
|
|
|
|
(4,964
|
)
|
|
|
88
|
|
|
|
10,656
|
|
Segment assets
|
|
|
4,610,951
|
|
|
|
607,500
|
|
|
|
320,744
|
|
|
|
5,539,195
|
|
Goodwill and intangibles
|
|
|
116,915
|
|
|
|
538
|
|
|
|
312
|
|
|
|
117,765
|
|
Capital expenditures
|
|
|
14,803
|
|
|
|
1,130
|
|
|
|
3,098
|
|
|
|
19,031
|
|
Depreciation and amortization
|
|
|
13,265
|
|
|
|
1,536
|
|
|
|
1,314
|
|
|
|
16,115
|
|
Amortization of intangibles
|
|
|
4,121
|
|
|
|
11
|
|
|
|
|
|
|
|
4,132
|
|
|
|
23.
|
Regulatory
requirements
|
PFSI is subject to the SEC Uniform Net Capital Rule
(Rule 15c3-1),
which requires the maintenance of minimum net capital. PFSI
elected to use the alternative method, permitted by
Rule 15c3-1,
which requires that PFSI maintain minimum net capital, as
defined, equal to the greater of $250 or 2% of aggregate debit
balances, as defined in the SECs Reserve Requirement Rule
(Rule 15c3-3).
At December 31, 2010, PFSI had net capital of $139,495, and
was $96,493 in excess of its required net capital of $43,002. At
December 31, 2009, PFSI had net capital of $94,738, and was
$70,417 in excess of its required net capital of $24,321.
The Companys Penson Futures, PFSL, PFSC and PFSA
subsidiaries are also subject to minimum financial and capital
requirements. All subsidiaries were in compliance with their
minimum financial and capital requirements as of
December 31, 2010.
The regulatory rules referred to above may restrict the
Companys ability to withdraw capital from its regulated
subsidiaries, which in turn could limit the Subsidiaries
ability to pay dividends and the Companys ability to
satisfy its debt obligations. PFSC, PFSL and PFSA are subject to
regulatory requirements in their respective countries which also
limit the amount of dividends that they may be able to pay to
their parent. The Company has no current plans to seek any
dividends from these entities.
The Company is required to disclose information about its
obligations under certain guarantee arrangements. Guarantees are
defined as contracts and indemnification agreements that
contingently require a guarantor to make payments for the
guaranteed party based on changes in an underlying (such as an
interest or foreign exchange rate, security or commodity price,
an index or the occurrence or non-occurrence of a specified
event) asset, liability, or
F-36
Penson
Worldwide, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
equity security of a guaranteed party. They are further defined
as contracts that contingently require the guarantor to make
payments to the guaranteed party based on another entitys
failure to perform under an agreement as well as indirect
guarantees of the indebtedness of others.
The Company is a member of various exchanges that trade and
clear securities, futures and commodities. Associated with its
membership, the Company may be required to pay a proportionate
share of the financial obligations of another member who may
default on its obligations to the exchange. While the rules
governing different exchange memberships vary, in general the
Companys guarantee obligations would arise only if the
exchange had previously exhausted its resources. In addition,
any such guarantee obligation would be apportioned among the
other non-defaulting members of the exchange. Any potential
contingent liability under these membership agreements cannot be
estimated. Prior to making such an estimate, the Company would
be required to know the size of the member company that would
experience financial difficulty as well as the amount of
recovery that could be expected from the exchange as well as the
other member firms of the exchange. Accordingly, the Company has
not recorded any liability in the consolidated financial
statements for these agreements and believes that any potential
requirement to make payments under these agreements is remote.
|
|
25.
|
Vendor
related asset impairment
|
In re Sentinel Management Group, Inc. is a
Chapter 11 bankruptcy case filed on August 17, 2007 in
the U.S. Bankruptcy Court for the Northern District of
Illinois by Sentinel. Prior to the filing of this action, Penson
Futures and PFFI held customer segregated accounts with Sentinel
totaling approximately $36,000. Sentinel subsequently sold
certain securities to Citadel Equity Fund, Ltd. and Citadel
Limited Partnership. On August 20, 2007, the Bankruptcy
Court authorized distributions of 95 percent of the
proceeds Sentinel received from the sale of those securities to
certain FCM clients of Sentinel, including Penson Futures and
PFFI. This distribution to the Penson Futures and PFFI customer
segregated accounts along with a distribution received
immediately prior to the bankruptcy filing totaled approximately
$25,400.
On May 12, 2008, a committee of Sentinel creditors,
consisting of a majority of non-FCM creditors, together with the
trustee appointed to manage the affairs and liquidation of
Sentinel (the Sentinel Trustee), filed with the
Court their proposed Plan of Liquidation (the Committee
Plan) and on May 13, 2008 filed a Disclosure
Statement related thereto. The Committee Plan allows the
Sentinel Trustee to seek the return from FCMs, including Penson
Futures and PFFI, of a portion of the funds previously
distributed to their customer segregated accounts. On
June 19, 2008, the Court entered an order approving the
Disclosure Statement over objections by Penson Futures, PFFI and
others. On September 16, 2008, the Sentinel Trustee filed
suit against Penson Futures and PFFI along with several other
FCMs that received distributions to their customer segregated
accounts from Sentinel. The suit against Penson Futures and PFFI
seeks the return of approximately $23,600 of post-bankruptcy
petition transfers and approximately $14,400 of pre-bankruptcy
petition transfers. The suit also seeks to declare that the
funds distributed to the customer segregated accounts of Penson
Futures and PFFI by Sentinel are the property of the Sentinel
bankruptcy estate rather than the property of customers of
Penson Futures and PFFI.
On December 15, 2008, over the objections of Penson Futures
and PFFI, the court entered an order confirming the Committee
Plan, and the Committee Plan became effective on
December 17, 2008. On January 7, 2009 Penson Futures
and PFFI filed their answer and affirmative defenses to the suit
brought by the Sentinel Trustee. Also on January 7, 2009,
Penson Futures, PFFI and a number of other FCMs that had placed
customer funds with Sentinel filed motions with the federal
district court for the Northern District of Illinois,
effectively asking the federal district court to remove the
Sentinel suits against the FCMs from the bankruptcy court and
consolidate them with other Sentinel related actions pending in
the federal district court. On April 8, 2009, the Sentinel
Trustee filed an amended complaint, which added a claim for
unjust enrichment. Following an unsuccessful attempt to dismiss
that claim on September 11, 2009, Penson Futures and PFFI
filed their amended answer and amended affirmative defenses to
the Sentinel Trustees amended complaint. On
October 28, 2009, the federal district court for the
Northern District
F-37
Penson
Worldwide, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
of Illinois granted the motions of Penson Futures, PFFI, and
certain other FCMs requesting removal of the matters
referenced above from the bankruptcy court, thereby removing
these matters to the federal district court.
On February 23, 2011, the federal district court held a
continued status hearing, during which Penson Futures, PFFI and
the Sentinel Trustee agreed that coordinated discovery with
respect to the Sentinel suits against the Company and other FCMs
was still proceeding. No trial date has been set.
In one of the actions brought by the Sentinel Trustee against an
FCM whose customer segregated accounts received similar
distributions to those made to the customer segregated accounts
of Penson Futures and PFFI, the Sentinel Trustee has brought a
motion for summary judgment on certain counts asserted against
such FCM that may implicate the claims brought by the Sentinel
Trustee against the Company. There is no date set for the
resolution of that motion.
The Company believes that the Court was correct in ordering the
prior distributions and Penson Futures and PFFI intend to
continue to vigorously defend their position. However, there can
be no assurance that any actions by Penson Futures or PFFI will
result in a limitation or avoidance of potential repayment
liabilities. In the event that Penson Futures and PFFI are
obligated to return all previously distributed funds to the
Sentinel Estate, any losses the Company might suffer would most
likely be partially mitigated as it is likely that Penson
Futures and PFFI would share in the funds ultimately disbursed
by the Sentinel Estate.
|
|
26.
|
Correspondent
asset loss
|
As reported in October 2008, the Companys Canadian
subsidiary obtained an unsecured receivable as a result of a
number of transactions involving listed Canadian equity
securities by Evergreen Capital Partners Inc.
(Evergreen) on behalf of itself
and/or its
customers, for which Evergreen
and/or its
customers were unable to make payment. Subsequently, Evergreen
ceased operations and filed for bankruptcy protection. The
Company conducted an investigation into the circumstances
surrounding the events that resulted in the unsecured receivable
and retained the services of various professional advisors to
assist in the investigation. PFSC has now obtained from
Evergreens bankruptcy estate an assignment of
Evergreens claims against certain of Evergreens
customers, and in June, 2009, PFSC commenced legal proceedings
against, among others, those customers of Evergreen in an
attempt to recover lost funds.
In connection with the Companys preparation of its 2008
consolidated financial statements, the Companys
management, after consultation with the Companys Board of
Directors and outside advisors, concluded that as of
December 31, 2008, a significant amount of the receivable
was not recoverable and recorded a charge of approximately
$26,400, net of estimated recoveries and professional fees. The
Company is continuing to explore ways to further recover amounts
associated with this charge and, other than recurring
professional fees, does not anticipate incurring any additional
losses relative to this matter.
|
|
27.
|
Stock
repurchase program
|
On July 3, 2007, the Companys Board of Directors
authorized the Company to purchase up to $25,000 of its common
stock in open market purchases and privately negotiated
transactions. The repurchase program was completed in October
2007. On December 6, 2007, the Companys Board of
Directors authorized the Company to purchase an additional
$12,500 of its common stock. From December, 2007 through 2008,
the Company repurchased approximately 654 shares at an
average price of $10.32 per share. No shares were repurchased
during the years ended December 31, 2010 and 2009. The
Company had approximately $4,700 available under the current
repurchase program as of December 31, 2010; however, our
Amended and Restated Credit Facility limits our ability to
repurchase our stock.
F-38
Penson
Worldwide, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
In June 2010, in connection with the recently signed outsourcing
agreement with Broadridge, the Company announced a plan to
reduce its headcount across several of its operating
subsidiaries primarily over the next six to 15 months. The
terms of the plan include both severance pay and bonus payments
associated with continuing employment (Stay Pay)
until the respective outsourcing is completed. These payments
will occur at the end of the respective severance periods. In
connection with the severance pay portion of the plan the
Company recorded a severance charge of $2,016 for the year ended
December 31, 2010 of which $1,687 is included in the United
States segment, $140 included in the Canada segment and $189
included in the Other segment. This charge was included in
employee compensation and benefits in the consolidated statement
of operations. The Company estimates that it will incur costs of
$2,141 associated with Stay Pay of which $1,808 is related to
the United States segment, $76 associated with the Canada
segment and $257 related to the Other segment. The Company has
recorded a charge of $864 in connection with the Stay Pay for
the year ended December 31, 2010 of which $723 is
associated with the United States segment, $60 is related to the
Canada segment and $81 is associated with the Other segment.
These charges are being recorded on a straight line basis as the
benefits are earned.
|
|
29.
|
Condensed
financial statements of Penson Worldwide, Inc. (parent
only)
|
Presented below are the Condensed Statements of Financial
Condition, Operations and Cash Flows for the Company on an
unconsolidated basis.
Penson
Worldwide, Inc. (parent only)
Condensed Statements of Financial Condition
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
921
|
|
|
$
|
249
|
|
Receivable from affiliates
|
|
|
237,244
|
|
|
|
202,929
|
|
Property and equipment, net
|
|
|
9,643
|
|
|
|
9,848
|
|
Investment in subsidiaries
|
|
|
243,001
|
|
|
|
234,032
|
|
Other assets
|
|
|
99,057
|
|
|
|
2,990
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
589,866
|
|
|
$
|
450,048
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
259,728
|
|
|
$
|
132,769
|
|
Accounts payable, accrued and other liabilities
|
|
|
29,217
|
|
|
|
18,377
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
288,945
|
|
|
|
151,146
|
|
Total stockholders equity
|
|
|
300,921
|
|
|
|
298,902
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
589,866
|
|
|
$
|
450,048
|
|
|
|
|
|
|
|
|
|
|
F-39
Penson
Worldwide, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
Penson
Worldwide, Inc. (parent only)
Condensed Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Revenues
|
|
$
|
13,562
|
|
|
$
|
5,075
|
|
|
$
|
5,097
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
15,933
|
|
|
|
12,753
|
|
|
|
11,533
|
|
Floor brokerage, exchange and clearance fees
|
|
|
458
|
|
|
|
|
|
|
|
|
|
Communications and data processing
|
|
|
2,131
|
|
|
|
2,562
|
|
|
|
60
|
|
Occupancy and equipment
|
|
|
8,176
|
|
|
|
7,170
|
|
|
|
4,745
|
|
Other expenses
|
|
|
5,157
|
|
|
|
4,522
|
|
|
|
6,562
|
|
Interest expense on long-term debt
|
|
|
30,633
|
|
|
|
10,187
|
|
|
|
3,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,488
|
|
|
|
37,194
|
|
|
|
26,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and equity in earnings of subsidiaries
|
|
|
(48,926
|
)
|
|
|
(32,119
|
)
|
|
|
(21,657
|
)
|
Income tax benefit
|
|
|
(24,418
|
)
|
|
|
(16,182
|
)
|
|
|
(10,669
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before equity in earnings of subsidiaries
|
|
|
(24,508
|
)
|
|
|
(15,937
|
)
|
|
|
(10,988
|
)
|
Equity in earnings of subsidiaries
|
|
|
4,661
|
|
|
|
31,948
|
|
|
|
21,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(19,847
|
)
|
|
$
|
16,011
|
|
|
$
|
10,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-40
Penson
Worldwide, Inc.
Notes to
the Consolidated Financial
Statements (Continued)
Penson
Worldwide, Inc. (parent only)
Condensed Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(19,847
|
)
|
|
$
|
16,011
|
|
|
$
|
10,656
|
|
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
6,825
|
|
|
|
5,376
|
|
|
|
4,722
|
|
Deferred income taxes
|
|
|
(593
|
)
|
|
|
5,131
|
|
|
|
977
|
|
Stock based compensation
|
|
|
4,986
|
|
|
|
5,087
|
|
|
|
4,523
|
|
Debt discount accretion
|
|
|
3,658
|
|
|
|
1,534
|
|
|
|
|
|
Debt issuance costs
|
|
|
1,805
|
|
|
|
882
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net receivable/payable with affiliates
|
|
|
(2,404
|
)
|
|
|
(62,674
|
)
|
|
|
(6,494
|
)
|
Other assets
|
|
|
(26,666
|
)
|
|
|
1,410
|
|
|
|
(2,417
|
)
|
Accounts payable, accrued and other liabilities
|
|
|
8,862
|
|
|
|
4,921
|
|
|
|
(5,695
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(23,374
|
)
|
|
|
(22,322
|
)
|
|
|
6,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment, net
|
|
|
(6,620
|
)
|
|
|
(9,409
|
)
|
|
|
(3,545
|
)
|
Subordinated loan to subsidiary
|
|
|
(70,000
|
)
|
|
|
|
|
|
|
|
|
Increase in investment in subsidiaries
|
|
|
(8,969
|
)
|
|
|
(39,796
|
)
|
|
|
(5,216
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(85,589
|
)
|
|
|
(49,205
|
)
|
|
|
(8,761
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of senior second lien secured
|
|
|
193,294
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of convertible notes
|
|
|
|
|
|
|
56,200
|
|
|
|
|
|
Proceeds from revolving credit facility
|
|
|
31,500
|
|
|
|
50,000
|
|
|
|
20,000
|
|
Repayments of revolving credit facility
|
|
|
(120,000
|
)
|
|
|
(36,500
|
)
|
|
|
|
|
Exercise of stock options
|
|
|
88
|
|
|
|
|
|
|
|
168
|
|
Excess tax benefit on exercise of stock options
|
|
|
48
|
|
|
|
27
|
|
|
|
75
|
|
Purchase of treasury stock
|
|
|
(878
|
)
|
|
|
(676
|
)
|
|
|
(7,431
|
)
|
Issuance of common stock
|
|
|
472
|
|
|
|
656
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
104,524
|
|
|
|
69,707
|
|
|
|
13,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash
|
|
|
5,111
|
|
|
|
2,060
|
|
|
|
(11,326
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
672
|
|
|
|
240
|
|
|
|
(3
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
249
|
|
|
|
9
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
921
|
|
|
$
|
249
|
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest payments
|
|
$
|
21,130
|
|
|
$
|
5,350
|
|
|
$
|
4,265
|
|
Income tax payments
|
|
$
|
1,402
|
|
|
$
|
3,409
|
|
|
$
|
11,762
|
|
Supplemental disclosure of non-cash activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in connection with the Ridge acquisition
|
|
$
|
14,611
|
|
|
$
|
|
|
|
$
|
|
|
F-41
INDEX TO
EXHIBITS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
Filing
|
Exhibit
|
|
Name of Exhibit
|
|
Form
|
|
File Number
|
|
Exhibit
|
|
Date
|
|
|
2
|
.1
|
|
Asset Purchase Agreement by and between SAI Holdings, Inc. and
Schonfeld Securities, LLC, dated as of November 20, 2006
|
|
8-K
|
|
001-32878
|
|
2.1
|
|
11/21/06
|
|
2
|
.2
|
|
Purchase Agreement by and among Goldenberg Hehmeyer &
Co. and Goldenberg LLC, Hehmeyer LLC, GHCO Partners LLC, GH
Traders LLC, each of the Principals listed on the signature
pages thereto and SAI Holdings, Inc., GHP1, Inc., GHP2, LLC and
Christopher Hehmeyer in his capacity as Sellers
Representative
|
|
8-K
|
|
001-32878
|
|
2.1
|
|
11/7/06
|
|
2
|
.3
|
|
Letter Agreement, dated as of October 8, 2007, by and among
SAI Holdings, Inc., Penson Financial Services, Inc., Schonfeld
Group Holdings LLC, Schonfeld Securities, LLC, Opus Trading
Fund LLC and Quantitative Trading Strategies LLC
|
|
8-K
|
|
001-32878
|
|
2.1
|
|
10/12/07
|
|
2
|
.4
|
|
Letter Agreement, dated as of April 22, 2010, by and among
SAI Holdings, Inc., Penson Financial Services, Inc., Schonfeld
Group Holdings LLC, Schonfeld Securities, LLC, and Opus Trading
Fund LLC
|
|
8-K
|
|
001-32878
|
|
2.1
|
|
4/28/10
|
|
2
|
.5*
|
|
Asset Purchase Agreement by and among Penson Worldwide, Inc.,
Penson Financial Services, Inc., Broadridge Financial Solutions,
Inc. and Ridge Clearing & Outsourcing Solutions, Inc.,
dated November 2, 2009
|
|
10-K
|
|
001-32878
|
|
2.4
|
|
3/5/10
|
|
3
|
.1
|
|
Form of Amended and Restated Certificate of Incorporation of
Penson Worldwide, Inc.
|
|
S-1/A
|
|
333-127385
|
|
3.1
|
|
5/1/06
|
|
3
|
.2
|
|
Form of Third Amended and Restated Bylaws of Penson Worldwide,
Inc.
|
|
8-K
|
|
001-32878
|
|
3.2
|
|
6/5/09
|
|
4
|
.1
|
|
Specimen certificate for shares of Common Stock
|
|
S-1
|
|
333-127385
|
|
4.1
|
|
4/24/06
|
|
4
|
.2+
|
|
Amended and Restated Registration Rights Agreement between Roger
J. Engemoen, Jr., Philip A. Pendergraft and Daniel P. Son and
Penson Worldwide, Inc. dated November 30, 2000
|
|
S-1
|
|
333-127385
|
|
4.2
|
|
8/10/05
|
|
4
|
.3
|
|
Indenture, dated June 3, 2009, between Penson Worldwide,
Inc. and U.S. Bank National Association
|
|
8-K
|
|
001-32878
|
|
4.1
|
|
6/5/09
|
|
4
|
.4
|
|
Form of 8.00% Senior Convertible Note due 2014
|
|
8-K
|
|
001-32878
|
|
4.2
|
|
6/5/09
|
|
4
|
.5
|
|
Indenture, dated May 6, 2010, between Penson Worldwide,
Inc. and U.S. Bank National Association
|
|
8-K
|
|
001-32878
|
|
4.1
|
|
5/7/10
|
|
4
|
.6
|
|
Form of 12.5% Senior Second Lien Secured Notes due 2017
|
|
8-K
|
|
001-32878
|
|
4.2
|
|
5/7/10
|
|
10
|
.1+
|
|
Penson Worldwide, Inc. Amended and Restated 2000 Stock Incentive
Plan
|
|
DEF 14A
|
|
001-32878
|
|
Appendix A
|
|
4/8/09
|
|
10
|
.2+
|
|
Penson Worldwide, Inc. 2005 Employee Stock Purchase Plan
|
|
S-1/A
|
|
333-127385
|
|
10.2
|
|
4/24/06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
Filing
|
Exhibit
|
|
Name of Exhibit
|
|
Form
|
|
File Number
|
|
Exhibit
|
|
Date
|
|
|
10
|
.3
|
|
1700 Pacific Avenue Office Lease by and between F/P/D Master
Lease, Inc. and Penson Financial Services, Inc. (f/k/a Service
Asset Management Company) dated May 20, 1998 as amended
July 16, 1998, February 17, 1999, September 20,
1999, November 30, 1999, May 25, 2000 and
January 9, 2001
|
|
S-1
|
|
333-127385
|
|
10.3
|
|
8/10/05
|
|
10
|
.4
|
|
Lease of Premises between Downing Street Holdings (330 Bay St),
Inc. and Penson Financial Services Canada Inc. (one of our
subsidiaries) dated September 17, 2002
|
|
S-1
|
|
333-127385
|
|
10.4
|
|
8/10/05
|
|
10
|
.5
|
|
Offer to Lease between Penson Financial Services Canada Inc. and
360 St-Jacques Nova Scotia Company dated October 14, 2003
|
|
S-1
|
|
333-127385
|
|
10.5
|
|
8/10/05
|
|
10
|
.6
|
|
Lease agreement between Derwent Valley London Limited, Derwent
Valley Central Limited, Penson Financial Services Limited, and
Penson Worldwide, Inc. effective August 11, 2005
|
|
S-1
|
|
333-127385
|
|
10.6
|
|
8/10/05
|
|
10
|
.7
|
|
Remote Processing Agreement between Penson Worldwide, Inc. and
SunGard Data Systems Inc. dated July 10, 1995, as amended
September 13, 1996 and August 1, 2002
|
|
S-1/A
|
|
333-127385
|
|
10.11
|
|
8/10/05
|
|
10
|
.8
|
|
Form of SAMCO Reorganization Agreement by and between Penson
Worldwide, Inc., SAI Holdings, Inc. and Penson Financial
Services, Inc. and SAMCO Capital Markets, Inc. and SAMCO
Holdings, Inc.
|
|
S-1/A
|
|
333-127385
|
|
10.12
|
|
5/1/06
|
|
10
|
.9
|
|
Form of Transition Services Agreement by and between SAMCO
Holdings, Inc. and Penson Worldwide, Inc.
|
|
S-1/A
|
|
333-127385
|
|
10.13
|
|
5/1/06
|
|
10
|
.10+
|
|
Employment Letter Agreement between the Company and Andrew
Koslow dated August 26, 2002
|
|
S-1
|
|
333-127385
|
|
10.15
|
|
8/10/05
|
|
10
|
.11+
|
|
Form of Indemnification Agreement entered into between Penson
Worldwide, Inc. and its officers and directors
|
|
S-1
|
|
333-127385
|
|
10.16
|
|
8/10/05
|
|
10
|
.12
|
|
Registration Rights Agreement by and between Penson Worldwide,
Inc. and Schonfeld Securities, LLC, dated as of
November 20, 2006
|
|
8-K
|
|
001-32878
|
|
10.1
|
|
3/21/06
|
|
10
|
.13
|
|
Stockholders Agreement effective as of November 20,
2006 between Penson Worldwide, Inc. and Schonfeld Securities, LLC
|
|
8-K
|
|
001-32878
|
|
10.2
|
|
11/21/06
|
|
10
|
.14
|
|
Guaranty Agreement made as of November 20, 2006 by
Schonfeld Group Holdings LLC in favor of SAI Holdings, Inc. and
Penson Financial Services, Inc.
|
|
8-K
|
|
001-32878
|
|
10.3
|
|
11/21/06
|
|
10
|
.15
|
|
Unconditional Guaranty Agreement made as of November 20,
2006 by Schonfeld Group Holdings LLC, Schonfeld Securities LLC
and Steven B. Schonfeld in favor of Penson Financial Services,
Inc.
|
|
8-K
|
|
001-32878
|
|
10.4
|
|
11/21/06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
Filing
|
Exhibit
|
|
Name of Exhibit
|
|
Form
|
|
File Number
|
|
Exhibit
|
|
Date
|
|
|
10
|
.16
|
|
Termination/Compensation Payment Agreement, dated as of
November 20, 2006, by and among Opus Trading Fund LLC,
Quantitative Trading Solutions, LLC and Penson Financial
Services, Inc.
|
|
8-K
|
|
001-32878
|
|
10.5
|
|
11/21/06
|
|
10
|
.17+
|
|
Employment Letter Agreement between the Company and Kevin W.
McAleer dated February 15, 2006
|
|
S-1/A
|
|
333-127385
|
|
10.22
|
|
3/21/06
|
|
10
|
.18+
|
|
Executive Employment Agreement between the Company and Philip A.
Pendergraft dated April 21, 2006
|
|
S-1/A
|
|
333-127385
|
|
10.23
|
|
5/1/06
|
|
10
|
.19+
|
|
Executive Employment Agreement between the Company and Daniel P.
Son dated April 21, 2006
|
|
S-1/A
|
|
333-127385
|
|
10.24
|
|
5/1/06
|
|
10
|
.20
|
|
Eighth Amendment to 1700 Pacific Avenue Office Lease by and
between Berkeley First City, Ltd. and Penson Worldwide, Inc.
dated April 12, 2006
|
|
S-1/A
|
|
333-127385
|
|
10.25
|
|
5/9/06
|
|
10
|
.21
|
|
Amendment to Remote Processing Agreement between Penson
Worldwide, Inc. and SunGard Data Systems Inc. dated
July 10, 1995, as amended September 13, 1996 and
August 1, 2002
|
|
8-K
|
|
001-32878
|
|
10.10
|
|
7/31/06
|
|
10
|
.22
|
|
Letter Agreement dated February 16th, 2007, amending that
certain Purchase Agreement dated as of November 6, 2006
among Goldenberg Hehmeyer & Co., Goldenberg LLC,
Hehmeyer LLC, GH Trading LLC, GHCO Partners LLC, Christopher
Hehmeyer, Ralph Goldenberg, SAI Holdings, Inc., GH1 Inc. and GH2
LLC and Christopher Hehmeyer in his capacity as Sellers
Representative
|
|
8-K
|
|
001-32878
|
|
10.2
|
|
2/16/07
|
|
10
|
.23
|
|
Schedule E, dated July 23, 2007, to the Remote
Processing Agreement between Penson Worldwide, Inc. and SunGard
Data Systems Inc. dated July 10, 1995, as amended
September 13, 1996 and August 1, 2002
|
|
10-Q
|
|
001-32878
|
|
10.2
|
|
11/13/07
|
|
10
|
.24+
|
|
Amended and Restated Executive Employment Agreement between the
Company and Daniel P. Son, dated December 31, 2008
|
|
10-K
|
|
001-32878
|
|
10.44
|
|
3/16/09
|
|
10
|
.25+
|
|
Amended and Restated Executive Employment Agreement between the
Company and Philip A. Pendergraft, dated December 31, 2008
|
|
10-K
|
|
001-32878
|
|
10.45
|
|
3/16/09
|
|
10
|
.26+
|
|
Amendment to Compensation Letter between the Company and Andrew
B. Koslow, dated December 31, 2008
|
|
10-K
|
|
001-32878
|
|
10.46
|
|
3/16/09
|
|
10
|
.27+
|
|
Amendment to Compensation Letter between the Company and Kevin
W. McAleer, dated December 31, 2008
|
|
10-K
|
|
001-32878
|
|
10.47
|
|
3/16/09
|
|
10
|
.28
|
|
Purchase Agreement by and among Penson Worldwide, Inc. and
J.P. Morgan Securities Inc. and Morgan Keegan &
Company, Inc., dated May 28, 2009
|
|
8-K
|
|
001-32878
|
|
10.1
|
|
5/29/09
|
|
10
|
.29+
|
|
2010 Executive Bonus Plan
|
|
8-K
|
|
001-32878
|
|
10.1
|
|
2/16/10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
Filing
|
Exhibit
|
|
Name of Exhibit
|
|
Form
|
|
File Number
|
|
Exhibit
|
|
Date
|
|
|
10
|
.30
|
|
Purchase Agreement, dated April 29, 2010, between Penson
Worldwide, Inc., Penson Holdings, Inc., SAI Holdings, Inc. and
J.P. Morgan Securities, Inc., as representative of the
initial purchasers
|
|
8-K
|
|
001-32878
|
|
10.1
|
|
4/30/10
|
|
10
|
.31
|
|
Amendment Agreement, dated June 25, 2010, among Penson
Worldwide, Inc., SAI Holdings, Inc., Penson Financial Services,
Inc., Penson Financial Services Ltd, Penson Financial Services
Canada Inc., Broadridge Financial Solutions, Inc., Ridge
Clearing & Outsourcing Solutions, Inc., Broadridge
Financial Solutions (Canada) Inc. and Ridge Clearing &
Outsourcing Solutions Limited
|
|
10-Q
|
|
001-32878
|
|
10.2
|
|
8/6/10
|
|
10
|
.32
|
|
Seller Note, dated June 25, 2010, with Penson Worldwide,
Inc., as Issuer and Broadridge Financial Solutions, Inc., as
Payee
|
|
10-Q
|
|
001-32878
|
|
10.4
|
|
8/6/10
|
|
10
|
.33
|
|
Amended and Restated Pledge Agreement, dated as of May 6,
2010, with Penson Worldwide, Inc., Penson Holdings, Inc., and
SAI Holdings, Inc. as pledgors, in favor of Regions Bank
|
|
10-Q
|
|
001-32878
|
|
10.6
|
|
8/6/10
|
|
10
|
.34
|
|
Intercreditor Agreement, dated as of May 6, 2010, between
Regions Bank, U.S. Bank National Association, Penson Worldwide,
Inc., Penson Holdings, Inc., and SAI Holdings, Inc.
|
|
10Q
|
|
001-32878
|
|
10.7
|
|
8/6/10
|
|
10
|
.35
|
|
Amended and Restated Guaranty, dated May 6, 2010, with SAI
Holdings, Inc., and Penson Holdings, Inc.
|
|
10-Q
|
|
001-32878
|
|
10.8
|
|
8/6/10
|
|
10
|
.36
|
|
Amendment, Assignment and Assumption Agreement, dated
June 25, 2010 among Penson Worldwide, Inc., SAI Holdings,
Inc., Penson Financial Services, Inc., Broadridge Financial
Solutions, Inc. and Ridge Clearing & Outsourcing
Solutions, Inc.
|
|
10-Q/A
|
|
001-32878
|
|
10.3
|
|
9/16/10
|
|
10
|
.37
|
|
Second Amended and Restated Credit Agreement, dated the
6th day of May, 2010, by and among the Company, Regions
Bank, as Administrative Agent, Swing Line Lender, and Letter of
Credit Issuer, the lenders party thereto and the other parties
thereto
|
|
10-Q/A
|
|
001-32878
|
|
10.5
|
|
9/16/10
|
|
10
|
.38
|
|
Master Services Agreement by and between Penson Worldwide, Inc.
and Broadridge Financial Solutions, Inc., dated November 2,
2009
|
|
10-K
|
|
001-32878
|
|
10.35
|
|
3/5/10
|
|
10
|
.39
|
|
Service Bureau and Operations Support Services Schedule to the
Master Services Agreement between Penson Worldwide, Inc. and
Broadridge Financial Solutions, Inc., dated November 2,
2009, by and between Penson Financial Services, Inc. and Ridge
Clearing & Outsourcing Solutions, Inc. dated
November 2, 2009
|
|
10-K
|
|
001-32878
|
|
10.36
|
|
3/5/10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
Filing
|
Exhibit
|
|
Name of Exhibit
|
|
Form
|
|
File Number
|
|
Exhibit
|
|
Date
|
|
|
10
|
.40
|
|
Service Bureau and Operations Support Services Schedule to the
Master Services Agreement between Penson Worldwide, Inc. and
Broadridge Financial Solutions, Inc., dated November 2,
2009, by and between Penson Financial Services Canada Inc. and
Ridge Clearing & Outsourcing Solutions, Inc. dated
November 2, 2009
|
|
10-K
|
|
001-32878
|
|
10.37
|
|
3/5/10
|
|
10
|
.41+
|
|
Letter Agreement, effective August 31, 2010, between Penson
Worldwide, Inc. and Daniel P. Son
|
|
10-Q
|
|
001-32878
|
|
10.1
|
|
11/9/10
|
|
10
|
.42+
|
|
Consulting Agreement, effective September 1, 2010, between
Penson Worldwide, Inc. and Holland Consulting, LLC
|
|
10-Q
|
|
001-32878
|
|
10.2
|
|
11/9/10
|
|
10
|
.43*
|
|
First Amendment to the Second Amended and Restated Credit
Agreement, dated the 29th day of October, 2010, by and
among the Company, Regions Bank, as Administrative Agent, Swing
Line Lender, and Letter of Credit Issuer, the lenders party
thereto and the other parties thereto
|
|
|
|
|
|
|
|
|
|
10
|
.44*+
|
|
Executive Bonus Plan.
|
|
|
|
|
|
|
|
|
|
11
|
.1
|
|
Statement regarding computation of per share earnings
|
|
S-1/A
|
|
333-127385
|
|
11.1
|
|
5/1/06
|
|
12
|
.1*
|
|
Statement regarding computation of ratios
|
|
|
|
|
|
|
|
|
|
21
|
.1*
|
|
List of Subsidiaries
|
|
|
|
|
|
|
|
|
|
23
|
.1*
|
|
Consent of BDO USA, LLP
|
|
|
|
|
|
|
|
|
|
31
|
.1*
|
|
Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
|
|
|
|
|
|
|
|
|
|
31
|
.2*
|
|
Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
|
|
|
|
|
|
|
|
|
|
32
|
.1*
|
|
Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
|
|
|
|
|
|
|
|
|
|
32
|
.2*
|
|
Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Filed herewith. |
|
+ |
|
Management contracts or compensation plans or arrangements in
which directors or executive officers are eligible to
participate. |
|
|
|
Confidential treatment has been requested for certain
information contained in this document. Such information has
been omitted and filed separately with the Securities and
Exchange Commission. |