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, 2011
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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 registrant’s 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
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No
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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
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No
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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
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No
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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
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No
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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 registrant’s 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.
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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
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Accelerated filer
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
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No
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The aggregate market value of the registrant’s common stock held by non-affiliates as of June 30, 2011 (the last business day of
the registrants’ most recently completed second fiscal quarter) was $57,305,604.
The number of outstanding shares of the
registrant’s Common Stock, $0.01 par value, as of March 12, 2012 was 27,984,321.
DOCUMENTS
INCORPORATED BY REFERENCE
Certain portions of registrant’s Definitive Proxy Statement relating to its 2012 annual
meeting of stockholders are incorporated by reference into Part III.
PENSON WORLDWIDE, INC.
Form 10-K
For the Fiscal Year Ended December 31, 2011
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”), and Nexa Technologies, Inc. (“Nexa”). During fiscal year 2011, the Company also conducted business through Penson Futures, formerly known as Penson GHCO (“Penson
Futures”), Penson Asia Limited (“Penson Asia”) and Penson Financial Services Australia Pty Ltd (“PFSA”). On August 31, 2011 Penson Futures was combined with PFSI and now operates as a division of PFSI (references to
Penson Futures after August 31, 2011 are references to the futures division of PFSI). On November 30, 2011, the Company announced that it had sold PFSA to BNY Mellon Company. On December 16, 2011, the Company announced that it will
cease operations of its PFSL subsidiary in 2012 and sell certain of its assets. During the fourth quarter of 2011, the Company ceased operations of Penson Asia. The Company has engaged investment bankers to assist in the expected sale of PFSC in
2012. The Company has accounted for the operations of PFSA, PFSC and PFSL as discontinued operations for all periods presented. Through its remaining 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. PFSI is also a registered Futures Commission Merchant (“FCM”) with the Commodity Futures Trading Commission (“CFTC”) and is a member of the
National Futures Association (“NFA”), and various futures exchanges. 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.
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, affiliates 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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our ability to execute and complete strategic initiatives:
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legislative and regulatory changes and proceedings;
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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.
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.
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“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 party’s assets such as physical
securities. Custody services are the safe-keeping and managing of another party’s 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.
“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 buyer’s broker-dealer.
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PART I
Overview
Through PFSI and certain third party contractual relationships, 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 of securities clearing in 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 party’s 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, 2011, we are the
largest independent securities clearing broker in the U.S., and among the top two clearing brokers overall in the U.S. We have grown both organically and through acquisitions. As of December 31, 2011, we had 323 active domestic correspondents,
compared to 335 domestic correspondents as of December 31, 2010. As of December 31, 2011, our pipeline of new correspondents under contract was 38, the majority of which we expect to begin clearing with us by June 30, 2012.
With continuing operations based in the U.S., we are primarily focused through our domestic operating subsidiaries and
through contractual relationships with third parties, on the global markets for equities, options, futures, fixed income and foreign exchange products. Our continuing operations are conducted in one operating segment (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, 2011, we generated net revenues of $217.3 million. Clearing and commission
fees, net interest income, technology revenues and other revenues comprised 48%, 28%, 10% and 14% of our net revenues, respectively. Approximately 64% of our securities correspondents generate both
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clearing and technology revenue. In addition, some of our customers generate revenue from both securities and futures trading, and trade in multiple global markets. The following table represents
the percentages of net revenues and total correspondents by correspondent type:
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Correspondent type
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Percentage of
net revenues
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Percentage of total
correspondents
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Direct market access
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10.3
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8.8
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Retail
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19.9
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32.4
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Online
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12.5
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7.7
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Institutional
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18.6
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29.1
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Other
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38.7
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22.0
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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,
Management’s 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 decreased from
$62.5 million in 2010 to $60.1 million in 2011, representing approximately 27% and 28% of our aggregate net revenues, respectively.
Clients
Currently, our
principal clients are online, direct access, institutional and traditional retail brokers. 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 financial data content or trading software firm that
purchases our data or combines its offerings with our trading software. In our Penson Futures division, we have 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 client’s 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.
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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.
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 other areas such as the futures market, where we have significantly expanded since early 2007. Net revenues from our
futures product offering comprised approximately 13% and 13% of total net revenues in 2011 and 2010.
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 strategic fit for correspondents in the growing algorithmic trading and hedge fund sectors.
Our product offering
Clearing and related services
As a securities and futures processing infrastructure provider, Penson’s 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 party’s 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, allowing us to process a high volume of transactions without sacrificing stability and reliability. In 2011, we processed an average of
950,000 equity transactions, 1.2 million equity options contracts and 371,000 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
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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 securities correspondent clearing
services in the U.S.
We have grown organically and through acquisitions to become the leading independent provider of
securities clearing services in our primary markets with 323 active domestic correspondents, which includes 68 futures clearing correspondents at December 31, 2011. As of December 31, 2011 (based on the number of correspondents), we were
the largest independent clearing broker-dealer in the U.S. 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 U.S. securities clearing services 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 most 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 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.
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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, 2011, no single category of correspondent represented more than 19.9% of total net revenues. In addition, no single correspondent represented more than 8.7% of net revenue, with our
top ten correspondents constituting 30.7% of our net revenues. As previously announced, the departure of one of our largest clients during the third quarter of 2011 significantly impacted overall revenues, though the client’s departure was
offset in part by reduced costs and capital requirements associated with that business. We hope to be able to replace a substantial portion of that revenue in 2012 from new correspondents we have signed. Additionally, we have diversified our client
base by asset class through expanding our operations into the futures business and foreign exchange business, among other business lines.
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 correspondent’s 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
26 years of industry experience and holding a substantial equity interest in Penson, our Global 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, together with Mr. Daniel P. Son, our former president and current director, founded our business in 1995 and have built it to its current position. Bryce B. Engel, our
president, was named to our Global Executive Committee in 2011.
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 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. We are also targeting these firms for our technology products and services, which we believe will increase as we finalize the transition to Broadridge’s 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 continue 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. By combining the operations of our futures and securities businesses in a single entity, we are
able to enhance the services we provide our customers.
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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 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, 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.
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
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 correspondent’s customer is known to us, and we are known to them, and we maintain the customer’s
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, MSRB, FINRA, NSCC, Options Clearing Corp., and Securities Investor Protection Corporation (“SIPC”) and is a participant in the Boston Options Exchange
(“BOX”). Penson Futures operates as a division of PFSI, which is a futures commission merchant and is regulated by the CFTC and the NFA and is a member of the Chicago Board of Trade, the Chicago Mercantile Exchange, the Kansas City Board
of Trade, NYSE Euronext LIFFE, the Minneapolis Grain Exchange, NYMEX, COMEX, ICE Futures US, ICE Clear Europe, NYSE LIFFE, One Chicago, and LCH.Clearnet.
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.
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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 party’s rights to mark securities to market.
Proprietary trading
Our
U.S. broker-dealer engages 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 futures clearing services, 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. During 2011 we successfully completed the transition of our Canadian operations to Broadridge’s system and the transition of the majority of our
non-futures U.S. operations to the Broadridge system. We completed the transfer of our remaining non-futures U.S. operations to the Broadridge systems during the first quarter of 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 certain of our futures customers through Penson
Futures.
Nexa provides our clients with innovative trading management technology with an international 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. Nexa’s
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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 client’s branding.
Nexa’s 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. Many 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 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 over time. Our technology revenues increased over the last year from $20.4 million in 2010
to $22.1 million in 2011.
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.
Many 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 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
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traders for whom speed is essential to successful implementation of their trading strategies. Our infrastructure required significant time and investment to build and 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.
Key licensed technology and proprietary customization
We completed the conversion of our Canadian operations and the majority of our non-futures U.S. operations to Broadridge’s systems in 2011 and completed the transition of the remainder of our
non-futures U.S. operations to the Broadridge systems in the first quarter of 2012. We anticipate this strategic partnership will expand our product offering to include, among other things, the outsourcing of certain of our correspondents’
operations. The Broadridge systems offer our clients 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 to access leading-edge products and services when trading in the U.S. markets.
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. We have capitalized on this
opportunity by implementing cross-border and multi-currency trade processing capabilities.
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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 a number 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
60 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, 2011, we had 323 active domestic correspondents, consisting of 255 active securities clearing
correspondents and 68 active futures clearing correspondents. Before conducting business with a correspondent, we review a variety of factors relating to the prospective correspondent, including the correspondent’s experience in the 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”), Ridge’s 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 with all accrued interest at maturity 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 19
months after closing (subject to extension in the event the dispute resolution procedures set forth in the Ridge APA are invoked). The Company and Broadridge are currently in discussions to finalize the applicable adjustments and have reached a
broad agreement. We have reflected below our expectation of the eventual adjustments, though these have not yet been finalized or implemented formally. 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 was 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
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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. As of December 31, 2011 a calculation was performed to determine the annualized revenues, based on a six-month review period, for each such Non-revenue Correspondent
(“Non-revenue Correspondent Revenues”). This calculation resulted in a reduction in the contingent consideration liability of approximately $.1 million. Additionally, the liability was reduced by approximately $1.3 million for other items
such as client concessions, departing correspondents and additional business as negotiated by both parties. The overall reduction to the liability of approximately $1.4 million is included in other expenses in the consolidated statement of
operations for the year ended December 31, 2011. As of December 31, 2011 the total amount of contingent consideration totaled $3.0 million.
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. 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 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 and $337.2 million for the years ended December 31, 2010 and 2009, respectively, and net income (loss) would have been $(19.0) million and $17.3 million for the years
ended December 31, 2010 and 2009, respectively had the acquisition occurred as of January 1, 2009. As of December 31, 2011 based upon an impairment review by the Company, it was determined that the goodwill was impaired, which
resulted in a goodwill impairment charge that reduced the Ridge goodwill balance to zero. See Note 2 to our consolidated financial statements.
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 Schonfeld’s responsibilities under the Schonfeld
Asset Purchase Agreement to its parent company, SGH, and extends the initial term of Opus’s portfolio margining agreement with PFSI from April 30, 2017 to April 30, 2019.
In January, 2011, the Company and SGH entered into a letter agreement setting the amount due for the third year earnout at $6 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 was required to
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pay under the Schonfeld Asset Purchase Agreement. This resulted in a reduction in goodwill and other liabilities of approximately $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.
A payment of approximately $26.6 million was paid in connection with the first year earnout that ended May 31, 2008, approximately
$25.5 million was paid in connection with the second year of the earnout that ended May 31, 2009 and approximately $9.3 million was paid in connection with the fourth year of the earnout that ended on May 31, 2011. Pursuant to the terms of
a letter agreement with Schonfeld, at December 31, 2011, we had paid $2.0 million as result of the third year of the earnout ended May 31, 2010. The remaining $4.0 million liability as of December 31, 2011, is to be paid evenly over
the eight month period commencing on January 1, 2012. We have not yet made the payment due March 1, 2012, due to a contractual dispute with one of the Schonfeld correspondents. We anticipate resolving the dispute in the near future. As of
December 31, 2011 the Company recorded a goodwill impairment charge that reduced the Schonfeld goodwill balance to zero. See Note 2 to our consolidated financial statements.
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; JPMorgan Chase & Co., National Financial Services LLC, a Fidelity Investments company; Merrill Lynch & Co., Inc., a subsidiary of Bank of America;
and RJ O’Brien & 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 management’s experience, we believe that we presently compete effectively with respect to many 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. 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.
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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. The majority of thinkorswim’s business was converted to TD Ameritrade in August, 2011.
Discontinued Operations
As part of our previously announced strategic initiatives, we committed to the disposition of our PFSC, PFSL and PFSA operations during the fourth quarter of 2011. We completed the sale of PFSA to BNY
Mellon Company in November, 2011. A description of our discontinued operations for PFSC and PFSL appears below.
Canada
PFSC is our Canadian clearing broker and provides clearing services to the Canadian markets on both a fully-disclosed
basis and an omnibus basis (where the identity of the end customer is not always known to us). PFSC in accordance with IIROC is a participating member organization or subscriber of the Toronto Stock Exchange, the Montreal Exchange, the TSX Venture
Exchange and various other Canadian market places 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. 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 correspondent’s 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.
The Company has engaged investment bankers to assist in the expected sale of PFSC, which the Company hopes to conclude in 2012. To date
no definitive decision has been taken regarding any transaction involving PFSC. The Company has accounted for the operations of PFSC as discontinued operations for all periods presented.
United Kingdom
As we announced on December 16, 2011, we have determined to sell certain of the assets of PFSL, our U.K. subsidiary, to third parties and close operations in an orderly manner during 2012. PFSL
offers securities clearing services, including: Model A 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. Prior to the decision to close operations, PFSL also offered
Model B clearing services. Under Model B clearing, we assume the positions and therefore full liability for the clearing and settlement of the trades. As of March 1, 2012, we no longer offer Model B clearing services. 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. The Company has accounted for the operations of PFSC as discontinued operations for all
periods presented.
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
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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 management’s attention and resources and may require us to
enter into royalty or licensing agreements.
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. Recent events in the futures markets, including the bankruptcy filing of MF Global Holdings, Ltd., have increased scrutiny from the CFTC and other regulatory bodies. For additional discussion of the potential consequences of the MF
Global Holdings, Ltd. bankruptcy filing, see “Risk Factors.” 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. From time to time, 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 member’s insolvency, the SIPC Fund provides protection for customer accounts up to $500,000 per customer, with a limitation of $250,000 on claims for cash balances.
In addition, until we wind up our operations in the U.K. and sell our Canadian subsidiary, we have to comply with the regulatory controls
of each of those countries. We expect to continue to offer services in these jurisdictions for our PFSI customers through contractual relationships after the respective wind up and sale of these 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. See Liquidity and Capital Resources
— Capital Resources
for a discussion regarding
certain recent increased regulatory capital requirements and the resulting effects on our operations.
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
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provisions of the Dodd-Frank Act were 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 currently provide clearing services in the U.S., and until we cease our operations, in Canada 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 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 almost exclusively transacted through our U.S. broker-dealer subsidiary, which is subject to the SEC’s 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 SEC’s customer
protection rule is to ensure that investment property of the firm’s 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
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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-dealer’s 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.
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 Reserve’s 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 161
portfolio margin accounts as of December 31, 2011.
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
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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 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 subsidiary’s 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.
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 SEC’s 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-dealer’s 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
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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-dealer’s 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.
Additionally, as an FCM, PFSI is subject to the capital and segregation rules of the CFTC,
NFA, and futures exchanges in the U.S. 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.
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 £1.7 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 subsidiary’s business and a withdrawal of the subsidiary’s 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 subsidiary’s authorization to conduct investment business may severely damage the reputation of the subsidiary and result in diminution of earnings. The revocation of the subsidiary’s
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 member’s 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 member’s 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 member’s RAC are designed to identify
dealer members with capital adequacy
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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.
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. See Liquidity and Capital Resources
— Capital Resources
for a discussion regarding certain recent increased regulatory capital requirements
and the resulting effects on our operations.
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 correspondent’s experience in the industry, its financial condition and the background of the principals of the firm. In addition, we generally 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 periodically evaluate the level of our margin lending exposure. Recently, to reduce credit risk exposure and increase capital availability, we have reduced our margin lending activity. See Note 9 to our consolidated financial
statements for a description of certain nonaccrual receivables. We also maintain a bad debt reserve.
Our customer agreements
and fully-disclosed clearing agreements generally 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, Puerto Rico and the U.S. Virgin
Islands under applicable local securities regulations. PFSC is authorized to conduct business in all major provinces and territories in Canada.
Employees
As of
December 31, 2011, we had 815 employees, of which 580 are related to our continuing operations. In our continuing operations, 191 were employed in clearing operations, 192 in technology support and development, 19 in sales and marketing
and 178 in finance and administration, all of which are located in the
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U.S. We had 171 employees in Canada and 64 in the U.K. 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 SEC’s 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.
Many factors could have an effect on PWI’s financial condition, cash flows and results of operations. We are subject to various
risks resulting from changing economic, environmental, political, regulatory, 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; JPMorgan Chase & Co., National Financial Services LLC, a Fidelity Investments company;
Merrill Lynch & Co., Inc., a subsidiary of Bank of America; and RJ O’Brien & 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 cause us to sustain additional losses.
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We may be unable to execute our previously announced strategic initiatives
In 2011, we announced several strategic initiatives, designed to reduce costs and debt, increase capital and return to
profitability. Although we have successfully implemented certain of our initiatives, if we are unable to effectively implement the remaining initiatives, we may need to reduce or discontinue offering certain services, which may materially adversely
affect our business. In addition, our inability to effectively implement our strategic initiatives could prevent us from returning to profitability. See “Management’s Discussion and Analysis —
Liquidity and Capital
Resources
” for a further discussion regarding the importance of the implementation of our strategic initiatives.
We depend on a limited number of clients for a significant portion of our clearing revenues.
Our ten largest current clients accounted for approximately 30.7% of our total net revenues for the year ended December 31, 2011,
while no client accounted for more than 8.7% of net revenues. The loss of even a small number of these clients at any one time could cause our revenues to significantly decline. As previously announced, the departure of one of our largest clients
during the third quarter of 2011 significantly impacted overall revenues, though the client’s departure was offset in part by reduced costs and capital requirements associated with that business. We hope to 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 60 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 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 obligations, or if important counterparties elect not to do business with us, 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.
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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 customer balances consistent with the current mix, we estimate that a 25 basis point change in the federal funds rate would affect our pre-tax income by approximately $1.0 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 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. This low interest rate environment is expected to continue at least through 2014. Interest rates in Canada
and the U.K. 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 investor’s 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, 2011, our receivables from customers and correspondents were $1.1 billion, which predominantly
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reflected margin loans. The Company generally recognizes interest income on an accrual basis as it is earned. At December 31, 2011 and 2010, the Company had approximately $8.5 million and
$97.4 million in net receivables, respectively, primarily from customers and correspondents that were substantially collateralized and/or reserved, 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 investor’s 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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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
customer’s equity in the account is at least 25% of the value of the securities in the account. Until we wind up our operations in the U.K. and sell our Canadian subsidiary, we are also subject to rules and regulations in those countries 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.
We converted our securities clearing correspondents to Broadridge’s systems in 2011 and the first quarter of 2012. SunGard continues to provide software systems for our futures execution and clearing
services. 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 U.S. securities operations to Broadridge’s systems, we expect to be able to rely on Broadridge to be able to provide similar future product developments for our U.S. securities operations. See “Business —
Strategic Acquisitions” for a description of the Broadridge transaction. For example, we expect to be able to continue to increase our U.S. trade volume if our business grows in the future. 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.
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Our 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 now converted our PFSC and our U.S. securities correspondents to Broadridge, who serves 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 and our U.S. operations in 2011 and the first quarter of 2012. 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 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.”
Our business is highly dependent upon the use of electronic transmission of information
and we could incur substantial monetary and reputational damages if we are unable to maintain the security of our cyber network
As part of our daily operations, we transmit personal customer information over computer systems and the Internet. Although we believe our transmission of information is secure, cyber attacks may go
undetected, and embedded malware could affect our cyber network without our knowledge for long periods of time. To effect
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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 security of our cyber network will be successful.
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.
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. See Part II, Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of Operations
for a description of losses we incurred due in part to illiquid collateral underlying margin
loans we extended.
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 the period in which
the payment is made. In addition, we are currently involved in a matter regarding Nexa’s 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. Further, as described in Item 3, the Company is involved purported shareholder class
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action litigation and derivative litigation. The Plaintiffs in those matters contend that the Company and/or certain officer or directors concealed from investors $96-97 million in
receivables that were partly collateralized by illiquid securities (“Nonaccrual Receivables”), and they take issue with the Company’s accounting treatment of those receivables, among other things. These events have led to increased
regulatory scrutiny of our operations and margin lending. We intend to vigorously defend our position, but we are not able to predict the outcome of this dispute at this time. As is not atypical in these situations, these events have led to
increased regulatory scrutiny of our operations by our regulators, including FINRA and the SEC, as described in Item 3. — “
Legal Proceedings
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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 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 the operational
requirements of our customers, we may experience operating inefficiencies, client dissatisfaction and lost revenue opportunities.
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. We believe that the current and anticipated future needs of our customers 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 changing customer requirements. In addition, we cannot assure you that we will be able to accurately predict the timing or rate of these changes or expand and upgrade our systems and
infrastructure on a timely basis.
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In addition, the scope of procedures for assuring compliance with applicable rules and
regulations has recently become increasingly stringent. We have implemented and continue to implement formal compliance procedures to respond to these changes and the impact on our operations. 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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The change in our customers’ operational requirements 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 the
change in our customers’ operational requirements successfully. If we fail to do so, 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.
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 and in August, 2011, TD Ameritrade, Inc., f/k/a thinkorswim, Inc., deconverted a substantial portion of its accounts to its own
systems.
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 the key personnel or the inability to identify, hire, train and retain other
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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.
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 Ridge’s 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 management’s 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.
As of December 31, 2011 we had $7.0 million outstanding under our Amended and
Restated Credit Facility. We currently have loans of approximately $.3 million outstanding under this facility. While 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 may 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.
Our ability to settle transactions often depends
on the availability of credit from our intraday and overnight lenders
As of December 31, 2011, we had uncommitted
lines of credit with six financial institutions for the purpose of facilitating our clearing business as well as the activities of our customers and correspondents, and one committed line of credit that permits us to borrow up to $1.5 million. Four
of the uncommitted lines of credit permitted us to borrow up to an aggregate of approximately $269.2 million while two lines had no stated limit. Our lenders have recently eliminated our ability to borrow unsecured funds, although such recent
limitations
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have not materially adversely affected our ability to service our clients’ business. While we believe we have sufficient resources to address intraday and overnight borrowing needs, if we
are not able to obtain sufficient credit, our ability to settle our customer transactions could be impaired, which would materially adversely affect our business operations.
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 certain other outstanding debt instruments 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.
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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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
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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 2011 to suffer significant turmoil initially caused by a sharp downturn in markets for mortgage-related securities and
non-investment grade debt securities and loans and more recently by sovereign debt problems in the European Union. 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 and difficulties in one country or financial market can adversely impact other countries or markets. 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.
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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our ability to obtain financing at favorable rates;
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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;
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Announcements and commencements of regulatory and legal proceedings; 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 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. In addition, extreme market volatility during certain periods of 2011, including
August, 2011, led to decreased overall 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.
Any funds we expect to receive from our planned disposition of certain foreign assets may be lengthy and
subject to foreign currency fluctuations.
As part of our strategic initiatives, we have announced our intention to
dispose of certain of our foreign assets. We may be unable to arrange for the sale of these assets on terms we believe to be acceptable for some time. Even if we are to quickly sell our foreign assets, we may experience significant currency
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may reduce the benefit we see. Also, we may have difficulty bringing the funds received from the sale to the U.S. due to foreign laws and regulations. Any delay in obtaining the anticipated funds
could materially adversely affect our available funds and our ability to finance our operations.
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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trade practices among broker-dealers and FCMs;
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use and safekeeping of investors’ funds and securities;
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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.
While we continue to operate clearing and related
businesses in the U.K. and Canada, and execute transactions in global markets, we remain subject to significant additional foreign regulations. 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.
36
The regulatory environment in which we operate has experienced significantly
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 will likely 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. Periodic reviews by our regulators have not historically led to material operational restrictions, however, our regulators are currently reviewing our operations and if our regulators believe
that it is necessary to apply additional restrictions on our operations, it could materially adversely affect our business.
In addition, because our industry is heavily regulated, in our regulatory environment approval is required prior to any material
expansion of our business activities. Regulatory scrutiny has recently significantly increased, in part as a result of (i) general regulatory trends in the industry, (ii) regulatory responses to the recent bankruptcy filing of MF Global
Holdings (as discussed below), and (iii) consideration by regulators of our operations, and we therefore 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.
Recent developments in the futures industry may lead to increased regulatory scrutiny and lower trading volumes.
The recent bankruptcy filing of MF Global Holdings, Ltd. has led to increased regulatory scrutiny and decreased customer confidence in the U.S. futures industry. Any additional regulatory restrictions
enacted in response to these developments could be costly or we may be unable to comply. Reduced customer confidence in the futures industry may lead to significantly decreased trading volume. If that were to occur, our revenue from our futures
operations could be materially reduced.
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.
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
37
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-dealer’s 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.
While our subsidiaries continue to operate 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 or materially adversely affect our strategic initiatives with respect to PFSL.
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.
In addition, some of the investments we make in our business may impact our regulatory capital. We have
made large investments into Nexa. 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
38
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
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:
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a classified board of directors;
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•
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limitations on the removal of directors;
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•
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advance notice requirements for stockholder proposals and nominations of directors at meetings of our stockholders; and
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•
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the inability of stockholders to act by written consent or to call special meetings.
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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 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.
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
39
liabilities related to the operations of the SAMCO entities. Due to the Company’s 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.
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 49.3% 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:
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reductions in market prices or volume;
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changes in securities or other government regulations;
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quarterly variations in operating results;
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Credit risk of investors in our margin lending business;
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our technological capabilities to accommodate any future growth in our operations or clients;
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announcements of technological innovations, new products, services, significant contracts, acquisitions or joint ventures by us or our competitors;
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issuance and sales of our securities in financing transactions; and
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changes in financial estimates and recommendations by securities analysts or our failure to meet or exceed analyst estimates.
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As a result, shareholders may be unable to sell their stock at or above the price they paid for it. In
addition, during the fourth quarter of 2011, our stock closed below $1.00 for the first time. If our stock were to trade below $1.00 for an extended period, we could be subject to de-listing by NASDAQ. If our stock were de-listed, liquidity in our
stock could be substantially lowered, which may cause our stockholders to have more difficulty buying and selling our stock.
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.
40
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Item 1B.
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Unresolved Staff Comments
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At the beginning of July, 2011, the Company received a comment letter from the staff of the Securities and Exchange Commission Division of Corporation Finance with respect to the Company’s Annual
Report on Form 10-K for the year ended December 31, 2010 and Quarterly Report on Form 10-Q for the period ended March 31, 2011. The Company has exchanged correspondence with the SEC regarding the matters raised in their comment letter and
in subsequent communications, and the SEC has provided additional comments with respect to the Company’s Quarterly Reports on Form 10-Q for the periods ended June 30, 2011 and September 30, 2011. In its filings during 2011 the Company
has adopted various suggestions made by the SEC, but a number of the comments raised by the SEC remain the subject of on- going discussions between the Company and the SEC. The comments of the SEC relate primarily to goodwill valuations and
methodologies for the determination of collectability of certain receivables. The Company is in the process of providing additional background information to the SEC with respect to its analysis and the factors that underlie the determinations
concerning these matters, as reflected in its financial statements.
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 Montreal and Toronto. We also lease additional office space at locations in California, Illinois, New York, Minnesota, Wisconsin,
Texas, London 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.
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Legal Proceedings
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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.
41
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 Trustee’s 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 FCM’s 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. On February 21, 2012, the Sentinel Trustee filed a Motion for Leave to Amend Complaint to add and amend claims against PFFI. No trial date has been set.
In one of the actions brought by the Sentinel Trustee against an FCM whose customer segregated accounts received distributions similar 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. The FCM filed its response in August, 2011 and the Sentinel Trustee filed his reply brief in November 2011. On December 15, 2011, the National Futures Association filed an
amicus
curie
brief in opposition to the Sentinel Trustee’s summary motion and on January 11, 2012, the Commodities Futures Trading Commission filed an amicus curie brief in opposition to the Sentinel Trustee’s summary
judgment motion. There is no date set for the resolution of that motion.
On January 13, 2012, four FCMs whose
customer segregated accounts received distributions similar to those made to the customer segregated accounts of Penson Futures and PFFI filed motions for summary judgment with respect to the Sentinel Trustee’s claims seeking recovery of
pre-bankruptcy petition transfers that may implicate the claims brought by the Sentinel Trustee by which the Trustee is seeking recovery from the Company of $14.4 million of pre-bankruptcy transfers. The federal district court has set
April 13, 2012 as the deadline for the Sentinel Trustee to respond to the FCMs summary judgment motions. There is no date set for the resolution of that motion.
On February 21, 2012, the Sentinel Trustee filed a motion to set a trial date with respect to its suit against one FCM whose customer segregated accounts received distributions similar to those made
to the customer segregated accounts of Penson Futures and PFFI. At a hearing held on February 28, 2012, the federal district court judge set the trial for that case to commence on August 13, 2012.
On February 21, 2012, the Sentinel Trustee filed a Motion for Leave to Amend Complaint to amend claims against Penson Futures
and PFFI. On February 28, 2012, the federal district court entered an order authorizing the Sentinel Trustee to file the amended complaint and on March 7, 2012, the Sentinel Trustee filed his Second Amended Complaint. No trial
date has been set with respect to the Trustee’s suit against Penson Futures and PFFI.
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. Management cannot currently estimate a range of reasonably possible loss. In the event that Penson Futures and PFFI are
42
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.
Purported Class Action and Derivative
Litigation Matters
On August 23, 2011, a class action complaint alleging violations of the federal securities
laws was filed in the United States District Court for the Northern District of Texas against the Company and its Chief Executive Officer and Chief Financial Officer, Philip A. Pendergraft and Kevin W. McAleer, by Reid Friedman, on behalf of himself
and all others similarly situated (the “Friedman Action”). Plaintiff contends, among other things, that “Penson concealed from investors that by at least the end of 2010, 1) that the Company had approximately $96-97 million in
receivables of which approximately $43 million were collateralized by illiquid securities and therefore unlikely to be collected; 2) the Company’s assets (Nonaccrual Receivables) were materially overstated and should have been written down at
least by the end of 2010; 3) as a result, the Company’s reported income and EBITDA (earnings before interest, taxes, depreciation, amortization and stock-based compensation, and excluding certain non-operating expenses) were materially
overstated; and 4) the Company’s financial statements were not prepared in accordance with generally accepted accounting principles. These events have led to increased regulatory scrutiny of our operations and margin lending. Plaintiff seeks to
recover an unspecified amount of damages, including interest, attorneys’ fees, costs, and equitable/injunctive relief as the Court may deem proper. The Company filed a Motion to Dismiss on March 2, 2012 and intends to vigorously defend
itself against these claims.
On September 21, 2011, a verified shareholder derivative petition was filed in County Court
at Law No. 3, Dallas, County, Texas by Chadwick McHugh, “individually and on behalf of nominal defendant Penson Worldwide, Inc.,” against the Company and current or former members of the Company’s board of directors, Roger J.
Engemoen, Jr., David M. Kelly, James S. Dyer, David Johnson, Philip A. Pendergraft, David A. Reed, Thomas R. Johnson, and Daniel P. Son (the McHugh Action”). A second verified shareholder derivative petition was filed against the same
defendants on September 21, 2011, by Sanjay Israni, “individually and on behalf of nominal defendant Penson Worldwide, Inc.,” in County Court at Law No. 1, Dallas, County, Texas (the “Israni Action”). On
November 4, 2011, another shareholder derivative suit was filed in the United States District Court for the Northern District of Texas, by Adam Leniartek, “derivatively on behalf of Penson Worldwide, Inc.,” against the same defendants
(the “Leniartek Action”). Plaintiffs in both the McHugh Action and the Israni Action allege, among other things, causes of action for breaches of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and waste of
corporate assets. Plaintiff in the Leniartek Action alleges those same causes of action as well as a claim for contribution and indemnification. The McHugh Action and the Israni Action have now been consolidated. The plaintiffs seek, among other
things, unspecified monetary damages in favor of the Company, changes to corporate governance procedures, restitution and disgorgement, and costs, including attorneys’ fees, accountants’ and experts’ fees, costs, and expenses. The
defendants have not yet filed an Answer or responsive motion.
In response to these actions, Penson has retained experienced
securities litigation counsel to vigorously represent it and its officers and directors. Management cannot currently estimate a range of reasonably possible loss. As is not atypical in these situations, this litigation has encouraged increased
regulatory scrutiny of our operations by our regulators, including FINRA and the SEC.
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.
43
The United States Court of Appeals for the Federal Circuit issued an order mandating the
transfer of the case to the Southern District of New York. The trial before the New York District Court is scheduled for November 26, 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. Management cannot currently estimate a range of reasonably possible loss.
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.
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Item 4.
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Mine Safety Disclosures
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Not applicable
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PART II
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Item 5.
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Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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Market information
The
common stock of the Company has been traded on the NASDAQ Global Select Market under the symbol PNSN since the Company’s initial public offering on May 16, 2006. Prior to that time there was no public market for the Company’s 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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Price Range
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High
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Low
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2011
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Quarter ended March 31, 2011
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$
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6.72
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$
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4.64
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Quarter ended June 30, 2011
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$
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7.30
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$
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3.06
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Quarter ended September 30, 2011
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$
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3.58
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$
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1.45
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Quarter ended December 31, 2011
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$
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1.49
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$
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0.97
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2010
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Quarter ended March 31, 2010
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$
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10.48
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$
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7.87
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Quarter ended June 30, 2010
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$
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10.42
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$
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5.64
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Quarter ended September 30, 2010
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$
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5.95
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$
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4.56
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Quarter ended December 31, 2010
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$
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5.40
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$
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4.53
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Holders
No shares of the Company’s preferred stock are issued and outstanding. As of March 6, 2012, there were 45 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 3,387 as of March 6, 2012.
Dividend policy
We currently intend to retain any earnings to maintain, 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 corporation’s 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
45
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.
PWI’s purchases of its equity securities
The following table sets forth the repurchases we made during the three months ended December 31, 2011 for common shares withheld to cover tax-withholding requirements relating to the vesting of
restricted stock units issued to employees pursuant to the Company’s shareholder-approved stock incentive plan:
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Total Number
of
Shares Repurchased
|
|
|
Average Price
Paid
per Share
|
|
|
October
|
|
|
6,765
|
|
|
$
|
1.45
|
|
|
November
|
|
|
2,359
|
|
|
|
1.19
|
|
|
December
|
|
|
6,473
|
|
|
|
1.16
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
15,597
|
|
|
$
|
1.29
|
|
|
|
|
|
|
|
|
|
|
|
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 2011. The
maximum number of shares that could have been purchased under this plan for the months of October, November and December 2011 was 3,233,552, 3,940,042 and 4,041,940 respectively based on the remaining dollar amount authorized divided by the average
purchase price in the month.
Recent sales of unregistered securities
None.
46
Stock Performance Graph
Cumulative Total Return to Stockholders
Penson Worldwide, Inc., NASDAQ Composite Index and NASDAQ Financial Stocks Index
% Return to Stockholders, December 31, 2006 to December 31, 2011
Total Return Performance
This comparison is based on a return assuming $100 invested December 31, 2006 in Penson
Worldwide, Inc. Common Stock, the NASDAQ Composite Index and the NASDAQ Financial Stocks Index, assuming the reinvestment of all dividends.
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.
47
|
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, 2011 and the summary consolidated balance sheet data as of December 31, 2011 and 2010 has been derived from our audited consolidated financial statements included elsewhere in this document, and should be read in conjunction
with the “Management’s 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-53. The consolidated statements of operations data for the years ended December 31, 2008 and 2007 and the consolidated balance sheet data as of December 31, 2009, 2008 and 2007, all of which are set forth below, are based on the
Company’s historical audited consolidated financial statements and the underlying accounting records.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(In thousands, except per share data)
|
|
|
Consolidated statement of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
217,332
|
|
|
$
|
229,057
|
|
|
$
|
230,520
|
|
|
$
|
293,402
|
|
|
$
|
305,012
|
|
|
Total expenses
|
|
|
450,463
|
|
|
|
249,488
|
|
|
|
206,679
|
|
|
|
264,563
|
|
|
|
281,703
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
(233,131
|
)
|
|
|
(20,431
|
)
|
|
|
23,841
|
|
|
|
28,839
|
|
|
|
23,309
|
|
|
Income tax expense (benefit)
|
|
|
(10,064
|
)
|
|
|
(5,830
|
)
|
|
|
9,645
|
|
|
|
10,497
|
|
|
|
9,747
|
|
|
Income (loss) from continuing operations
|
|
|
(223,067
|
)
|
|
|
(14,601
|
)
|
|
|
14,196
|
|
|
|
18,342
|
|
|
|
13,562
|
|
|
Income (loss) from discontinued operations, net of tax(1)
|
|
|
(2,443
|
)
|
|
|
(5,246
|
)
|
|
|
1,815
|
|
|
|
(7,686
|
)
|
|
|
13,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(225,510
|
)
|
|
$
|
(19,847
|
)
|
|
$
|
16,011
|
|
|
$
|
10,656
|
|
|
$
|
26,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share — basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share from continuing operations
|
|
$
|
(7.92
|
)
|
|
$
|
(0.54
|
)
|
|
$
|
0.56
|
|
|
$
|
0.73
|
|
|
$
|
0.52
|
|
|
Earnings (loss) per share from discontinued operations
|
|
|
(0.09
|
)
|
|
|
(0.19
|
)
|
|
|
0.07
|
|
|
|
(0.31
|
)
|
|
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share
|
|
$
|
(8.01
|
)
|
|
$
|
(0.73
|
)
|
|
$
|
0.63
|
|
|
$
|
0.42
|
|
|
$
|
1.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share — diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share from continuing operations
|
|
$
|
(7.92
|
)
|
|
$
|
(0.54
|
)
|
|
$
|
0.56
|
|
|
$
|
0.72
|
|
|
$
|
0.51
|
|
|
Earnings (loss) per share from discontinued operations
|
|
|
(0.09
|
)
|
|
|
(0.19
|
)
|
|
|
0.07
|
|
|
|
(0.30
|
)
|
|
|
0.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share
|
|
$
|
(8.01
|
)
|
|
$
|
(0.73
|
)
|
|
$
|
0.63
|
|
|
$
|
0.42
|
|
|
$
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding — basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
28,168
|
|
|
|
27,034
|
|
|
|
25,373
|
|
|
|
25,217
|
|
|
|
26,232
|
|
|
Diluted
|
|
|
28,168
|
|
|
|
27,034
|
|
|
|
25,591
|
|
|
|
25,416
|
|
|
|
26,817
|
|
|
(1)
|
Income tax expense (benefit) from discontinued operations was $1,109, $(3,538), $179, $(4,504) and $5,378, respectively for years ended December 31, 2011 to
December 31, 2007
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
(In thousands)
|
|
|
Consolidated balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (2)
|
|
$
|
72,226
|
|
|
$
|
138,614
|
|
|
$
|
48,643
|
|
|
$
|
38,825
|
|
|
$
|
120,923
|
|
|
Total assets
|
|
|
6,197,406
|
|
|
|
10,319,473
|
|
|
|
7,294,293
|
|
|
|
5,541,519
|
|
|
|
7,911,161
|
|
|
Notes payable
|
|
|
271,302
|
|
|
|
259,729
|
|
|
|
132,769
|
|
|
|
75,000
|
|
|
|
55,000
|
|
|
Total stockholders’ equity
|
|
|
75,585
|
|
|
|
300,921
|
|
|
|
298,902
|
|
|
|
264,467
|
|
|
|
265,428
|
|
|
(2)
|
Includes cash and cash equivalents in assets held for sale
|
See discussions regarding goodwill and intangible asset impairment, write down of Nonaccrual Receivables, establishment of deferred tax asset valuation allowance and the disposition of PFSA in Notes 2, 8,
20 and 27, respectively, to our consolidated financial statements. Each of these items impact the comparability of the 2011 Selected Financial Data presented above to the previous years presented.
|
Item 7.
|
Management’s 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.
Recent Developments
The Company announced on March 13, 2012 that it had agreed principal terms for a proposed debt exchange offer relating to the
Company’s 12.5% senior second lien secured notes due 2017 (the “Senior Secured Notes”), unsecured 8% senior convertible notes due 2014 (the “Convertible Notes”) and Broadridge Financial Solutions, Inc.
(“Broadridge”) subordinated unsecured note due June 25, 2015 (the “Ridge Seller Note”). Under the terms of the proposed exchange (the “Restructuring”) the Company would exchange an aggregate of $281 million of
outstanding indebtedness as of the date of the Restructuring for new debt and equity securities. The proposed transactions are subject to approval and acceptance of debt holders, among other parties.
In connection with the proposed Restructuring, the Company and certain of its wholly owned subsidiaries have entered into a Restructuring
Support Agreement, dated March 13, 2012 (the “Restructuring Support Agreement”) with (i) the holders of a majority of its Senior Secured Notes, (ii) the holders of over 70% of Convertible Notes, and (iii) Broadridge (such holders
collectively, the “Exchanging Holders” and each such holder a “Noteholder”) ”), pursuant to which such holders have agreed to support the Restructuring, subject to certain terms, conditions and termination events. Among
other things, the Restructuring Support Agreement provides that:
|
•
|
|
The existing $200 million of outstanding Senior Secured Notes would be exchanged for a combination of (A) $100 million in aggregate principal amount of
12.5% first lien senior secured notes (payable in kind) (the “New Senior Secured Notes”) and (B) $100 million aggregate liquidation preference of newly issued Series A preferred stock (the “Series A Senior Preferred Stock”).
|
The New Senior Secured Notes will mature on April 1, 2017. The Series A Senior Preferred Stock will have a
12.5% cumulative dividend accruing semi-annually (payable in kind) and a senior liquidation preference, due for redemption on the fifth anniversary of the consummation of the Restructuring. The Series A Senior Preferred Stock shall not be
convertible into shares of the Company’s common stock.
49
|
•
|
|
The existing $60 million of outstanding Convertible Notes would be exchanged for a combination of (A) $5 million in aggregate principal amount of New
Senior Secured Notes, (B) $20 million aggregate liquidation preference of Series A Senior Preferred Stock, (C) $35 million aggregate liquidation preference of newly issued Series B preferred stock (the “Series B Preferred Stock”) and (D)
newly issued shares of common stock of the Company which will represent 51.6% of the outstanding shares of common stock of the Company upon consummation of the Restructuring. The Series B Preferred Stock will have a 12.5% cumulative dividend
accruing semi-annually (payable in kind) and a perpetual junior liquidating preference to the Series A Senior Preferred Stock. The Series B Preferred Stock shall not be convertible into shares of the Company’s common stock.
|
|
•
|
|
The existing Ridge Seller Note would be exchanged for newly issued shares of common stock of the Company which will represent 9.9% of the outstanding
shares of common stock of the Company upon consummation of the Restructuring.
|
In addition, the Company and
Broadridge have agreed to modify certain agreements relating to the master Services Agreement between Broadridge and the Company and related schedules.
Following completion of the Restructuring, the Company will have seven authorized directors. Until the Series A Senior Preferred Stock has been redeemed in full, (i) holders of the Series A Senior
Preferred Stock will be entitled to elect up to four directors, (ii) holders of the Series B Preferred Stock will be entitled to elect one director and (iii) holders of common stock will be entitled to elect two directors, voting together with the
Series A Senior Preferred Stock, which preferred stock will control such vote, with one such director being the Company’s Chief Executive Officer. After the Series A Senior Preferred Stock has been redeemed in full, then, until the Series B
Preferred Stock has been redeemed in full, holders of the Series B Preferred Stock will be entitled to elect up to four directors and holders of common stock will be entitled to elect three directors.
Under the Restructuring Agreement, the Exchanging Holders have agreed to support the Restructuring, subject to the satisfaction of
various conditions. Among other things, the Restructuring is conditioned upon:
|
|
•
|
|
The execution of mutually acceptable definitive agreements covering the terms of the Restructuring;
|
|
|
•
|
|
The acceptance of the terms of the Restructuring by the holders of at least 95% of the Senior Secured Notes and at least 95% of the Convertible Notes;
|
|
|
•
|
|
Making all appropriate filings with, and receipt of applicable approvals from FINRA;
|
|
|
•
|
|
Receipt of any required waivers and approvals from NASDAQ in connection with the consummation of the Restructuring; and
|
|
|
•
|
|
The approval of all other applicable governmental and regulatory authorities.
|
A copy of the form of Restructuring Support Agreement is filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on
March 14, 2012.
The New Senior Secured Notes, the Series A Senior Preferred Stock, the Series B Preferred Stock, the common
stock and the proposed exchange offer have not been registered under the Securities Act of 1933, or any applicable state securities laws and may not be offered, sold or exchanged in the United States, absent registration or an applicable exemption
from such registration requirements.
Results of continuing operations
The following discussion and analysis of the Company’s results of continuing operations exclude the results of PFSC, PFSL and PFSA.
These businesses are segregated from continuing operations and included in discontinued operations for all periods presented. See section entitled “Results of discontinued operations” following this section and Note 27 to our consolidated
financial statements for a discussion of our discontinued operations.
50
Market and Economic Conditions in 2011
Much of the economic uncertainty of 2008-2010 continued to have an effect on the securities and credit markets in 2011.
|
|
•
|
|
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%. The Federal Reserve announced its intentions to keep interest rates at these
historically low levels through 2014.
|
|
|
•
|
|
After rising 11% from year end 2010, to a first half high of 12,810 in April 2011, the Dow Jones Industrial Average fell 17%, to the year’s low of
10,655 in October 2011, primarily due to fears about European fiscal stability, and then rebounded 15%, to end the year at 12,217, up 6%.
|
|
|
•
|
|
Average daily volume in equities in the U.S. fell 8% during 2011, to 7.8 billion shares, from 8.5 billion shares in 2010, largely due to fears about
European fiscal stability combined with the extreme volatility in the third quarter. Equity average daily volumes in December 2011 were 6.4 billion, the lowest monthly level the last four years.
|
|
|
•
|
|
The quarterly average of the Chicago Board Options Exchange Volatility Index (“VIX”), a popular measure of implied stock market volatility,
jumped 75% from the second to the third quarter, after having fallen four quarters in a row. The third quarter average of 30.6 was the highest since the second quarter of 2009.
|
|
|
•
|
|
Short interest activity continued to decline. The average number of shares sold short among New York Stock Exchange listed companies fell 2.6%, to 13.7
billion in 2011, from 14.1 billion in 2010, which was down 2.8% from 2009.
|
|
|
•
|
|
Margin debt continued to rebound. Aggregate debits in securities margin accounts of New York Stock Exchange member organizations increased 18%, to an
average of $293.1 billion in 2011, from $249.6 billion in 2010, which was up 24% from 2009.
|
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 year’s 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 U.S. 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 U.S. 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 year’s high of 31.9 in May 2010 following the May 6th “Flash Crash,” and then steadily declining 45% to 17.6 in December 2010.
|
51
|
|
•
|
|
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.
|
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.
|
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.
Since starting our business in 1995 with three correspondents, we have grown to serve approximately 255 active securities clearing correspondents and 68 futures clearing correspondents as of
December 31, 2011. Our net revenues were approximately $217.3 million in 2011, $229.1 million in 2010 and $230.5 million in 2009, 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.
52
Fiscal 2011 focal points
|
|
•
|
|
We converted substantially all of our domestic non-futures correspondent business to Broadridge’s systems in the fourth quarter, 2011, converting
the remainder during the first quarter of 2012.
|
|
|
•
|
|
We recorded a bad debt charge of $43.0 million related to our Nonaccrual Receivables in the second quarter of 2011.
|
|
|
•
|
|
We completed the sale of PFSA to BNY Mellon Company for a purchase price of approximately $33.2 million.
|
|
|
•
|
|
During the fourth quarter, we paid down approximately $18 million on our senior credit facility, leaving approximately $7.0 million outstanding as of
December 31, 2011, and subsequently have reduced the outstanding balance to approximately $.3 million.
|
|
|
•
|
|
We committed to the sale of our PFSC subsidiary.
|
|
|
•
|
|
We committed to the sale of the assets and ceasing the operations of our PFSL subsidiary.
|
|
|
•
|
|
We recorded a goodwill and intangible asset impairment charge of $137.7 million, including $.3 million included in discontinued operations associated
with our PFSL subsidiary.
|
|
|
•
|
|
We recorded a valuation allowance of approximately $77.2 million as a result of management’s conclusion that it was more likely than not that the
Company’s deferred tax assets would not be utilized.
|
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”), Ridge’s 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 with all accrued interest at maturity 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 19
months after closing (subject to extension in the event the dispute resolution procedures set forth in the Ridge APA are invoked). The Company and Broadridge are currently in discussions to finalize the applicable adjustments and have reached a
broad agreement. We have reflected below our expectation of the eventual adjustments, though these have not yet been finalized or implemented formally. 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 was 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”). 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.
As of December 31, 2011 a calculation was performed to determine the annualized revenues, based on a six-month review period, for each such Non-revenue Correspondent (“Non-revenue Correspondent Revenues”). This calculation resulted in
a reduction in the contingent consideration
53
liability of approximately $.1 million. Additionally, the liability was reduced by approximately $1.3 million for other items such as client concessions, departing correspondents and additional
business as negotiated by both parties. The overall reduction to the liability of approximately $1.4 million is included in other expenses in the consolidated statement of operations for the year ended December 31, 2011. As of December 31,
2011 the total amount of contingent consideration totaled $3.0 million.
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. 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 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 and $337.2 million
for the years ended December 31, 2010 and 2009, respectively, and net income (loss) would have been $(19.0) million and $17.3 million for the years ended December 31, 2010 and 2009, respectively had the acquisition occurred as of
January 1, 2009. As of December 31, 2011, based upon an impairment review by the Company, it was determined that the goodwill was impaired, which resulted in a goodwill impairment charge that reduced the Ridge goodwill balance to zero. See
Note 2 to our consolidated financial statements.
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, 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 Schonfeld’s responsibilities under the Schonfeld Asset Purchase Agreement to its parent company, SGH, and extends the initial term of Opus’s portfolio margining agreement with PFSI from April 30, 2017 to April 30, 2019.
In January, 2011, the Company and SGH entered into a letter agreement setting the amount due for the third year earnout at
$6,000 due to the provisions in various agreements related to the Schonfeld transaction, including the termination/compensation agreement, which reduced the amount that the Company was required to pay under the Schonfeld Asset Purchase Agreement.
This resulted in a reduction in goodwill and other liabilities of approximately $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.
A payment of approximately $26.6 million was paid in connection with the first year earnout that
ended May 31, 2008, approximately $25.5 million was paid in connection with the second year of the earnout that
54
ended May 31, 2009 and approximately $9.3 million was paid in connection with the fourth year of the earnout that ended on May 31, 2011. Pursuant to the terms of a letter agreement with
Schonfeld, at December 31, 2011, we had paid $2.0 million as result of the third year of the earnout ended May 31, 2010. The remaining $4.0 million liability as of December 31, 2011, is to be paid evenly over the eight month period
commencing on January 1, 2012. We have not yet made the payment due March 1, 2012, due to a contractual dispute with one of the Schonfeld correspondents. We anticipate resolving the dispute in the near future. As of December 31, 2011
the Company recorded a goodwill impairment charge that reduced the Schonfeld goodwill balance to zero. See Note 2 to our consolidated financial statements.
Strategic Initiatives
We are continuing to advance our previously
announced series of strategic initiatives designed to increase our regulatory and other capital positions, further reduce our operating expenses and sharpen our strategic focus. Since the beginning of the third quarter, the Company:
|
|
•
|
|
Completed the combination of the operations of Penson Futures and PFSI into one operating company;
|
|
|
•
|
|
Expanded the scope of our outsourcing agreement with Broadridge;
|
|
|
•
|
|
Deconverted certain TD Ameritrade, f/k/a thinkorswim accounts;
|
|
|
•
|
|
Completed the sale of PFSA;
|
|
|
•
|
|
Announced plans to sell certain of PFSL’s assets to third parties and close operations in an orderly manner;
|
|
|
•
|
|
Paid down approximately $18 million of the revolving credit facility and reduced commitments, and have subsequently reduced the outstanding balance to
approximately $.3 million under this facility;
|
|
|
•
|
|
Began negotiations for the sale of PFSC;
|
|
|
•
|
|
Foreclosed upon certain Nonaccrual Receivables; and
|
|
|
•
|
|
Continued efforts to streamline the operations of PFSI.
|
For a more complete description of the effect of these initiatives on our operations, see “Liquidity and Capital Resources” below.
Combination of the operations of Penson Futures and PFSI into one operating company
On September 1, 2011, we announced the completion of the combination of our U.S. broker-dealer business and U.S. futures businesses.
The businesses are now combined into a single entity. This combination facilitates more efficient use of both capital and infrastructure. By eliminating the need to maintain separate regulatory capital bases for the respective businesses we
estimated that we enhanced our excess regulatory capital by approximately $25.1 million at the time of the combination. Since the date of the combination we have withdrawn approximately $18.5 million in order to finance operations for business
outside of PFSI. We also expect to be able to achieve savings from synergies between the futures and broker dealer operations and estimate that we may be able to reduce costs by up to $2 million annually. We also anticipate that the combination of
the futures and broker dealer operations will enhance the product offering for our customers.
Expansion of outsourcing
to Broadridge
On October 13, 2011, we announced that the Company had entered into an amendment agreement with
Broadridge, providing, among other things, for the expansion of various services subject to the master services agreement (MSA) with Broadridge and related country schedules (the MSA Schedules) for the United States and Canada. The amendment
agreement sets a target for the Company to outsource $8 million worth of additional services by July, 2013. The amendment agreement also provides that the MSA Schedule related to the
55
Company’s United Kingdom subsidiary may be terminated without penalty. In connection with the signing of the amendment agreement, expansion of various services subject to the MSA, and to
defray certain costs associated with the conversion by the Company to Broadridge’s technology platform, Broadridge made a payment to the Company of $7 million. In the event that the Company has not outsourced at least $7 million worth of
additional services to Broadridge by July 1, 2013, a penalty (proportionate to the amount by which the expanded outsources services are less than $7 million) will be paid to Broadridge. As of December 31, 2011 management estimates it will
be able to outsource approximately $6.2 million of additional services. The amendment agreement entered by the Company did not include the cost of inflation adjustment previously contemplated. As previously announced, the expansion of the services
pursuant to the amendment agreement does not include an outsourcing of the Company’s data centers and the Company continues to work with Broadridge and third party vendors to investigate additional cost savings that may be achieved through
streamlining data center functions.
Separately, the Company and Broadridge amended and restated the terms of the Ridge Seller
Note, dated as of June 25, 2010, to provide for payment of interest by the Company at maturity rather than on a quarterly basis. The Ridge Seller Note is scheduled to mature in June 2015.
Conversion to BPS Platform
As we previously announced, the Company’s Canadian subsidiary completed its conversion to the Broadridge BPS technology platform. In October 2011, the Company’s United States subsidiary
completed the first stage of its conversion to the BPS technology platform, completed a second conversion in December, 2011 and converted its remaining securities clearing correspondents during the first quarter of 2012. We believe that the
outsourcing of services to Broadridge offers significant cost savings, product enhancements and strategic flexibility for the Company.
Streamlining operations
In addition to the expansion of outsourcing
to Broadridge, the Company has been proceeding with its plans to further streamline its internal operations, which we anticipate could reduce costs by an additional $6 million annually.
Sale of PFSA
In November 2011, the Company completed the sale of its Australian subsidiary, PFSA, to BNY Mellon Group for a purchase price of approximately $33.2 million and recorded a gain on disposition of
approximately $11.5 million, net of tax.
Sale of certain of PFSL’s assets and closure of operations
After exploring available alternatives for rationalizing the operations of the Company’s U.K. subsidiary, PFSL,
the Company announced in December, 2011 that it had elected to pursue the sale of certain of the assets of PFSL to third parties and to commence the closure of the operations of PFSL. The Company anticipates that the closure of PFSL will result in
annual savings to the Company of approximately $6 million. The Company anticipates that costs associated with the closure of PFSL will be approximately $2.7 million, offset by any gain on dispostion generated by sales of assets.
Liquidation of certain Nonaccrual Receivables
As discussed in Note 8 to our consolidated financial statements, the Company has commenced enforcement actions with respect to certain of its Nonaccrual Receivables. In particular, the Company determined
that it was appropriate to foreclose on certain of the collateral securing certain of the Nonaccrual Receivables. Accordingly, on August 4, 2011, the Company foreclosed on 1,001 shares of its common stock at a price of $2.61 per share,
56
the then current market price, totaling $2,612, which proceeds were applied to reduce the applicable Nonaccrual Receivable. Subsequently, on September 1, 2011 the Company foreclosed on
certain municipal bonds, limited partnership interests, secured debts and other collateral pursuant to a public foreclosure auction. The Company successfully entered a credit bid $40.2 million of Nonaccrual Receivables at the foreclosure auction
reducing the outstanding Nonaccrual Receivables by an equal amount. The debtors subject to the various foreclosure sales remain liable for deficiency claims of approximately $56.9 million in respect of which the Company continues to hold certain
collateral not subject to the September foreclosure actions. Subsequently, in February 2012 the Company conducted a further foreclosure auction of certain additional municipal bonds and successfully entered a credit bid of $8.0 million. We recognize
that, despite the initial foreclosure actions, it may take significant time and investment of resources to execute upon a plan of liquidation of the assets acquired at the foreclosures. Given the illiquid nature of some of these assets, the Company
is likely to be more heavily involved in restructurings of the investments than it would be typically. We believe it is necessary to do so in this case so that the Company may maximize the value received in connection with the ultimate realization
on these investments. The various foreclosure and enforcement actions undertaken by the Company will not have a negative impact on the regulatory capital or liquidity of the Company or any of its operating subsidiaries.
Conversion Away of Certain TD Ameritrade, f/k/a thinkorswim, Accounts to TD Ameritrade
In August, 2011, TD Ameritrade, Inc., f/k/a thinkorswim, Inc., deconverted its accounts to its own systems resulting in an improvement in
the excess regulatory capital position of PFSI due to the lower required commitment of capital to process this business.
Pay down the revolving credit facility
In December 2011 we repaid $18 million of the amount outstanding under our Amended and Restated Credit Agreement, which reduced the outstanding amount to approximately $7 million and has reduced our
interest costs. We have recently further paid down this facility, and currently owe approximately $.3 million under the facility. Our goal is to ultimately repay this debt in full, which would eliminate approximately $2 million of interest
expense annually assuming an outstanding balance of $25 million. See “Liquidity and Capital Resources —
Capital Resources
” for a description of the required pay down provisions of the Amended and Restated Credit Agreement.
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 typically 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
57
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. and Canada each generate these types of
transactions.
Revenues from clearing and commission fees represented 48%, 48% and 44% of our total net revenues for the years
ended December 31, 2011, 2010 and 2009, 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 28%, 27% and 26% of our
total net revenues for years ended December 31, 2011, 2010 and 2009, 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.
58
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, income (loss) before income taxes is determined in the aggregate. We also separately record interest income and interest expense to determine the overall profitability of this
activity.
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
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clearing and commission fees
|
|
|
48
|
%
|
|
|
48
|
%
|
|
|
44
|
%
|
|
Technology
|
|
|
10
|
%
|
|
|
9
|
%
|
|
|
10
|
%
|
|
Interest, gross
|
|
|
38
|
%
|
|
|
36
|
%
|
|
|
40
|
%
|
|
Other revenues
|
|
|
14
|
%
|
|
|
16
|
%
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
110
|
%
|
|
|
109
|
%
|
|
|
114
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense from securities operations
|
|
|
10
|
%
|
|
|
9
|
%
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
35
|
%
|
|
|
40
|
%
|
|
|
39
|
%
|
|
Floor brokerage exchange and clearance fees
|
|
|
16
|
%
|
|
|
14
|
%
|
|
|
12
|
%
|
|
Communications and data processing
|
|
|
28
|
%
|
|
|
19
|
%
|
|
|
13
|
%
|
|
Occupancy and equipment
|
|
|
11
|
%
|
|
|
10
|
%
|
|
|
9
|
%
|
|
Bad debt expense
|
|
|
23
|
%
|
|
|
1
|
%
|
|
|
—
|
|
|
Goodwill and intangible asset impairment
|
|
|
63
|
%
|
|
|
—
|
|
|
|
—
|
|
|
Other expenses
|
|
|
12
|
%
|
|
|
12
|
%
|
|
|
12
|
%
|
|
Interest expense on long-term debt
|
|
|
19
|
%
|
|
|
13
|
%
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
207
|
%
|
|
|
109
|
%
|
|
|
90
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
(107
|
)%
|
|
|
(9
|
)%
|
|
|
10
|
%
|
|
Income tax expense (benefit)
|
|
|
(4
|
)%
|
|
|
(3
|
)%
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(103
|
)%
|
|
|
(6
|
)%
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of the years ended December 31, 2011 and December 31, 2010
Overview
Results of
continuing operations declined for the year ended December 31, 2011 compared to the year ended December 31, 2010. This decline was primarily due to a goodwill and intangible asset impairment of $137.4 million, a $43.0 million write down to
certain Nonaccrual Receivables, a $77.2 million provision to record a deferred tax asset valuation allowance, lower clearing and commission fees, lower net interest income, lower other revenues, higher floor brokerage, exchange and clearance fees,
increased communications and data processing costs and higher interest expense on long-term debt, partially offset by higher technology revenues, lower employee compensation and benefits and lower other expenses. Loss from continuing operations
increased $208.5 million for 2011 as compared to 2010.
Our U.S. operating subsidiaries experienced a decrease in pretax
income (loss) of approximately $75.5 million due primarily to a $43.0 million write down to certain Nonaccrual Receivables in the second quarter,
59
lower clearing and commission fees, lower net interest income, lower other revenues, higher communications and data processing, floor brokerage, exchange and clearance fees, occupancy and
equipment and interest expense on long-term debt offset partially by higher technology revenue and lower employee compensation and benefits. The 2011 U.S. operating results were also impacted by the addition of the Ridge business that closed on
June 25, 2010.
The above factors resulted in a larger loss from continuing operations for the year ended
December 31, 2011 compared to the year ended December 31, 2010.
The following is a summary of the increases
(decreases) in the categories of revenues and expenses for the year ended December 31, 2011 compared to the year ended December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
Amount
|
|
|
%
Change from
Previous Period
|
|
|
|
|
(In thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Clearing and commission fees
|
|
$
|
(6,394
|
)
|
|
|
(5.8
|
)
|
|
Technology
|
|
|
1,636
|
|
|
|
8.0
|
|
|
Interest:
|
|
|
|
|
|
|
|
|
|
Interest on asset based balances
|
|
|
3,665
|
|
|
|
5.3
|
|
|
Interest on conduit borrows
|
|
|
(4,263
|
)
|
|
|
(39.9
|
)
|
|
Money market
|
|
|
(88
|
)
|
|
|
(3.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Interest, gross
|
|
|
(686
|
)
|
|
|
(0.8
|
)
|
|
Other revenue
|
|
|
(4,543
|
)
|
|
|
(12.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
(9,987
|
)
|
|
|
(4.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
Interest expense on liability based balances
|
|
|
4,940
|
|
|
|
39.5
|
|
|
Interest on conduit loans
|
|
|
(3,202
|
)
|
|
|
(44.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense from securities operations
|
|
|
1,738
|
|
|
|
8.8
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
(11,725
|
)
|
|
|
(5.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
(16,570
|
)
|
|
|
(17.9
|
)
|
|
Floor brokerage, exchange and clearance fees
|
|
|
4,594
|
|
|
|
14.7
|
|
|
Communications and data processing
|
|
|
16,611
|
|
|
|
37.9
|
|
|
Occupancy and equipment
|
|
|
453
|
|
|
|
2.0
|
|
|
Bad debt expense
|
|
|
49,163
|
|
|
|
3,328.6
|
|
|
Goodwill and intangible asset impairment
|
|
|
137,421
|
|
|
|
|
|
|
Other expenses
|
|
|
(810
|
)
|
|
|
(3.0
|
)
|
|
Interest expense on long-term debt
|
|
|
10,113
|
|
|
|
32.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200,975
|
|
|
|
80.6
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues
Net revenues decreased $11.7 million, or 5.1%, to $217.3 million from the year ended December 31, 2010 to the year ended December 31, 2011. The decrease is primarily attributed to the
following:
Clearing and commission fees decreased $6.4 million, or 5.8%, to $104.4 million during this same period. This
decrease is primarily due to clearing and commission fees of $15.5 million for the first six months of 2011 related to the Ridge acquisition in June 2010, offset by a decrease of approximately $22.2 million in our existing
60
U.S. securities and futures businesses, of which approximately $2.5 million is related to the deconversion of thinkorswim. During this period we encountered lower equity and option volumes in the
U.S. offset by a weaker mix. Our futures business benefited from higher commissions from execution business and a stronger mix.
Technology revenue increased $1.6 million, or 8.0% from the year ended December 31, 2010 to $22.1 million due to higher
recurring revenues of $1.9 million offset by a reduction in development revenues of $.3 million.
Interest, gross decreased
$.7 million or .8%, to $81.5 million during the year ended December 31, 2011 compared to the year ended December 31, 2010. Interest revenues from customer balances increased $3.6 million or 5.0% to $75.1 million due to
higher interest income on asset balances of approximately $3.7 million offset by a decrease of approximately $.1 million in money market revenues. The increase in our interest income on assets balances is attributable to an increase in our average
daily interest earning assets of $.6 billion or 9.6% to $6.5 billion while our average daily interest rate decrease four basis points to 1.12%. The previously announced deconversion of thinkorswim resulted in approximately a $2.7 billion decrease in
our average daily interest earning assets for the year ended December 31, 2011.
Interest from our stock conduit
borrowing operations decreased $4.3 million or 39.9% during 2011 to $6.4 million, as a result of a decrease in our average daily interest rate of 65 basis points or 36.1% to 1.15% and a decrease in our average daily assets of approximately
$36.5 million, or 6.2% to $556.9 million.
Other revenue decreased $4.5 million, or 12.8% from 2010 to $30.9 million
primarily due to decreases in equity and foreign exchange trading of $3.8 million and approximately $3.1 million in our trade aggregation business offset by increased account servicing fees of approximately $1.9 million and increased execution
services revenues of $.5 million.
Interest expense from securities operations increased $1.7 million, or 8.8%, to
$21.5 million from the year ended December 31, 2010 to the year ended December 31, 2011. Interest expense from clearing operations increased approximately $4.9 million, or 39.5%, to $17.4 million due to an increase in our average
daily balances on our short-term obligations of $.6 billion, or 9.6%, to $6.5 billion and a 6 basis point or 25.0% increase in our average daily interest rate to .30%. The previously announced deconversion of thinkorswim resulted in
approximately a $2.7 billion decrease in our average daily balances for the year ended December 31, 2011.
Interest from
our stock conduit loans for 2011 decreased $3.2 million, or 44.3% to $4.0 million due to a 49 basis point decrease, or 40.2% in our average daily interest rate to .73% and a $36.5 million, or 6.2% decrease in our average daily balances to $556.2
million.
Interest, net decreased from $62.5 million for the year ended December 31, 2010 to $60.1 million for
the year ended December 31, 2011. This decrease was due to higher customer balances offset by lower conduit balances, a lower interest rate spread of 10 basis points on customer balances and 16 basis points on conduit balances.
Employee compensation and benefits
Total employee costs decreased $16.6 million, or 17.9%, to $75.9 million from the year ended December 31, 2010 to the year ended December 31, 2011, primarily due to lower compensation
costs of approximately $9.3 million resulting from lower headcounts, lower severance costs of $2.9 million including a $1.1 million reversal of severance costs related to the outsourcing agreement with Broadridge taken in the second quarter of 2011
(see Note 19 to consolidated financial statements), lower stock-based compensation of approximately $1.8 million, lower incentive compensation of $1.3 million and approximately $1.3 million in lower stay pay costs. Employee count in the U.S.
decreased 15.8% to 580 as of December 31, 2011.
61
Floor brokerage, exchange and clearance fees
Floor brokerage, exchange and clearance fees increased $4.6 million, or 14.7%, to $35.8 million for the year ended December 31, 2011
from the year ended December 31, 2010, resulting in large part from the additional volumes from the Ridge acquisition in the first six months of 2011.
Communication and data processing
Total expenses for our communication and
data processing requirements increased $16.6 million, or 37.9%, to $60.5 million from the year ended December 31, 2010 to the year ended December 31, 2011 primarily attributable to outsourcing costs associated with the Ridge
acquisition and higher maintenance fees associated with our futures trade processing system.
Occupancy and equipment
Total expenses for occupancy and equipment increased $.5 million, or 2.0%, to $22.9 million from the year ended December 31,
2010 to the year ended December 31, 2011 primarily due to higher depreciation resulting from computer equipment and software associated with our conversion to the Broadridge technology platform.
Bad debt expense
Bad
debt expense increased approximately $49.2 million primarily due to a $43.0 million write down to certain Nonaccrual Receivables. Typically, our loans to customers or correspondents are made on a fully collateralized basis because they are generally
margin loans and the amount advanced is less than the then current value of the margin collateral. When the value of that collateral declines, or the collateral decreases in liquidity, we consider a variety of credit enhancements such as, but not
limited to, seeking additional collateral or guarantees. When valuing receivables that become less than fully collateralized, we compare what we determine to be the market value of the collateral, deposits and any additional credit enhancements to
the balance of the loan outstanding and evaluate the collectability based on various qualitative factors, such as, but not limited to, the creditworthiness of the counterparty, the potential impact of any outstanding litigation or arbitration and
nature of the collateral and available realization methods. We monitor every account that is less than fully collateralized with liquid securities every trading day. This specific, account-by-account review is supplemented by the risk management
procedures to identify illiquid securities and other market developments that it is anticipated would affect accounts that otherwise appear to be fully collateralized. The corporate and local country risk management officers monitor market
developments on a daily basis. At the culmination of this review, we record an appropriate allowance for doubtful accounts, which in our judgment is necessary to reflect anticipated losses in outstanding receivables. When a receivable is deemed not
to be collectable it is generally reserved at 100% as the applicable reserve would correlate with the amount of the balance that is under-secured.
Our review of accounts receivable is an active, continuing process during which, among other factors, we seek to assess the fair value and liquidity of the assets collateralizing the receivables. As
discussed in Note 9 to our consolidated financial statements, following the failure of the Texas legislature to enact legislation expanding gaming rights, we reassessed the value of the collateral securing the Nonaccrual Receivables and in
particular the value of the Retama Development Corporation (“RDC”) bonds. This review resulted in our determination that the carrying value of the Nonaccrual Receivables was not fully realizable and we recorded a bad debt charge of $43.0
million in the second quarter of 2011.
We also determined that it was appropriate to commence enforcement actions with
respect to certain of those Nonaccrual Receivables, and therefore began foreclosure against collateral securing certain of these Nonaccrual Receivables. On August 4, 2011, we foreclosed on 1.0 million shares of our common stock which were
held as collateral for Nonaccrual Receivables at a price of $2.61 per share, the then current market price.
62
The value of these shares, totaling $2.6 million, was applied to reduce the applicable Nonaccrual Receivables. The purchased shares increased the total number of treasury shares as of that date.
Further, on September 1, 2011 we foreclosed on certain municipal bonds, limited partnership interests, secured debts and other collateral pursuant to a public foreclosure auction. This foreclosure resulted in a reduction in the applicable
Nonaccrual Receivables of $40.2 million. Subsequently, in February 2012 the Company conducted a further foreclosure auction of certain additional municipal bonds and successfully entered a credit bid of $8.0 million. The debtors subject to the
various foreclosure sales remain liable for the Nonaccrual Receivables that were not subject to such credit, including Nonaccrual Receivables previously reserved against. We continue to evaluate whether additional enforcement action is feasible or
advisable at this stage with respect to outstanding Nonaccrual Receivables and deficiency claims that we retain. As of December 31, 2011 and December 31, 2010, we had approximately $9.3 million and $97.4 million in Nonaccrual Receivables,
net of reserves of $0 and $2.4 million, respectively. Of these Nonaccrual Receivables approximately $8.5 million were collateralized by RDC Bonds and certain other interests in the Project referred to below.
When assessing collectability of its remaining Nonaccrual Receivables, or assets acquired as a consequence of foreclosure on collateral
securing Nonaccrual Receivables, we consider a variety of factors relating to the collateral securing such receivables and assets acquired through foreclosure such as, but not limited to, the macroeconomic environment, the underlying value of the
projects associated with the bonds, the value of assets (often real estate) held in those projects and the liquidity of the collateral. In each case these bonds are owned by customers and pledged to us and/or our affiliates, or acquired by us
following foreclosure on such collateral. When evaluating the value of the RDC bonds, in addition to third party pricing indications, we looked at additional factors such as, but not limited to (i) the value of the real estate and racing
license rights held by the issuer, which were supported by a third party appraisal of the Retama property, (ii) the potential for the issuer to find additional partners (such as, but not limited to, gaming companies); and (iii) the
potential expansion of gaming in Texas.
There can be no assurances that our collection efforts, including anticipated funding
and/or other actions by third parties, will be effectuated as currently contemplated, or that we will be able to realize the full value on the collateral securing the Nonaccrual Receivables, or assets acquired as a consequence of foreclosure on
collateral securing Nonaccrual Receivables, as currently contemplated. Given the illiquid nature of much of the collateral, we anticipate that ultimate realization upon the collateral and foreclosed assets may require investment of significant time
and resources, including active participation in the restructuring of the investments, in order to execute upon a plan of liquidation. In order to support attempts to restructure the horse racing track and real estate project (‘Project”)
financed by the RDC’s bonds, we made an advance to the RDC of $400,000 on September 2, 2011 and a further advance of $400,000 on December 20, 2011. These advances are secured by certain real estate interests of the RDC in the Project.
We believe that an eventual restructuring of the Project represents the best opportunity for us to maximize the value of its interests in the Project. We continue to work towards restructuring the Project with a view to encouraging a third party
investment in the Project.
Goodwill and intangible asset impairment
As of December 31, 2011 we recorded a goodwill and intangible asset impairment charge of $137.4 million as a result of our annual
impairment testing. During the second quarter of 2011 the Company’s common stock declined approximately 35%. In light of the potential impairment indicator represented by the market capitalization reduction, the Company’s management
performed an interim goodwill impairment analysis in June 2011 using a discounted cash flow analysis. The results of our interim analysis did not indicate that the fair value of any reporting units had fallen below its carrying value at that time,
and therefore the Company did not perform step two of the impairment analysis.
By the fourth quarter of 2011, there had been
further deterioration to the Company’s business which included significant reductions in trade volumes and, importantly reports from the Federal Reserve that the targeted federal funds rate would remain at the current historical lows at least
through the majority of 2014.
63
During the fourth quarter of 2011 the Company had determined that the future outlook for trade volumes and interest rates had significantly declined. This in turn influenced management’s
assumptions regarding revenue levels that could be expected to be reached in the future, which consequently impacted the Company’s cash flow models. Even when considering the strategic initiatives the Company has initiated which are expected to
significantly reduce the Company’s cost structure the earning potential of its U.S. securities and futures businesses has been affected by these revised assumptions regarding the Company’s revenue potential in the future. Applying these
revised assumptions, the Company’s discounted cash flow analysis resulted in a determination by the Company that the estimated fair values for both its U.S. securities and futures reporting units were below their respective carrying values. As
a result management performed step two of the impairment test for each reporting units which resulted in a goodwill impairment charge of $118.8 million and $16.9 million, respectively for the U.S. securities and futures reporting units which reduced
the goodwill for each reporting unit to zero. The Company also recorded an impairment charge of approximately $.3 million for its PFSL business as a result of the decision to shut down its operations. This charge is included in discontinued
operations. The goodwill impairment charge was not deductible for income tax purposes and did not impact the Company’s regulatory capital position or its cash position.
Other expenses
Other expenses decreased $.8 million, or 3.0%, to
$26.4 million from the year ended December 31, 2010 to the year ended December 31, 2011, due primarily to a decrease in the Ridge contingent consideration of $1.4 million, lower professional fees of $1.2 million and costs incurred in
connection with the Ridge acquisition in 2010 offset by higher legal and accounting fees of $1.3 million and amortization of $1.0 million associated with the Ridge acquisition.
Interest expense on long-term debt
Interest expense on long-term debt
increased $10.1 million from $30.8 million for the year ended December 31, 2010 to $40.9 million for the year ended December 31, 2011 resulting primarily from approximately $9.0 million of interest expense associated with our senior second
lien secured notes issued on May 6, 2010, $.9 million associated with the Ridge Seller Note issued on June 25, 2010 and $.4 million of higher interest expense on our convertible notes offset by $.3 million in lower interest costs on our
revolving credit facility due to lower balances as compared to the prior year.
Income tax benefit
Income tax benefit, based on an overall effective income tax rate of 4.4%, was $10.1 million for the year ended December 31,
2011 as compared to an overall effective income tax rate of 28.5% and an income tax benefit of $5.8 million for the year ended December 31, 2010. This change is primarily attributed to a $75.8 million deferred tax asset valuation allowance
recorded in 2011 as well as items deducted for books that are not deductible for tax primarily attributable to stock-based compensation that creates additional taxable income.
Loss from continuing operations
As a result of the foregoing, the loss
from continuing operations was approximately $223.1 million for the year ended December 31, 2011 compared to a loss from continuing operations of $14.6 million for the year ended December 31, 2010.
Comparison of years ended December 31, 2010 and December 31, 2009
Overview
Results of continuing operations declined for the year ended
December 31, 2010 compared to the year ended December 31, 2009. Clearing and commission fees increased $10.0 million while technology revenues decreased
64
$3.4 million, other revenues decreased $9.9 million and net interest revenues decreased $1.8 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 U.S. equity and
options volumes. This decline was offset by higher futures volumes. 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,
bad debt expense 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 $110.0 million reduction in our revolving credit facility during the second quarter 2010 ($88.5 million as of December 31, 2009).
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
Amount
|
|
|
%
Change from
Previous Year
|
|
|
|
|
(In thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Clearing and commission fees
|
|
$
|
9,983
|
|
|
|
9.9
|
|
|
Technology
|
|
|
(3,374
|
)
|
|
|
(14.2
|
)
|
|
Interest:
|
|
|
|
|
|
|
|
|
|
Interest on asset based balances
|
|
|
2,715
|
|
|
|
4.1
|
|
|
Interest on conduit borrows
|
|
|
(14,382
|
)
|
|
|
(57.4
|
)
|
|
Money market
|
|
|
535
|
|
|
|
23.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest, gross
|
|
|
(11,132
|
)
|
|
|
(11.9
|
)
|
|
Other revenue
|
|
|
(9,860
|
)
|
|
|
(21.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
(14,383
|
)
|
|
|
(5.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
Interest expense on liability based balances
|
|
|
(1,374
|
)
|
|
|
(9.9
|
)
|
|
Interest on conduit loans
|
|
|
(11,546
|
)
|
|
|
(61.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense from securities operations
|
|
|
(12,920
|
)
|
|
|
(39.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
(1,463
|
)
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
3,497
|
|
|
|
3.9
|
|
|
Floor brokerage, exchange and clearance fees
|
|
|
3,714
|
|
|
|
13.5
|
|
|
Communications and data processing
|
|
|
13,175
|
|
|
|
43.0
|
|
|
Occupancy and equipment
|
|
|
1,013
|
|
|
|
4.7
|
|
|
Bad debt expense
|
|
|
977
|
|
|
|
195.4
|
|
|
Other expenses
|
|
|
(52
|
)
|
|
|
(0.2
|
)
|
|
Interest expense on long-term debt
|
|
|
20,485
|
|
|
|
198.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,809
|
|
|
|
20.7
|
|
|
|
|
|
|
|
|
|
|
|
65
Net revenues
Net revenues decreased $1.5 million, or 0.6%, to $229.1 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 $10.0 million, or 9.9%, to $110.8 million during this
same period. This increase is attributable to clearing and commission fees of approximately $16.2 million related to the Ridge acquisition and approximately $3.8 million from our futures business offset by a decrease of approximately $10.1 million
associated with our existing securities U.S. clearing business. 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 and option volumes 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 $11.1 million or 11.9%, to $82.2 million during the year ended December 31, 2010 compared to the year
ended December 31, 2009. Interest revenues from customer balances increased $3.3 million or 4.8% to $71.5 million due to an increase in our average daily interest earning assets of $1.6 billion or 36.4% to $5.9 billion offset by a decrease
in our average daily interest rate of 37 basis points or 24.2% to 1.16%.
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 $9.9 million, or 21.8%, to $35.4 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 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 $5.3 million.
Interest
expense from securities operations decreased $12.9 million, or 39.6%, to $19.7 million from the year ended December 31, 2009 to the year ended December 31, 2010. Interest expense from clearing operations decreased approximately $1.4
million, or 9.9%, to $12.5 million due to a 12 basis point or 33.3% decrease in our average daily interest rate to .24% offset by an increase in our average daily balances on our short-term obligations of $1.5 billion, or 39.0%, to $5.3 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 $60.7 million for the year ended December 31, 2009 to $62.5 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 25 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 $3.5 million, or 3.9%, to $92.5 million from the year ended December 31, 2009 to the year ended December 31, 2010, primarily due to severance charges of
approximately $3.7 million related to future outsourcing resulting from our Ridge acquisition (see Note 26 to our consolidated financial
66
statements) and a program to reduce overhead as a result of the current market environment, and $1.8 million associated with the Ridge acquisition offset by lower incentive-based compensation
expense of approximately $1.6 million and lower continuing employee costs from a lower headcount. Employee headcount decreased as a result of reductions in force offset by the addition of employees associated with the Ridge acquisition.
Floor brokerage, exchange and clearance fees
Floor brokerage, exchange and clearance fees increased $3.7 million, or 13.5%, to $31.2 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.
Communication and data
processing
Total expenses for our communication and data processing requirements increased $13.2 million, or 43.0%, to
$43.8 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.
Occupancy and equipment
Total expenses for occupancy and equipment
increased $1.0 million, or 4.7%, to $22.5 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.
Bad debt expense
Bad debt expense increased $1.0 million or 195.4% to $1.5 million from the year ended December 31, 2009 to the year ended December 31, 2010 primarily due to receivables that management
determined were not collectable.
Other expenses
Other expenses decreased less than $.1 million, or .2%, to $27.2 million from the year ended December 31, 2009 to the year ended December 31, 2010. We incurred approximately $3.0 million of
costs associated with the Ridge acquisition in 2010 compared to $1.4 million in 2009 and $1.1 million in higher legal expenses to conclude certain outstanding litigation, higher professional fees associated with our Broadridge conversion offset by
lower expenses 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.
Income tax expense (benefit)
Income tax benefit, based on an effective income tax rate of approximately 28.5%, was $5.8 million for the year ended December 31,
2010 as compared to an effective tax rate of 40.5% and income tax expense of $9.6 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 creates additional taxable income.
67
Income (loss) from continuing operations
As a result of the foregoing, we incurred a loss from continuing operations of $14.6 million for the year ended December 31, 2010
compared to income from continuing operations of $14.2 million for the year ended December 31, 2009.
Results of discontinued
operations
Comparison of years ended December 31, 2011 and December 31, 2010
Loss from discontinued operations was approximately $2.4 million for the year ended December 31, 2011 compared to a loss of
approximately $5.2 million for the year ended December 31, 2010 which includes the operations of PFSC, PFSL and PFSA (through November 30, 2011). The loss in 2011 included a gain on the sale of PFSA of approximately $11.5 million, net of
tax. Both PFSC and PFSL incurred greater losses in 2011 as compared to 2010 while PFSA achieved higher net income.
Comparison of years
ended December 31, 2010 and December 31, 2009
Loss from discontinued operations was approximately $5.2 million
for the year ended December 31, 2010 compared to income of approximately $1.8 million for the year ended December 31, 2009 which includes the operations of PFSC, PFSL and PFSA. Both PFSC and PFSL incurred greater losses in 2011 as compared
to 2010 while PFSA achieved higher net income. PFSC incurred lower net income in 2010 as compared to 2009 while PFSL’s losses increased in 2010 as compared to 2009. PFSA achieved net income in 2010 as compared to a net loss in 2009.
Liquidity and capital resources
As discussed in greater detail below, the principal sources of liquidity for the Company are borrowings by our broker-dealer subsidiaries, borrowings at the parent level, and cash generated from
operations in our operating entities. In turn, the principal uses of cash are to support the operations of our operating broker dealer subsidiaries, to pay our operating expenses and to cover interest and principal payments on our long term debt.
In the ordinary course of their business our broker-dealer subsidiaries may be required to make payments on account of the
settlement of customers trades and to post collateral or margin at various exchanges where we they are members or conduct business in respect of the activity of our customers. These requirements are highly dependent on the activity of our
correspondents and customers and general market conditions. Consequently, the cash requirements of our broker-dealer subsidiaries are highly variable in their nature and difficult to fully predict. Our operating subsidiaries fund their daily cash
requirements principally from cash on hand and their short term debt facilities. The extent to which our operating subsidiaries are required to borrow under their available debt facilities is, therefore, also highly variable and unpredictable. As
discussed below, we seek to establish sufficient borrowing capacity at our broker-dealer subsidiaries to cover anticipated liquidity requirements and also review and seek to control correspondent and customer activity that would materially adversely
impact available liquidity. Our broker-dealer debt facilities are typically uncommitted and on demand. In the event that our lenders under these facilities refuse to extend loans, limit the size of loans they will make, or require repayment of
outstanding loans, the available liquidity for our broker dealer subsidiaries would be adversely impacted and, in turn, could materially adversely impact the nature and types of business that our broker-dealer subsidiaries could support. Changes in
the composition of our client base and the types of business we handle have also reduced overall daily cash requirements in our broker dealer subsidiaries.
In contrast to the cash requirements to support the business of our correspondents and customers at our operating subsidiaries, the requirements for supporting our long-term debt obligations and operating
expenses are relatively predictable and fixed. In addition to the principal and interest payment obligations on our long term debt discussed below, the principal operating expense requirements are our compensation expense, lease
68
obligations and technology and back office support system expenses. These obligations are principally satisfied from cash generated by our broker-dealer subsidiaries and borrowings at the parent
level. Our ability to incur additional borrowing at the parent level, outside of our existing credit facilities, is limited by our existing debt facilities and the ability of our parent to access cash generated by our operating subsidiaries to meet
operating expenses and debt obligations at a parent company level is potentially subject to restrictions imposed the various regulators of our operating subsidiaries.
Operating Liquidity —
As noted above, the liquidity needs of our broker dealer subsidiaries are principally driven by the requirements to support the trading activities of correspondents
and their customers. We regularly review the liquidity requirements of our operating subsidiaries and the correspondent and customer activity impacting on those liquidity requirements. Where necessary, we seek to limit liquidity impacts by requiring
additional deposits, limiting particular trading activity, or limiting the types of correspondents or customers that the Company will support. For example, during the year the Company reduced its exposure to the trading of low priced securities and
deconverted the majority of the business of TD Ameritrade, Inc., f/k/a thinkorswim, Inc. Both these actions had the effect of reducing the significant liquidity requirements associated with those lines of business. Our clearing broker-dealer
subsidiaries typically finance their operating liquidity needs through short term secured bank lines of credit and through secured borrowings from stock lending counterparties in the 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, 2011, we had uncommitted lines of credit with six financial institutions for
the purpose of facilitating our clearing business as well as the activities of our customers and correspondents. Four of the uncommitted lines of credit permitted us to borrow up to an aggregate of approximately $269.2 million while two lines had no
stated limit. Our lenders have recently eliminated our ability to borrow unsecured funds, although such recent limitations have not materially adversely affected our ability to service our clients’ business. As of December 31, 2011, we had
approximately $90.1 million in short-term bank loans outstanding, which left approximately $259.9 million potentially available under our lines of credit with stated limitations, though as noted these facilities are uncommitted. Since the
Nonaccrual Receivables had been previously excluded from our regulatory capital calculation, the write down taken against the Nonaccrual Receivables had no effect on the operating liquidity of our clearing subsidiaries. In addition, the write-off of
the Nonaccrual Receivables is excluded for purposes of calculating our financial covenants under the Amended and Restated Credit Facility and our financial covenant compliance was not impacted negatively. Therefore, it is our belief that the write
down of the Nonaccrual Receivables had no material adverse effect on the Company’s operating liquidity as compared to its position prior to the write down. Similarly, the write downs on account of goodwill and charges in respect of our deferred
tax assets that we have taken in the fourth quarter are non-cash charges and have not affected the regulatory capital of our operating subsidiaries. While these write downs did negatively impact certain financial covenants in our Amended and
Restated Credit Agreement as of December 31, 2011, our banks provided us with a waiver of the applicable covenant.
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. During the course of 2011 we
experienced a reduction in stock lending activity. We believe that was in keeping with reductions overall in the market, though we believe that our stock price decline may have contributed to a number of counterparties reducing their counterparty
exposure to us. At December 31, 2011, we had approximately $217.0 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 significantly
from year to year.
69
Our broker-dealer subsidiaries are subject to minimum net capital requirements established
in each jurisdiction. Most jurisdictions also have early warning capital levels which are significantly higher than minimum requirements. In addition to these statutory requirements, our regulators have the discretion to require higher capital or
liquidity levels. We regularly review our capital and liquidity positions with our regulators, and our expectations of future levels. Over the course of the year we have significantly increased the capital retained in our broker dealer subsidiaries
and are currently substantially above the minimum net capital requirements for each of our broker-dealer subsidiaries. If our regulators require that we retain significant regulatory capital at these subsidiaries, the liquidity of the Company could
be impaired, perhaps significantly.
Capital Resources —
At times, PWI provides capital to its subsidiaries.
PWI has had the ability to obtain capital through equipment leases, typically secured by the equipment itself, through the Amended and Restated Credit Facility and through a committed line of credit that permits PWI to borrow up to $1.5 million. At
December 31, 2011, availability under the Amended and Restated Credit Facility was limited to $7 million, of which $7 million was outstanding. We have recently further paid down this facility, and currently owe approximately $.3 million under the
facility, which is the most we can currently borrow, 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 senior revolving 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
then existing Credit Facility and entered into the Amended and Restated Credit Facility which we have subsequently amended. Our obligations under the Amended and Restated Credit Facility and senior second lien secured notes 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 currently scheduled to mature on March 31, 2012. As is common with facilities of this
type, the negative covenants in our various credit facilities limit our ability to incur additional debt outside of the ordinary course of business and our ability to incur additional working capital debt facilities at a parent company level is
therefore significantly restricted.
We incur a significant amount of interest on our outstanding debt obligations. In 2011,
we paid $1.8 million in interest under our Amended and Restated Credit Facility and predecessor facility, $4.8 million in interest under our Senior Convertible Notes, $25.0 million in interest under our Senior Second Lien Secured Notes and $.6
million in interest under the Ridge Seller Note. We are required to make an interest payment of $12.5 million on the Senior Second Lien Secured Notes in mid-May 2012, and this obligation will continue semi-annually through 2017, when the principal
amount of $200.0 million is due. We are also required, under the Amended and Restated Credit Facility, to pay down the outstanding balance with the proceeds of certain asset sales or equity offerings, including in the event we conclude a sale of
PFSC.
In addition, we expect to continue to pay a significant amount of interest under other debt instruments in 2012 and for
the next several years including our equipment leases, although we are not required to make any payments of principal or interest on the Ridge Seller Note prior to maturity in June 2015. Our significant debt obligations may restrict our ability to
effectively utilize the capital available to us, and may materially adversely affect our business or operations.
As a holding
company, we access the earnings of our operating subsidiaries from time to time through the receipt of dividends from these subsidiaries. As discussed above, however, our broker-dealer subsidiaries are subject to minimum and early warning net
capital requirements established in each jurisdiction. Additionally, as with other regulated entities in our industry, the making of distributions from our regulated operating subsidiaries is generally subject to prior approval by the applicable
regulators. Our regulators have considerable discretion
70
when deciding whether to permit a distribution, though we anticipate that they look at factors such as liquidity, excess regulatory capital, profitability, changes in the business mix and
expected growth in aggregate debits. It is unlikely that our regulators would be willing to permit a distribution that would result in the regulatory capital of an operating subsidiary being reduced to an early warning level. However, as discussed
above, we currently have significant excess regulatory capital and historically have not experienced significant difficulty obtaining approval for distributions by our regulated operating subsidiaries when we have had significant excess capital. For
example, since the combination of PFSI and Penson Futures as of August 31, 2011, the Company has withdrawn $18,500 from PFSI in order to finance operations outside PFSI. We do not believe that our regulators are likely to change their past practice
with respect to approval of dividends by our regulated operating subsidiaries, though our regulators, in part as a result of our stock price, have shown an increased scrutiny of us. However, if our regulators were to require that we must retain
significant regulatory capital at these subsidiaries in excess of minimum early warning levels, such restrictions would correspondingly reduce the amount of funds available to our holding company.
Our principal U.S. subsidiary, PFSI, is subject to the SEC Uniform Net Capital Rule (“Rule 15c3-1”) as well as other
capital requirements from several commodities organizations, including the CFTC, which requires the maintenance of 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 greater of 2% of aggregate debit balances, as defined in the SEC’s Reserve Requirement Rule (“Rule 15c3-3”), the sum of 8% of customer and 8% of noncustomer commodities risk
maintenance requirements on all positions, as these terms are defined by the CFTC, minimum NFA dollar capital requirement of $20 million for FCM’s offering retail forex transactions, or other NFA requirements. At December 31, 2011, PFSI
had net capital of $142.7 million, which was $116.0 million in excess of its required net capital of $26.7 million. For a further description of our Rule 15c3-3 reserve requirements, see Note 6 to our consolidated financial statements.
During times of extreme market volatility, as was the case for portions of 2011, our regulatory liquidity requirements have been and in
the future may be increased significantly in excess of normal levels as a result of, among other things, our correspondents experiencing unusually high trading volume or holding unusually large options or margins positions. During this time, on
two occasions, we sought and received regulatory relief with respect to one of our regulatory liquidity requirements. We no longer clear the business activity which engendered these requests. Nonetheless, the risk exists that in times of
extreme market volatility, our regulatory liquidity requirements could rise significantly due to such circumstances and, if we are unable to satisfy these requirements, we may be subject to adverse consequences such as those set forth in the Risk
Factors section.
Penson Futures, PFSL and PFSC are also subject to minimum financial and capital requirements. All such
businesses were in compliance with their minimum financial and capital requirements as of December 31, 2011. Due to the combination of PFSI and Penson Futures, the total net capital requirements of the combined PFSI entity are substantially
lower than the total requirements of PFSI and Penson Futures prior to the combination.
Partially as a result of recent market
volatility, in coordination with our regulators we developed a plan that we believe will allow us to increase our liquidity and capital position. Through that plan, we intended to increase our liquidity by $100 million, which has largely been
accomplished. See “Strategic Initiatives” for a description of certain components of this plan. One of our previously announced strategic initiatives is the anticipated sale of PFSC. The sale of PFSC is expected to provide a
substantial increase in liquidity to help continue to fund our operations. Although we intend to complete the sale of PFSC in the near term, if the sale is substantially delayed, such delay could adversely affect our continuing operations. We do not
believe a substantial delay is likely, and even if such delay were to occur, we do not believe such delay would materially adversely affect our ability to service a majority of our customers’ needs. Senior management regularly reviews the type
of correspondent activity we permit in light of the macroeconomic environment in which we operate and our internal policies and procedures, as well as other liquidity drivers, which we then review with our regulators. Recently, in order to maximize
our profitability and reduce risk, we have enhanced our review of the capital commitments necessary to support our correspondents’ and our potential correspondents’ operations and began restricting certain
71
activities, including trading in low-priced securities while focusing on less capital intensive operations. As we continue to evaluate the best use of our capital resources, we may continue
to revise our policies with respect to the type of correspondent activity we choose to permit or limit and which correspondents we choose to accept.
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 19 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, which is not adjusted for the effect, if any, of the proposed restructuring agreement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations
|
|
Total
|
|
|
Less Than
1
Year
|
|
|
1—3 Years
|
|
|
4—5 Years
|
|
|
More Than
5
Years
|
|
|
|
|
(In thousands)
|
|
|
Long-term debt obligations (1)
|
|
$
|
287,578
|
|
|
$
|
7,000
|
|
|
$
|
60,000
|
|
|
$
|
20,578
|
|
|
$
|
200,000
|
|
|
Interest on long-term debt obligations (1)
|
|
|
154,596
|
|
|
|
29,962
|
|
|
|
57,200
|
|
|
|
54,934
|
|
|
|
12,500
|
|
|
Capital lease obligations
|
|
|
4,866
|
|
|
|
3,048
|
|
|
|
1,818
|
|
|
|
—
|
|
|
|
—
|
|
|
Operating lease obligations
|
|
|
21,273
|
|
|
|
4,560
|
|
|
|
7,248
|
|
|
|
4,818
|
|
|
|
4,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
468,313
|
|
|
$
|
44,570
|
|
|
$
|
126,266
|
|
|
$
|
80,330
|
|
|
$
|
217,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The long-term debt obligations and accrued interest consists of our 12.50% Senior Second Lien Secured Notes due 2017, 8.00% Senior Convertible Notes due 2014, our
Ridge Seller Note and our Amended and Restated Credit Facility. Our Ridge Seller Note and Amended and Restated Credit Facility accrue interest at variable rates. We have estimated future interest payments for our Amended and Restated Credit Facility
based on the rates in effect as of December 31, 2011 (7-7.25%) as the outstanding balance is due March 31, 2012. We estimated our future interest payment under the Ridge Seller Note (90 day LIBOR +5.50%) using a 90 day LIBOR rate of .5%
which is based on the current 90 day LIBOR forward curve.
|
As of December 31, 2011 the Company had accrued
income tax liabilities for uncertain tax positions of approximately $1.0 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 15 to
the consolidated financial statements for information on off-balance sheet arrangements and Note 23 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 unaudited interim condensed 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
72
described in more detail in the notes to 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 goodwill, stock-based compensation and allowance for doubtful accounts.
Revenue recognition
Revenues from clearing transactions are
recorded in the Company’s 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 Company’s 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 Company’s 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 Company’s 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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73
|
|
•
|
|
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 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. These financial instruments have
significant inputs that cannot be validated by readily determinable data and generally involve considerable judgment by management.
|
See Note 5 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 unit’s goodwill with the carrying amount of the goodwill. If the carrying amount of the reporting unit’s goodwill is greater than the implied fair value of its goodwill, an impairment loss must be recognized for
the excess and charged to operations.
Our assessment was based upon a market capitalization and discounted cash flow
analysis. Management considers the Company’s market capitalization as a potential indicator of impairment and is considered as part of its impairment evaluation. However, management considers the discounted cash flow analysis as a generally
more reliable and effective test of potential impairment. The estimate of cash flow is based upon, among other things, certain assumptions about expected future operating performance and an appropriate discount rate
74
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.
As of December 31, 2011 we recorded a goodwill and
intangible asset impairment charge of $137.4 million as a result of our annual impairment testing. During the second quarter of 2011 the Company’s common stock declined approximately 35%. In light of the potential impairment indicator
represented by the market capitalization reduction, the Company’s management performed an interim goodwill impairment analysis in June 2011 using a discounted cash flow analysis. The results of our interim analysis did not indicate that the
fair value of any reporting units had fallen below its carrying value at that time, and therefore the Company did not perform step two of the impairment analysis.
By the fourth quarter of 2011, there had been further deterioration to the Company’s business which included significant reductions in trade volumes and, importantly reports from the Federal Reserve
that the targeted federal funds rate would remain at the current historical lows at least through the majority of 2014. During the fourth quarter of 2011 the Company had determined that the future outlook for trade volumes and interest rates had
significantly declined. This in turn influenced management’s assumptions regarding revenue levels that could be expected to be reached in the future, which consequently impacted the Company’s cash flow models. Even when considering the
strategic initiatives the Company has initiated which are expected to significantly reduce the Company’s cost structure the earning potential of its U.S. securities and futures businesses has been affected by these revised assumptions regarding
the Company’s revenue potential in the future. Applying these revised assumptions, the Company’s discounted cash flow analysis resulted in a determination by the Company that the estimated fair values for both its U.S. securities and
futures reporting units were below their respective carrying values. As a result management performed step two of the impairment test for each reporting units which resulted in an impairment charge of $118.8 million and $16.9 million, respectively
for the U.S. securities and futures reporting units which reduced the goodwill for each reporting unit to zero. The Company also recorded an impairment charge of approximately $.3 million for its PFSL business as a result of the decision to shut
down its operations. This charge is included in discontinued operations. The goodwill impairment charge was not deductible for income tax purposes and did not impact the Company’s regulatory capital position or its cash position.
At December 31, 2011, our remaining goodwill totaled $.5 million. No impairment of the $.5 million of goodwill associated with our
PFSC subsidiary has been taken as management believes the proceeds from the sale of that business will exceed its carrying value.
Income taxes
We account for income taxes in accordance with the
applicable sections of the Accounting Standards Codification, which establishes financial accounting and reporting standards for the effect of income taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable
or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in addressing the future tax
consequences of events that have been recognized in our consolidated financial statements or tax returns.
As of
December 31, 2011 and 2010, the Company had federal net operating losses of $84.0 million and $24.8 million, respectively as well as state net operating loss carryforwards and loss carryforwards in certain foreign jurisdictions. Management has
determined that a valuation allowance of $78.5 million and $1.3 million, respectively was necessary as of December 31, 2011 and 2010 as the realization of the deferred tax assets was not more likely than not. All of the 2010 federal net
operating loss was carried back to recover taxes paid in 2008 and 2009.
75
Stock-based compensation
The Company’s 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 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.
Allowance for doubtful accounts
Typically, our loans to customers or correspondents are made on a fully collateralized basis because they are generally margin loans and
the amount advanced is less than the then current value of the margin collateral. When the value of that collateral declines, when the collateral decreases in liquidity, or margin calls are not met, we may consider a variety of credit enhancements
such as, but not limited to, seeking additional collateral or guarantees. In valuing receivables that become less than fully collateralized, we compare the estimated fair value of the collateral, deposits and any additional credit enhancements to
the balance of the loan outstanding and evaluate the collectability based on various qualitative factors such as, but not limited to, the creditworthiness of the counterparty, the potential impact of any outstanding litigation or arbitration and
nature of the collateral and available realization methods. To the extent that the collateral, the guarantees and any other rights we have against the customer or the related introducing broker are not sufficient to cover potential losses, we record
an appropriate allowance for doubtful accounts. We review these 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 risk management
procedures to identify positions in illiquid securities and other market developments that could affect accounts that otherwise appear to be fully collateralized. The parent company and local country risk management officers monitor market
developments on a daily basis. We maintain an allowance for doubtful accounts that represents amounts, in our judgment, necessary to adequately reflect anticipated losses in outstanding receivables. Typically, when a receivable is deemed not to be
fully collectable it is generally reserved at an amount correlating with the amount of the balance that is considered under secured. See Note 8 for a description of certain nonaccrual receivables.
|
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, 2011. Based upon the December quarter average customer balances, assuming no increase, and adjusting for the timing of rate changes, we believe that each 25 basis point increase or
decrease will affect pretax income by approximately $1.0 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, executive officers and their affiliates, 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
76
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, other than as discussed in Note 8 to our consolidated financial statements, does not involve more than normal risk of collectability or present other unfavorable features. Leverage involves
securing large potential future obligations, which may be small or large depending on any number of circumstances, 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 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 and Europe 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 Company’s consolidated financial statements and supplementary data are included in pages F-2 through F-53 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.
77
Quarterly results of operations (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
Dec. 31,
2011
|
|
|
Sep. 30,
2011
|
|
|
Jun. 30,
2011
|
|
|
Mar. 31,
2011
|
|
|
Dec. 31,
2010
|
|
|
Sep. 30,
2010
|
|
|
Jun. 30,
2010
|
|
|
Mar. 31,
2010
|
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clearing and commission fees
|
|
$
|
20,492
|
|
|
$
|
25,901
|
|
|
$
|
27,592
|
|
|
$
|
30,374
|
|
|
$
|
30,131
|
|
|
$
|
27,963
|
|
|
$
|
28,176
|
|
|
$
|
24,483
|
|
|
Technology
|
|
|
5,086
|
|
|
|
5,675
|
|
|
|
5,274
|
|
|
|
6,020
|
|
|
|
5,167
|
|
|
|
4,661
|
|
|
|
5,207
|
|
|
|
5,384
|
|
|
Interest, gross
|
|
|
13,268
|
|
|
|
19,821
|
|
|
|
24,536
|
|
|
|
23,916
|
|
|
|
24,173
|
|
|
|
20,695
|
|
|
|
18,267
|
|
|
|
19,092
|
|
|
Other
|
|
|
7,296
|
|
|
|
6,151
|
|
|
|
8,213
|
|
|
|
9,193
|
|
|
|
8,939
|
|
|
|
7,112
|
|
|
|
10,111
|
|
|
|
9,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
46,142
|
|
|
|
57,548
|
|
|
|
65,615
|
|
|
|
69,503
|
|
|
|
68,410
|
|
|
|
60,431
|
|
|
|
61,761
|
|
|
|
58,193
|
|
|
Interest expense from securities operations
|
|
|
3,431
|
|
|
|
5,350
|
|
|
|
6,485
|
|
|
|
6,210
|
|
|
|
5,761
|
|
|
|
4,390
|
|
|
|
4,499
|
|
|
|
5,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
42,711
|
|
|
|
52,198
|
|
|
|
59,130
|
|
|
|
63,293
|
|
|
|
62,649
|
|
|
|
56,041
|
|
|
|
57,262
|
|
|
|
53,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
17,468
|
|
|
|
19,420
|
|
|
|
18,759
|
|
|
|
20,260
|
|
|
|
22,329
|
|
|
|
23,733
|
|
|
|
25,070
|
|
|
|
21,345
|
|
|
Floor brokerage, exchange and clearance fees
|
|
|
7,816
|
|
|
|
9,340
|
|
|
|
9,426
|
|
|
|
9,183
|
|
|
|
8,148
|
|
|
|
8,085
|
|
|
|
7,754
|
|
|
|
7,184
|
|
|
Communications and data processing
|
|
|
16,144
|
|
|
|
15,153
|
|
|
|
14,489
|
|
|
|
14,664
|
|
|
|
14,300
|
|
|
|
13,965
|
|
|
|
7,856
|
|
|
|
7,718
|
|
|
Occupancy and equipment
|
|
|
6,381
|
|
|
|
5,569
|
|
|
|
5,175
|
|
|
|
5,792
|
|
|
|
5,797
|
|
|
|
5,742
|
|
|
|
5,617
|
|
|
|
5,308
|
|
|
Bad debt expense
|
|
|
7,038
|
|
|
|
264
|
|
|
|
43,144
|
|
|
|
194
|
|
|
|
1,136
|
|
|
|
266
|
|
|
|
58
|
|
|
|
17
|
|
|
Goodwill and intangible impairment
|
|
|
137,421
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Other expenses
|
|
|
6,546
|
|
|
|
7,494
|
|
|
|
5,637
|
|
|
|
6,744
|
|
|
|
5,940
|
|
|
|
6,078
|
|
|
|
9,888
|
|
|
|
5,325
|
|
|
Interest expense on long-term debt
|
|
|
11,415
|
|
|
|
10,029
|
|
|
|
9,787
|
|
|
|
9,711
|
|
|
|
9,530
|
|
|
|
9,315
|
|
|
|
7,429
|
|
|
|
4,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
210,229
|
|
|
|
67,269
|
|
|
|
106,417
|
|
|
|
66,548
|
|
|
|
67,180
|
|
|
|
67,184
|
|
|
|
63,672
|
|
|
|
51,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
(167,518
|
)
|
|
|
(15,071
|
)
|
|
|
(47,287
|
)
|
|
|
(3,255
|
)
|
|
|
(4,531
|
)
|
|
|
(11,143
|
)
|
|
|
(6,410
|
)
|
|
|
1,653
|
|
|
Income tax expense (benefit)
|
|
|
17,173
|
|
|
|
(6,895
|
)
|
|
|
(18,531
|
)
|
|
|
(1,811
|
)
|
|
|
(829
|
)
|
|
|
(4,692
|
)
|
|
|
(1,069
|
)
|
|
|
760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(184,691
|
)
|
|
|
(8,176
|
)
|
|
|
(28,756
|
)
|
|
|
(1,444
|
)
|
|
|
(3,702
|
)
|
|
|
(6,451
|
)
|
|
|
(5,341
|
)
|
|
|
893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations net of tax (a)
|
|
|
4,345
|
|
|
|
(3,958
|
)
|
|
|
(1,413
|
)
|
|
|
(1,417
|
)
|
|
|
498
|
|
|
|
(2,963
|
)
|
|
|
(2,027
|
)
|
|
|
(754
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(180,346
|
)
|
|
$
|
(12,134
|
)
|
|
$
|
(30,169
|
)
|
|
$
|
(2,861
|
)
|
|
$
|
(3,204
|
)
|
|
$
|
(9,414
|
)
|
|
$
|
(7,368
|
)
|
|
$
|
139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share — basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share from continuing operations
|
|
$
|
(6.68
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
(1.01
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
0.04
|
|
|
Earnings (loss) per share from discontinued operations
|
|
|
0.16
|
|
|
|
(0.14
|
)
|
|
|
(0.05
|
)
|
|
|
(0.05
|
)
|
|
|
0.02
|
|
|
|
(0.10
|
)
|
|
|
(0.08
|
)
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share — basic
|
|
$
|
(6.52
|
)
|
|
$
|
(0.43
|
)
|
|
$
|
(1.06
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share — diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share from continuing operations
|
|
$
|
(6.68
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
(1.01
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.21
|
)
|
|
$
|
0.04
|
|
|
Earnings (loss) per share from discontinued operations
|
|
|
0.16
|
|
|
|
(0.14
|
)
|
|
|
(0.05
|
)
|
|
|
(0.05
|
)
|
|
|
0.02
|
|
|
|
(0.10
|
)
|
|
|
(0.08
|
)
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share — diluted
|
|
$
|
(6.52
|
)
|
|
$
|
(0.43
|
)
|
|
$
|
(1.06
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding — basic
|
|
|
27,672
|
|
|
|
27,987
|
|
|
|
28,546
|
|
|
|
28,478
|
|
|
|
28,394
|
|
|
|
28,295
|
|
|
|
25,830
|
|
|
|
25,573
|
|
|
Weighted average shares outstanding — diluted
|
|
|
27,672
|
|
|
|
27,987
|
|
|
|
28,546
|
|
|
|
28,478
|
|
|
|
28,394
|
|
|
|
28,295
|
|
|
|
25,830
|
|
|
|
25,704
|
|
|
(a)
|
Income tax expense (benefit) from discontinued operations was $1,555, $(543), $40, $57, $(897), $(860), $(1,107) and $(674), respectively for each quarterly period
beginning with December 31, 2011.
|
See discussions regarding goodwill and intangible asset impairment, write down of
Nonaccrual Receivables, establishment of deferred tax asset valuation allowance and the disposition of PFSA in Notes 2, 8, 20 and 27, respectively, to our consolidated financial statements. The goodwill and intangible asset impairment, establishment
of deferred tax asset valuation allowance and the disposition of PFSA occurred in the fourth quarter of 2011, while the write-down of Nonaccrual receivables occurred in the second quarter of 2011. Each of these items impacted the comparability of
the 2011 and 2010 quarterly results of operations presented above.
78
|
Item 9.
|
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|
None.
|
Item 9A.
|
Controls and Procedures
|
Management’s 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 SEC’s 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, 2011.
Management’s 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, 2011. 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, 2011, we have maintained effective internal control over financial reporting.
The Company’s independent registered public accounting firm has audited the Company’s internal control over financial reporting
as of December 31, 2011 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.
79
PART III
|
Item 10.
|
Directors, Executive Officers of the Registrant 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 Company’s definitive proxy statement for the 2012 annual meeting of stockholders to be filed not later than April 30, 2012 with the SEC
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the “2012 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 2012 Proxy Statement.
|
Item 12.
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|
Equity compensation plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan Category
|
|
Number of Securities
to
be Issued Upon Exercise
of Outstanding Options,
Warrants and Rights(a)
|
|
|
Weighted-Average
Exercise Price
of
Outstanding Options,
Warrants and Rights
|
|
|
Number of
Securities
Remaining Available
for Future Issuance
|
|
|
Equity Compensation Plans Approved by Security Holders(b)
|
|
|
1,985,662
|
|
|
$
|
9.55
|
|
|
|
2,777,546
|
|
|
Equity Compensation Plans Not Approved By Security Holders
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,985,662
|
|
|
$
|
9.55
|
|
|
|
2,777,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 2,747,061 shares remaining
available for future issuance and the Penson Worldwide, Inc. 2005 Employee Stock Purchase Plan of which there were 30,485 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 2012 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 2012 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 2012 Proxy Statement.
80
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.
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.
81
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 15, 2012
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.
|
|
Chairman
|
|
March 15, 2012
|
|
Roger J. Engemoen, Jr.
|
|
|
|
|
|
|
|
/s/ PHILIP A.
PENDERGRAFT
|
|
Chief Executive Officer
(Principal Executive Officer)
and Director
|
|
March 15, 2012
|
|
Philip A. Pendergraft
|
|
|
|
|
|
|
|
/s/ DANIEL P.
SON
|
|
Non Executive Vice Chairman and Director
|
|
March 15, 2012
|
|
Daniel P. Son
|
|
|
|
|
|
|
|
/s/ KEVIN W.
MCALEER
|
|
Executive Vice President & Chief Financial Officer (Principal Financial and Accounting Officer)
|
|
March 15, 2012
|
|
Kevin W. McAleer
|
|
|
|
|
|
|
|
/s/ ROBERT S.
BASSO
|
|
Director
|
|
March 15, 2012
|
|
Robert S. Basso
|
|
|
|
|
|
|
|
/s/ DAVID
JOHNSON
|
|
Director
|
|
March 15, 2012
|
|
David Johnson
|
|
|
|
|
|
|
|
/s/ DAVID M.
KELLY
|
|
Director
|
|
March 15, 2012
|
|
David M. Kelly
|
|
|
|
|
|
|
|
/s/ DIANE L.
SCHUENEMAN
|
|
Director
|
|
March 15, 2012
|
|
Diane L. Schueneman
|
|
|
82
Index to consolidated financial statements
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, 2011 and 2010 and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2011. These financial
statements are the responsibility of the Company’s 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 presentation of the financial statements. 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, 2011 and 2010, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2011 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, 2011, 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 15, 2012,
expressed an unqualified opinion thereon.
|
|
|
/s/ BDO USA,
LLP
|
|
BDO USA, LLP
|
Dallas, Texas
March 15, 2012
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, 2011, based on criteria established in
Internal
Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’s 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, Management’s Report on Internal Control over Financial Reporting.” Our responsibility is
to express an opinion on the Company’s 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 company’s 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 company’s 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 company’s 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, 2011, 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, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2011 and our report dated March 15, 2012
expressed an unqualified opinion thereon.
|
|
|
/s/ BDO USA,
LLP
|
|
BDO USA, LLP
|
Dallas, Texas
March 15, 2012
F-3
Penson Worldwide, Inc.
Consolidated Statements of Financial Condition
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
(In thousands,
except par values)
|
|
|
ASSETS
|
|
|
Cash and cash equivalents
|
|
$
|
43,509
|
|
|
$
|
55,507
|
|
|
Cash and securities — segregated under federal and other regulations (including securities at fair value of $1,960 at
December 31, 2011 and $14,197 at December 31, 2010)
|
|
|
2,529,301
|
|
|
|
5,155,822
|
|
|
Receivable from broker-dealers and clearing organizations (including securities at fair value of $2,498 at
December 31,2010)
|
|
|
146,313
|
|
|
|
114,187
|
|
|
Receivable from customers, net
|
|
|
983,420
|
|
|
|
1,606,427
|
|
|
Receivable from correspondents
|
|
|
74,521
|
|
|
|
102,192
|
|
|
Securities borrowed
|
|
|
544,109
|
|
|
|
851,371
|
|
|
Securities owned, at fair value
|
|
|
34,686
|
|
|
|
458
|
|
|
Deposits with clearing organizations (including securities at fair value of $153,090 at December 31, 2011 and $203,843 at
December 31, 2010)
|
|
|
496,775
|
|
|
|
388,520
|
|
|
Property and equipment, net
|
|
|
22,452
|
|
|
|
27,936
|
|
|
Other assets
|
|
|
71,374
|
|
|
|
251,884
|
|
|
Assets held-for-sale
|
|
|
1,250,946
|
|
|
|
1,765,169
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
6,197,406
|
|
|
$
|
10,319,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
Payable to broker-dealers and clearing organizations
|
|
$
|
133,110
|
|
|
$
|
78,165
|
|
|
Payable to customers
|
|
|
3,692,140
|
|
|
|
6,314,493
|
|
|
Payable to correspondents
|
|
|
124,863
|
|
|
|
230,651
|
|
|
Short-term bank loans
|
|
|
80,800
|
|
|
|
317,500
|
|
|
Notes payable
|
|
|
271,302
|
|
|
|
259,729
|
|
|
Securities loaned
|
|
|
549,166
|
|
|
|
1,025,909
|
|
|
Securities sold, not yet purchased, at fair value
|
|
|
499
|
|
|
|
549
|
|
|
Accounts payable, accrued and other liabilities
|
|
|
70,579
|
|
|
|
99,351
|
|
|
Liabilities associated with assets held-for-sale
|
|
|
1,199,362
|
|
|
|
1,692,205
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
6,121,821
|
|
|
|
10,018,552
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
Preferred stock, $0.01 par value, 10,000 shares authorized; none issued and outstanding as of December 31, 2011
and 2010
|
|
|
—
|
|
|
|
—
|
|
|
Common stock, $0.01 par value, 100,000 shares authorized; 32,388 issued and 27,733 outstanding as of December 31,
2011; 32,054 issued and 28,454 outstanding as of December 31, 2010
|
|
|
324
|
|
|
|
321
|
|
|
Additional paid-in capital
|
|
|
281,922
|
|
|
|
278,469
|
|
|
Accumulated other comprehensive income, net
|
|
|
3,909
|
|
|
|
4,367
|
|
|
Retained earnings (deficit)
|
|
|
(152,875
|
)
|
|
|
72,635
|
|
|
Treasury stock, at cost; 4,655 shares at December 31, 2011; 3,600 shares at December 31, 2010
|
|
|
(57,695
|
)
|
|
|
(54,871
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
75,585
|
|
|
|
300,921
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
6,197,406
|
|
|
$
|
10,319,473
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
Penson Worldwide, Inc.
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clearing and commission fees
|
|
$
|
104,359
|
|
|
$
|
110,753
|
|
|
$
|
100,770
|
|
|
Technology
|
|
|
22,055
|
|
|
|
20,419
|
|
|
|
23,793
|
|
|
Interest, gross
|
|
|
81,541
|
|
|
|
82,227
|
|
|
|
93,359
|
|
|
Other
|
|
|
30,853
|
|
|
|
35,396
|
|
|
|
45,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
238,808
|
|
|
|
248,795
|
|
|
|
263,178
|
|
|
Interest expense from securities operations
|
|
|
21,476
|
|
|
|
19,738
|
|
|
|
32,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
217,332
|
|
|
|
229,057
|
|
|
|
230,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
75,907
|
|
|
|
92,477
|
|
|
|
88,980
|
|
|
Floor brokerage, exchange and clearance fees
|
|
|
35,765
|
|
|
|
31,171
|
|
|
|
27,457
|
|
|
Communications and data processing
|
|
|
60,450
|
|
|
|
43,839
|
|
|
|
30,664
|
|
|
Occupancy and equipment
|
|
|
22,917
|
|
|
|
22,464
|
|
|
|
21,451
|
|
|
Bad debt expense
|
|
|
50,640
|
|
|
|
1,477
|
|
|
|
500
|
|
|
Goodwill and intangible asset impairment
|
|
|
137,421
|
|
|
|
—
|
|
|
|
—
|
|
|
Other expenses
|
|
|
26,421
|
|
|
|
27,231
|
|
|
|
27,283
|
|
|
Interest expense on long-term debt
|
|
|
40,942
|
|
|
|
30,829
|
|
|
|
10,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
450,463
|
|
|
|
249,488
|
|
|
|
206,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
(233,131
|
)
|
|
|
(20,431
|
)
|
|
|
23,841
|
|
|
Income tax expense (benefit)
|
|
|
(10,064
|
)
|
|
|
(5,830
|
)
|
|
|
9,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(223,067
|
)
|
|
|
(14,601
|
)
|
|
|
14,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of income taxes of $1,109, $(3,538) and $179, respectively
|
|
|
(2,443
|
)
|
|
|
(5,246
|
)
|
|
|
1,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(225,510
|
)
|
|
$
|
(19,847
|
)
|
|
$
|
16,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share — basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share from continuing operations
|
|
$
|
(7.92
|
)
|
|
$
|
(0.54
|
)
|
|
$
|
0.56
|
|
|
Earnings (loss) per share from discontinued operations
|
|
|
(0.09
|
)
|
|
|
(0.19
|
)
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share
|
|
$
|
(8.01
|
)
|
|
$
|
(0.73
|
)
|
|
$
|
0.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share — diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share from continuing operations
|
|
$
|
(7.92
|
)
|
|
$
|
(0.54
|
)
|
|
$
|
0.56
|
|
|
Earnings (loss) per share from discontinued operations
|
|
|
(0.09
|
)
|
|
|
(0.19
|
)
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share
|
|
$
|
(8.01
|
)
|
|
$
|
(0.73
|
)
|
|
$
|
0.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares — basic
|
|
|
28,168
|
|
|
|
27,034
|
|
|
|
25,373
|
|
|
Weighted average common shares — diluted
|
|
|
28,168
|
|
|
|
27,034
|
|
|
|
25,591
|
|
See accompanying notes to consolidated financial statements
F-5
Penson Worldwide, Inc.
Consolidated Statements of Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
|
|
|
|
Additional
Paid-In
Capital
|
|
|
|
|
|
Accumulated
Other
Comprehensive
Income (loss)
|
|
|
Retained
Earnings
(Deficit)
|
|
|
Total
Stockholders’
Equity
|
|
|
|
|
|
Common stock
|
|
|
|
Treasury
Stock
|
|
|
|
|
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,784
|
|
|
Purchase 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,288
|
)
|
|
Purchase 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
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(225,510
|
)
|
|
|
(225,510
|
)
|
|
Foreign currency translation adjustments, net of tax of $296
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(458
|
)
|
|
|
—
|
|
|
|
(458
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(225,968
|
)
|
|
Purchase of treasury stock
|
|
|
—
|
|
|
|
(1,055
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,824
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,824
|
)
|
|
Stock-based compensation expense
|
|
|
—
|
|
|
|
235
|
|
|
|
2
|
|
|
|
3,264
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,266
|
|
|
Purchases of stock under the employee stock purchase plan
|
|
|
—
|
|
|
|
99
|
|
|
|
1
|
|
|
|
189
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2011
|
|
$
|
—
|
|
|
|
27,733
|
|
|
$
|
324
|
|
|
$
|
281,922
|
|
|
$
|
(57,695
|
)
|
|
$
|
3,909
|
|
|
$
|
(152,875
|
)
|
|
$
|
75,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
F-6
Penson Worldwide, Inc.
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(225,510
|
)
|
|
$
|
(19,847
|
)
|
|
$
|
16,011
|
|
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Income) loss from discontinued operations, net of tax
|
|
|
2,443
|
|
|
|
5,246
|
|
|
|
(1,815
|
)
|
|
Gain from sale of subsidiary common stock
|
|
|
(14,436
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Goodwill and intangible asset impairment
|
|
|
137,421
|
|
|
|
—
|
|
|
|
—
|
|
|
Depreciation and amortization
|
|
|
18,875
|
|
|
|
17,842
|
|
|
|
16,503
|
|
|
Deferred income taxes
|
|
|
(6,828
|
)
|
|
|
(593
|
)
|
|
|
5,131
|
|
|
Stock-based compensation
|
|
|
3,266
|
|
|
|
4,986
|
|
|
|
5,087
|
|
|
Debt discount accretion
|
|
|
4,573
|
|
|
|
3,658
|
|
|
|
1,534
|
|
|
Debt issuance costs
|
|
|
1,858
|
|
|
|
1,805
|
|
|
|
1,081
|
|
|
Contingent consideration accretion
|
|
|
308
|
|
|
|
201
|
|
|
|
—
|
|
|
Bad debt expense
|
|
|
50,640
|
|
|
|
1,477
|
|
|
|
500
|
|
|
Changes in operating assets and liabilities exclusive of effects of business combinations and divestitures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and securities — segregated under federal and other regulations
|
|
|
2,626,522
|
|
|
|
(1,802,128
|
)
|
|
|
(1,140,019
|
)
|
|
Net receivable/payable with customers
|
|
|
(2,053,006
|
)
|
|
|
1,033,553
|
|
|
|
1,046,149
|
|
|
Net receivable/payable with correspondents
|
|
|
(78,117
|
)
|
|
|
111,598
|
|
|
|
(28,368
|
)
|
|
Securities borrowed
|
|
|
252,452
|
|
|
|
289,342
|
|
|
|
(164,357
|
)
|
|
Securities owned
|
|
|
(34,228
|
)
|
|
|
38,756
|
|
|
|
192,999
|
|
|
Deposits with clearing organizations
|
|
|
(108,255
|
)
|
|
|
9,591
|
|
|
|
(76,734
|
)
|
|
Other assets
|
|
|
24,081
|
|
|
|
36,620
|
|
|
|
8,447
|
|
|
Net receivable/payable with broker-dealers and clearing organizations
|
|
|
18,505
|
|
|
|
(5,252
|
)
|
|
|
52,587
|
|
|
Securities loaned
|
|
|
(421,932
|
)
|
|
|
75,313
|
|
|
|
56,828
|
|
|
Securities sold, not yet purchased
|
|
|
(50
|
)
|
|
|
304
|
|
|
|
(12,327
|
)
|
|
Accounts payable, accrued and other liabilities
|
|
|
(1,575
|
)
|
|
|
(57,483
|
)
|
|
|
10,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities of continuing operations
|
|
|
197,007
|
|
|
|
(255,011
|
)
|
|
|
(9,911
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business combinations, net of cash acquired
|
|
|
(11,560
|
)
|
|
|
(1,921
|
)
|
|
|
(32,262
|
)
|
|
Purchases of property and equipment
|
|
|
(10,693
|
)
|
|
|
(14,138
|
)
|
|
|
(18,449
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities of continuing operations
|
|
|
(22,253
|
)
|
|
|
(16,059
|
)
|
|
|
(50,711
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
40,000
|
|
|
|
31,500
|
|
|
|
50,000
|
|
|
Repayments of revolving credit facility
|
|
|
(33,000
|
)
|
|
|
(120,000
|
)
|
|
|
(36,500
|
)
|
|
Net borrowing (repayments) on short-term bank loans
|
|
|
(236,700
|
)
|
|
|
206,500
|
|
|
|
13,470
|
|
|
Proceeds from sale of subsidiary common stock
|
|
|
33,187
|
|
|
|
—
|
|
|
|
—
|
|
|
Exercise of stock options
|
|
|
—
|
|
|
|
88
|
|
|
|
—
|
|
|
Excess tax benefit from stock-based compensation plans
|
|
|
—
|
|
|
|
48
|
|
|
|
27
|
|
|
Purchase of treasury stock
|
|
|
(212
|
)
|
|
|
(878
|
)
|
|
|
(676
|
)
|
|
Issuance of common stock
|
|
|
190
|
|
|
|
472
|
|
|
|
656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities of continuing operations
|
|
|
(196,535
|
)
|
|
|
311,024
|
|
|
|
83,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities of discontinued operations
|
|
|
24,610
|
|
|
|
32,904
|
|
|
|
22,870
|
|
|
Net cash used in investing activities of discontinued operations
|
|
|
(2,872
|
)
|
|
|
(6,220
|
)
|
|
|
(3,292
|
)
|
|
Net cash provided by (used in) financing activities of discontinued operations
|
|
|
(11,167
|
)
|
|
|
18,222
|
|
|
|
(34,375
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by (used in) discontinued operations
|
|
|
10,571
|
|
|
|
44,906
|
|
|
|
(14,797
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash
|
|
|
(1,922
|
)
|
|
|
5,111
|
|
|
|
2,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
(13,132
|
)
|
|
|
89,971
|
|
|
|
9,818
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
138,614
|
|
|
|
48,643
|
|
|
|
38,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
125,482
|
|
|
$
|
138,614
|
|
|
$
|
48,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest payments
|
|
$
|
38,802
|
|
|
$
|
26,054
|
|
|
$
|
10,633
|
|
|
Income tax payments
|
|
$
|
1,290
|
|
|
$
|
6,632
|
|
|
$
|
3,807
|
|
|
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
|
|
|
$
|
—
|
|
|
Purchase of Treasury stock
|
|
$
|
2,612
|
|
|
$
|
—
|
|
|
$
|
—
|
|
See accompanying notes to consolidated financial statements.
F-7
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements
(In thousands, except per share data or where noted)
Organization and business
— Penson Worldwide, Inc. (individually or collectively with
its subsidiaries, “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 currently 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”), and Nexa Technologies,
Inc. (“Nexa”). During fiscal year 2011, the Company also conducted business through Penson Futures, formerly known as Penson GHCO (“Penson Futures”), Penson Asia Limited (“Penson Asia”) and Penson Financial Services
Australia Pty Ltd (“PFSA”). On August 31, 2011 Penson Futures was combined with PFSI and now operates as a division of PFSI (references to Penson Futures after August 31, 2011 are references to the futures division of PFSI). On
November 30, 2011, the Company announced that it had sold PFSA to BNY Mellon Company. On December 16, 2011, the Company announced that it will cease operations of its PFSL subsidiary in 2012. During the fourth quarter of 2011, the Company
ceased operations of Penson Asia. The Company has engaged investment bankers to assist in the anticipated sale of PFSC expected to close in 2012. The Company has accounted for the operations of PFSA, PFSC and PFSL as discontinued operations in and
has reclassified its operations all periods presented. Through its remaining 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.
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.
SAI’s wholly owned subsidiaries include among others, PFSI, Nexa, Penson Execution Services, Inc., Penson Financial Futures, Inc. (“PFFI”), GHP1, Inc. (“GHP1”), which includes its 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. The accounts of PFSC,
PFSL and PFSA have been presented as assets held-for-sale and liabilities associated with assets held-for sale on the statements of financial condition and in discontinued operations, net of income tax on the consolidated statements of operations.
See Note 27.
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 Company’s 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 Company’s 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.
F-8
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Liquidity
— As discussed in greater detail below, the principal sources of
liquidity for the Company are borrowings by its broker-dealer subsidiaries, borrowings at the parent level, and cash generated from operations in the Company’s operating entities. In turn, the principal uses of cash are to support the
operations of the Company’s operating broker dealer subsidiaries, to pay its operating expenses and to cover interest and principal payments on its long term debt.
In the ordinary course of its business, the Company’s broker-dealer subsidiaries may be required to make payments on account of the settlement of customers trades and to post collateral or margin at
various exchanges where we they are members or conduct business in respect of the activity of their customers. These requirements are highly dependent on the activity of their correspondents and customers and general market conditions. Consequently,
the cash requirements of the Company’s broker-dealer subsidiaries are highly variable in their nature and difficult to fully predict. The Company’s operating subsidiaries fund their daily cash requirements principally from cash on hand and
their short term debt facilities. The extent to which the Company’s operating subsidiaries are required to borrow under their available debt facilities is, therefore, also highly variable and unpredictable. As discussed below, the Company seeks
to establish sufficient borrowing capacity at its broker-dealer subsidiaries to cover anticipated liquidity requirements and also to review and seek to control correspondent and customer activity that would materially adversely impact available
liquidity. The broker-dealer debt facilities are typically uncommitted and on demand. In the event that the lenders under these facilities refuse to extend loans, limit the size of loans they will make, or require repayment of outstanding loans, the
available liquidity for the Company’s broker dealer subsidiaries would be adversely impacted and, in turn, could materially adversely impact the nature and types of business that such broker-dealer subsidiaries could support. Changes in the
composition of client base and the types of business have also reduced overall daily cash requirements in the Company’s broker dealer subsidiaries.
In contrast to the cash requirements to support the business of the Company’s correspondents and customers at its operating subsidiaries, the requirements for supporting the Company’s long-term
debt obligations and operating expenses are relatively predictable and fixed. In addition to the principal and interest payment obligations on the Company’s long term debt discussed below, the principal operating expense requirements are
compensation expense, lease obligations and technology and back office support system expenses. These obligations are principally satisfied from cash generated by the Company’s broker-dealer subsidiaries and borrowings at the parent level.
PWI’s ability to incur additional borrowing, outside of its existing credit facilities, is limited by its existing debt facilities and the ability of PWI to access cash generated by its operating subsidiaries, to meet operating expenses and
debt obligations at a PWI level, is potentially subject to restrictions imposed by the various regulators of PWI’s operating subsidiaries.
Operating Liquidity
— As noted above, the liquidity needs of the Company’s broker dealer subsidiaries are principally driven by the requirements to support the trading activities of
correspondents and their customers. The Company regularly reviews the liquidity requirements of its operating subsidiaries and the correspondent and customer activity impacting on those liquidity requirements. Where necessary, the Company seeks to
limit liquidity impacts by requiring additional deposits, limiting particular trading activity, or limiting the types of correspondents or customers that the Company will support. For example, during the year the Company reduced its exposure to the
trading of low priced securities and deconverted the majority of the business of TD Ameritrade, Inc., f/k/a thinkorswim, Inc. Both these had the effect of reducing the significant liquidity requirements associated with those lines of business. The
Company’s clearing broker-dealer subsidiaries typically finance their operating liquidity needs through short term secured bank lines of credit and through secured borrowings from stock lending counterparties in the securities business, which
are referred to as “stock loans.” Most of the Company’s borrowings are driven by the activities of its clients or correspondents, primarily the purchase of securities on margin by those parties. As of December 31, 2011, the Company
had uncommitted lines of credit with six financial institutions for the purpose of facilitating its clearing business as well as the
F-9
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
activities of its customers and correspondents. Four of the uncommitted lines of credit permitted the Company to borrow up to an aggregate of approximately $269.2 million while two lines had no
stated limit. The Company’s lenders have recently eliminated its ability to borrow unsecured funds, although such recent limitations have not materially adversely affected its ability to service the Company’s clients’ business. As of
December 31, 2011, the Company had approximately $90.1 million in short-term bank loans outstanding, which left approximately $259.9 million potentially available under the Company’s lines of credit with stated limitations, though as noted
these facilities are uncommitted. Since the Nonaccrual Receivables had been previously excluded from the Company’s regulatory capital calculation, the write down taken against the Nonaccrual Receivables had no effect on the operating liquidity
of the Company’s operating subsidiaries. In addition, the write-off of the Nonaccrual Receivables is excluded for purposes of calculating the Company’s financial covenants under the Amended and Restated Credit Facility and its financial
covenant compliance was not impacted negatively. Therefore, it is management’s belief that the write down of the Nonaccrual Receivables had no material adverse effect on the Company’s operating liquidity as compared to its position prior
to the write down. Similarly, the impairment of goodwill and intangible assets and charges in respect of the Company’s deferred tax assets that were taken in the fourth quarter are non-cash charges and have not affected the regulatory capital
of the Company’s operating subsidiaries. While these write downs did negatively impact certain financial covenants in the Company’s Amended and Restated Credit Agreement as of December 31, 2011, its banks provided it with a waiver of the
applicable covenant.
As noted above, the Company’s clearing broker businesses also have the ability to borrow through
stock loan arrangements. There are no specific limitations on the borrowing capacities pursuant to the Company’s 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 its customers’ margin account securities, and are repayable on demand. During the course of 2011 the Company experienced a reduction in stock lending activity. The
Company believes that was in keeping with reductions overall in the market, though management believes that the Company’s stock price decline may have contributed to a number of counterparties reducing their counterparty exposure to it. At
December 31, 2011, the Company had approximately $217.0 million in borrowings under stock loan arrangements, the majority of which relates to its customer activities.
As a result of the Company’s customers’ and correspondents’ aforementioned activities, the Company’s operating cash flows may vary significantly from year to year.
The Company’s broker-dealer subsidiaries are subject to minimum net capital requirements established in each jurisdiction. Most
jurisdictions also have early warning capital levels which are significantly higher than minimum requirements. In addition to these statutory requirements, the Company’s regulators have the discretion to require higher capital or liquidity
levels. Management regularly reviews the Company’s capital and liquidity positions with its regulators, and its expectations of future levels. Over the course of the year the Company has significantly increased the capital retained in its
broker dealer subsidiaries and is currently substantially above the minimum net capital requirements for each of its broker-dealer subsidiaries. If the Company’s regulators require that it retain significant regulatory capital at these
subsidiaries, the liquidity of the Company could be impaired, perhaps significantly.
Capital Resources —
At
times, PWI provides capital to its subsidiaries. PWI has had the ability to obtain capital through equipment leases, typically secured by the equipment itself, through the Amended and Restated Credit Facility and through a committed line of credit
that permits PWI to borrow up to $1.5 million. At December 31, 2011, availability under the Amended and Restated Credit Facility was limited to $7 million, of which $7 million was outstanding. The Company has recently further paid down this
facility, and currently owes approximately $.3 million under the facility, which is the most it can currently borrow, On June 3, 2009, the Company issued $60 million aggregate principal amount of 8.00% Senior Convertible Notes due
2014. The net
F-10
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
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 senior revolving 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 then existing Credit Facility and entered into the Amended and Restated Credit Facility which we have subsequently amended. PWI’s
obligations under the Amended and Restated Credit Facility and senior second lien secured notes are supported by a guaranty from SAI and PHI and a pledge by PWI, SAI and PHI of equity interests of certain of our subsidiaries. The Amended and
Restated Credit Facility is currently scheduled to mature on March 31, 2012. As is common with facilities of this type, the negative covenants in the Company’s various credit facilities limit its ability to incur additional debt outside of the
ordinary course of business and the Company’s ability to incur additional working capital debt facilities at a PWI is therefore significantly restricted.
The Company incurs a significant amount of interest on its outstanding debt obligations. In 2011, the Company paid $1.8 million in interest under its Amended and Restated Credit Facility and predecessor
facility, $4.8 million in interest under its Senior Convertible Notes, $25.0 million in interest under its Senior Second Lien Secured Notes and $.6 million in interest under the Ridge Seller Note. The Company is required to make an interest payment
of $12.5 million on the Senior Second Lien Secured Notes in mid-May 2012, and this obligation will continue semi-annually through 2017, when the principal amount of $200.0 million is due. The Company is also required, under the Amended and Restated
Credit Facility, to pay down the outstanding balance with the proceeds of certain asset sales or equity offerings, including in the event the Company concludes a sale of PFSC.
In addition, management expects to continue to pay a significant amount of interest under other debt instruments in 2012 and for the next several years including its equipment leases, although it is not
required to make any payments of principal or interest on the Ridge Seller Note prior to maturity in June 2015. The Company’s significant debt obligations may restrict its ability to effectively utilize the capital available to it, and may
materially adversely affect its business or operations.
As a holding company, PWI accesses the earnings of its operating
subsidiaries from time to time through the receipt of dividends from these subsidiaries. As discussed above, however, the Company’s broker-dealer subsidiaries are subject to minimum and early warning net capital requirements established in each
jurisdiction. Additionally, as with other regulated entities in the Company’s industry, the making of distributions from the Company’s regulated operating subsidiaries is generally subject to prior approval by the applicable regulators.
The Company’s regulators have considerable discretion when deciding whether to permit a distribution, though the Company anticipates that they look at factors such as liquidity, excess regulatory capital, profitability, changes in the business
mix and expected growth in aggregate debits. It is unlikely that the Company’s regulators would be willing to permit a distribution that would result in the regulatory capital of an operating subsidiary being reduced to an early warning level.
However, as discussed above, the Company currently has significant excess regulatory capital and historically has not experienced significant difficulty obtaining approval for distributions by its regulated operating subsidiaries when it has had
significant excess capital. For example, since the combination of PFSI and Penson Futures as of August 31, 2011, the Company has withdrawn $18,500 from PFSI in order to finance operations outside PFSI. The Company does not believe that its
regulators are likely to change their past practice with respect to approval of dividends by its regulated operating subsidiaries, though its regulators, in part as a result of PWI’s stock price, have shown an increased scrutiny of the Company.
However, if the Company’s regulators were to require that it must retain significant regulatory capital at these subsidiaries in excess of minimum early warning levels, such restrictions would correspondingly reduce the amount of funds
available to PWI.
F-11
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
During times of extreme market volatility, as was the case for portions of 2011, the
Company’s regulatory liquidity requirements have been and in the future may be increased significantly in excess of normal levels as a result of, among other things, its correspondents experiencing unusually high trading volume or holding
unusually large options or margins positions. During this time, on two occasions, the Company sought and received regulatory relief with respect to one of its regulatory liquidity requirements. The Company no longer clears the business
activity which engendered these requests. Nonetheless, the risk exists that in times of extreme market volatility, the Company’s regulatory liquidity requirements could rise significantly due to such circumstances and, if it is unable to
satisfy these requirements, it may be subject to adverse consequences such as those set forth in the Risk Factors section.
Partially as a result of recent market volatility, in coordination with the Company’s regulators management developed a plan that it
believes will allow it to increase the Company’s liquidity and capital position. Through that plan, the Company intended to increase its liquidity by $100 million, which has largely been accomplished. See “Strategic
Initiatives” for a description of certain components of this plan. One of the previously announced strategic initiatives is the anticipated sale of PFSC. The sale of PFSC is expected to provide a substantial increase in liquidity to help
continue to fund the Company’s operations. Although the Company intends to complete the sale of PFSC in the near term, if the sale is substantially delayed, such delay could adversely affect the Company’s continuing operations. Management
does not believe a substantial delay is likely, and even if such delay were to occur, management does not believe such delay would materially adversely affect the Company’s ability to service a majority of its customers’ needs. Senior
management regularly reviews the type of correspondent activity it permits in light of the macroeconomic environment in which the Company operates and the internal policies and procedures, as well as other liquidity drivers, which management then
reviews with its regulators. Recently, in order to maximize the Company’s profitability and reduce risk, the Company has enhanced its review of the capital commitments necessary to support its correspondents’ and its potential
correspondents’ operations and began restricting certain activities, including trading in low-priced securities while focusing on less capital intensive operations. As the Company continues to evaluate the best use of its capital
resources, it may continue to revise its policies with respect to the type of correspondent activity it chooses to permit or limit and which correspondents it chooses to accept.
The Company’s recent net losses were primarily driven by the write-off of non-accrual receivables, goodwill, intangible assets and
the recording of a deferred tax asset valuation allowance. These write-downs were triggered not only by individual factors, but also because of the recent, current and expected interest rate environment.
In addition to the Company’s operating cash requirements, it has certain debt service obligations in 2012. In the event that the
Company is not able to complete the anticipated debt for equity conversion discussed in more detail in Note 29, or to complete the previously announced sale of its Canadian subsidiary, the Company may need to request additional dividends from its
broker-dealer subsidiaries to service its obligations. The Company believes, based on its regulator’s recent approval of dividends, that this can be accomplished, and that the combination of these actions will satisfy the Company’s cash
requirements throughout 2012.
|
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,
2011 without any material adverse effect on the Company’s financial condition.
F-12
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
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 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 Company’s 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 Company’s 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.
F-13
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
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. A valuation allowance is recorded when it is
more likely than not that some portion or all of the deferred tax assets will not be realized. 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.
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 management’s opinion, there was no impairment of such assets at December 31, 2011 or 2010.
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 Company’s 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 unit’s 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 in management’s opinion; there was no impairment of such assets at December 31, 2010.
During the second quarter of 2011 the Company’s common stock declined approximately 35%. In light of the potential impairment
indicator represented by the market capitalization reduction, the Company’s management performed an interim goodwill impairment analysis in June 2011 using a discounted cash flow analysis. The results of our interim analysis did not indicate
that the fair value of any reporting units had fallen below its carrying value at that time, and therefore the Company did not perform step two of the impairment analysis.
By the fourth quarter of 2011, there had been further deterioration to the Company’s business which included significant reductions in trade volumes and, importantly reports from the Federal Reserve
that the targeted federal funds rate would remain at the current historical lows at least through the majority of 2014. During the fourth quarter of 2011 the Company had determined that the future outlook for trade volumes and interest rates had
significantly declined. This in turn influenced management’s assumptions regarding revenue levels that could be expected to be reached in the future, which consequently impacted the Company’s cash flow models. Even when considering the
strategic initiatives the Company has initiated which are expected to significantly reduce the Company’s cost structure the earning potential of its U.S. securities and futures businesses has been affected by these revised assumptions regarding
the Company’s revenue potential in the future. Applying these revised assumptions, the Company’s discounted cash flow analysis resulted in a
F-14
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
determination by the Company that the estimated fair values for both its U.S. securities and futures reporting units were below their respective carrying values. As a result management performed
step two of the impairment test for each reporting units which resulted in a goodwill impairment charge of $118,782 and $16,879, respectively for the U.S. securities and futures reporting units which reduced the goodwill for each reporting unit to
zero. The Company also recorded an impairment charge of approximately $312 for its PFSL business as a result of the decision to shut down its operations. This charge is included in discontinued operations. The goodwill impairment charge was not
deductible for income tax purposes and did not impact the Company’s regulatory capital position or its cash position.
The changes in goodwill during 2010 and 2011 were as follows:
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
$
|
112,823
|
|
|
Goodwill acquired
|
|
|
28,724
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
|
141,547
|
|
|
Goodwill acquired
|
|
|
4,148
|
|
|
Goodwill write-off
|
|
|
(135,973
|
)
|
|
Goodwill reduction
|
|
|
(9,184
|
)
|
|
|
|
|
|
|
|
Balance, December 31, 2011
|
|
$
|
538
|
|
|
|
|
|
|
|
All goodwill acquired in 2010 and 2011 was related to the United States reportable segment. Goodwill is
included in other assets in the consolidated statements of financial condition. The acquired goodwill is associated with an earnout payment related to the FCG and Schonfeld acquisitions. The reduction in goodwill is related to a reduction in the
amount the Company was required to pay under the Schonfeld Asset Purchase agreement (see Note 3). Of the goodwill write-off, $135,661 is attributable to continuing operations and $312 is attributable to the closure of PFSL and is included in
discontinued operations.
Intangibles
— Intangibles consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Value
|
|
|
Customer related intangible assets
|
|
$
|
39,935
|
|
|
$
|
9,522
|
|
|
$
|
30,413
|
|
|
Purchased technology
|
|
|
14,082
|
|
|
|
14,067
|
|
|
|
15
|
|
|
Other
|
|
|
1,000
|
|
|
|
475
|
|
|
|
525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
55,017
|
|
|
$
|
24,064
|
|
|
$
|
30,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Value
|
|
|
Customer related intangible assets
|
|
$
|
39,935
|
|
|
$
|
6,061
|
|
|
$
|
33,874
|
|
|
Purchased technology
|
|
|
14,082
|
|
|
|
13,742
|
|
|
|
340
|
|
|
Other
|
|
|
2,760
|
|
|
|
363
|
|
|
|
2,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
56,777
|
|
|
$
|
20,166
|
|
|
$
|
36,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 non-compete agreements with estimated useful lives of 11 years. In 2010, Other included the efutures.com domain name that was acquired with First Capitol
Group LLC (“FCG”). This intangible had an indefinite life. During 2011, the domain name was impaired and the Company recorded a charge of $1,760 to reduce its value to $0. Intangible
F-15
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
assets are included in other assets. Amortization expense related to intangible assets was approximately $3,898, $3,232 and $3,136 in 2011, 2010 and 2009, respectively. The Company estimates that
amortization expense will be approximately $3,561 in 2012, $3,546 in 2013, 2014 and 2015 and $3,496 in 2016.
Financing
Costs
— Financing costs associated with the Company’s 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 Company’s 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.
Management’s 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 5 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
F-16
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
guarantees to the balance of the loan outstanding and evaluates the collectability based on various qualitative 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 Company’s 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 2011, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
$
|
8,028
|
|
|
Bad debt expense
|
|
|
1,580
|
|
|
Write-offs
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
9,602
|
|
|
Bad debt expense
|
|
|
4,657
|
|
|
Write-offs
|
|
|
(761
|
)
|
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
|
13,498
|
|
|
Bad debt expense
|
|
|
53,987
|
|
|
Write-offs
|
|
|
(759
|
)
|
|
|
|
|
|
|
|
Balance, December 31, 2011
|
|
$
|
66,726
|
|
|
|
|
|
|
|
Bad debt expense of $3,347, $3,180 and $1,080 was directly offset against interest income in connection with certain
receivables in which the Company had ceased recognizing interest income for the years ended December 31, 2011, 2010 and 2009, respectively.
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 $7,420, $2,394 and $6,880 in 2011, 2010 and 2009, respectively. Amortization expense related to capitalized
software development costs was approximately $5,069, $3,783 and $2,543 for the years ended December 31, 2011, 2010 and 2009, respectively.
F-17
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
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.
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 Company’s reporting currency. Translation gains and losses are recorded as an accumulated balance, net of tax, in the consolidated statements of stockholders’ equity. See Note 14. Gains or losses resulting from
re-measurement of foreign currency transactions are included in net income (loss).
Discontinued
Operations
— Long-lived assets classified as held-for-sale are measured and reported at the lower of their carrying amount or fair value less cost to sell.
Reclassifications —
The Company has reclassified prior period amounts associated with bad debt expense and discontinued operations to conform to the current year’s presentation. The
reclassifications had no effect on the consolidated statements of operations, stockholders’ equity or cash flows as previously reported.
Recent Accounting Pronouncements
In June 2011, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, Presentation of Comprehensive Income. This standard eliminates the current option to report other comprehensive income and its
components in the statement of changes in equity. Under this guidance, an entity can elect to present items of net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. This guidance is
effective for publicly traded companies for fiscal years beginning after December 15, 2011 and interim and annual periods thereafter. Early adoption is permitted, but full retrospective application is required. As the Company reports
comprehensive income (loss) within its consolidated statement of stockholders’ equity, the adoption of this guidance will result in a change in the presentation of comprehensive income (loss) in the Company’s consolidated financial
statements beginning in the first quarter of 2012.
In December 2011, the FASB issued ASU 2011-11,
Balance Sheet (Topic
210): Disclosures about Offsetting Assets and Liabilities
. ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those
arrangements on its financial position. ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual periods. The adoption of this guidance may
expand
existing disclosure requirements, which the Company is currently evaluating.
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”), Ridge’s 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
F-18
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
note (the “Ridge Seller Note”) with an estimated fair value of $17,301 on that date (see Note 13 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%. On October 11, 2011 the Company amended and restated the terms of the Ridge Seller Note to provide for payment of interest by the Company at maturity rather than on a quarterly basis.
The Company recorded a liability of $4,089 attributable to the estimated fair value of contingent consideration to be paid 19
months after closing (subject to extension in the event the dispute resolution procedures set forth in the Ridge APA are invoked). The Company and Broadridge are currently in discussions to finalize the applicable adjustments and have reached a
broad agreement. We have reflected below our expectation of the eventual adjustments, though these have not yet been finalized or implemented formally. 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 was 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 19 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 was 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. As of December 31, 2011 a calculation was performed to determine the annualized revenues,
based on a six-month review period, for each such Non-revenue Correspondent (“Non-revenue Correspondent Revenues”). This calculation resulted in a reduction in the contingent consideration liability of approximately $51. Additionally, the
liability was reduced by approximately $1,313 for other items such as client concessions, departing correspondents and additional business as negotiated by both parties. The overall reduction to the liability of approximately $1,364 is included in
other expenses in the consolidated statement of operations for the year ended December 31, 2011. As of December 31, 2011 the total amount of contingent consideration totaled $2,999.
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 incurred acquisition related costs of
approximately $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 acquisition for the year ended December 31, 2010. On an unaudited basis, the Company estimates that net revenues would have been $312,921 and $337,233 for the years ended December 31, 2010 and 2009,
respectively, and net income (loss) would have been $(18,957) and $17,260 for the years ended December 31, 2010 and 2009, respectively had the acquisition occurred as of January 1, 2009. As of December 31, 2011 based upon an
impairment test performed by the Company, it was determined that the goodwill was impaired, which resulted in a goodwill impairment charge that reduced the Ridge goodwill balance to zero. See Note 2 to our consolidated financial statements.
F-19
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
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 Schonfeld’s
responsibilities under the Schonfeld Asset Purchase Agreement to its parent company, SGH, and extends the initial term of Opus’s portfolio margining agreement with PFSI from April 30, 2017 to April 30, 2019.
In January, 2011, the Company and SGH entered into a letter agreement setting the amount due for the third year earnout at $6,000 due to
the provisions in various agreements related to the Schonfeld transaction, including the termination/compensation agreement, which reduced the amount that the Company was required to pay under the Schonfeld Asset Purchase Agreement. This resulted 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.
A payment of approximately $26,600 was paid in connection with the first year earnout that ended May 31, 2008; approximately $25,500
was paid in connection with the second year of the earnout that ended May 31, 2009 and approximately $9,269 was paid in connection with the fourth year of the earnout that ended on May 31, 2011. Pursuant to the terms of a letter agreement
with Schonfeld, at December 31, 2011, the Company had paid $2,000 as result of the third year of the earnout ended May 31, 2010. The remaining $4,000 liability as of December 31, 2011 is to be paid evenly over the eight month period
commencing on January 1, 2012. We have not yet made the payment due March 1, 2012, due to a contractual dispute with one of the Schonfeld correspondents. We anticipate resolving the dispute in the near future.
F-20
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
|
4.
|
Computation of net income (loss) per share
|
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings (loss) 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,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(223,067
|
)
|
|
$
|
(14,601
|
)
|
|
$
|
14,196
|
|
|
Income (loss) from discontinued operations
|
|
|
(2,443
|
)
|
|
|
(5,246
|
)
|
|
|
1,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(225,510
|
)
|
|
$
|
(19,847
|
)
|
|
$
|
16,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding — basic
|
|
|
28,168
|
|
|
|
27,034
|
|
|
|
25,373
|
|
|
Incremental shares from outstanding stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
26
|
|
|
Incremental shares from non-vested restricted stock units
|
|
|
—
|
|
|
|
—
|
|
|
|
101
|
|
|
Shares issuable
|
|
|
—
|
|
|
|
—
|
|
|
|
18
|
|
|
Convertible debt
|
|
|
—
|
|
|
|
—
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and common share equivalents — diluted
|
|
|
28,168
|
|
|
|
27,034
|
|
|
|
25,591
|
|
|
Earnings (loss) per share — basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share from continuing operations
|
|
$
|
(7.92
|
)
|
|
$
|
(0.54
|
)
|
|
$
|
0.56
|
|
|
Earnings (loss) per share from discontinued operations
|
|
|
(0.09
|
)
|
|
|
(0.19
|
)
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share
|
|
$
|
(8.01
|
)
|
|
$
|
(0.73
|
)
|
|
$
|
0.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share — diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share from continuing operations
|
|
$
|
(7.92
|
)
|
|
$
|
(0.54
|
)
|
|
$
|
0.56
|
|
|
Earnings (Loss) per share from discontinued operations
|
|
|
(.09
|
)
|
|
|
(0.19
|
)
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share
|
|
$
|
(8.01
|
)
|
|
$
|
(0.73
|
)
|
|
$
|
0.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2011, 2010 and 2009 stock options and restricted stock units totaling 2,057, 1,332
and 1,272 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.
|
5.
|
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 Company’s 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:
|
|
•
|
|
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.
|
F-21
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
|
|
•
|
|
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. T 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 Company’s 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.
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.
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.
F-22
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Municipal bonds
Municipal bonds are generally valued based on quoted prices in markets that are not active; or other inputs that are observable or can be
corroborated by observable market data. These securities are categorized in Level 2 of the fair value hierarchy. In some instances municipal bonds are valued based on inputs that are unobservable and not corroborated by market data. These securities
are categorized in Level 3 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, 2011 and 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Cash and securities — segregated under federal and other regulations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
|
$
|
1,960
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,960
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities owned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate equity
|
|
$
|
950
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
950
|
|
|
Listed option contracts
|
|
|
88
|
|
|
|
—
|
|
|
|
—
|
|
|
|
88
|
|
|
Municipal bonds
|
|
|
—
|
|
|
|
26,335
|
|
|
|
7,133
|
|
|
|
33,468
|
|
|
U.S. government and agency securities
|
|
|
180
|
|
|
|
—
|
|
|
|
—
|
|
|
|
180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,218
|
|
|
$
|
26,335
|
|
|
$
|
7,133
|
|
|
$
|
34,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits with clearing organizations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
|
$
|
153,090
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
153,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
153,090
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
153,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold, not yet purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate equity
|
|
$
|
378
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
378
|
|
|
Listed option contracts
|
|
|
121
|
|
|
|
—
|
|
|
|
—
|
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
499
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-23
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
Level 1
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
458
|
|
|
$
|
458
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits with clearing organizations
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
|
$
|
203,843
|
|
|
$
|
203,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
203,843
|
|
|
$
|
203,843
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities sold, not yet purchased
|
|
|
|
|
|
|
|
|
|
Corporate equity
|
|
$
|
262
|
|
|
$
|
262
|
|
|
Listed option contracts
|
|
|
287
|
|
|
|
287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
549
|
|
|
$
|
549
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 assets measured at fair value on a recurring basis
The following table presents a summary of changes in the fair value of the Company’s Level 3 assets for the year ended
December 31, 2011.
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
$
|
—
|
|
|
Purchases
|
|
|
8,102
|
|
|
Unrealized loss
|
|
|
(969
|
)
|
|
|
|
|
|
|
|
Balance, December 31, 2011
|
|
$
|
7,133
|
|
|
|
|
|
|
|
Cash and securities segregated under U.S. federal and other regulations totaled $2,529,301 at December 31,
2011. Cash and securities segregated under federal and other regulations by PFSI totaled $2,529,301 at December 31, 2011. Of this amount, $2,121,291 was segregated for the benefit of customers under Rule 15c3-3 of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”), against a requirement as of December 31, 2011 of $2,071,723. A balance of $28,749 at the end of the period relates to the Company’s election to compute a reserve requirement for
Proprietary Accounts of Introducing Broker-Dealers (“PAIB”) calculation, as defined, against a requirement as of December 31, 2011 of $38,336. An additional deposit of $17,000 was made on January 4, 2012 as allowed by Rule
15c3-3. The PAIB calculation is completed in order for each introducing broker that uses the Company as its clearing broker-dealer to classify its assets held by the Company as allowable assets in the correspondent’s net capital calculation.
The remaining balance of $379,261 was segregated for the benefit of customers pursuant to Commodity Futures Trading Commission Rule 1.20.
F-24
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Additionally, $110,044 and $11,068 was segregated under similar Canadian and United Kingdom regulations, respectively and is included in assets held-for-sale in the consolidated statement of
financial condition as of December 31, 2011. See Note 27. At December 31, 2010, $5,155,822 was segregated for the benefit of customers under applicable U.S. regulations. $251,823 was segregated under applicable Canadian, United Kingdom and
Australian regulations and is included in assets held-for sale in the consolidated statement of financial condition.
|
7.
|
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,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Receivable:
|
|
|
|
|
|
|
|
|
|
Securities failed to deliver
|
|
$
|
80,357
|
|
|
$
|
63,334
|
|
|
Receivable from clearing organizations
|
|
|
65,956
|
|
|
|
50,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
146,313
|
|
|
$
|
114,187
|
|
|
|
|
|
|
|
|
|
|
|
|
Payable:
|
|
|
|
|
|
|
|
|
|
Securities failed to receive
|
|
$
|
64,092
|
|
|
$
|
60,078
|
|
|
Payable to clearing organizations
|
|
|
69,018
|
|
|
|
18,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
133,110
|
|
|
$
|
78,165
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
8.
|
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. This collateral includes financial instruments that are actively traded with valuations based on quoted prices and financial instruments in illiquid markets
with valuations that involve considerable judgment. Such collateral is not reflected in the consolidated financial statements. Payable to correspondents also includes commissions due on customer transactions.
Typically, the Company’s loans to customers or correspondents are made on a fully collateralized basis because they are generally
margin loans and the amount advanced is less than the then current value of the margin collateral. When the value of that collateral declines, when the collateral decreases in liquidity, or margin calls are not met, the Company may consider a
variety of credit enhancements such as, but not limited to, seeking additional collateral or guarantees. In certain circumstances it may be necessary to acquire third party valuation reports for illiquid financial instruments held as collateral.
These reports are used to assist management in its assessment of the collectability of its receivables. In valuing receivables that become less than fully collateralized, the Company compares the estimated fair value of the collateral, deposits and
any additional credit
F-25
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
enhancements to the balance of the loan outstanding and evaluates the collectability based on various qualitative factors such as, but not limited to, the creditworthiness of the counterparty,
the potential impact of any outstanding litigation or arbitration and the nature of the collateral and available realization methods. 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 potential losses, the Company records an appropriate allowance for doubtful accounts. In the ordinary course of business the Company carries less than fully collateralized balances for which no
allowance has been recorded due to the Company’s judgment that the amounts are collectable. The Company monitors every account that is less than fully collateralized with liquid securities every trading day. The Company reviews these 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 parent company 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 the Company, necessary to adequately reflect anticipated losses in outstanding receivables. Typically, when a receivable is deemed not to be fully collectable, it is generally reserved at
an amount correlating with the amount of the balance that is considered under-secured. Provisions made to this allowance are charged to operations based on anticipated recoverability.
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 Company’s 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. Interest on margin
loans is typically accrued monthly and, therefore, increases the margin loan balance reflected on the Company’s financial statements. However, there may be cases when the Company believes that, while the outstanding amount of the receivable is
collectable, amounts greater than the current carrying value of the loan may not be collectable. At that point the Company may elect, even though the outstanding amount of the receivable is considered collectable, to recognize interest income only
when received rather than reflecting any additional accrued interest on the receivable (“Nonaccrual Receivables”).
Generally, when an account has been reserved, no additional interest is accrued. With regard to margin loans, payments are generally
recorded against the outstanding loan balance which includes accrued interest. The Company’s policy with regard to loans with stated terms is to apply payments as set forth in the individual loan agreement. The accrual of interest does not
resume until such time as the Company has determined that the amount is fully collectable. This would be evidenced by payments on margin loans resulting in the account becoming fully secured or loans with stated terms becoming current. Margin loans
become delinquent at the point that margin calls are not met while loans with stated terms become delinquent in accordance with their stated terms. When either a margin loan or a loan with stated terms becomes delinquent, the Company undertakes a
collectability review and generally requires customers to deposit additional collateral or to reduce positions.
As discussed
in the Company’s prior periodic filing on Form 10-Q for the quarters ended June 30, 2011 and September 30, 2011, consistent with its policy for the evaluation of collateral securing receivables from customers and correspondents and
following its review of the collateral securing the Nonaccrual Receivables, the Company determined that the carrying value of its Nonaccrual Receivables was not fully realizable and recorded a charge of $43,000 in the quarter ended June 30,
2011. An important factor that prompted the Company to reevaluate its Nonaccrual Receivables in the second quarter was the reduced likelihood for expanded gaming rights in Texas in the near term. With the adjournment of the Texas Legislature on
June 29, 2011 without taking up the bills that had been proposed to permit such expansion, the Company determined that, since the prospects for further consideration of legislation before the next Texas legislative session in 2013 appeared
unlikely, it would be appropriate to reevaluate the value of Nonaccrual Receivables collateralized by bonds issued by the
F-26
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Retama Development Corporation (“RDC”) and certain other interests in the horse racing track and real estate project (“Project”) financed by the RDC’s bonds. Based upon
the Company’s re-assessment of the value of collateral securing the Nonaccrual Receivables, including review of appraisals of underlying real estate and the Project, among other factors, the Company recorded the charge against its Nonaccrual
Receivables for the quarter ended June 30, 2011.
The Company also determined that it was appropriate to commence
enforcement actions with respect to certain of those Nonaccrual Receivables, and therefore began foreclosure against collateral securing certain of these Nonaccrual Receivables. On August 4, 2011, the Company foreclosed on 1,001 shares of its
common stock, which it held as collateral, at a price of $2.61 per share, the then current market price. The value of these shares, totaling $2,612, was applied to reduce the applicable Nonaccrual Receivables. The purchased shares increased the
total number of treasury shares as of that date. Further, on September 1, 2011, the Company foreclosed on certain municipal bonds, limited partnership interests, secured debts and other collateral pursuant to a public foreclosure auction. This
foreclosure resulted in a reduction of the applicable Nonaccrual Receivables of $40,220. The debtors subject to the various foreclosure sales remain liable for the Nonaccrual Receivables that were not subject to foreclosure, including Nonaccrual
Receivables previously reserved against. The Company continues to evaluate whether additional enforcement action is feasible or advisable at this stage with respect to outstanding Nonaccrual Receivables and deficiency claims that the Company
retains. As of December 31, 2011 and 2010, the Company had approximately $8,500, and $97,427 in Nonaccrual Receivables, net of reserves of $0 and $2,379 respectively. Of these Nonaccrual Receivables approximately $8,500, were collateralized by
RDC Bonds and certain other interests in the Project at December 31, 2011. The acquired municipal bonds are included in securities owned, at fair value, while the secured debts are included in other assets.
When assessing collectability of its remaining Nonaccrual Receivables, the Company considers a variety of factors relating to the
collateral securing such receivables such as, but not limited to, the macroeconomic environment, the underlying value of the projects associated with the bonds, the value of assets (often real estate) held in those projects and the liquidity of the
collateral. In each case these bonds are owned by customers and pledged to the Company and/or its affiliates. When evaluating the RDC bonds in addition to third party pricing indications, the Company looked at factors such as, but not limited to
(i) the value of the real estate and racing license rights held by the issuer, which were supported by a third party appraisal of the Retama property, (ii) the potential for the issuer to find additional partners (such as, but not limited
to, gaming companies); and (iii) the potential expansion of gaming in Texas. The Company continues to work towards restructuring the Project with a view to encouraging a third party investment in the Project.
There can be no assurances that the Company’s collection efforts, including anticipated funding and/or other actions by third
parties, will be effectuated as currently contemplated, or that the Company will be able to realize the full value on the collateral securing the Nonaccrual Receivables, or assets acquired as a consequence of foreclosure on collateral securing
Nonaccrual Receivables, as currently contemplated. Given the illiquid nature of much of the collateral, the Company anticipates that ultimate realization upon the collateral and foreclosed assets may require investment of significant time and
resources, including active participation in the restructuring of the investments, in order to execute upon a plan of liquidation. In order to support attempts to restructure the Project, the Company made an advance to the RDC of $400 on
September 2, 2011 and a further advance of $400 on December 20, 2011. These advances are secured by certain real estate interests of the RDC in the Project. The Company believes that an eventual restructuring of the Project represents the best
opportunity for the Company to maximize the value of its interests in the Project. The Company continues to work towards restructuring the Project with a view to encouraging a third party investment in the Project.
F-27
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
|
9.
|
Securities owned and securities sold, not yet purchased
|
Securities owned and securities sold, not yet purchased consist of trading securities at fair value as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Securities Owned:
|
|
|
|
|
|
|
|
|
|
Corporate equity
|
|
$
|
950
|
|
|
$
|
290
|
|
|
Listed option contracts
|
|
|
88
|
|
|
|
168
|
|
|
Municipal bonds
|
|
|
33,468
|
|
|
|
—
|
|
|
U.S. federal and agency securities
|
|
|
180
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
34,686
|
|
|
$
|
458
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Sold, Not Yet Purchased:
|
|
|
|
|
|
|
|
|
|
Corporate equity
|
|
$
|
378
|
|
|
$
|
262
|
|
|
Listed option contracts
|
|
|
121
|
|
|
|
287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
499
|
|
|
$
|
549
|
|
|
|
|
|
|
|
|
|
|
|
|
10.
|
Reverse repurchase and repurchase agreements
|
At December 31, 2011 and 2010, the Company held reverse repurchase agreements of $0 and $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 approximately $0 and $91,840. There were no repurchase agreements outstanding at December 31, 2011 and
2010.
Additionally, at December 31, 2011 and 2010, respectively, PFSC held reverse repurchase agreements of
approximately $90,932 and $132,669 of reverse repurchase agreements collateralized by Canadian government obligations and corporate debt with fair values of approximately $89,776 and $133,034. At December 31, 2011 and 2010, PFSC held repurchase
agreements of $6,565 and $0 collateralized by Canadian government obligations and corporate debt with a fair value of approximately $6,530 and $0, respectively. These instruments are included in assets held-for-sale and liabilities associated with
assets held-for-sale.
|
11.
|
Property and equipment
|
Property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Equipment
|
|
$
|
34,038
|
|
|
$
|
33,919
|
|
|
Software
|
|
|
69,022
|
|
|
|
60,509
|
|
|
Furniture
|
|
|
4,078
|
|
|
|
4,087
|
|
|
Leasehold improvements
|
|
|
4,160
|
|
|
|
4,204
|
|
|
Other
|
|
|
994
|
|
|
|
994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112,292
|
|
|
|
103,713
|
|
|
Less accumulated depreciation and amortization
|
|
|
89,840
|
|
|
|
75,777
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
22,452
|
|
|
$
|
27,936
|
|
|
|
|
|
|
|
|
|
|
|
F-28
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
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, 2011, 2010 and 2009 was
approximately $14,977, $14,610 and $13,310, respectively.
|
12.
|
Short-term bank loans
|
At December 31, 2011 and 2010, the Company had $80,800 and $317,500, respectively in short-term bank loans
outstanding with weighted average interest rates of approximately .8% and 1.1%, respectively. As of December 31, 2011, the Company had uncommitted lines of credit with six financial institutions. Six of these lines of credit permitted the
Company to borrow up to an aggregate of approximately $269,212 while two lines do not have specified borrowing limits. These lenders have recently eliminated the Company’s ability to borrow unsecured funds, although such recent limitations have
not materially adversely affected the Company’s ability to service its clients’ business. Outstanding balances of $9,302 and $20,611, respectively are included in liabilities associated with assets held-for-sale in the consolidated
statements of financial position as of December 31, 2011 and 2010. See Note 27. The fair value of short-term bank loans approximates their carrying values. The short-term bank loans do not contain any covenants.
The Company also has the ability to borrow under stock loan arrangements. At December 31, 2011 and December 31, 2010, the
Company had $217,030 and $619,833, 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
Company’s conduit stock loan business.
Notes payable consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
8.00% Senior Convertible Notes with a principal amount of $60,000, unsecured. Payable in full in June 2014
|
|
$
|
50,370
|
|
|
$
|
47,141
|
|
|
12.50% Senior Second Lien Secured Notes with a principal amount of $200,000. Payable in full in May 2017
|
|
|
195,810
|
|
|
|
195,024
|
|
|
Bank credit line up to $7,000, unsecured, with variable rates of interest ranging from 7.00 to 7.25% at December 31, 2011.
Payable in full March 31, 2012
|
|
|
7,000
|
|
|
|
—
|
|
|
Ridge Seller Note with a principal amount of $20,578, unsecured, with a variable rate of interest that approximated 5.87% and
5.80% at December 31, 2011 and 2010. Payable in full in June 2015
|
|
|
18,122
|
|
|
|
17,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
271,302
|
|
|
$
|
259,729
|
|
|
|
|
|
|
|
|
|
|
|
F-29
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
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 Company’s 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 Company’s 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 Company’s common stock and certain fundamental changes, including changes of control and dispositions of substantially all of the Company’s assets;
and (4) at any time beginning on March 1, 2014. Upon conversion, the Company will pay or deliver, at the Company’s option, cash, shares of the Company’s common stock or a combination thereof. The initial conversion rate for the
Convertible Notes was 101.9420 shares of the Company’s 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 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 Company is in compliance with all covenants.
The Company was required to
separately account for the liability and equity components of the Convertible Notes in a manner that reflected the Company’s 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
F-30
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
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
Company’s effective interest rate on the Convertible Notes was 15.0%. The Company is recognizing interest expense during the twelve months ending May 2012 on the Convertible Notes in an amount that approximates 15.0% of $50,143, the liability
component of the Convertible Notes at June 1, 2011. 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 ending May 2012 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, $4,800 and $2,773, related to the coupon, $2,660, $2,301 and $1,201 related to the conversion feature and $714, $714 and $417 related to various issuance costs for the years ended
December 31, 2011, 2010 and 2009, respectively.
The fair value of the Convertible Notes was estimated using a discounted
cash flow analysis based on the current estimated effective yield for the Company’s senior second lien secured notes, which approximates the estimated current borrowing rate for an instrument with similar terms (estimated to be 25.5%). At
December 31, 2011 and 2010, the estimated fair value of the Convertible Notes was $41,902 and $52,677, respectively.
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 PWI’s 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 Company’s 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 is in compliance with all covenants.
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.
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, 2011, 2010 and 2009 the Company recognized interest expense of $25,000, $16,319
and $0 related to the coupon and $958, $638 and $0 related to various issuance costs. At December 31, 2011 and 2010, the estimated fair value of the Notes was approximately $126,124 and $200,000, respectively.
F-31
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Revolving credit facility
On May 6, 2010, the Company entered into a second amended and restated credit agreement, as amended (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. As of December 31, 2011 $7,000 was outstanding under the Amended and Restated
Credit Facility, which was the maximum available. Subsequent to year-end, the facility was paid down further and currently loans of approximately $300 are outstanding under this facility. The Company’s 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 Company’s 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. As of December 31, 2011 the Company was in violation of certain financial covenants as a result of its impairment charge and deferred tax asset valuation allowance. The
Company’s banks provided a waiver of the applicable covenants. On October 29, 2010, the Company 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. On August 4, 2011, the Company entered into a second amendment to the Amended and Restated Credit Facility (the “Second Amendment”). The Second Amendment, among other things, reduces the commitment under the Amended and
Restated Credit Facility, adjusts the timing of the clean down provisions of the Amended and Restated Credit Agreement that require a periodic pay down of outstanding loans for a period of at least thirty consecutive days for each six month period,
including prior to the end of the calendar year, and provides for prepayments, subject to certain conditions set forth in the Second Amendment, upon certain dispositions and certain increases in capital. The Second Amendment also amends certain
other covenants to provide additional flexibility for the realization, by the Company and its subsidiaries, upon collateral held by the Company or its subsidiaries, including with respect to the Nonaccrual Receivables, and the provision of greater
flexibility for the Company to pursue certain strategic initiatives including certain asset sales. On December 6, 2011, the Company entered into a third amendment (the “Third Amendment”) to its Second Amended and Restated Credit Agreement.
The Third Amendment, among other things, changes the scheduled maturity date to March 31, 2012, reduces the total commitment to $7,000; and modifies a number of covenants, including removing the application of certain financial covenants and
eliminating the requirement to repay all outstanding loans for thirty days in each six month period. In connection with the Third Amendment, the Company repaid $18,000 of loans and kept a $7,000 balance outstanding.
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% (5.87% at December 31, 2011). 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
F-32
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
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
Company’s Master Services Agreement with Broadridge. The Ridge Seller Note contains no financial covenants. On October 11, 2011 the Company amended and restated the terms of the Ridge Seller Note to provide for payment of interest by the
Company at maturity rather than on a quarterly basis. 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, 2012 and subsequent periods will be greater as the discount is accreted and the effective interest method is applied. For the years ended December 31, 2011, 2010 and 2009, respectively, the Company
recognized interest expense of $1,211, $619 and $0 associated with the coupon and $558, $263 and $0 related to the discount. The estimated fair value of the Ridge Seller Note was calculated using a discounted cash flow analysis based on the current
estimated effective yield for the Company’s senior second lien secured notes, which approximates the estimated current borrowing rate for an instrument with similar terms (currently 25.5%). The estimated fair value of the Ridge Seller Note at
December 31, 2011 and 2010 was $11,485 and $17,560, respectively.
Approximate future annual maturities of the
Company’s notes payable at December 31, 2011 are listed below:
|
|
|
|
|
|
|
|
|
Amount
|
|
|
2012
|
|
$
|
7,000
|
|
|
2013
|
|
|
—
|
|
|
2014
|
|
|
60,000
|
|
|
2015
|
|
|
20,578
|
|
|
2016
|
|
|
—
|
|
|
Thereafter
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
$
|
287,578
|
|
|
|
|
|
|
|
F-33
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
The following table details the Company’s share activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Treasury
Stock
|
|
|
Balance, December 31, 2008
|
|
|
—
|
|
|
|
25,207
|
|
|
|
3,397
|
|
|
Issuance of common stock
|
|
|
—
|
|
|
|
35
|
|
|
|
—
|
|
|
Purchase 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
|
|
|
|
—
|
|
|
Purchase 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
|
|
|
Purchase of treasury stock
|
|
|
—
|
|
|
|
(1,055
|
)
|
|
|
1,055
|
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
235
|
|
|
|
—
|
|
|
Purchases under the employee stock purchase plan
|
|
|
—
|
|
|
|
99
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2011
|
|
|
—
|
|
|
|
27,733
|
|
|
|
4,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
During the years ended December 31, 2011, 2010 and 2009, the Company did not grant any stock options and granted 1,292, 407 and 207
shares of restricted stock units (“RSUs”) with a fair value of $6,228, $3,384 and $1,336, respectively. As a result, additional paid-in capital increased by $3,264, $4,981 and $5,084 during the years ended December 31, 2011, 2010 and
2009, respectively to reflect the amortization of the fair value of the stock options and RSUs. This increase included $133, 153 and $218 of expense related to features of the employee stock purchase plan (see Note 18).
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,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Net income (loss)
|
|
$
|
(225,510
|
)
|
|
$
|
(19,847
|
)
|
|
$
|
16,011
|
|
|
Foreign currency translation gain (loss)
|
|
|
(458
|
)
|
|
|
2,619
|
|
|
|
4,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
(225,968
|
)
|
|
$
|
(17,228
|
)
|
|
$
|
20,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-34
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
The exchange rates used in the translation of amounts into U.S. dollars are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Canadian Dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of operations
|
|
$
|
1.02
|
|
|
$
|
0.99
|
|
|
$
|
0.88
|
|
|
Balance sheet
|
|
|
0.98
|
|
|
|
1.01
|
|
|
|
0.95
|
|
|
British Pounds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of operations
|
|
$
|
1.61
|
|
|
$
|
1.54
|
|
|
$
|
1.56
|
|
|
Balance sheet
|
|
|
1.55
|
|
|
|
1.57
|
|
|
|
1.61
|
|
|
Australian Dollars
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of operations
|
|
$
|
1.05
|
|
|
$
|
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.
|
15.
|
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.
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 customer’s obligations. The Company generally 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, generally 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
F-35
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
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 Company’s policy is to regularly monitor its market exposure and counterparty risk and maintains a policy of
reviewing the credit exposure 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, 2011, at fair values of the related securities and may incur a loss if the fair value of the securities increases subsequent to
December 31, 2011.
|
16.
|
Related party transactions
|
The Company’s 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 Financial’s 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 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 Company’s 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 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 Company’s 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. Certain of the SAMCO Entities received certain assets from the Company when those assets were split-off
immediately prior to the Company’s 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
F-36
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Split-Off. During the third quarter of 2008, the Company’s 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, $1,000 in the second quarter of 2010 and $206 in 2011. 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 arm’s 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. That agreement, as amended, was also entered into at arm’s 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 2011 the Company generated $105 in revenue from providing technology support and similar services to SAMCO and approximately $165 in revenue from the Company’s clearing relationship with SAMCO Capital Markets.
The Company sublets space to SAMCO Capital Markets at the Company’s 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 2011, for occupying the 20th floor of the Company’s Dallas office, SAMCO Capital Markets made payments totaling $304 to the landlord of that property. For occupying a portion of Suite 5120 in
the Company’s New York office, SAMCO Capital Markets made payments totaling $40 to the landlord of that property.
Until
his resignation on May 12, 2011, Mr. Thomas R. Johnson was a member of the Company’s Board of Directors. Mr. Johnson is also a member of the board of directors and the President, CEO and a stockholder of
F-37
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
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 Company’s 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 at the time made.
During 2010, the Company’s management worked with Call Now to restructure Call Now’s margin loans after the Company determined
that certain collateral securing the margin loans had suffered reduced liquidity. As part of that restructuring, in February 2010, Call Now restructured certain of its margin debts into a secured promissory note. The largest balance that Call Now
has owed under the Promissory Note and margin debts, including accrued interest, was $20,286. On August 1, 2011, in connection with the Company’s ongoing review of the margin debts owed by Call Now, the Company made demand on Call Now for
the repayment of margin and other debts owed by Call Now to the Company, with the exception of the Promissory Note. Call Now failed to make payment of the amount demanded and the Company determined to commence foreclosure proceedings with respect to
certain of the collateral securing the amounts owed. On August 4, 2011 the Company, therefore, foreclosed on certain collateral of Call Now comprised of 501 shares of common stock of the Company, which the Company purchased at prevailing market
rates and credited the purchase price against the amounts owed by Call Now. On August 12, 2011 the Company and Call Now entered into a waiver agreement pursuant to which Call Now acknowledged its default of its obligations to the Company and
waived certain rights to notice or redemption in respect of the foreclosure by the Company upon collateral provided by Call Now, other than certain municipal bonds issued by the Retama Development Corporation and certain partnership interests that
were the subject to pledges to third parties. On August 30, 2011 the Company and Call Now entered into an Irrevocable Proxy in respect, among other things, of the Retama Development Corporation municipal bonds. On September 1, 2011 the
Company conducted a public foreclosure sale of certain of the Call Now collateral. The Company was the successful bidder at the foreclosure sale and bid a total of $3,741 for the assets offered for sale. This bid was satisfied by crediting the
purchase price against the obligations of Call Now to the Company. Following the foreclosure sale the amounts owed to the Company under the Promissory Note and margin debts was $15,252. Subsequently, in January 2012 the Company made demand on the
Promissory Note and other outstanding debts of Call Now. Subsequent to year-end Call Now failed to make payment and on February 13, 2012 the Company conducted a further foreclosure sale at which the Retama Development Corporation municipal
bonds previously excluded from the foreclosure sales in 2011 were offered for sale. The Company purchased the Retama Development Corporation municipal bonds for a purchase price of $7,966, which was credited against the amounts owed by Call Now. As
of February 29, 2012 the outstanding balance of the debts owed to the Company by Call Now was $7,968.
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.
Broadridge Financial Solutions, Inc. (“Broadridge”) is a significant shareholder in the Company and as of December 31,
2011, held approximately 8.9% of the Company’s issued and outstanding shares of common stock. Broadridge is also an important service provider to the Company, following the conversion of PFSI and PFSC to the Broadridge securities processing
technology platform in 2011.
See Note 3 for a description of the Company’s acquisition of the clearing and execution
business of Ridge Clearing & Outsourcing Solutions, Inc. The largest balance that the Company has owed under the Ridge Seller Note, including accrued interest, in 2011 was $21,189.
F-38
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Concurrent with entering into the Ridge APA, the Company and Broadridge entered into a
Master Services Agreement (the “MSA”) which provides for provision by Broadridge and its subsidiaries, including Ridge, of securities processing and back-office services to certain of the Company’s subsidiaries, including PFSI.
Concurrent with the closing of Ridge APA on June 25, 2010, the Company and Broadridge also entered into a number of ancillary agreements, including an Amendment, Assignment and Assumption Agreement (the “Assignment Agreement”) and an
Amendment Agreement (the “Amendment Agreement” and the Assignment Agreement are referred to together as the “Amendment Agreements”). Pursuant to the Amendment Agreements, the Company and Broadridge agreed to a number of
amendments to the terms of the Asset Purchase Agreement, the MSA and certain related agreements and documents. Amendments included, among others, certain adjustments to the consideration and amounts payable pursuant to the MSA. Additionally, the
term of the MSA was extended by one year, to eleven years, and the scope of services subject to the MSA was revised. The Amendment Agreements also provided for the entry of Schedules to the MSA (the “MSA Schedules”) providing for the
provision of securities processing and back office services to PFSL, PFSI and PFSC. On October 13, 2011, the Company and Broadridge entered into a further Amendment Agreement providing, among other things, for the expansion of various services
subject to the MSA and related MSA Schedules of PFSI and PFSC. This Amendment Agreement set a target for the Company to outsource $8,000 worth of additional services by July, 2013. The Amendment Agreement also provided that the MSA Schedule related
to PFSL could be terminated without penalty. In connection with the signing of the amendment agreement, expansion of various services subject to the MSA, and to defray certain costs associated with the conversion by the Company to Broadridge’s
technology platform, Broadridge made a payment to the Company of $7,000. In the event that the Company has not outsourced at least $7,000 worth of additional services to Broadridge by July 1, 2013, a penalty (proportionate to the amount by
which the expanded outsources services are less than $7,000) will be payable to Broadridge. During 2011 the Company and its subsidiaries paid approximately $28,733 to Broadridge and its subsidiaries in respect of services pursuant to the MSA.
In connection with the closing of the Ridge APA, the Company and Broadridge also entered into a Stockholder’s and
Registration Rights Agreement. This agreement entitles Broadridge one demand registration right and piggy back registration rights, subject to customary terms and conditions. In addition, Broadridge is entitled to sell its common stock as permitted
under SEC Rule 144. In the event the Company redeems or repurchases any of its common stock, if necessary, it will repurchase the common stock on a pro rata basis on the same terms and conditions so that Broadridge’s beneficial ownership of the
Company’s common stock will not exceed 9.9% of the Company’s issued and outstanding common stock following any such repurchases or redemptions.
Effective September 1, 2010, the Company entered into a consulting agreement with Holland Consulting, LLC, a company controlled by the Company’s 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. The Company believes it entered into the consulting agreement on market terms, given Mr. Son’s expertise in the Company’s industry and
his knowledge of the Company’s operations. In 2011, the Company paid approximately $180 to Holland Consulting, LLC for consulting services rendered by Mr. Son.
|
17.
|
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-39
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
requirements. The Company contributed approximately $1,881, $2,020 and $1,963 during 2011, 2010 and 2009, respectively.
|
18.
|
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 April 2011 (the “2000 Stock Incentive Plan”), under which 6,006 shares of common stock have been authorized for issuance. Of this amount, options and RSUs to purchase 3,259 shares of common
stock, net of forfeitures and tax withholdings have been granted and 2,747 shares remain available for future grants at December 31, 2011. 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 Company’s 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 Company’s 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 2011, 2010 and 2009 the Company did not grant any stock options to employees.
The Company recorded compensation expense relating to options of approximately $46, $501 and $1,197 during the years ended December 31, 2011, 2010 and 2009, respectively.
A summary of the Company’s stock option activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value of In-the
Money Options
|
|
|
|
|
|
|
|
(In whole dollars)
|
|
|
(In years)
|
|
|
|
|
|
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
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited, cancelled or expired
|
|
|
(66
|
)
|
|
|
18.60
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2011
|
|
|
701
|
|
|
$
|
17.24
|
|
|
|
2.11
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2011
|
|
|
701
|
|
|
$
|
17.24
|
|
|
|
2.11
|
|
|
$
|
—
|
|
F-40
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
The aggregate intrinsic value of the options exercised during the years ended
December 31, 2011, 2010 and 2009 was $0, $100 and $0. At December 31, 2011 and 2010, the Company had approximately $0 and $49 of total unrecognized compensation expense, net of estimated forfeitures, related to stock option plans that will
be recognized over the weighted average period of 0 and .51 years, respectively. Cash received from stock option exercises totaled approximately $0, $88 and $0 during the years ended December 31, 2011, 2010 and 2009, respectively.
Restricted stock units
A summary of the Company’s Restricted Stock Unit activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Units
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
Weighted
Average
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
(In whole dollars)
|
|
|
(In years)
|
|
|
|
|
|
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
|
|
|
Granted
|
|
|
1,292
|
|
|
|
4.82
|
|
|
|
—
|
|
|
|
—
|
|
|
Vested and issued
|
|
|
(235
|
)
|
|
|
8.53
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited
|
|
|
(193
|
)
|
|
|
5.55
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2011
|
|
|
1,285
|
|
|
$
|
5.35
|
|
|
|
1.8
|
|
|
$
|
1,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded compensation expense relating to restricted stock units of approximately $3,087,
$4,166 and $3,672 during the years ended December 31, 2011, 2010 and 2009, respectively. There is approximately $4,720 and $3,118 of unamortized compensation expense, net of estimated forfeitures, related to unvested restricted stock units
outstanding at December 31, 2011 and 2010, respectively.
Employee stock purchase plan
In July 2005, the Company’s 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
F-41
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
purchase price per share shall be 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 Company’s 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, 2011, 625 shares of common stock had been reserved and 595 shares of common stock had been purchased by employees pursuant to the ESPP plan. The Company
recognized expense of $133, $153 and $218 for the years ended December 31, 2011, 2010 and 2009, 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.
|
19.
|
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, 2011, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Leases
|
|
|
Operating
Leases
|
|
|
2012
|
|
$
|
3,048
|
|
|
$
|
4,560
|
|
|
2013
|
|
|
1,401
|
|
|
|
4,089
|
|
|
2014
|
|
|
417
|
|
|
|
3,159
|
|
|
2015
|
|
|
—
|
|
|
|
2,724
|
|
|
2016
|
|
|
—
|
|
|
|
2,094
|
|
|
2017 and thereafter
|
|
|
—
|
|
|
|
4,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,866
|
|
|
$
|
21,273
|
|
|
|
|
|
|
|
|
|
|
|
The Company has recorded assets under capital leases, included in property and equipment in the
consolidated statements of financial condition, with net balances of $3,022 of equipment and $103 of software at December 31, 2011 and $7,049 of equipment and $1,047 of software at December 31, 2010. 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, 2011, 2010 and 2009 was $5,292, $4,626 and $4,483, 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 16).
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 director’s 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
F-42
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
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 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, 2011.
Income (loss) from continuing operations before income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Income (loss) before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
(233,416
|
)
|
|
$
|
(20,725
|
)
|
|
$
|
23,605
|
|
|
Non-U.S.
|
|
|
285
|
|
|
|
294
|
|
|
|
236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(233,131
|
)
|
|
$
|
(20,431
|
)
|
|
$
|
23,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for (benefit from) income taxes from continuing operations consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(108
|
)
|
|
$
|
(5,809
|
)
|
|
$
|
4,145
|
|
|
State
|
|
|
43
|
|
|
|
1,054
|
|
|
|
354
|
|
|
Non-U.S.
|
|
|
47
|
|
|
|
(14
|
)
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18
|
)
|
|
|
(4,769
|
)
|
|
|
4,546
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(9,246
|
)
|
|
$
|
(995
|
)
|
|
$
|
4,556
|
|
|
State
|
|
|
(800
|
)
|
|
|
(66
|
)
|
|
|
543
|
|
|
Non-U.S.
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,046
|
)
|
|
|
(1,061
|
)
|
|
|
5,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(10,064
|
)
|
|
$
|
(5,830
|
)
|
|
$
|
9,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The differences in income tax provided and the amounts determined by applying the statutory rate to
income (loss) before income taxes from continuing operations results from the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Federal statutory income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
Lower tax rates applicable to non-U.S. earnings
|
|
|
—
|
|
|
|
0.9
|
|
|
|
(0.1
|
)
|
|
State and local income taxes, net of U.S. federal income tax benefits
|
|
|
2.2
|
|
|
|
(3.2
|
)
|
|
|
2.5
|
|
|
Stock-based compensation
|
|
|
(0.2
|
)
|
|
|
(4.4
|
)
|
|
|
2.4
|
|
|
Change in valuation allowance
|
|
|
(32.7
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Other, net
|
|
|
—
|
|
|
|
0.2
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.3
|
%
|
|
|
28.5
|
%
|
|
|
40.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-43
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
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 are expected to be in effect when these differences reverse. Valuation allowances recorded on the balance sheet dates are necessary in cases where
management 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, 2011 and 2010, the Company had federal net operating losses of $84,014 and $24,835, respectively as well
as state net operation loss carryforward and loss carryforwards in certain foreign jurisdictions. Management has determined that a valuation allowance of $78,469 and $1,275, respectively was necessary as of December 31, 2011 and 2010 as the
realization of all or a portion of the deferred tax assets was not more likely than not. All of the 2010 federal net operating loss was carried back to recover taxes paid in 2008 and 2009. Deferred taxes are included in other assets as of December
31, 2011 and accounts payable, accrued and other liabilities as of December 31, 2010.
Deferred income taxes
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Deferred taxes:
|
|
|
|
|
|
|
|
|
|
Bad debt allowance
|
|
$
|
5,898
|
|
|
$
|
3,495
|
|
|
Accrued expenses
|
|
|
902
|
|
|
|
2,291
|
|
|
Prepaid assets
|
|
|
(874
|
)
|
|
|
(751
|
)
|
|
Net operating loss carry forwards
|
|
|
34,287
|
|
|
|
1,275
|
|
|
Fixed asset basis differences
|
|
|
(5,810
|
)
|
|
|
(4,656
|
)
|
|
Intangible assets
|
|
|
44,714
|
|
|
|
(5,865
|
)
|
|
Stock-based compensation
|
|
|
2,776
|
|
|
|
2,046
|
|
|
Equity component of the conversion feature attributable to senior convertible notes
|
|
|
(3,726
|
)
|
|
|
(4,103
|
)
|
|
Other
|
|
|
(135
|
)
|
|
|
278
|
|
|
Valuation allowance
|
|
|
(78,469
|
)
|
|
|
(1,275
|
)
|
|
Total
|
|
$
|
(437
|
)
|
|
$
|
(7,265
|
)
|
|
|
|
|
|
|
|
|
|
|
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 2006. The Company does not
anticipate the results of any open examinations would result in a material change to its financial position.
A reconciliation
of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
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
|
|
|
Additions based on tax positions related to the current year
|
|
|
17
|
|
|
Reductions for tax positions of prior years
|
|
|
(203
|
)
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
$
|
1,037
|
|
|
|
|
|
|
|
F-44
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
The Company recognizes accrued interest and penalties related to unrecognized tax
benefits in income taxes. The Company recognized penalties and interest of approximately $(47), $161 and $83 respectively, for the years ended December 31, 2011, 2010 and 2009 and had accrued approximately $517 and $564 for the payment of
penalties and interest at December 31, 2011 and 2010, respectively. The reserves for uncertain tax positions are included in accounts payable, accrued and other liabilities as of December 31, 2011 and 2010.
Prior to 2011, the Company was organized into operating segments based on geographic regions. Those operating segments
were aggregated into three reportable segments; United States, Canada and Other. During 2011, the Company disposed its PFSA subsidiary and shut down the operations of Penson Asia. Additionally, the Company has reported the results of PFSC and PFSL
as discontinued operations. As of December 31, 2011, the Company operates in only one operating segment.
|
22.
|
Regulatory requirements
|
PFSI is subject to the SEC Uniform Net Capital Rule (SEC Rule 15c3-1) as well as other capital requirements from
several commodities organizations, including the CFTC, which requires the maintenance of minimum net capital, including the CFTC, 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 2% of aggregate debit balances, as defined in the SEC’s Reserve Requirement Rule (Rule 15c3-3), the sum of 8% of customer and 8%
of noncustomer commodities risk maintenance margin requirements on all positions, as these terms are defined by the CFTC, minimum NFA dollar capital requirement of $20,000 for FCM’s offering retail forex transactions, or other NFA requirement.
At December 31, 2011, PFSI had net capital of $142,735, and was $116,049 in excess of its required net capital of $26,686. 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.
Our Penson Futures, PFSL and PFSC businesses are also subject to minimum financial and capital requirements. All
subsidiaries were in compliance with their statutory minimum financial and capital requirements as of December 31, 2011. Due to the combination of PFSI and Penson Futures, the total net capital requirements of the combined PFSI entity are
substantially lower than the total requirements of PFSI and Penson Futures individually prior to the combination.
The
regulatory rules referred to above may restrict the Company’s ability to withdraw capital from its regulated subsidiaries, which in turn could limit the subsidiaries’ ability to pay dividends and the Company’s ability to satisfy its
debt obligations. PFSC and PFSL 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, which may be significantly in excess of the minimum
requirements depending upon the restrictions placed on these companies by their respective regulators.
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 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 entity’s failure to perform under an agreement as well as indirect guarantees of the indebtedness of others.
F-45
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
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 Company’s 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.
|
24.
|
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 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
September 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 Trustee’s 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 FCM’s
F-46
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
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. On February 21, 2012, the Sentinel Trustee filed a Motion for Leave to Amend Complaint to add and amend
claims against PFFI. No trial date has been set.
In one of the actions brought by the Sentinel Trustee against an FCM whose
customer segregated accounts received distributions similar 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. The FCM filed its response in August, 2011 and the Sentinel Trustee filed his reply brief in November 2011. On December 15, 2011, the National
Futures Association filed an
amicus curie
brief in opposition to the Sentinel Trustee's summary motion and on January 11, 2012, the Commodities Futures Trading Commission filed an amicus curie brief in opposition to the
Sentinel Trustee's summary judgment motion. There is no date set for the resolution of that motion.
On January 13,
2012, four FCMs whose customer segregated accounts received distributions similar to those made to the customer segregated accounts of Penson Futures and PFFI filed motions for summary judgment with respect to the Sentinel Trustee's claims seeking
recovery of pre-bankruptcy petition transfers that may implicate the claims brought by the Sentinel Trustee by which the Trustee is seeking recovery from the Company of $14.4 million of pre-bankruptcy transfers. The federal district court
has set April 13, 2012 as the deadline for the Sentinel Trustee to respond to the FCMs summary judgment motions. There is no date set for the resolution of that motion.
On February 21, 2012, the Sentinel Trustee filed a motion to set a trial date with respect to its suit against one FCM whose
customer segregated accounts received distributions similar to those made to the customer segregated accounts of Penson Futures and PFFI. At a hearing held on February 28, 2012, the federal district court judge set the trial for that
case to commence on August 13, 2012.
On February 21, 2012, the Sentinel Trustee filed a Motion for Leave to
Amend Complaint to amend claims against Penson Futures and PFFI. On February 28, 2012, the federal district court entered an order authorizing the Sentinel Trustee to file the amended complaint and on March 7, 2012, the
Sentinel Trustee filed his Second Amended Complaint. No trial date has been set with respect to the Trustee's suit against Penson Futures and PFFI.
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. Management cannot currently estimate a range of loss. 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.
|
25.
|
Stock repurchase program
|
On July 3, 2007, the Company’s 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 Company’s Board of Directors authorized the Company to purchase an additional
$12,500 of its common stock. From December, 2007 through 2008, the Company
F-47
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
repurchased approximately 654 shares at an average price of $10.32 per share. No shares were repurchased during the years ended December 31, 2011, 2010 and 2009. The Company had
approximately $4,700 available under the current repurchase program as of December 31, 2011; however, our Amended and Restated Credit Facility and other of our debt instruments limit our ability to repurchase our stock.
In June 2010, in connection with the Company’s outsourcing agreement with Broadridge, the Company announced a plan
to reduce its headcount across several of its operating subsidiaries primarily over the following six to 21 months. The terms of the plan included both severance pay and bonus payments associated with continuing employment (“Stay Pay”)
until the respective outsourcing was completed. These payments were to 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 was associated with the Company’s U.S. operations and $140 and $189, respectively related to the Company’s Canadian and U.K. operations, which have been discontinued. This charge was included in
employee compensation and benefits in the consolidated statement of operations. During 2011, the Company reduced its severance liability by approximately $1,390 due to reductions in the number of employees that were eligible to receive severance
payments due to voluntary terminations or transfers to other areas and made severance payments of approximately $413. The severance reserve is $213 as of December 31, 2011.
The Company initially estimated that it would incur costs of $2,141 associated with Stay Pay of which $1,808 was related to its U.S.
operations, and $333 related to its Canadian and U.K. operations. The Company recorded a charge of $864 in connection with the Stay Pay for the year ended December 31, 2010 of which $723 was associated with its U.S. operations, $60 associated
with its Canadian operations and $81 was associated with its U.K. operations. For the year ended December 31, 2011 the Company recorded charge of $89 associated with Stay Pay. The Company made payments of approximately $604 and has accrued $349
as of December 31, 2011 related to Stay Pay.
In September 2011, the Company commenced the closing of its Penson Asia
offices. In connection with the closing the Company recorded a severance charge of approximately $129 and a charge of approximately $664 related to certain contract termination costs for the year ended December 31, 2011.
The Company accounts for its restructuring charges in accordance with Accounting Standards Codification Topic 420,
Exit or Disposal
Cost Obligations.
|
27.
|
Discontinued operations
|
In August 2011, the Company committed to a plan to sell its PFSL subsidiary in the United Kingdom and its PFSA
subsidiary in Australia and initiated an active program to locate buyers for each business. The Company announced the completion of its sale of PFSA on November 30, 2011, which resulted in a gain of approximately $11,500, net of tax. It also
announced its plans to sell certain assets of PFSL and wind down its business on December 16, 2011. Additionally, in December 2011 the Company announced plans to sell its PFSC subsidiary. The Company discontinued its securities clearing
businesses in both Canada and the U.K.
The results of the PFSC operations previously included in the Canada segment, and PFSL
and PFSA operations, previously included in the Other segment, are included in loss from discontinued operations, net of tax, for all periods presented. The net assets associated with the PFSC and PFSL businesses, totaling $51,584 as of
December 31, 2011 and $72,964 associated with the PFSC, PFSL and PFSA businesses as of December 31, 2010, have been reclassified to assets held-for-sale and liabilities associated with assets held-for-sale in the consolidated statements of
financial condition.
F-48
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
For a period of time, the Company will continue to operate the PFSC and PFSL businesses
and report statement of operations activity in loss from discontinued operations, net of tax.
The following summarized
financial information relate to the operations of PFSC, PFSL and PFSA that have been segregated from continuing operations and reported as discontinued operations for the years ended December 31, 2011, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Net revenues
|
|
$
|
85,064
|
|
|
$
|
59,556
|
|
|
$
|
59,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations before income taxes
|
|
|
(1,334
|
)
|
|
|
(8,784
|
)
|
|
|
1,994
|
|
|
Income tax expense (benefit)
|
|
|
1,109
|
|
|
|
(3,538
|
)
|
|
|
179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of tax
|
|
$
|
(2,443
|
)
|
|
$
|
(5,246
|
)
|
|
$
|
1,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following assets and liabilities have been segregated and classified as assets held-for-sale and
liabilities associated with assets held-for-sale in the consolidated statements of financial condition as of December 31, 2011 and December 31, 2010, respectively. These assets and liabilities related to the PFSC and PFSL businesses for
2011 and the PFSC, PFSL, and PFSA businesses for 2010, described above. The amounts presented below were adjusted to exclude intercompany receivables and payables between the businesses held-for-sale and the Company, which are to be excluded from
the sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
28,717
|
|
|
$
|
83,107
|
|
|
Cash and securities — segregated under federal and other regulations
|
|
|
121,112
|
|
|
|
251,823
|
|
|
Receivable from broker-dealers and clearing organizations
|
|
|
153,895
|
|
|
|
147,162
|
|
|
Receivable from customers, net
|
|
|
407,530
|
|
|
|
609,111
|
|
|
Receivable from correspondents
|
|
|
5,949
|
|
|
|
27,017
|
|
|
Securities borrowed
|
|
|
114,161
|
|
|
|
254,121
|
|
|
Securities owned, at fair value
|
|
|
287,606
|
|
|
|
200,737
|
|
|
Deposits with clearing organizations
|
|
|
33,850
|
|
|
|
34,636
|
|
|
Property and equipment, net
|
|
|
7,683
|
|
|
|
9,807
|
|
|
Other assets
|
|
|
90,443
|
|
|
|
147,648
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets held-for-sale
|
|
$
|
1,250,946
|
|
|
$
|
1,765,169
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Payable to broker-dealers and clearing organizations
|
|
$
|
133,338
|
|
|
$
|
50,370
|
|
|
Payable to customers
|
|
|
681,973
|
|
|
|
1,189,891
|
|
|
Payable to correspondents
|
|
|
248,634
|
|
|
|
238,892
|
|
|
Short-term bank loans
|
|
|
9,302
|
|
|
|
20,611
|
|
|
Securities loaned
|
|
|
15,439
|
|
|
|
44,252
|
|
|
Securities sold, not yet purchased, at fair value
|
|
|
81,097
|
|
|
|
115,367
|
|
|
Accounts payable, accrued and other liabilities
|
|
|
29,579
|
|
|
|
32,822
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities associated with assets held-for-sale
|
|
$
|
1,199,362
|
|
|
$
|
1,692,205
|
|
|
|
|
|
|
|
|
|
|
|
F-49
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
|
28.
|
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,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
256
|
|
|
$
|
921
|
|
|
Receivable from customers, net
|
|
|
14,353
|
|
|
|
—
|
|
|
Receivable from affiliates
|
|
|
213,893
|
|
|
|
237,244
|
|
|
Property and equipment, net
|
|
|
3,527
|
|
|
|
9,643
|
|
|
Investment in subsidiaries
|
|
|
55,456
|
|
|
|
243,001
|
|
|
Other assets
|
|
|
82,097
|
|
|
|
99,057
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
369,582
|
|
|
$
|
589,866
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders’ equity
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
271,302
|
|
|
$
|
259,728
|
|
|
Accounts payable, accrued and other liabilities
|
|
|
22,695
|
|
|
|
29,217
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
293,997
|
|
|
|
288,945
|
|
|
Total stockholders’ equity
|
|
|
75,585
|
|
|
|
300,921
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
369,582
|
|
|
$
|
589,866
|
|
|
|
|
|
|
|
|
|
|
|
Penson Worldwide, Inc. (parent only)
Condensed Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Revenues
|
|
$
|
14,020
|
|
|
$
|
13,562
|
|
|
$
|
5,075
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
7,852
|
|
|
|
15,933
|
|
|
|
12,753
|
|
|
Floor brokerage, exchange and clearance fees
|
|
|
1,778
|
|
|
|
458
|
|
|
|
—
|
|
|
Communications and data processing
|
|
|
308
|
|
|
|
2,131
|
|
|
|
2,562
|
|
|
Occupancy and equipment
|
|
|
5,619
|
|
|
|
8,176
|
|
|
|
7,170
|
|
|
Other expenses
|
|
|
6,408
|
|
|
|
5,157
|
|
|
|
4,522
|
|
|
Interest expense on long-term debt
|
|
|
40,378
|
|
|
|
30,633
|
|
|
|
10,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,343
|
|
|
|
62,488
|
|
|
|
37,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes and equity in earnings of subsidiaries
|
|
|
(48,323
|
)
|
|
|
(48,926
|
)
|
|
|
(32,119
|
)
|
|
Income tax benefit
|
|
|
(9,604
|
)
|
|
|
(24,418
|
)
|
|
|
(16,182
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before equity in earnings (loss) of subsidiaries
|
|
|
(38,719
|
)
|
|
|
(24,508
|
)
|
|
|
(15,937
|
)
|
|
Equity (deficit) in earnings (loss) of subsidiaries
|
|
|
(186,791
|
)
|
|
|
4,661
|
|
|
|
31,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(225,510
|
)
|
|
$
|
(19,847
|
)
|
|
$
|
16,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-50
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
Penson Worldwide, Inc. (parent only)
Condensed Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(225,510
|
)
|
|
$
|
(19,847
|
)
|
|
$
|
16,011
|
|
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
5,498
|
|
|
|
6,825
|
|
|
|
5,376
|
|
|
Deferred income taxes
|
|
|
(6,829
|
)
|
|
|
(593
|
)
|
|
|
5,131
|
|
|
Stock based compensation
|
|
|
3,266
|
|
|
|
4,986
|
|
|
|
5,087
|
|
|
Debt discount accretion
|
|
|
4,573
|
|
|
|
3,658
|
|
|
|
1,534
|
|
|
Debt issuance costs
|
|
|
1,858
|
|
|
|
1,805
|
|
|
|
882
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net receivable/payable with affiliates
|
|
|
23,351
|
|
|
|
(2,404
|
)
|
|
|
(62,674
|
)
|
|
Receivable from customers, net
|
|
|
(14,353
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Other assets
|
|
|
25,102
|
|
|
|
(26,666
|
)
|
|
|
1,410
|
|
|
Accounts payable, accrued and other liabilities
|
|
|
3,999
|
|
|
|
8,862
|
|
|
|
4,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(179,045
|
)
|
|
|
(23,374
|
)
|
|
|
(22,322
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment, net
|
|
|
(1,910
|
)
|
|
|
(6,620
|
)
|
|
|
(9,409
|
)
|
|
Subordinated loan to subsidiary
|
|
|
(10,000
|
)
|
|
|
(70,000
|
)
|
|
|
—
|
|
|
Decrease (increase) in investment in subsidiaries
|
|
|
187,545
|
|
|
|
(8,969
|
)
|
|
|
(39,796
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
175,635
|
|
|
|
(85,589
|
)
|
|
|
(49,205
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
40,000
|
|
|
|
31,500
|
|
|
|
50,000
|
|
|
Repayments of revolving credit facility
|
|
|
(33,000
|
)
|
|
|
(120,000
|
)
|
|
|
(36,500
|
)
|
|
Exercise of stock options
|
|
|
—
|
|
|
|
88
|
|
|
|
—
|
|
|
Excess tax benefit on exercise of stock options
|
|
|
—
|
|
|
|
48
|
|
|
|
27
|
|
|
Purchase of treasury stock
|
|
|
(2,824
|
)
|
|
|
(878
|
)
|
|
|
(676
|
)
|
|
Issuance of common stock
|
|
|
190
|
|
|
|
472
|
|
|
|
656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
4,366
|
|
|
|
104,524
|
|
|
|
69,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash
|
|
|
(1,621
|
)
|
|
|
5,111
|
|
|
|
2,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
(665
|
)
|
|
|
672
|
|
|
|
240
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
921
|
|
|
|
249
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
256
|
|
|
$
|
921
|
|
|
$
|
249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest payments
|
|
$
|
32,553
|
|
|
$
|
21,130
|
|
|
$
|
5,350
|
|
|
Income tax payments
|
|
$
|
494
|
|
|
$
|
1,402
|
|
|
$
|
3,409
|
|
|
Supplemental disclosure of non-cash activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in connection with the Ridge acquisition
|
|
$
|
—
|
|
|
$
|
14,611
|
|
|
$
|
—
|
|
F-51
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
|
29.
|
Subsequent event (unaudited)
|
The Company announced on March 13, 2012 that it had agreed principal terms for a proposed debt exchange offer relating
to the Company’s 12.5% senior second lien secured notes due 2017 (the “Senior Secured Notes”), unsecured 8% senior convertible notes due 2014 (the “Convertible Notes”) and Broadridge Financial Solutions, Inc.
(“Broadridge”) subordinated unsecured note due June 25, 2015 (the “Ridge Seller Note”). Under the terms of the proposed exchange (the “Restructuring”) the Company would exchange an aggregate of $281 million of
outstanding indebtedness as of the date of the Restructuring for new debt and equity securities. The proposed transactions are subject to approval and acceptance of debt holders, among other parties.
In connection with the proposed Restructuring, the Company and certain of its wholly owned subsidiaries have entered into a Restructuring
Support Agreement, dated March 13, 2012 (the “Restructuring Support Agreement”) with (i) the holders of a majority of its Senior Secured Notes, (ii) the holders of more than 70% of Convertible Notes, and (iii) Broadridge (such holders
collectively, the “Exchanging Holders” and each such holder a “Noteholder”) pursuant to which such holders have agreed to support the Restructuring, subject to certain terms, conditions and termination events. Among other things
the Restructuring Support Agreement provides that:
|
•
|
|
The existing $200,000 of outstanding Senior Secured Notes would be exchanged for a combination of (A) $100,000 in aggregate principal amount of 12.5%
first lien senior secured notes (payable in kind) (the “New Senior Secured Notes”) and (B) $100,000 aggregate liquidation preference of newly issued Series A preferred stock (the “Series A Senior Preferred Stock”).
|
The New Senior Secured Notes will mature on April 1, 2017. The Series A Senior Preferred Stock will have a
12.5% cumulative dividend accruing semi-annually (payable in kind) and a senior liquidation preference, due for redemption on the fifth anniversary of the consummation of the Restructuring. The Series A Senior Preferred Stock shall not be
convertible into shares of the Company’s common stock.
|
•
|
|
The existing $60,000 of outstanding Convertible Notes would be exchanged for a combination of (A) $5 million in aggregate principal amount of New
Senior Secured Notes, (B) $20 million aggregate liquidation preference of Series A Senior Preferred Stock, (C) $35,000 aggregate liquidation preference of newly issued Series B preferred stock (the “Series B Preferred Stock”) and (D) newly
issued shares of common stock of the Company which will represent 51.6% of the outstanding shares of common stock of the Company upon consummation of the Restructuring. The Series B Preferred Stock will have a 12.5% cumulative dividend accruing
semi-annually (payable in kind) and a perpetual junior liquidating preference to the Series A Senior Preferred Stock. The Series B Preferred Stock shall not be convertible into shares of the Company’s common stock.
|
|
•
|
|
The existing Ridge Seller Note would be exchanged for newly issued shares of common stock of the Company which will represent 9.9% of the outstanding
shares of common stock of the Company upon consummation of the Restructuring.
|
In addition, the Company and
Broadridge have agreed to modify certain agreements relating to the master Services Agreement between Broadridge and the Company and related schedules.
Following completion of the Restructuring, the Company will have seven authorized directors. Until the Series A Senior Preferred Stock has been redeemed in full, (i) holders of the Series A Senior
Preferred Stock will be entitled to elect up to four directors, (ii) holders of the Series B Preferred Stock will be entitled to elect one director and (iii) holders of common stock will be entitled to elect two directors, voting together with the
Series A Senior Preferred Stock, which preferred stock will control such vote, with one such director being the Company’s Chief Executive Officer. After the Series A Senior Preferred Stock has been redeemed in full, then,
F-52
Penson Worldwide, Inc.
Notes to the Consolidated Financial Statements — (Continued)
until the Series B Preferred Stock has been redeemed in full, holders of the Series B Preferred Stock will be entitled to elect up to four directors and holders of common stock will be entitled
to elect three directors.
Under the Restructuring Agreement, the Exchanging Holders have agreed to support the Restructuring,
subject to the satisfaction of various conditions. Among other things, the Restructuring is conditioned upon:
|
|
•
|
|
The execution of mutually acceptable definitive agreements covering the terms of the Restructuring;
|
|
|
•
|
|
The acceptance of the terms of the Restructuring by the holders of at least 95% of the Senior Secured Notes and at least 95% of the Convertible Notes;
|
|
|
•
|
|
Making all appropriate filings with, and receipt of applicable approvals from FINRA;
|
|
|
•
|
|
Receipt of any required waivers and approvals from NASDAQ in connection with the consummation of the Restructuring; and
|
|
|
•
|
|
The approval of all other applicable governmental and regulatory authorities.
|
A copy of the form of Restructuring Support Agreement is filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on
March 14, 2012.
The New Senior Secured Notes, the Series A Senior Preferred Stock, the Series B Preferred Stock, the common
stock and the proposed exchange offer have not been registered under the Securities Act of 1933, or any applicable state securities laws and may not be offered, sold or exchanged in the United States, absent registration or an applicable exemption
from such registration requirements.
F-53
INDEX TO EXHIBITS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
Filing
Date
|
|
Exhibit
|
|
Name of Exhibit
|
|
Form
|
|
File Number
|
|
Exhibit
|
|
|
|
|
|
|
|
|
|
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
|
|
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
|
|
|
|
|
|
|
|
|
2.3
|
|
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
|
|
|
|
|
|
|
|
|
2.4†
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
Filing
Date
|
|
Exhibit
|
|
Name of Exhibit
|
|
Form
|
|
File Number
|
|
Exhibit
|
|
|
|
|
|
|
|
|
|
10.2+
|
|
Penson Worldwide, Inc. 2005 Employee Stock Purchase Plan
|
|
S-1/A
|
|
333-127385
|
|
10.2
|
|
4/24/06
|
|
|
|
|
|
|
|
|
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+*
|
|
Second Amendment to Employment Letter Agreement between the Company and Andrew Koslow, dated February 10, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.12+
|
|
Form of Indemnification Agreement entered into between Penson Worldwide, Inc. and its officers and directors
|
|
S-1
|
|
333-127385
|
|
10.16
|
|
8/10/05
|
|
|
|
|
|
|
|
|
10.13+*
|
|
Executive Employment Agreement between the Company and Bryce B. Engel, dated February 2, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
Date
|
|
Exhibit
|
|
Name of Exhibit
|
|
Form
|
|
File Number
|
|
Exhibit
|
|
|
|
|
|
|
|
|
|
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+
|
|
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
|
|
|
|
|
|
|
|
|
10.20+*
|
|
Amendment to Amended and Restated Executive Employment Agreement between the Company and Philip A. Pendergraft, dated February 2, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.21
|
|
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
|
|
|
|
|
|
|
|
|
10.22†
|
|
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
|
|
|
|
|
|
|
|
|
10.23
|
|
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 Seller’s Representative
|
|
8-K
|
|
001-32878
|
|
10.2
|
|
2/16/07
|
|
|
|
|
|
|
|
|
10.24†
|
|
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
|
|
|
|
|
|
|
|
|
10.25+
|
|
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
|
|
|
|
|
|
|
|
|
10.26+
|
|
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
|
|
|
|
|
|
|
|
|
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|
|
Incorporated by Reference
|
|
Filing
Date
|
|
Exhibit
|
|
Name of Exhibit
|
|
Form
|
|
File Number
|
|
Exhibit
|
|
|
|
|
|
|
|
|
|
10.29+
|
|
2010 Executive Bonus Plan
|
|
8-K
|
|
001-32878
|
|
10.1
|
|
2/16/10
|
|
|
|
|
|
|
|
|
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
|
|
10.34
|
|
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
|
|
10.35
|
|
3/5/10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
Filing
Date
|
|
Exhibit
|
|
Name of Exhibit
|
|
Form
|
|
File Number
|
|
Exhibit
|
|
|
|
|
|
|
|
|
|
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
|
|
10.36
|
|
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-K
|
|
001-32878
|
|
10.43
|
|
3/3/11
|
|
|
|
|
|
|
|
|
10.44†
|
|
Second Amendment to the Second Amended and Restated Credit Agreement, dated the 4th day of August, 2011, 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
|
|
001-32878
|
|
10.1
|
|
11/9/11
|
|
|
|
|
|
|
|
|
10.45*†
|
|
Third Amendment to the Second Amended and Restated Credit Agreement, dated the 6th day of December, 2011, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.46*†
|
|
Amendment Agreement among the Company, SAI, PFSI, PFSL, PFSC, Broadridge, Ridge, Broadridge Canada and Ridge UK, dated October 11, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.47*
|
|
Amended and Restated Seller Note, effective July 1, 2011, with Penson Worldwide, Inc., as Issuer and Broadridge Financial Solutions, Inc., as Payee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.48*+
|
|
Separation Agreement, dated January 31, 2012, between C. William Yancey and PFSI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.49*
|
|
Share Purchase Agreement by and between Pershing Group, LLC and the Company, dated November 22, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
Filing
Date
|
|
Exhibit
|
|
Name of Exhibit
|
|
Form
|
|
File
Number
|
|
Exhibit
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
101
|
|
The following materials from Penson Worldwide, Inc.'s annual report on Form 10-K for the year ended December 31, 2011, formatted in XBRL (Extensible Business
Reporting Language): (i) Consolidated Statements of Financial Condition as of December 31, 2011 and 2010, (ii) Consolidated Statements of Operations for the Years Ended December 31, 2011, 2010 and 2009, (iii) Consolidated Statements
of Stockholders' Equity for the Years Ended December 31, 2011, 2010 and 2009, (iv) Consolidated Statements of Cash Flows for the Years Ended December 31, 2011, 2010 and 2009, and (v) Notes to Consolidated Financial Statements tagged
as blocks of text
|
|
+
|
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.
|