UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED JUNE 30, 2012
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 001- 33220
BROADRIDGE FINANCIAL SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE | 33-1151291 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
1981 MARCUS AVENUE LAKE SUCCESS, NY |
11042 | |
(Address of principal executive offices) | (Zip code) |
(516) 472-5400
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class: |
Name of Each Exchange on Which Registered: | |
Common Stock, par value $0.01 per share | New York Stock Exchange |
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 x No ¨
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 ¨ No x
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 x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
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):
Large Accelerated Filer x Accelerated Filer ¨ Non-Accelerated Filer ¨ Smaller Reporting Company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The aggregate market value, as of December 31, 2011, of common stock held by non-affiliates of the registrant was approximately $2,772,014,819.
As of July 31, 2012, there were 124,903,708 shares of the registrants common stock outstanding (excluding 28,046,796 shares held in treasury), par value $0.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants definitive proxy statement to be filed with the Securities and Exchange Commission within
120 days after the fiscal year end of June 30, 2012 are incorporated by reference into Part III.
2
Forward-Looking Statements
This Annual Report on Form 10-K may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are not historical in nature and which may be identified by the use of words like expects, assumes, projects, anticipates, estimates, we believe, could be and other words of similar meaning, are forward-looking statements. In particular, information appearing under Business, Risk Factors, and Managements Discussion and Analysis of Financial Condition and Results of Operations includes forward-looking statements. These statements are based on managements expectations and assumptions and are subject to risks and uncertainties that may cause actual results to differ materially from those expressed. Factors that could cause actual results to differ materially from those contemplated by the forward-looking statements include:
| the success of Broadridge Financial Solutions, Inc. (Broadridge or the Company) in retaining and selling additional services to its existing clients and in obtaining new clients; |
| Broadridges reliance on a relatively small number of clients, the continued financial health of those clients, and the continued use by such clients of Broadridges services with favorable pricing terms; |
| changes in laws and regulations affecting the investor communication services provided by Broadridge; |
| declines in participation and activity in the securities markets; |
| overall market and economic conditions and their impact on the securities markets; |
| any material breach of Broadridge security affecting its clients customer information; |
| the failure of our outsourced data center services provider to provide the anticipated levels of service; |
| any significant slowdown or failure of Broadridges systems or error in the performance of Broadridges services; |
| Broadridges failure to keep pace with changes in technology and demands of its clients; |
| the ability to attract and retain key personnel; |
| the impact of new acquisitions and divestitures; and |
| competitive conditions. |
There may be other factors that may cause our actual results to differ materially from the forward-looking statements. Our actual results, performance or achievements could differ materially from those expressed in, or implied by, the forward-looking statements. We can give no assurances that any of the events anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on our results of operations and financial condition. You should carefully read the factors described in the Risk Factors section of this Annual Report on Form 10-K for a description of certain risks that could, among other things, cause our actual results to differ from these forward-looking statements.
All forward-looking statements speak only as of the date of this Annual Report on Form 10-K and are expressly qualified in their entirety by the cautionary statements included in this Annual Report on Form 10-K. We disclaim any obligation to update or revise forward-looking statements that may be made to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events, other than as required by law.
ITEM 1. | Business |
Overview
Broadridge is a leading global provider of investor communications and technology-driven solutions to banks/broker-dealers, mutual funds and corporate issuers. Our systems and services include investor
3
communication solutions, and securities processing and operations outsourcing solutions. In short, we provide the infrastructure that helps the financial services industry operate. With 50 years of experience, we provide financial services firms with advanced, dependable, scalable and cost-effective integrated systems. Our systems help reduce the need for clients to make significant capital investments in operations infrastructure, thereby allowing them to increase their focus on core business activities.
We deliver a broad range of solutions that help our clients better serve their retail and institutional customers across the entire investment lifecycle, including pre-trade, trade, and post-trade processing. We serve a large and diverse client base across our four businesses: Bank/Broker-Dealer Communications, Mutual Fund and Retirement Solutions, Corporate Issuer Solutions, and Bank/Broker-Dealer Technology and Operations. Our businesses operate in our two business segments: Investor Communication Solutions and Securities Processing Solutions.
Investor Communication Solutions
Our Bank/Broker-Dealer Communications, Mutual Funds and Retirement Solutions and Corporate Issuer Solutions businesses operate within this segment. A large portion of our Investor Communication Solutions business involves the processing and distribution of proxy materials to investors in equity securities and mutual funds, as well as the facilitation of related vote processing. ProxyEdge®, our innovative electronic proxy delivery and voting solution for institutional investors and financial advisors, helps ensure the participation of the largest stockholders of many companies. We also provide the distribution of regulatory reports and corporate action/reorganization event information, as well as tax reporting solutions that help our clients meet their regulatory compliance needs. In addition, we provide financial information distribution and transaction reporting services to both financial institutions and securities issuers. These services include the processing and distribution of account statements and trade confirmations, traditional and personalized document fulfillment and content management services, marketing communications, and imaging, archival and workflow solutions that enable and enhance our clients communications with investors. All of these communications are delivered in paper or electronic form. In addition, Broadridge provides corporate issuers with registrar, stock transfer and record-keeping services.
| Bank/Broker-Dealer Communications: Broadridge is the leader in corporate governance activities, processing approximately 85 percent of the outstanding shares in the U.S. in the performance of our proxy services, and over 60 percent of the votes returned on shares distributed globally. We distribute more than one billion investor communications annually through a combination of physical and electronic channels. |
| Mutual Fund and Retirement Solutions: Through our governance activities, Broadridge has a service relationship with every major mutual fund complex in the U.S. Broadridge is the leading independent provider of retirement fund processing and provides unique data-driven market intelligence, specialized marketing communications and fund governance. |
| Corporate Issuer Solutions: Broadridge serves corporate issuers with a variety of their needs including proxy and transfer agency services, both domestically and globally. |
Securities Processing Solutions
Our Bank/Broker-Dealer Technology and Operations business operates within this segment. We offer a suite of advanced computerized real-time transaction processing services that automate the securities transaction lifecycle, from desktop productivity tools, data aggregation, performance reporting, and portfolio management to order capture and execution, trade confirmation, settlement, and accounting. Our services help financial institutions efficiently and cost-effectively consolidate their books and records, gather and service assets under management, focus on their core businesses, and manage risk. With multi-currency capabilities, our Global Processing Solution supports real-time global trading of equity, option, mutual fund, and fixed income securities in established and emerging markets. In addition, our operations outsourcing solutions allow broker-dealers to
4
outsource certain administrative functions relating to clearing and settlement, from order entry to trade matching and settlement, while maintaining their ability to finance and capitalize their business.
| Bank/Broker-Dealer Technology and Operations: Broadridge is the leading back- and middle-office securities processing platform for North American and global broker-dealers. Provided on an application service provider (ASP) basis, Broadridges platform is a global market solution, clearing and settling in over 50 countries. Broadridge processes on average over $4.5 trillion in equity and fixed income trades per day, including approximately 60 percent of U.S. fixed income trades. |
In September 2011, the Company acquired Paladyne Systems, Inc. (Paladyne), a provider of buy-side technology solutions for the global investment management industry. The purchase price was $72.4 million, net of cash acquired.
History and Development of Our Company
We are the former Brokerage Services division of Automatic Data Processing, Inc. (ADP). Broadridge Financial Solutions, Inc. was incorporated in Delaware as a wholly-owned subsidiary of ADP on March 29, 2007 in anticipation of our spin-off from ADP. Five years ago, we spun off from ADP and began operating as an independent public company on March 30, 2007. Our company has 50 years of history of providing innovative solutions to financial services firms and publicly-held companies. In 1962, the Brokerage Services division of ADP opened for business with one client, processing an average of 300 trades per night. In 1979, we expanded our U.S.-based securities processing solutions to process Canadian securities.
We made significant additions to our Securities Processing Solutions business through two key acquisitions in the mid-1990s. In 1995, we acquired a London-based provider of multi-currency clearance and settlement services, to become a global supplier of transaction processing services. In 1996, we acquired a provider of institutional fixed income transaction processing systems.
We began offering our proxy services in 1989. The proxy services business, which started what has become our Investor Communication Solutions business, leveraged the information processing systems and infrastructure of our Securities Processing Solutions business. Our proxy services offering attracted 31 major clients in its first year of operations. In 1992, we acquired The Independent Election Corporation of America which further increased our proxy services capabilities. By 1999, we were handling over 90% of the investor communication distributions for all securities held of record by banks and broker-dealers in the U.S.from proxy statements to annual reports. During the 1990s, we expanded our proxy services business to serve security owners of Canadian and United Kingdom issuers and we began offering a complete outsourced solution for international proxies.
In 1998, having previously provided print and distribution services as an accommodation to our securities processing and proxy clients, we decided to focus on account statement and reporting services. In 2001, we developed and released PostEdge® to meet the need for electronic distribution and archiving of all investor communications.
In 2004, we purchased Bank of America Corporations U.S. Clearing and Broker-Dealer Services businesses, which enabled us to provide securities clearing and operations outsourcing services through our subsidiary, Ridge Clearing & Outsourcing Solutions, Inc. (Ridge). In 2010, Ridge sold the contracts of substantially all of its securities clearing clients and no longer performs securities clearing services for correspondent broker-dealers. Our operations outsourcing services are now part of our Securities Processing Solutions business.
The Broadridge Business
Investor Communication Solutions
A majority of publicly-traded shares are not registered in companies records in the names of their ultimate beneficial owners. Instead, a substantial majority of all public companies shares are held in street name,
5
meaning that they are held of record by broker-dealers or banks through their depositories. Most street name shares are registered in the name Cede & Co., the name used by The Depository Trust and Clearing Corporation (DTCC), which holds shares on behalf of its participant broker-dealers and banks. These participant broker-dealers and banks (which are known as nominees because they hold securities in name only) in turn hold the shares on behalf of their clients, the individual beneficial owners. Nominees, upon request, are required to provide companies with lists of beneficial owners who do not object to having their names, addresses, and share holdings supplied to companies, so called non-objecting beneficial owners (or NOBOs). Objecting beneficial owners (or OBOs) may be contacted directly only by the broker-dealer or bank.
Because DTCCs role is only that of custodian, a number of mechanisms have been developed in order to pass the legal rights it holds as the record owner (such as the right to vote) to the beneficial owners. The first step in passing voting rights down the chain is the omnibus proxy, which DTCC executes to transfer its voting rights to its participant nominees.
Under applicable rules, nominees must deliver proxy materials to beneficial owners and request voting instructions. Nominees are often prohibited by applicable New York Stock Exchange (NYSE), or other self-regulatory organization (SRO) rules, or by express agreements with their customers from voting the securities held in their customers accounts in the absence of receiving such customers voting instructions.
A large number of nominees have contracted out the administrative processes of distributing proxy materials and tabulating voting instructions to us. Nominees accomplish this by transferring to us via powers of attorney the authority to execute a proxy, which authority they receive from DTCC (via omnibus proxy). We then distribute the proxy materials and voting instruction forms (known as VIFs) to beneficial owners.
The Securities and Exchange Commissions (the SEC) rules require public companies to reimburse nominees for the expense of distributing stockholder communications to beneficial owners of securities held in street name. The reimbursement rates are set forth in the rules of SROs, including the NYSE. We act as a billing and collection agent for many nominees with respect to this reimbursement. We bill public companies on behalf of the nominees, collect the fee and remit to the nominee any difference between the fee that the nominee is entitled to collect and the amount that the nominee has agreed to pay us for our services. In addition, the NYSE rules establish fees specifically for the services provided by intermediaries in the proxy process such as Broadridge.
We also compile NOBO lists on behalf of nominees in response to requests from issuers. The preparation of NOBO lists is subject to reimbursement by the securities issuers requesting such lists to the broker-dealers. The reimbursement rates are based on the number of NOBOs on the list produced pursuant to NYSE or other SRO rules. Such rules also provide for certain fees to be paid to third party intermediaries who compile such NOBO lists. We function as such an intermediary in the NOBO process.
We also provide proxy distribution, vote tabulation, and various additional investor communication tools and services to institutional investors, corporate issuers, and investment companies.
The services we provide in this segment represented approximately 71%, 72%, and 76% of our total Revenues in fiscal years 2012, 2011, and 2010, respectively. These services include the following:
Bank and Brokerage Offerings. We handle the entire proxy materials distribution and voting process for our bank and broker-dealer clients on-line and in real-time, from coordination with third-party entities to ordering, inventory maintenance, mailing, tracking and vote tabulation. We offer electronic proxy delivery services for the electronic delivery of proxy materials to investors and collection of consents; maintenance of a database that contains the delivery method preferences of our clients customers; posting of documents on the Internet; e-mail notification to investors notifying them that proxy materials are available; and proxy voting over the Internet, mobile devices and tablets. We also have the ability to combine stockholder communications for
6
multiple stockholders residing at the same address which we accomplish by having ascertained the delivery preferences of investors. In addition, we provide a complete outsourced solution for the processing of international proxies. We also provide a complete reorganization communications solution to notify investors of reorganizations or corporate action events such as tender offers, mergers and acquisitions, bankruptcies, and class action lawsuits.
We also offer our bank and brokerage clients financial information distribution and transaction reporting services to help them meet their regulatory compliance requirements and business needs including: prospectus fulfillment services; electronic prospectus services; PostEdge, our electronic document archival and electronic delivery solution for documents including trade confirmations, tax documents and account statements; marketing communications; imaging, archival and workflow solutions; and on-demand digital print services. In addition, we offer our Mailbox productsAdvisor Mailbox and Investor Mailbox which provide a holistic network environment that supports and complements any investor communication strategy. Advisor Mailbox is the latest complement to our Investor Mailbox solution, our service providing the electronic delivery of investor communications to our clients websites, creating investor access to regulatory delivery notices, day-to-day account and investment information and convenient response tools. Our Advisor Mailbox is an electronic communications platform for financial advisors that delivers immediate electronic access to the communications and documents sent to such advisors customers. Advisor Mailbox streamlines multiple communication paths for all investor-related documents into a single-visit portal that is integrated onto an advisors platform.
We also offer tax services to financial services firms that support their various information year-end reporting (e.g., Forms 1099) and withholding requirements, with a focus on securities and fund processing/clearance operations. Our tax data services provide tax content and data management, including securities tax classifications and reclassifications, calculations of original issue discount and other accrual and cost basis adjusting events. Our tax managed services provide technology and personnel outsourcing, withholding services and client reporting, including print/electronic distribution and archival.
In fiscal year 2011, the Company acquired NewRiver, Inc. (NewRiver), a leader in mutual fund electronic investor disclosure solutions. NewRiver has provided the Company with important capabilities for the broker-dealer and retirement and annuity markets. Specifically, the proprietary EDGAR extraction, normalization and presentment capabilities of this business have enabled us to enhance our prospectus post-sale fulfillment operations by moving to an on demand solution. This process provides efficiency for our clients as it reduces their reliance on offset print and fund delivered inventory. Broadridge has also been able to leverage the intellectual property in this business to provide portfolio-specific solutions for the retirement and annuity markets. Through our integration of this functionality into our existing output solutions capabilities, we offer a new and efficient fulfillment model for regulatory and compliance mailings.
The Company also acquired Forefield, Inc. (Forefield) in fiscal year 2011, a leading provider of real-time sales, education and client communication solutions for financial institutions and their advisors. Forefield has expanded its services portfolio to leverage its industry leading financial content for use by financial services firms in their social media content libraries. Forefield has also launched an advisor website product that can be populated with Forefields content or content created by the advisor. Forefield continues to develop new applications that further the goal of creating timely, accurate and meaningful communications for both advisors and their clients. For example, Forefields newly released Womens Resource Center, which contains a broad selection of content for both the advisor and their client, focuses specifically on the requirements and challenges faced by women investors.
Institutional Investor Offerings. We provide a suite of services to manage the entire proxy voting process of institutional investors, including fulfilling their fiduciary obligations and meeting their reporting needs such as ProxyEdge, our workflow solution that integrates ballots for positions held across multiple custodians and presents them under a single proxy. Voting can be instructed for the entire position, by account vote group or on an individual account basis either manually or automatically based on the recommendations of participating
7
governance research providers. ProxyEdge also provides for client reporting and regulatory reporting. ProxyEdge can be utilized for meetings of U.S. and Canadian companies and for meetings in many non-North American countries based on the holdings of our global custodian clients. ProxyEdge is offered in several languages and there are currently over 5,500 ProxyEdge users worldwide.
Corporate Issuer Offerings. We are the largest processor and provider of investor communication solutions to public companies. We offer our corporate issuer clients many tools to facilitate their communications with investors such as Internet and telephone proxy voting, electronic delivery of corporate filings, and householding of communications to stockholders at the same address. One of our opportunities for growth in the Investor Communication Solutions segment involves serving corporate issuer clients in providing communications services to registered stockholdersthat is, stockholders who do not hold their shares through a broker-dealer in street name. We also offer proxy services to non-North American corporate issuers in connection with their general and special meetings of stockholders. Our corporate issuer services include ShareLink®, which provides complete project management for the beneficial and registered proxy process.
Two years ago, we entered the transfer agency business through our acquisition of a provider of registrar, stock transfer and record-keeping services. Our strategy in the transfer agency business is to address the needs public companies have expressed for lower cost, more reliable stockholder record maintenance and communication services. We intend to accomplish this by leveraging our existing investor communications and securities processing capabilities to enable us to deliver enhanced transfer agency services to corporate issuers. In addition, we can offer issuers and their shareholders the ability to migrate their shareholders holdings from registered to beneficial ownership, thereby creating efficiencies for issuers and greater convenience for their shareholders.
Our Shareholder Forum solution is an online venue that offers public companies the ability to host structured, controlled communication with their shareholders on a timely and regular basis. Validated shareholders can submit questions, answer surveys in preparation of the annual meeting and year-round, and communicate in various ways with a corporation. Our Virtual Shareholder Meeting service provides corporate issuers in a number of states with the ability to host their annual meeting electronically on the Internet, either on a stand-alone basis, or in conjunction with their physical annual meeting. As the entity that provides beneficial shareholder proxy processing on behalf of many banks and brokerage firms, we can provide shareholder validation and voting to companies that want to hold virtual meetings.
Mutual Fund Offerings. We provide a full range of tools that enable mutual funds to communicate with large audiences of investors efficiently, reliably, and often with substantial cost savings. Our solutions allow mutual funds to centralize all investor communications through one resource. We also provide printing and mailing of regulatory reports, prospectuses and proxy materials, as well as proxy solicitation services. In addition, we distribute marketing communications and informational materials and create on-demand enrollment materials for mutual fund investors. Our position in the industry enables us to manage the entire communication process with both registered and beneficial stockholders. Our SalesVision® platform provides comprehensive data aggregation and data management solutions. SalesVision is software delivered as a service (SaaS) and assists mutual funds in processing commission and distribution payments, monitoring their compliance with regulatory requirements, and assembling shareholder and intermediary data in a form to better drive their sales strategy and marketing programs.
In addition, we provide mutual fund processing services for third party administrators, financial advisors, banks and wealth management professionals through our subsidiary Matrix Financial Solutions, Inc. (Matrix) which was acquired in fiscal year 2011. Our back-office, trust, custody, trading and mutual fund settlement services are integrated into our product suite, thereby strengthening our role as a provider of data processing and distribution channel solutions to the mutual fund industry.
8
Securities Processing Solutions
Transactions involving securities and other financial market instruments originate with an investor, who places an order with a broker who in turn routes that order to an appropriate market for execution. At that point, the parties to the transaction coordinate payment and settlement of the transaction through a clearinghouse. The records of the parties involved must then be updated to reflect completion of the transaction. Tax, custody, accounting and record-keeping requirements must be complied with in connection with the transaction and the customers account information must correctly reflect the transaction. The accurate processing of trading activity and custody activity requires effective automation and information flow across multiple systems and functions within the brokerage firm and across the systems of the various parties that participate in the execution of a transaction.
Our securities processing solutions automate the transaction lifecycle of equity, mutual fund, fixed income, and option securities trading operations, from order capture and execution through trade confirmation, settlement, custody and accounting. Our services facilitate the automation of straight-through-processing operations and enable financial institutions to efficiently and cost-effectively consolidate their books and records, gather and service assets under management, focus on their core businesses, and manage risk. With our multi-currency capabilities, we support trading activities on a global basis.
In September 2011, we acquired Paladyne, a provider of buy-side technology solutions for the global investment management industry. Paladyne provides front-, middle-, and back-office solutions such as Order Management, Data Warehousing, Reporting and Portfolio Accounting to hedge funds, investment managers and the providers that service this space (prime brokers, hedge fund administrators and custodians). The scope of Paladynes client base includes start-up or emerging managers through some of the largest global hedge fund complexes and global administrators. We are integrating our operational expertise with the Paladyne technology solutions to offer a set of managed services to the buy-side of the industry. Paladyne has enhanced the asset classes we service and expanded our global footprint and market coverage.
In March 2010, we entered into an Information Technology Services Agreement (the IT Services Agreement) with International Business Machines Corporation (IBM), under which IBM provides certain aspects of our information technology infrastructure. The migration of our data center processing from ADP to IBM was substantially completed in June 2012. ADP will continue to perform data processing services until August 2012, when the migration to IBM is expected to be complete.
Our securities processing services represented approximately 29%, 28%, and 24% of our total Revenues in fiscal years 2012, 2011, and 2010, respectively. These services include the following:
North American Processing Services. We provide a set of sophisticated, multi-currency systems that support real-time processing of securities transactions in North American equities, options, fixed income securities, and mutual funds. Brokerage Processing Services (BPS) is our core multi-currency back-office processing system that supports real-time processing of transactions in the U.S. markets. BPS handles everything from order management to clearance/settlement and custody, and assists our clients in meeting their regulatory reporting and other back-office requirements. BPS is provided on a hosted ASP basis. We also offer a version of BPS for processing Canadian securities. In addition to our BPS offering, we provide specialized transaction processing tools and services for small to mid-market financial firms in the U.S. and Canada that are operated on separate Broadridge technology platforms. We also provide state-of-the-art fixed income transaction processing capabilities and support for front-, middle-, and back-office functions. Our securities processing services can be integrated with our web-based desktop applications, wealth management tools, enterprise workflow, automated inquiry reporting and record-keeping services.
International Processing Services. We provide advanced multi-currency transaction processing solutions for institutional and retail securities operations, corporate actions, and business process outsourcing services such as data cleansing. Our Global Processing Solution is our integrated delivery of multiple securities processing
9
products and services to create a comprehensive system that is capable of processing transactions in equity, option, mutual fund, and fixed income securities in established and emerging markets, at any time. Its advanced real-time processes automate the securities transaction lifecycle from order capture and execution through confirmation, settlement, and accounting.
Operations Outsourcing Services. We also provide operations outsourcing services relating to a variety of securities clearing, record-keeping, and custody-related functions. Our clients execute and clear their securities transactions and engage us to perform a number of related administrative back-office functions, such as record-keeping and reconciliations. In this capacity, we are not the broker-dealer of record.
Broadridges Integrated Solutions
Our core systems for processing equity, option, and mutual fund transactions in the U.S. markets can also be combined with our specialized systems for processing fixed income and international securities transactions. These specialized securities processing services can be fully integrated with operations outsourcing services. In addition, our clients can integrate our securities processing and operations outsourcing services with our other services including: (i) the processing of trade confirmations and account statements, delivered in paper or electronically; (ii) equity and mutual fund prospectus processing; (iii) automated workflow tools that help our clients streamline their securities processing and operations activities; and (iv) a full suite of wealth management products including data aggregation tools, end-customer websites, broker desktop, financial planning and modeling tools, performance reporting and portfolio accounting.
Clients
We serve a large and diverse client base in the financial services industry including retail and institutional brokerage firms, global banks, mutual funds, annuity companies, institutional investors, specialty trading firms, independent broker-dealers, and clearing firms. We also provide services to corporate issuers.
In fiscal year 2012, we:
| processed approximately 85% of the outstanding shares in the U.S. in the performance of our proxy services; |
| distributed over 1.0 billion investor communications in either paper or electronic form; |
| processed on average over $4.5 trillion in equity and fixed income trades per day of U.S. and Canadian securities; and |
| provided fixed income trade processing services to 15 of the 21 primary dealers of fixed income securities in the U.S. |
In fiscal year 2012, we derived approximately 23% of our consolidated revenues from five clients. Our largest single client accounted for approximately 5% of our consolidated revenues.
Competition
We operate in a highly competitive industry. Our Investor Communication Solutions business competes with companies that provide investor communication and corporate governance solutions including transfer agents who handle communication services to registered (non-beneficial) securities holders, proxy advisory firms, proxy solicitation firms and other proxy services providers. We also face competition from numerous firms in the compiling and printing of transaction confirmations and account statements. Our Securities Processing Solutions business principally competes with brokerage firms that perform their trade processing in-house, and with numerous other outsourcing vendors. Our back-office support services offered through this segment also compete with very large financial institutions that manage their own back-office record-keeping operations. In many cases, clients engage us only to perform certain functions, such as back-office processing, and do not outsource their other functions such as clearing operations support that we would also perform for them.
10
Technology
We have several information processing systems which serve as the core foundation of our technology platform. We leverage these systems in order to provide our services. We are committed to maintaining extremely high levels of quality service through our skilled technical employees and the use of our technology within an environment that seeks continual improvement.
Our mission-critical applications are designed to provide high levels of availability, scalability, reliability, and flexibility. They operate on industry standard enterprise architecture platforms that provide high degrees of horizontal and vertical scaling. This scalability and redundancy allows us to provide high degrees of system availability. In March 2010, we entered into the IT Services Agreement with IBM, under which IBM performs a broad range of technology services including supporting our mainframe, midrange, open systems, network and data center operations, as well as providing disaster recovery services. We have the option of incorporating additional services into the agreement over time. The IT Services Agreement expires on June 30, 2022. We have the right to renew it for up to an additional 12-month term. Our principal data center systems and applications had previously been operated and managed by ADP. The migration of our data center processing from ADP to IBM was substantially completed in June 2012. ADP will continue to perform data processing services until August 2012, when the migration to IBM is expected to be complete.
We have the right to terminate the IT Services Agreement for several reasons including for cause, for convenience, or in the event of a change of ownership control of IBM. However, several of the grounds for termination of the IT Services Agreement by Broadridge require us to pay a termination fee to IBM. IBM also has certain termination rights in the event of a material breach of the Companys obligations under the IT Services Agreement and its failure to cure.
Most of our systems and applications process in Tier III+ and Tier IV data centers. Tier III+ and Tier IV data centers employ multiple active power and cooling distribution paths, redundant components, and are capable of providing 99.995% availability. Tier III+ and Tier IV data centers provide infrastructure capacity and capability to permit any planned activity without disruption to the critical load, and can sustain at least one worst-case, unplanned failure or event with no critical load impact. Our geographically dispersed processing centers also provide disaster recovery and business continuity processing.
To further demonstrate our commitment to maintaining the highest levels of quality service and client satisfaction within an environment that fosters continual improvement, our data centers are International Organization for Standardization (ISO) 9001:2000 certified. In addition, Broadridges core applications and facilities for the provision of our proxy, U.S. equity and fixed income securities processing services, and IBMs data centers are ISO 27001 certified. This security standard specifies the requirements for establishing, implementing, operating, monitoring, reviewing, maintaining and improving a documented Information Security Management System within the context of the organizations overall business risks. It specifies the requirements for the implementation of security controls customized to the needs of individual organizations. This standard addresses confidentiality, access control, vulnerability, business continuity, and risk assessment.
Product Development. Our products and services are designed with reliability, availability, scalability, and flexibility so that we can fully meet our clients processing needs. These applications are built in a manner which allows us to meet the breadth and depth of requirements of our financial services industry clients in a highly efficient manner. We continually upgrade, enhance, and expand our existing products and services taking into account input from clients, industry-wide initiatives and regulatory changes affecting our clients.
Intellectual Property. We own registered marks for our trade name and own or have applied for trademark registrations for many of our services and products. We regard our products and services as proprietary and utilize internal security practices and confidentiality restrictions in contracts with employees, clients, and others for protection. We believe that we hold all proprietary rights necessary to conduct our business.
11
Employees
At June 30, 2012, we had approximately 6,200 employees. None of our employees are subject to collective bargaining agreements governing their employment with our company. We believe that our employee relations are good.
Regulation
The securities and financial services industries are subject to extensive regulation in the U.S. and in other jurisdictions. As a matter of public policy, regulatory bodies in the U.S. and the rest of the world are charged with safeguarding the integrity of the securities and other financial markets and with protecting the interests of investors participating in those markets.
In the U.S., the securities and financial services industries are subject to regulation under both federal and state laws. At the federal level, the SEC regulates the securities industry, along with the Financial Industry Regulatory Authority, Inc. (FINRA), the various stock exchanges, and other SROs. Our Investor Communication Solutions and Securities Processing Solutions businesses are generally not directly subject to federal, state, or foreign laws and regulations that are specifically applicable to financial institutions. However, as a provider of services to financial institutions and issuers of securities, our services are provided in a manner to assist our clients in complying with the laws and regulations to which they are subject, such as our proxy distribution, processing, and voting services. As a result, the services we provide may change as applicable SEC, FINRA and SRO regulations are revised. For example, the SEC has in recent years amended the proxy rules to allow public companies to follow a notice and access model of proxy material delivery. The SECs notice and access rules have caused us to develop and offer a number of new and additional services.
On July 14, 2010, the SEC voted unanimously to issue for public comment a concept release (the Concept Release) focusing on a wide range of topics related to the U.S. proxy system. The Concept Release is organized by the three general topics on which the SEC sought public input: (1) ensuring the accuracy, transparency, and efficiency of the voting process, (2) enhancing shareholder communication and participation, and (3) addressing the relationship between voting power and economic interest. The comment period on the Concept Release ended in 2010. The SEC may, but is not necessarily required to, engage in rulemaking with respect to the topics addressed by the Concept Release. There are no indicators that would enable the Company to make a determination as to whether there will be any modifications made to the current proxy system, and if so, what impact, if any, any such modifications to the current proxy system will have on our business. However, as with any regulatory change, we may have to incur additional costs to adapt our business to possible modifications in the proxy system that could result from the rulemaking process initiated by the Concept Release. In September 2010, the NYSE formed the Proxy Fee Advisory Committee made up of issuers, broker-dealers and investors to review the NYSE proxy distribution fees. In May 2012, the Proxy Fee Advisory Committee issued its recommendations on the fees paid by issuers for the distribution of proxy materials to beneficial shareholders. The report makes recommendations for changes in fees; however, at this time it is not a formal proposal for changing the NYSE rules pertaining to fees. Any such changes would be subject to public comment and SEC approval. We will monitor any future actions taken by the SEC, the SROs or other participants in the proxy process with respect to the Concept Release and the Proxy Fee Advisory Committee recommendations. If changes are made to the U.S. proxy system, we expect to continue to adapt our business practices and service offerings to assist our clients in fulfilling their obligations under any new or modified legal requirements and industry practices.
Certain of the securities processing services we provide may be deemed to be mission-critical functions of financial institutions that are regulated by one or more member agencies of the Federal Financial Institutions Examination Council (FFIEC). We are therefore subject to examination by the member agencies of the FFIEC which are the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the National Credit Union Association. The FFIEC conducts periodic reviews of certain of our operations in order to identify existing or
12
potential risks associated with our operations that could adversely affect the financial institutions to which we provide services, evaluates our risk management systems and controls, and determines our compliance with applicable laws that affect the services we provide to financial institutions. In addition to examining areas such as our management of technology, data integrity, information confidentiality and service availability, the reviews also assess our financial stability. A sufficiently unfavorable review from the FFIEC could result in our clients not being allowed to use our services. In addition, we engage independent auditors to review many of our operations to provide internal control evaluations for our clients and their regulators.
Our operations outsourcing and mutual fund processing services are performed by registered broker-dealers. As registered broker-dealers and members of FINRA, they are subject to regulations concerning many aspects of their business, including trade practices, capital requirements, record retention, money laundering prevention, the protection of customer funds and customer securities, and the supervision of the conduct of directors, officers and employees. A failure to comply with any of these laws, rules or regulations could result in censure, fine, the issuance of cease-and-desist orders, or the suspension or revocation of SEC or FINRA authorization granted to allow the operation of their businesses or disqualification of their directors, officers or employees. In addition, as registered broker-dealers, they are required to participate in the Securities Investor Protection Corporation (SIPC) for the benefit of customers. In addition, MG Trust Company, LLC (MG Trust), a subsidiary of Matrix, is a Colorado State non-depository trust company whose primary business is to provide cash agent, custodial and directed or non-discretionary trust services to institutional customers. MG Trust operates pursuant to the rules and regulations of the Colorado Division of Banking.
In addition, our operations outsourcing services are subject to regulatory oversight by the SEC and FINRA. The recent economic turmoil has resulted in increased regulatory scrutiny of the securities industry including the outsourcing of regulatory functions. This oversight could result in the future enactment of more restrictive laws or rules with respect to operations outsourcing. We will monitor any future actions taken by the SEC and FINRA, and if new requirements are enacted, we expect to adapt our business practices and service offerings to assist our clients in fulfilling their obligations under any new or modified legal requirements and industry practices. In addition, if we expand our outsourcing solutions services into other countries in the future, we will be required to comply with the regulatory controls of each country in which we conduct business.
Our transfer agency business, Broadridge Corporate Issuer Solutions, Inc., is subject to certain rules and regulations promulgated by the SEC, including without limitation, with respect to registration with the SEC, annual reporting, examination, internal controls, proper disposal of shareholder information and obligations relating to its operations. Our transfer agency business has been formally approved by the NYSE to act as a transfer agent or registrar for issuers of NYSE listed securities and is subject to certain NYSE requirements concerning operational standards. Furthermore, it is also subject to U.S. Internal Revenue Service (the IRS) and postal regulations, as well as certain provisions of the Gramm-Leach-Bliley Act and the Federal Trade Commissions regulations with respect to maintenance of information security safeguards.
Privacy and Information Security Regulations
The processing of personal information is required to provide our services. Data privacy laws and regulations in the U.S. and foreign countries apply to the collection, transfer, use, storage, and destruction of personal information. In the U.S., the federal Gramm-Leach-Bliley Act, which applies to financial institutions, applies to certain aspects of our operations outsourcing, mutual fund processing and transfer agency businesses and to the services that involve data processing for financial institutions, and applies indirectly to our other businesses through contractual commitments with our clients and through industry standards. In addition, state privacy and information security laws, and consumer protection laws, which apply to businesses that collect or process personal information, also apply directly to our businesses. These laws may require notification to affected individuals, state officers, and consumer reporting agencies in the event of a security breach that results in unauthorized access to or disclosure of certain non-public personal information. These regulations and laws also impose requirements for safeguarding personal information through internal policies and procedures.
13
Similar data privacy laws related to the collection, transfer, use, and storage of personal information exist outside of the U.S., such as the European Unions 95/46 EC Directive of the European Parliament, Canadas Personal Information Protection and Electronic Documents Act, individual European national laws, and data privacy laws of other countries. In some cases, these laws may be more restrictive and may require different compliance requirements than the Gramm-Leach-Bliley Act, the U.S. state privacy laws or consumer protection laws, and may impose additional duties on companies.
There has been increased public attention regarding the corporate use of personal information, accompanied by 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 believe that Broadridge is compliant with its regulatory responsibilities, the legal, political, and business environments in these areas are rapidly changing, and subsequent legislation, regulation, litigation, court rulings, or other events could expose Broadridge to increased program costs, liability, and possible damage to our reputation.
Other
Our businesses, both directly and indirectly, rely on the Internet and other electronic communications gateways. We intend to expand our use of these gateways. To date, the use of the Internet has been relatively free from regulatory restraints. However, governmental agencies within the U.S. and other jurisdictions 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 constrain our own and our clients abilities to transact business through the Internet or other electronic communications gateways.
Seasonality
Processing and distributing proxy materials and annual reports to investors in equity securities and mutual funds comprises a large portion of our Investor Communication Solutions business. We process and distribute the greatest number of proxy materials and annual reports during our fourth fiscal quarter (the second quarter of the calendar year). The recurring periodic activity of this business is linked to significant filing deadlines imposed by law on public reporting companies and mutual funds. Historically, this has caused our revenues, operating income, net earnings, and cash flows from operating activities to be higher in our fourth fiscal quarter than in any other quarter. The seasonality of our revenues makes it difficult to estimate future operating results based on the results of any specific fiscal quarter and could affect an investors ability to compare our financial condition, results of operations, and cash flows on a fiscal quarter-by-quarter basis.
Segment and Geographic Area Financial Information
You can find financial information regarding our operating segments and our geographic areas in Note 19, Financial Data By Segment to our Consolidated Financial Statements under Item 8 of Part II of this Annual Report on Form 10-K.
Available Information
Our headquarters are located at 1981 Marcus Avenue, Lake Success, New York 11042, and our telephone number is (516) 472-5400.
We maintain an Investor Relations website on the Internet at www.broadridge-ir.com. We make available free of charge, on or through this website, our annual, quarterly and current reports, and any amendments to those reports as soon as reasonably practicable following the time they are electronically filed with or furnished to the SEC. To access these, just click on the SEC Filings link found on our Investor Relations homepage. You can also access our Investor Relations website through our main website at www.broadridge.com by clicking on the Investor Relations link, which is located at the top of our homepage. Information contained on our website is not incorporated by reference into this Annual Report on Form 10-K or any other report filed with the SEC.
14
ITEM 1A. | Risk Factors |
You should carefully consider each of the following risks and all of the other information set forth in this Annual Report on Form 10-K or incorporated by reference herein. Based on the information currently known to us, we believe that the following information identifies the material risk factors affecting our company. However, additional risks and uncertainties not currently known to us or that we currently believe to be immaterial may also adversely affect our business.
If any of the following risks and uncertainties develop into actual events, they could have a material adverse effect on our business, financial condition, or results of operations.
Consolidation in the financial services industry could adversely affect our revenues by eliminating some of our existing and potential clients and could make us increasingly dependent on a more limited number of clients.
There has been and continues to be merger, acquisition, and consolidation activity in the financial services industry. In recent years, the economic slowdown and in particular, its impact on the financial services industry, resulted in increased mergers or consolidations of our clients. Mergers or consolidations of financial institutions could reduce the number of our clients and potential clients. If our clients merge with or are acquired by other firms that are not our clients, or firms that use fewer of our services, they may discontinue or reduce the use of our services. In addition, it is possible that the larger financial institutions resulting from mergers or consolidations could decide to perform in-house some or all of the services that we currently provide or could provide. Any of these developments could have a material adverse effect on our business and results of operations.
A large percentage of our revenues are derived from a small number of clients in the financial services industry.
In fiscal year 2012, we derived approximately 23% of our consolidated revenues from our five largest clients and approximately 63% of the revenues of our Securities Processing Solutions segment from the 15 largest clients in that segment. Our largest single client accounted for approximately 5% of our consolidated revenues. While these clients generally work with multiple business segments, the loss of business from any of these clients due to merger or consolidation, financial difficulties or bankruptcy, or the termination or non-renewal of contracts would have a material adverse effect on our revenues and results of operations. Also, in the event a client experiences financial difficulties or bankruptcy resulting in a reduction in their demand for our services or loss of the clients business, in addition to losing the revenue from that client, the Company would be required to write-off any investments made by the Company in connection with that client. Under a number of our contracts, our clients have the opportunity to renegotiate their contracts with us and to consider whether to renew their contracts or engage one of our competitors to provide services. If we are not successful in achieving high renewal rates with favorable terms, particularly with these clients, our revenues from such renewals and the associated earnings could be negatively impacted. In addition, the current economic slowdown and its specific impact on the financial services industry, has resulted in increased pricing pressure, particularly with respect to our Securities Processing Solutions business.
The financial services industry has experienced increasing scrutiny by regulatory authorities in recent years and further changes in legislation or regulations may adversely affect our ability to conduct our business or may reduce our profitability.
The legislative and regulatory environment of the financial services industry has recently undergone significant change and may undergo further change in the future. The SEC, FINRA, various stock 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 adversely affect the way in which we conduct our business and may make our business less profitable. Also,
15
changes in the interpretation or enforcement of existing laws and regulations by those entities may adversely affect our business.
Our Investor Communication Solutions and Securities Processing Solutions businesses are generally not directly subject to federal, state, or foreign laws and regulations that are specifically applicable to financial institutions. However, as a provider of services to financial institutions and issuers of securities, our services are particularly sensitive to changes in laws and regulations governing our clients and the securities markets. On July 14, 2010, the SEC voted unanimously to issue the Concept Release for public comment. The Concept Release focuses on a wide range of topics related to the U.S. proxy system. The Concept Release is organized by the three general topics on which the SEC sought public input: (1) ensuring the accuracy, transparency, and efficiency of the voting process, (2) enhancing shareholder communication and participation, and (3) addressing the relationship between voting power and economic interest. The comment period on the Concept Release ended in 2010. The SEC may, but is not necessarily required to, engage in rulemaking with respect to the topics addressed by the Concept Release. There are no indicators that would enable the Company to make a determination as to whether there will be any modifications made to the current proxy system, and if so, what impact, if any, any such modifications to the current proxy system will have on our business. However, as with any regulatory change, we may have to incur additional costs to adapt our business to possible modifications in the proxy system that could result from the rulemaking process initiated by the Concept Release. In September 2010, the NYSE formed the Proxy Fee Advisory Committee made up of issuers, broker-dealers and investors to review the NYSE proxy distribution fees. In May 2012, the Proxy Fee Advisory Committee issued its recommendations on the fees paid by issuers for the distribution of proxy materials to beneficial shareholders. The report makes recommendations for changes in fees; however, at this time it is not a formal proposal for changing the NYSE rules pertaining to fees. Any such changes would be subject to public comment and SEC approval. We will monitor any future actions taken by the SEC, the SROs or other participants in the proxy process with respect to the Concept Release and the Proxy Fee Advisory Committee recommendations.
Certain of the securities processing services we provide may be deemed to be mission-critical functions of financial institutions that are regulated by one or more member agencies of the FFIEC. We are therefore subject to examination by the member agencies of the FFIEC. The FFIEC has been conducting periodic reviews of certain of our operations since August 2006 in order to identify existing or potential risks associated with our operations that could adversely affect the financial institutions to which we provide services, evaluates our risk management systems and controls, and determines our compliance with applicable laws that affect the services we provide to financial institutions. In addition to examining areas such as our management of technology, data integrity, information confidentiality and service availability, the reviews also assess our financial stability. A sufficiently unfavorable review from the FFIEC could result in our clients not being allowed to use our services, which could have a material adverse effect on our business, financial condition and results of operations.
In addition, our operations outsourcing, mutual fund processing and transfer agency solutions as well as the entities providing those services are subject to regulatory oversight. Our provision of these services must comply with applicable rules and regulations of the SEC, FINRA, and various stock 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. If we fail to comply with any applicable regulations in performing those services, we could lose our clients, be subject to suits for breach of contract or to governmental proceedings, censures and fines, our reputation could be harmed and we could be limited in our ability to obtain new clients. Our ability to comply with these regulations depends largely upon the maintenance of an effective compliance system which can be time consuming and costly, as well as our ability to attract and retain qualified compliance personnel. In addition, the future enactment of more restrictive laws or rules with respect to our regulated subsidiaries could have an adverse impact on the financial performance of those businesses. Furthermore, regulatory approval may be required before expansion of these business activities. We may not be able to obtain the necessary regulatory approvals for any desired expansion. Even if approvals are obtained, they may impose restrictions on our business and could require us to incur significant compliance costs or adversely affect the development of business activities in affected markets.
16
There has been increased public attention regarding the corporate use of personal information, accompanied by 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 believe that Broadridge is compliant with its regulatory responsibilities, the legal, political and business environments in these areas are rapidly changing, and subsequent legislation, regulation, litigation, court rulings or other events could expose Broadridge to increased program costs, liability, and possible damage to our reputation.
Our clients in the financial services industry are subject to increasing regulation and oversight by regulators, which could adversely affect our ability to conduct our business or may reduce our profitability.
We provide technology solutions to a large and diverse client base in the financial services industry including retail and institutional brokerage firms, global banks, mutual funds, annuity companies, institutional investors, specialty trading firms, independent broker-dealers, and clearing firms. These clients are generally subject to extensive regulation in the U.S. and in other jurisdictions. The current legislative and regulatory environment may impact the way that our clients do business in a way that could adversely impact us. For example, new regulations governing our clients could result in significant expenditures that could cause them to reduce their use of our services, seek to renegotiate existing agreements, or cease or curtail their operations, all of which could adversely impact our business. In addition, the financial services industry has experienced increased scrutiny in recent years and penalties and fines sought by regulatory authorities, including the SEC, FINRA, securities exchanges, state attorneys general and international regulators, have increased accordingly. Failure to comply with laws, regulations or policies, could result in fines, limitations on business activity or suspension or expulsion from the industry, any of which could have a material adverse effect upon our clients. Adverse regulatory actions that change our clients businesses or adversely affect their operating results or financial condition could decrease their ability to purchase, or demand for, our products and services, thus causing loss of business from these clients. The loss of business from our largest clients could have a material adverse effect on our revenues and results of operations.
Our revenues may decrease due to declines in the number of unique securities positions, levels of event-driven communications activity, trading volume, market prices, or the liquidity of the securities markets.
We generate significant revenues from the transaction processing fees we earn from our services. These revenue sources are substantially dependent on the levels of participation and activity in the securities markets. The number of unique securities positions held by investors through our clients and our clients customer trading volumes reflect the levels of participation and activity in the markets, which are impacted by market prices, and the liquidity of the securities markets, among other factors. Over the past several years, the U.S. and foreign securities markets have experienced significant volatility. Sudden sharp or gradual but sustained declines in market participation and activity can result in reduced investor communications activity, including reduced proxy and event-driven communications processing such as mutual fund proxy, and mergers and acquisitions and other special corporate event communications processing, and reduced trading volumes. The occurrence of any of these events would likely result in reduced revenues and decreased profitability from our business operations.
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.
The number of unique securities positions held by investors through our clients, the level of event-driven communications activity we process on behalf of our clients, trading volume, market prices, and liquidity of the securities markets are affected by general national and international economic and political conditions, and broad trends in business and finance that result in changes in participation and activity in the securities markets. These factors include:
| economic, political and market conditions; |
| legislative and regulatory changes; |
17
| the availability of short-term and long-term funding and capital; |
| the level and volatility of interest rates; |
| currency values and inflation; and |
| national, state, and local taxation levels affecting securities transactions. |
These factors are beyond our control and may contribute to reduced levels of participation and activity in the securities markets. Our revenues have historically been largely driven by transaction processing based on levels of participation and activity in the securities markets. Accordingly, any significant reduction in participation and activity in the securities markets would likely result in lower revenues from our business operations.
Breaches of our information security policies or safeguards could adversely affect our ability to operate, could result in the personal or account information of our clients customers being misappropriated, and may cause us to be held liable or suffer harm to our reputation.
We process and transfer the personal and account information of customers of financial institutions and investors in public companies and mutual funds. Our clients that are financial institutions or clients that collect or handle personal information outside the U.S. are subject to laws and regulations in the U.S. and other jurisdictions designed to protect the privacy of personal information and to prevent that information from being inappropriately disclosed, misused, altered, destroyed or otherwise compromised, and they require that we abide by such laws and regulations in performing our services for them. In the U.S., the federal Gramm-Leach-Bliley Act, which applies to financial institutions, applies to certain aspects of our operations outsourcing, mutual fund processing and transfer agency businesses and to the services that involve data processing for financial institutions, and applies indirectly to our other businesses through contractual commitments with our clients and through industry standards. In addition, state privacy and information security laws, and consumer protection laws, which apply to businesses that collect or process personal information, also apply directly to our businesses. We have developed and maintain technical and operational safeguards which vary based on service and information type, including encryption, authentication technology, and transmission of data over private networks in order to effect secure transmissions of confidential information over computer systems and the Internet. However, despite those safeguards, it is possible that unauthorized individuals could improperly access our systems or improperly obtain or disclose the personal or account information of our clients customers or investors in public companies and mutual funds. Any breach of our information security policies or safeguards resulting in the unauthorized use or disclosure of personal or account information could result in interruptions to our operations or delivery of services to our clients, and we could be liable to parties who are financially harmed by those breaches. Our liability risk is anticipated in our services agreements with our clients and our insurance coverage. However, we may not be adequately protected against all possible losses through the terms of our services agreements and our insurance coverage. In addition, we may incur significant costs to protect against the threat of information security breaches or to respond to or alleviate problems caused by such breaches. Furthermore, such breaches could cause us to lose revenues, lose clients or cause damage to our reputation.
We purchase a significant portion of our data center services, including disaster recovery capabilities, from a third party data center services provider, and if our data center services provider fails to adequately perform the data center services in the manner necessary to meet our clients needs, our business, financial condition, and results of operations may be harmed.
IBM provides us with data center services under the IT Services Agreement that include supporting our mainframe, midrange, open systems, network and data center operations, as well as disaster recovery services. As a result, we currently purchase a significant portion of our data center services, including disaster recovery capabilities, from IBM. If IBM fails to adequately perform the data center services in the manner necessary to meet our clients needs, our business, financial condition and results of operations may be harmed. Some of these risks are anticipated and covered through service level credits, termination rights, and indemnification clauses in
18
the IT Services Agreement. However, we may not adequately be protected against all possible losses through the terms of the IT Services Agreement.
Any slowdown or failure of our computer or communications systems or those of our outsourced data center services provider could impact our ability to provide services to our clients and support our internal operations and 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 transactions and investor communications through a variety of electronic systems and media. Our systems, those of our outsourced data center services provider, or any other systems with which ours interact could slow down significantly or fail for a variety of reasons, including:
| computer viruses or undetected errors in internal software programs or computer systems; |
| inability to rapidly monitor all system activity; |
| inability to effectively resolve any errors in internal software programs or computer systems once they are detected; |
| heavy stress placed on systems during peak times; or |
| power or telecommunications failure, fire, flood or any other disaster. |
While we 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 predict future volume increases or volatility accurately or that our systems and those of our data center services provider will be able to accommodate these volume increases or volatility without failure or degradation. Moreover, because we have outsourced our data center operations, the operation and performance of the data center involve factors beyond our control. Any significant degradation or failure of our computer systems, communications systems or any other systems in the performance of our services could cause our clients or their customers to suffer delays in their receipt of our services. These delays could cause substantial losses for our clients or their customers, and we could be liable to parties who are financially harmed by those failures. Our liability risk is anticipated in our services agreements with our clients and our insurance coverage. However, we may not be adequately protected against all possible losses through the terms of our services agreements and our insurance coverage. In addition, such failures could cause us to lose revenues, lose clients or damage our reputation.
Operational errors in the performance of our services could lead to liability for claims, client loss and result in reputational damage.
The failure to properly perform our services could result in our clients and/or certain of our subsidiaries being subjected to censures, fines, or other sanctions by applicable regulatory authorities, and we could be liable to parties who are financially harmed by those errors. Our liability risk is anticipated in our services agreements with our clients and our insurance coverage. However, we may not be adequately protected against all possible losses through the terms of our services agreements and our insurance coverage. In addition, such errors could cause us to lose revenues, lose clients or damage our reputation.
If the operational systems and infrastructure that we depend on fail to keep pace with our growth, we may experience operating inefficiencies, client dissatisfaction and lost revenue opportunities.
The growth of our business and expansion of our client base may place a strain on our management and operations. We believe that our current and anticipated future growth will require the implementation of new and enhanced communications and information systems, the training of personnel to operate these systems, and the expansion and upgrade of core technologies. While many of our systems are designed to accommodate additional growth without redesign or replacement, we may nevertheless need to make significant investments in additional hardware and software to accommodate growth. In addition, we cannot assure you that we will be able to predict the timing or rate of this growth accurately or expand and upgrade our systems and infrastructure on a timely basis.
19
Our growth has required and will continue to require increased investments in management personnel and systems, financial systems and controls, and office facilities. In the absence of continued revenue growth, the costs associated with these investments would cause our operating margins to decline from current levels. We cannot assure you that we will be able to manage or continue to manage our recent or future growth successfully. If we fail to manage our growth, we may experience operating inefficiencies, dissatisfaction among our client base, and lost revenue opportunities.
If we are unable to respond to the demands of our existing and new clients, our ability to reach our revenue goals or maintain our profitability could be diminished.
The global financial services industry is characterized by increasingly complex and integrated infrastructures and products, new and changing business models and rapid technological and regulatory changes. Our clients needs and demands for our products and services evolve with these changes. Our future success will depend, in part, on our ability to respond to our clients demands for new services, capabilities and technologies on a timely and cost-effective basis, to adapt to technological advancements and changing regulatory standards, and to address our clients increasingly sophisticated requirements.
Intense competition could negatively affect our ability to maintain or increase our market share and profitability.
The markets for our products and services continue to evolve and are highly competitive. We compete with a number of firms that provide similar products and services. In addition, our securities processing solutions compete with our clients in-house capabilities to perform competitive functions. Our 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 we will be able to offer or adopt. In addition, we expect that the markets in which we compete will continue to attract new competitors and new technologies, including international providers of similar products and services to ours. There can be no assurances 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 results of operations could be materially harmed.
Our business, financial position, and results of operations could be harmed by adverse rating actions by credit rating agencies.
If the credit ratings of our outstanding indebtedness are downgraded, or if rating agencies indicate that a downgrade may occur, our business, financial position, and results of operations could be adversely affected and perceptions of our financial strength could be damaged. A downgrade would have the effect of increasing our borrowing costs, and could decrease the availability of funds we are able to borrow, adversely affecting our business, financial position, and results of operations. In addition, a downgrade could adversely affect our relationships with our clients. For further information with respect to our borrowing costs, see Note 13, Borrowings to our Consolidated Financial Statements under Item 8 of Part II of this Annual Report on Form 10-K.
We may be unable to attract and retain key personnel.
Our continued success depends on our ability to attract and retain key personnel such as our senior management and other qualified personnel to conduct our business. The market for such experienced senior managers and other qualified personnel is extremely competitive. There can be no assurance that we will be successful in our efforts to recruit and retain the required key personnel. If we are unable to attract and retain qualified individuals or our recruiting and retention costs increase significantly, our operations and financial results could be materially adversely affected.
20
The inability to identify, obtain and retain important intellectual property rights to technology could harm our business.
Our success depends in part upon the development and acquisition of systems and applications to conduct our business. These systems and applications are primarily developed by employees or independent contractors, or obtained through acquisitions. Our success will increasingly depend in part on our ability to identify, obtain and retain intellectual property rights to technology, both for internal use as well as for use in providing services to our clients, either through internal development, acquisition or licensing from others, or alliances with others. Our inability to identify, obtain and retain rights to certain technology on favorable terms and conditions would make it difficult to conduct business, or to timely introduce new and innovative products and services, which could harm our business, financial condition, and results of operations.
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, we are subject to the risk of claims alleging infringement of third-party proprietary rights. If we infringe upon the rights of third parties, we may be unable to obtain licenses to use those rights on commercially reasonable terms. Additionally, third parties that provide us with products and services that are integral to the conduct of our business may be subject to similar allegations, which could prevent them from continuing to provide these products and services to us. In either of these events, we would need to undertake substantial reengineering in order to continue offering our services and we may not succeed in doing so. In addition, any claim of infringement could cause us to incur 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.
Acquisitions and integrating such acquisitions create certain risks and may affect operating results.
From time to time, we engage in, and expect to continue to engage in, business acquisitions. The acquisition and integration of businesses involve a number of risks. The core risks are in the areas of:
| valuation: negotiating a fair price for the business based on inherently limited due diligence reviews; |
| integration: managing the complex process of integrating the acquired companys people, products, technology, and other assets so as to realize the projected value of the acquired company and the synergies projected to be realized in connection with the acquisition; and |
| legacy issues: protecting against actions, claims, regulatory investigations, losses, and other liabilities related to the predecessor business. |
Also, the process of integrating these businesses may disrupt our business and divert our resources. These risks may arise for a number of reasons including, for example:
| finding suitable businesses to acquire at affordable valuations or on other acceptable terms; |
| competition for acquisitions from other potential acquirors; |
| incurring unforeseen obligations or liabilities in connection with such acquisitions; |
| devoting unanticipated financial and management resources to an acquired business; |
| borrowing money from lenders or selling equity or debt securities to the public to finance future acquisitions on terms that may be adverse to us; |
| entering markets where we have minimal prior experience; and |
| experiencing decreases in earnings as a result of non-cash impairment charges. |
21
In addition, international acquisitions often involve additional or increased risks including, for example:
| geographically separated organizations, systems, and facilities; |
| integrating personnel with diverse business backgrounds and organizational cultures; |
| complying with foreign regulatory requirements; |
| enforcing intellectual property rights in some foreign countries; and |
| general economic and political conditions. |
In the event of a disaster, our disaster recovery and business continuity plans may fail, which could result in the loss of client data and adversely interrupt operations.
Our operations are dependent on our ability to protect our infrastructure against damage from catastrophe, natural disaster, or severe weather including events resulting from unauthorized security breach, power loss, telecommunications failure, terrorist attack, or other events that could have a significant disruptive effect on our operations. We have disaster recovery and business continuity plans in place in the event of system failure due to any of these events and we test our plans regularly. In addition, our outsourced data center services provider also has disaster recovery plans and procedures in place. However, we cannot be certain that our plans, or those of our primary outsourced data center services provider, will be successful in the event of a disaster. If our disaster recovery or business continuity plans are unsuccessful in a disaster recovery scenario, we could potentially lose client data or experience material adverse interruptions to our operations or delivery of services to our clients, and we could be liable to parties who are financially harmed by those failures. Our liability risk is anticipated in our services agreements with our clients and our insurance coverage. However, we may not be adequately protected against all possible losses through the terms of our services agreements and our insurance coverage. In addition, such failures could cause us to lose revenues, lose clients or damage our reputation.
Our business is highly dependent on the financial services industry and exchanges and market centers around the world that may be targets of terrorism.
Our business is highly dependent on the financial services industry and exchanges and market centers around the world that may be targets of terrorism. Terrorist activities in September 2001 caused the U.S. securities markets to close for four days. This impacted our revenues and profitability for that period of time. If terrorist incidents cause interruption of the financial services industry or securities market activity, our revenues and profits may be impacted negatively again.
Our mutual fund processing services may be exposed to risk from our counterparties and third parties.
In the normal course of business, our mutual fund processing services involve the settlement of transactions on behalf of our customers and third parties. With these activities, we may be exposed to risk in the event our customers, other broker-dealers, banks, clearing organizations, or depositories are unable to fulfill contractual obligations and the mutual fund counterparty is not able to cancel the transaction.
Our revenues are subject to seasonal variations because we process and distribute the greatest number of proxy materials and annual reports in our fourth fiscal quarter.
Processing and distributing proxy materials and annual reports to investors in equity securities and mutual funds comprises a large portion of our Investor Communication Solutions business. We process and distribute the greatest number of proxy materials and annual reports during our fourth fiscal quarter. The recurring periodic activity of this business is linked to significant filing deadlines imposed by law on public reporting companies and mutual funds. Historically, this has caused our revenues, operating income, net earnings, and cash flows from operating activities to be higher in our fourth fiscal quarter than in any other fiscal quarter. The seasonality of our revenues makes it difficult to estimate future operating results based on the results of any specific fiscal quarter and could affect an investors ability to compare our financial condition, results of operations, and cash flows on a fiscal quarter-by-quarter basis.
22
ITEM 1B. | Unresolved Staff Comments. |
None.
ITEM 2. | Properties. |
We operate our business from 52 facilities. We own a 20,000 square foot facility in Mount Laurel, New Jersey, where we perform certain product development functions. We also own a 36,000 square foot facility in Wheat Ridge, Colorado, where we perform securities processing services. We lease four facilities in Edgewood, New York, with a combined space of 763,320 square feet which are used in connection with our Investor Communication Solutions business. We lease space at 46 additional locations, subject to customary lease arrangements, including a 67,000 square foot facility in Lake Success, New York, that serves as our corporate headquarters as well as the location of our operations outsourcing solutions business. Our leases expire on a staggered basis. We believe our facilities are currently adequate for their intended purposes and are adequately maintained.
ITEM 3. | Legal Proceedings. |
In the normal course of business, the Company is subject to claims and litigation. While the outcome of any claim or litigation is inherently unpredictable, and with the exception of the matter described in the following paragraph, the Company believes that the ultimate resolution of these matters will not, individually or in the aggregate, result in a material impact on its financial condition, results of operations, or cash flows.
On January 28, 2010, the Company filed a declaratory action in the U.S. District Court for the District of Delaware (the Delaware District Court) against Inveshare, Inc. (the Defendant) seeking a declaration by the court that Broadridge does not infringe two U.S. patents owned by the Defendant that included claims related to the delivery and distribution of an electronic solicitation. The Companys complaint also alleged that the Defendants patents are invalid and/or are unenforceable due to inequitable conduct. On March 22, 2010, the Defendant answered the Companys complaint and filed a counterclaim against the Company alleging that Broadridge uses a process that infringes on one of the patents in the action. In its counterclaim, Defendant is seeking injunctive relief and unspecified damages. This lawsuit is in an early procedural stage, with the Delaware District Court recently issuing its claim construction ruling on April 11, 2012; however, due to the limited scope of this matter, the Company believes that the outcome of this litigation would not result in a material adverse impact on its financial condition, results of operations, or cash flows.
ITEM 4. | Mine Safety Disclosures. |
None.
23
ITEM 5. | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Our common stock began trading regular way on the NYSE under the symbol BR on April 2, 2007. There were 15,192 stockholders of record of the Companys common stock as of July 31, 2012. This figure excludes an estimate of the indeterminate number of beneficial holders whose shares may be held of record by brokerage firms and clearing agencies. The following table presents the high and low closing prices of the Companys common stock on the NYSE as well as the cash dividends per share of common stock declared during the fiscal quarters indicated:
Common Stock Market Price |
High | Low | Dividends Declared |
|||||||||
Fiscal Year 2012 |
||||||||||||
First Quarter |
$ | 24.75 | $ | 19.59 | $ | 0.16 | ||||||
Second Quarter |
22.79 | 19.18 | 0.16 | |||||||||
Third Quarter |
24.85 | 22.57 | 0.16 | |||||||||
Fourth Quarter |
24.19 | 20.23 | 0.16 | |||||||||
Fiscal Year 2011 |
||||||||||||
First Quarter |
$ | 23.13 | $ | 18.96 | $ | 0.15 | ||||||
Second Quarter |
23.08 | 20.59 | 0.15 | |||||||||
Third Quarter |
23.40 | 21.00 | 0.15 | |||||||||
Fourth Quarter |
24.07 | 21.79 | 0.15 |
Dividend Policy
We expect to pay cash dividends on our common stock. On August 8, 2012, our Board of Directors increased our quarterly cash dividend by $0.02 per share to $0.18 per share, an increase in our annual dividend amount from $0.64 to $0.72 per share. However, the declaration and payment of future dividends to holders of our common stock will be at the discretion of our Board of Directors, and will depend upon many factors, including our financial condition, earnings, capital requirements of our businesses, legal requirements, regulatory constraints, industry practice, and other factors that the Board of Directors deems relevant.
As a holding company with no material liquid assets other than the capital stock of our subsidiaries, our ability to pay dividends will be dependent on our receiving dividends from our operating subsidiaries. Our subsidiaries through which we provide our operations outsourcing and mutual fund processing services, are regulated and may be subject to restrictions on their ability to pay dividends to us.
24
Performance Graph
The following graph compares the cumulative total stockholder return on Broadridge common stock from March 22, 2007, the date our common stock commenced trading on a when issued basis, to June 30, 2012 with the comparable cumulative return of (i) the S&P 400 MidCap Index, and (ii) the S&P 400 Information Technology Index. The graph assumes $100 was invested on March 22, 2007 in our common stock and in each of the indices and assumes that all cash dividends are reinvested. The table below the graph shows the dollar value of those investments as of the dates in the graph. The comparisons in the graph are required by the SEC and are not intended to forecast or be indicative of future performance of our common stock.
The following performance graph and related information shall not be deemed soliciting material or to be filed with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or the Exchange Act, each as amended, except to the extent that Broadridge specifically incorporates it by reference into such filing.
Comparison of Cumulative Total Return Among Broadridge Financial Solutions, Inc., S&P 400 MidCap
Index and S&P 400 Information Technology Index (in dollars)
March 22, 2007 |
June 30, 2007 |
June 30, 2008 |
June 30, 2009 |
June 30, 2010 |
June 30, 2011 |
June 30, 2012 |
||||||||||||||||||||||
Broadridge Common Stock Value |
$ | 100.00 | $ | 95.42 | $ | 106.29 | $ | 85.20 | $ | 100.48 | $ | 130.46 | $ | 118.76 | ||||||||||||||
S&P 400 MidCap Index Value |
$ | 100.00 | $ | 105.25 | $ | 97.53 | $ | 70.20 | $ | 87.70 | $ | 122.24 | $ | 119.44 | ||||||||||||||
S&P 400 Information Technology Index Value |
$ | 100.00 | $ | 107.14 | $ | 91.33 | $ | 74.91 | $ | 92.32 | $ | 134.57 | $ | 123.37 |
25
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table contains information about our purchases of our equity securities for each of the three months during our fourth fiscal quarter ended June 30, 2012:
Period |
Total Number of Shares Purchased |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of a Publicly Announced Plan(2) |
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans(2) |
||||||||||||
April 1, 2012 April 30, 2012 |
460,897 | (1) | $ | 23.91 | | | ||||||||||
May 1, 2012 May 31, 2012 |
| | | | ||||||||||||
June 1, 2012 June 30, 2012 |
250,000 | (2) | 20.90 | 250,000 | 5,869,489 | |||||||||||
|
|
|
|
|
|
|||||||||||
Total |
710,897 | $ | 22.85 | 250,000 | 5,869,489 | |||||||||||
|
|
|
|
|
|
(1) | Represents shares purchased from employees to pay taxes related to the vesting of restricted stock units. |
(2) | On August 11, 2010, the Board of Directors authorized a stock repurchase plan for the repurchase of up to 10 million shares of the Companys common stock. During the fiscal quarter ended June 30, 2012, the Company repurchased 250,000 shares of common stock under this plan at an average price per share of $20.90. |
At June 30, 2012, there were 5,869,489 shares remaining for repurchase under the August 11, 2010 stock repurchase plan. |
On August 8, 2012, the Board of Directors authorized a stock repurchase plan for the repurchase of up to 4 million shares of the Companys common stock. With this authorization, the Company currently has approximately 10 million shares available for repurchase under its stock repurchase plans. |
26
ITEM 6. | Selected Financial Data |
The following tables set forth selected consolidated financial information from our audited Consolidated Financial Statements (the Financial Statements) as of and for the fiscal years ended June 30, 2012, 2011, 2010, 2009 and 2008. The selected financial data presented below should be read in conjunction with our Financial Statements and the accompanying Notes included in this Annual Report on Form 10-K and Managements Discussion and Analysis of Financial Condition and Results of Operations.
Years Ended June 30, | ||||||||||||||||||||
2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
(in millions, except for per share amounts) | ||||||||||||||||||||
Statements of Earnings Data |
||||||||||||||||||||
Revenues |
$ | 2,303.5 | $ | 2,166.9 | $ | 2,209.2 | $ | 2,073.0 | $ | 2,130.8 | ||||||||||
Earnings from continuing operations before income taxes |
$ | 200.9 | $ | 269.7 | $ | 342.1 | $ | 346.0 | $ | 319.7 | ||||||||||
Net earnings from continuing operations |
$ | 125.0 | $ | 171.8 | $ | 225.1 | $ | 223.1 | $ | 188.4 | ||||||||||
Net earnings |
$ | 123.6 | $ | 169.6 | $ | 190.0 | $ | 223.3 | $ | 192.2 | ||||||||||
Basic earnings per share from continuing operations(a) |
$ | 1.01 | $ | 1.38 | $ | 1.66 | $ | 1.60 | $ | 1.35 | ||||||||||
Diluted earnings per share from continuing operations(a) |
$ | 0.98 | $ | 1.34 | $ | 1.62 | $ | 1.58 | $ | 1.34 | ||||||||||
Basic Weighted-average shares outstanding |
124.1 | 124.8 | 135.9 | 140.0 | 139.6 | |||||||||||||||
Diluted Weighted-average shares outstanding |
127.5 | 128.3 | 139.1 | 141.6 | 141.0 | |||||||||||||||
Cash dividends declared per common share |
$ | 0.64 | $ | 0.60 | $ | 0.56 | $ | 0.28 | $ | 0.24 | ||||||||||
June 30, | ||||||||||||||||||||
2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
(in millions) | ||||||||||||||||||||
Balance Sheet Data |
||||||||||||||||||||
Cash and cash equivalents |
$ | 320.5 | $ | 241.5 | $ | 412.6 | $ | 173.4 | $ | 54.7 | ||||||||||
Securities clearing receivables(b) |
| | 52.5 | 1,011.3 | 1,369.9 | |||||||||||||||
Total current assets |
777.4 | 751.4 | 992.4 | 2,051.8 | 2,131.8 | |||||||||||||||
Property, plant and equipment, net |
79.0 | 83.1 | 87.4 | 75.4 | 82.6 | |||||||||||||||
Total assets |
1,987.6 | 1,904.0 | 1,794.4 | 2,774.7 | 2,833.6 | |||||||||||||||
Securities clearing payables(b) |
| | 77.4 | 1,088.1 | 1,157.4 | |||||||||||||||
Total current liabilities |
410.3 | 782.7 | 486.4 | 1,429.9 | 1,532.2 | |||||||||||||||
Long-term debt |
524.4 | 124.3 | 324.1 | 324.1 | 447.9 | |||||||||||||||
Total liabilities |
1,137.1 | 1,106.7 | 987.3 | 1,865.7 | 2,087.8 | |||||||||||||||
Total stockholders equity |
$ | 850.5 | $ | 797.3 | $ | 807.1 | $ | 909.0 | $ | 745.8 |
(a) | The computation of basic earnings per share (EPS) from continuing operations is based on the Companys Net Earnings divided by the basic Weighted-average shares outstanding. Diluted EPS reflects the potential dilution that could occur if outstanding stock options at the presented date are exercised, shares of restricted stock and restricted stock units have vested. |
(b) | See Note 8, Discontinued Operations to our Consolidated Financial Statements under Item 8 of Part II of this Annual Report on Form 10-K for additional information about our Securities clearing receivables and Securities clearing payables. |
27
ITEM 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
This discussion summarizes the significant factors affecting the results of operations and financial condition of Broadridge during the fiscal years ended June 30, 2012, 2011, and 2010 and should be read in conjunction with our Consolidated Financial Statements and accompanying Notes thereto included elsewhere herein. Certain information contained in Managements Discussion and Analysis of Financial Condition and Results of Operations are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are not historical in nature and which may be identified by the use of words like expects, assumes, projects, anticipates, estimates, we believe, could be and other words of similar meaning, are forward-looking statements. These statements are based on managements expectations and assumptions and are subject to risks and uncertainties that may cause actual results to differ materially from those expressed. Our actual results, performance or achievements may differ materially from the results discussed in this Item 7 because of various factors, including those set forth elsewhere herein. See Forward-Looking Statements and Risk Factors included in Item 1 of this Annual Report on Form 10-K.
DESCRIPTION OF THE COMPANY AND BUSINESS SEGMENTS
Broadridge is a leading global provider of investor communications and technology-driven solutions to banks/broker-dealers, mutual funds and corporate issuers. Our systems and services include investor communication solutions, and securities processing and operations outsourcing solutions. In short, we provide the infrastructure that helps the financial services industry operate. With 50 years of experience, we provide financial services firms with advanced, dependable, scalable and cost-effective integrated systems. Our systems help reduce the need for clients to make significant capital investments in operations infrastructure, thereby allowing them to increase their focus on core business activities. Our operations are classified into two business segments: Investor Communication Solutions and Securities Processing Solutions.
Investor Communication Solutions
A large portion of our Investor Communication Solutions business involves the processing and distribution of proxy materials to investors in equity securities and mutual funds, as well as the facilitation of related vote processing. ProxyEdge, our innovative electronic proxy delivery and voting solution for institutional investors, helps ensure the participation of the largest stockholders of many companies. We also provide the distribution of regulatory reports and corporate action/reorganization event information, as well as tax reporting solutions that help our clients meet their regulatory compliance needs. In addition, we provide financial information distribution and transaction reporting services to both financial institutions and securities issuers. These services include the processing and distribution of account statements and trade confirmations, traditional and personalized document fulfillment and content management services, marketing communications, and imaging, archival and workflow solutions that enable and enhance our clients communications with investors. All of these communications are delivered in paper or electronic form.
Two years ago, Broadridge entered the transfer agency business through its acquisition of StockTrans, Inc. (renamed Broadridge Corporate Issuer Solutions, Inc.), a provider of registrar, stock transfer and record-keeping services.
In fiscal year 2011, the Company acquired three businesses in the Investor Communication Solutions segment. In August 2010, the Company acquired NewRiver, Inc. (NewRiver), a leader in mutual fund electronic investor disclosure solutions. In December 2010, the Company acquired Forefield, Inc. (Forefield), a leading provider of real-time sales, education and client communication solutions for financial institutions and their advisors. In January 2011, the Company acquired Matrix Financial Solutions, Inc. (Matrix). Matrix is a provider of mutual fund processing services for third party administrators, financial advisors, banks and wealth management professionals. Matrixs back-office, trust, custody, trading and mutual fund settlement services are integrated into our product suite thereby strengthening Broadridges role as a provider of data processing and distribution channel solutions to the mutual fund industry.
28
Securities Processing Solutions
We offer a suite of advanced computerized real-time transaction processing services that automate the securities transaction lifecycle, from desktop productivity tools, data aggregation, performance reporting, and portfolio management to order capture and execution, trade confirmation, settlement, and accounting. Our services help financial institutions efficiently and cost-effectively consolidate their books and records, gather and service assets under management, focus on their core businesses, and manage risk. With multi-currency capabilities, our Global Processing Solution supports real-time global trading of equity, option, mutual fund, and fixed income securities in established and emerging markets. In addition, our operations outsourcing solutions allow broker-dealers to outsource certain administrative functions relating to clearing and settlement, from order entry to trade matching and settlement, while maintaining their ability to finance and capitalize their business.
In fiscal year 2010, the Company acquired City Networks Ltd (City Networks), a leading software and services provider of reconciliation, multi-asset process automation and operational risk management solutions to the global financial services industry.
In fiscal year 2012, the Company acquired Paladyne Systems, Inc. (Paladyne), a provider of buy-side technology solutions for the global investment management industry.
ACQUISITIONS
Assets acquired and liabilities assumed in business combinations were recorded on the Companys Consolidated Balance Sheets as of the respective acquisition dates based upon their estimated fair values at such dates. The results of operations of businesses acquired by the Company were included in the Companys Consolidated Statements of Earnings since their respective dates of acquisition. The excess of the purchase price over the estimated fair values of the underlying assets acquired and liabilities assumed was allocated to Goodwill.
Acquisitions completed by the Company with an aggregate purchase price of greater than $15.0 million during the fiscal years ended June 30, 2012, 2011 and 2010, were as follows:
During the fiscal year ended June 30, 2012, the Company acquired one business in the Securities Processing Solutions segment:
Paladyne Systems, Inc.
In September 2011, the Company acquired Paladyne, a provider of buy-side technology solutions for the global investment management industry. The purchase price was $72.4 million, net of cash acquired. Net liabilities assumed were $15.4 million. This acquisition resulted in $64.0 million of goodwill. Intangible assets acquired, which totaled $23.8 million, consist primarily of acquired software technology and customer relationships, which are being amortized over a seven-year life and ten-year life, respectively. This acquisition was not material to the Companys consolidated operations, financial position, or cash flows.
During the fiscal year ended June 30, 2011, the Company acquired three businesses in the Investor Communication Solutions segment. A summary of each acquisition is as follows:
NewRiver, Inc.
In August 2010, the Company acquired NewRiver, a leader in mutual fund electronic investor disclosure solutions. The purchase price was $77.6 million, net of cash acquired. This acquisition resulted in $47.8 million of goodwill, after post-closing adjustments for deferred taxes. Intangible assets acquired, which totaled $27.3 million, consist primarily of customer relationships and software technology, which are being amortized over an eight-year and seven-year life, respectively. This acquisition was not material to the Companys operations, financial position, or cash flows.
29
Forefield, Inc.
In December 2010, the Company acquired Forefield, a leading provider of real-time sales, education and client communication solutions for financial institutions and their advisors. The purchase price was $18.3 million, net of cash acquired. This acquisition resulted in $11.1 million of goodwill, after post-closing adjustments for deferred taxes. Intangible assets acquired, which totaled $6.8 million, primarily consist of customer relationships and software technology that are being amortized over a seven-year and a five-year life, respectively. This acquisition was not material to the Companys operations, financial position, or cash flows.
Matrix Financial Solutions, Inc.
In January 2011, the Company acquired Matrix, a provider of mutual fund processing services for third party administrators, financial advisors, banks and wealth management professionals. The purchase price was $197.6 million, net of cash acquired.
This acquisition resulted in $154.7 million of goodwill, after post-closing adjustments for deferred taxes. Goodwill primarily resulted from the Companys expectation of sales growth and cost synergies from the integration of Matrixs technology and product offerings with the Companys technology and operations to provide an expansion of products and market reach. Intangible assets acquired, which totaled $71.5 million, consist of customer relationships, software technology, trademarks and non-compete agreements, and are being amortized over a ten-year, seven-year, five-year and three-year life, respectively. This acquisition was not material to the Companys operations, financial position, or cash flows.
During the fiscal year ended June 30, 2010, the Company acquired one business in the Securities Processing Solutions segment:
City Networks, Ltd
In June 2010, the Company acquired City Networks, a leading software and services provider of reconciliation, multi-asset process automation and operational risk management solutions to the global financial services industry, for $37.7 million. This acquisition resulted in $20.9 million of goodwill. Intangible assets acquired, which totaled $10.6 million, consist primarily of customer relationships and acquired software technology, which are being amortized over a ten-year life and five-year life, respectively. This acquisition was not material to the Companys operations, financial position, or cash flows.
The Company also completed acquisitions with individual aggregate purchase prices of less than $15.0 million during fiscal year 2010 which were not material to the Companys operations, financial position or cash flows.
DIVESTITURES
In November 2009, the Company and its wholly owned subsidiary Ridge Clearing & Outsourcing Solutions, Inc. (Ridge), entered into an asset purchase agreement (the Asset Purchase Agreement) with Penson Worldwide, Inc. (PWI) and Penson Financial Services, Inc., a wholly owned subsidiary of PWI (PFSI, referred to together with PWI as Penson), to sell substantially all contracts of the securities clearing clients of Ridge to PFSI.
On June 25, 2010, the Company completed the sale of the contracts of substantially all of the securities clearing clients of Ridge to PFSI for an aggregate purchase price of $35.2 million. The purchase price paid to Broadridge consisted of (i) a five-year subordinated note from PWI (the Seller Note) in the principal amount of $20.6 million bearing interest at an annual rate equal to the London Inter-Bank Offer Rate (LIBOR) plus 550 basis points, and (ii) 2,455,627 shares of PWIs common stock (representing 9.5% of PWIs outstanding common
30
stock as of May 31, 2010), at the June 25, 2010 closing price of PWIs common stock of $5.95 per share (the Seller Shares). As a result of this transaction, we no longer provide securities clearing services for correspondent broker-dealers but continue to provide operations outsourcing solutions aligned with the Securities Processing Solutions business. See Note 11, Other Non-current Assets to our Consolidated Financial Statements under Item 8 of Part II of this Annual Report on Form 10-K for a discussion on the Seller Note and the Seller Shares.
Concurrent with entering into the Asset Purchase Agreement, the Company entered into a master services agreement with PWI (the Outsourcing Services Agreement) for an eleven-year term expiring in December 2022. Under the Outsourcing Services Agreement, Ridge provided securities processing and back-office support services to PFSI, including services for the clients acquired from Ridge and PWIs existing clients. As of January 2012, the Company completed the conversion of PWIs U.S. and Canadian businesses. On June 5, 2012, the Company entered into a ten-year master services agreement (the Apex MSA) with Apex Clearing Corporation (Apex Clearing) under which Broadridge will perform outsourcing services for Apex Clearing consistent with the securities processing and back-office support services it had previously performed for Penson. The Apex MSA was part of a series of related transactions involving Broadridge, Penson, PEAK6 Investments, L.P. (PEAK6) and Apex Clearing Holdings LLC (Apex Holdings), an entity created by Penson and PEAK6 to provide clearing and related services to Pensons U.S. securities correspondents. As part of the series of related transactions, Broadridge transferred ownership of its broker-dealer subsidiary, Ridge, to Apex Holdings and Ridge was renamed Apex Clearing Corporation. Pensons U.S. broker-dealer subsidiary, PFSI, then sold its U.S. clearing contracts to Apex Clearing.
In addition, on June 5, 2012, Broadridge, Ridge (prior to its transfer to Apex Holdings) and Broadridge Financial Solutions (Canada), Inc. entered into a termination and mutual release agreement with PWI, PFSI and Penson Financial Services Canada, Inc. (PFSC) (the Termination Agreement), thereby terminating certain schedules including the U.S. schedule (the U.S. Schedule) to the Outsourcing Services Agreement. See Note 11, Other Non-current Assets to our Consolidated Financial Statements under Item 8 of Part II of this Annual Report on Form 10-K for a discussion on the impact of the Termination Agreement.
The Termination Agreement: (i) terminates the schedules under the Outsourcing Services Agreement, including the U.S. Schedule, other than to the extent necessary to provide any transition services that may be required under the Apex MSA and for Broadridge to continue to service Pensons Canadian subsidiary, PFSC; and (ii) terminates, discharges and releases in full PWIs obligations, including all obligations to make principal and interest payments, under the Seller Note. The Termination Agreement also provides that PWI and Broadridge mutually release all claims arising under the Outsourcing Services Agreement, provided that Broadridge will retain claims of up to $20 million under the Outsourcing Services Agreement against PFSC while PWI will retain all of its rights under the Outsourcing Services Agreement to defend any such claims against PFSC.
See Note 8, Discontinued Operations to our Consolidated Financial Statements under Item 8 of Part II of this Annual Report on Form 10-K for detailed information on discontinued operations.
BORROWINGS
On March 29, 2007, the Company entered into a $1,190.0 million senior unsecured credit facility, consisting of a $440.0 million five-year term loan, a $500.0 million five-year revolving credit facility and a $250.0 million one-year revolving credit facility. In May 2007, the Company refinanced the $250.0 million one-year revolving credit facility through an offering of $250.0 million of 6.125% Senior Notes discussed below. Borrowings under the five-year term loan facility bore interest at LIBOR plus 40 to 90 basis points based on debt ratings at the time of the borrowing. The five-year term loan facility was subject to interest at LIBOR plus 40 basis points as of June 30, 2011. Borrowings under the five-year revolving credit facility bore interest at LIBOR plus 27 to 75 basis points based on debt ratings and the utilization percentage of the facility at the time of the borrowing. At June 30, 2011, the Company had outstanding borrowings of $200.0 million on the five-year revolving credit facility and $200.0 million on the five-year term loan facility.
31
On September 22, 2011, the Company entered into a $990.0 million senior unsecured credit facility, consisting of a $490.0 million five-year term loan facility (the Fiscal 2012 Term Loan) and a $500.0 million five-year revolving credit facility (the Fiscal 2012 Revolving Credit Facility) (collectively the Fiscal 2012 Credit Facilities). Borrowings under the Fiscal 2012 Term Loan and Fiscal 2012 Revolving Credit Facility bear interest at LIBOR plus 125 basis points. The Fiscal 2012 Revolving Credit Facility also has an annual facility fee equal to 15 basis points, on the unused portion of the facility. The Company incurred $3.0 million in debt issuance costs to establish the Fiscal 2012 Credit Facilities, of which $0.1 million of these costs were expensed as incurred and $2.9 million of these costs have been capitalized in Other non-current assets in the Consolidated Balance Sheets and will be amortized to interest expense on a straight-line basis, which approximates the effective interest method, over the terms of these facilities. At June 30, 2012, $0.4 million had been amortized related to the Fiscal 2012 Credit Facilities.
The Company used a portion of the Fiscal 2012 Term Loan proceeds to repay $200.0 million of outstanding borrowing under the previous five-year term loan and $200.0 million of outstanding borrowing under the previous five-year revolving credit facility. The previous five-year term loan facility and the previous five-year revolving credit facility both had expiration dates of March 2012 and were cancelled upon repayment in September 2011. The weighted-average interest rate on the previous five-year term loan facility was 0.65% and 0.77% for the fiscal years ended June 30, 2012 and 2011, respectively. The weighted-average interest rate on the previous five-year revolving credit facility was 0.51% and 0.57% for the fiscal years ended June 30, 2012 and 2011, respectively.
The Fiscal 2012 Term Loan contains a repayment schedule that requires the Company to make minimum principal repayments on the loan of $12.3 million, on a quarterly basis, commencing with the first payment due by March 31, 2013, and the final payment due by June 30, 2016, for a total repayment of $171.5 million before the balance of the loan becomes due in September 2016.
During the fiscal year ended June 30, 2012, the Company repaid $90.0 million of the $490.0 million of borrowings under the Fiscal 2012 Term Loan. Under the terms of the Fiscal 2012 Term Loan agreement, any prepayment of a term borrowing shall be applied to reduce the subsequent scheduled repayment, in direct order of maturity, with no prepayment penalty. At June 30, 2012, the Company had met the repayment requirements on the Fiscal 2012 Term Loan through September 30, 2014. Under the terms of the Fiscal 2012 Term Loan agreement, as a portion of the outstanding borrowing is paid down, the total borrowing capacity is reduced commensurately, leaving a borrowing capacity of $400.0 million at June 30, 2012. The weighted-average interest rate on the Fiscal 2012 Term Loan was 1.54% for the fiscal year ended June 30, 2012.
The Fiscal 2012 Credit Facilities are subject to covenants, including financial covenants consisting of a leverage ratio and an interest coverage ratio. At June 30, 2012, the Company is not aware of any instances of any non-compliance with the financial covenants of the Fiscal 2012 Credit Facilities. The carrying value of the Fiscal 2012 Term Loan approximates fair value.
In May 2007, the Company completed an offering of $250.0 million in aggregate principal amount of senior notes (the Senior Notes). The Senior Notes will mature on June 1, 2017 and bear interest at a rate of 6.125% per annum. Interest on the Senior Notes is payable semi-annually in arrears on June 1 and December 1 of each year. The Senior Notes were issued at a price of 99.1% (effective yield to maturity of 6.251%). The indenture governing the Senior Notes contains certain covenants including covenants restricting the Companys ability to create or incur liens securing indebtedness for borrowed money and to enter into certain sale-leaseback transactions. At June 30, 2012, the Company is not aware of any instances of non-compliance with the financial covenants of the indenture governing the Senior Notes. The indenture also contains covenants regarding the purchase of the Senior Notes upon a change of control triggering event. The Senior Notes are senior unsecured obligations of the Company and rank equally with our other senior indebtedness. The Company may redeem the Senior Notes in whole or in part at any time before their maturity. The Company incurred $1.9 million in debt issuance costs to establish the Senior Notes. These costs have been capitalized and will be amortized to interest
32
expense on a straight-line basis, which approximates the effective interest method, over the ten-year term. At June 30, 2012, $0.8 million had been amortized related to the Senior Notes. The fair value of the fixed-rate Senior Notes at June 30, 2012 was $137.6 million based on quoted market prices.
Please refer to Note 13, Borrowings to our Consolidated Financial Statements under Item 8 of Part II of this Annual Report on Form 10-K for a more detailed discussion.
BASIS OF PRESENTATION
The Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the U.S. These Consolidated Financial Statements present the consolidated position of the Company. These Consolidated Financial Statements include the entities in which the Company directly or indirectly has a controlling financial interest and various entities in which the Company has investments recorded under the cost and equity methods of accounting. Intercompany balances and transactions have been eliminated.
In presenting the Consolidated Financial Statements, management makes estimates and assumptions that affect the amounts reported and related disclosures. Estimates, by their nature, are based on judgment and available information. Accordingly, actual results could differ from those estimates. In managements opinion, the Consolidated Financial Statements contain all normal recurring adjustments necessary for a fair presentation of results reported. The results of operations reported for the periods presented are not necessarily indicative of the results of operations for subsequent periods.
CRITICAL ACCOUNTING POLICIES
We continually evaluate the accounting policies and estimates used to prepare the Consolidated Financial Statements. The estimates are based on historical experience and are believed to be reasonable. Actual amounts and results could differ from these estimates made by management. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed below.
Goodwill. We review the carrying value of all our goodwill in accordance with Accounting Standards Codification (ASC) No. 350, IntangiblesGoodwill and Other (ASC No. 350), by comparing the carrying value of our reporting units to their fair values. We are required to perform this comparison at least annually or more frequently if circumstances indicate possible impairment. When determining fair value, we utilize a discounted future cash flow approach using various assumptions, including projections of revenues based on assumed long-term growth rates, estimated costs and appropriate discount rates based on the particular business weighted-average cost of capital. The principal factors used in the discounted cash flow analysis requiring judgment are the projected future operating cash flows, the weighted-average cost of capital and the terminal value growth rate assumptions. The weighted-average cost of capital takes into account the relative weights of each component of our consolidated capital structure (equity and long-term debt). Our estimates of long-term growth and costs are based on historical data, various internal estimates and a variety of external sources, and are developed as part of our routine, long-range planning process. Changes in economic and operating conditions impacting these assumptions could result in goodwill impairments in future periods. We had $780.0 million of goodwill as of June 30, 2012. Given the significance of our goodwill, an adverse change to the fair value could result in an impairment charge, which could be material to our earnings.
The Company performs a sensitivity analysis under Step 1 of the goodwill impairment test as prescribed in ASC No. 350, assuming hypothetical reductions in the fair values of our reporting units. A 10% change in our estimates of projected future operating cash flows, discount rates, or terminal value growth rates used in our calculations of the fair values of the reporting units would not result in an impairment of our goodwill.
Income Taxes. We account for income taxes in accordance with ASC No. 740, Income Taxes, which establishes financial accounting and reporting standards for the effect of income taxes. The objectives of
33
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 entitys 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 (e.g., realization of deferred tax assets, changes in tax laws or interpretations thereof). The Company is subject to the continuous examination of our income tax returns by the IRS, state and foreign tax authorities. A change in the assessment of the outcomes of such matters could materially impact our Consolidated Financial Statements. As of June 30, 2012, we had estimated foreign net operating loss carryforwards of approximately $21.7 million of which $0.6 million expires in 2017 through 2027 and $21.1 million which has an indefinite utilization period. In addition, the Company has estimated U.S. federal net operating loss carryforwards of approximately $63.6 million, which expire in 2018 through 2032. We have recorded valuation allowances of $14.7 million and $12.1 million at June 30, 2012 and 2011, respectively, because the Company does not believe that it is more likely than not that it will be able to utilize the deferred tax assets attributable to net operating and capital loss carryforwards of certain subsidiaries to offset future taxable earnings.
Share-based Payments. ASC No. 718 CompensationStock Compensation requires the measurement of stock-based compensation expense based on the fair value of the award on the date of grant. We determine the fair value of stock options issued by using a binomial option-pricing model. The binomial option-pricing model considers a range of assumptions related to volatility, dividend yield, risk-free interest rate and employee exercise behavior. Expected volatilities utilized in the binomial option-pricing model are based on a combination of implied market volatilities, historical volatility of our stock price and other factors. Similarly, the dividend yield is based on historical experience and expected future changes. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of grant. The binomial option-pricing model also incorporates exercise and forfeiture assumptions based on an analysis of historical data. The expected life of the stock option grants is derived from the output of the binomial model and represents the period of time that options granted are expected to be outstanding. Determining these assumptions are subjective and complex, and therefore, a change in the assumptions utilized could impact the calculation of the fair value of our stock options. A hypothetical change of five percentage points applied to the volatility assumption used to determine the fair value of the fiscal year 2012 stock option grants would result in approximately a $1.1 million change in total pre-tax stock-based compensation expense for the fiscal year 2012 grants, which would be amortized over the vesting period. A hypothetical change of one year in the expected life assumption used to determine the fair value of the fiscal year 2012 stock option grants would result in approximately a $0.2 million change in the total pre-tax stock-based compensation expense for the fiscal year 2012 grants, which would be amortized over the vesting period. A hypothetical change of one percentage point in the forfeiture rate assumption used for the fiscal year 2012 stock option grants would result in approximately a $0.1 million change in the total pre-tax stock-based compensation expense for the fiscal year 2012 grants, which would be amortized over the vesting period. A hypothetical one-half percentage point change in the dividend yield assumption used to determine the fair value of the fiscal year 2012 stock option grants would result in approximately a $0.4 million change in the total pre-tax stock-based compensation expense for the fiscal year 2012 grants, which would be amortized over the vesting period.
IBM INFORMATION TECHNOLOGY SERVICES AGREEMENT
In March 2010, the Company and IBM entered into the IT Services Agreement, under which IBM provides certain aspects of the Companys information technology infrastructure that were previously provided by ADP. Under the IT Services Agreement, IBM will provide a broad range of technology services to the Company including supporting its mainframe, midrange, server, network and data center operations, as well as providing disaster recovery services. The Company has the option of incorporating additional services into the agreement over time. The IT Services Agreement expires on June 30, 2022. The Company has the right to renew the initial term of the IT Services Agreement for up to one additional 12-month term.
The migration of our data center processing from ADP to IBM was substantially completed in June 2012. ADP will continue to perform data processing services until August 2012, when the migration to IBM is
34
expected to be complete. The Company is anticipating that it will realize approximately $25.0 million in average annual cost savings, net of deferred cost amortization, over the term of the IT Services Agreement beginning in the fiscal year ending June 30, 2013.
During the course of the migration to IBM, the Company incurred migration costs as part of establishing an operable IBM data center. For the fiscal year ended June 30, 2012, the Company recorded expenses of $24.6 million in the Consolidated Statements of Earnings related to this agreement. The Company currently estimates that it will incur total migration costs of approximately $85.0 million related to this agreement until the migration is complete. We expensed approximately $30.9 million of these costs and we capitalized the remaining $52.7 million of the migration costs through June 30, 2012.
RESULTS OF OPERATIONS
The following discussions of Analysis of Consolidated Statements of Earnings from Continuing Operations and Analysis of Reportable Segments refer to the fiscal year ended June 30, 2012 compared to the fiscal year ended June 30, 2011, and the fiscal year ended June 30, 2011 compared to the fiscal year ended June 30, 2010. The following discussions of the Companys results of continuing operations exclude the results related to the securities clearing business. This business is segregated from continuing operations and included in discontinued operations for fiscal year ended June 30, 2012 and the fiscal year ended June 30, 2011. The Analysis of Consolidated Statements of Earnings from Continuing Operations should be read in conjunction with the Analysis of Reportable Segments, which provides more detailed discussions concerning certain components of the Consolidated Statements of Earnings from Continuing Operations.
The following references are utilized in the discussions of Analysis of Consolidated Statements of Earnings from Continuing Operations and Analysis of Reportable Segments:
Acquisitions refers to the Companys acquisitions of Matrix, NewRiver, and Forefield in the Investor Communication Solutions segment and Paladyne in our Securities Processing Solutions segment.
IBM Migration costs refers to costs related to the Companys IT Services Agreement with IBM and the associated migration of the Companys data center to IBM.
Penson Charges, net referred to herein represents the following:
Penson OTTI charge refers to the charge that resulted after the Company reviewed its investment in the PWI common stock for impairment. Based on the Companys review, factoring in the level of decline in the fair value of the PWI common stock, management determined that the market value of the PWI common stock may not equal or exceed the cost basis of our investment within a reasonable period of time. After consideration of the severity and duration of this decline in fair value as well as the reasons for the decline in value, the Company believes that the impairment is other-than-temporary and has recorded a charge of $12.5 million for the fiscal year ended June 30, 2012.
Penson Note Receivable impairment charge refers to the charge the Company recorded as a result of a restructuring support agreement Broadridge and Ridge entered into with PWI and certain of its subsidiaries on March 13, 2012. The restructuring support agreement provided for proposed transactions related to the restructuring of Pensons outstanding indebtedness, including the note receivable in the principal amount of $20.6 million issued by PWI to Broadridge as part of the consideration in the sale of the Ridge clearing contracts to Penson. As part of PWIs proposed debt restructuring, Broadridge agreed to cancel this note receivable in exchange for additional shares of PWIs common stock, and the Company recorded a $21.4 million charge at June 30, 2012, which included $0.8 million of accrued interest on the note receivable.
Penson Deferred Costs impairment charge refers to the charge the Company recorded as a result of the termination of the U.S. Schedule to the Outsourcing Services Agreement on June 5, 2012. Upon termination of
35
this agreement, Broadridge determined that a charge for impairment was appropriate on Broadridges deferred client conversion and start-up costs associated with the Outsourcing Services Agreement. The charge taken by the Company on the Deferred Costs was $47.2 million for the fiscal year ended June 30, 2012, representing all deferred costs related to the Outsourcing Services Agreement with Penson.
Eliminated obligation to pay or credit Penson fees refers to Broadridges obligation to pay or credit to Penson fees in the amount of $15.1 million related to a third party vendors services that were replaced by the Outsourcing Services Agreement that was extinguished with the termination of the U.S. Schedule to the Outsourcing Services Agreement on June 5, 2012.
Penson Shutdown costs refers to costs of $8.2 million including severance, legal and other costs associated with the Penson transaction consummated on June 5, 2012 including the transfer of the Ridge entity to Apex Holdings.
The following definitions describe the Companys Revenues:
Fee revenues in the Investor Communication Solutions segment are derived from both recurring and event-driven activity. In addition, the level of recurring and event-driven activity we process directly impacts distribution revenues. While event-driven activity is highly repeatable, it may not recur on an annual basis. The types of services we provide that comprise event-driven activity are:
| Mutual Fund Proxy: The proxy and related services we provide to mutual funds when certain events occur requiring a shareholder vote including changes in directors, sub-advisors, fee structures, investment restrictions, and mergers of funds. |
| Mutual Fund Communications: Mutual fund communications services consist primarily of the distribution on behalf of mutual funds of supplemental information required to be provided to the annual mutual fund prospectus as a result of certain triggering events such as a change in portfolio managers. In addition, mutual fund communications consist of notices and marketing materials such as newsletters. |
| Proxy Contests and Specials, Corporate Actions, and Other: The proxy services we provide in connection with shareholder meetings driven by special events such as proxy contests, mergers and acquisitions, and tender/exchange offers. |
Event-driven fee revenues are based on the number of special events and corporate transactions we process. Event-driven activity is impacted by financial market conditions and changes in regulatory compliance requirements, resulting in fluctuations in the timing and levels of event-driven fee revenue. As such, the timing and level of event-driven activity and its potential impact on revenues and earnings is difficult to forecast.
Fiscal year 2010 pre-sale fulfillment revenues have been reclassified from event-driven revenues to recurring revenues to conform to the current periods presentation.
Generally, mutual fund proxy activity has been subject to a greater level of volatility than the other components of event-driven activity. During fiscal year 2010, the Company processed a record level of mutual fund proxy activity. In contrast, during fiscal years 2011 and 2012, mutual fund proxy fee revenues were 74% and 28% lower respectively, than their prior fiscal years. Although it is difficult to forecast the levels of event-driven activity, we expect that the portion of fee revenues derived from mutual fund proxy activity may continue to experience volatility in the future. However, the level of volatility experienced between fiscal year 2010 and fiscal year 2011 was greater than we have experienced in prior years.
Revenues derived from sales are a component of Net New Business, which is defined herein as our closed sales less client losses. Closed sales represent anticipated revenues for new client contracts that were signed by Broadridge during the periods referenced. A sale is considered closed when the Company has received the signed
36
client contract. For recurring revenue closed sales, the amount of the closed sale is generally a reasonable estimate of annual revenues based on client volumes or activity, excluding pass-through revenues such as distribution revenues. Event-driven revenue closed sales primarily occur in our Investor Communication Solutions segment. The amount of the event-driven revenue closed sale is generally a reasonable estimate of production revenues based on client volumes or activity, excluding pass-through revenues such as distribution revenues. Broadridges determination of the amount of a closed sale is based on the clients estimate of transaction volumes and activity levels, as our fees are largely based on transaction volume and activity levels. The inherent variability of transaction volumes and activity levels can result in some variability of amounts reported as closed sales. Larger recurring revenue closed sales can take up to 12 to 24 months to convert to revenues, particularly for the services provided by our Securities Processing Solutions segment. The majority of event-driven revenue closed sales are usually recognized during the year the contract is signed.
The Company tracks actual revenue achieved during the first year that the client contract is fully implemented and compares this to the amount that was included in the Companys previously reported closed sales amount. The Company adjusts the current year closed sales amount for any difference between the prior years reported closed sales amount and the actual revenue achieved in the first year of the applicable contract. Closed sales were adjusted by $(3.1) million, $0.9 million and $2.4 million for the fiscal years ended June 30, 2012, 2011 and 2010, respectively. Recurring revenue closed sales were adjusted by $(3.1) million, $0.9 million and $1.1 million for the fiscal years ended June 30, 2012, 2011 and 2010, respectively.
ANALYSIS OF CONSOLIDATED STATEMENTS OF EARNINGS FROM CONTINUING OPERATIONS
Fiscal Year 2012 Compared to Fiscal Year 2011
The table below presents Consolidated Statements of Earnings from continuing operations data for the fiscal years ended June 30, 2012 and 2011, and the dollar and percentage changes between periods:
Years Ended June 30, | ||||||||||||||||
2012 | 2011 | Change | ||||||||||||||
($) | (%) | |||||||||||||||
($ in millions, except for per share amounts) | ||||||||||||||||
Revenues |
$ | 2,303.5 | $ | 2,166.9 | $ | 136.6 | 6 | |||||||||
|
|
|
|
|
|
|||||||||||
Cost of revenues |
1,715.1 | 1,617.1 | 98.0 | 6 | ||||||||||||
Selling, general and administrative expenses |
299.9 | 270.0 | 29.9 | 11 | ||||||||||||
Impairment and other charges, net |
74.2 | | 74.2 | NM | * | |||||||||||
Other expenses, net |
13.4 | 10.1 | 3.3 | 33 | ||||||||||||
|
|
|
|
|
|
|||||||||||
Total expenses |
2,102.6 | 1,897.2 | 205.4 | 11 | ||||||||||||
|
|
|
|
|
|
|||||||||||
Earnings from continuing operations before income taxes |
200.9 | 269.7 | (68.8 | ) | (26 | ) | ||||||||||
Margin |
8.7 | % | 12.4 | % | (3.7 | ) pts | ||||||||||
Provision for income taxes |
75.9 | 97.9 | (22.0 | ) | (22 | ) | ||||||||||
Effective tax rate |
37.8 | % | 36.3 | % | 1.5 | pts | ||||||||||
|
|
|
|
|
|
|||||||||||
Net earnings from continuing operations |
$ | 125.0 | $ | 171.8 | $ | (46.8 | ) | (27 | ) | |||||||
|
|
|
|
|
|
|||||||||||
Basic earnings per share from continuing operations |
$ | 1.01 | $ | 1.38 | $ | (0.37 | ) | (27 | ) | |||||||
Diluted earnings per share from continuing operations |
$ | 0.98 | $ | 1.34 | $ | (0.36 | ) | (27 | ) |
* | Not Meaningful |
Revenues. Revenues for the fiscal year ended June 30, 2012 were $2,303.5 million, an increase of $136.6 million, or 6%, compared to $2,166.9 million for the fiscal year ended June 30, 2011. The $136.6 million increase was driven by higher recurring fee revenues of $139.6 million and higher distribution revenues of $0.3 million,
37
partially offset by lower event-driven fee revenues, which declined from $135.0 million to $131.9 million, or $3.1 million, mainly due to lower mutual fund proxy activity. The positive contribution from recurring fee revenues reflected higher Net New Business, revenues from internal growth, gains from Acquisitions, and the Outsourcing Services Agreement. Fluctuations in foreign currency exchange rates were unfavorably impacted by $0.2 million. Revenues from Acquisitions and the Outsourcing Services Agreement contributed $109.8 million.
Closed sales for the fiscal year ended June 30, 2012 were $148.7 million, an increase of $15.0 million, or 11%, compared to $133.7 million for the fiscal year ended June 30, 2011. Recurring revenue closed sales for the fiscal year ended June 30, 2012 were $120.2 million, an increase of $6.8 million, or 6%, compared to $113.4 million for the fiscal year ended June 30, 2011.
Total Expenses. Total expenses for the fiscal year ended June 30, 2012 were $2,102.6 million, an increase of $205.4 million, or 11%, compared to $1,897.2 million for the fiscal year ended June 30, 2011. The IBM Migration costs, Penson Charges, net, and restructuring charges contributed $105.5 million, or 51%, of the $205.4 million increase in Total expenses. Costs related to our Acquisitions and the Outsourcing Services Agreement constituted $87.0 million, or 42%, of the increase in Total expenses. The remaining increases to Total expenses constitute costs related to our core business operations. These items are discussed in detail in the following paragraphs:
Cost of revenues for the fiscal year ended June 30, 2012 were $1,715.1 million, an increase of $98.0 million, or 6%, compared to $1,617.1 million for the fiscal year ended June 30, 2011. The increase reflects costs of $40.1 million related to Acquisitions and the Outsourcing Services Agreement, distribution costs of $8.0 million, increased IBM Migration costs of $18.3 million, restructuring charges of $6.7 million, and other variable costs of $35.4 million. Distribution cost of revenues for the fiscal year ended June 30, 2012 were $621.0 million, an increase of $7.5 million, or 1%, compared to $613.5 million for the fiscal year ended June 30, 2011. Distribution cost of revenues consists primarily of postage related expenses. Fluctuations in foreign currency exchange rates decreased cost of revenues by $2.8 million.
Selling, general and administrative expenses for the fiscal year ended June 30, 2012 were $299.9 million, an increase of $29.9 million, or 11%, compared to $270.0 million for the fiscal year ended June 30, 2011. The 11% increase was mainly due to increased costs related to Acquisitions of $16.0, and higher selling expenses of $10.4 million on higher closed sales. Fluctuations in foreign currency exchange rates decreased Selling, general and administrative expenses by $1.0 million.
Impairment and other charges, net for the fiscal year ended June 30, 2012 were $74.2 million as a result of the Penson Charges, net.
Other expenses, net for the fiscal year ended June 30, 2012 were $13.4 million, an increase of $3.3 million, compared to $10.1 million for the fiscal year ended June 30, 2011. The increase is primarily driven by higher interest expense on our Long-term borrowings of $3.4 million. Fluctuations in foreign currency exchange rates slightly decreased Other expenses, net by $1.4 million.
Earnings from continuing operations before income taxes. Earnings from continuing operations before income taxes for the fiscal year ended June 30, 2012 were $200.9 million, a decrease of $68.8 million, or 26%, compared to $269.7 million for the fiscal year ended June 30, 2011. The decrease is mainly due to higher Total expenses which more than offset the increase in Revenues. As discussed above, higher Total expenses were driven by the IBM Migration costs, Penson Charges, net, and restructuring charges. Margin decreased from 12.4% for the fiscal year ended June 30, 2011 to 8.7% for the fiscal year ended June 30, 2012. The impact of the IBM Migration costs, Penson Charges, net, and restructuring charges was 460 basis points on the Margin for the fiscal year ended June 30, 2012.
Provision for income taxes. Provision for income taxes and Effective tax rates for the fiscal year ended June 30, 2012 were $75.9 million and 37.8%, respectively, compared to $97.9 million and 36.3%, for the fiscal
38
year ended June 30, 2011, respectively. The change in the Companys Effective tax rate was attributable to a valuation allowance on capital tax losses related to the PWI common stock, a write-off of certain state net operating loss carryforwards and changes in the geographical mix of income.
Net earnings from continuing operations and Basic and Diluted earnings per share from continuing operations. Net earnings from continuing operations for the fiscal year ended June 30, 2012 were $125.0 million, a decrease of $46.8 million, or 27%, compared to $171.8 million for the fiscal year ended June 30, 2011. The decrease in Net earnings from continuing operations reflects lower Earnings from continuing operations, as discussed above, including the impact of the IBM Migration costs, Penson Charges, net, and restructuring charges.
Basic and Diluted earnings per share from continuing operations for the fiscal year ended June 30, 2012 were $1.01, a decrease of $0.37, or 27%, and $0.98, a decrease of $0.36, or 27%, respectively, compared to $1.38 and $1.34 for the fiscal year ended June 30, 2011, respectively. The IBM Migration costs, Penson Charges, net, and restructuring charges decreased diluted earnings per share by $0.12, $0.42 and $0.03, respectively.
Fiscal Year 2011 Compared to Fiscal Year 2010
The table below presents Consolidated Statements of Earnings from continuing operations data for the fiscal years ended June 30, 2011 and 2010, and the dollar and percentage changes between periods:
Years Ended June 30, | ||||||||||||||||
2011 | 2010 | Change | ||||||||||||||
($) | (%) | |||||||||||||||
($ in millions, except for per share amounts) | ||||||||||||||||
Revenues |
$ | 2,166.9 | $ | 2,209.2 | $ | (42.3 | ) | (2 | ) | |||||||
|
|
|
|
|
|
|||||||||||
Cost of revenues |
1,617.1 | 1,616.4 | 0.7 | | ||||||||||||
Selling, general and administrative expenses |
270.0 | 241.6 | 28.4 | 12 | ||||||||||||
Other expenses, net |
10.1 | 9.1 | 1.0 | 11 | ||||||||||||
|
|
|
|
|
|
|||||||||||
Total expenses |
1,897.2 | 1,867.1 | 30.1 | 2 | ||||||||||||
|
|
|
|
|
|
|||||||||||
Earnings from continuing operations before income taxes |
269.7 | 342.1 | (72.4 | ) | (21 | ) | ||||||||||
Margin |
12.4 | % | 15.5 | % | (3.1 | ) pts | ||||||||||
Provision for income taxes |
97.9 | 117.0 | (19.1 | ) | (16 | ) | ||||||||||
Effective tax rate |
36.3 | % | 34.2 | % | 2.1 | pts | ||||||||||
|
|
|
|
|
|
|||||||||||
Net earnings from continuing operations |
$ | 171.8 | $ | 225.1 | $ | (53.3 | ) | (24 | ) | |||||||
|
|
|
|
|
|
|||||||||||
Basic earnings per share from continuing operations |
$ | 1.38 | $ | 1.66 | $ | (0.28 | ) | (17 | ) | |||||||
Diluted earnings per share from continuing operations |
$ | 1.34 | $ | 1.62 | $ | (0.28 | ) | (17 | ) |
Revenues. Revenues for the fiscal year ended June 30, 2011 were $2,166.9 million, a decrease of $42.3 million, or 2%, compared to $2,209.2 million for the fiscal year ended June 30, 2010. The 2% decrease was driven by lower event-driven fee revenues of $121.4 million, mainly the result of a decrease in mutual fund proxy activity when compared to the record level of activity during the fiscal year ended June 30, 2010. Also contributing to the 2% decline were lower distribution revenues driven by the lower event-driven mutual fund proxy activity of $76.5 million, or 10%, down from $780.6 million to $704.1 million, for the fiscal year ended June 30, 2010 compared to the fiscal year ended June 30, 2011, respectively. These declines were partially offset by a positive contribution from recurring fee revenues of $143.2 million reflecting gains from Acquisitions, and the Outsourcing Services Agreement, revenue from Net New Business, internal growth, and the favorable impact of foreign currency exchange rates of $12.4 million. Revenues from Acquisitions and the Outsourcing Services Agreement contributed $122.5 million.
Closed sales for the fiscal year ended June 30, 2011 were $133.7 million, a decrease of $41.3 million, or 24%, compared to $175.0 million for the fiscal year ended June 30, 2010. Recurring revenue closed sales for the
39
fiscal year ended June 30, 2011 were $113.4 million, a decrease of $5.3 million, or 4%, compared to $118.7 million for the fiscal year ended June 30, 2010. Excluding the three large recurring revenue sales that are described below, recurring revenue closed sales for the fiscal year ended June 30, 2011 were $80.0 million, an increase of $1.9 million, or 2%, compared to $78.1 million for the fiscal year ended June 30, 2010. During the fiscal years ended June 30, 2011 and 2010, the Investor Communication Solutions segment closed a fulfillment services recurring revenue sale with Fidelity Investments for $11.2 million and a transaction reporting services recurring revenue sale with Morgan Stanley Smith Barney LLC (MSSB) for $40.6 million, respectively. During the fiscal year ended June 30, 2011, the Securities Processing Solutions segment closed a recurring revenue sale with a large global institutional bank for equity and fixed income securities processing services of $22.2 million. Event-driven revenue closed sales for the fiscal year ended June 30, 2011 were $20.3 million, a decrease of $36.0 million, or 64%, compared to $56.3 million for the fiscal year ended June 30, 2010, primarily due to lower registered mutual fund proxy and solicitation services.
Total Expenses. Total expenses for the fiscal year ended June 30, 2011 were $1,897.2 million, an increase of $30.1 million, or 2%, compared to $1,867.1 million for the fiscal year ended June 30, 2010. The increase reflects higher Cost of revenues of $0.7 million, higher Selling, general and administrative expenses of $28.4 million, or 12%, and higher Other expenses, net of $1.0 million, or 11%. The increase in Total expenses relate mainly to Acquisitions and the Outsourcing Services Agreement of $136.6 million and IBM Migration costs of $6.3 million, mostly offset by $112.8 million of lower expenses mainly from lower event-driven activity including the decline in cost of distribution revenues as discussed above.
Cost of revenues for the fiscal year ended June 30, 2011 were $1,617.1 million, an increase of $0.7 million, compared to $1,616.4 million for the fiscal year ended June 30, 2010. The increase reflects costs of $105.9 million related to acquisitions and the Outsourcing Services Agreement, IBM Migration costs of $6.3 million, and fluctuations in foreign currency exchange rates of $5.5 million, virtually offset by lower distribution costs related to lower distribution revenues of $100.7 million (excluding Acquisitions and fluctuations in foreign currency exchange rates) and other variable costs of $17.0 million. Distribution cost of revenues for the fiscal year ended June 30, 2011 were $613.5 million, a decrease of $72.2 million, or 11%, compared to $685.7 million for the fiscal year ended June 30, 2010. Distribution cost of revenues consist primarily of postage related expenses.
Selling, general and administrative expenses for the fiscal year ended June 30, 2011 were $270.0 million, an increase of $28.4 million, or 12%, compared to $241.6 million for the fiscal year ended June 30, 2010. The 12% increase is primarily due to increased costs of $30.7 million related to Acquisitions and the Outsourcing Services Agreement.
Other expenses, net for the fiscal year ended June 30, 2011 were $10.1 million, an increase of $1.0 million, or 11%, compared to $9.1 million for the fiscal year ended June 30, 2010. The increase is mainly due to the net impact of a higher foreign currency exchange loss of $2.7 million and higher interest income of $1.5 million.
Earnings from continuing operations before income taxes. Earnings from continuing operations before income taxes for the fiscal year ended June 30, 2011 were $269.7 million, a decrease of $72.4 million, or 21%, compared to $342.1 million for the fiscal year ended June 30, 2010. The decrease is mainly due to lower revenues and higher expenses as discussed above. Margin decreased from 15.5% to 12.4% for the fiscal year ended June 30, 2011 compared to the fiscal year ended June 30, 2010, respectively. Margin for the fiscal year ended June 30, 2011 was unfavorably impacted by 180 basis points as a result of the impact of Acquisitions, the Outsourcing Services Agreement, and IBM Migration costs.
Provision for income taxes. Provision for income taxes and Effective tax rates for the fiscal year ended June 30, 2011 were $97.9 million and 36.3%, respectively, compared to $117.0 million and 34.2%, for the fiscal year ended June 30, 2010, respectively. The increase in the Effective tax rate for the fiscal year ended June 30, 2011 compared to the fiscal year ended June 30, 2010 was primarily attributable to the one-time recognition of tax benefits associated with the release of a valuation allowance on a deferred tax asset for certain tax loss carryforwards in fiscal year 2010.
40
Net earnings from continuing operations and Basic and Diluted earnings per share from continuing operations. Net earnings from continuing operations for the fiscal year ended June 30, 2011 were $171.8 million, a decrease of $53.3 million, or 24%, compared to $225.1 million for the fiscal year ended June 30, 2010. The decrease in Net earnings from continuing operations reflects a higher effective tax rate and lower Earnings from continuing operations before income taxes, as discussed above.
Basic and Diluted earnings per share from continuing operations for the fiscal year ended June 30, 2011 were $1.38, a decrease of $0.28, or 17%, and $1.34, a decrease of $0.28, or 17%, respectively, compared to $1.66 and $1.62 for the fiscal year ended June 30, 2010, respectively. The Companys Basic and Diluted earnings per share from continuing operations benefited by $0.09 per share, respectively, from its repurchase of 8.7 million shares of its common stock under the Companys stock repurchase plans during the fiscal year ended June 30, 2011.
ANALYSIS OF REPORTABLE SEGMENTS
As a result of Broadridges sale of substantially all of the contracts of the securities clearing clients of Ridge to PFSI, Broadridge now has two reportable operating business segments: (1) Investor Communication Solutions and (2) Securities Processing Solutions. Ridges securities clearing business is reflected in discontinued operations (see Note 1, Basis of Presentation and Note 8, Discontinued Operations to our Consolidated Financial Statements under Item 8 of Part II of this Annual Report on Form 10-K for detailed information on discontinued operations), and the operations outsourcing solutions business is now reported as part of the Securities Processing Solutions business segment. This change is reflected in all prior periods presented in this Annual Report on Form 10-K.
The primary components of Other are IBM Migration costs, Penson Charges, net, restructuring charges, and the elimination of intersegment revenues and profits as well as certain unallocated expenses. Foreign exchange is a reconciling item between the actual foreign exchange rates and budgeted foreign exchange rates.
Certain corporate expenses, as well as certain centrally managed expenses, are allocated based upon budgeted amounts in a reasonable manner. Because the Company compensates the management of its various businesses on, among other factors, segment profit, the Company may elect to record certain segment-related expense items of an unusual or non-recurring nature in consolidation rather than reflect such items in segment profit.
Revenues
Years Ended June 30, | Change | |||||||||||||||||||||||||||
2012 vs. 2011 | 2011 vs. 2010 | |||||||||||||||||||||||||||
2012 | 2011 | 2010 | $ | % | $ | % | ||||||||||||||||||||||
($ in millions) | ||||||||||||||||||||||||||||
Investor Communication Solutions |
$ | 1,634.0 | $ | 1,559.4 | $ | 1,669.6 | $ | 74.6 | 5 | $ | (110.2 | ) | (7 | ) | ||||||||||||||
Securities Processing Solutions |
655.5 | 593.6 | 535.9 | 61.9 | 10 | 57.7 | 11 | |||||||||||||||||||||
Other |
0.5 | 0.2 | 2.4 | 0.3 | 150 | (2.2 | ) | 92 | ||||||||||||||||||||
Foreign currency exchange |
13.5 | 13.7 | 1.3 | (0.2 | ) | (1 | ) | 12.4 | NM | * | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Revenues |
$ | 2,303.5 | $ | 2,166.9 | $ | 2,209.2 | $ | 136.6 | 6 | $ | (42.3 | ) | (2 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
* | Not Meaningful |
41
Earnings (Loss) from Continuing Operations before Income Taxes
Years Ended June 30, | Change | |||||||||||||||||||||||||||
2012 vs. 2011 | 2011 vs. 2010 | |||||||||||||||||||||||||||
2012 | 2011 | 2010 | $ | % | $ | % | ||||||||||||||||||||||
($ in millions) | ||||||||||||||||||||||||||||
Investor Communication Solutions |
$ | 242.8 | $ | 213.4 | $ | 272.8 | $ | 29.4 | 14 | $ | (59.4 | ) | (22 | ) | ||||||||||||||
Securities Processing Solutions |
91.1 | 87.4 | 99.3 | 3.7 | 4 | (11.9 | ) | (12 | ) | |||||||||||||||||||
Other |
(146.8 | ) | (41.3 | ) | (34.1 | ) | (105.5 | ) | NM | * | (7.2 | ) | (21 | ) | ||||||||||||||
Foreign currency exchange |
13.8 | 10.2 | 4.1 | 3.6 | 35 | 6.1 | NM | * | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Earnings from continuing operations before income taxes |
$ | 200.9 | $ | 269.7 | $ | 342.1 | $ | (68.8 | ) | (26 | ) | $ | (72.4 | ) | (21 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
* | Not Meaningful |
Investor Communication Solutions
Fiscal Year 2012 Compared to Fiscal Year 2011
Revenues. Investor Communication Solutions segments Revenues for the fiscal year ended June 30, 2012 were $1,634.0 million, an increase of $74.6 million, or 5%, compared to $1,559.4 million for the fiscal year ended June 30, 2011. Higher recurring fee revenues contributed $77.4 million and higher distribution revenues contributed $0.3 million, and were partially offset by lower event-driven fee revenues, which declined from $135.0 million to $131.9 million, or $3.1 million. The positive contribution from recurring fee revenues were driven primarily by Net New Business, internal growth, and Acquisitions. The decrease in event-driven fee revenues was primarily due to lower mutual fund proxy activity. Distribution revenues for the fiscal year ended June 30, 2012 were $704.4 million, an increase of $0.3 million, compared to $704.1 million for the fiscal year ended June 30, 2011. Position growth was positive 1% for annual equity proxy and positive 9% for mutual fund interim communications, resulting in a net increase in pieces processed for the fiscal year ended June 30, 2012.
Earnings from continuing operations before income taxes. Earnings from continuing operations before income taxes for the fiscal year ended June 30, 2012 were $242.8 million, an increase of $29.4 million, or 14%, compared to $213.4 million for the fiscal year ended June 30, 2011, primarily due to higher recurring revenues. Margin increased by 120 basis points from 13.7% to 14.9% mainly as a result of higher recurring revenues and cost containment efforts.
Fiscal Year 2011 Compared to Fiscal Year 2010
Revenues. Investor Communication Solutions segments Revenues for the fiscal year ended June 30, 2011 were $1,559.4 million, a decrease of $110.2 million, or 7%, compared to $1,669.6 million for the fiscal year ended June 30, 2010. The 7% decrease was driven by a decline in event-driven fee revenues of $121.4 million, mainly the result of a decrease in mutual fund proxy activity when compared to the record level of activity during the fiscal year ended June 30, 2010. Also contributing to the 7% decline were lower distribution revenues of $76.5 million, or 10%, down from $780.6 million to $704.1 million, for the fiscal year ended June 30, 2010 compared to the fiscal year ended June 30, 2011, respectively. These declines were partially offset by recurring revenues from Acquisitions completed during fiscal year 2011 and Net New Business mainly as a result of the contract with MSSB. Position growth, a key measure in the number of pieces processed, was unchanged for annual equity proxy and a positive 9% for mutual fund interim communications. Revenues from Acquisitions completed during fiscal year 2011 contributed $74.1 million.
Earnings from continuing operations before income taxes. Earnings from continuing operations before income taxes for the fiscal year ended June 30, 2011 were $213.4 million, a decrease of $59.4 million, or 22%,
42
compared to $272.8 million for the fiscal year ended June 30, 2010. The decrease was mainly driven by lower event-driven activity as discussed above. Margin decreased by 260 basis points from 16.3% to 13.7% as a result of the decline in event-driven mutual fund proxy revenues and related distribution revenues. Excluding Acquisitions, overall margin decreased by 160 basis points from 16.3% to 14.7%.
Securities Processing Solutions
Fiscal Year 2012 Compared to Fiscal Year 2011
Revenues. Securities Processing Solutions segments Revenues for the fiscal year ended June 30, 2012 were $655.5 million, an increase of $61.9 million, or 10%, compared to $593.6 million for the fiscal year ended June 30, 2011. The increase was driven mainly by positive contributions from the Paladyne acquisition, the Outsourcing Services Agreement and from Net New Business.
Earnings from continuing operations before income taxes. Earnings from continuing operations before income taxes for the fiscal year ended June 30, 2012 were $91.1 million, an increase of $3.7 million, or 4%, compared to $87.4 million for the fiscal year ended June 30, 2011. Margin decreased by 80 basis points from 14.7% to 13.9% for the fiscal year ended June 30, 2012 mainly due to the effect of the Paladyne acquisition. Excluding the dilutive impact of the operating results from the Paladyne acquisition, overall margin increased by 40 basis points from 14.7% to 15.1%.
Fiscal Year 2011 Compared to Fiscal Year 2010
Revenues. Securities Processing Solutions segments Revenues for the fiscal year ended June 30, 2011 were $593.6 million, an increase of $57.7 million, or 11%, compared to $535.9 million for the fiscal year ended June 30, 2010. Revenues from Acquisitions and the Outsourcing Services Agreement constituted 84% of the $57.7 million increase. The remaining $9.3 million or 16% increase in revenues, were from contributions by new business and internal growth, partially offset by the carryover impact of the prior fiscal years client losses and price concessions. Internal growth was driven by higher fixed income trade volumes.
Earnings from continuing operations before income taxes. Earnings from continuing operations before income taxes for the fiscal year ended June 30, 2011 were $87.4 million, a decrease of $11.9 million, or 12%, compared to $99.3 million for the fiscal year ended June 30, 2010. Margin decreased by 380 basis points from 18.5% to 14.7% for the fiscal year ended June 30, 2011. Excluding the impact of the Outsourcing Services Agreement and the City Networks, Ltd acquisition, Earnings from continuing operations increased by $7.3 million and overall margin improved by 120 basis points from 18.5% to 19.7%, for the fiscal year ended June 30, 2011 compared to the fiscal year ended June 30, 2010.
Other
Fiscal Year 2012 Compared to Fiscal Year 2011
Revenues. There were no significant reportable Revenues in our Other segment for the periods presented.
Loss from continuing operations before income taxes. Loss from Continuing Operations before income taxes was $146.8 million for the fiscal year ended June 30, 2012, an increase of $105.5 million, compared to a $41.3 million loss from continuing operations before income taxes for the fiscal year ended June 30, 2011. The increased loss was mainly due to the Penson Charges, net of $74.2 million, IBM Migration costs of $18.3 million, restructuring charges of $6.7 million and higher interest expense on our Long-term borrowings of $3.4 million.
Fiscal Year 2011 Compared to Fiscal Year 2010
Revenues. Other segment Revenues for the fiscal year ended June 30, 2011 were $0.2 million, a decrease of $2.2 million, compared to $2.4 million for the fiscal year ended June 30, 2010 driven by one-time, non-recurring revenues during the fiscal year ended June 30, 2010.
43
Loss from continuing operations before income taxes. Loss from continuing operations before income taxes was $41.3 million for the fiscal year ended June 30, 2011, an increase of $7.2 million, or 21%, compared to a $34.1 million loss from continuing operations before income taxes for the fiscal year ended June 30, 2010. The increased loss was primarily due to IBM Migration costs incurred during the fiscal year ended June 30, 2011.
Adjusted Net Earnings from Continuing Operations
We define Adjusted net earnings from continuing operations as Net earnings from continuing operations, net of taxes excluding all items associated with Penson Charges, net, IBM Migration costs, restructuring charges and the impact of one-time tax (expense)/benefit items. Adjusted net earnings from continuing operations is not a measure defined in accordance with GAAP and should not be construed as an alternative to net income (loss), as determined in accordance with GAAP.
We use Adjusted net earnings from continuing operations as a financial measure for a number of reasons, including:
| in communications with our board of directors concerning our consolidated financial performance; |
| we believe it is an enterprise level performance measure commonly reported and widely used by analysts and investors; and |
| for planning purposes, including the preparation of our annual operating budget. |
We are reporting our Adjusted net earnings from continuing operations to exclude the impact of these items from our GAAP results because these items are significant and we believe this information helps our investors understand the effect of these non-recurring items on our reported results and therefore, will provide a better representation of our actual performance. Our presentation of Adjusted net earnings from continuing operations should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.
Set forth below is a reconciliation of Adjusted net earnings from continuing operations (Non-GAAP) to the comparable GAAP measure:
Years ended June 30, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
($ in millions) | ||||||||||||
Adjusted net earnings from continuing operations (Non-GAAP) |
$ | 198.0 | $ | 175.8 | $ | 217.1 | ||||||
Adjustments: |
||||||||||||
Penson Charges, net |
(74.2 | ) | | | ||||||||
IBM Migration costs |
(24.6 | ) | (6.3 | ) | | |||||||
Restructuring charges |
(6.7 | ) | | | ||||||||
Tax impact of adjustments |
39.9 | 2.3 | | |||||||||
One-time tax (expense)/benefit |
(7.4 | ) | | 8.0 | ||||||||
|
|
|
|
|
|
|||||||
Net Earnings from continuing operations (GAAP) |
$ | 125.0 | $ | 171.8 | $ | 225.1 | ||||||
|
|
|
|
|
|
44
Set forth below is a reconciliation of Adjusted earnings per share from continuing operations (Non-GAAP) to the comparable GAAP measure:
Years ended June 30, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Adjusted diluted earnings per share from continuing operations (Non-GAAP) |
$ | 1.55 | $ | 1.37 | $ | 1.56 | ||||||
Adjustments: |
||||||||||||
Penson Charges, net |
(0.58 | ) | | | ||||||||
IBM Migration costs |
(0.19 | ) | (0.05 | ) | | |||||||
Restructuring charges |
(0.05 | ) | | | ||||||||
Tax impact of adjustments |
0.31 | 0.02 | | |||||||||
One-time tax (expense)/benefit |
(0.06 | ) | | 0.06 | ||||||||
|
|
|
|
|
|
|||||||
Diluted earnings per share from continuing operations (GAAP) |
$ | 0.98 | $ | 1.34 | $ | 1.62 | ||||||
|
|
|
|
|
|
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2012 and 2011, Cash and cash equivalents were $320.5 million and $241.5 million, respectively. Total stockholders equity was $850.5 million and $797.3 million at June 30, 2012 and 2011, respectively. At June 30, 2012, net working capital was $367.1 million, compared to $(31.3) million at June 30, 2011. At the current time, and in future periods, we expect cash generated by our operations, together with existing cash, cash equivalents, marketable securities and borrowings from the capital markets, to be sufficient to cover cash needs for working capital, capital expenditures, strategic acquisitions, dividends and common stock repurchases. We do not rely on short-term borrowings to meet our liquidity needs.
As of June 30, 2012, $111.4 million of the $320.5 million of cash and cash equivalents was held by our foreign subsidiaries. If these funds are needed for our operations in the U.S., we would be required to accrue and pay U.S. taxes to repatriate these funds. However, our current plans do not demonstrate a need to repatriate them to fund our U.S. operations.
On March 29, 2007, the Company entered into a $1,190.0 million senior unsecured credit facility, consisting of a $440.0 million five-year term loan, a $500.0 million five-year revolving credit facility and a $250.0 million one-year revolving credit facility. In May 2007, the Company refinanced the $250.0 million one-year revolving credit facility through an offering of $250.0 million of 6.125% Senior Notes discussed below. Borrowings under the five-year term loan facility bore interest at LIBOR plus 40 to 90 basis points based on debt ratings at the time of the borrowing. The five-year term loan facility was subject to interest at LIBOR plus 40 basis points as of June 30, 2011. Borrowings under the five-year revolving credit facility bore interest at LIBOR plus 27 to 75 basis points based on debt ratings and the utilization percentage of the facility at the time of the borrowing. At June 30, 2011, the Company had outstanding borrowings of $200.0 million on the five-year revolving credit facility and $200.0 million on the five-year term loan facility.
On September 22, 2011, the Company entered into a $990.0 million senior unsecured credit facility, consisting of a $490.0 million five-year term loan facility (the Fiscal 2012 Term Loan) and a $500.0 million five-year revolving credit facility (the Fiscal 2012 Revolving Credit Facility) (collectively the Fiscal 2012 Credit Facilities). Borrowings under the Fiscal 2012 Term Loan and Fiscal 2012 Revolving Credit Facility bear interest at LIBOR plus 125 basis points. The Fiscal 2012 Revolving Credit Facility also has an annual facility fee equal to 15 basis points, on the unused portion of the facility. The Company incurred $3.0 million in debt issuance costs to establish the Fiscal 2012 Credit Facilities, of which $0.1 million of these costs were expensed as incurred and $2.9 million of these costs have been capitalized in Other non-current assets in the Consolidated Balance Sheets and will be amortized to interest expense on a straight-line basis, which approximates the effective interest method, over the terms of these facilities. At June 30, 2012, $0.4 million had been amortized related to the Fiscal 2012 Credit Facilities.
45
The Company used a portion of the Fiscal 2012 Term Loan proceeds to repay $200.0 million of outstanding borrowing under the previous five-year term loan and $200.0 million of outstanding borrowing under the previous five-year revolving credit facility. The previous five-year term loan facility and the previous five-year revolving credit facility both had expiration dates of March 2012 and were cancelled upon repayment in September 2011. The weighted-average interest rate on the previous five-year term loan facility was 0.65% and 0.77% for the fiscal years ended June 30, 2012 and 2011, respectively. The weighted-average interest rate on the previous five-year revolving credit facility was 0.51% and 0.57% for the fiscal years ended June 30, 2012 and 2011, respectively.
The Fiscal 2012 Term Loan contains a repayment schedule that requires the Company to make minimum principal repayments on the loan of $12.3 million, on a quarterly basis, commencing with the first payment due by March 31, 2013, and the final payment due by June 30, 2016, for a total repayment of $171.5 million before the balance of the loan becomes due in September 2016.
During the fiscal year ended June 30, 2012, the Company repaid $90.0 million of the $490.0 million of borrowings under the Fiscal 2012 Term Loan. Under the terms of the Fiscal 2012 Term Loan agreement, any prepayment of a term borrowing shall be applied to reduce the subsequent scheduled repayment, in direct order of maturity, with no prepayment penalty. At June 30, 2012, the Company had met the repayment requirements on the Fiscal 2012 Term Loan through September 30, 2014. Under the terms of the Fiscal 2012 Term Loan agreement, as a portion of the outstanding borrowing is paid down, the total borrowing capacity is reduced commensurately, leaving a borrowing capacity of $400.0 million at June 30, 2012. The weighted-average interest rate on the Fiscal 2012 Term Loan was 1.54% for the fiscal year ended June 30, 2012.
The Fiscal 2012 Credit Facilities are subject to covenants, including financial covenants consisting of a leverage ratio and an interest coverage ratio. At June 30, 2012, the Company is not aware of any instances of any non-compliance with the financial covenants of the Fiscal 2012 Credit Facilities.
In May 2007, the Company completed an offering of $250.0 million in aggregate principal amount of senior notes (the Senior Notes). The Senior Notes will mature on June 1, 2017 and bear interest at a rate of 6.125% per annum. Interest on the Senior Notes is payable semi-annually in arrears on June 1 and December 1 of each year. The Senior Notes were issued at a price of 99.1% (effective yield to maturity of 6.251%). The indenture governing the Senior Notes contains certain covenants including covenants restricting the Companys ability to create or incur liens securing indebtedness for borrowed money and to enter into certain sale-leaseback transactions. At June 30, 2012, the Company is not aware of any instances of non-compliance with the financial covenants of the indenture governing the Senior Notes. The indenture also contains covenants regarding the purchase of the Senior Notes upon a change of control triggering event. The Senior Notes are senior unsecured obligations of the Company and rank equally with our other senior indebtedness. The Company may redeem the Senior Notes in whole or in part at any time before their maturity. The Company incurred $1.9 million in debt issuance costs to establish the Senior Notes. These costs have been capitalized and will be amortized to interest expense on a straight-line basis, which approximates the effective interest method, over the ten-year term. At June 30, 2012, $0.8 million had been amortized related to the Senior Notes. The fair value of the fixed-rate Senior Notes at June 30, 2012 was $137.6 million based on quoted market prices.
Please refer to Note 13, Borrowings to our Consolidated Financial Statements under Item 8 of Part II of this Annual Report on Form 10-K for a more detailed discussion.
Based upon current and anticipated levels of operation, we believe that our cash on hand and cash flow from operations, combined with borrowings available under the credit facility, will be sufficient to enable us to meet our current and anticipated cash operating requirements, capital expenditures, and working capital needs. Please refer to the discussion of cash flows used in financing activities in the following section for further discussion of our financing activities.
46
Cash Flows
Net cash flows provided by operating activities were $290.6 million for the fiscal year ended June 30, 2012 compared to $190.9 million during the fiscal year ended June 30, 2011. The increase is primarily due to a decrease in working capital driven by reductions in accounts receivable due to improved collections and lower payables and accruals consistent with the seasonality of our business, which were partially offset by higher deferred costs driven by our client conversions activity and the IBM Migration costs.
Net cash flows used in investing activities for the fiscal year ended June 30, 2012 were $110.5 million, a decrease of $230.3 million, compared to $340.8 million of net cash flows used in investing activities for the fiscal year ended June 30, 2011. The decrease reflects lower spending of $221.1 million on acquisitions during the fiscal year ended June 30, 2012, compared to the fiscal year ended June 30, 2011.
Net cash flows used in financing activities for the fiscal year ended June 30, 2012 were $88.7 million, an increase of $43.4 million, compared to $45.3 million of net cash flows used in financing activities for the fiscal year ended June 30, 2011. The increased use of cash in the fiscal year ended June 30, 2012 primarily reflects a decrease of $202.9 million of net proceeds from borrowings, after debt repayment and borrowing costs, in the fiscal year ended June 30, 2012 compared to the fiscal year ended June 30, 2011, offset by a decrease in purchases of common stock of $170.5 million in the fiscal year ended June 30, 2012 versus the fiscal year ended June 30, 2011.
Income Taxes
Before the spin-off from our former parent company Automatic Data Processing, Inc. (ADP), the Companys taxable income was included in separate income tax returns filed with the appropriate taxing jurisdictions, except for U.S. federal and certain state and foreign jurisdictions in which the Companys taxable income is included in the income tax returns of ADP or an ADP affiliate. Subsequent to the spin-off, the Company files its own U.S. federal, state and foreign returns.
The provision for income taxes is computed as if the Company filed on a combined stand-alone or separate tax return basis, as applicable. The provision for income taxes does not reflect the Companys inclusion in the tax returns of ADP or an ADP affiliate. Certain income taxes of the Company were paid by ADP or an ADP affiliate on behalf of the Company.
The Company, headquartered in the U.S., is routinely examined by the IRS as part of the IRS U.S. federal income tax audit of ADP and is also routinely examined by the tax authorities in the U.S. states and foreign countries in which it conducts business. The tax years under audit examination vary by tax jurisdiction. With respect to U.S. federal income taxes, the Company was a member of the ADP U.S. federal income tax consolidated group through March 30, 2007. As a member of the ADP U.S. federal income tax consolidation, the Company is included in any IRS examination of ADP for periods up to and including March 30, 2007. ADP and the Company are currently under IRS audit for the fiscal year ended June 30, 1998 through the fiscal year ended June 30, 2002 which was substantially completed in fiscal year 2009. In addition, the IRS is conducting an examination of fiscal years 2003 through 2007. As a member of the ADP U.S. federal income tax consolidated group and pursuant to a tax allocation agreement between the Company and ADP, the U.S. federal income tax payable of the Company for the period ended March 30, 2007, will be assumed by ADP. In addition, any items of income or expense successfully challenged by the IRS attributable to the business operations of the Company for tax periods ended March 30, 2007 or earlier, will be tax liabilities assumed by ADP. Correspondingly, any items of income or expense attributable to the business operations of the Company for tax periods ended March 30, 2007 or earlier, which are settled favorably with the IRS by ADP will remain with ADP. Accordingly, the Company has not established any tax reserves or tax assets with respect to U.S. federal income taxes for the tax period ended March 30, 2007.
The tax allocation agreement between the Company and ADP also extends to the Companys U.S. state income tax and most foreign income tax liabilities and tax assets. Thus, for any foreign or U.S. state income tax
47
liabilities or tax assets relating to tax periods ended March 30, 2007 or earlier attributable to the Companys business operations, depending on the tax jurisdiction, ADP will either make payments directly to the appropriate tax authorities or reimburse the Company for tax payments the Company made to the tax authorities that related to tax liabilities subject to the tax allocation agreement to the extent that such tax liabilities are in excess of amounts provided for in respect of such income taxes on the Consolidated Balance Sheet of the Company including the Notes thereto, as of June 30, 2012. Similarly, to the extent that there are any tax refunds attributable to the Companys business operations in a particular tax jurisdiction for the period ended March 30, 2007 or earlier, ADP will either receive such refund directly from the appropriate tax authorities or receive reimbursement from the Company for the refund received by the Company that is subject to the tax allocation agreement.
The Company regularly considers the likelihood of assessments in each of the jurisdictions resulting from examinations. To the extent the Company determines it has potential tax assessment in particular tax jurisdictions and that such assessments are not covered by the tax allocation agreement, the Company has established tax reserves which it believes are adequate in relation to the potential assessments. Once established, reserves are adjusted when there is more information available, when an event occurs necessitating a change to the reserves or the statute of limitations for the relevant taxing authority to examine the tax position has expired. The resolution of tax matters should not have a material effect on the financial condition of the Company or on the Companys Consolidated Statements of Earnings for a particular future period.
Defined Benefit Pension Plans
The Company sponsors a Supplemental Officer Retirement Plan (the Broadridge SORP). The Broadridge SORP is a defined benefit plan pursuant to which the Company will pay supplemental pension benefits to certain key officers upon retirement based upon the officers years of service and compensation. The amount charged to expense for the Broadridge SORP was $2.4 million, $1.6 million and $1.2 million during the fiscal years ended June 30, 2012, 2011 and 2010, respectively. The Broadridge SORP is currently unfunded, and the benefit obligation under this plan was $15.7 million, $11.1 million and $7.6 million at June 30, 2012, 2011 and 2010, respectively.
The Company also sponsors a Supplemental Executive Retirement Plan (the Broadridge SERP). The Broadridge SERP is a defined benefit plan pursuant to which the Company will pay supplemental pension benefits to certain key executives upon retirement based upon the executives years of service and compensation. The amount charged to expense for the Broadridge SERP was $0.3 million, $0.2 million and $0.2 million during the fiscal years ended June 30, 2012, 2011 and 2010, respectively. The Broadridge SERP is currently unfunded, and the benefit obligation under this plan was $1.3 million, $0.6 million and $0.3 million at June 30, 2012, 2011 and 2010, respectively.
Other Post-retirement Benefit Plan
The Company sponsors an Executive Retiree Health Insurance Plan. It is a post-retirement benefit plan pursuant to which the Company helps defray the health care costs of certain eligible key executive retirees and qualifying dependents, based upon the retirees age and years of service, until they reach the age of 65. The amount charged to expense under this plan was $0.3 million, $0.4 million and $0.4 million during the fiscal years ended June 30, 2012, 2011 and 2010, respectively. The plan is currently unfunded, and the benefit obligation under this plan was $2.8 million, $3.1 million and $3.0 million at June 30, 2012, 2011 and 2010, respectively.
48
Contractual Obligations
The following table summarizes our contractual obligations to third parties as of June 30, 2012 and the effect such obligations are expected to have on our liquidity and cash flows in future periods:
Payments Due by Period | ||||||||||||||||||||
Total | Less than 1 Year |
1-3 Years | 4-5 Years | After 5 Years |
||||||||||||||||
(in millions) | ||||||||||||||||||||
Debt(1) |
$ | 524.4 | $ | | $ | 32.5 | $ | 491.9 | $ | | ||||||||||
Operating lease and software licenses(2) |
139.9 | 40.4 | 47.7 | 33.3 | 18.5 | |||||||||||||||
Purchase obligations(3) |
558.9 | 69.4 | 119.1 | 115.3 | 255.1 | |||||||||||||||
Uncertain tax positions(4) |
4.9 | | 4.9 | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 1,228.1 | $ | 109.8 | $ | 204.2 | $ | 640.5 | $ | 273.6 | ||||||||||
|
|
|
|
|
|
|
|
|
|
(1) | These amounts represent the principal repayments of Long-term debt and are included on our Consolidated Balance Sheets. As of June 30, 2012, we had $524.4 million of outstanding debt consisting of $400.0 million of a term loan facility and $124.4 million in Senior Notes. See Note 13, Borrowings to our Consolidated Financial Statements under Item 8 of Part II of this Annual Report on Form 10-K for additional information about our Borrowings and related matters. Excludes future cash payments related to interest expense as the term loan facility is variable rate and the interest payments will ultimately be determined by the rates in effect during each period. |
(2) | Included in these amounts are various facilities and equipment leases and software license agreements. We enter into operating leases in the normal course of business relating to facilities and equipment, as well as the licensing of software. The majority of our lease agreements have fixed payment terms based on the passage of time. Certain facility and equipment leases require payment of maintenance and real estate taxes and contain escalation provisions based on future adjustments in price indices. Our future operating lease obligations could change if we exit certain contracts and if we enter into additional operating lease agreements. |
(3) | Purchase obligations primarily relate to payments to ADP related to a data center outsourcing services agreement that expires in August 2012, payments to IBM related to the IT Services Agreement entered into in March 2010 that expires in June 2022, and purchase and maintenance agreements on our software, equipment and other assets. |
(4) | Due to the uncertainty related to the timing of the reversal of uncertain tax positions, only the uncertain tax benefit related to a transfer pricing settlement has been provided in the table above. The Company is unable to make reasonably reliable estimates related to the timing of the remaining unrecognized tax benefits expected to be paid. See Note 16, Income Taxes to our Consolidated Financial Statements under Item 8 of Part II of this Annual Report on Form 10-K for further detail. |
The Company entered into a data center outsourcing services agreement with ADP before its spin-off from ADP in March 2007 under which ADP provided the Company with data center services consistent with the services provided to the Company immediately before the spin-off, provided that the operation of the data center is the sole responsibility of ADP. Among the principal services provided by the data center are information technology services and service delivery network services. The agreement with ADP provided for increasing volumes and the addition of new services over the term. Under the agreement, ADP was responsible for hosting the mainframe, midrange, open systems, and networks. Additionally, systems engineering, network engineering, hardware engineering, network operations, data center operations, application change management, and data center disaster recovery services were managed by ADP. The March 2007 agreement expired on June 30, 2012. The Company entered into a short-term extension of the agreement which expires on August 31, 2012. The
49
Company expects to incur $6.3 million in costs in connection with the services to be provided during this term extension. For the fiscal years ended June 30, 2012, 2011 and 2010, the Company recorded expenses of $111.4 million, $110.4 million and $104.8 million, respectively, in the Consolidated Statements of Earnings related to the March 2007 agreement.
In March 2010, the Company and International Business Machines Corporation (IBM) entered into an Information Technology Services Agreement (the IT Services Agreement), under which IBM is providing certain aspects of the Companys information technology infrastructure that are currently provided under a data center outsourcing services agreement with ADP. Under the IT Services Agreement, IBM provides a broad range of technology services to the Company including supporting its mainframe, midrange, server, network and data center operations, as well as providing disaster recovery services. The Company has the option of incorporating additional services into the agreement over time. The migration of the data center processing from ADP to IBM was substantially completed in June 2012, and is expected to be complete by August 31, 2012. The IT Services Agreement expires on June 30, 2022. The Company has the right to renew the initial term of the IT Services Agreement for up to one additional 12-month term. Commitments remaining under this agreement are $552.6 million through fiscal year 2022, the final year of the contract. For the fiscal years ended June 30, 2012 and 2011, the Company recorded expenses of $24.6 million and $6.3 million, respectively, in the Consolidated Statements of Earnings related to this agreement. The Company capitalized $47.0 million and $5.7 million of costs related to the build out of the IBM data center in Other non-current assets in fiscal years 2012 and 2011, respectively.
Other Commercial Commitments
Immediately before the separation from ADP, certain of the Companys foreign subsidiaries established unsecured, uncommitted lines of credit with banks. These lines of credit bear interest at a rate equal to LIBOR plus 250 basis points. There were no outstanding borrowings under these lines of credit at June 30, 2012.
Off-Balance Sheet Arrangements
It is not the Companys business practice to enter into off-balance sheet arrangements. However, the Company is exposed to market risk from changes in foreign currency exchange rates that could impact its financial position, results of operations, and cash flows. The Company manages its exposure to these market risks through its regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. The Company uses derivative financial instruments as risk management tools and not for trading purposes. The Company was not a party to any derivative financial instruments at June 30, 2012, 2011 and 2010. In the normal course of business, the Company also enters into contracts in which it makes representations and warranties that relate to the performance of the Companys products and services. The Company does not expect any material losses related to such representations and warranties, or collateral arrangements.
NEW ACCOUNTING PRONOUNCEMENTS
Please refer to Note 2, Summary of Significant Accounting PoliciesQ. New Accounting Pronouncements to our Consolidated Financial Statements under Item 8 of Part II of this Annual Report on Form 10-K for a discussion on the impact of the adoption of new accounting pronouncements.
50
ITEM 7A. | Quantitative and Qualitative Disclosures About Market Risk |
As of June 30, 2012, $400.0 million of our total $524.4 million in debt outstanding is based on floating interest rates. Our term loan facility had a balance outstanding of $400.0 million as of June 30, 2012. The interest rate is based on LIBOR plus 125 basis points. The weighted-average interest rate was 1.54% as of June 30, 2012. Our revolving credit facility had a balance outstanding of zero as of June 30, 2012. The interest rate is based on LIBOR plus 125 basis points.
Our operations outsourcing and mutual fund processing services are performed by registered broker-dealers. As registered broker-dealers and members of FINRA, they are subject to regulations concerning many aspects of their business, including trade practices, capital requirements, record retention, money laundering prevention, the protection of customer funds and customer securities, and the supervision of the conduct of directors, officers and employees. A failure to comply with any of these laws, rules or regulations could result in censure, fine, the issuance of cease-and-desist orders, or the suspension or revocation of SEC or FINRA authorization granted to allow the operation of their businesses or disqualification of their directors, officers or employees. In addition, as registered broker-dealers, they are required to participate in the Securities Investor Protection Corporation (SIPC) for the benefit of customers. In addition, MG Trust Company, LLC (MG Trust), a subsidiary of Matrix, is a Colorado State non-depository trust company whose primary business is to provide cash agent, custodial and directed or non-discretionary trust services to institutional customers. MG Trust operates pursuant to the rules and regulations of the Colorado Division of Banking.
51
ITEM 8. | Financial Statements and Supplementary Data |
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Consolidated Financial Statements |
||||
53 | ||||
Consolidated Statements of Earnings for the Fiscal Years Ended June 30, 2012, 2011, and 2010 |
55 | |||
56 | ||||
Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30, 2012, 2011, and 2010 |
57 | |||
58 | ||||
59 | ||||
Financial Statement Schedule |
||||
87 |
52
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Broadridge Financial Solutions, Inc.
1981 Marcus Avenue
Lake Success, NY 11042
We have audited the accompanying consolidated balance sheets of Broadridge Financial Solutions, Inc. and subsidiaries (the Company) as of June 30, 2012 and 2011, and the related consolidated statements of earnings, stockholders equity, and cash flows for each of the three years in the period ended June 30, 2012. Our audits also included the financial statement schedule listed in the Index at Item 15. We also have audited the Companys internal control over financial reporting as of June 30, 2012, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Companys management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and financial statement schedule and an opinion on the Companys internal control over financial reporting 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 and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included 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, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed by, or under the supervision of, the companys principal executive and principal financial officers, or persons performing similar functions, and effected by the companys board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
53
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Broadridge Financial Solutions, Inc. and subsidiaries as of June 30, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2012, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2012, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ DELOITTE & TOUCHE LLP
New York, New York
August 9, 2012
54
Broadridge Financial Solutions, Inc.
Consolidated Statements of Earnings
(In millions, except per share amounts)
Years ended June 30, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Revenues |
$ | 2,303.5 | $ | 2,166.9 | $ | 2,209.2 | ||||||
|
|
|
|
|
|
|||||||
Cost of revenues |
1,715.1 | 1,617.1 | 1,616.4 | |||||||||
Selling, general and administrative expenses |
299.9 | 270.0 | 241.6 | |||||||||
Impairment and other charges, net |
74.2 | | | |||||||||
Other expenses, net |
13.4 | 10.1 | 9.1 | |||||||||
|
|
|
|
|
|
|||||||
Total expenses |
2,102.6 | 1,897.2 | 1,867.1 | |||||||||
|
|
|
|
|
|
|||||||
Earnings from continuing operations before income taxes |
200.9 | 269.7 | 342.1 | |||||||||
Provision for income taxes |
75.9 | 97.9 | 117.0 | |||||||||
|
|
|
|
|
|
|||||||
Net earnings from continuing operations |
125.0 | 171.8 | 225.1 | |||||||||
Loss from discontinued operations, net of tax benefit |
(1.4 | ) | (2.2 | ) | (35.1 | ) | ||||||
|
|
|
|
|
|
|||||||
Net earnings |
$ | 123.6 | $ | 169.6 | $ | 190.0 | ||||||
|
|
|
|
|
|
|||||||
Basic earnings per share: |
||||||||||||
Basic earnings per share from continuing operations |
$ | 1.01 | $ | 1.38 | $ | 1.66 | ||||||
Basic loss per share from discontinued operations |
(0.01 | ) | (0.02 | ) | (0.26 | ) | ||||||
|
|
|
|
|
|
|||||||
Basic earnings per share |
$ | 1.00 | $ | 1.36 | $ | 1.40 | ||||||
|
|
|
|
|
|
|||||||
Diluted earnings per share: |
||||||||||||
Diluted earnings per share from continuing operations |
$ | 0.98 | $ | 1.34 | $ | 1.62 | ||||||
Diluted loss per share from discontinued operations |
(0.01 | ) | (0.02 | ) | (0.25 | ) | ||||||
|
|
|
|
|
|
|||||||
Diluted earnings per share |
$ | 0.97 | $ | 1.32 | $ | 1.37 | ||||||
|
|
|
|
|
|
|||||||
Weighted-average shares outstanding: |
||||||||||||
Basic |
124.1 | 124.8 | 135.9 | |||||||||
Diluted |
127.5 | 128.3 | 139.1 | |||||||||
Dividends declared per common share |
$ | 0.64 | $ | 0.60 | $ | 0.56 |
See notes to consolidated financial statements.
55
Broadridge Financial Solutions, Inc.
(In millions, except per share amounts)
June 30, 2012 |
June 30, 2011 |
|||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 320.5 | $ | 241.5 | ||||
Accounts receivable, net of allowance for doubtful accounts of $6.5 and $2.0, respectively |
370.7 | 406.6 | ||||||
Other current assets |
86.2 | 103.3 | ||||||
|
|
|
|
|||||
Total current assets |
777.4 | 751.4 | ||||||
Property, plant and equipment, net |
79.0 | 83.1 | ||||||
Goodwill |
780.0 | 735.6 | ||||||
Intangible assets, net |
143.3 | 147.2 | ||||||
Other non-current assets |
207.9 | 186.7 | ||||||
|
|
|
|
|||||
Total assets |
$ | 1,987.6 | $ | 1,904.0 | ||||
|
|
|
|
|||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 102.2 | $ | 119.0 | ||||
Short-term borrowings |
| 400.0 | ||||||
Accrued expenses and other current liabilities |
260.6 | 230.3 | ||||||
Deferred revenues |
47.5 | 33.4 | ||||||
|
|
|
|
|||||
Total current liabilities |
410.3 | 782.7 | ||||||
Long-term debt |
524.4 | 124.3 | ||||||
Deferred taxes |
63.2 | 71.3 | ||||||
Deferred revenues |
38.3 | 47.3 | ||||||
Other non-current liabilities |
100.9 | 81.1 | ||||||
|
|
|
|
|||||
Total liabilities |
1,137.1 | 1,106.7 | ||||||
|
|
|
|
|||||
Commitments and contingencies (Note 17) |
||||||||
Stockholders equity: |
||||||||
Preferred stock: Authorized, 25.0 shares; issued and outstanding, none |
| | ||||||
Common stock, $0.01 par value: Authorized, 650.0 shares; issued, 152.9 and 149.6 shares at June 30, 2012 and 2011, respectively; outstanding, 124.8 and 123.7 shares at June 30, 2012 and 2011, respectively |
1.5 | 1.5 | ||||||
Additional paid-in capital |
739.4 | 667.4 | ||||||
Retained earnings |
686.1 | 642.2 | ||||||
Treasury stock, at cost: 28.1 and 25.9 shares at June 30, 2012 and 2011, respectively |
(580.0 | ) | (529.9 | ) | ||||
Accumulated other comprehensive income |
3.5 | 16.1 | ||||||
|
|
|
|
|||||
Total stockholders equity |
850.5 | 797.3 | ||||||
|
|
|
|
|||||
Total liabilities and stockholders equity |
$ | 1,987.6 | $ | 1,904.0 | ||||
|
|
|
|
See notes to consolidated financial statements.
56
Broadridge Financial Solutions, Inc.
Consolidated Statements of Cash Flows
(In millions)
Years ended June 30, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
Cash Flows From Operating Activities |
||||||||||||
Net earnings |
$ | 123.6 | $ | 169.6 | $ | 190.0 | ||||||
Adjustments to reconcile Net earnings to net cash flows provided by operating activities: |
||||||||||||
Loss from discontinued operations, net of tax |
1.4 | 2.2 | 35.1 | |||||||||
Depreciation and amortization |
51.0 | 43.1 | 36.8 | |||||||||
Amortization of acquired intangibles |
22.2 | 14.3 | 4.5 | |||||||||
Amortization of other assets |
18.8 | 14.9 | 15.7 | |||||||||
Deferred income taxes |
(8.4 | ) | 12.8 | 3.4 | ||||||||
Stock-based compensation expense |
28.3 | 30.0 | 27.3 | |||||||||
Excess tax benefits from the issuance of stock-based compensation awards |
(3.9 | ) | (2.1 | ) | (0.2 | ) | ||||||
Impairment of available for sale securities and other non-current assets |
69.1 | | | |||||||||
Other |
3.0 | (5.4 | ) | 1.1 | ||||||||
Changes in operating assets and liabilities: |
||||||||||||
Current assets and liabilities: |
||||||||||||
(Increase) decrease in Accounts receivable, net |
34.7 | (39.8 | ) | 27.8 | ||||||||
Decrease in Other current assets |
23.3 | 8.0 | 4.2 | |||||||||
(Decrease) increase in Accounts payable |
(12.4 | ) | 8.5 | 9.9 | ||||||||
(Decrease) increase in Accrued expenses and other current liabilities |
35.2 | (16.0 | ) | 7.8 | ||||||||
(Decrease) increase in Deferred revenues |
(8.9 | ) | (11.4 | ) | 0.1 | |||||||
Non-current assets and liabilities: |
||||||||||||
Increase in Other non-current assets |
(106.5 | ) | (61.5 | ) | (10.9 | ) | ||||||
Increase in Other non-current liabilities |
20.1 | 23.7 | 7.5 | |||||||||
|
|
|
|
|
|
|||||||
Net cash flows provided by operating activities of continuing operations |
290.6 | 190.9 | 360.1 | |||||||||
|
|
|
|
|
|
|||||||
Cash Flows From Investing Activities |
||||||||||||
Capital expenditures |
(33.8 | ) | (29.2 | ) | (42.7 | ) | ||||||
Purchases of intangibles |
(12.9 | ) | (18.1 | ) | (10.4 | ) | ||||||
Sale of available for sale securities |
2.1 | | | |||||||||
Acquisitions, net of cash acquired |
(72.4 | ) | (293.5 | ) | (35.2 | ) | ||||||
Other investing activities |
6.5 | | | |||||||||
|
|
|
|
|
|
|||||||
Net cash flows used in investing activities of continuing operations |
(110.5 | ) | (340.8 | ) | (88.3 | ) | ||||||
|
|
|
|
|
|
|||||||
Cash Flows From Financing Activities |
||||||||||||
Proceeds from Short-term borrowings |
| 240.0 | | |||||||||
Proceeds from issuance of Long-term debt |
490.0 | | | |||||||||
Payment on Short-term borrowings |
(400.0 | ) | (40.0 | ) | | |||||||
Payment on Long-term debt |
(90.0 | ) | | | ||||||||
Dividends paid |
(78.1 | ) | (74.8 | ) | (66.6 | ) | ||||||
Proceeds from exercise of stock options |
43.6 | 47.8 | 57.2 | |||||||||
Purchases of Treasury stock |
(51.6 | ) | (222.1 | ) | (268.9 | ) | ||||||
Other financing transactions |
(3.6 | ) | 1.7 | | ||||||||
Cost related to issuance of Long-term debt |
(2.9 | ) | | | ||||||||
Excess tax benefit from the issuance of stock-based compensation awards |
3.9 | 2.1 | 0.2 | |||||||||
|
|
|
|
|
|
|||||||
Net cash flows used in financing activities of continuing operations |
(88.7 | ) | (45.3 | ) | (278.1 | ) | ||||||
|
|
|
|
|
|
|||||||
Cash flows from discontinued operations: |
||||||||||||
Net cash flows (used in) provided by operating activities |
(6.4 | ) | 23.4 | 133.5 | ||||||||
Net cash flows (used in) provided by financing activities |
| (7.2 | ) | 4.4 | ||||||||
|
|
|
|
|
|
|||||||
Net cash flows (used in) provided by discontinued operations |
(6.4 | ) | 16.2 | 137.9 | ||||||||
|
|
|
|
|
|
|||||||
Effect of exchange rate changes on Cash and cash equivalents |
(6.0 | ) | 7.9 | 0.1 | ||||||||
|
|
|
|
|
|
|||||||
Net change in Cash and cash equivalents |
79.0 | (171.1 | ) | 131.7 | ||||||||
Cash and cash equivalents, beginning of fiscal year |
241.5 | 412.6 | 173.4 | |||||||||
Cash and cash equivalents of discontinued operations, beginning of fiscal year |
| | 107.5 | |||||||||
|
|
|
|
|
|
|||||||
Cash and cash equivalents, end of fiscal year |
$ | 320.5 | $ | 241.5 | $ | 412.6 | ||||||
|
|
|
|
|
|
|||||||
Supplemental disclosure of cash flow information: |
||||||||||||
Cash payments made for interest |
$ | 13.8 | $ | 9.7 | $ | 11.1 | ||||||
Cash payments made for income taxes |
$ | 71.1 | $ | 58.4 | $ | 107.9 | ||||||
Non-cash operating activities: |
||||||||||||
Non-cash obligation assumed from sale of discontinued operations |
$ | | $ | | $ | 21.6 | ||||||
Non-cash investing and financing activities: |
||||||||||||
Property, plant and equipment included in accrued expenses |
$ | 1.9 | $ | 3.1 | $ | 4.3 | ||||||
Consideration received as part of the sale of discontinued operations |
$ | | $ | | $ | 33.1 | ||||||
Purchases of treasury stock excluded from accrued expenses |
$ | | $ | 1.5 | $ | 21.3 | ||||||
Dividends payable |
$ | 1.6 | $ | | $ | 8.8 |
See notes to consolidated financial statements.
57
Broadridge Financial Solutions, Inc.
Consolidated Statements of Stockholders Equity
(In millions, except per share amounts)
Common Stock | Additional Paid-In Capital |
Retained Earnings |
Treasury Stock |
Accumulated Other Comprehensive Income (Loss) |
Total Stockholders Equity |
|||||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||||
Balances, July 1, 2009 |
141.8 | $ | 1.4 | $ | 505.9 | $ | 432.3 | $ | (37.5 | ) | $ | 6.9 | $ | 909.0 | ||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||
Net earnings |
| | | 190.0 | | | ||||||||||||||||||||||
Foreign currency translation adjustments |
| | | | | (7.5 | ) | |||||||||||||||||||||
Pension and postretirement liability adjustment, net of taxes of $0.5 |
| | | | | (0.8 | ) | |||||||||||||||||||||
Total comprehensive income |
181.7 | |||||||||||||||||||||||||||
Stock plans and related tax benefits |
4.1 | 0.1 | 53.8 | | | | 53.9 | |||||||||||||||||||||
Stock-based compensation |
| | 28.1 | | | | 28.1 | |||||||||||||||||||||
Treasury stock acquired (14.2 shares) |
| | | | (290.2 | ) | | (290.2 | ) | |||||||||||||||||||
Common stock dividends ($0.56 per share) |
| | | (75.4 | ) | | | (75.4 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balances, June 30, 2010 |
145.9 | 1.5 | 587.8 | 546.9 | (327.7 | ) | (1.4 | ) | 807.1 | |||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||
Net earnings |
| | | 169.6 | | | ||||||||||||||||||||||
Foreign currency translation adjustments |
| | | | | 20.7 | ||||||||||||||||||||||
Pension and postretirement liability adjustment, net of taxes of $0.7 |
| | | | | (1.1 | ) | |||||||||||||||||||||
Unrealized loss on available-for-sale securities, net of taxes of $1.3 |
| | | | | (2.1 | ) | |||||||||||||||||||||
Total comprehensive income |
187.1 | |||||||||||||||||||||||||||
Stock plans and related tax benefits |
3.7 | | 49.8 | | | | 49.8 | |||||||||||||||||||||
Stock-based compensation |
| | 29.8 | | | | 29.8 | |||||||||||||||||||||
Treasury stock acquired (9.2 shares) |
| | | | (202.2 | ) | | (202.2 | ) | |||||||||||||||||||
Common stock dividends ($0.60 per share) |
| | | (74.3 | ) | | | (74.3 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balances, June 30, 2011 |
149.6 | 1.5 | 667.4 | 642.2 | (529.9 | ) | 16.1 | 797.3 | ||||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||
Net earnings |
| | | 123.6 | | | ||||||||||||||||||||||
Foreign currency translation adjustments |
| | | | | (13.8 | ) | |||||||||||||||||||||
Pension and postretirement liability adjustment, net of taxes of $0.8 |
| | | | | (1.1 | ) | |||||||||||||||||||||
Unrealized loss on available-for-sale securities, net of taxes of $2.6 |
| | | | | (4.5 | ) | |||||||||||||||||||||
Reclassification adjustment for other-than temporary impairment included in net income, net of taxes of $(4.0) |
| | | | | 6.8 | ||||||||||||||||||||||
Total comprehensive income |
111.0 | |||||||||||||||||||||||||||
Stock plans and related tax benefits |
3.3 | | 43.7 | | | | 43.7 | |||||||||||||||||||||
Stock-based compensation |
| | 28.3 | | | | 28.3 | |||||||||||||||||||||
Treasury stock acquired (2.2 shares) |
| | | | (50.1 | ) | | (50.1 | ) | |||||||||||||||||||
Common stock dividends ($0.64 per share) |
| | | (79.7 | ) | | | (79.7 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balances, June 30, 2012 |
152.9 | $ | 1.5 | $ | 739.4 | $ | 686.1 | $ | (580.0 | ) | $ | 3.5 | $ | 850.5 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
58
Broadridge Financial Solutions, Inc.
Notes to Consolidated Financial Statements
NOTE 1. BASIS OF PRESENTATION
A. Description of Business. Broadridge Financial Solutions, Inc. (Broadridge® or the Company), a Delaware corporation, is a leading global provider of investor communication solutions and securities processing and operations outsourcing solutions to the financial services industry. The Company classifies its continuing operations into the following two reportable segments:
| Investor Communication SolutionsA large portion of Broadridges Investor Communication Solutions business involves the processing and distribution of proxy materials to investors in equity securities and mutual funds, as well as the facilitation of related vote processing. ProxyEdge®, its innovative electronic proxy delivery and voting solution for institutional investors, helps ensure the participation of the largest stockholders of many companies. Broadridge also provides the distribution of regulatory reports and corporate action/reorganization event information, as well as tax reporting solutions that help its clients meet their regulatory compliance needs. In addition, Broadridge provides financial information distribution and transaction reporting services to both financial institutions and securities issuers. These services include the processing and distribution of account statements and trade confirmations, traditional and personalized document fulfillment and content management services, marketing communications, and imaging, archival and workflow solutions that enable and enhance its clients communications with investors. All of these communications are delivered in paper or electronic form. In fiscal year 2010, Broadridge entered the transfer agency business through its acquisition of StockTrans®, Inc. (renamed Broadridge Corporate Issuer Solutions, Inc.), a provider of registrar, stock transfer and record-keeping services. In August 2010, Broadridge acquired NewRiver®, Inc., a leader in mutual fund electronic investor disclosure solutions. In December 2010, Broadridge acquired Forefield®, Inc., a leading provider of real-time sales, education, and client communication solutions for financial institutions and their advisors. In January 2011, Broadridge acquired Matrix Financial Solutions, Inc., an independent provider of mutual fund processing solutions for the defined contribution market. |
| Securities Processing SolutionsBroadridge offers a suite of advanced computerized real-time transaction processing services that automate the securities transaction lifecycle, from desktop productivity tools, data aggregation, performance reporting, and portfolio management to order capture and execution, trade confirmation, settlement, and accounting. Broadridges services help financial institutions efficiently and cost-effectively consolidate their books and records, gather and service assets under management, focus on their core businesses, and manage risk. With multi-currency capabilities, its Global Processing Solution supports real-time global trading of equity, option, mutual fund and fixed income securities in established and emerging markets. In addition, its operations outsourcing solutions allow broker-dealers to outsource certain administrative functions relating to clearing and settlement, from order entry to trade matching and settlement, while maintaining their ability to finance and capitalize their businesses. In June 2010, the Company acquired City Networks Ltd, a leading software and services provider of reconciliation, multi-asset process automation and operational risk management solutions to the global financial services industry. In September 2011, Broadridge acquired Paladyne Systems, Inc., a provider of buy-side technology solutions for the global investment management industry. |
B. Basis of Presentation. The Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). These financial statements present the consolidated position of the Company. These financial statements include the entities in which the Company directly or indirectly has a controlling financial interest and various entities in which the Company has investments recorded under both the cost and equity methods of accounting. Intercompany balances and transactions have been eliminated.
59
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Use of Estimates. The preparation of these financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes thereto. Actual results may differ from those estimates.
B. Revenue Recognition. The Companys revenues are primarily generated from fees for providing services. Revenues are recognized for the two reportable segments as follows:
| Investor Communication SolutionsRevenues are generated from processing and distributing investor communications as well as vote processing and tabulation. The Company typically enters into agreements with clients to provide services on a fee for service basis. Fees received from the rendering of services are recognized as revenue in the period in which the services have been provided and when collectability is reasonably assured. |
| Securities Processing SolutionsRevenues are generated from fees for transaction processing. Client service agreements often include up-front consideration as well as a recurring fee for transaction processing. In accordance with Accounting Standards Codification Topic (ASC) No. 605 Revenue Recognition up-front implementation fees are deferred and recognized on a straight-line basis over the longer of the respective service term of the contract or the expected customer relationship period which commences after client acceptance when the processing term begins. Fees received from processing services are recognized as revenue in the period in which the services have been rendered and when collectability is reasonably assured. Additionally, revenues generated from outsourcing services are recognized based on fixed monthly fees in the period in which the services are rendered in accordance with the respective contractual agreement. |
C. Cash and Cash Equivalents. Investment securities with an original maturity of 90 days or less are considered cash equivalents. The fair value of our cash and cash equivalents approximates carrying value.
D. Financial Instruments. Substantially all of the financial instruments of the Company other than Long-term debt are carried at fair values, or at carrying amounts that approximate fair values because of the short maturity of the instruments. The carrying value of the Companys long-term variable-rate term loan facility approximates fair value because these instruments reflect market changes to interest rates. The carrying value of the Companys long-term fixed-rate senior notes represents the face value of the long-term fixed-rate senior notes net of the unamortized discount. The fair value of the Companys long-term fixed-rate senior notes is based on quoted market prices. See Note 13, Borrowings, for a further discussion of the Companys long-term fixed-rate senior notes.
E. Property, Plant and Equipment. Property, plant and equipment is stated at cost and depreciated over the estimated useful lives of the assets using the straight-line method. Leasehold improvements are amortized over the shorter of the term of the lease or the estimated useful lives of the improvements. The estimated useful lives of assets are as follows:
Equipment |
3 to 5 years | |||
Buildings |
10 years | |||
Furniture and fixtures |
3 to 7 years |
F. Available-For-Sale Equity Securities. Available-for-sale equity securities are non-derivatives that are reflected in Other non-current assets in the Consolidated Balance Sheets, unless management intends to dispose of the investment within twelve months of the end of the reporting period, in which case they are reflected in Other current assets in the Consolidated Balance Sheets. These investments are in entities over which the Company does not have control, joint control, or significant influence. Investments are initially recognized and carried at fair value. Unrealized holding gains and losses, net of tax, on available-for-sale securities are excluded
60
from earnings and are included in other comprehensive income. Realized gains and losses on available-for-sale securities are included in Other income/expenses, net and, when applicable, are reported as a reclassification adjustment, net of tax, in other comprehensive income.
Declines in the fair value of available-for-sale securities below their cost that are other-than-temporary result in write-downs of the individual securities to their fair value. The related write-downs are included in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
G. Inventories. Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market. Inventory balances of $8.6 million and $9.4 million, consisting of forms and envelopes used in the mailing of proxy materials to our customers, are reflected in Other current assets in the Consolidated Balance Sheets at June 30, 2012 and 2011, respectively.
H. Deferred Client Conversion and Start-Up Costs. Direct costs that are incurred to set up or convert a clients systems to function with the Companys technology are generally deferred and recognized on a straight-line basis which commences after client acceptance when the processing term begins. To the extent deferred costs exceed related implementation fee revenues, such excess costs are amortized over the service term of the contract. Deferred costs up to the amount of the related implementation fees are recognized and capitalized over the longer of the respective service term of the contract or expected customer relationship period. These deferred costs are reflected in Other non-current assets in the Consolidated Balance Sheets at June 30, 2012 and 2011, respectively. See Note 11, Other non-current assets, for a further discussion.
I. Deferred Data Center Costs. Data center costs relate to conversion costs associated with our principal data center systems and applications. Costs directly related to the activities necessary to make the data center usable for its intended purpose are deferred and amortized over the life of the contract on a straight-line basis commencing on the date the data center has achieved full functionality. These deferred costs are reflected in Other non-current assets in the Consolidated Balance Sheets at June 30, 2012 and 2011, respectively. See Note 11, Other non-current assets.
J. Goodwill. The Company accounts for its goodwill and intangible assets in accordance with ASC No. 350, IntangiblesGoodwill and Other (ASC No. 350), which states that goodwill and intangible assets with indefinite useful lives should not be amortized, but instead tested for impairment at the reporting unit level at least annually or more frequently if circumstances indicate possible impairment. The Company tests for goodwill impairment annually in the fourth quarter of the fiscal year, using the March 31 financial statement balances. If impairment exists, a write-down to fair value (measured by discounting estimated future cash flows) is recorded.
The Company performs a sensitivity analysis under Step 1 of the goodwill impairment test as prescribed in ASC No. 350, assuming hypothetical reductions in the fair values of our reporting units. A 10% change in our estimates of projected future operating cash flows, discount rates, or terminal value growth rates used in our calculations of the fair values of the reporting units would not result in an impairment of our goodwill.
K. Impairment of Long-Lived Assets. In accordance with ASC No. 360, Property, Plant and EquipmentImpairment or Disposal of Long-Lived Assets (ASC No. 360), long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its expected estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. Intangible assets with finite lives are amortized primarily on a straight-line basis over their estimated useful lives and are reviewed for impairment in accordance with ASC No. 360.
61
L. Foreign Currency Translation and Transactions. The assets and liabilities of the Companys foreign subsidiaries are translated into U.S. dollars based on exchange rates in effect at the end of each period. Revenues and expenses are translated at average exchange rates during the periods. Currency transaction gains or losses are included in Other expenses, net. Gains or losses from balance sheet translation are included in Stockholders equity within Accumulated other comprehensive income (loss) on the Consolidated Balance Sheets.
M. Stock-Based Compensation. The Company accounts for stock-based compensation in accordance with ASC No. 718, CompensationStock Compensation, by recognizing the measurement of stock-based compensation expense in Net earnings based on the fair value of the award on the date of grant. For stock options issued, the fair value of each stock option was estimated on the date of grant using a binomial option pricing model. The binomial model considers a range of assumptions related to volatility, risk-free interest rate, and employee exercise behavior. Expected volatilities utilized in the binomial model are based on a combination of implied market volatilities, historical volatility of the Companys stock price, and other factors. Similarly, the dividend yield is based on historical experience and expected future changes. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of grant. The binomial model also incorporates exercise and forfeiture assumptions based on an analysis of historical data. The expected life of the stock option grants is derived from the output of the binomial model and represents the period of time that options granted are expected to be outstanding.
N. Internal Use Software. Expenditures for major software purchases and software developed or obtained for internal use are capitalized and amortized over a three- to five-year period on a straight-line basis. For software developed or obtained for internal use, the Company capitalizes these costs in accordance with the provisions of ASC No. 350-40, Internal Use Software. The Companys policy provides for the capitalization of external direct costs of materials and services associated with developing or obtaining internal use computer software. In addition, the Company also capitalizes payroll and payroll-related costs for employees who are directly associated with internal use computer software projects. The amount of capitalizable payroll costs with respect to these employees is limited to direct time spent on such projects. Costs associated with preliminary project stage activities, training, maintenance, and all other post-implementation stage activities are expensed as incurred. The Company also expenses internal costs related to minor upgrades and enhancements, as it is impractical to separate these costs from normal maintenance activities.
O. Income Taxes. The Company accounts for income taxes under the liability method, which requires that deferred tax assets and liabilities be determined based on the expected future income tax consequences of events that have been recognized in the Consolidated Financial Statements.
Deferred tax assets and liabilities are recognized based on temporary differences between the consolidated financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the temporary differences are expected to reverse.
P. Advertising Costs. Advertising costs are expensed at the time the advertising takes place. Selling, general and administrative expenses include advertising costs of $2.0 million, $3.0 million and $1.9 million for the fiscal years ended June 30, 2012, 2011 and 2010, respectively.
Q. New Accounting Pronouncements. In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-08, Intangibles Goodwill and Other (ASC Topic 350): Testing Goodwill for Impairment (ASU No. 2011-08), which amends guidance for goodwill impairment testing. The amendment allows for entities to first assess qualitative factors in determining whether or not the fair value of a reporting unit exceeds its carrying value. If an entity concludes from this qualitative assessment that it is more likely than not that the fair value of a reporting unit exceeds its carrying value, then performing a two-step impairment test is unnecessary. ASU No. 2011-08 will be effective for public companies for fiscal years beginning after December 15, 2011. The Company does not expect that the adoption of ASU 2011-08 will have an impact on its consolidated results of operations, financial condition or cash flows.
62
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (ASC Topic 220): Presentation of Comprehensive Income (ASU No. 2011-05), which amends current comprehensive income guidance. This accounting update eliminates the option to present the components of other comprehensive income as part of the statement of stockholders equity. Instead, the Company must report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. ASU 2011-05 will be effective for public companies for fiscal years beginning after December 15, 2011, with early adoption permitted. In December 2011, the FASB issued an update to ASU No. 2011-05. The update, ASU No. 2011 -12, Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (ASU No. 2011-12), defers the effective date of certain presentation requirements within ASU No. 2011-05. The Company does not expect that the adoption of ASU 2011-05 will have an impact on its consolidated results of operations, financial condition or cash flows as it only requires a change in the format of the Companys current presentation.
In December 2010, the FASB issued ASU No. 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations. This standard requires an entity to disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period. ASU No. 2010-29 is effective prospectively for business combinations that occur on or after the beginning of the first annual reporting period beginning after December 15, 2010. ASU No. 2010-29 became effective for the Company in the first quarter of fiscal year 2012 and did not have a material impact on the Companys consolidated results of operations, cash flows or financial condition.
In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements a consensus of the FASB Emerging Issues Task Force, an amendment of ASC No. 605-25, Revenue Recognition (formerly EITF Issue No. 08-01, Revenue Arrangements with Multiple Deliverables). This standard provides principles for allocation of consideration among its multiple elements, allowing more flexibility in identifying and accounting for separate deliverables under an arrangement. The ASU introduces an estimated selling price method for valuing the elements of a bundled arrangement if vendor-specific objective evidence or third-party evidence of selling price is not available, and significantly expands related disclosure requirements. It is effective on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. ASU No. 2009-13 became effective for the Company in the first fiscal quarter of fiscal year 2011 and did not have a material impact on the Companys consolidated results of operations, cash flows or financial condition.
R. Subsequent Events. In preparing the accompanying Consolidated Financial Statements, in accordance with ASC No. 855, Subsequent Events, the Company has reviewed events that have occurred after June 30, 2012, through the date of issuance of the Consolidated Financial Statements. During this period, the Company did not have any material subsequent events.
NOTE 3. EARNINGS PER SHARE
Basic earnings per share (EPS) is calculated by dividing the Companys Net earnings by the basic Weighted-average shares outstanding for the periods presented.
Diluted EPS reflects the potential dilution that could occur if outstanding stock options at the presented date are exercisable and shares of restricted stock have vested.
As of June 30, 2012, 2011 and 2010, the computation of diluted EPS did not include 2.6 million, 2.4 million and 4.4 million options to purchase Broadridge common stock, respectively, as the effect of their inclusion would have been anti-dilutive.
63
The following table sets forth the denominators of the basic and diluted EPS computations:
Years ended June 30, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
(in millions) | ||||||||||||
Weighted-average shares outstanding: |
||||||||||||
Basic |
124.1 | 124.8 | 135.9 | |||||||||
Common stock equivalents |
3.4 | 3.5 | 3.2 | |||||||||
|
|
|
|
|
|
|||||||
Diluted |
127.5 | 128.3 | 139.1 | |||||||||
|
|
|
|
|
|
The following table sets forth the computation of basic EPS utilizing Net earnings from continuing operations and Net earnings for the fiscal year and the Companys basic Weighted-average shares outstanding:
Years ended June 30, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
(in millions, except per share amounts) |
||||||||||||
Net earnings from continuing operations |
$ | 125.0 | $ | 171.8 | $ | 225.1 | ||||||
Net earnings |
$ | 123.6 | $ | 169.6 | $ | 190.0 | ||||||
Basic Weighted-average shares outstanding |
124.1 | 124.8 | 135.9 | |||||||||
Basic EPS from continuing operations |
$ | 1.01 | $ | 1.38 | $ | 1.66 | ||||||
Basic EPS |
$ | 1.00 | $ | 1.36 | $ | 1.40 |
The following table sets forth the computation of diluted EPS utilizing Net earnings from continuing operations and Net earnings for the fiscal year and the Companys diluted Weighted-average shares outstanding:
Years ended June 30, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
(in millions, except per share amounts) |
||||||||||||
Net earnings from continuing operations |
$ | 125.0 | $ | 171.8 | $ | 225.1 | ||||||
Net earnings |
$ | 123.6 | $ | 169.6 | $ | 190.0 | ||||||
Diluted Weighted-average shares outstanding |
127.5 | 128.3 | 139.1 | |||||||||
Diluted EPS from continuing operations |
$ | 0.98 | $ | 1.34 | $ | 1.62 | ||||||
Diluted EPS |
$ | 0.97 | $ | 1.32 | $ | 1.37 |
NOTE 4. IMPAIRMENT AND OTHER CHARGES, NET
Impairment and other charges, net of $74.2 million for the fiscal year ended June 30, 2012, includes charges resulting from the termination of the U.S. schedule of the outsourcing services agreement (the Outsourcing Services Agreement) with Penson Worldwide, Inc. (PWI) (see Note 8, Discontinued Operations). The charges primarily include a $47.2 million impairment of the deferred client conversion and start-up costs associated with the U.S. schedule of the Outsourcing Services Agreement (see Note 11, Other Non-current Assets) representing all deferred costs associated with Penson, a $12.5 million impairment of marketable securities relating to the Companys investment in the common stock of PWI (see Note 11, Other Non-current Assets), and a $21.4 million impairment of a five-year subordinated note from PWI (see Note 11, Other Non-current Assets) and $8.2 million of shutdown costs. These charges were slightly offset by a $15.1 million benefit associated with the extinguishment of Broadridges obligation to pay or credit to PWI fees related to a third party vendors services replaced by the Outsourcing Services Agreement (see Note 12, Accrued Expenses and Other Current Liabilities). These charges are included in the Other segment (see Note 19, Financial Data by Segment).
64
NOTE 5. OTHER EXPENSES, NET
Other expenses, net consisted of the following:
Years ended June 30, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
($ in millions) | ||||||||||||
Interest expense on borrowings |
$ | 13.3 | $ | 9.9 | $ | 9.8 | ||||||
Interest income |
(1.8 | ) | (2.2 | ) | (0.7 | ) | ||||||
Foreign currency exchange loss (gain) |
0.3 | 1.7 | (1.0 | ) | ||||||||
Other, net |
1.6 | 0.7 | 1.0 | |||||||||
|
|
|
|
|
|
|||||||
Other expenses, net |
$ | 13.4 | $ | 10.1 | $ | 9.1 | ||||||
|
|
|
|
|
|
NOTE 6. ACQUISITIONS
Assets acquired and liabilities assumed in business combinations were recorded on the Companys Consolidated Balance Sheets as of the respective acquisition dates based upon their estimated fair values at such dates. The results of operations of businesses acquired by the Company were included in the Companys Consolidated Statements of Earnings since their respective dates of acquisition. The excess of the purchase price over the estimated fair values of the underlying assets acquired and liabilities assumed was allocated to Goodwill.
Acquisitions completed by the Company with an aggregate purchase price of greater than $15.0 million during the fiscal years ended June 30, 2012, 2011 and 2010, were as follows:
During the fiscal year ended June 30, 2012, the Company acquired one business in the Securities Processing Solutions segment:
Paladyne Systems, Inc.
In September 2011, the Company acquired Paladyne Systems, Inc. (Paladyne), a provider of buy-side technology solutions for the global investment management industry. The purchase price was $72.4 million, net of cash acquired of $8.3 million. Net liabilities assumed were $15.4 million. This acquisition resulted in $64.0 million of goodwill. Intangible assets acquired, which totaled $23.8 million, consist primarily of acquired software technology and customer relationships, which are being amortized over a seven-year life and ten-year life, respectively. The results of Paladynes operations were included in the accompanying consolidated financial statements from the date of acquisition. Pro forma supplemental financial information is not provided as the impact of the acquisition was not material to operating results, financial position or cash flows of the Company.
During the fiscal year ended June 30, 2011, the Company acquired three businesses in the Investor Communication Solutions segment. A summary of each acquisition is as follows:
NewRiver, Inc.
In August 2010, the Company acquired NewRiver, Inc. (NewRiver), a leader in mutual fund electronic investor disclosure solutions. The purchase price was $77.6 million, net of cash acquired. This acquisition resulted in $47.8 million of goodwill, after post-closing adjustments for deferred taxes. Intangible assets acquired, which totaled $27.3 million, consist primarily of customer relationships and software technology, which are being amortized over an eight-year and seven-year life, respectively. The results of NewRivers operations were included in the accompanying consolidated financial statements from the date of acquisition. Pro forma supplemental financial information is not provided as the impact of the acquisition was not material to operating results, financial position or cash flows of the Company.
65
Forefield, Inc.
In December 2010, the Company acquired Forefield, Inc. (Forefield), a leading provider of real-time sales, education and client communication solutions for financial institutions and their advisors. The purchase price was $18.3 million, net of cash acquired. This acquisition resulted in $11.1 million of goodwill, after post-closing adjustments for deferred taxes. Intangible assets acquired, which totaled $6.8 million, primarily consist of customer relationships and software technology that are being amortized over a seven-year and a five-year life, respectively. The results of Forefields operations were included in the accompanying consolidated financial statements from the date of acquisition. Pro forma supplemental financial information is not provided as the impact of the acquisition was not material to operating results, financial position or cash flows of the Company.
Matrix Financial Solutions, Inc.
In January 2011, the Company acquired Matrix Financial Solutions, Inc. (Matrix). Matrix is a provider of mutual fund processing services for third party administrators, financial advisors, banks and wealth management professionals. Matrixs back-office, trust, custody, trading and mutual fund settlement services are integrated into Broadridges solution suite; thereby strengthening our role as a provider of data processing and distribution channel solutions to the mutual fund industry. The purchase price was $197.6 million, net of cash acquired.
This acquisition resulted in $154.7 million of goodwill, after post-closing adjustments for deferred taxes. Goodwill primarily resulted from the Companys expectation of sales growth and cost synergies from the integration of Matrixs technology and product offerings with the Companys technology and operations to provide an expansion of products and market reach. Intangible assets acquired, which totaled $71.5 million, consist of customer relationships, software technology, trademarks and non-compete agreements, and are being amortized over a ten-year, seven-year, five-year and three-year life, respectively. The results of Matrixs operations were included in the accompanying consolidated financial statements from the date of acquisition. Pro forma supplemental financial information is not provided as the impact of the acquisition was not material to operating results, financial position or cash flows of the Company.
During the fiscal year ended June 30, 2010, the Company acquired one business in the Securities Processing Solutions segment:
City Networks, Ltd
In June 2010, the Company acquired City Networks Ltd (City Networks), a leading software and services provider of reconciliation, multi-asset process automation and operational risk management solutions to the global financial services industry, for $37.7 million. This acquisition resulted in $20.9 million of goodwill. Intangible assets acquired, which totaled $10.6 million, consist primarily of customer relationships and acquired software technology, which are being amortized over a ten-year life and five-year life, respectively. The results of City Networks operations were included in the accompanying consolidated financial statements from the date of acquisition. Pro forma supplemental financial information is not provided as the impact of the acquisition was not material to operating results, financial position or cash flows of the Company.
The Company also completed acquisitions with individual aggregate purchase prices of less than $15.0 million during fiscal year 2010 which were not material to the Companys Consolidated Financial Statements.
66
NOTE 7. FAIR VALUE OF FINANCIAL INSTRUMENTS
Accounting guidance on fair value measurements for certain financial assets and liabilities requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
Level 1 | Inputs that are based upon unadjusted quoted prices for identical instruments traded in active markets. | |
Level 2 | Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly. These instruments include money market funds. | |
Level 3 | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. |
In valuing assets and liabilities, the Company is required to maximize the use of quoted market prices and minimize the use of unobservable inputs. The Company calculates the fair value of its Level 1 and Level 2 instruments based on the exchange traded price of similar or identical instruments where available or based on other observable instruments. These calculations take into consideration the credit risk of both the Company and its counterparties. The Company has not changed its valuation techniques in measuring the fair value of any financial assets and liabilities during the period.
The following table sets forth the Companys financial assets and liabilities at June 30, 2012 that are measured at fair value on a recurring basis during the period, segregated by level within the fair value hierarchy:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
($ in millions) | ||||||||||||||||
Assets |
||||||||||||||||
Cash and cash equivalents: |
||||||||||||||||
Money market funds |
$ | 160.9 | $ | | $ | | $ | 160.9 | ||||||||
Other current assets: |
||||||||||||||||
Available-for-sale equity securities |
| | | | ||||||||||||
Other non-current assets: |
||||||||||||||||
Available-for-sale equity securities |
7.0 | | | 7.0 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 167.9 | $ | | $ | | $ | 167.9 | ||||||||
|
|
|
|
|
|
|
|
The following table sets forth the Companys financial assets and liabilities at June 30, 2011 that are measured at fair value on a recurring basis during the period, segregated by level within the fair value hierarchy:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
($ in millions) | ||||||||||||||||
Assets |
||||||||||||||||
Cash and cash equivalents: |
||||||||||||||||
Money market funds |
$ | 150.4 | $ | | $ | | $ | 150.4 | ||||||||
Other current assets: |
||||||||||||||||
Available-for-sale equity securities |
2.0 | | | 2.0 | ||||||||||||
Other non-current assets: |
||||||||||||||||
Available-for-sale equity securities |
14.0 | | | 14.0 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 166.4 | $ | | $ | | $ | 166.4 | ||||||||
|
|
|
|
|
|
|
|
67
A note receivable of $20.6 million from PWI was included as a financial asset measured at fair value on a recurring basis as of June 30, 2010; however, this financial asset was not being measured at fair value on a recurring basis. Therefore, this note receivable was subsequently removed from the table for June 30, 2011.
The following table sets forth an analysis of changes during fiscal years 2012 and 2011 in Level 3 financial assets of the Company:
2012 | 2011 | |||||||
($ in millions) | ||||||||
Beginning balance, |
$ | | $ | 20.6 | ||||
Net realized/unrealized gains/(losses) |
| | ||||||
Purchases/(sales) |
| | ||||||
Transfers in/(out) of Level 3 |
| (20.6 | ) | |||||
|
|
|
|
|||||
Balance at June 30, |
$ | | $ | | ||||
|
|
|
|
The Company did not incur any Level 3 fair value asset impairments during fiscal years 2012 and 2011. This Level 2 asset, which was being measured on a non-recurring basis, was impaired as of June 30, 2012 (see Note 11, Other non-current assets).
NOTE 8. DISCONTINUED OPERATIONS
In November 2009, the Company and its wholly owned subsidiary Ridge Clearing & Outsourcing Solutions, Inc. (Ridge) entered into an asset purchase agreement (the Asset Purchase Agreement) with PWI and Penson Financial Services, Inc., a wholly owned subsidiary of PWI (PFSI, referred to together with PWI as Penson), to sell substantially all contracts of the securities clearing clients of Ridge to PFSI.
On June 25, 2010, the Company completed the sale of the contracts of substantially all of the securities clearing clients of Ridge to PFSI for an aggregate purchase price of $35.2 million. The purchase price paid to Broadridge consisted of (i) a five-year subordinated note from PWI (the Seller Note) in the principal amount of $20.6 million bearing interest at an annual rate equal to the London Inter-Bank Offer Rate (LIBOR) plus 550 basis points, and (ii) 2,455,627 shares of PWIs common stock (representing 9.5% of PWIs outstanding common stock as of May 31, 2010), at the June 25, 2010 closing price of PWIs common stock of $5.95 per share (the Seller Shares). The Company discontinued its securities clearing services business but continued to provide operations outsourcing solutions aligned with the Securities Processing Solutions business.
Concurrent with entering into the Asset Purchase Agreement, the Company entered into the Outsourcing Services Agreement for an eleven-year term expiring in December 2022. Under the Outsourcing Services Agreement, Ridge provided securities processing and back-office support services to PFSI, including services for the clients acquired from Ridge and PWIs existing clients. In January 2012, the Company completed the conversion of PWIs U.S. and Canadian businesses and at the time projected annual revenues under the original terms of the Outsourcing Services Agreement were approximately $50.0 million. On October 11, 2011, Broadridge entered into an amendment agreement with PWI (the Amendment Agreement) to expand the scope of outsourcing support services that Ridge provided to PWI under the Outsourcing Services Agreement. The expanded services were expected to result in additional annual revenues to Broadridge of $8.0 million over the remaining term of the Outsourcing Services Agreement. The Company expected to commence providing the expanded services to PWI at various dates, and expected these services to be completely transitioned by July 1, 2013. Under the Amendment Agreement, in October 2011, Broadridge provided PWI with $7.0 million in consideration of the additional services and other amendments contemplated by the Amendment Agreement, and to defray the costs of PWI associated with the conversion to the Broadridge platform. To the extent that the expanded services provided less than $8.0 million of annualized fees to Broadridge by July 1, 2013, PWI would
68
have been obligated to pay Broadridge an amount equal to the shortfall of such fees below $7.0 million by August 1, 2013. In addition, on October 11, 2011, PWI and Broadridge entered into an Amended and Restated Seller Note which converted the quarterly interest payment terms under the original Seller Note to the payment of interest on the maturity date of the Seller Note effective July 1, 2011.
On March 13, 2012, Broadridge and Ridge entered into a restructuring support agreement (the Restructuring Support Agreement) with Penson and certain holders of Pensons outstanding indebtedness, which provided for proposed transactions related to the restructuring of Pensons outstanding indebtedness (the Restructuring), including the Seller Note held by Broadridge. The consummation of the Restructuring was subject to the approval and acceptance of Pensons debt holders, among other parties, and other conditions.
The Restructuring Support Agreement provided that Penson would offer to exchange the Seller Note for newly issued shares of Penson common stock which would have represented, together with Broadridges existing holdings in the Seller Shares, 9.9% of the outstanding common stock of Penson upon consummation of the Restructuring Support Agreement. See Note 11, Other Non-current Assets, for a discussion on the Seller Note and the Seller Shares.
In addition, in connection with the Restructuring, Broadridge and Penson agreed to enter into an amendment to the Outsourcing Services Agreement, which otherwise remained in place, to clarify or modify, as applicable, certain terms of the Outsourcing Services Agreement. The terms of this amendment were subject to the consummation of the Restructuring and the execution of a definitive amendment to the Outsourcing Services Agreement, and the reasonable acceptance of the terms of such amendment by the holders of a majority in principal amount of Pensons outstanding indebtedness. On May 17, 2012, the Restructuring Support Agreement terminated automatically pursuant to its terms as PWI did not launch the proposed exchange offer as contemplated under the Restructuring Support Agreement.
On June 5, 2012, the Company entered into a ten-year master services agreement (the Apex MSA) with Apex Clearing Corporation (Apex Clearing) under which Broadridge will perform outsourcing services for Apex Clearing consistent with the securities processing and back-office support services it had previously performed for Penson. The Apex MSA was part of a series of related transactions involving Broadridge, Penson, PEAK6 Investments, L.P. (PEAK6) and Apex Clearing Holdings LLC (Apex Holdings), an entity created by Penson and PEAK6 to provide clearing and related services to Pensons U.S. securities correspondents. As part of the series of related transactions, Broadridge transferred ownership of its broker-dealer subsidiary, Ridge, to Apex Holdings and Ridge was renamed Apex Clearing Corporation. Pensons U.S. broker-dealer subsidiary, PFSI, then sold its U.S. clearing contracts to Apex Clearing. These related transactions were all consummated on June 5, 2012.
The transfer of Ridge to Apex Holdings was made pursuant to a purchase and sale agreement entered into by Broadridge and its subsidiary, Broadridge Securities Processing Solutions, Inc., on May 31, 2012 (the Purchase and Sale Agreement). Under the Purchase and Sale Agreement, Broadridge transferred ownership of Ridge, excluding certain assets and liabilities relating to its ongoing outsourcing business, to Apex Holdings, for a purchase price approximately equal to the amount of regulatory net capital transferred with Ridge, an amount that was not material to Broadridge. As a result of consummation of the transfer, Ridge is a wholly owned subsidiary of Apex Holdings and has been renamed Apex Clearing Corporation.
Broadridges fees under the Apex MSA are based on a percentage of Apex Clearings revenues, and the Apex MSA provides for a termination fee to be paid to Broadridge in the event it is terminated by Apex Clearing for convenience during its term. In addition, Broadridge has agreed that in the event PFSI becomes incapable of performing transition outsourcing services for Apex Clearing under a transition services agreement between PFSI and Apex Clearing during a transition period not to exceed 24 months, Broadridge will perform those transition outsourcing services.
69
In addition, on June 5, 2012, Broadridge, Ridge (prior to its transfer to Apex Holdings) and Broadridge Financial Solutions (Canada), Inc. entered into a termination and mutual release agreement with Penson, PFSI and Penson Financial Services Canada, Inc. (PFSC) (the Termination Agreement), thereby terminating certain schedules including the U.S. schedule (the U.S. Schedule) to the Outsourcing Services Agreement.
The Termination Agreement: (i) terminates the schedules under the Outsourcing Services Agreement, including the U.S. Schedule, other than to the extent necessary to provide any transition services that may be required under the Apex MSA and for Broadridge to continue to service Pensons Canadian subsidiary, PFSC; and (ii) terminates, discharges and releases in full Pensons obligations, including all obligations to make principal and interest payments, under the Seller Note. The Termination Agreement also provides that Penson and Broadridge mutually release all claims arising under the Outsourcing Services Agreement, provided that Broadridge will retain claims of up to $20 million under the Outsourcing Services Agreement against PFSC while Penson will retain all of its rights under the Outsourcing Services Agreement to defend any such claims against PFSC.
On June 5, 2012, as a result of the termination of the U.S. Schedule to the Outsourcing Services Agreement, Broadridge made the determination to impair the deferred client conversion and start-up costs associated with the Outsourcing Services Agreement (the Deferred Costs). The charge taken by the Company on the Deferred Costs was $47.2 million for the fiscal year ended June 30, 2012 (see Note 11, Other Non-current Assets), representing all deferred costs associated with the Outsourcing Services Agreement with Penson. In addition, as a result of the termination of the U.S. Schedule to the Outsourcing Services Agreement on June 5, 2012, Broadridges obligation to pay or credit to Penson fees in the amount of $15.1 million related to a third party vendors services that were replaced by the Outsourcing Services Agreement was extinguished (see Note 12, Accrued Expenses and Other Current Liabilities).
For a period of time in fiscal year 2011, the Company continued to generate cash flows and reported income statement activity in Loss from discontinued operations, net of taxes, associated with the securities clearing business. The activities that gave rise to these cash flows and income statement activities were transitional in nature.
The following summarized financial information related to the securities clearing services business has been segregated from continuing operations and reported as discontinued operations:
Years ended June 30, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
($ in millions) | ||||||||||||
Revenues |
$ | | $ | 2.9 | $ | 74.3 | ||||||
|
|
|
|
|
|
|||||||
Earnings (loss) from discontinued operations, before net loss on disposal |
$ | | $ | | $ | | ||||||
Income tax benefit (expense) |
| | | |||||||||
|
|
|
|
|
|
|||||||
Net earnings (loss) from discontinued operations, before loss on disposal |
| | | |||||||||
Loss on disposal of assets of discontinued operations, net of tax benefit for the fiscal years ended June 30, 2012, 2011 and 2010 of $1.0 and $1.3 and $20.2, respectively |
(1.4 | ) | (2.2 | ) | (35.1 | ) | ||||||
|
|
|
|
|
|
|||||||
Loss from discontinued operations, net of tax benefit |
$ | (1.4 | ) | $ | (2.2 | ) | $ | (35.1 | ) | |||
|
|
|
|
|
|
70
NOTE 9. PROPERTY, PLANT AND EQUIPMENT, NET
Depreciation and amortization expense for Property, plant and equipment was $36.3 million, $36.1 million, and $32.3 million for the three fiscal years ended June 30, 2012, 2011 and 2010, respectively. Property, plant and equipment at cost and accumulated depreciation at June 30, 2012 and 2011 are as follows:
June 30, | ||||||||
2012 | 2011 | |||||||
($ in millions) | ||||||||
Property, plant and equipment: |
||||||||
Land and buildings |
$ | 4.5 | $ | 4.4 | ||||
Equipment |
255.1 | 242.9 | ||||||
Furniture, leaseholds and other |
159.3 | 157.3 | ||||||
|
|
|
|
|||||
418.9 | 404.6 | |||||||
Less: Accumulated depreciation |
(339.9 | ) | (321.5 | ) | ||||
|
|
|
|
|||||
Property, plant and equipment, net |
$ | 79.0 | $ | 83.1 | ||||
|
|
|
|
NOTE 10. GOODWILL AND INTANGIBLE ASSETS, NET
Changes in Goodwill for the fiscal years ended June 30, 2012 and 2011 are as follows:
Investor Communication Solutions |
Securities Processing Solutions |
Total | ||||||||||
($ in millions) | ||||||||||||
Balance as of July 1, 2010 |
$ | 303.1 | $ | 206.4 | $ | 509.5 | ||||||
Additions |
213.6 | | 213.6 | |||||||||
Cumulative translation adjustments |
0.1 | 12.4 | 12.5 | |||||||||
|
|
|
|
|
|
|||||||
Balance as of June 30, 2011 |
516.8 | 218.8 | 735.6 | |||||||||
Additions |
| 64.0 | 64.0 | |||||||||
Other |
(14.3 | ) | | (14.3 | ) | |||||||
Cumulative translation adjustments |
(0.1 | ) | (5.2 | ) | (5.3 | ) | ||||||
|
|
|
|
|
|
|||||||
Balance as of June 30, 2012 |
$ | 502.4 | $ | 277.6 | $ | 780.0 | ||||||
|
|
|
|
|
|
During fiscal year 2010, the Company sold the contracts of substantially all of its securities clearing clients. As a result, goodwill of $29.3 million in the former Clearing and Outsourcing Solutions segment was reclassified to Assets of discontinued operations and subsequently written off in fiscal year 2010 as a result of the sale of this business (see Note 8, Discontinued Operations).
Other includes a $9.3 million decrease to goodwill related to the disposition of the non-controlling interest of a subsidiary related to our January 2011 acquisition of Matrix.
During fiscal years 2012, 2011 and 2010, the Company performed the required impairment tests of Goodwill under ASC No. 350 and determined that there was no impairment other than as noted above.
71
Intangible assets at cost and accumulated amortization at June 30, 2012 and 2011 are as follows:
June 30, | ||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
Original Cost |
Accumulated Amortization |
Intangible Assets, net |
Original Cost |
Accumulated Amortization |
Intangible Assets, net |
|||||||||||||||||||
($ in millions) | ||||||||||||||||||||||||
Software and software licenses |
$ | 123.8 | $ | (63.3 | ) | $ | 60.5 | $ | 120.8 | $ | (59.3 | ) | $ | 61.5 | ||||||||||
Customer contracts and lists |
102.3 | (29.5 | ) | 72.8 | 94.7 | (19.5 | ) | 75.2 | ||||||||||||||||
Other intangibles |
15.1 | (5.1 | ) | 10.0 | 13.0 | (2.5 | ) | 10.5 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
$ | 241.2 | $ | (97.9 | ) | $ | 143.3 | $ | 228.5 | $ | (81.3 | ) | $ | 147.2 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
In fiscal year 2012, accumulated amortization was reduced by $20.4 million of asset retirements related to fully depreciated intangibles.
Other intangibles consist primarily of purchased rights, covenants, patents, and trademarks (acquired directly or through acquisitions). All of the intangible assets have finite lives and, as such, are subject to amortization. The weighted-average remaining useful life of the intangible assets is 5.8 years (4.2 years for software and software licenses, 7.5 years for customer contracts and lists and 4.9 years for other intangibles). Amortization of intangibles totaled $37.0 million, $21.8 million, and $9.0 million for fiscal years 2012, 2011, and 2010, respectively. Estimated remaining amortization expenses of the Companys existing intangible assets for the next five fiscal years and thereafter are as follows:
Years Ending June 30, |
($ in millions) | |||
2013 |
$ | 32.8 | ||
2014 |
25.6 | |||
2015 |
21.6 | |||
2016 |
18.8 | |||
2017 |
16.0 | |||
Thereafter |
28.5 |
NOTE 11. OTHER NON-CURRENT ASSETS
Other non-current assets consisted of the following:
June 30, | ||||||||
2012 | 2011 | |||||||
($ in millions) | ||||||||
Deferred client conversion and start-up costs |
$ | 115.9 | $ | 125.8 | ||||
Deferred data center costs |
52.2 | 5.7 | ||||||
Note receivable |
| 20.6 | ||||||
Long-term investments |
12.6 | 18.1 | ||||||
Long-term broker fees |
11.4 | 13.6 | ||||||
Other |
15.8 | 2.9 | ||||||
|
|
|
|
|||||
Total |
$ | 207.9 | $ | 186.7 | ||||
|
|
|
|
Deferred Client Conversion and Start-up Costs
Included in Deferred client conversion and start-up costs during the fiscal year ended June 30, 2012 were $47.2 million of deferred client conversion and start-up costs associated with the Outsourcing Services Agreement with Penson (see Note 8, Discontinued Operations). In reviewing these assets for impairment, management considered: (1) the terms and conditions of the Outsourcing Services Agreement, (2) PWIs
72
progress toward its stated financial improvement plan and the anticipated improvement to its overall financial condition, (3) the outlook for PWIs business, and (4) the payment status of the Companys trade account receivables with Penson. In addition, the Company used its best efforts to calculate the probability of the Company realizing potential weighted undiscounted cash flows related to the Outsourcing Services Agreement based on the occurrence of a number of various scenarios. On June 5, 2012, as a result of the termination of the U.S. Schedule to the Outsourcing Services Agreement, Broadridge determined that a material charge for impairment would be taken on the deferred costs associated with the Outsourcing Services Agreement. The charge taken by the Company on the Deferred Costs was $47.2 million for the fiscal year ended June 30, 2012, representing all deferred costs associated with the Outsourcing Services Agreement with Penson.
Note Receivable
The Note receivable refers to the Seller Note in the principal amount of $20.6 million issued by PWI to Broadridge as part of the consideration in the sale of the Ridge clearing contracts to Penson (see Note 8, Discontinued Operations). On March 13, 2012, Broadridge and Ridge entered into a Restructuring Support Agreement with PWI and certain of its subsidiaries, which provided for proposed transactions related to the restructuring of Pensons outstanding indebtedness, including the Seller Note. As part of PWIs debt restructuring, Broadridge agreed to cancel this note receivable in exchange for additional shares of PWIs common stock, and the Company recorded a $21.4 million charge during the fiscal year ended June 30, 2012, which included $0.8 million of accrued interest on the Seller Note. On May 17, 2012, the Restructuring Support Agreement terminated automatically pursuant to its terms as PWI did not launch the proposed exchange offer as contemplated under the Restructuring Support Agreement.
Long-term Investments
Included in Long-term investments during the fiscal year ended June 30, 2012 was the Companys investment of 2,455,627 shares in the common stock of PWI (see Note 8, Discontinued Operations). In estimating other-than-temporary impairment losses, managements policy considers, but is not limited to, the following: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Based on the Companys review, factoring in the level of decline in the fair value of the PWI common stock, management determined that the market value of the PWI common stock may not equal or exceed the cost basis of the Companys investment within a reasonable period of time. After consideration of the severity and duration of this decline in fair value, as well as the reasons for the decline in value, the Company determined that there was an other-than-temporary impairment (OTTI) related to the Companys investment in PWI common stock, for which the Company recorded a $12.5 million charge during the fiscal year ended June 30, 2012 and wrote down the cost basis of this investment to zero.
NOTE 12. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
June 30, | ||||||||
2012 | 2011 | |||||||
($ in millions) | ||||||||
Employee compensation and benefits |
$ | 139.6 | $ | 102.1 | ||||
Accrued broker fees |
38.6 | 40.6 | ||||||
Accrued income taxes |
42.9 | 23.7 | ||||||
Accrued dividend payable |
19.9 | 18.2 | ||||||
Other |
19.6 | 45.7 | ||||||
|
|
|
|
|||||
Total |
$ | 260.6 | $ | 230.3 | ||||
|
|
|
|
73
As a result of the termination of the U.S. Schedule to the Outsourcing Services Agreement on June 5, 2012, Broadridges obligation to pay or credit to Penson fees in the amount of $15.1 million related to a third party vendors services that were replaced by the Outsourcing Services Agreement was extinguished. $9.7 million of this obligation was previously included in Accrued expenses and other current liabilities on the Consolidated Balance Sheet.
NOTE 13. BORROWINGS
Revolving Credit and Term Loan Facilities: On March 29, 2007, the Company entered into a $1,190.0 million senior unsecured credit facility, consisting of a $440.0 million five-year term loan, a $500.0 million five-year revolving credit facility and a $250.0 million one-year revolving credit facility. In May 2007, the Company refinanced the $250.0 million one-year revolving credit facility through an offering of $250.0 million of 6.125% Senior Notes discussed below. Borrowings under the five-year term loan facility bore interest at LIBOR plus 40 to 90 basis points based on debt ratings at the time of the borrowing. The five-year term loan facility was subject to interest at LIBOR plus 40 basis points as of June 30, 2011. Borrowings under the five-year revolving credit facility bore interest at LIBOR plus 27 to 75 basis points based on debt ratings and the utilization percentage of the facility at the time of the borrowing. At June 30, 2011, the Company had outstanding borrowings of $200.0 million on the five-year revolving credit facility and $200.0 million on the five-year term loan facility.
Fiscal 2012 Credit Facilities: On September 22, 2011, the Company entered into a $990.0 million senior unsecured credit facility, consisting of a $490.0 million five-year term loan facility (the Fiscal 2012 Term Loan) and a $500.0 million five-year revolving credit facility (the Fiscal 2012 Revolving Credit Facility) (collectively the Fiscal 2012 Credit Facilities). Borrowings under the Fiscal 2012 Term Loan and Fiscal 2012 Revolving Credit Facility bear interest at LIBOR plus 125 basis points. The Fiscal 2012 Revolving Credit facility also has an annual facility fee equal to 15 basis points, on the unused portion of the facility. The Company incurred $3.0 million in debt issuance costs to establish the Fiscal 2012 Credit Facilities, of which $0.1 million of these costs were expensed as incurred and $2.9 million of these costs have been capitalized in Other non-current assets in the Consolidated Balance Sheets and will be amortized to interest expense on a straight-line basis, which approximates the effective interest method, over the terms of these facilities. At June 30, 2012, $0.4 million had been amortized related to the Fiscal 2012 Credit Facilities.
The Company used a portion of the Fiscal 2012 Term Loan proceeds to repay $200.0 million of outstanding borrowing under the previous five-year term loan and $200.0 million of outstanding borrowing under the previous five-year revolving credit facility. The previous five-year term loan facility and the previous five-year revolving credit facility both had expiration dates of March 2012 and were cancelled upon repayment in September 2011. The weighted-average interest rate on the previous five-year term loan facility was 0.65% and 0.77% for the fiscal years ended June 30, 2012 and 2011, respectively. The weighted-average interest rate on the previous five-year revolving credit facility was 0.51% and 0.57% for the fiscal years ended June 30, 2012 and 2011, respectively.
The Fiscal 2012 Term Loan contains a repayment schedule that requires the Company to make minimum principal repayments on the loan of $12.3 million, on a quarterly basis, commencing with the first payment due by March 31, 2013, and the final payment due by June 30, 2016, for a total repayment of $171.5 million before the balance of the loan becomes due in September 2016.
During the fiscal year ended June 30, 2012, the Company repaid $90.0 million of the $490.0 million of borrowings under the Fiscal 2012 Term Loan. Under the terms of the Fiscal 2012 Term Loan agreement, any prepayment of a term borrowing shall be applied to reduce the subsequent scheduled repayment, in direct order of maturity, with no prepayment penalty. At June 30, 2012, the Company had met the repayment requirements on the Fiscal 2012 Term Loan through September 30, 2014. Under the terms of the Fiscal 2012 Term Loan agreement, as a portion of the outstanding borrowing is paid down, the total borrowing capacity is reduced
74
commensurately, leaving a borrowing capacity of $400.0 million at June 30, 2012. The weighted-average interest rate on the Fiscal 2012 Term Loan was 1.54% for the fiscal year ended June 30, 2012.
The Fiscal 2012 Credit Facilities are subject to covenants, including financial covenants consisting of a leverage ratio and an interest coverage ratio. At June 30, 2012, the Company is not aware of any instances of any non-compliance with the financial covenants of the Fiscal 2012 Credit Facilities. The carrying value of the Fiscal 2012 Term Loan approximates fair value.
Senior Notes: In May 2007, the Company completed an offering of $250.0 million in aggregate principal amount of senior notes (the Senior Notes). The Senior Notes will mature on June 1, 2017 and bear interest at a rate of 6.125% per annum. Interest on the Senior Notes is payable semi-annually in arrears on June 1 and December 1 of each year. The Senior Notes were issued at a price of 99.1% (effective yield to maturity of 6.251%). The indenture governing the Senior Notes contains certain covenants including covenants restricting the Companys ability to create or incur liens securing indebtedness for borrowed money and to enter into certain sale-leaseback transactions. At June 30, 2012, the Company is not aware of any instances of non-compliance with the financial covenants of the indenture governing the Senior Notes. The indenture also contains covenants regarding the purchase of the Senior Notes upon a change of control triggering event. The Senior Notes are senior unsecured obligations of the Company and rank equally with our other senior indebtedness. The Company may redeem the Senior Notes in whole or in part at any time before their maturity. The Company incurred $1.9 million in debt issuance costs to establish the Senior Notes. These costs have been capitalized and will be amortized to interest expense on a straight-line basis, which approximates the effective interest method, over the ten-year term. At June 30, 2012, $0.8 million had been amortized related to the Senior Notes. The fair value of the fixed-rate Senior Notes at June 30, 2012 was $137.6 million based on quoted market prices.
Available Capacity: As of June 30, 2012, outstanding borrowings and available capacity under the Companys borrowing arrangements were as follows:
Expiration Date |
Total Capacity |
Outstanding Borrowings |
Unused Available Capacity |
|||||||||||||
($ in millions) | ||||||||||||||||
Long-term debt |
||||||||||||||||
Fiscal 2012 Term Loan |
September 2016 | $ | 400.0 | $ | 400.0 | $ | | |||||||||
Fiscal 2012 Revolving Credit Facility |
September 2016 | 500.0 | | 500.0 | ||||||||||||
Senior Notes |
June 2017 | 124.4 | 124.4 | | ||||||||||||
|
|
|
|
|
|
|||||||||||
Total debt |
$ | 1,024.4 | $ | 524.4 | $ | 500.0 | ||||||||||
|
|
|
|
|
|
In addition, certain of the Companys foreign subsidiaries established unsecured, uncommitted lines of credit with banks. These lines of credit bear interest at LIBOR plus 250 basis points. As of June 30, 2012 and 2011, respectively, no amounts were outstanding under these lines of credit.
NOTE 14. STOCK-BASED COMPENSATION
Incentive Equity Awards. The Broadridge Financial Solutions, Inc. 2007 Omnibus Award Plan (the 2007 Plan) provides for the granting of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, phantom stock awards, stock bonuses and performance compensation awards to employees, non-employee directors, and other key individuals who perform services for the Company. The Company accounts for stock-based compensation in accordance with ASC No. 718 which requires the measurement of stock-based compensation expense to be recognized in Net earnings based on the fair value of the award on the date of grant. In accordance with the 2007 Plan, the Companys stock-based compensation consists of the following:
Stock Options: Stock options are granted to employees at exercise prices equal to the fair market value of the Companys common stock on the dates of grant. Stock options are generally issued under a graded vesting
75
schedule, generally vest ratably over five years and have a term of 10 years. Compensation expense for stock options is recognized over the requisite service period for each separately vesting portion of the stock option award.
Time-based Restricted Stock: The Company has a time-based restricted stock program under which shares of common stock have been issued to certain key employees. These shares are restricted as to transfer and in certain circumstances must be returned to the Company at the original purchase price. The Company records stock compensation expense relating to the issuance of time-based restricted stock over the period during which the transfer restrictions exist, which is up to five years from the date of grant. The value of the Companys time-based restricted stock, based on market prices, is recognized as compensation expense over the restriction period on a straight-line basis. There are no shares of time-based restricted stock outstanding at June 30, 2012.
Performance-based Restricted Stock: The Company has a performance-based restricted stock program under which shares of common stock will be issued to certain key employees upon the achievement, by the Company, of specific performance metrics. When it is probable that the performance metrics will be achieved, the Company records stock compensation expense for performance-based restricted stock on a straight-line basis over the performance period, plus a subsequent vesting period, which typically totals approximately two and one-half years from the date of grant. Certain performance-based equity awards granted to non-U.S. employees are to be settled in cash. The Company records a liability for these performance-based equity awards. The liability and the corresponding stock compensation expense are adjusted to reflect the Companys closing stock price as of the end of each reporting period. There are no shares of performance-based restricted stock outstanding at June 30, 2012.
Time-based Restricted Stock Units: The Company has a time-based restricted stock unit (RSU) program under which RSUs representing the right to receive one share of the Companys common stock for each vested RSU are granted. Time-based RSUs typically vest two and one-half years from the date of grant. The Company records stock compensation expense for time-based RSUs on a straight-line basis over the vesting period.
Performance-based Restricted Stock Units: The Company has a performance-based RSU program under which RSUs representing the right to receive one share of the Companys common stock for each vested RSU are granted. RSUs vest upon the achievement, by the Company, of specific performance metrics. The Company records stock compensation expense for performance-based RSUs on a straight-line basis over the performance period, plus a subsequent vesting period, which typically totals approximately two and one-half years from the date of grant.
76
The activity related to the Companys incentive equity awards for the fiscal years ended June 30, 2012, 2011 and 2010 consisted of the following:
Stock Options | Time-based RSUs |
Performance-based RSUs |
||||||||||||||||||||||
Number of Options |
Weighted Average Exercise Price |
Number of Shares |
Weighted Average Grant-Date Fair Value |
Number of Shares |
Weighted Average Grant-Date Fair Value |
|||||||||||||||||||
Balances at July 1, 2009 |
18,659,152 | $ | 18.86 | 1,958,112 | $ | 16.35 | 533,400 | $ | 15.72 | |||||||||||||||
Granted |
1,751,500 | 22.94 | 1,005,598 | 18.65 | 407,043 | 18.64 | ||||||||||||||||||
Exercised(a) |
(2,905,972 | ) | 18.46 | | | | | |||||||||||||||||
Vesting of RSUs(b) |
| | (982,805 | ) | 17.88 | (266,634 | ) | 18.34 | ||||||||||||||||
Expired/forfeited |
(135,468 | ) | 19.93 | (96,735 | ) | 21.51 | (2,950 | ) | 16.27 | |||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Balances at June 30, 2010 |
17,369,212 | $ | 19.33 | 1,884,170 | $ | 16.52 | 670,859 | $ | 16.45 | |||||||||||||||
Granted |
284,150 | 22.53 | 1,044,004 | 21.59 | 359,253 | 21.64 | ||||||||||||||||||
Exercised(a) |
(2,488,648 | ) | 19.22 | | | | ||||||||||||||||||
Vesting of RSUs(b) |
| | (901,654 | ) | 14.22 | (321,388 | ) | 14.03 | ||||||||||||||||
Expired/forfeited |
(1,389,988 | ) | 24.05 | (94,517 | ) | 19.40 | | | ||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Balances at June 30, 2011 |
13,774,726 | $ | 18.94 | 1,932,003 | $ | 20.19 | 708,724 | $ | 20.18 | |||||||||||||||
Granted |
1,057,538 | 24.01 | 1,142,616 | 18.37 | 342,628 | 17.61 | ||||||||||||||||||
Exercised(a) |
(2,151,613 | ) | 18.52 | | | | | |||||||||||||||||
Vesting of RSUs(b) |
| | (887,892 | ) | 18.68 | (279,028 | ) | 18.68 | ||||||||||||||||
Expired/forfeited |
(299,163 | ) | 20.03 | (161,158 | ) | 19.91 | (69,129 | ) | 18.73 | |||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Balances at June 30, 2012(c) |
12,381,488 | $ | 19.42 | 2,025,569 | $ | 19.61 | 703,195 | $ | 20.39 | |||||||||||||||
|
|
|
|
|
|
(a) | Stock options exercised during the fiscal years ended June 30, 2012, 2011 and 2010 had intrinsic values of $9.7 million, $8.7 million and $10.1 million, respectively. |
(b) | Time-based restricted stock units that vested during the fiscal years ended June 30, 2012, 2011 and 2010 had a total fair value of $20.9 million, $20.6 million and $20.8 million, respectively. Performance-based restricted stock units that vested during the fiscal years ended June 30, 2012, 2011 and 2010 had a total fair value of $6.7 million, $7.4 million and $5.7 million, respectively. |
(c) | As of June 30, 2012, the Companys outstanding in the money stock options using the fiscal year-end share price of $21.27 (approximately 8.3 million shares) had an aggregate intrinsic value of $30.3 million. As of June 30, 2012, time-based restricted stock units and performance-based restricted stock units expected to vest using the fiscal year-end share price of $21.27 (approximately 2.0 million and 0.6 million shares, respectively) had an aggregate intrinsic value of $42.2 million and $12.1 million, respectively. |
77
The tables below summarizes information regarding the Companys outstanding and exercisable stock options as of June 30, 2012:
Outstanding Options | ||||||||||||
Options Outstanding |
Weighted Average Remaining Contractual Life |
Weighted Average Exercise Price |
||||||||||
Range of Exercise Prices |
||||||||||||
$0.01 to $14.00 |
760,756 | 4.13 | $ | 13.80 | ||||||||
$14.01 to $16.00 |
1,318,713 | 2.87 | $ | 15.71 | ||||||||
$16.01 to $18.00 |
2,090,179 | 3.19 | $ | 17.34 | ||||||||
$18.01 to $20.00 |
3,488,451 | 3.94 | $ | 18.76 | ||||||||
$20.01 to $22.00 |
2,051,082 | 6.79 | $ | 21.42 | ||||||||
$22.01 to $24.00 |
1,318,420 | 6.84 | $ | 22.93 | ||||||||
$24.01 to $26.00 |
1,353,887 | 9.05 | $ | 24.65 | ||||||||
|
|
|||||||||||
12,381,488 | 5.05 | $ | 19.42 | |||||||||
|
|
Exercisable Options | ||||||||||||
Range of Exercise Prices |
Options Exercisable |
Weighted Average Remaining Contractual Life |
Weighted Average Exercise Price |
|||||||||
$0.01 to $14.00 |
733,356 | 4.04 | $ | 13.80 | ||||||||
$14.01 to $16.00 |
1,318,713 | 2.87 | $ | 15.71 | ||||||||
$16.01 to $18.00 |
2,065,379 | 3.15 | $ | 17.34 | ||||||||
$18.01 to $20.00 |
3,438,211 | 3.92 | $ | 18.76 | ||||||||
$20.01 to $22.00 |
1,633,777 | 6.65 | $ | 21.35 | ||||||||
$22.01 to $24.00 |
1,026,262 | 6.46 | $ | 22.95 | ||||||||
$24.01 to $26.00 |
255,549 | 7.61 | $ | 25.67 | ||||||||
|
|
|||||||||||
10,471,247 | 4.41 | $ | 18.73 | |||||||||
|
|
Stock-based compensation expense of $28.3 million, $30.0 million, and $27.3 million was recognized in earnings from continuing operations in the Consolidated Statements of Earnings for the fiscal years ended June 30, 2012, 2011 and 2010, respectively, as well as related tax benefits of $10.4 million, $11.3 million, and $10.4 million, respectively.
As of June 30, 2012, the total remaining unrecognized compensation cost related to non-vested stock options and RSU awards amounted to $5.1 million and $25.9 million, respectively, which will be amortized over the weighted-average remaining requisite service periods of 3.2 years and 1.5 years, respectively.
The following table presents the assumptions used to determine the fair values of the stock option grants using the Binomial options pricing model during the fiscal years ended June 30, 2012, 2011 and 2010:
Fiscal Year Ended June 30, 2012 |
Fiscal Year Ended June 30, 2011 |
Fiscal Year Ended June 30, 2010 |
||||||||||
Risk-free interest rate |
1.4% | 3.1% | 2.9% - 3.2% | |||||||||
Dividend yield |
2.6% | 2.7% | 2.5% - 2.6% | |||||||||
Weighted-average volatility factor |
28.1% | 31.4% | 32.1% - 33.0% | |||||||||
Weighted-average expected life (in years) |
6.6 | 7.1 | 6.1 - 6.9 | |||||||||
Weighted-average fair value (in dollars) |
$ 5.01 | $ 6.07 | $ 6.00 |
78
NOTE 15. EMPLOYEE BENEFIT PLANS
A. Defined Contribution Savings Plan. The Company approved a Broadridge sponsored 401(k) savings plan covering eligible full-time domestic employees of the Company. This plan provides a base contribution plus Company matching contributions on a portion of employee contributions. The costs recorded by the Company for this plan were $20.4 million, $18.8 million and $18.2 million for the fiscal years ended June 30, 2012, 2011 and 2010, respectively.
B. Defined Benefit Pension Plans. The Company sponsors a Supplemental Officer Retirement Plan (the Broadridge SORP). The Broadridge SORP is a defined benefit plan pursuant to which the Company will pay supplemental pension benefits to certain key officers upon retirement based upon the officers years of service and compensation. The amount charged to expense for the Broadridge SORP was $2.4 million, $1.6 million and $1.2 million during the fiscal years ended June 30, 2012, 2011 and 2010, respectively. The Broadridge SORP is currently unfunded, and the benefit obligation under this plan was $15.7 million, $11.1 million and $7.6 million at June 30, 2012, 2011 and 2010, respectively.
The Company also sponsors a Supplemental Executive Retirement Plan (the Broadridge SERP). The Broadridge SERP is a defined benefit plan pursuant to which the Company will pay supplemental pension benefits to certain key executives upon retirement based upon the executives years of service and compensation. The amount charged to expense for the Broadridge SERP was $0.3 million, $0.2 million and $0.2 million during the fiscal years ended June 30, 2012, 2011 and 2010, respectively. The Broadridge SERP is currently unfunded, and the benefit obligation under this plan was $1.3 million, $0.6 million and $0.3 million at June 30, 2012, 2011 and 2010, respectively.
C. Other Post-retirement Benefit Plan. The Company sponsors an Executive Retiree Health Insurance Plan. It is a post-retirement benefit plan pursuant to which the Company helps defray the health care costs of certain eligible key executive retirees and qualifying dependents, based upon the retirees age and years of service, until they reach the age of 65. The amount charged to expense under this plan was $0.3 million, $0.4 million and $0.4 million during the fiscal years ended June 30, 2012, 2011 and 2010, respectively. The plan is currently unfunded, and the benefit obligation under this plan was $2.8 million, $3.1 million and $3.0 million at June 30, 2012, 2011 and 2010, respectively.
NOTE 16. INCOME TAXES
Earnings from continuing operations before income taxes shown below are based on the geographic location to which such earnings are attributable.
Years Ended June 30, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
($ in millions) | ||||||||||||
Earnings from continuing operations before income taxes: |
||||||||||||
U.S. |
$ | 125.5 | $ | 196.2 | $ | 247.9 | ||||||
Foreign |
75.4 | 73.5 | 94.2 | |||||||||
|
|
|
|
|
|
|||||||
$ | 200.9 | $ | 269.7 | $ | 342.1 | |||||||
|
|
|
|
|
|
79
The Provision for income taxes consists of the following components:
Years Ended June 30, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
($ in millions) | ||||||||||||
Current: |
||||||||||||
U.S. Domestic |
$ | 53.3 | $ | 56.3 | $ | 76.5 | ||||||
Foreign |
22.0 | 22.9 | 28.1 | |||||||||
State |
9.0 | 5.9 | 9.0 | |||||||||
|
|
|
|
|
|
|||||||
Total current |
84.3 | 85.1 | 113.6 | |||||||||
Deferred: |
||||||||||||
U.S. Domestic |
(5.2 | ) | 20.0 | 0.6 | ||||||||
Foreign |
(1.1 | ) | (1.5 | ) | 0.9 | |||||||
State |
(2.1 | ) | (5.7 | ) | 1.9 | |||||||
|
|
|
|
|
|
|||||||
Total deferred |
(8.4 | ) | 12.8 | 3.4 | ||||||||
|
|
|
|
|
|
|||||||
Total provision for income taxes |
$ | 75.9 | $ | 97.9 | $ | 117.0 | ||||||
|
|
|
|
|
|
Years Ended June 30, | ||||||||||||||||||||||||
2012 | % | 2011 | % | 2010 | % | |||||||||||||||||||
($ in millions) | ||||||||||||||||||||||||
Provision for income taxes at U.S. statutory rate |
$ | 70.3 | 35.0 | $ | 94.4 | 35.0 | $ | 119.7 | 35.0 | |||||||||||||||
Increase in Provision for income taxes from: |
||||||||||||||||||||||||
State taxes, net of federal tax |
4.8 | 2.4 | 3.6 | 1.3 | 8.6 | 1.6 | ||||||||||||||||||
Foreign taxes |
(5.7 | ) | (2.8 | ) | (1.4 | ) | (0.5 | ) | (4.6 | ) | (1.4 | ) | ||||||||||||
Valuation allowances |
3.2 | 1.6 | (4.5 | ) | (1.7 | ) | (9.5 | ) | (2.8 | ) | ||||||||||||||
Advance pricing agreement adjustment |
| | 4.9 | 1.9 | | | ||||||||||||||||||
Other |
3.3 | 1.6 | 0.9 | 0.3 | 2.8 | 1.8 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
$ | 75.9 | 37.8 | $ | 97.9 | 36.3 | $ | 117.0 | 34.2 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The Companys effective tax rate for the fiscal year ended June 30, 2012 was 37.8% compared to 36.3% for the fiscal year ended June 30, 2011. The increase in the effective tax rate was primarily due to a $7.4 million one-time tax expense attributable to a valuation allowance on capital tax losses related to the PWI common stock and a write-off of certain state net operating loss carryforwards in fiscal year ended June 30, 2012.
As of June 30, 2012, the Company had approximately $280.3 million of earnings attributable to foreign subsidiaries. The Company considers such earnings as permanently reinvested outside the U.S. and, therefore, provides no additional taxes that could occur upon repatriation. It is not practicable to determine the amount of income taxes payable in the event all such foreign earnings are repatriated.
Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect
80
when such differences are expected to reverse. Significant components of the Companys deferred tax assets and liabilities at June 30, 2012 and 2011 were as follows:
June 30, | ||||||||
2012 | 2011 | |||||||
($ in millions) | ||||||||
Classification: |
||||||||
Current deferred tax assets (included in Other current assets) |
$ | 19.8 | $ | 16.0 | ||||
Long-term deferred tax assets (included in Other non-current assets) |
0.3 | | ||||||
Current deferred tax liabilities (included in Accrued expenses and other current liabilities) |
(0.5 | ) | | |||||
Long-term deferred tax liabilities |
(63.2 | ) | (71.3 | ) | ||||
|
|
|
|
|||||
Net deferred tax liabilities |
$ | (43.6 | ) | $ | (55.3 | ) | ||
|
|
|
|
|||||
Components: |
||||||||
Deferred tax assets: |
||||||||
Accrued expenses not currently deductible |
$ | 3.4 | $ | 4.9 | ||||
Depreciation |
25.1 | 15.8 | ||||||
Compensation and benefits not currently deductible |
49.6 | 43.2 | ||||||
Net operating and capital losses |
33.5 | 36.3 | ||||||
Tax credits |
1.9 | 1.2 | ||||||
Other |
9.4 | 7.2 | ||||||
|
|
|
|
|||||
122.9 | 108.6 | |||||||
Less: Valuation allowances |
(14.7 | ) | (12.1 | ) | ||||
|
|
|
|
|||||
Deferred tax assets, net |
108.2 | 96.5 | ||||||
|
|
|
|
|||||
Deferred tax liabilities: |
||||||||
Goodwill and identifiable intangibles |
126.4 | 123.9 | ||||||
Net deferred expenses |
21.6 | 23.9 | ||||||
Other |
3.8 | 4.0 | ||||||
|
|
|
|
|||||
Deferred tax liabilities |
151.8 | 151.8 | ||||||
|
|
|
|
|||||
Net deferred tax liabilities |
$ | (43.6 | ) | $ | (55.3 | ) | ||
|
|
|
|
The Company has estimated foreign net operating loss carryforwards of approximately $21.7 million as of June 30, 2012 of which $0.6 million expires in 2017 through 2027 and $21.1 million which has an indefinite utilization period. In addition, the Company has estimated U.S. federal net operating loss carryforwards of approximately $63.6 million which expire in 2018 through 2032.
The Company has recorded valuation allowances of $14.7 million and $12.1 million at June 30, 2012 and 2011, respectively, because the Company does not believe that it is more likely than not that it will be able to utilize the deferred tax assets attributable to net operating and capital loss carryforwards of certain subsidiaries to offset future taxable earnings.
For fiscal years 2012 and 2011, the Companys total amounts of unrecognized tax benefits were $62.6 million and $47.0 million, respectively. The change relates to tax positions taken for the current and prior tax year. The amount of the unrecognized tax benefits at June 30, 2012 that, if recognized, would affect the Companys effective tax rate is approximately $22.7 million.
In the next twelve months, the Company expects to decrease its reserve for unrecognized tax benefits by approximately $7.0 million as a result of a transfer pricing settlement for the years 2007 through 2010 and certain state settlements.
81
The following table summarizes the activity related to the Companys unrecognized tax benefits:
Fiscal Year Ended June 30, |
||||||||||||
2012 | 2011 | 2010 | ||||||||||
($ in millions) | ||||||||||||
Beginning balance |
$ | 47.0 | $ | 16.7 | $ | 11.5 | ||||||
Gross increase related to prior period tax positions |
9.2 | 31.4 | 5.2 | |||||||||
Gross increase related to current period tax positions |
6.4 | 2.6 | | |||||||||
Gross decrease related to prior period tax positions Statute expiration |
| (3.7 | ) | | ||||||||
|
|
|
|
|
|
|||||||
Balance at June 30, |
$ | 62.6 | $ | 47.0 | $ | 16.7 | ||||||
|
|
|
|
|
|
The Companys policy with respect to interest and penalties associated with uncertain tax positions is not to include them in income tax expense but include penalties as a component of other accrued expenses and interest in interest expense. During the fiscal years ended June 30, 2012, 2011 and 2010, the Company recognized approximately $1.0 million, $0.8 million and $0.8 million, respectively, in interest and penalties.
The Company is continuously subject to U.S. Federal, state and foreign income tax exams for the periods beginning March 31, 2007 through June 30, 2012.
NOTE 17. CONTRACTUAL COMMITMENTS, CONTINGENCIES, AND OFF-BALANCE SHEET ARRANGEMENTS
In the normal course of business, the Company is subject to various claims and litigation. While the outcome of any claim or litigation is inherently unpredictable, and with the exception of the matter described in the following paragraph, the Company believes that the ultimate resolution of these matters will not, individually or in the aggregate, result in a material impact on its financial condition, results of operations or cash flows.
On January 28, 2010, the Company filed a declaratory action in the U.S. District Court for the District of Delaware (the Delaware District Court) against Inveshare, Inc. (the Defendant) seeking a declaration by the court that Broadridge does not infringe two U.S. patents owned by the Defendant that included claims related to the delivery and distribution of an electronic solicitation. The Companys complaint also alleged that the Defendants patents are invalid and/or are unenforceable due to inequitable conduct. On March 22, 2010, the Defendant answered the Companys complaint and filed a counterclaim against the Company alleging that Broadridge uses a process that infringes one of the patents in the action. In its counterclaim, Defendant is seeking injunctive relief and unspecified damages. This lawsuit is in an early procedural stage, with the Delaware District Court recently issuing its claim construction ruling on April 11, 2012; however, due to the limited scope of this matter, the Company believes that the outcome of this litigation would not result in a material adverse impact on its consolidated financial condition, results of operations, or cash flows.
The Company entered into a data center outsourcing services agreement with Automatic Data Processing, Inc. (ADP) before its spin-off from ADP in March 2007 under which ADP provided the Company with data center services consistent with the services provided to the Company immediately before the spin-off, provided that the operation of the data center is the sole responsibility of ADP. Among the principal services provided by the data center are information technology services and service delivery network services. The agreement with ADP provided for increasing volumes and the addition of new services over the term. Under the agreement, ADP was responsible for hosting the mainframe, midrange, open systems, and networks. Additionally, systems engineering, network engineering, hardware engineering, network operations, data center operations, application change management, and data center disaster recovery services were managed by ADP. The March 2007 agreement expired on June 30, 2012. The Company entered into a short-term extension of the agreement which expires on August 31, 2012. The Company expects to incur $6.3 million in costs in connection with the services
82
to be provided during this term extension. For the fiscal years ended June 30, 2012, 2011 and 2010, the Company recorded expenses of $111.4 million, $110.4 million and $104.8 million, respectively, in the Consolidated Statements of Earnings related to the March 2007 agreement.
In March 2010, the Company and International Business Machines Corporation (IBM) entered into an Information Technology Services Agreement (the IT Services Agreement), under which IBM is providing certain aspects of the Companys information technology infrastructure that are currently provided under a data center outsourcing services agreement with ADP. Under the IT Services Agreement, IBM provides a broad range of technology services to the Company including supporting its mainframe, midrange, server, network and data center operations, as well as providing disaster recovery services. The Company has the option of incorporating additional services into the agreement over time. The migration of the data center processing from ADP to IBM was substantially completed in June 2012, and is expected to be complete by August 31, 2012. The IT Services Agreement expires on June 30, 2022. The Company has the right to renew the initial term of the IT Services Agreement for up to one additional 12-month term. Commitments remaining under this agreement are $552.6 million through fiscal year 2022, the final year of the contract. For the fiscal years ended June 30, 2012 and 2011, the Company recorded expenses of $24.6 million and $6.3 million, respectively, in the Consolidated Statements of Earnings related to this agreement. The Company capitalized $47.0 million and $5.7 million of costs related to the build out of the IBM data center in Other non-current assets in fiscal years 2012 and 2011, respectively.
The Company has obligations under various facilities and equipment leases, software license agreements and data center outsourcing services agreements. Total expense under the above agreements was approximately $203.4 million, $181.3 million and $162.1 million in fiscal years 2012, 2011, and 2010, respectively, with minimum commitments under these obligations at June 30, 2012 as follows:
Years Ending June 30, |
($ in millions) | |||
2013 |
$ | 109.8 | ||
2014 |
88.1 | |||
2015 |
78.7 | |||
2016 |
76.0 | |||
2017 |
72.6 | |||
Thereafter |
273.6 | |||
|
|
|||
$ | 698.8 | |||
|
|
In addition to fixed rentals, certain leases require payment of maintenance and real estate taxes and contain escalation provisions based on future adjustments in price indices.
As of June 30, 2012, the Company had purchase commitments of approximately $2.9 million comprised primarily of maintenance contracts, the majority of which relate to fiscal year 2013.
As of June 30, 2012, the Company had an outstanding letter of credit for $0.7 million. This letter of credit was issued in May 2007 to guarantee certain claim payments to a third-party insurance company in the event the Company does not pay its portion of the claims. No amounts were drawn on this letter of credit.
In addition, the Company has obligations under various facilities and equipment leases and software license agreements.
It is not the Companys business practice to enter into off-balance sheet arrangements. However, the Company is exposed to market risk from changes in foreign currency exchange rates that could impact its financial position, results of operations, and cash flows. The Company manages its exposure to these market risks through its regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. The Company may use derivative financial instruments as risk management tools and not for trading purposes. The Company was not a party to any derivative financial instruments as of
83
June 30, 2012 and June 30, 2011, respectively. In the normal course of business, the Company also enters into contracts in which it makes representations and warranties that relate to the performance of the Companys products and services. The Company does not expect any material losses related to such representations and warranties, or collateral arrangements.
Our operations outsourcing and mutual fund processing services are performed by registered broker-dealers. As registered broker-dealers and members of FINRA, they are subject to regulations concerning many aspects of their business, including trade practices, capital requirements, record retention, money laundering prevention, the protection of customer funds and customer securities, and the supervision of the conduct of directors, officers and employees. A failure to comply with any of these laws, rules or regulations could result in censure, fine, the issuance of cease-and-desist orders, or the suspension or revocation of SEC or FINRA authorization granted to allow the operation of their businesses or disqualification of their directors, officers or employees. In addition, as registered broker-dealers, they are required to participate in the Securities Investor Protection Corporation (SIPC) for the benefit of customers. In addition, MG Trust Company, LLC (MG Trust), a subsidiary of Matrix, is a Colorado State non-depository trust company whose primary business is to provide cash agent, custodial and directed or non-discretionary trust services to institutional customers. MG Trust operates pursuant to the rules and regulations of the Colorado Division of Banking.
NOTE 18. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Comprehensive income is a measure of income that includes both Net earnings and Other comprehensive income (loss). Other comprehensive income (loss) results from items deferred on the Consolidated Balance Sheets in Stockholders equity. Other comprehensive income (loss) was $(12.6) million, $17.5 million and $(8.3) million in fiscal years 2012, 2011 and 2010, respectively. The accumulated balances for each component of Other comprehensive income (loss) are as follows:
June 30, | ||||||||||||
2012 | 2011 | 2010 | ||||||||||
($ in millions) | ||||||||||||
Currency translation adjustments |
$ | 9.1 | $ | 22.9 | $ | 2.2 | ||||||
Unrealized (gain) loss on available-for-sale securities |
0.2 | (2.1 | ) | | ||||||||
Pension and post-retirement liability adjustment, net of taxes of $2.3, $3.1 and $2.4 at June 30, 2012, 2011 and 2010, respectively |
(5.8 | ) | (4.7 | ) | (3.6 | ) | ||||||
|
|
|
|
|
|
|||||||
Accumulated other comprehensive income (loss) |
$ | 3.5 | $ | 16.1 | $ | (1.4 | ) | |||||
|
|
|
|
|
|
NOTE 19. FINANCIAL DATA BY SEGMENT
The Company classifies its operations into the following two reportable segments: (1) Investor Communication Solutions and (2) Securities Processing Solutions. See Note 1, Basis of Presentation for a further discussion of the Companys reportable segments. The primary components of Other are the elimination of intersegment revenues and profits as well as certain unallocated expenses. Foreign exchange is a reconciling item between the actual foreign exchange rates and fiscal year 2012 budgeted foreign exchange rates. The prior fiscal years reportable segment Revenues and Earnings from continuing operations before income taxes have been adjusted to reflect updated fiscal year 2012 budgeted foreign exchange rates, this adjustment represents a reconciling difference to Revenues and Earnings from continuing operations before income taxes.
Certain corporate expenses, as well as certain centrally managed expenses, are allocated based upon budgeted amounts in a reasonable manner. Because the Company compensates the management of its various businesses on, among other factors, segment profit, the Company may elect to record certain segment related expense items of an unusual or non-recurring nature in Other rather than reflect such items in segment profit.
84
For the year ended June 30, 2010, Assets included in Other includes the securities clearing activities formerly reported in the Clearing and Outsourcing Solutions segment that are now reported as assets of discontinued operations.
Investor Communication Solutions |
Securities Processing Solutions |
Other | Foreign Exchange |
Total | ||||||||||||||||
($ in millions) | ||||||||||||||||||||
Year ended June 30, 2012 |
||||||||||||||||||||
Revenues |
$ | 1,634.0 | $ | 655.5 | $ | 0.5 | $ | 13.5 | $ | 2,303.5 | ||||||||||
Earnings (loss) from continuing operations before income taxes |
242.8 | 91.1 | (146.8 | ) | 13.8 | 200.9 | ||||||||||||||
Assets |
1,018.3 | 718.8 | 250.5 | | 1,987.6 | |||||||||||||||
Capital expenditures |
19.9 | 9.2 | 4.7 | | 33.8 | |||||||||||||||
Depreciation and amortization |
22.8 | 22.2 | 6.0 | | 51.0 | |||||||||||||||
Amortization of acquired intangibles |
16.3 | 5.9 | | | 22.2 | |||||||||||||||
Amortization of other assets |
3.1 | 15.7 | | | 18.8 | |||||||||||||||
Year ended June 30, 2011 |
||||||||||||||||||||
Revenues |
$ | 1,559.4 | $ | 593.6 | $ | 0.2 | $ | 13.7 | $ | 2,166.9 | ||||||||||
Earnings (loss) from continuing operations before income taxes |
213.4 | 87.4 | (41.3 | ) | 10.2 | 269.7 | ||||||||||||||
Assets |
1,099.6 | 574.1 | 230.3 | | 1,904.0 | |||||||||||||||
Capital expenditures |
18.6 | 8.5 | 2.1 | | 29.2 | |||||||||||||||
Depreciation and amortization |
22.8 | 13.8 | 6.5 | | 43.1 | |||||||||||||||
Amortization of acquired intangibles |
10.9 | 3.4 | | | 14.3 | |||||||||||||||
Amortization of other assets |
2.6 | 12.3 | | | 14.9 | |||||||||||||||
Year ended June 30, 2010 |
||||||||||||||||||||
Revenues |
$ | 1,669.6 | $ | 535.9 | $ | 2.4 | $ | 1.3 | $ | 2,209.2 | ||||||||||
Earnings (loss) from continuing operations before income taxes |
272.8 | 99.3 | (34.1 | ) | 4.1 | 342.1 | ||||||||||||||
Assets |
735.5 | 650.5 | 408.4 | | 1,794.4 | |||||||||||||||
Capital expenditures |
26.8 | 12.1 | 3.8 | | 42.7 | |||||||||||||||
Depreciation and amortization |
20.6 | 10.0 | 6.2 | | 36.8 | |||||||||||||||
Amortization of acquired intangibles |
2.6 | 1.9 | | | 4.5 | |||||||||||||||
Amortization of other assets |
2.3 | 13.4 | | | 15.7 |
Revenues and assets by geographic area are as follows (assets for the U.S. for the fiscal year ended June 30, 2011 includes the securities clearing activities formerly reported in the Clearing and Outsourcing Solutions segment that were reported as assets of discontinued operations):
United States |
Canada | United Kingdom |
Other | Total | ||||||||||||||||
($ in millions) | ||||||||||||||||||||
Year ended June 30, 2012 |
||||||||||||||||||||
Revenues |
$ | 1,997.8 | $ | 243.8 | $ | 24.3 | $ | 37.6 | $ | 2,303.5 | ||||||||||
Assets |
$ | 1,700.0 | $ | 108.8 | $ | 114.0 | $ | 64.8 | $ | 1,987.6 | ||||||||||
Year ended June 30, 2011 |
||||||||||||||||||||
Revenues |
$ | 1,857.8 | $ | 251.5 | $ | 22.3 | $ | 35.3 | $ | 2,166.9 | ||||||||||
Assets |
$ | 1,639.7 | $ | 85.9 | $ | 115.4 | $ | 63.0 | $ | 1,904.0 | ||||||||||
Year ended June 30, 2010 |
||||||||||||||||||||
Revenues |
$ | 1,929.6 | $ | 241.9 | $ | 13.9 | $ | 23.8 | $ | 2,209.2 | ||||||||||
Assets |
$ | 1,560.1 | $ | 67.0 | $ | 121.3 | $ | 46.0 | $ | 1,794.4 |
85
NOTE 20. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Summarized quarterly results of operations for the fiscal years ended June 30, 2012 and 2011 are as follows:
First Quarter |
Second Quarter |
Third Quarter |
Fourth Quarter |
|||||||||||||
($ in millions, except per share amounts) | ||||||||||||||||
Year ended June 30, 2012 |
||||||||||||||||
Revenues |
$ | 476.4 | $ | 479.8 | $ | 547.0 | $ | 800.3 | ||||||||
Gross profit |
93.6 | 97.2 | 126.2 | 271.4 | ||||||||||||
Earnings from continuing operations before income taxes |
26.2 | 10.6 | 28.8 | 135.3 | ||||||||||||
Net earnings |
16.7 | 6.8 | 16.7 | 83.4 | ||||||||||||
Basic EPS from continuing operations |
0.14 | 0.05 | 0.15 | 0.67 | ||||||||||||
Basic EPS |
0.14 | 0.05 | 0.14 | 0.67 | ||||||||||||
Diluted EPS from continuing operations |
0.13 | 0.05 | 0.14 | 0.65 | ||||||||||||
Diluted EPS |
0.13 | 0.05 | 0.13 | 0.65 | ||||||||||||
Year ended June 30, 2011 |
||||||||||||||||
Revenues |
$ | 421.4 | $ | 442.3 | $ | 527.1 | $ | 776.1 | ||||||||
Gross profit |
84.8 | 85.7 | 120.5 | 258.8 | ||||||||||||
Earnings from continuing operations before income taxes |
20.9 | 16.5 | 51.1 | 181.2 | ||||||||||||
Net earnings |
13.3 | 10.4 | 29.7 | 116.2 | ||||||||||||
Basic EPS from continuing operations |
0.11 | 0.08 | 0.26 | 0.93 | ||||||||||||
Basic EPS |
0.11 | 0.08 | 0.24 | 0.94 | ||||||||||||
Diluted EPS from continuing operations |
0.10 | 0.08 | 0.25 | 0.91 | ||||||||||||
Diluted EPS |
0.10 | 0.08 | 0.23 | 0.92 |
* * * * * * *
86
Broadridge Financial Solutions, Inc.
Schedule IIValuation and Qualifying Accounts
($ in thousands)
Column A |
Column B | Column C | Column D | Column E | ||||||||||||
Balance at beginning of period |
Additions charged to costs and expenses |
Deductions | Balance at end of period |
|||||||||||||
Fiscal year ended June 30, 2012: |
||||||||||||||||
Allowance for doubtful accounts: |
||||||||||||||||
Accounts receivable, net |
$ | 2,010 | $ | 5,076 | $ | (547 | ) | $ | 6,539 | |||||||
Securities clearing receivables |
$ | | $ | | $ | | $ | | ||||||||
Deferred tax valuation allowance |
$ | 12,100 | $ | 2,600 | $ | | $ | 14,700 | ||||||||
Fiscal year ended June 30, 2011: |
||||||||||||||||
Allowance for doubtful accounts: |
||||||||||||||||
Accounts receivable, net |
$ | 2,008 | $ | 2,216 | $ | (2,214 | ) | $ | 2,010 | |||||||
Securities clearing receivables |
$ | | $ | | $ | | $ | | ||||||||
Deferred tax valuation allowance |
$ | 15,900 | $ | | $ | (3,800 | ) | $ | 12,100 | |||||||
Fiscal year ended June 30, 2010: |
||||||||||||||||
Allowance for doubtful accounts: |
||||||||||||||||
Accounts receivable, net |
$ | 2,251 | $ | 3,016 | $ | (3,259 | ) | $ | 2,008 | |||||||
Securities clearing receivables |
$ | 2,000 | $ | | $ | (2,000 | ) | $ | | |||||||
Deferred tax valuation allowance |
$ | 25,700 | $ | | $ | (9,800 | ) | $ | 15,900 |
87
ITEM 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
ITEM 9A. | Controls and Procedures. |
Management Report
Attached as Exhibits 31.1 and 31.2 to this Form 10-K are certifications of Broadridges Chief Executive Officer and Chief Financial Officer, which are required by Rule 13a-14(a) of the Exchange Act, as amended. This Controls and Procedures section should be read in conjunction with the Deloitte & Touche LLP audit and attestation of the Companys internal control over financial reporting that appears in Item 8 Financial Statements and Supplementary Data in this Annual Report on Form 10-K and is hereby incorporated herein by reference.
Managements Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer as of June 30, 2012, evaluated the effectiveness of our disclosure controls as defined in Rule 13a-15(e) under the Exchange Act. The Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of June 30, 2012 were effective to ensure that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized, and reported within the time periods specified in the SECs rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure.
Managements Report on Internal Control over Financial Reporting
It is the responsibility of Broadridges management to establish and maintain effective internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act as defined in Rule 13a-15(f) under the Exchange Act). Internal control over financial reporting is designed to provide reasonable assurance to Broadridges management and board of directors regarding the preparation of reliable financial statements for external purposes in accordance with generally accepted accounting principles.
Broadridges internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Broadridge; (ii) 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 Broadridge are being made only in accordance with authorizations of management and directors of Broadridge; and (iii) provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of Broadridges assets that could have a material effect on the financial statements of Broadridge.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management has performed an assessment of the effectiveness of Broadridges internal control over financial reporting as of June 30, 2012 based upon criteria set forth in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management determined that Broadridges internal control over financial reporting was effective as of June 30, 2012.
88
Deloitte & Touche LLP, the Companys independent registered public accounting firm, has audited the effectiveness of the Companys internal over financial reporting and has issued an attestation report on the effectiveness of the Companys internal control over financial reporting, which attestation report appears in Item 8 Financial Statements and Supplementary Data in this Annual Report on Form 10-K.
/S/ RICHARD J. DALY | ||
Richard J. Daly | ||
Chief Executive Officer | ||
/S/ DAN SHELDON | ||
Dan Sheldon | ||
Vice President, Chief Financial Officer |
Lake Success, New York
August 9, 2012
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended June 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. | Other Information. |
None.
89
ITEM 10. | Directors. Executive Officers and Corporate Governance. |
We incorporate by reference the information responsive to this Item appearing in our Proxy Statement.
ITEM 11. | Executive Compensation. |
We incorporate by reference the information responsive to this Item appearing in our Proxy Statement.
ITEM 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
We incorporate by reference the information responsive to this Item appearing in our Proxy Statement.
ITEM 13. | Certain Relationships and Related Transactions, and Director Independence. |
We incorporate by reference the information responsive to this Item appearing in our Proxy Statement.
ITEM 14. | Principal Accountant Fees and Services. |
We incorporate by reference the information responsive to this Item appearing in our Proxy Statement.
90
ITEM 15. | Exhibits and Financial Statement Schedules. |
(a) | The following documents are filed as part of this Annual Report on Form 10-K: |
1. | Financial Statements. |
The Consolidated Financial Statements are listed under Item 8 of this Annual Report on Form 10-K. See Index to Financial Statements and Financial Statement Schedule.
2. | Financial Statement Schedule. |
Schedule IIValuation and Qualifying Accounts is listed under Item 8 of this Annual Report on Form 10-K. See Index to Financial Statements and Financial Statement Schedule.
3. | Exhibits. |
The Exhibits filed as part of this Annual Report on Form 10-K are listed on the Exhibit Index, which Exhibit Index is incorporated in this Annual Report on Form 10-K by reference.
91
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned hereunto duly authorized.
Date: August 9, 2012
BROADRIDGE FINANCIAL SOLUTIONS, INC. | ||
By: | /s/ RICHARD J. DALY | |
Name: | Richard J. Daly | |
Title: | Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature |
Title |
Date | ||
/S/ RICHARD J. DALY Richard J. Daly |
Chief Executive Officer and Director (Principal Executive Officer) | August 9, 2012 | ||
/S/ DAN SHELDON Dan Sheldon |
Vice President, Chief Financial Officer (Principal Financial and Accounting Officer) | August 9, 2012 | ||
/S/ LESLIE A. BRUN Leslie A. Brun |
Chairman of the Board | August 9, 2012 | ||
/S/ ROBERT N. DUELKS Robert N. Duelks |
Director | August 9, 2012 | ||
/S/ RICHARD J. HAVILAND Richard J. Haviland |
Director | August 9, 2012 | ||
/S/ SANDRA S. JAFFEE Sandra S. Jaffee |
Director | August 9, 2012 | ||
/S/ ALEXANDRA LEBENTHAL Alexandra Lebenthal |
Director | August 9, 2012 | ||
/S/ STUART R. LEVINE Stuart R. Levine |
Director | August 9, 2012 | ||
/S/ THOMAS J. PERNA Thomas J. Perna |
Director | August 9, 2012 | ||
/S/ ALAN J. WEBER Alan J. Weber |
Director | August 9, 2012 |
92
EXHIBIT INDEX
Exhibit |
Description of Exhibit(1) | |
2.1 | Asset Purchase Agreement, dated as of November 2, 2009, by and among Broadridge Financial Solutions, Inc., Ridge Clearing & Outsourcing Solutions, Inc., Penson Worldwide, Inc., and Penson Financial Services, Inc. (incorporated by reference to Exhibit 2.1 to Form 10-Q filed on February 4, 2010).(2)(3) | |
2.2 | Stock Purchase Agreement, dated as of November 23, 2010, by and among the sellers named therein, Broadridge Investor Communication Solutions, Inc. and Broadridge Financial Solutions, Inc. (incorporated by reference to Exhibit 2.1 to Form 8-K/A filed on May 19, 2011).(2)(3) | |
2.3 | Escrow Agreement, dated as of January 7, 2011, by and among Capital One, N.A., Broadridge Investor Communication Solutions, Inc., the sellers named therein and Bluff Point Associates Corp. (incorporated by reference to Exhibit 2.2 to Form 8-K/A filed on May 19, 2011).(3) | |
3.1 | Certificate of Incorporation of Broadridge Financial Solutions, Inc. (incorporated by reference to Exhibit 3.1 to Form 8-K filed on April 2, 2007). | |
3.2 | Amended and Restated By-laws of Broadridge Financial Solutions, Inc. (incorporated by reference to Exhibit 3.2 to Form 8-K filed on June 7, 2007). | |
4.1 | Indenture, dated as of May 29, 2007, by and between Broadridge Financial Solutions, Inc. and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.1 to Form 8-K filed on May 30, 2007). | |
4.2 | First Supplemental Indenture, dated as of May 29, 2007, by and between Broadridge Financial Solutions, Inc. and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.2 to Form 8-K filed on May 30, 2007). | |
4.3 | Form of 6.125% Senior Note due 2017 dated May 29, 2007 (incorporated by reference to Exhibit 4.3 to Form 8-K filed on May 30, 2007). | |
10.1 | Separation and Distribution Agreement, dated as of March 20, 2007, between Automatic Data Processing, Inc. and Broadridge Financial Solutions, LLC (incorporated by reference to Exhibit 10.1 to Form 8-K filed on March 21, 2007). | |
10.2 | Tax Allocation Agreement, dated as of March 29, 2007, between Automatic Data Processing, Inc. and Broadridge Financial Solutions, Inc. (incorporated by reference to Exhibit 10.1 to Form 8-K filed on April 2, 2007). | |
10.3 | Transition Services Agreement, dated as of March 29, 2007, between Automatic Data Processing, Inc. and Broadridge Financial Solutions, Inc. (incorporated by reference to Exhibit 10.2 to Form 8-K filed on April 2, 2007). | |
10.4 | Data Center Outsourcing Services Agreement, dated as of March 29, 2007, between Automatic Data Processing, Inc. and Broadridge Financial Solutions, Inc. (incorporated by reference to Exhibit 10.3 to Form 8-K filed on April 2, 2007). | |
10.5 | Intellectual Property Transfer Agreement, dated as of March 29, 2007, between Automatic Data Processing, Inc. and Broadridge Financial Solutions, Inc. (incorporated by reference to Exhibit 10.4 to Form 8-K filed on April 2, 2007). | |
10.6 | Employee Matters Agreement, dated as of March 29, 2007, between Automatic Data Processing, Inc. and Broadridge Financial Solutions, Inc. (incorporated by reference to Exhibit 10.5 to Form 8-K filed on April 2, 2007). | |
10.7 | Broadridge Financial Solutions, Inc. Change in Control Severance Plan for Corporate Officers (incorporated by reference to Exhibit 10.6 to Form 8-K filed on April 2, 2007). |
93
Exhibit |
Description of Exhibit(1) | |
10.8 | Amendment No. 1 to the Broadridge Financial Solutions, Inc. Change in Control Severance Plan for Corporate Officers (incorporated by reference to Exhibit 10.26 to Form 10-K/A filed on October 27, 2010). | |
10.9 | Amended and Restated Supplemental Officers Retirement Plan (incorporated by reference to Exhibit 10.27 to Form 10-K/A filed on October 27, 2010). | |
10.10 | Change in Control Enhancement Agreement for Richard J. Daly (incorporated by reference to Exhibit 10.8 to Form 8-K filed on April 2, 2007). | |
10.11 | Amendment No. 1 to Change in Control Enhancement Agreement for Richard J. Daly (incorporated by reference to Exhibit 10.28 to Form 10-K/A filed on October 27, 2010). | |
10.12 | Change in Control Enhancement Agreement for John Hogan (incorporated by reference to Exhibit 10.9 to Form 8-K filed on April 2, 2007). | |
10.13 | Amendment No. 1 to Change in Control Enhancement Agreement for John Hogan (incorporated by reference to Exhibit 10.29 to Form 10-K/A filed on October 27, 2010). | |
10.14 | Broadridge Financial Solutions, Inc. 2007 Omnibus Award Plan (Amended and Restated effective August 4, 2008) (incorporated by reference to Exhibit 10.1 to Form 8-K filed on November 14, 2008). | |
10.15 | Broadridge Financial Solutions, Inc. 2007 Omnibus Award Plan (Amended and Restated effective August 4, 2008, as amended effective August 4, 2009) (incorporated by reference to Exhibit 10.1 to Form 8-K filed on November 20, 2009). | |
10.16 | Broadridge Financial Solutions, Inc. 2007 Omnibus Award Plan (Amended and Restated effective August 4, 2008, as amended effective August 4, 2009 and August 3, 2010) (incorporated by reference to Exhibit 10.1 to Form 8-K filed on November 19, 2010). | |
10.17 | Five-Year Credit Agreement, dated as of March 29, 2007, by and among Broadridge Financial Solutions, Inc., JPMorgan Chase Bank, N.A., as Administrative Agent, J.P. Morgan Europe Limited, as London Agent, Citibank, N.A., as Syndication Agent, and the Lenders party thereto (incorporated by reference to Exhibit 10.12 to Form 8-K filed on April 2, 2007). | |
10.18 | Interim Credit Agreement, dated as of March 29, 2007, by and among Broadridge Financial Solutions, Inc., JPMorgan Chase Bank, N.A., as Administrative Agent, Citibank, N.A., as Syndication Agent, and the Lenders party thereto (incorporated by reference to Exhibit 10.13 to Form 8-K filed on April 2, 2007). | |
10.19 | Underwriting Agreement, dated as of May 23, 2007, by and among Broadridge Financial Solutions, Inc. and Citigroup Global Markets Inc. and J.P. Morgan Securities Inc., as representatives of the underwriters party thereto (incorporated by reference to Exhibit 1.1 to Form 8-K filed on May 30, 2007). | |
10.20 | Revolving Credit Agreement, dated as of August 5, 2009, by and among Ridge & Outsourcing Solutions, Inc., Broadridge Financial Solutions, Inc., as guarantor, and U.S. Bank National Association (incorporated by reference to Exhibit 10.1 to Form 8-K filed on August 6, 2009). | |
10.21 | Collateral Pledge Agreement, dated as of August 5, 2009, by and between Ridge & Outsourcing Solutions, Inc. and U.S. Bank National Association (incorporated by reference to Exhibit 10.2 to Form 8-K filed on August 6, 2009). | |
10.22 | Master Services Agreement, dated as of November 2, 2009, by and between Broadridge Financial Solutions, Inc. and Penson Worldwide, Inc. (incorporated by reference to Exhibit 10.1 to Form 10-Q/A filed on June 10, 2010).(3) |
94
Exhibit |
Description of Exhibit(1) | |
10.23 | Offer Letter by and between Broadridge Financial Solutions, Inc. and Timothy Gokey, dated as of March 15, 2010, (incorporated by reference to Exhibit 10.1 to Form 10-Q filed on May 10, 2010). | |
10.24 | Amendment No. 1, dated as of September 13, 2010, to the Offer Letter by and between Broadridge Financial Solutions, Inc. and Timothy Gokey, dated as of March 15, 2010 (incorporated by reference to Exhibit 10.1 to Form 10-Q filed on November 4, 2010). | |
10.25 | Information Technology Services Agreement, dated as of March 31, 2010, by and between International Business Machines Corporation and Broadridge Financial Solutions, Inc. (incorporated by reference to Exhibit 10.2 to Form 10-Q filed on May 10, 2010).(3) | |
10.26 | Amendment Agreement, dated as of June 25, 2010, by and among SAI Holdings, Inc., Penson Financial Services, Inc., Penson Worldwide, 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 (incorporated by reference to Exhibit 10.22 to Form 10-K filed on August 12, 2010).(3) | |
10.27 | Amendment, Assignment and Assumption Agreement, dated as of June 25, 2010, by and among SAI Holdings, Inc., Penson Financial Services, Inc., Penson Worldwide, 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 (incorporated by reference to Exhibit 10.23 to Form 10-K filed on August 12, 2010).(2)(3) | |
10.28 | Amendment No. 1 to the Information Technology Services Agreement, dated as of June 25, 2010, by and between International Business Machines Corporation and Broadridge Financial Solutions, Inc. (incorporated by reference to Exhibit 10.24 to Form 10-K filed on August 12, 2010).(3) | |
10.29 | 2009 Director Deferred Compensation Plan (incorporated by reference to Exhibit 10.30 to Form 10-K/A filed on October 27, 2010). | |
10.30 | Broadridge Financial Solutions, Inc. Director Deferred Compensation Program (Amended and Restated Effective November 17, 2010) (incorporated by reference to Exhibit 10.1 to Form 10-Q filed on February 8, 2011). | |
10.31 | Broadridge Financial Solutions, Inc. Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.31 to Form 10-K/A filed on October 27, 2010). | |
10.32 | Broadridge Financial Solutions, Inc. Executive Deferred Compensation Plan (Amended and Restated effective June 15, 2011). | |
10.33 | Amendment No. 3 to the Information Technology Services Agreement, dated as of April 15, 2011, by and between International Business Machines Corporation and Broadridge Financial Solutions, Inc. | |
10.34 | Amendment No. 5 to the Information Technology Services Agreement, dated as of June 11, 2011, by and between International Business Machines Corporation and Broadridge Financial Solutions, Inc.(3) | |
10.35 | Amendment to Broadridge Financial Solutions, Inc., 2007 Omnibus Award Plan effective August 2, 2011 (incorporated by reference to Exhibit 10.1 to Form 10-Q filed on November 3, 2011). | |
10.36 | Amendment Agreement among SAI Holdings, Inc., Penson Financial Services, Inc., Penson Worldwide, Inc., Penson Financial Services Canada Inc., Broadridge Financial Solutions, Inc., Ridge Clearing & Outsourcing Solutions, Inc., Broadridge Solutions (Canada) Inc., and Ridge Clearing & Outsourcing Solutions Limited (incorporated by reference to Exhibit 10.2 to Form 10-Q filed on November 3, 2011). |
95
Exhibit |
Description of Exhibit(1) | |
10.37 | Amended and Restated Seller Note, effective as of July 1, 2011, issued by Penson Worldwide, Inc. to Broadridge Financial Solutions, Inc. (incorporated by reference to Exhibit 10.3 to Form 10-Q filed November 3, 2011). | |
10.38 | Amendment No. 7 to the Information Technology Services Agreement dated October 10, 2011 by and between International Business Machines Corporation and Broadridge Financial Solutions, Inc. (incorporated by reference to Exhibit 10.1 to Form 10-Q filed February 7, 2012). (3) | |
10.39 | Purchase and Sale Agreement dated as of May 31, 2012 by and among Broadridge Financial Solutions, Inc., Broadridge Securities Processing Solutions, Inc. and Apex Clearing Holdings LLC.(2) | |
10.40 | Termination and Mutual Release Agreement entered into on June 5, 2012 by and among Broadridge Financial Solutions, Inc., Ridge Clearing & Outsourcing Solutions, Inc., Broadridge Financial Solutions (Canada), Inc., Penson Worldwide, Inc., Penson Financial Services, Inc., and Penson Financial Services Canada, Inc. | |
10.41 | Master Services Agreement entered into on June 5, 2012 between Broadridge Financial Solutions, Inc. and Apex Clearing Corporation.(3) | |
12.1 | Computation of Ratio of Earnings to Fixed Charges. | |
14.1 | Code of Ethics for the Companys Principal Executive Officer and Senior Financial Officers (incorporated by reference to Exhibit 99.1 to Form 8-K filed on August 2, 2007). | |
21.1 | Subsidiaries of the Company. | |
23.1 | Consent of Independent Registered Public Accounting Firm. | |
31.1 | Certification of the Chief Executive Officer of Broadridge Financial Solutions, Inc., pursuant to Rule 13a-14 of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of the Chief Financial Officer of Broadridge Financial Solutions, Inc., pursuant to Rule 13a-14 of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of the Chief Executive Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification of the Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101 | The following financial statements from the Broadridge Financial Solutions, Inc. Annual Report on Form 10-K for the fiscal years ended June 30, 2011, 2010 and 2009, formatted in eXtensible Business Reporting Language (XBRL): (i) consolidated statements of earnings for the fiscal years ended June 30, 2011, 2010 and 2009, (ii) consolidated balance sheets as of June 30, 2011 and 2010, (iii) consolidated statements of cash flows for the fiscal years ended June 30, 2011, 2010 and 2009, (iv) consolidated statements of stockholders equity for the fiscal years ended June 30, 2011, 2010 and 2009 and (v) the notes to the consolidated financial statements. |
(1) | The SEC File No. for the Companys Form 8-K Reports referenced is 001-33220. |
(2) | Schedules to the Asset Purchase Agreement filed as Exhibit 2.1, as amended by the Amendment, Assignment and Assumption Agreement filed as Exhibit 10.23, and the Stock Purchase Agreement filed as Exhibit 2.2, and the Purchase and Sale Agreement filed as Exhibit 10.39 have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Registrant hereby undertakes to furnish supplemental copies of any omitted schedules upon request by the Securities and Exchange Commission. |
(3) | Certain Confidential Information contained in this Exhibit was omitted by means of redacting a portion of the text and replacing it with an asterisk. This Exhibit has been filed separately with the Secretary of the Securities and Exchange Commission without the redaction pursuant to a Confidential Treatment Request under Rule 24b-2 of the Securities Exchange Act of 1934, as amended. |
96
EXHIBIT 10.39
EXECUTION COPY
PURCHASE AND SALE AGREEMENT
BY AND AMONG
BROADRIDGE FINANCIAL SOLUTIONS, INC.,
BROADRIDGE SECURITIES PROCESSING SOLUTIONS, INC.
And
APEX CLEARING HOLDINGS LLC
Dated as of May 31, 2012
TABLE OF CONTENTS
Page | ||||||
ARTICLE I | ||||||
DEFINITIONS | ||||||
SECTION 1.1 |
DEFINITIONS OF CERTAIN DEFINED TERMS |
2 | ||||
SECTION 1.2 |
INTERPRETATION |
7 | ||||
ARTICLE II | ||||||
PURCHASE AND SALE OF SHARES | ||||||
SECTION 2.1 |
PURCHASE AND SALE OF SHARES |
7 | ||||
SECTION 2.2 |
PURCHASE PRICE |
8 | ||||
SECTION 2.3 |
CLOSING |
8 | ||||
ARTICLE III | ||||||
REPRESENTATIONS AND WARRANTIES OF TRANSFEROR | ||||||
SECTION 3.1 |
REPRESENTATIONS AND WARRANTIES OF TRANSFEROR |
8 | ||||
ARTICLE IV | ||||||
REPRESENTATIONS AND WARRANTIES OF TRANSFEREE | ||||||
SECTION 4.1 |
REPRESENTATIONS AND WARRANTIES OF TRANSFEREE |
16 | ||||
ARTICLE V | ||||||
COVENANTS OF THE PARTIES | ||||||
SECTION 5.1 |
TRANSFEREES COVENANTS |
18 | ||||
SECTION 5.2 |
EFFECT OF INVESTIGATIONS |
18 | ||||
SECTION 5.3 |
TRANSFERORS COVENANTS |
18 | ||||
SECTION 5.4 |
TAXES |
19 | ||||
SECTION 5.5 |
PURSUIT OF CLAIM BY TRANSFEROR |
21 | ||||
SECTION 5.6 |
TRANSFER OF EXCLUDED COMPANY ASSETS AND LIABILITIES TO TRANSFEROR |
21 | ||||
SECTION 5.7 |
PRESS RELEASES, ETC. |
22 | ||||
SECTION 5.8 |
EXPENSES INCIDENT TO THIS AGREEMENT |
22 | ||||
SECTION 5.9 |
CONFIDENTIALITY |
22 | ||||
ARTICLE VI | ||||||
CONDITIONS PRECEDENT TO THE CLOSING | ||||||
SECTION 6.1 |
CONDITIONS TO EACH PARTYS OBLIGATIONS |
23 |
-i-
Page | ||||||
SECTION 6.2 |
CONDITIONS TO TRANSFEREES OBLIGATIONS |
23 | ||||
SECTION 6.3 |
CONDITIONS TO TRANSFERORS OBLIGATIONS |
25 | ||||
ARTICLE VII | ||||||
TERMINATION | ||||||
SECTION 7.1 |
TERMINATION |
26 | ||||
SECTION 7.2 |
EFFECT OF TERMINATION |
26 | ||||
ARTICLE VIII | ||||||
INDEMNIFICATION | ||||||
SECTION 8.1 |
INDEMNIFICATION BY TRANSFEROR |
26 | ||||
SECTION 8.2 |
INDEMNIFICATION BY TRANSFEREE |
28 | ||||
SECTION 8.3 |
SURVIVAL |
28 | ||||
SECTION 8.4 |
THIRD PARTY CLAIMS |
29 | ||||
SECTION 8.5 |
TREATMENT OF MATERIALITY |
30 | ||||
SECTION 8.6 |
WAIVER OF RIGHTS TO SUBROGATION |
30 | ||||
SECTION 8.7 |
INVESTIGATION |
30 | ||||
SECTION 8.8 |
CALCULATION OF LOSSES |
30 | ||||
SECTION 8.9 |
LIMITATION ON LOSSES |
30 | ||||
SECTION 8.10 |
SETOFF |
31 | ||||
SECTION 8.11 |
NON-THIRD PARTY CLAIMS |
31 | ||||
SECTION 8.12 |
LIMITATIONS ON REMEDIES |
31 | ||||
ARTICLE IX | ||||||
MISCELLANEOUS | ||||||
SECTION 9.1 |
WAIVERS |
31 | ||||
SECTION 9.2 |
MODIFICATIONS |
31 | ||||
SECTION 9.3 |
GOVERNING LAW |
32 | ||||
SECTION 9.4 |
NOTICES |
32 | ||||
SECTION 9.5 |
ENTIRE UNDERSTANDING; NO THIRD PARTY BENEFICIARIES |
33 | ||||
SECTION 9.6 |
ASSIGNABILITY |
33 | ||||
SECTION 9.7 |
SEVERABILITY |
33 | ||||
SECTION 9.8 |
SPECIFIC PERFORMANCE AND INJUNCTIVE RELIEF |
33 | ||||
SECTION 9.9 |
COUNTERPARTS |
34 |
LIST OF SCHEDULES
Transferor Disclosure Schedules
Schedule A - Excluded Company Assets and Liabilities
Schedule B - Retained Company Assets and Liabilities
Schedule C - Litigation; Regulatory Action
Schedule D - Governmental Approvals
-ii-
PURCHASE AND SALE AGREEMENT
THIS PURCHASE AND SALE AGREEMENT (this Agreement) is dated as of May 31, 2012, by and among Apex Clearing Holdings LLC, a Delaware limited liability company (Transferee), Broadridge Securities Processing Solutions, Inc., a Delaware corporation (BSPS) and Broadridge Financial Solutions, Inc., a Delaware corporation (Broadridge and, together with BSPS the Transferor). Capitalized terms used in this Agreement and not otherwise defined have the meanings specified in Section 1.1.
W I T N E S S E T H :
WHEREAS, BSPS, a wholly owned subsidiary of Broadridge, owns all of the issued and outstanding shares of the capital stock, par value $0.10 per share (the Shares) of Ridge Clearing & Outsourcing Solutions, Inc. (formerly named ADP Clearing & Outsourcing Services, Inc.), a New York corporation (the Company);
WHEREAS, the Company is a member of FINRA and a broker-dealer registered with Securities and Exchange Commission (the SEC);
WHEREAS, Transferee intends to acquire the correspondent clearing business of Penson Financial Services, Inc. (PFSI), which is engaged in the Correspondent Clearing Services (the PFSI Acquisition);
WHEREAS, in order to facilitate the PFSI Acquisition, the Company will be transferred to Transferee pursuant to this Agreement, and subsequently thereto, the Company will effectively function as a vehicle for Transferee, through which Transferee will engage in the PFSI Acquisition and subsequently to the completion of the PFSI Acquisition, operate the correspondent clearing business of PFSI and provide the Corresponding Clearing Services that are provided by PFSI;
WHEREAS, immediately prior to the Closing, Transferor will transfer out of the Company and to Transferor (the Pre-Transaction Transfers), certain assets, liabilities and related ongoing business of the Company (including, but not limited to operations support and outsourcing business and Excluded Company Assets and Liabilities listed on Schedule A to the Transferor Disclosure Schedule) and such assets, liabilities and related ongoing business will not be included in the transactions contemplated by this Agreement;
WHEREAS, for the avoidance of doubt, Transferor does not intend to transfer any of its ongoing business in connection with the transactions contemplated by this Agreement; and
WHEREAS, Transferor desires to sell to Transferee and Transferee desires to purchase from Transferor, on the terms, and subject to the conditions, set forth in this Agreement, the Shares, exclusive of certain Company assets and liabilities as further defined in this Agreement;
NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained and other valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties do hereby covenant and agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 Definitions of Certain Defined Terms. Capitalized terms used in this Agreement and not otherwise defined herein shall have the meanings set forth below.
Accountant has the meaning ascribed thereto in Section 5.4(e)(i).
Affiliate of a Person means a Person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, the first Person. As used in this definition, the term control (including the terms controlled by and under common control with) means the possession, directly or indirectly, of the power to (i) vote twenty-five percent (25%) or more of the outstanding voting securities of such Person or (ii) otherwise direct the management policies of such Person by contract or otherwise. For the avoidance of doubt, (i) Mountain and its Affiliates will be deemed Affiliates of Transferee for purposes of this Agreement and (ii) after the Closing, the Company shall be deemed an Affiliate of Transferee and not an Affiliate of Transferor.
Agreement has the meaning ascribed thereto in the Preamble.
Applicable Law means, for any Person at any time of determination, any constitution, statute, by-law, federal, state, foreign or local law (including the common law and equity), ordinance, rule, regulation or administrative interpretation or any judgment, decree, governmental permit, license, certificate of authority, order or approval of a Governmental Authority to which such Person or any of its properties is subject at such time.
Basic Liability Cap has the meaning ascribed thereto in Section 8.1(b).
Basic Transferee Representations has the meaning ascribed thereto in Section 8.2(c).
Basic Transferor Representations has the meaning ascribed thereto in Section 8.1(c).
Broadridge has the meaning ascribed thereto in the Preamble.
Broadridge Master Services Agreement means that certain letter agreement between Transferee and Broadridge in the form attached hereto as Exhibit A.
Broadridge Release means that certain Termination and Mutual Release Agreement in the form attached hereto as Exhibit B.
BSPS has the meaning ascribed thereto in the Preamble.
Business means any business and related operations relating to Customer accounts remaining in the Company after giving effect to the Pre-Transaction Transfers.
Business Day means any day, other than a Saturday, Sunday or a day on which the New York Stock Exchange is not scheduled to be open for trading.
Closing has the meaning ascribed thereto in Section 2.3.
Closing Date has the meaning ascribed thereto in Section 2.3.
-2-
Code means the Internal Revenue Code of 1986, as the same may be amended from time to time, and any successor to such code.
Company has the meaning ascribed thereto in the Recitals.
Companys Knowledge, Knowledge of the Company and similar formulations mean that one or more of the officers of the Company have actual knowledge of the fact or other matter at issue.
Common Stock has the meaning ascribed thereto in Section 3.1(d)(i).
Confidential Information means all information, matter or thing of a secret, confidential or private nature which is either (x) marked by the disclosing party as Confidential, or (y) with respect to which the nature of such information, matter or thing or the circumstances of its disclosure would lead to a reasonable conclusion that such information, matter or thing is confidential to the disclosing party.
Consent means any consent, approval, authorization, waiver, permit, grant, franchise, concession, agreement, license, exemption or order.
Contract means, with respect to any Person, any agreement, indenture, debt instrument, contract, lease or other commitment, whether oral or written, to which such Person or any of its Subsidiaries is a party, or by which any of them is bound or to which any of their properties is subject.
Correspondent Clearing Services means any services that involve (i) international securities clearing and execution, (ii) international securities transaction settlement services, and (iii) customer account maintenance and related data processing services.
Covered Person has the meaning ascribed thereto in Section 3.1(q).
Customers means, collectively, as of any date, the customers with an account, which is held by the Company.
Deductible has the meaning ascribed thereto in Section 8.1(b).
Dollars or $ means the lawful currency of the United States of America.
Exchange Act means the Securities Exchange Act of 1934, as the same may be amended from time to time, and any successor to such act.
Excluded Company Assets and Liabilities has the meaning ascribed thereto in Section 5.6.
Financial Statements has the meaning ascribed thereto in Section 3.1(k)(i).
FINRA means the Financial Industry Regulatory Authority and any successor Self-Regulatory Organization.
GAAP means United States generally accepted accounting principles.
Governmental Approval means a Consent of, with or to a Governmental Authority or Self-Regulatory Organization (including the expiration of any waiting or other time period required to pass before such Consent may be assumed or relied on).
-3-
Governmental Authority means any domestic or foreign governmental or regulatory authority, Self-Regulatory Organization, state, department, board, instrumentality, agency, court, tribunal, arbitrator or mediator, commission or other entity.
Indebtedness means, as applied to any Person, all indebtedness of such Person for borrowed money, whether current or funded, or secured or unsecured, excluding current trade payables incurred in the ordinary course of business, but including, (i) all obligations of that Person evidenced by bonds, debentures, notes, or other similar instruments or debt securities; (ii) all indebtedness of that Person secured by a purchase money mortgage or other Lien to secure all or part of the purchase price of the property subject to such Lien; (iii) all obligations under leases that shall have been or must be, in accordance with GAAP, recorded as capital leases in respect of which such Person is liable as lessee; (iv) any liability of that Person in respect of bankers acceptances or letters of credit; and (v) all indebtedness referred to above which is directly or indirectly guaranteed by that Person or which that Person has agreed (contingently or otherwise) to purchase or otherwise acquire or in respect of which it has otherwise assured a creditor against loss.
Indemnified Party means any Transferee Indemnified Person or Transferor Indemnified Person.
Indemnifying Party has the meaning ascribed thereto in Section 8.4(a).
IRS means the Internal Revenue Service.
Legal Proceedings means any legal, administrative, arbitral, or other proceedings, suits, actions, claims, investigations, complaints or hearings by or before a Governmental Authority or Self-Regulatory Organization.
Licenses means licenses, franchises and permits.
Liability means, with respect to any Person, any liability or obligation of such Person whether known or unknown, whether asserted or unasserted, whether determined, determinable or otherwise, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, whether directly incurred or consequential, whether due or to become due and whether or not required under GAAP to be accrued on the financial statements of such Person.
Lien means any restriction, lien, claim, charge, pledge, encumbrance, mortgage, deed of trust or security interest, right of first refusal, option, warrant, pre-emption right, call right, put right or similar right, in each case of any kind or nature whatsoever.
Loss means any and all claims, losses, Liabilities, costs, Taxes, penalties, fines and expenses (including reasonable attorneys, accountants, consultants and experts fees and expenses), damages, obligations to third parties, expenditures (including costs of collection incurred in the enforcement of rights under this Agreement), proceedings, judgments, awards or demands that are imposed upon or otherwise incurred or suffered by the relevant party.
Material Adverse Effect means, with respect to a Person, any event, fact, condition, change, development or effect that (a) is, or could reasonably be expected to be, materially adverse to the business, assets, condition (financial or otherwise), prospects, results of operations or properties of such Person or (b) would prevent or materially delay the consummation of the transactions contemplated by the Transaction Documents. A Material Adverse Effect with respect to a Person shall include, but shall not be limited to, any material adverse change in the Persons regulatory standing; provided that in no
-4-
event shall any of the following, alone or in combination, be deemed to constitute, nor shall any of the following be taken into account in determining whether there has been, or could be, a Material Adverse Effect: (i) changes in the economy, financial markets or political system (provided such changes do not disproportionately affect such Person as compared to other Persons in such Persons industry, which, in the case of Transferor, shall be the broker dealer industry), (ii) general changes to the industry or regulatory framework governing the industry in which such Persons business operates (provided such changes do not disproportionately affect such Person as compared to other Persons in such Persons industry, which, in the case of Transferor, shall be the broker dealer industry), (iii) acts of war, terrorism or natural disaster, or (iv) transfers of the Excluded Company Assets and Liabilities to Transferor and steps taken in contemplation thereof.
Most Recent Balance Sheet Date has the meaning ascribed thereto in Section 3.1(k)(i).
Most Recent Financial Statement has the meaning ascribed thereto in Section 3.1(k)(i).
Mountain means PEAK6 Investments, L.P.
Net Capital means the net capital of the Company based on the Companys books and records, calculated by Transferor and Transferee in accordance with Rule 15c3-1 under the Exchange Act and agreed to by Transferor and Transferee one (1) Business Day prior to the Closing Date.
Organizational Documents means, with respect to a Person, the articles or certificate of incorporation and bylaws or articles or certificate of formation and limited liability company agreement (or other constituent documents) of such Person.
Outsourcing Business means the business of providing outsourced operations support to broker-dealers, which business, as of the date hereof, has approximately 17 customers.
PATRIOT Act means the USA PATRIOT Act, formerly known as the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, as amended from time to time, and the rules and regulations promulgated thereunder.
Person means any individual, partnership (general or limited), corporation, limited liability company, limited liability partnership, association, trust, joint venture, unincorporated organization, or similar entity, any government, governmental department or agency or political subdivision thereof.
PFSI has the meaning ascribed thereto in the Recitals.
PFSI Acquisition has the meaning ascribed thereto in the Recitals.
Pre-Transaction Transfers has the meaning ascribed thereto in the Recitals.
Purchase Price has the meaning ascribed thereto in Section 2.2.
Purchase Price Allocation has the meaning ascribed thereto in Section 5.4(e)(i).
Regulatory Reports has the meaning ascribed thereto in Section 3.1(b).
Retained Company Assets and Liabilities means only the assets and liabilities set forth on Schedule B of the Transferor Disclosure Schedule.
SEC has the meaning ascribed thereto in the Recitals.
-5-
Section 338(h)(10) Election has the meaning ascribed thereto in Section 5.4(e)(i).
Self-Regulatory Organization means FINRA and any other commission, board, agency or body that is not a Governmental Authority but is charged with the supervision or regulation of broker-dealers or investment advisers, or, with respect to Transferor, to the jurisdiction of which Transferor is otherwise subject.
Shares has the meaning ascribed thereto in the Recitals.
Straddle Period means any taxable period that includes (but does not end on) the Closing Date.
Tax or Taxes means all federal, state, local or foreign taxes or other governmental charges, fees, custom, duties, levies and assessments of whatever kind or nature, including all federal, state, local or foreign income, gross receipts, capital gains, capital stock, social security, escheat, unemployment, payroll, stamp, withholding, alternative or add-on minimum, value added, windfall profits, severance, property, production, sales, use, license, excise, franchise, employment, premium, recording, documentary, transfer, back-up withholding or similar taxes, together with any interest, additions, or penalties with respect thereto and any interest in respect of such additions or penalties.
Tax Returns means any report, return, declaration or other information required to be supplied to any taxing authority in connection with Taxes (including any attached schedules), including, without limitation, any information return, claim for refund, amended return and declaration of estimated Tax.
Third Party Claim has the meaning ascribed thereto in Section 8.4(a).
Transaction Documents means this Agreement, the Broadridge Master Services Agreement, the Transition Services Agreement and the Broadridge Release.
Transferee has the meaning ascribed thereto in the Preamble.
Transferee Disclosure Schedule has the meaning ascribed thereto in Section 4.1.
Transferee Indemnified Person has the meaning ascribed thereto in Section 8.1(a).
Transferee Liability Cap has the meaning ascribed thereto in Section 8.2(b).
Transferor has the meaning ascribed thereto in the Preamble.
Transferor Disclosure Schedule has the meaning ascribed thereto in Section 3.1.
Transferor Indemnified Person has the meaning ascribed thereto in Section 8.2(a).
Transition Services Agreement means the Transition Services Agreement in the form attached hereto as Exhibit C.
Treasury Regulations means the regulations issued as of the date hereof and from time to time by the United States Department of the Treasury relating to matters arising under the Code.
-6-
SECTION 1.2 Interpretation.
(a) As used in this Agreement, references to the following terms will have the meanings indicated:
(i) To the Preamble or to the Recitals, Sections, Exhibits or Schedules are to the Preamble or a Recital or Section of, or Exhibit or Schedule to, this Agreement unless otherwise indicated.
(ii) To any agreement (including this Agreement), contract, statute or regulation are to the agreement, contract, statute or regulation as amended, modified, supplemented or replaced from time to time, and any section of any statute or regulation are to any successor to the section.
(b) Whenever this Agreement requires a party to take an action, the requirement constitutes an undertaking by the party to cause its Subsidiaries, and to use its commercially reasonable efforts to cause its other Affiliates, to take appropriate action in connection therewith.
(c) The Table of Contents of this Agreement and various headings contained herein are for reference purposes only and do not limit or otherwise affect any of the provisions of this Agreement.
(d) Whenever the words include, includes or including are used in this Agreement, they will be deemed to be followed by the words without limitation. Any singular term in this Agreement will be deemed to include the plural, and any plural term the singular. All pronouns and variations thereof will be deemed to refer to the feminine, masculine or neuter, singular or plural, as the identity of the Person referred to may require.
(e) It is the intention of the parties that every covenant, term and provision of this Agreement shall be construed simply according to its fair meaning and not strictly for or against any party, it being understood and agreed that the parties to this Agreement are sophisticated and have had adequate opportunity and means to retain counsel to represent their respective interests and to otherwise negotiate the terms and provisions of this Agreement. Accordingly, the parties hereby waive, to the fullest extent permitted by Applicable Law, the benefit of any Applicable Law that would require that in cases of uncertainty, the language of a contract should be strictly construed against, or most strongly construed against, the party who drafted such language.
(f) All references in this Agreement to amounts of money or amounts to be paid by any Person to any other Person shall mean such amounts in United States dollars, unless otherwise indicated.
ARTICLE II
PURCHASE AND SALE OF SHARES
SECTION 2.1 Purchase and Sale of Shares. Subject to the terms and conditions set forth herein, at the Closing, Transferor shall sell, assign, transfer, convey and deliver to Transferee, and Transferee shall buy from Transferor, the Shares free and clear of all Liens in exchange for the Purchase Price specified in Section 2.2.
-7-
SECTION 2.2 Purchase Price. The aggregate purchase price for the Shares shall be equal to the Net Capital of the Company (the Purchase Price); provided, however, that the Purchase Price shall not exceed $500,000.
SECTION 2.3 Closing. The closing of transaction contemplated in Section 2.1 (Closing) shall take place at the offices of Sidley Austin LLP, One South Dearborn, Chicago, Illinois, at a mutually satisfactory date and time, subject to the prior satisfaction or waiver of the conditions set forth in Article VI, no later than 9:30 a.m. New York time on June 1, 2012 in accordance with the terms of this Agreement or at such other time and place as Transferee and Transferor mutually agree (Closing Date).
(a) At the Closing, Transferor shall deliver to Transferee:
(i) stock certificates evidencing the Shares, free and clear of all Liens, duly endorsed in blank or accompanied by stock powers or other instruments of transfer duly executed in blank, with all required stock transfer tax stamps affixed thereto;
(ii) all deliverables required from Transferor in connection with the conditions to Transferees obligations under Section 6.2 (including each Transaction Document, duly executed by Transferor and each Affiliate of Transferor party to, or specified to be a party to, any Transaction Document); and
(iii) all other documents, certificates and other items required to be delivered at Closing pursuant to the Transaction Documents and reasonably requested by Transferee, which such documents, certificates and other items shall be in form and substance, and shall be executed in a manner (as applicable), reasonably satisfactory to Transferee.
(b) No later than one (1) Business Day after the Closing, Transferee shall deliver to Transferor the Purchase Price by wire transfer of immediately available funds to an account of Transferor designated in writing by Transferor to Transferee.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF TRANSFEROR
SECTION 3.1 Representations and Warranties of Transferor. As an inducement to Transferee to enter into this Agreement, Transferor represents and warrants to Transferee as of the date of this Agreement and as of the Closing as follows, except as set forth in the Transferor Disclosure Schedule prepared separately by Transferor and delivered to Transferee at the time of execution and delivery of this Agreement (the Transferor Disclosure Schedule) (it being agreed that any matter set forth in any schedule or subsection of a schedule of the Transferor Disclosure Schedule shall be deemed disclosed in any other schedule or subsection of a schedule of the Transferor Disclosure Schedule only if (and to the extent that) such information is readily apparent on its face to be so applicable to such other schedule or subsection of a schedule of the Transferor Disclosure Schedule):
(a) Organization and Authority.
(i) Each of BSPS and Broadridge is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware and is duly licensed or qualified to do business and is in good standing in the states of the United States and other jurisdictions where its ownership or leasing of property or assets or the conduct of its business requires it to be so licensed or qualified except where the failure to be so licensed or qualified would not have a
-8-
Material Adverse Effect. Each of BSPS and Broadridge has all necessary corporate power and authority to, and has taken all corporate action on its part necessary to, execute and deliver each Transaction Document, consummate the transactions contemplated hereby and thereby and perform its obligations hereunder and thereunder, and no other proceedings on the part of either of BSPS or Broadridge are necessary to authorize the Transaction Documents and the transactions contemplated hereby and thereby.
(ii) The Company is a corporation validly existing and in good standing under the laws of the State of New York and is duly licensed or qualified to do business and is in good standing in the states of the United States and other jurisdictions where its ownership or leasing of property or assets or the conduct of its business requires it to be so licensed or qualified except where the failure to be so qualified would not have a Material Adverse Effect. The Company has the requisite power and authority necessary to carry on its business as it is now being conducted and as it is proposed to be conducted immediately following the Closing and to own, lease and operate its properties and assets. The Company is not in default under or in violation of any provision of its Organizational Documents.
(iii) This Agreement has been duly executed and delivered by each of BSPS and Broadridge and, assuming due execution by the other parties hereto and thereto, are (or, when executed and delivered, will constitute) legal, valid and binding obligations of each of BSPS and Broadridge enforceable against each of BSPS and Broadridge in accordance with their respective terms, except as the same may be limited by (i) applicable bankruptcy, insolvency, moratorium, reorganization, fraudulent conveyance or similar laws in effect which affect the enforcement of creditors rights generally or (ii) general principles of equity, whether considered in a proceeding at law or in equity.
(b) Reports. The Company has timely filed all reports, registrations, declarations, notices, statements, and other filings, together with any amendments required to be made with respect thereto, that were required to be filed since January 1, 2008 with any Governmental Authority (including the SEC, FINRA and CFTC) (all such reports, registrations, declarations, notices, statements and filings being collectively referred to herein as the Regulatory Reports), including all reports, registrations, declarations, notices, statements and filings required under the Exchange Act and Commodity Exchange Act. As of their respective dates, the Regulatory Reports were complete and accurate in all material respects and complied in all material respects with the Applicable Laws enforced or promulgated by the Governmental Authority or Self-Regulatory Organization with which they were filed.
(c) Regulatory Consents. Other than the Governmental Approvals listed on Schedule D to the Transferor Disclosure Schedule, no notices, reports or other filings are required to be made by Transferor, the Company or their respective Affiliates with, and no Consents, registrations, approvals, licenses, memberships, permits or authorizations are required to be obtained by Transferor from, any Governmental Authority or any Self-Regulatory Organization in connection with the execution, delivery and performance of this Agreement or the other Transaction Documents by Transferor, the performance by Transferor of its obligations hereunder or thereunder, or the consummation by Transferor of the transactions contemplated hereby and thereby.
(d) Capitalization; Title.
(i) The authorized capital stock of the Company consists of 200,000 shares of common stock, par value $0.10 per share (the Common Stock), of which 100,000 shares are issued and outstanding and constitute the Shares. All of the Shares have been duly authorized, are validly issued, fully paid and non-assessable, and are owned of record and beneficially by BSPS, free and clear of all Encumbrances.
-9-
(ii) There are no outstanding or authorized options, warrants, convertible securities or other rights, agreements, arrangements or commitments of any character relating to the capital stock of the Company or obligating BSPS or the Company to issue or sell any shares of capital stock of, or any other interest in, the Company. The Company does not have outstanding or authorized any stock appreciation, phantom stock, profit participation or similar rights. There are no voting trusts, stockholder agreements, proxies or other agreements or understandings in effect with respect to the voting or transfer of any of the Shares.
(iii) BSPS is the sole registered and beneficial owner of all the Shares, and owns all the Shares free and clear of all Liens.
(e) Retained Company Assets and Liabilities Only. The Company has no assets other than assets set forth on Schedule A of the Transferor Disclosure Schedule or on Schedule B of the Transferor Disclosure Schedule and has no Liabilities other than those Liabilities set forth on Schedule A of the Transferor Disclosure Schedule or Schedule B of the Transferor Disclosure Schedule. The Company conducts no, and has not since July 1, 2011 (before which date, the Company operated in the clearing business), conducted any, business other than the maintenance of dormant legacy Customer accounts, and except, until immediately prior to the Pre-Transaction Transfers, the Outsourcing Business. After the transfer of all the Excluded Company Assets and Liabilities in accordance with Sections 5.6 and Section 6.2(h), the Company will not own any assets or have any Liabilities, including contractual and other obligations, other than the Retained Company Assets and Liabilities. As of the Closing, the Company will not have any employees.
(f) No Subsidiaries. The Company does not own, or have any interest in any shares or have an ownership interest in any other Person.
(g) No Conflicts. The execution, delivery and performance by Transferor and the Company of the Transaction Documents to which Transferor or the Company is a party does not and will not, and the consummation of the transactions contemplated hereby and thereby will not, with or without the giving of notice, the lapse of time or both:
(i) Violate or conflict with the Organizational Documents of Transferor or the Company;
(ii) Breach or violate, or constitute a default under, any Applicable Law or other restriction of, or agreement or stipulation with, any Governmental Authority to which Transferor, the Company or any of their respective Affiliates are subject, or permit or result in the revocation, cancellation, suspension or adverse modification of any License, authorization, registration, permit, membership, certificate of authority or Consent to which the Company or its properties is subject;
(iii) Violate or conflict with or result in a breach of any provision of, or constitute a default (or any event that, with or without due notice or lapse of time, or both, would constitute such a default) under, or result in the termination of, accelerate the performance required by, or give rise to any rights of any counterparty to terminate, cancel, accelerate, modify or to additional benefits under, any term or provision of any Contract of or binding on Transferor, the Company or their respective Affiliates; or
-10-
(iv) Result in the creation or imposition of any Lien on the Business or the property or assets of Transferor, the Company or their respective Affiliates.
(h) Litigation; Regulatory Action. Except as set forth in Schedule C to the Transferor Disclosure Schedule, there are, and since January 1, 2008, have been, no material Legal Proceedings or investigations pending or threatened against the Company, or to which the Company or its properties or assets, or its managers, officers or employees (relating to the performance of their duties in such capacities) are subject, and the Company has not received notice thereof. Without limiting the foregoing, there are no Legal Proceedings or investigations pending or threatened against the Company relating to the termination of, or limitation of, the rights of the Company under its registrations or qualifications under any Applicable Law, including any federal or state securities laws or regulations. There are, and since January 1, 2008, have been, no outstanding judgments, decrees, stipulations or orders in favor of or naming any Person relating to the Company or any of its directors, officers or employees (as applicable) relating to the performance of its duties in such capacities or against or affecting its properties. There are no consent decrees or similar arrangements entered into with a Governmental Authority, Self-Regulatory Organization, or other Person by, or relating to, the Company or any of its directors, managers, officers or employees, as applicable, relating to the performance of their duties in such capacities or against or affecting the Companys properties, that are still in effect, or were in effect at any time since January 1, 2008. The Company is not a party to or subject to any order, decree, agreement, stipulation, memorandum of understanding or similar arrangement with, or a commitment letter or similar submission to, any Governmental Authority (a Government Order). The Company has not been notified by or received any other communication from any Governmental Authority to the effect that such Governmental Authority is contemplating issuing or requesting (or is considering the appropriateness of issuing or requesting) any such Government Order.
(i) Compliance with Laws. The Company is and has been in compliance in all material respects with Applicable Law.
(i) The Company and each of its officers, directors, managers, agents, contractors and employees:
(A) Has in effect the Licenses and Governmental Approvals that are listed on Schedule D to the Transferor Disclosure Schedule and has made all material filings, applications and registrations with all Governmental Authorities and Self-Regulatory Organizations that are required in order to permit the Company to own or lease its properties and assets and to conduct the Business as presently conducted; all such Licenses and Governmental Approvals listed on Schedule D to the Transferor Disclosure Schedule are in full force and effect and are current and no suspension or cancellation of any of them is threatened or reasonably likely;
(B) Is not in default with respect to any judgment, order, writ, injunction, decree, demand or assessment issued by any court or any foreign, federal, state, municipal or other Governmental Authority, or by any Self-Regulatory Organization;
(C) Has not been charged, convicted of or threatened with, and is not and has not been under investigation with respect to, any violation of any provision of any Applicable Law, including any federal or state securities law or regulation applicable to the Business or the properties or assets of the Company, affecting the Company, or the transactions contemplated by the Transaction Documents, and is not on notice of the pendency of any such charge or investigation;
-11-
(D) Has been in material compliance with all Applicable Laws relating to the employment of the Companys employees (including, but not limited to, all Applicable Laws relating to wages, hours, overtime, employee classification, civil rights, work authorization, immigration, wage payment, and the collection and payment of withholding and other similar taxes); and
(E) Is not subject to any cease-and-desist or other order issued by, or a party to any written agreement, consent agreement or memorandum of understanding with, or a party to any commitment letter or similar undertaking to, or subject to any order or directive by, a recipient of any supervisory letter from or has adopted any board resolutions at the request of any Governmental Authority or Self-Regulatory Organization and is not on notice of the pendency of any such charge or investigation.
(ii) The Company has provided to Transferee copies of the currently effective Form BD as filed by the Company with the SEC. The information contained in such form was complete and accurate in all material respects as of the time of filing thereof and remains complete and accurate in all material respects as of the date hereof and there are no amendments contemplated thereto other than with respect to the consummation of this Agreement.
(iii) The Company neither is nor has been subject to, nor is under current investigation or proceeding, whether preliminary or otherwise, for, statutory disqualification as defined in Section 3(a)(39) of the Exchange Act.
(iv) The Company has not been enjoined by any Government Order from engaging or continuing any conduct or practice in connection with any activity or in connection with the purchase or sale of any security.
(j) Affiliate Transactions. After the Closing, the Company will have no Indebtedness or Liability to Transferor or any of its Affiliates, except such Indebtedness or Liabilities as arise under the Broadridge Master Services Agreement.
(k) Financial Statements; FOCUS Reports.
(i) Transferor has delivered to Transferee: (i) true and complete copies of the unaudited consolidated balance sheet of the Company (the Most Recent Financial Statement), dated March 31, 2012 (such date, the Most Recent Balance Sheet Date); and (ii) true and complete copies of the audited consolidated balance sheet of the Company dated June 30, 2011, and the related consolidated statements of income, stockholders equity and cash flows for the fiscal year then ended (collectively, the Financial Statements). Such Financial Statements present fairly in all material respects the consolidated financial position, results of operations, stockholders equity and cash flows of the Company as at and for the respective periods then ended (except that the unaudited Most Recent Financial Statement is subject to normal year-end adjustments and matters that would be revealed by notes thereto, and has been prepared in accordance with GAAP.
-12-
(ii) Transferor has delivered to Transferee true and complete copies of all Financial and Operational Combined Uniform Single (FOCUS) Reports filed with FINRA since January 1, 2011.
(iii) Transferee expressly acknowledges that the information delivered pursuant to this Section 3.1(k) do not reflect the transfer of assets and liabilities set forth in Section 5.6 and Section 6.2(h) and, accordingly, do not reflect the consolidated financial position of the Company at Closing.
(l) Taxes.
(i) The Company has filed all Tax Returns required to be filed by it, each such Tax Return has been prepared in compliance with Applicable Law, and each such Tax Return is true, accurate and complete in all material respects. The Company has timely paid all Taxes due and payable, whether or not shown on Tax Returns, and the Company is not and will not be liable for any additional Taxes in respect of any taxable period or any portion thereof ending on or before the Closing Date.
(ii) The Company has timely withheld and timely paid all Taxes required to be withheld by it in connection with any amounts paid or owing to any member, employee, creditor, independent contractor or other Person.
(iii) The Company has timely collected all sales, use and value added Taxes required or permitted to be collected by it, and each of the foregoing has timely remitted all such Taxes to the appropriate Governmental Authority.
(iv) None of the assets of the Company (A) directly or indirectly secures any debt, the interest on which is tax exempt under Section 103(a) of the Code; (B) is treated as tax exempt bond financed property under Section 168(g)(5) of the Code or (C) is treated as owned by any other Person pursuant to the provisions of Section 168(f)(8) of the Internal Revenue Code of 1954, as amended and in effect immediately before the enactment of the Tax Reform Act of 1986.
(v) No Tax Return of the Company is under audit or examination by any Governmental Authority, and the Company has received no notice of such an audit or examination. Each deficiency resulting from any audit or examination relating to Taxes by any Governmental Authority has been paid. The Company has not given, nor is there a pending request to give, waivers or extensions (or is or would be subject to a waiver or extension given by any other Person) of any statute of limitations relating to any such Taxes. No closing agreement pursuant to Section 7121 of the Code (or any similar provision of state, local or foreign law) has been entered into by or with respect to the Company.
(vi) There are no Liens with respect to Taxes (other than Taxes not yet due and payable) on any of the assets of the Company.
(vii) No claim has been made by any Governmental Authority in a jurisdiction where the Company does not currently file Tax Returns that the Company is or may be subject to Tax by such jurisdiction, nor has any Governmental Authority threatened to make such an assertion.
(viii) There are no outstanding rulings of, or requests for rulings by, any Governmental Authority that are, or if issued would be, binding on the Company for any full or partial taxable period beginning on or after the Closing Date.
-13-
(ix) The Company is not a party to, or bound by, or has any obligation under, any Tax allocation or sharing agreement or similar contract or arrangement or any agreement that obligates it to make any payment computed by reference to the Taxes, taxable income or taxable losses of any other Person.
(x) The Company will not be required to include any item of income in, or exclude any item of deduction from, taxable income for any taxable period (or portion thereof) ending after the Closing Date as a result of any (A) change in method of accounting for a taxable period ending on or prior to the Closing Date, (B) closing agreement as described in Section 7121 of the Code (or any corresponding or similar provision of state or local income Tax law) executed on or prior to the Closing Date, (C) intercompany transactions or any excess loss account described in Treasury Regulations under Section 1502 of the Code (or any corresponding or similar provision of state or local income Tax law), (D) installment sale or open transaction disposition made on or prior to the Closing Date, (E) prepaid amount received on or prior to the Closing Date, or (F) or election under Section 108(i) of the Code.
(xi) The Company has never been either a distributing corporation or a controlled corporation in a distribution in which the parties to such distribution treated the distribution as one to which Section 355 of the Code is applicable.
(xii) The Company has never been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(l)(A)(ii) of the Code.
(xiii) The Company has never participated in a reportable transaction, within the meaning of Treasury Regulation Section 1.6011-4.
(m) Employees and Benefit Plans.
(i) Since May 25, 2012, the Company has had no employees, otherwise engage any individual to provide services to the Company, or sponsor, maintain or contribute to any employee benefit plan.
(ii) No labor union, labor organization or group of employees has made any demand of the Company for recognition or certification. The Company is not and has not been a party to, or bound by, any collective bargaining agreement, Contract or other agreement or understanding with any labor union or labor organization. The Company has not agreed to recognize any union or other collective bargaining unit nor has any union or other collective bargaining unit been certified as representing any Company employee. The Company has not been a party to, affected by or threatened with any labor strike, work stoppage, slowdown, walkout or lockout or any dispute of controversy with any union or with respect to unionization or collective bargaining. The Company is not and has not been engaged in any unfair labor practice and there is no unfair labor practice complaint pending or threatened against the Company before the National Labor Relations Board.
(iii) The Company is and, since January 1, 2008, has been in compliance with the Workers Adjustment and Retraining Notification Act and all similar state and local laws, has no liabilities or other obligations pursuant thereto, and has not taken any action that would cause Transferor or any of its Affiliates to have any liability or other obligation pursuant thereto as of, or immediately following, the Closing Date.
-14-
(iv) The Company does not have any Liability of any kind whatsoever, whether known or unknown, direct, indirect, contingent or otherwise arising under or related to (a) any employee benefit plan (as such term is defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended, (ERISA)), whether or not subject to ERISA, or any other employee benefit or compensation plans, policies, programs, agreements or arrangements, including but not limited to any pension, retirement, profit-sharing, thrift, savings, bonus plan, incentive, stock option or other equity or equity-based compensation, or deferred compensation, stock purchase, severance, bonus, commissions, vacation or holiday pay, health or medical insurance, life insurance, fringe benefits, severance benefits, sick pay or paid time off or other plans, policies, programs, agreements or arrangements, (b) any employment, retention, change in control, severance, or similar agreement, or (c) Part 6 of Subtitle B of Title I of ERISA, Section 4980B of the Code or any similar law. None of the Company or any of its ERISA affiliates (determined in accordance with Section 414(b), (c), (m) or (o) of the Code, as applicable) has ever sponsored, maintained, contributed to (or had any obligation to sponsor, maintain or contribute to) or otherwise had any liability with respect to (x) a plan subject to Title IV of ERISA, including any defined benefit plan (as defined in Section 3(35) of ERISA), a multiemployer plan (as defined in Section 3(37) of ERISA), or a multiple employer plan subject to Section 4063 or 4064 of ERISA, (y) a multiple employer welfare benefit arrangement (as defined in Section 3(40)(A) of ERISA), or (z) a plan subject to Section 302 of ERISA or Section 412 of the Code.
(n) No Brokers or Finder. Neither Transferor nor the Company has employed any broker or finder or incurred any liability for any financial advisory fees, brokerage fees, commissions or finders fees, and no broker or finder has acted directly or indirectly for them in connection with the Transaction Documents or the transactions contemplated hereby or thereby.
(o) Third Parties Business Operations. The Company has not allowed any Person to use its assets, properties or other resources to conduct any type of business other than the Business.
(p) Power of Attorney. The Company has not granted any Person a power of attorney or similar authorization that is presently in effect or outstanding.
(q) Indemnification. After giving effect to the Pre-Transaction Transfers, other than pursuant to the provisions of its Organizational Documents, the Company is not a party to any indemnification agreement with any of its present stockholders, officers, directors, employees, agents or other Persons who serve or served in any other capacity with any other enterprise at the request of the Company (a Covered Person), and there are no claims for which any Covered Person would be entitled to indemnification by the Company if such provisions were deemed in effect.
(r) AML Standards. The Company has provided Transferee with copies of policies and procedures for verification of the identity of new customers of the Company and compliance with the PATRIOT Act and other Applicable Law. Such policies and procedures have been duly implemented by the Company and have operated effectively since their inception.
-15-
(s) Investment Advisory Activities. Neither the conduct of the Business, nor the ownership, management or use of the properties or assets of the Company requires the Company or any of its officers or employees to be registered as an investment adviser under the Investment Advisers Act of 1940 or as an investment adviser or investment adviser representative or agent under the Laws of any State.
(t) Disclosure. To the Companys Knowledge, no representation or warranty by Transferor in this Agreement, nor any certificate furnished or to be furnished by or on behalf of Transferor, or any Person acting on behalf of such a Person, to Transferee or its representatives in connection with or under this Agreement, when taken as a whole together with information provided or made available to Transferee, contains any untrue statement of a material fact, or omits to state any material fact required to make the statements contained in this Agreement or the certificate, as the case may be, not misleading. To the Companys Knowledge, Transferor has disclosed to Transferee all materials facts and circumstances concerning the Company and the Business that are known to Transferor that would be material to Transferee in the context of the transactions contemplated hereby.
(u) No Other Representations or Warranties. Except for the representations and warranties expressly set forth in this Section 3.1, Transferor makes no other representation or warranty, express or implied, at law or in equity.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF TRANSFEREE
SECTION 4.1 Representations and Warranties of Transferee. As an inducement to Transferor to enter into this Agreement, Transferee represents and warrants to Transferor as of the date of this Agreement and as of the Closing as follows, except as set forth in the schedules prepared separately by Transferee and delivered to Transferor at the time of execution and delivery of this Agreement (the Transferee Disclosure Schedule) (it being agreed that any matter set forth in any schedule or subsection of a schedule of the Transferee Disclosure Schedule shall be deemed disclosed in any other schedule or subsection of a schedule of the Transferee Disclosure Schedule only if (and to the extent that) such information is readily apparent on its face to be so applicable to such other schedule or subsection of a schedule of the Transferee Disclosure Schedule):
(a) Existence and Good Standing. Transferee is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware and is duly licensed or qualified to do business and is in good standing in the states of the United States and other jurisdictions where its ownership or leasing of property or assets or the conduct of its business requires it to be so licensed or qualified, except where the failure to be so licensed or qualified would not reasonably be expected to have a Material Adverse Effect. Transferee has the requisite power and authority necessary to carry on its business as it is now being conducted and as it is contemplated will be conducted immediately following the Closing and to own, lease and operate its properties and assets. Transferee is not in default under or in violation of any provision of its Organizational Documents.
(b) Authorization and Validity. Transferee has all necessary power and authority to, and has taken (or, with respect to Transaction Documents to be executed at the Closing, will take) all action on its part necessary to, execute and deliver each Transaction Document to which it is or is specified to be a party, consummate the transactions contemplated hereby and thereby and perform its obligations hereunder and thereunder, and no other proceedings on the part of Transferee
-16-
are necessary to authorize any such Transaction Document and the transactions contemplated hereby and thereby. The Transaction Documents to which Transferee is a party have been (or when executed and delivered, will be) duly executed and delivered by Transferee and, assuming due execution by the other parties hereto and thereto, and are (or when executed and delivered, will be) legal, valid and binding obligations of Transferee, enforceable against Transferee in accordance with their respective terms, except as the same may be limited by (i) applicable bankruptcy, insolvency, moratorium, reorganization, fraudulent conveyance or similar laws in effect which affect the enforcement of creditors rights generally or (ii) general principles of equity, whether considered in a proceeding at law or in equity.
(c) No Other Representations or Warranties. Except for the representations and warranties expressly set forth in this Section 4.1, Transferee makes no other representation or warranty, express or implied, at law or in equity.
(d) No Conflicts. The execution, delivery and performance by Transferee of the Transaction Documents to which Transferee is a party does not and will not, and the consummation of the transactions contemplated hereby and thereby will not, with or without the giving of notice, the lapse of time or both:
(i) Violate or conflict with the Organizational Documents of Transferee;
(ii) Breach or violate, or result in a default under, any Applicable Law with respect to Transferee or permit or result in the revocation, cancellation, suspension or adverse modification of any License, certificate of authority or Consent to which Transferee or its properties is subject;
(iii) Violate or conflict with or result in a breach of any provision of, or constitute a default (or any event that, with or without due notice or lapse of time, or both, would constitute such a default) under, or result in the termination of, accelerate the performance required by, or require the Consent of any party to, any term or provision of any Contract of or binding on Transferee or its Affiliates; or
(iv) Result in the creation or imposition of any Lien on the Business or the property or assets of Transferee or its Affiliates.
(e) Certain Tax Matters. At all times from its inception through and including the Closing Date, Transferee will be treated as a corporation for U.S. federal and applicable state and local income tax purposes. Assuming the correctness of the representations made in Section 3.1(d), following the Closing, Transferee will be treated as the beneficial owner for U.S. federal and applicable state and local income tax purposes of 100% of the issued and outstanding shares of Common Stock.
-17-
ARTICLE V
COVENANTS OF THE PARTIES
SECTION 5.1 Transferees Covenants.
(a) Further Actions.
(i) Transferee shall, as promptly as practicable, use all commercially reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to fulfill its obligations hereunder and to consummate and make effective the transactions contemplated hereunder.
(ii) Transferee will not take any action that would cause any of its representations or warranties in Article IV to become untrue on the Closing Date or result in any of the conditions to the Closing set forth in Section 6.1 or Section 6.2 not being satisfied.
(iii) Transferee will coordinate and cooperate with Transferor in exchanging the information and supplying the reasonable assistance requested by them in connection with the filings and other actions contemplated by Section 5.3(b).
(b) Further Assurances. Following the Closing Date, Transferee shall from time to time execute and deliver such additional documents and take such other actions as Transferor reasonably requests to confirm the rights and obligations hereunder and render the transactions contemplated hereunder effective.
SECTION 5.2 Effect of Investigations. No investigation by any of the parties before or after the date of this Agreement, or the provision of any documents, whether pursuant to this Agreement or otherwise, will affect the representations and warranties of the parties in this Agreement or in any certificate delivered in connection with the Closing or in connection with the transfers of the Excluded Company Assets and Liabilities.
SECTION 5.3 Transferors Covenants.
(a) Conduct of Business. Except as expressly contemplated by this Agreement or as otherwise consented to by Transferee in writing, from the date of this Agreement to the earlier of the termination of this Agreement and the Closing, Transferor will, and will cause the Company to:
(i) maintain all the Retained Company Assets and Liabilities in the Company;
(ii) maintain all Licenses necessary to conduct the Business;
(iii) remain in good standing with Self-Regulatory Organizations; and
(iv) conduct the Business in the ordinary course consistent with past practice.
(b) Further Actions.
(i) Transferor will, and will cause the Company to, as promptly as practicable, use all commercially reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to fulfill its obligations hereunder and to consummate and make effective the transactions contemplated hereunder.
-18-
(ii) Transferor will, and will cause the Company to, as promptly as practicable:
(A) use all commercially reasonable efforts to make, or cause to be made, the filings and submissions that it are required to make under Applicable Law to consummate the transactions contemplated hereby; and
(B) use all commercially reasonable efforts to obtain, or cause to be obtained, the Governmental Approvals and Consents (including those Governmental Approvals listed on Schedule D to the Transferor Disclosure Schedule), if any, needed to consummate the transactions contemplated hereby.
(iii) Transferor will not, and will not cause the Company to, take any action that would cause any of the representations or warranties in Article III to become untrue on the Closing Date or result in any of the conditions to the Closing set forth in Section 6.1 or Section 6.2 not being satisfied.
(iv) Transferor will, and will cause the Company to, coordinate and cooperate with Transferee in exchanging the information and supplying the reasonable assistance requested by Transferee in connection with the filings and other actions contemplated by Section 5.1(a).
(c) Access and Information. From the date of this Agreement to the Closing, Transferor shall, or shall cause the Company to, give to Transferee and its Affiliates and their respective accountants, counsel and other representatives reasonable access during normal business hours to the Companys offices, properties, books, Contracts, commitments, reports, records and personnel, and give them, or give them access to, the documents, financial data, records and information with respect to Transferor and the Business as Transferee from time to time reasonably requests.
(d) Further Assurances. Following the Closing Date, Transferor shall, and shall cause the Company to, from time to time, execute and deliver such additional documents and take such other actions as Transferee reasonably requests to confirm the rights and obligations in the Transaction Documents and render the transactions contemplated hereunder and thereunder effective.
SECTION 5.4 Taxes.
(a) Transfer Taxes. All transfer, sales, use, registration or similar taxes and recording charges and fees, if any, in connection with the transactions effected pursuant to this Agreement shall be borne by Transferor.
(b) Transferor shall indemnify and hold harmless Transferee and its Affiliates (including the Company) and each of their respective officers, directors, employees, partners, members, stockholders, agents and other representatives and hold them harmless from:
(i) any and all liability for Taxes of the Company for all taxable periods ending on or before the Closing Date and the portion through the Closing Date for any Straddle Period;
-19-
(ii) any and all liability (as a result of Treasury Regulation Section 1.1502-6 or otherwise) for Taxes of Transferor or any other person (other than the Company) which has ever been affiliated with the Company, or with whom the Company has ever joined (or has ever been required to join) in filing any consolidated, combined, unitary or aggregate Tax Return, prior to the Closing Date, other than any such Taxes that would not have been incurred in the absence of Transferees breach of any representation contained in Section 4.1(e) or the covenant contained in Section 5.4(e)(ii);
(iii) all liability for Taxes arising (directly or indirectly) as a result of (A) the sale and transfer of the Shares (including, without limitation, any Taxes arising as a result of (I) the Section 338(h)(10) Election and (II) the recognition by Transferor or the Company of any deferred intercompany gain or excess loss account) or (B) any transfers described in Section 5.6 of Excluded Assets and Liabilities, other than (in each case) any such Taxes that would not have been incurred in the absence of Transferees breach of any representation contained in Section 4.1(e) or the covenant contained in Section 5.4(e)(ii); and
(iv) any payments required to be made after the Closing Date under any Tax sharing, Tax indemnity, Tax allocation or similar contracts (whether or not written) to which the Company was obligated, or was a party, on or prior to the Closing Date.
(c) In the case of any Straddle Period, the amount of Taxes allocable to the portion of the Straddle Period ending on the Closing Date shall be deemed to be:
(i) In the case of Taxes imposed on a periodic basis (such as real or personal property Taxes), the amount of such Taxes for the entire period (or, in the case of such Taxes determined on an arrears basis, the amount of such Taxes for the immediately preceding period) multiplied by a fraction, the numerator of which is the number of calendar days in the Straddle Period ending on and including the Closing Date and the denominator of which is the number of calendar days in the entire relevant Straddle Period; and
(ii) In the case of Taxes not described in Section 5.4(c)(i) above (such as franchise Taxes, Taxes that are based upon or related to income or receipts, based upon occupancy or imposed in connection with any sale or other transfer or assignment of property (real or personal, tangible or intangible)), the amount of any such Taxes shall be determined as if such taxable period ended as of the close of business on the Closing Date.
Notwithstanding anything herein to the contrary, all Taxes arising as a result of the Section 338(h)(10) Election shall be allocable to the portion of the Straddle Period ending on and including the Closing Date.
(d) Mitigation. Transferor and Transferee shall, upon reasonable request by the other party, use all commercially reasonable efforts to obtain any certificate or other document from any Governmental Authority or any other Person as may be necessary to mitigate, reduce or eliminate any Tax that could be imposed (including with respect to the transactions contemplated by the Transaction Documents) with respect to the assets of the Company and the Company. Notwithstanding the foregoing, no party shall be unreasonably required to prepare any document, or determine any information, not then in its possession in response to a request under this Section 5.4(d).
-20-
(e) Section 338(h)(10) Election.
(i) Transferor and Transferee agree to make an election under Section 338(h)(10) of the Code (collectively, the Section 338(h)(10) Election) with respect to the sale of the Shares hereunder. Within 120 calendar days after Closing, Transferor shall provide Transferee with a proposed allocation of the Purchase Price for the deemed asset sale (and other relevant items) (the Purchase Price Allocation), for Transferees review and comment. The Purchase Price Allocation shall be reasonable and shall be prepared in accordance with Section 338(h)(10) of the Code and the Treasury Regulations thereunder. If, within 30 calendar days following Transferors delivery of the Purchase Price Allocation, Transferee does not notify Transferor of its disagreement with the Purchase Price Allocation, then the Purchase Price Allocation shall be final and binding. If within such 30-calendar day period Transferee so notifies Transferor, then Transferor and Transferee shall cooperate in good faith to revise and finalize the Purchase Price Allocation. If Transferor and Transferee are unable to agree on the Purchase Price Allocation within 60 calendar days after the date Transferor provides the Purchase Price Allocation to Transferee, they shall request that any disputed items be resolved by an independent accounting firm jointly selected by Transferor and Transferee (the Accountant). The cost of the Accountant shall be borne one-half by Transferor and one-half by Transferee. The parties shall cooperate with each other in preparing IRS Forms 8023 and 8883 and any other applicable filings. Unless required by law, neither party shall take any position on any income Tax Return (including IRS Forms 8023 and 8883) nor for any other income Tax purpose that is inconsistent with the Section 338(h)(10) Election and the Purchase Price Allocation.
(ii) Following the Closing, (i) Transferee shall timely file IRS Forms 8023 and 8883 and any other applicable filings required to make a Section 338(h)(10) Election in connection with the purchase and sale of the Shares and (ii) Transferee shall not, for a period of twelve (12) months following the Closing Date: (A) take (or cause or permit any of its Affiliates to take) any action that would be treated as a liquidation of Transferee for U.S. federal income tax purposes (including, but not limited to, making an election pursuant to Treas. Reg. § 301.7701-3(c) to change Transferees classification for U.S. federal income tax purposes to something other than a corporation) or (B) sell, or cause or permit the Company to issue to a Person other than Transferee, shares of capital stock of the Company possessing more than 20% of the total voting power or more than 20% of the total value (in each case as those terms are used in Section 1504(a)(2) of the Code) of the capital stock of the Company; provided, that in determining the amount of any indemnification payment required pursuant to Section 8.2 in connection with a breach of this Section 5.4(e)(ii), for the avoidance of doubt, only those Losses that would not have been incurred in the absence of such a breach shall be taken into account.
SECTION 5.5 Pursuit of Claim by Transferor. To the extent Transferor pursues any claim, or has claims which it may pursue, against third-parties other than Transferee or any of its Affiliates, arising from the operation of the Company prior to Closing, Transferor may pursue such claims at its expense and shall be entitled to any recoveries it obtains therefrom. Transferee agrees to cooperate with Transferor in connection with the pursuit of any such claims, at the sole expense of Transferor. For the avoidance of doubt, neither Transferee nor any of its Affiliates including the Company shall be required to incur any costs or expenses in connection with Transferors right to pursue any such claims.
SECTION 5.6 Transfer of Excluded Company Assets and Liabilities to Transferor. Set forth in on Schedule A to the Transferor Disclosure Schedule are assets and liabilities of the Company which are not intended to be owned by the Company post-Closing (with all assets and Liabilities of the Company, other than the Retained Company Assets and Liabilities, referred to as the Excluded Company Assets and Liabilities). To the extent that Transferor and Company have not transferred the assets
-21-
included in the Excluded Company Assets and Liabilities out of the Company or assumed the Liabilities included in the Excluded Company Assets and Liabilities prior to the Closing, Transferee will cooperate, and cause the Company to cooperate, with Transferor to, and Transferor shall effect such transfers and assumptions as promptly as practicable. Until such transfers and assumptions can be completed, Transferee and the Company will pass through to Transferor the economic benefits and costs (including Taxes) attributable to the Excluded Company Assets and Liabilities. The expense of effecting the transfers of the Excluded Company Assets and Liabilities, including any Taxes imposed as a result of such transfers, will be solely borne by Transferor. For the avoidance of doubt, neither Transferee nor any of its Affiliates shall be required to incur any costs or expenses in connection with effecting the transfers contemplated by this Section 5.6.
SECTION 5.7 Press Releases, Etc. Transferor and Transferee will consult with each other as to the form, substance and timing of any press release or other public disclosure of matters related the Transaction Documents, or any of the transactions contemplated hereby or thereby and no such press release or other public disclosure will be made without the consent of the other party, which shall not be unreasonably withheld or delayed; provided, however, that each of Transferor and Transferee may make such disclosures as are required by Applicable Law after being advised by its counsel that such disclosure is required by Applicable Law and after giving the other a reasonable opportunity to review the proposed disclosure and provide comments.
SECTION 5.8 Expenses Incident to this Agreement. Except as otherwise expressly provided herein, whether or not the transactions contemplated by the Transaction Documents are consummated: (i) Transferor shall pay its own and the Companys expenses incident to the negotiation and consummation of the transactions contemplated hereby and the preparation and carrying out of the transactions contemplated hereby and (ii) Transferee shall pay its own expenses incident to the negotiation and consummation of the transactions contemplated hereby and the preparation and carrying out of the transactions contemplated hereby.
SECTION 5.9 Confidentiality.
(a) Transferor hereby agrees with Transferee that Transferor will not and that it will cause its Affiliates and their directors, officers, partners, members, stockholders, Affiliates, employees, agents, consultants, advisors or other representatives, including legal counsel, accountants and financial advisors not to, at any time on or after the Closing, directly or indirectly, without the prior written consent of Transferee disclose or use, any Confidential Information involving or relating to the Company; provided, however, that the information subject to the foregoing provisions of this sentence will not include any information generally available to, or known by, the public (other than as a result of disclosure in violation hereof), which is in the public domain or enters into the public domain through no fault of Transferor, or is available to Transferor on a non-confidential basis from a source other than Transferee or any of its Affiliates; provided that such source is not and was not bound by a confidentiality agreement or other legal duty of confidentiality to such parties; and provided, further, that the provisions of this Section 5.9(a) will not prohibit any retention of copies of records or disclosure (i) required by any Applicable Law or (ii) necessary or appropriate in making any registration, declaration, notice, report, submission or other filing or obtaining any Consent required for the consummation of the transactions contemplated by this Agreement, the other Transaction Documents.
(b) Transferee hereby agrees with Transferor that Transferee will not and that it will cause its Affiliates and their directors, officers, partners, members, stockholders, Affiliates, employees, agents, consultants, advisors or other representatives, including legal counsel, accountants and financial advisors not to, at any time on or after the Closing, directly or indirectly, without
-22-
the prior written consent of Transferor disclose or use, any Confidential Information involving or relating to the Excluded Company Assets and Liabilities; provided, however, that the information subject to the foregoing provisions of this sentence will not include any information generally available to, or known by, the public (other than as a result of disclosure in violation hereof), which is in the public domain or enters into the public domain through no fault of Transferee, or is available to Transferee on a non-confidential basis from a source other than Transferor or any of its Affiliates; provided that such source is not and was not bound by a confidentiality agreement or other legal duty of confidentiality to such parties; and provided, further, that the provisions of this Section 5.9(b) will not prohibit any retention of copies of records or disclosure (i) required by any Applicable Law or (ii) necessary or appropriate in making any registration, declaration, notice, report, submission or other filing or obtaining any Consent required for the consummation of the transactions contemplated by this Agreement, the other Transaction Documents.
ARTICLE VI
CONDITIONS PRECEDENT TO THE CLOSING
SECTION 6.1 Conditions to Each Partys Obligations. The obligations of Transferor, on the one hand, and Transferee, on the other hand, to consummate the transactions contemplated by the Transaction Documents are subject to the fulfillment, on or before the Closing Date, of the following conditions:
(a) No Injunction, etc. No court or other Governmental Authority has issued an order, injunction, decree or judgment, and there is no action or proceeding pending or threatened before a court or other Governmental Authority (including an action or proceeding of a private party) restraining, enjoining or otherwise prohibiting, or seeking to restrain, enjoin or otherwise prohibit, consummation of the transactions contemplated by the Transaction Documents. No court or other Governmental Authority has promulgated, entered or issued, or determined to be applicable to this Agreement, any Applicable Law making the consummation of the transactions contemplated by the Transaction Documents illegal, and no proceeding with respect to the application of any such Applicable Law is pending.
(b) Governmental Approvals. All Governmental Approvals listed on Schedule D of the Transferor Disclosure Schedule and any other Governmental Approvals required to be made or obtained in connection with executing and delivering this Agreement or consummating the transactions contemplated by the Transaction Documents, have been made or obtained, on terms acceptable to Transferee in its sole discretion.
SECTION 6.2 Conditions to Transferees Obligations. The obligations of Transferee, to consummate the transactions contemplated by the Transaction Documents are also subject to the fulfillment, on or before the Closing Date, of the following conditions:
(a) Representations Concerning Transferor. The representations and warranties concerning Transferor and the Company in Section 3.1:
(i) other than the representations and warranties that are by their terms qualified by materiality, Material Adverse Effect or a derivative thereof, were true and correct in all material respects as of the date of this Agreement (except representations and warranties made as of a certain date, which are true and correct in all material respects as of such date), and are repeated and are true and correct in all material respects as of the Closing Date with the same effect as though made on and as of the Closing (except representations and warranties made as of a certain date, which are true and correct in all material respects as of such date); and
-23-
(ii) that are by their terms qualified by materiality, Material Adverse Effect or a derivative thereof, were true and correct in all respects as of the date of this Agreement (except representations and warranties made as of a certain date, which are true and correct in all respects as of such date), and are repeated and are true and correct in all respects as of the Closing Date with the same effect as though made on and as of the Closing (except representations and warranties made as of a certain date, which are true and correct in all respects as of such date).
(b) Performance. Transferor has duly performed and complied in all material respects with its covenants, obligations and conditions under this Agreement by or before Closing.
(c) Certificates. Transferor shall have delivered to Transferee a certificate, dated as of the Closing Date, certifying the matters in Sections 6.2(a) and (b).
(d) Lien Releases. Transferor shall, or shall have caused the Company to, have obtained and delivered to Transferee all Lien releases that are necessary or appropriate (as determined by Transferee in its sole discretion) to consummate the transactions contemplated hereby.
(e) No Material Adverse Effect. Since the date of this Agreement, the Company shall not have suffered a Material Adverse Effect and no events, facts or circumstances shall have occurred which could reasonably be expected to result, individually or in the aggregate, in a Material Adverse Effect with respect to Transferor or the Company.
(f) Organizational Documents. Transferor shall have delivered to Transferee a certificate executed by an authorized officer of Transferor attaching (i) copies of the Certificate of Incorporation of the Company as in effect on the Closing Date, including all amendments thereto, certified by the Secretary of State of the State of New York; (ii) a certificate from the Secretary of State of the State of New York dated as a recent date from the Closing Date to the effect that Company is in good standing in such jurisdiction and listing all Organizational Documents of Transferor on file; and (iii) copies of the resolutions of the board of directors of the Company approving the transactions contemplated by this Agreement.
(g) Books and Records. Transferor shall, or shall have caused the Company to, have delivered to Transferee all books and records relating to the Company or a copy of any books and records required by Applicable Law to be retained by Transferor.
(h) Transfer of Assets and Liabilities. The Company shall have transferred out to Transferor and Transferee shall have assumed the Excluded Company Assets and Liabilities; provided that if such transfers have not been made prior to Closing, the terms of Section 5.6 shall apply.
(i) Tax Certificate. Transferor shall have delivered to Transferee on the Closing Date a certificate of non-foreign status (in accordance with Treasury Regulation Section 1.1445-2(b)) in form and substance reasonably satisfactory to Transferee.
-24-
(j) Transaction Documents. Each of Transferor and its Affiliates party to (or specified to be a party to) any Transaction Document shall have executed and delivered each of the Transaction Documents to which they are a party (or specified to be a party) to be held in escrow until the closing of the transactions under the Assignment and Assumption Agreement, dated May 31, 2012 between Apex Clearing Holdings LLC and Penson Financial Services, Inc.
(k) Assignment and Assumption Closing. All conditions to the Transferees obligations under that certain Assignment and Assumption Agreement, dated May 31, 2012 between Apex Clearing Holdings LLC and Penson Financial Services, Inc. shall have been satisfied or waived.
(l) Change of Name. The Company shall have filed an amendment to its Organizational Documents to change its name to Apex Clearing Corporation and shall have taken all necessary actions to cease all use of the Companys former name, Ridge Clearing & Outsourcing Solutions, Inc.
SECTION 6.3 Conditions to Transferors Obligations. The obligations of Transferor, to consummate the transactions contemplated by the Transaction Documents are also subject to the fulfillment, on or before the Closing, of the following conditions:
(a) Representations Concerning Transferee. The representations and warranties concerning Transferee in Section 4.1:
(i) other than the representations and warranties that are by their terms qualified by materiality, Material Adverse Effect or a derivative thereof, were true and correct in all material respects as of the date of this Agreement (except representations and warranties made as of a certain date, which are true and correct in all material respects as of such date), and are repeated and are true and correct in all material respects as of the Closing Date with the same effect as though made on and as of the Closing (except representations and warranties made as of a certain date, which are true and correct in all material respects as of such date); and
(ii) that are by their terms qualified by materiality, Material Adverse Effect or a derivative thereof, were true and correct in all respects as of the date of this Agreement (except representations and warranties made as of a certain date, which are true and correct in all respects as of such date), and are repeated and are true and correct in all respects as of the Closing Date with the same effect as though made on and as of the Closing (except representations and warranties made as of a certain date, which are true and correct in all respects as of such date).
(b) Performance. Transferee has duly performed and complied in all material respects with its covenants, obligations and conditions under this Agreement by or before Closing.
(c) Transaction Documents. Each of Transferee and its Affiliates party to (or specified to be a party to) any Transaction Document shall have executed and delivered each of the Transaction Documents to which they are a party (or specified to be a party) to be held in escrow until the closing of the transactions under the Assignment and Assumption Agreement, dated May 31, 2012 between Apex Clearing Holdings LLC and Penson Financial Services, Inc.
(d) Certificates. Transferee shall have delivered to Transferee a certificate, dated as of the Closing Date, certifying the matters in Sections 6.3(a), (b) and (c).
-25-
(e) IRS Form 8832. Transferee shall have delivered to Transferor a copy of its as-filed IRS Form 8832, pursuant to which it has elected to be classified as a corporation for federal income Tax purposes, with an effective date prior to the Closing Date.
ARTICLE VII
TERMINATION
SECTION 7.1 Termination. This Agreement may be terminated before the Closing Date:
(a) by the written agreement of Transferee and Transferor;
(b) by Transferee if that certain Assignment and Assumption Agreement, dated May 31, 2012 between Apex Clearing Holdings LLC, the Company and Penson Financial Services, Inc. is terminated;
(c) by Transferee by written notice to Transferor, at any date or time after 5:00 p.m., New York City time, on June 5, 2012 (the Outside Date) if the Closing has not occurred by then (unless due to a material breach of this Agreement by Transferee), unless this date is extended by the written consent of Transferee;
(d) by Transferor by written notice to Transferee, at any date or time after 5:00 p.m., New York City time, on June 5, 2012 if the Closing has not occurred by then (unless due to a material breach of this Agreement by Transferor), unless this date is extended by the written consent of Transferee; and
(e) by Transferee if Transferor has materially breached any of its representations, warranties, covenants, agreements or obligations in this Agreement and (if not a willful breach) has not cured such breach within two (2) Business Days of receiving notice of the breach, provided that Transferee has performed and complied, in all material respects, with its representations, warranties, covenants, agreements and obligations required by this Agreement to have been performed or complied with before this time (it being understood and acknowledged that the truthfulness and accuracy of Transferors representations and warranties and the fulfillment of its obligations under this Agreement shall be determined without giving effect to any materiality or Material Adverse Effect qualifier contained therein).
SECTION 7.2 Effect of Termination. If this Agreement is terminated in accordance with Section 7.1, it shall become void and have no effect, without any obligation or liability to any Person in respect of the Agreement or of the transactions contemplated by the Transaction Documents on the part of any party, or a partys directors, officers, employees, agents, representatives, advisers, stockholders, members, partners or Affiliates, except that the provisions of Section 5.7, this Section 7.2, and Article IX shall remain in full force and effect and shall survive any termination of this Agreement and except that each party shall remain liable for any breach of this Agreement prior to its termination.
-26-
ARTICLE VIII
INDEMNIFICATION
SECTION 8.1 Indemnification by Transferor.
(a) Subject to Section 8.1(b), following the Closing, Transferor will indemnify and hold harmless Transferee and any of its Affiliates (and their respective officers, directors, employees, shareholders, limited or general partners, members, successors, assigns, agents, advisers and representatives) (each, a Transferee Indemnified Person), from, against and in respect of any and all Losses, including for purposes of this Section 8.1 all claims for consequential damages whether or not involving a Third Party Claim, incurred, sustained or suffered by the Transferee Indemnified Persons or any of them as a result of, arising out of or directly or indirectly relating to:
(i) any breach of, or inaccuracy in, any representation or warranty when made by Transferor in this Agreement;
(ii) any breach, violation or non-fulfillment of any covenant or agreement of Transferor, including under this Article VIII, in this Agreement;
(iii) any fraud of Transferor;
(iv) the Excluded Company Assets and Liabilities; or
(v) the ownership and operation of the Company on or prior to Closing (including, with respect to the employment of any Company employees and any terminations, transfers or layoffs thereof or any compensation or benefit plans of the Company or its affiliates).
(b) Subject to Section 8.1(c), Transferor will have no obligation to indemnify the Transferee Indemnified Persons pursuant to Section 8.1(a)(i) in respect of Losses arising from the breach of, or inaccuracy in, any representation or warranty described therein unless the aggregate amount of all such Losses incurred or suffered by the Transferee Indemnified Persons exceeds $75,000 (the Deductible), at which point Transferor will indemnify the Transferee Indemnified Persons for such Losses that exceed the Deductible, and the aggregate liability in respect of claims for indemnification pursuant to Section 8.1(a)(i) will not exceed $10,000,000 (the Basic Liability Cap).
(c) Notwithstanding the foregoing, the Deductible and the Basic Liability Cap shall not apply to Losses resulting from, arising out of, or incurred by the Transferee Indemnified Persons in connection with (i) claims for indemnification pursuant to Section 8.1(a)(i) in respect of breaches of, or inaccuracies in, representations and warranties set forth in Sections 3.1(a) (Organization and Authority), (c) Regulatory Consents, (d) (Capitalization; Title), (f) No Subsidiaries, (g) (No Conflicts), (l) (Taxes) and (m) (No Brokers or Finder) (such representations and warranties, Basic Transferor Representations), or (ii) claims based upon fraud or intentional misrepresentation. Claims for indemnification pursuant to any other provision of Section 8.1(a) are not subject to the monetary limitations set forth in Section 8.1(b).
-27-
SECTION 8.2 Indemnification by Transferee.
(a) Subject to the limitations and other terms and conditions set forth in this Article VIII, Transferee will indemnify and hold harmless Transferor and its Affiliates (and their respective officers, directors, employees, shareholders, members, successors, assigns, agents, advisers and representatives) (each, a Transferor Indemnified Person), from, against and in respect of any and all Losses, whether or not involving a Third Party Claim, incurred or suffered by the Transferor Indemnified Persons or any of them as a result of, arising out of or relating to, directly or indirectly:
(i) any breach of, or inaccuracy in, any representation or warranty made by Transferee in this Agreement;
(ii) any breach, violation or non-fulfillment of any covenant or agreement of Transferee, including under this Section 8.2(a), to this Agreement.
(iii) any fraud of Transferee; or
(iv) the operation of the Company after Closing (other than Losses (x) relating to the Excluded Company Assets and Liabilities or (y) for which Transferor may be responsible under the Broadridge Master Services Agreement.
(b) Transferee will have no obligation to indemnify the Transferor Indemnified Persons pursuant to Section 8.2(a)(i) in respect of Losses arising from the breach of, or inaccuracy in, any representation or warranty described therein unless and until the aggregate amount of all such Losses incurred or suffered by the Transferor Indemnified Persons exceeds the Deductible (at which point Transferee will indemnify the Transferor Indemnified Persons for all such Losses that exceed the Deductible), and Transferees aggregate liability in respect of claims for indemnification pursuant to Section 8.2(a)(i) will not exceed $10,000,000 (the Transferee Liability Cap).
(c) Notwithstanding the foregoing, the Deductible and Transferee Liability Cap shall not apply to Losses resulting from, arising out of, or incurred by the Transferor Indemnified Persons in connection with (i) claims for indemnification pursuant to Section 8.2(a)(i) in respect of breaches of, or inaccuracies in, the representations and warranties set forth in Sections 4.1(a) (Existence and Good Standing), (b) (Authorization and Validity), or (e) (Certain Tax Matters) (such representations, warranties and covenant, Basic Transferee Representations); or (ii) claims based upon fraud or intentional misrepresentation. Claims for indemnification pursuant to any other provision of Section 8.2(a) are not subject to the limits set forth in Section 8.2(b).
SECTION 8.3 Survival. Each of the representations and warranties in this Agreement shall survive the Closing for a period of twenty-four (24) months following the Closing Date; provided, however, that (a) the Basic Transferor Representations and Basic Transferee Representations shall survive the Closing indefinitely and (b) the representations and warranties in Sections 3.1(l) (Taxes) or in any certificate delivered pursuant to this Agreement and related thereto shall survive the Closing until the end of the applicable statute of limitations. All covenants set forth in this Agreement shall survive the Closing indefinitely unless they expire earlier in accordance with the express terms of this Agreement. No claim, lawsuit, or other proceeding arising out of or related to the breach of any representation or warranty contained in this Agreement may be made by any Indemnified Party unless notice of such claim, lawsuit or other proceeding is given to the Indemnifying Party in accordance with Section 8.4 prior to the end of the applicable survival period set forth in this Section 8.3.
-28-
SECTION 8.4 Third Party Claims.
(a) Notice of Claim. If any third party notifies an Indemnified Party with respect to any matter which may give rise to Losses for which indemnification may be sought pursuant to Section 8.1 or Section 8.2, as the case may be (a Third Party Claim), against Transferee, on the one hand, or Transferor, on the other hand (an Indemnifying Party), under this Section 8.4, then the Indemnified Party will promptly give written notice to the Indemnifying Party; provided, however, that no delay on the part of the Indemnified Party in notifying the Indemnifying Party will relieve the Indemnifying Party from any obligation under this Section 8.4, except to the extent such delay actually and materially prejudices the Indemnifying Party.
(b) Assumption of Defense, etc. The Indemnifying Party will be entitled to participate in the defense of any Third Party Claim that is the subject of a notice given by the Indemnified Party pursuant to Section 8.4(a). In addition, the Indemnifying Party will have the right to assume the defense of such Third Party Claim with counsel of its choice reasonably satisfactory to the Indemnified Party so long as (i) the Indemnifying Party gives written notice to the Indemnified Party within fifteen (15) calendar days after the Indemnified Party has given notice of the Third Party Claim that the Indemnifying Party will indemnify the Indemnified Party from and against the entirety of any and all Losses the Indemnified Party may suffer, subject to the limitations contained in Section 8.1(b) or Section 8.2(b), resulting from, arising out of, relating to, in the nature of, or caused by the Third Party Claim; (ii) the Indemnifying Party provides the Indemnified Party with evidence reasonably acceptable to the Indemnified Party that the Indemnifying Party will have adequate financial resources to defend against the Third Party Claim and fulfill its indemnification obligations hereunder; (iii) the Third Party Claim involves only money damages and does not seek an injunction or other equitable relief against the Indemnified Party; (iv) the Indemnified Party has not provided the Indemnifying Party with notice that the Indemnified Party has been advised by counsel that an actual or potential conflict exists between the Indemnified Party and the Indemnifying Party in connection with the defense of the Third Party Claim; (v) the Third Party Claim does not relate to or otherwise arise in connection with any criminal or regulatory enforcement action, suit or proceeding; and (vi) the Indemnified Party provided the Indemnifying Party with written notice that the settlement of, an adverse judgment with respect to or the Indemnifying Partys conduct of the defense of the Third Party Claim is not, in the good faith judgment of the Indemnified Party, likely to be adverse to the Indemnified Partys reputation or continuing business interests. The Indemnified Party may retain separate co-counsel at its sole cost and expense and participate in the defense of the Third Party Claim; provided, however, that the Indemnifying Party will pay the fees and expenses of separate co-counsel retained by the Indemnified Party that are incurred prior to Indemnifying Partys assumption of control of the defense of the Third Party Claim.
(c) Limitations on Indemnifying Party. Neither the Indemnifying Party nor the Indemnified Party will consent to the entry of any judgment or enter into any compromise or settlement with respect to any Third Party Claim without the prior written consent of the other, unless such judgment, compromise or settlement (i) provides for the payment by the Indemnifying Party of money as sole relief for the claimant, (ii) results in the full and general release of the Transferee Indemnified Persons or Transferor Indemnified Persons, as applicable, from all liabilities arising or relating to, or in connection with, the Third Party Claim, and (iii) involves no finding or admission of any violation of Applicable Law or the rights of any Person and has no effect on any other claims that may be made against the Indemnified Party.
-29-
(d) Indemnified Partys Control. If the Indemnifying Party does not deliver to the Indemnified Party the notice contemplated by Section 8.4(b) within fifteen (15) calendar days after the Indemnified Party has given notice of the Third Party Claim pursuant to Section 8.4(a) (or any of the conditions set forth in clauses (i) though (vi) of the second sentence of Section 8.4(b) is unsatisfied), or otherwise at any time fails to conduct the defense of the Third Party Claim actively and diligently, the Indemnified Party may defend the Third Party Claim in a good faith and reasonable manner; provided, however, that if the Indemnified Party does not permit the Indemnifying Party to conduct the defense, then the Indemnified Party may not consent to the entry of any judgment or enter into any compromise or settlement of any Third Party Claim without the prior written consent of the Indemnifying Party, which consent will not be unreasonably withheld, delayed or conditioned. In the event that the Indemnified Party conducts the defense of the Third Party Claim pursuant to this Section 8.4, the Indemnifying Party will remain responsible for any and all other Losses that the Indemnified Party is responsible for pursuant to Section 8.1 or Section 8.2, as applicable.
(e) Consent to Jurisdiction Regarding Third Party Claim. Transferee and Transferor, each in its capacity as an Indemnifying Party, hereby consents to the non-exclusive jurisdiction of any court in which any Third Party Claim may be brought against any Indemnified Party for purposes of any claim which such Indemnified Party may have against such Indemnifying Party pursuant to this Agreement in connection with such Third Party Claim, and in furtherance thereof, the provisions of Section 9.3 are incorporated herein by reference, mutatis mutandis.
SECTION 8.5 Treatment of Materiality. For purposes of this Article VIII, in determining whether there has been any breach of any representation or warranty, or the amount of any Losses related to a breach of a representation or warranty, such representations and warranties shall be read without regard to any materiality or Material Adverse Effect or similar qualifier contained therein, and any breach thereof as so read shall be indemnifiable hereunder, subject to the limitations set forth in this Article VIII.
SECTION 8.6 Waiver of Rights to Subrogation. Transferor shall not be entitled to, and Transferor hereby irrevocably waives any right to, subrogation to Transferee with respect to any liability of Transferor that may arise under or pursuant to the Transaction Documents.
SECTION 8.7 Investigation. The right to indemnification and all other remedies based upon any representation, warranty, covenant or agreement contained in this Agreement shall not be limited, diminished or otherwise affected by any investigation conducted with respect to, or any knowledge acquired at any time, whether before or after the Closing and regardless of whether such knowledge came from Transferee, Transferor or their respective representatives or any other Person, with respect to the accuracy or inaccuracy of or compliance with any such representation, warranty, covenant or agreement.
SECTION 8.8 Calculation of Losses. An Indemnified Party shall not be entitled to recover any amount due hereunder more than once in respect of the same Loss. In calculating any amount due hereunder in respect of Losses, Losses shall be reduced by any amounts actually recovered by the Indemnified Party under third party insurance policies or third party indemnification obligations or other rights of recovery from a third party with respect to such Losses, net of any deductible or any other expense incurred by the Indemnified Party in obtaining such recovery (including, with respect to insurance recoveries, any increase in premiums), other than any such recovery under any self insurance; provided however, that no Indemnified Party shall be required to seek any such recovery.
SECTION 8.9 Limitation on Losses. Except to the extent actually paid to a third party, no party shall, under any circumstance, have any liability to any other party for any punitive or special damages claimed by such other party under the terms of or due to any breach or non-performance of this Agreement.
-30-
SECTION 8.10 Setoff. Any Losses under Sections 8.1 and 8.2 shall be determined after giving effect to any actual cash payments, setoffs or recoupment of cash amounts in each case actually received, realized or retained by an Indemnified Party as a result of any matter giving rise to a claim for such indemnification. Nothing in this Article VIII will require any party to pursue recovery under any of its insurance policies. The parties expressly agree that to the extent any indemnity payment is due to a Transferee Indemnified Person hereunder, such amount may be reduced, set-off and deducted by Transferee or the Company from any payments due to Transferor or its Affiliates under any other Transaction Document.
SECTION 8.11 Non-Third Party Claims. In the event any Indemnified Party has a claim under Section 8.1 or Section 8.2 that does not involve a Third Party Claim, the Indemnified Party shall deliver notice of such claim to the Indemnifying Party; provided, however, that no delay on the part of the Indemnified Party in notifying the Indemnifying Party will relieve the Indemnifying Party from any obligation under this Article VIII, except to the extent such delay actually and materially prejudices the Indemnifying Party. If the Indemnifying Party does not notify the Indemnified Party within twenty (20) Business Days following its receipt of such notice that the Indemnifying Party disputes the liability to such Indemnified Party, such claim specified by such Indemnified Party in such notice shall be conclusively deemed a liability of the Indemnifying Party and shall be deemed to have been finally determined hereunder. For the avoidance of doubt, any legal fees and other expenses reasonably incurred by any Indemnified Party in connection with the assertion of any indemnification claim under this Article VIII shall be included in the Losses subject to indemnification in respect of such claim.
SECTION 8.12 Limitations on Remedies. The indemnification provided in this Article VIII shall constitute the sole and exclusive remedy of the parties hereto with respect to all Losses relating to, arising from or connected to a breach of the representations and warranties or covenants contained herein or in any certificate executed and delivered pursuant hereto (other than claims of, or causes of action arising out of, fraud or intentional misrepresentation with respect to the representations and warranties contained herein).
ARTICLE IX
MISCELLANEOUS
SECTION 9.1 Waivers. Any waiver of any terms or conditions or of the breach of any covenant, representation or warranty of this Agreement in any one instance shall not operate as or be deemed to be or construed as a further or continuing waiver of any other breach of such term, condition, covenant, representation or warranty or any other term, condition, covenant, representation or warranty, nor shall any failure or delay at any time or times to enforce or require performance of any provision hereof operate as a waiver of or affect in any manner such partys right at a later time to enforce or require performance of such provision or of any other provision hereof; provided, however, that no such waiver, unless it, by its own terms, explicitly provides to the contrary, shall be construed to effect a continuing waiver of the provision being waived and no such waiver in any instance shall constitute a waiver in any other instance or for any other purpose or impair the right of the party against whom such waiver is claimed in all other instances or for all other purposes to require full compliance.
SECTION 9.2 Modifications. Except as otherwise expressly provided in this Agreement, neither this Agreement (including any Schedules hereto), nor any term hereof (or thereof) may be changed, amended, modified, waived, discharged or terminated except to the extent that the same is effected and evidenced by the written agreement of all of the parties hereto (or their successors in interest, if applicable).
-31-
SECTION 9.3 Governing Law.
(a) This Agreement shall be governed by, and interpreted in accordance with, the laws of the State of New York applicable to agreements made and to be performed entirely within such State. All actions and proceedings arising out of or relating to this Agreement, including the resolution of any and all disputes hereunder, shall be heard and determined in the state and federal courts located in New York, New York, and the Parties to this Agreement hereby irrevocably submit to the exclusive jurisdiction of such courts in any such action or proceeding and irrevocably waive the defense of an inconvenient forum to the maintenance of any such action or proceeding.
(b) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES AND, THEREFORE, EACH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH SUCH PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) EACH SUCH PARTY MAKES THIS WAIVER VOLUNTARILY AND (iv) EACH SUCH PARTY HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 9.3(C).
SECTION 9.4 Notices.
(a) All notices, requests, demands and other communications required or permitted under this Agreement shall be in writing and sent as follows:
(i) If to Transferee, to:
c/o PEAK6 Investments, L.P.
141 W. Jackson Blvd., Suite 500
Chicago, IL 60604
Email: legal@peak6.com
Attention: CEO and Chief Legal Officer
with a copy (which shall not constitute notice) to:
Sidley Austin LLP
One South Dearborn
Chicago, Illinois 60603
Facsimile: (312) 853.7036
Attention: John R. Box
-32-
(ii) If to Transferor, to:
Broadridge Financial Solutions, Inc.
1981 Marcus Avenue
Lake Success, NY 11042
Attention: Adam. D. Amsterdam
Email: Adam.Amsterdam@broadridge.com
(b) All notices and other communications required or permitted under this Agreement which are addressed as provided in Section 9.4(a), (i) if delivered personally against proper receipt shall be effective upon delivery; (ii) if sent via facsimile shall be effective upon the date of dispatch if confirmation of transmission is provided and (iii) if sent (A) by certified or registered mail with postage prepaid or (B) by Federal Express or similar courier service with courier fees paid by the sender, shall be effective upon receipt. The parties hereto may from time to time change their respective addresses for the purpose of notices to that party by a similar notice specifying a new address, but no such change shall be deemed to have been given unless it is sent and received in accordance with this Section 9.4.
SECTION 9.5 Entire Understanding; No Third Party Beneficiaries. This Agreement represents the entire understanding of the parties hereto with reference to the transactions contemplated hereby and supersedes any and all other oral or written agreements heretofore made. Except as expressly provided herein, nothing in this Agreement, express or implied, is intended to confer upon any Person, other than the parties hereto or their respective heirs, personal representatives, successors and permitted assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement.
SECTION 9.6 Assignability. Neither this Agreement nor any rights or obligations hereunder shall be assignable by any party to any other Person (whether by operation of law or otherwise) without the written consent of the other parties and any purported assignment in violation of this Section 9.6 shall be void ab initio; provided that this Agreement (including the rights, interests and obligations hereunder) may be assigned in whole or in part by Transferee to any Affiliate of Transferee or any successor entity (provided that Transferee remains liable for all obligations hereunder) or by operation of any consolidation or merger of Transferee and any of its Affiliates and by Transferor to any Affiliate or successor entity (provided that Transferor remains liable for all obligations hereunder). Subject to the preceding sentence, this Agreement shall be binding upon and enforceable by, and shall inure to the benefit of, the parties hereto and their respective heirs, personal representatives, successors and permitted assigns (which shall include any successor entity to Transferor) and no others.
SECTION 9.7 Severability. The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed in all respects by interpreting such invalid or unenforceable provision as nearly to the original meaning as possible so as to make it valid and enforceable or, if that is not possible or permitted by Applicable Law, by omitting such invalid or unenforceable provision. If any material provision of this Agreement is determined by a court or regulatory body to be invalid or unenforceable, then the parties shall use their best efforts to address the implications of such invalidity or unenforceability so as to preserve the essential understanding of the parties with respect hereto.
SECTION 9.8 Specific Performance and Injunctive Relief. The parties acknowledge that money damages would not be a sufficient remedy for any breach of this Agreement and that irreparable harm would result if this Agreement were not specifically enforced. Therefore, the rights and obligations of the parties under this Agreement shall be enforceable by a decree of specific performance issued
-33-
by any court of competent jurisdiction, and appropriate injunctive relief may be applied for and granted in connection therewith. If Transferor fails or Transferee fails to consummate the transactions contemplated in this Agreement, and if this Agreement has not been terminated pursuant to Section 7.1 of this Agreement, Transferee or Transferor, as the case may be, may commence an action, suit or proceeding for the specific enforcement of this Agreement, subject to any defenses Transferor or Transferee, as applicable, may validly assert to any such action. In the event that this Agreement is terminated pursuant to Section 7.1 hereof, nothing in this Section 9.8 shall be construed to limit the right of Transferor or Transferee to seek injunctive relief with respect to the breach of any covenant or agreement that survives such termination in accordance with Section 7.2.
SECTION 9.9 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. The signature pages hereto may be transmitted by facsimile or .pdf, and if so transmitted, shall constitute originals.
[Remainder of page left intentionally blank.]
-34-
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date set forth above.
BROADRIDGE FINANCIAL SOLUTIONS, INC. | ||
By: | /s/ John Hogan | |
Name: John Hogan | ||
Title: President |
BROADRIDGE SECURITIES PROCESSING SOLUTIONS, INC. | ||
By: | /s/ Adam Amsterdam | |
Name: Adam Amsterdam | ||
Title: President |
APEX CLEARING HOLDINGS LLC | ||
By: | APEX CLEARING SOLUTIONS LLC, in | |
its capacity as managing member of Apex Clearing Holdings LLC | ||
By: | PEAK6 INVESTMENTS, L.P., in its | |
Capacity as Manager of Apex Clearing Solutions LLC | ||
By: | /s/ Jenny Just | |
Name: Jenny Just | ||
Title: Manager |
[Signature Page to Broadridge Purchase and Sale Agreement]
EXHIBIT 10.40
EXECUTION VERSION
TERMINATION AND MUTUAL RELEASE AGREEMENT
This Termination and Mutual Release Agreement (this Agreement) is made and entered into as of the 5th day of June, 2012 (the Effective Date), by and among Broadridge Financial Solutions, Inc. (Broadridge Financial), Ridge Clearing & Outsourcing Solutions, Inc. (Ridge), Broadridge Financial Solutions (Canada) Inc., (Broadridge Canada and, together with Broadridge Financial and Ridge, collectively Broadridge), Penson Worldwide, Inc. (PWI), Penson Financial Services, Inc. (PFSI) and Penson Financial Services Canada Inc. (PFSC and, together with PWI and PFSI, collectively Penson) (Broadridge, PWI, PFSC and PFSI is referred to each as a Party and collectively, as the Parties).
RECITALS:
WHEREAS, Broadridge Financial and PWI entered into that certain Master Services Agreement dated as of November 2, 2009, as amended from time to time prior to the date hereof (as amended, the MSA);
WHEREAS, Broadridge Financial and PWI agreed to cause their respective affiliates to enter into schedules governed by the terms of the MSA (including, without limitation, any and all attachments thereto, each a Schedule and collectively, the Schedules, and the MSA, the Schedules and all attachments and other documents, agreements and instruments related thereto referred to as the MSA Documents), by which certain affiliates of Broadridge (the Ridge Local Affiliates) would provide certain services to certain affiliates of PWI, including PFSI and PFSC, (the Penson Local Affiliates) in Canada, the United States and the United Kingdom1;
WHEREAS, Broadridge, the Ridge Local Affiliates, Penson and the Penson Local Affiliates (each of the foregoing, an MSA Party, and, collectively, the MSA Parties) did enter into certain Schedules to provide certain services, which are governed by the terms of the MSA;
WHEREAS, PFSI has advised Broadridge that it has been directed by FINRA to enter into a transaction that calls for the transfer of customer accounts to a new SEC registered broker-dealer by June 8, 2012 or FINRA will seriously consider asking PFSI to accede to a SIPC liquidation, thereby triggering a termination of certain Schedules under the MSA Documents (the FINRA Letter);
WHEREAS, as a result of the FINRA Letter noted above, PFSI and Penson have determined that a termination of the MSA documents is imminent and unavoidable;
1 | All capitalized terms not defined herein shall have the meanings given to them in the MSA Documents. |
WHEREAS, Broadridge Financial has agreed, at the request of Penson, which has advised Broadridge that it is acting in furtherance of the FINRA Letter, to transfer (the Ridge Transaction) the equity interests in Ridge to Apex Clearing Holdings LLC (Newco);
WHEREAS, Penson has informed Broadridge that subsequent to completion of the Ridge Transaction, in furtherance of the FINRA Letter, it intends to transfer to Ridge certain correspondent clearing contracts, and related underlying customer accounts, including those of PFSI (collectively, the Transferred Accounts), which prior to the date hereof were supported indirectly through the services provided by Broadridge and the Ridge Local Affiliates pursuant to the MSA Documents (the Acquisition Transaction);
WHEREAS, Broadridge has determined, despite the imminent termination of those Schedules (the Terminating Schedules) pursuant to which certain of the Ridge Local Affiliates provide services to certain of the Penson Local Affiliates in the United States and the United Kingdom, to allow the termination of such Terminating Schedules on the terms and conditions hereof without triggering the full termination damages described in Section 3 hereof;
WHEREAS, Penson has determined that it is in the best interests of Penson and its customers that Broadridge and the Ridge Local Affiliates cooperate in transferring the Transferred Accounts and to continue to provide services related to such Transferred Accounts; and
WHEREAS, Ridge has requested that Broadridge and the Ridge Local Affiliates provide services to Ridge in the United States similar to those governed by the MSA Documents pursuant to a new services contract with Ridge in form and substance acceptable to Broadridge and Ridge (the New Services Agreement) concurrent with or immediately following the transfer of the Transferred Accounts.
NOW THEREFORE, in consideration of the terms and conditions set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the Parties agree as follows:
Section 1. Termination of Agreements. On the terms of and subject to the conditions set forth in this Agreement, and effective as of the Effective Date, the Parties hereby terminate each of the Terminating Schedules and acknowledge and agree that, except as otherwise expressly provided in this Agreement, no Party has any further obligations or shall derive any consideration or other benefit under any of the Terminating Schedules.
Section 2. Termination of Broadridge Seller Note. Broadridge agrees that, subject to and conditioned upon the occurrence of the Closing (as defined below), and subject to the terms of Section 8 hereof, that certain Amended and Restated Seller Note, dated effective as of July 1, 2011 (the Broadridge Seller Note), in the original principal amount of $20,578,155, shall be cancelled and all obligations of PWI under the Broadridge Seller Note, including but not limited to any liabilities with respect to legal, accounting or other expenses or reimbursements, are hereby discharged and released in full.
2
Section 3. Transition Assistance. Notwithstanding anything in Section 1 above or in the MSA Documents, (a) Penson agrees that it will assist in the transfer of Transferred Accounts to Ridge, as may be reasonably requested by Broadridge subsequent to the date hereof; and (b) Broadridge agrees that, notwithstanding anything to the contrary in any MSA Documents, it will allow Penson continued use of, and will continue to provide to Penson, without charge, the Software and Services pursuant to the MSA Documents, as necessary to enable Penson to complete the orderly transfer of Transferred Accounts and related assets in accordance with all applicable legal and regulatory requirements.
Section 4. Termination Claims. Broadridge contends that as a result of the termination of the Terminating Schedules, it has incurred and suffered and has the right to assert claims, including for Damages, against PWI and PFSI in an amount not less than $87 million (the Termination Claims). Penson disputes the Termination Claims and contends that it possesses valid defenses to such claims. The Parties now desire and intend to settle, compromise and resolve the Termination Claims on the terms set forth herein, subject to the terms of Section 8 hereof, and to that end, enter into this Agreement and the Releases contained in Section 7 hereof.
Section 5. Remaining MSA Termination Claims. In order to induce Broadridge to enter into this Agreement, to agree to the termination of the Terminating Schedules, and to waive certain of its rights, claims and interests under the MSA Documents, the parties agree that from and after the Effective Date, subject to the terms of Section 8 hereof, Broadridges claims in respect of the MSA Documents shall be limited to an aggregate of $20 million and shall be further limited solely to those claims that Broadridge may have against PFSC in connection with the termination of the MSA Documents to the extent related to PFSC (the Remaining MSA Termination Claims), which the parties acknowledge shall not be subject to the Releases contained in Section 7 hereof, and PFSC shall not release any of its defenses with respect to the Remaining MSA Termination Claims, which the parties acknowledge shall not be subject to the Releases contained in Section 7 hereof.
Section 6. Conditions Precedent to Closing. The effectiveness of this Agreement is subject to and conditioned on the satisfaction of each of the following conditions precedent (or waiver by the Party entitled to the benefit of such condition precedent) (the time of such satisfaction or waiver of all of the following conditions is referred to herein as the Closing), and thereafter this Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors and assigns. Penson agrees that the failure to satisfy any of the conditions set forth in this Agreement shall in no way affect or impair the obligations of any Party or be construed as a waiver by any Party of any of Broadridges rights under any of the MSA Documents or hereunder.
(a) Broadridge shall have received each of the following:
(i) this Agreement, duly authorized, executed and delivered by PWI, PFSC and PFSI;
(ii) written confirmation from Penson, in a form reasonably acceptable to Broadridge, that the Acquisition Transaction has closed;
3
(iii) written confirmation from Penson, in a form reasonably acceptable to Broadridge, that Penson consents to Broadridges entry into the New Services Agreement with Ridge concerning the Transferred Accounts;
(iv) written confirmation from Penson that Newco has received all expected equity contributions from Apex Clearing Solutions LLC (or an affiliate thereof);
(v) the New Services Agreement, fully executed, authorized and delivered by Ridge; and
(vi) such other agreements, documents, instruments and certificates as Broadridge may reasonably request related to the transactions contemplated by this Agreement and the Acquisition Transaction.
(b) Penson shall have received each of the following or the following shall have occurred (as applicable):
(i) this Agreement, duly authorized, executed and delivered by Broadridge;
(ii) written confirmation from Broadridge that it consents to the Acquisition Transaction; and
(iii) the Acquisition Transaction has closed.
Section 7. Releases.
(a) In consideration of Broadridges execution of this Agreement, subject to and conditioned upon the occurrence of the Closing, Penson, on behalf of itself, the Penson Local Affiliates, and their respective current and former agents, servants, officers, directors, shareholders, employees, subsidiaries, divisions, branches, units, affiliates, parents, attorneys, successors, predecessors, heirs, personal representatives, and assigns, and any other party, person or entity claiming under or through Penson and the Penson Local Affiliates, but in no event including Ridge or Newco (each, a Penson Party and collectively, the Penson Parties), hereby generally, irrevocably and forever releases, discharges and acquits Broadridge and the Ridge Local Affiliates and their respective current and former agents, servants, officers, directors, shareholders, employees, subsidiaries, divisions, branches, units, affiliates, parents, attorneys, successors, predecessors, heirs, personal representatives, and assigns (each, a Broadridge Party and collectively, the Broadridge Parties), to the fullest extent permitted by law, from all manners of action, causes of action, judgments, executions, debts, demands, rights, damages, costs, expenses and claims of every kind, nature, and character whatsoever, whether in law or in equity, whether based on contract (including, without limitation, quasi-contract or estoppel), statute, regulation, tort (including, without limitation, intentional torts, fraud, misrepresentation, defamation, breaches of alleged fiduciary duty, recklessness, gross negligence, or negligence) or otherwise,
4
accrued or unaccrued, known or unknown, matured, unmatured, liquidated or unliquidated, certain or contingent, that such releasing Penson Party ever had or claimed to have or now has or claims to have presently or at any future date, against any Broadridge Party arising under or related to any matter or thing whatsoever, including, without limitation, the Broadridge Seller Note, the MSA Documents and their negotiation, execution, performance, any breaches thereof, or their termination and the relationship between Broadridge and Penson; provided, however, that (A) neither of the Acquisition Transaction nor the New Services Agreement (including their respective terms and conditions and the transactions contemplated thereby) shall affect the rights, interests and obligations of the Parties under this Agreement; (B) this release shall not release Broadridge from any obligations under this Agreement; and (C) nothing under this Agreement shall affect the rights, interests and obligations of the parties under either of the Acquisition Transaction or the New Services Agreement. Notwithstanding anything contained in this Agreement to the contrary, PFSC retains and preserves any and all defenses that PFSC may have against the Remaining MSA Termination Claims under the MSA Documents or under applicable law.
(b) In consideration of Pensons execution of this Agreement, subject to and conditioned upon the occurrence of the Closing, Broadridge, on behalf of itself and the Broadridge Parties (but not including Newco for any purpose of this paragraph b), hereby generally, irrevocably and forever releases, discharges and acquits the Penson Parties, to the fullest extent permitted by law, from all manners of action, causes of action, judgments, executions, debts, demands, rights, damages, costs, expenses and claims of every kind, nature, and character whatsoever, whether in law or in equity, whether based on contract (including, without limitation, quasi-contract or estoppel), statute, regulation, tort (including, without limitation, intentional torts, fraud, misrepresentation, defamation, breaches of alleged fiduciary duty, recklessness, gross negligence, or negligence) or otherwise, accrued or unaccrued, known or unknown, matured, unmatured, liquidated or unliquidated, certain or contingent, that such releasing Broadridge Party ever had or claimed to have or now has or claims to have presently or at any future date, against any Penson Party arising under or related to any matter or thing whatsoever, including, without limitation, the Broadridge Seller Note, the MSA Documents and their negotiation, execution, performance, any breaches thereof, or their termination and the relationship between Broadridge and Penson; provided, however, that (A) neither of the Acquisition Transaction nor the New Services Agreement (including their respective terms and conditions and the transactions contemplated thereby) shall affect the rights, interests and obligations of the Parties under this Agreement; (B) this release shall not release Penson from any obligations under this Agreement; (C) this release shall not release PFSC from the Remaining MSA Termination Claims; (D) nothing under this Agreement shall affect the rights, interests and obligations of the parties under either of the Acquisition Transaction or the New Services Agreement, or under any other new commercial arrangements between any Penson Party and either Ridge or Newco that become effective at any time from and after the Closing; and (E) this clause (b), including the release, discharge and acquittal set forth herein, shall not apply to, or limit the rights, claims, remedies, indemnities or causes of action of, Ridge for periods of time, or claims, indemnities or rights arising, at or after the closing of the Ridge Transaction, including all rights of Ridge under the Assignment and Assumption Agreement dated as of May 31, 2012, by and among PFSI and Newco (the Assignment Agreement), and related transaction documents.
5
(c) In entering into this Agreement, the Parties, and each of them, expressly waive any and all rights that they have or may have under California law (including California Civil Code Section 1542) or under any other similar state or federal statute or under any common law principle that is of similar effect as California Civil Code Section 1542. California Civil Code Section 1542 provides as follows:
A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if known by him or her must have materially affected his or her settlement with the debtor.
The consequences of the foregoing waiver have been explained by counsel to the Parties. The Parties, and each of them, acknowledge that they may hereafter discover facts different from, or in addition to, those which they now know or believe to be true with respect to the Agreement and agree that this Agreement and the releases contained herein shall be and remain effective in all respects notwithstanding such different or additional facts or the discovery thereof.
Section 8. Reinstatement. In the event that this Agreement, the Assignment Agreement or the Purchase and Sale Agreement by and among Broadridge Financial, Broadridge Securities Processing Solutions, Inc. and Apex Clearing Holdings LLC dated as of May 31, 2012 shall be invalidated, declared to be null and void, or declared to be unenforceable by a court of competent jurisdiction, (i) the Broadridge Seller Note shall be reinstated in the original principal amount of $20,578,155 and the provisions of Section 2 hereof shall be void, shall not be enforceable against Broadridge, and shall be of no further force and effect; (ii) the Termination Claims shall be reinstated against PWI and PFSI (in an amount not less than $87 million); (iii) the Remaining MSA Termination Claims shall not be limited to an aggregate of $20 million, and the provisions of Section 5 hereof shall be void, shall not be enforceable against any party, and shall be of no further force and effect; (iv) the provisions of Section 7 hereof shall be void, shall not be enforceable against any party, and shall be of no further force and effect; and (v) the Letter Agreement of even date herewith between Ridge (whose name is to be changed to Apex Clearing Corporation) and Broadridge Financial shall be terminated and of no further force or effect.
Section 9. Representations. Each Party represents and warrants to each other Party, that (i) the execution, delivery and performance by such Party of this Agreement is within the powers of such Party and have been duly authorized by all necessary action on the part of such Party, (ii) this Agreement has been duly executed and delivered by such Party and constitutes a valid and binding obligation of such Party, enforceable against such Party in accordance with the terms hereof, (iii) it is not relying upon any statements, understandings, representations, expectations or agreements other than those expressly set forth in this Agreement, (iv) it has had the opportunity to be represented and advised by legal counsel in connection with this
6
Agreement, which it enters into voluntarily and of its own choice and not under coercion or duress, (v) it has made its own investigation of the facts and is relying upon its own knowledge and the advice of its counsel, (vi) it has no expectation that any of the other Parties will disclose facts material to the MSA Documents or this Agreement except as contemplated herein, and (vii) it knowingly waives any and all claims that this Agreement was induced by any misrepresentation or non-disclosure and knowingly waives any and all rights to rescind or avoid this Agreement based upon presently existing facts, known or unknown. Broadridge represents and warrants that as of the date hereof, it has not sold, assigned or otherwise transferred any rights or claims arising hereunder or otherwise as a result of the termination of the Broadridge Seller Note and the Terminating Schedules.
Section 10. Further Assurances. The Parties, other than Ridge, agree to execute and deliver, at no cost to Broadridge, such further documents and instruments evidencing, pertaining to or facilitating the transactions contemplated by this Agreement and the New Services Agreement as may be reasonably requested by another Party from time to time.
Section 11. General.
(a) Assignment. Neither this Agreement, nor any of the rights, duties or obligations hereunder, may be delegated or assigned by a Party hereto or thereto without the prior written consent of the other Parties hereto except to an affiliate, including, without limitation, any merger, consolidation acquisition or amalgamation in which all or substantially all of its assets or equity ownership are transferred or as part of any sale of all or substantially all of the capital stock or assets. This Agreement shall be binding upon and shall inure to the benefit of the Parties hereto and their respective successors and permitted assigns.
(b) Obligations Several. The obligations of the Parties, other than Ridge, shall be deemed to be several and not joint with the obligations of any other Party. Ridges obligations under this Agreement shall be limited to the releases it is providing pursuant to Section 7(b) hereof. Ridge shall have no liability for the obligations of any other Broadridge Party under this Agreement, and no Party shall proceed or make any claim against Ridge in respect of such obligations.
(c) Interpretation. Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the MSA Documents. In this Agreement (i) the words hereof, herein, hereto, hereunder and the like mean and refer to this Agreement as a whole and not merely to the specific Article, Section, subsection, paragraph or clause in which the respective word appears; (ii) the meaning of defined terms shall be equally applicable to both the singular and plural forms of the terms defined; (iii) the words including, includes and include shall be deemed to be followed by the words without limitation; (iv) the term or shall not be limiting; (v) references to agreements and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto.
(d) Severability. If any provision of this Agreement (or any portion hereof) is held to be invalid, illegal or unenforceable, then the validity, legality or enforceability of the remainder of this Agreement shall not in any way be affected or impaired thereby.
7
(e) Notices. All notices, consents, approvals, agreements, authorizations, acceptances, rejections, requests and waivers under this Agreement must be in writing and shall be forwarded by registered or certified mail or nationally recognized overnight courier and sent to:
To Broadridge:
Broadridge Financial Solutions, Inc.
1981 Marcus Avenue
Lake Success, NY 11042
Telephone: (516) 472-5458
Attn: General Counsel
With a copy to:
Squire Sanders (US) LLP
221 E. Fourth Street, Suite 2900
Cincinnati, OH 45202
Telephone: (513) 361-1200
Attn: Stephen D. Lerner
To Penson:
Penson Financial Services, Inc.
1700 Pacific Avenue, Suite 1400
Dallas, TX 75201
Telephone: (415) 409-1531
Attn: General Counsel
With a copy to:
Morgan, Lewis & Bockius LLP
1111 Pennsylvania Ave., NW
Washington, DC 20004-2541
Telephone: (202) 739-3000
Attn: Steven W. Stone
(f) Headings. The headings in this Agreement are intended for convenience of reference and shall not affect their interpretation.
(g) Counterparts. This Agreement and any document necessary for closing the transactions contemplated by this Agreement may be executed in counterparts, each of which shall be deemed an original agreement, but all of which together shall constitute one and the same instrument. This Agreement may be executed by facsimile signature.
8
(h) Governing Law. This Agreement shall be governed by, and construed and enforced in accordance with, the Laws of New York applicable to agreements wholly to be executed and to be performed therein.
(i) Third-Party Beneficiaries. This Agreement is by and between Broadridge and Penson only and is not intended to confer and shall not confer any benefits or rights upon any other persons not expressly made parties hereto, including, without limitation, customers of Penson or service providers of Broadridge.
(j) Integration; No Modification. This Agreement and the agreements, instruments and documents referred to in this Agreement contain the entire agreement of the parties with respect to its subject matter and supersede all existing agreements and all other oral, written or other communications between them concerning their subject matter. This Agreement shall not be modified in any way except by a writing signed by both parties.
[Signature Pages Follow]
9
IN WITNESS WHEREOF, the undersigned have executed, or have caused to be executed, this Agreement on the date first written above.
PENSON WORLDWIDE, INC. | ||
By: | /s/ Philip A. Pendergraft | |
Name: | ||
Title: | Chief Executive Officer |
PENSON FINANCIAL SERVICES, INC. | ||
By: | /s/ Philip A. Pendergraft | |
Name: | ||
Title: | Chairman |
PENSON FINANCIAL SERVICES CANADA INC. | ||
By: | /s/ Philip A. Pendergraft | |
Name: | ||
Title: |
10
IN WITNESS WHEREOF, the undersigned have executed, or have caused to be executed, this Termination and Mutual Release Agreement on the date first written above.
BROADRIDGE FINANCIAL SOLUTIONS, INC. | ||
By: | /s/ John Hogan | |
Name: | ||
Title: |
RIDGE CLEARING & OUTSOURCING SOLUTIONS, INC. | ||
By: | /s/ Joseph Barra | |
Name: | ||
Title: |
BROADRIDGE FINANCIAL SOLUTIONS (CANADA) INC. | ||
By: | /s/ Adam D. Amsterdam | |
Name: | Adam D. Amsterdam | |
Title: | President |
11
Confidential Treatment is Requested by Broadridge Financial Solutions, Inc.
Pursuant to 17 C.F.R. 200.83
EXHIBIT 10.41
Execution Version
NOTE: PORTIONS OF THIS AGREEMENT ARE THE SUBJECT OF A
CONFIDENTIAL TREATMENT REQUEST BY THE REGISTRANT TO THE
SECURITIES AND EXCHANGE COMMISSION. SUCH PORTIONS HAVE BEEN
REDACTED AND ARE MARKED WITH A [****] IN PLACE OF THE REDACTED LANGUAGE.
BROADRIDGE FINANCIAL SOLUTIONS, INC.
1981 Marcus Avenue
Lake Success, New York
June 5, 2012
Apex Clearing Corporation
c/o Apex Clearing Holding LLC
141 W. Jackson Blvd., Suite 500
Chicago, IL 60604
Attn: Danny Rosenthal
Re: | Services Agreement between Broadridge Financial Solutions, Inc. and Apex Clearing Corporation (Apex) |
Background
Broadridge Financial Solutions, Inc. (Broadridge) and Penson Worldwide, Inc. (Penson) entered into a Master Services Agreement dated as of November 2, 2009, as amended or modified from time to time (collectively, and a full and complete copy of which is attached hereto, the Penson MSA). Pursuant to the Penson MSA, Ridge Clearing & Outsourcing Solutions, Inc. (Ridge, now known as Apex) and Penson Financial Services, Inc. (PFSI) entered into that certain Schedule A (United States) Service Bureau and Operations Support Services Schedule to the Penson MSA, dated as of November 2, 2009, as amended or modified from time to time (collectively, and a full and complete copy of which is attached hereto, the U.S. MSA Schedule, and collectively together with the Penson MSA, the MSA Documents). In connection with a series of transactions, including those described on the Term Sheet attached as Attachment 1 hereto (the Term Sheet), the securities clearing contracts of PFSI which were the subject of the services being provided by Broadridge and its affiliates under the MSA Documents are being assigned by PFSI to Apex (the Transactions, with Apex also being referred to in the Term Sheet as JVP1 Sub). As a result of, and as a pre-condition to, the Transactions, (i) the MSA Documents will be terminated by mutual agreement of Broadridge, PFSI and Penson pursuant to a Termination and Mutual Release Agreement dated the date hereof (the Termination Agreement), and (ii) Apex desires to have Broadridge and its affiliates provide to Apex the services previously provided by Broadridge and its affiliates to PFSI under the MSA Documents, subject to the terms of this letter. As a result of the termination of the MSA Documents as noted above, and Apexs willingness to enter into the agreements
Confidential Treatment is Requested by Broadridge Financial Solutions, Inc.
Pursuant to 17 C.F.R. 200.83
set forth herein, PFSI will be relieved of its obligation to pay certain amounts, as more fully described in the Termination Agreement (collectively, the Debt Forgiveness). In the absence of Apexs agreements set forth herein, the Debt Forgiveness would not occur. This letter sets forth the agreement of Apex to purchase, and Broadridge to provide, certain services, all in accordance with and as further described in this letter.
Interim Agreement
Broadridge (itself or through its affiliates) will provide services to Apex under this letter agreement in accordance with the terms of the MSA Documents for a term of ten (10) years commencing on June 5, 2012, based on, and as modified by, the charges, early termination penalties and other business terms as set forth in the Agreed Upon Business Terms set forth in Schedule A hereto (notwithstanding anything in the MSA Documents to the contrary), including the Term Sheet and the Term Sheet Supplement attached hereto as Attachment 2. Accordingly, in connection with the application of the MSA Documents to the services provided under this letter agreement, (i) all provisions in the MSA Documents relating to pricing, fees or expense reimbursement (including without limitation, pricing terms in Section V and Attachment B to the U.S. MSA Schedule) are hereby replaced, superseded, amended and restated in their entirety with the pricing provisions set forth in Schedule A hereto, including the Term Sheet and the Term Sheet Supplement attached hereto as Attachment 2; and (ii) the termination fee amounts set forth in Section IV.B(i) and Section IV.B(iii) of the U.S. MSA Schedule are hereby replaced, superseded, amended and restated in their entirety with the termination fee amount determined in accordance with Section 2(c) of Services Agreement provisions of Attachment 1 to Schedule A hereto. In the event of any conflict between this letter agreement (including all schedules and exhibits hereto) and the MSA Documents, this letter agreement shall control. This letter agreement constitutes a binding agreement between the parties in accordance with its terms, until such time as a Definitive Agreement (defined below) has been mutually executed and delivered by the parties hereto, if ever.
Definitive Agreement
Broadridge and Apex agree to use good faith efforts to, as expeditiously as practicable, negotiate the terms of, and enter into, a Services Agreement which will supersede and replace the terms of this letter agreement (the Definitive Agreement) within ninety (90) days of the date of this letter. The Definitive Agreement will be based upon the terms of the MSA Documents, with modifications including: (i) incorporation of terms applicable to the Interim Agreement set forth in subparts (i) and (ii) of the previous paragraph; (ii) the Agreed Upon Business Terms as set forth in Schedule A hereto, (iii) modifications necessary to address the changed corporate structure of Apex as the service recipient, and (iv) such other modifications as may be mutually agreed upon by Broadridge and Apex, provided the final terms of the Definitive Agreement (not taking into consideration the modifications agreed to in this letter, including Schedule A and the Attachments) will be no less favorable to Apex in the aggregate than the terms of the MSA Documents to PFSI. In the event that the parties are unable to finalize and execute the Definitive Agreement in the time frame set forth above, the parties shall continue to operate under the interim agreement evidenced hereby and shall continue to use good faith efforts to, as expeditiously as practicable, finalize and execute the Definitive Agreement.
-2-
Confidential Treatment is Requested by Broadridge Financial Solutions, Inc.
Pursuant to 17 C.F.R. 200.83
Miscellaneous
This letter agreement will inure to the benefit of and bind the respective successors and assigns of the parties hereto. This letter agreement shall be governed by and construed in accordance with the internal substantive laws of the State of New York without giving effect to conflict of laws principles thereof. This letter agreement may be executed in any number of counterparts, and any party hereto may execute any such counterpart, each of which when executed and delivered shall be deemed to be an original and all of which counterparts taken together shall constitute but one and the same instrument. In the event any portion of this letter agreement is held to be illegal or unenforceable, the reminder shall continue in full force and effect. This letter agreement constitutes the entire understanding between the parties with respect to its subject matter and may not be modified, amended, terminated or waived except in a writing signed by the parties.
IN WITNESS WHEREOF, this letter agreement has been duly executed and delivered as of the date first above written.
Apex Clearing Corporation | ||
By: | /s/ Danny Rosenthal | |
Name: Danny Rosenthal | ||
Title: Chief Executive Officer and President |
Broadridge Financial Solutions, Inc. | ||
By: | /s/ John Hogan | |
Name: John Hogan | ||
Title: President |
Agreed and Accepted, but only with respect to the obligations of PEAK6 Investments, L.P. contained Section 11 of the Term Sheet Supplement (Attachment 2).
PEAK6 Investments, L.P. | ||
By: | PEAK6 LLC | |
Its: | General Partner | |
By: | /s/ Jay Coppoletta | |
Name: Jay Coppoletta | ||
Title: Chief Legal Officer |
-3-
Confidential Treatment is Requested by Broadridge Financial Solutions, Inc.
Pursuant to 17 C.F.R. 200.83
Signature Page to MSA Letter Agreement
-4-
Confidential Treatment is Requested by Broadridge Financial Solutions, Inc.
Pursuant to 17 C.F.R. 200.83
Schedule A
Terms and Conditions
The following business terms have been agreed upon by Broadridge and Apex, which will apply to all services being provided by Broadridge under this letter and will be contained in any Definitive Agreement:
Agreed Upon Business Terms
Section 2 of the Services Agreement portion of the Term Sheet attached hereto as Attachment 1, as modified or supplemented by the Term Sheet Supplement set forth in Attachment 2, including Attachments 2A through 2D, all of which are hereby incorporated by reference.
-5-
Confidential Treatment is Requested by Broadridge Financial Solutions, Inc.
Pursuant to 17 C.F.R. 200.83
ATTACHMENT 1
Term Sheet
May 21, 2012
[****]
[****]
[****]
1. | [****] |
2. | [****] |
3. | [****] |
4. | [****] |
a. | [****] |
b. | [****] |
c. | [****] |
5. | [****] |
6. | [****] |
7. | [**** ] |
[****]
1. | [****] |
2. | [****] |
[****]
1. | [****] |
2. | [****] |
[****]
1. | [****] |
2. | [****] |
3. | [****.] |
4. | [****] |
Services Agreements
1. | [****] |
2. | Broadridge enters into a new 10-year master services agreement (the MSA) with Newco and JVP1 Sub for Broadridge and its affiliates to provide services to Newco and JVP1 Sub. In the event that the Existing MSA is assigned to JVP1 Sub, upon the entry into the MSA, the Existing MSA will terminate without any penalty, fee or obligation except as set forth in Section 6 below. |
a. | Broadridge agrees that under the MSA it will perform, in consideration of the revenue sharing arrangement set forth below, (i) all services consistent with the services Broadridge currently provides and services Broadridge has committed to provide to PFSI, and (ii) as necessary, any or all services to be |
-6-
Confidential Treatment is Requested by Broadridge Financial Solutions, Inc.
Pursuant to 17 C.F.R. 200.83
provided by PFSI and/or Nexa pursuant to the PFSI/Nexa TSA in the event PFSI and/or Nexa do not perform any or all such services pursuant to, and for the remainder of the term of, the PFSI/Nexa TSA. The services in (i) above shall include [****]. To the extent Broadridge performs any services pursuant to the PFSI/Nexa TSA, Broadridge shall be paid in accordance with the terms of the TSA (but in no event more for such services than PFSIs cost therefor). The parties intend that the MSA (or other agreement entered into relating to such services) shall contain catch-all and no-extras provisions to this effect. Payments to Broadridge under the MSA will be as follows: |
[****] of Net Revenue [****]% of such Net Revenues [****]
Next [****] of Net Revenue [****]% of such Net Revenues
Next [****] of Net Revenue [****]% of such Net Revenues
Net Revenues in excess of [****] [****]% of such Net Revenues
Net Revenue shall mean annual (calendar year) revenues from correspondent clearing businesses run on the Broadridge platform only and shall exclude any revenues relating to non-correspondent clearing businesses such as revenue from floor brokerage operations, clearance, execution, order routing and other fees (but only to the extent such revenues are related to non-correspondent clearing businesses).
b. | If Newco and/or JVP1 Sub identify any product or service needed (based on the current business operations of the operations to be acquired by JVP1 Sub and Newco) to operate their respective businesses within four months of closing that is not provided under the MSA or currently performed by PFSI or one of its affiliates for itself, Broadridge will agree to build or otherwise obtain such product or service [****] and provide such product or service to Newco and JVP1 Sub at [****], except to the extent prohibited by law, rule or regulation, or by a regulator. After expiration of such four month period, if Newco and/or JVP1 Sub identify any product or service needed to operate their respective businesses that is not provided under the MSA or currently performed by PFSI or one of its affiliates for itself, Broadridge shall supply such product or service to Newco and JVP1 Sub (i) [****] or (ii) at a price to be negotiated between JVP1 Sub and Broadridge in good faith if provision of such product or service to JVP1 Sub will cost Broadridge more than the additional revenues reasonably expected to be received by Broadridge as a result of such product or service. |
c. | If the entire MSA is terminated by Newco for convenience, Broadridge shall receive a payment equal to $[****], reduced on a straight-line basis over the term of the MSA (reduced on a monthly basis by $[****] on each monthly anniversary of entry into the MSA) (the Termination Fee). |
d. | If Broadridge fails to meet its obligations to provide services under the MSA, its payments under the MSA may, at the election of the other party to the agreement, be reduced to offset losses and damages in connection with such failure, provided that such payments will, other than certain to be agreed exceptions, be capped for each year of the term at the greater of (i) for year one of the MSA, $[****] million, year two of the MSA, $[****] million, and thereafter $[****] million and (ii) the amount of compensation Broadridge has received under such agreement over the prior rolling [****]-month period (as measured from the date of such failure. If Broadridge is in material default and does not cure within 30 days, Newco and JVP1 Sub shall be entitled to terminate the MSA and all schedules thereto without payment of the termination fee set forth above. |
e. | Broadridge shall have audit rights with regard to Net Revenue calculations. |
f. | Broadridge and PEAK6 will mutually agree on a list of additional services to be included in the MSA that Broadridge will provide for no additional cost. |
3. | [****] |
a. | [****] |
b. | [**** ] |
c. | [****] |
4. | [****] |
5. | PFSI and Broadridge and their respective affiliates, including Nexa, agree not to, directly or indirectly, through ownership, control, management or otherwise, compete with, facilitate competition with or provide intellectual property or know-how to an entity that directly or indirectly competes with Newco or JVP1 Sub in the correspondent clearing business; provided, however, that Broadridge may provide services to other parties similar to what it will provide Newco and JVP1 Sub under the MSA. The MSA will contain a mutually agreed to exclusivity provision from JVP1 Sub and Newco. |
-7-
Confidential Treatment is Requested by Broadridge Financial Solutions, Inc.
Pursuant to 17 C.F.R. 200.83
6. | [****] |
Governmental Approvals
All governmental, regulatory body and exchange approvals and consents (including approvals of self-regulatory organizations) in form and substance acceptable to PEAK6 will be in place at closing.
Funding
Replacement overnight funding for the clearing business in amounts reasonably acceptable to PEAK6 shall be in place as of the closing.
Confidentiality
The parties agree that the terms of this term sheet and all confidential and proprietary material disclosed to one another during the course of negotiations of the transaction contemplated hereby will be considered confidential and will not, without the other parties prior written consent, be disclosed to any third party, in any manner whatsoever, in whole or in part, other than as otherwise required by law or permitted pursuant to confidentiality agreements between the parties hereto, and will not be used by any party other than in connection with the transaction contemplated hereby.
Other; Non-Binding Nature
This term sheet may be executed in counterparts (whether by original signature or facsimile copy thereof), each of which shall be deemed to constitute an original but all of which, when taken together, shall constitute one and the same instrument.
This Term Sheet was prepared to facilitate discussions regarding the proposed transactions outlined above. This Term Sheet does not constitute an offer to enter into negotiations; it is only a non-binding preliminary expression of interest. No obligations with respect to the negotiation, execution or closing of the proposed Transaction are created, implied or inferred hereby. The only legally binding obligations that will exist among the parties will be those expressly set forth in definitive transaction documents when and if such definitive transaction documents are executed and delivered. PEAK6 reserves the right to withdraw from the negotiations and to not proceed with the transactions contemplated hereby or with any transactions for any or no reason at any time prior to the execution and delivery of such definitive transaction documents.
Agreed and accepted:
PEAK6 INVESTMENTS, L.P. | ||
By: | /s/ Daniel Rosenthal | |
Name: Daniel Rosenthal | ||
Title: Partner, Peak6 Investments |
Date: May 21, 2012
-8-
Confidential Treatment is Requested by Broadridge Financial Solutions, Inc.
Pursuant to 17 C.F.R. 200.83
BROADRIDGE FINANCIAL SOLUTIONS, INC. | ||
By: | /s/ John Hogan | |
Name: John Hogan Title: President | ||
Date: 5/21/12 | ||
PENSON FINANCIAL SERVICES, INC. | ||
By: | /s/ Philip A. Pendergraft | |
Name: Philip A. Pendergraft Title: Chairman | ||
Date: 5/21/12 | ||
NEXA TECHNOLOGIES, INC. | ||
By: | /s/ Philip A. Pendergraft | |
Name: Title: | ||
Date: |
-9-
Confidential Treatment is Requested by Broadridge Financial Solutions, Inc.
Pursuant to 17 C.F.R. 200.83
Signature Page to Non-Binding Term Sheet Dated May 21, 2012
-10-
Confidential Treatment is Requested by Broadridge Financial Solutions, Inc.
Pursuant to 17 C.F.R. 200.83
Attachment 2
Term Sheet Supplement
1. | The revenue share for the remainder of Calendar 2012 under Section 2(a) of the Services Agreement provisions of the Term Sheet for [****] of Net Revenue shall be reduced from [****]% to (i) [****]%, for June 2012, (ii) [****]%, for July, August and September 2012, and (iii)[ ****]%, for October, November and December 2012. Thereafter, the revenue share under Section 2(a) of the Services Agreement provisions of the Term Sheet for [****] of Net Revenue shall be increased from [****]% to [****]% for the remainder of the Term. |
2. | The parties agree that Net Revenues of PFSI for the first Quarter of 2012, calculated in accordance with this Agreement, were equal to $26,764,000, as determined in accordance with the Q1 2012 Net Revenue Reconciliation attached hereto as Attachment 2A hereto. The parties shall determine Net Revenue for the remainder of the Term in a manner consistent with such Attachment 2A. Each months revenue share percentage will be determined based on the annualized revenue for that month, determined based on the revenue per day in that month times the number of days in a year. In addition, Apex shall reimburse Broadridge for the pass-through expenses consistent with those paid by PFSI over the previous twelve months, including for illustrative purposes without limitation those pass-through expenses set forth on Attachment 2B hereto. |
3. | Pursuant to Section 2(f) of the Services Agreement provisions of the Term Sheet, the following additional services will be provided by Broadridge at no additional cost to Apex |
(a) | The Business as Usual items listed on Attachment 2C hereto (BAU) will be completed by Broadridge in accordance with the current schedule included on such Attachment 2C, or as otherwise mutually agreed to by Apex and Broadridge, including the following: |
(i) | Broadridge shall take over correspondent billing, including paying for staffing by end 2012. |
(ii) | Broadridge shall provide all services around any additional gaps (as compared to the products and services that PFSI was receiving from Wall Street Concepts) that arise in tax processing. |
(b) | Handle all trade upload support (taking over remaining trade upload functions still at PFSI). |
(c) | Broadridge will take responsibility to get the existing PFSI cost basis data base up to date and cleansed in order to facilitate a timely conversion to the Broadridge system in order to insure 2012 tax year reporting and filing deadlines are met. Broadridge will provide cost basis reporting in compliance with tax laws for 2012 tax year and beyond. In order to provide the foregoing, Broadridge will rely on (i) having access to the existing operating PFSI system in order to update it and cleanse it and (ii) PFSI providing the part time support of subject matter experts relative to their system which will be required until this data base is converted to the Broadridge system (and that such access and support shall be free of charge to Broadridge for the 2012 tax reporting year). |
1
Confidential Treatment is Requested by Broadridge Financial Solutions, Inc.
Pursuant to 17 C.F.R. 200.83
(d) | Broadridge will provide transition services supporting acquired correspondents throughout the Term using the minimum number of resources described on Attachment 2D hereto. |
(e) | Broadridge will perform the transition of daily customer reporting from the DataWatch system to Broadridges PostEdge system in a timely manner in accordance with mutually acceptable schedules. In addition, Broadridge agrees to maintain the StorQM system to continue to support Apexs regulatory record retention requirements. |
(f) | Broadridge will handle all OATS reporting for Apex for orders processed through Broadridge order processing systems until such time as Apex elects to transition that function in house or to a third party. |
4. | Apex has the option to engage Broadridge to provide System Administration and Data Base Administration services at Broadridges incremental cost. |
5. | Additional services requested by Apex and not identified in the Term Sheet or this Term Sheet Supplement to be provided by Broadridge [****] Such services will be provided in a manner that is consistent with Broadridge quality and also meets the requirements of the MSA Documents. [****]. |
6. | Broadridge and Apex agree to work in good faith with each other to reduce their expenses that are mutually agreed to be unnecessary, such as among other things the elimination of unnecessary and or excessive electronic storage of reports or images and documents. |
7. | Immediately following the execution of the letter agreement, the Broadridge and Apex will negotiate in good faith the terms of one or more additional Service Level Agreements, with the expectation of entering into the Service Level Agreements within thirty (30) days. |
8. | [****]. |
9. | Broadridge and Apex agree that, for the purposes of calculating Net Revenue, the following shall apply: |
(a) | Regulatory and exchange fee pass-throughs will be a contra expense and excluded from Net Revenue. |
(b) | Amounts passed through to customers up to expenses for postage and statements will be booked as contra expenses against customer fees collected and not included in Net Revenue. Amounts passed through to customers in excess of expenses for postage and statements will be booked as and included in Net Revenue. |
(c) | Reimbursement from a customer of any other pass-through cost will be excluded from Net Revenue. For the avoidance of doubt, the parties agree that the $26,764,000 amount referred to in item 2 above does not include any pass-through costs. |
(d) | Amounts paid by issuers and passed through to Apex by Broadridge for proxy, e-mail or other communications with customers pursuant to a separate agreement between Apex and Broadridge shall be excluded from Net Revenue. |
2
Confidential Treatment is Requested by Broadridge Financial Solutions, Inc.
Pursuant to 17 C.F.R. 200.83
10. | The indemnification provided by Broadridge under Section 14(A) of the MSA shall include Losses incurred by Apex Client Indemnities arising out of the gross negligence or willful misconduct of Broadridge. |
11. | In lieu of Section 17.A of the MSA, PEAK6 Investments, L.P. (PEAK6) and Apex agree that throughout the Term of the letter agreement PEAK6, Apex and their Subsidiaries (but not including PEAK6 Advisors LLC, PEAK6 Opportunities Management and the respective funds and accounts for which they serve as an investment manager or managing member) shall not engage in the business of providing clearing and settlement services for unaffiliated correspondent customers (the Prohibited Activity) in competition with Broadridge; it being understood that nothing in this provision shall prohibit PEAK6, Apex or any of their Subsidiaries from: (i) owning up to 10% in the aggregate any class of capital stock of any corporation if such stock is publicly traded and listed on any national or regional stock exchange or on the Nasdaq national market; or (ii) acquiring an entity, business, operations or assets if the Prohibited Activity comprises less than 15% of the revenue of such acquired entity, business, operations or assets. This restriction shall not apply to the extent that Broadridge does not perform any required clearing services in a particular geographic market or is otherwise not capable of performing the services in a competitive manner to the same level and in accordance with the other requirements of the MSA Documents. |
3
Confidential Treatment is Requested by Broadridge Financial Solutions, Inc.
Pursuant to 17 C.F.R. 200.83
Attachment 2A
Q1 2012 Net Revenue Reconciliation
[****]
Confidential Treatment is Requested by Broadridge Financial Solutions, Inc.
Pursuant to 17 C.F.R. 200.83
Attachment 2B
Pass-Through Expenses
[****]
Confidential Treatment is Requested by Broadridge Financial Solutions, Inc.
Pursuant to 17 C.F.R. 200.83
Attachment 2B contd
[****]
Confidential Treatment is Requested by Broadridge Financial Solutions, Inc.
Pursuant to 17 C.F.R. 200.83
Attachment 2C
BAU LIST
[****]
Confidential Treatment is Requested by Broadridge Financial Solutions, Inc.
Pursuant to 17 C.F.R. 200.83
Attachment 2D
Transition Services
[****]
Exhibit 12.1
Computation of Ratio of Earnings to Fixed Charges
Fiscal Years Ended June 30, | ||||||||||||||||||||
2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
($ in millions) | ||||||||||||||||||||
Earnings: |
||||||||||||||||||||
Add: |
||||||||||||||||||||
Earnings from continuing operations before income taxes |
$ | 200.9 | $ | 269.7 | $ | 342.1 | $ | 346.0 | $ | 319.7 | ||||||||||
Fixed charges |
28.4 | 25.7 | 24.1 | 26.8 | 44.0 | |||||||||||||||
Amortization of capitalized interest |
| | | | | |||||||||||||||
Distributed income from equity investees |
| | | | | |||||||||||||||
Share of pre-tax losses of equity investees for which charges arising from guarantees are included in fixed charges |
| | | | | |||||||||||||||
Less: |
||||||||||||||||||||
Interest capitalized |
| | | | | |||||||||||||||
Preference security dividend requirements of consolidated subsidiaries |
| | | | | |||||||||||||||
The minority interest in the pre-tax income/(loss) of subsidiaries that have not incurred fixed charges(2) |
(0.7 | ) | (0.2 | ) | 1.0 | 2.5 | (0.2 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 230.0 | $ | 295.6 | $ | 365.2 | $ | 370.3 | $ | 363.9 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Fixed charges: |
||||||||||||||||||||
Interest expense |
$ | 14.0 | $ | 9.9 | $ | 9.8 | $ | 14.3 | $ | 31.3 | ||||||||||
Amortized premiums, discounts and capitalized expenses related to indebtedness |
| | | | | |||||||||||||||
Estimate of the interest within rental expense(1) |
14.4 | 15.8 | 14.3 | 12.5 | 12.7 | |||||||||||||||
Preference security dividend requirements of consolidated subsidiaries |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 28.4 | $ | 25.7 | $ | 24.1 | $ | 26.8 | $ | 44.0 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Ratio of Earnings to Fixed Charges |
8.1 | 11.5 | 15.2 | 13.8 | 8.3 |
(1) | One-third of rental expense under operating leases is assumed to be the equivalent of interest. |
(2) | Represents the Companys share of gains/(losses) from its joint venture with the Tokyo Stock Exchange. |
Exhibit 21.1
Subsidiaries of the Company:
Name: |
State or other Jurisdiction of Incorporation: | |
Broadridge (Suisse) S.A. |
Switzerland | |
Broadridge Securities Processing Solutions, Inc. |
Delaware | |
Broadridge Output Solutions, Inc. |
Delaware | |
Broadridge (Canada) ULC |
Canada | |
Broadridge Trading Trf. Corp. |
Delaware | |
Broadridge Investor Communication Solutions, Inc. |
Delaware | |
Broadridge Financial Solutions (Canada) Inc. |
Canada | |
Broadridge Nederland III B.V. |
Netherlands | |
Broadridge Software Limited |
Canada | |
Broadridge Investor Communications Corporation |
Canada | |
Broadridge Nederland II B.V. |
Netherlands | |
Broadridge (Australia) Pty. Ltd. |
Australia | |
ICJ Inc.(1) |
Japan | |
Broadridge Financial Solutions International, Ltd. |
United Kingdom | |
Broadridge (Deutschland) GmbH |
Germany | |
Broadridge Nederland I B.V. |
Netherlands | |
Broadridge Financial Solutions Ltd. |
United Kingdom | |
Ridge Clearing & Outsourcing Solutions Limited |
United Kingdom | |
Broadridge Asia Pacific Limited |
Hong Kong | |
Broadridge Czech Republic s.r.o. |
Czech Republic | |
Broadridge Financial Solutions (India) Private Limited |
India | |
Investigo Corporation |
Minnesota | |
Access Data Corp. |
Delaware | |
BR NYC Solutions, Inc. |
Delaware | |
Broadridge Corporate Issuer Solutions, Inc. |
Pennsylvania | |
Broadridge City Networks (UK) Limited |
United Kingdom | |
Matrix Financial Solutions, Inc. |
Delaware | |
Paladyne Systems, Inc. |
Delaware | |
Broadridge SPS, Inc. |
Delaware | |
Broadridge REC, LLC |
New York |
(1) | Less than 100% owned. |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No. 333-143141 on Form S-3, and Registration Statement No. 333-141673, No. 333-157105, No. 333-163401 and No. 333-172126 on Form S-8 of our report dated August 9, 2012, relating to the consolidated financial statements and financial statement schedule of Broadridge Financial Solutions, Inc. (the Company) and the effectiveness of the Companys internal control over financial reporting, appearing in this Annual Report on Form 10-K of the Company for the year ended June 30, 2012.
/s/ DELOITTE & TOUCHE LLP
New York, New York
August 9, 2012
Exhibit 31.1
SECTION 302 CERTIFICATION
I, Richard J. Daly, certify that:
1. | I have reviewed this annual report on Form 10-K of Broadridge Financial Solutions, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: August 9, 2012
/s/ RICHARD J. DALY |
Richard J. Daly |
Chief Executive Officer |
Exhibit 31.2
SECTION 302 CERTIFICATION
I, Dan Sheldon, certify that:
1. | I have reviewed this annual report on Form 10-K of Broadridge Financial Solutions, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: August 9, 2012
/s/ DAN SHELDON |
Dan Sheldon |
Vice President, Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Broadridge Financial Solutions, Inc. (the Company) on Form 10-K for the fiscal year ended June 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Richard J. Daly, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(a) | the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(b) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ RICHARD J. DALY |
|
Richard J. Daly |
Chief Executive Officer |
August 9, 2012
This certification shall not be deemed to be filed for the purpose of Section 18 of the Securities Exchange Act of 1934, as amended, and will not be incorporated by reference into any registration statement filed under the Securities Act of 1933, as amended, unless specifically identified therein as being incorporated therein by reference.
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Broadridge Financial Solutions, Inc. and will be retained by Broadridge Financial Solutions, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Broadridge Financial Solutions, Inc. (the Company) on Form 10-K for the fiscal year ended June 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Dan Sheldon, Vice President, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(a) | the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(b) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ DAN SHELDON |
|
Dan Sheldon |
Vice President, Chief Financial Officer |
August 9, 2012
This certification shall not be deemed to be filed for the purpose of Section 18 of the Securities Exchange Act of 1934, as amended, and will not be incorporated by reference into any registration statement filed under the Securities Act of 1933, as amended, unless specifically identified therein as being incorporated therein by reference.
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Broadridge Financial Solutions, Inc. and will be retained by Broadridge Financial Solutions, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
W.O?(=,]+PG<<%SV>W.O?(=,]+PG<<%SV>W.O?(=,]+
MPG<<%SV>W.O?(=,]+PG<<%SV>W.O?(=,]+PG<<%SV>W.O?(=,]+PG<<%SV>W
M.O?(=,]+PG<<%SV>W.O?(=,]+PG<<%SV>W.O?(=,]+PG<<%SV>W.O?(=,]+P
MG<<%SV>W.O?(=,]+PG<<%SV>W.O?(=,]+PG<<%SV>W.O?(=,]+PG<<%SV>W.
MO?(=,]+PG<<%SV>W.O?(=,]+PG<<%SV>W.O?(=,]+PG<<%SV>W.O?(=,]+PG
M<<%SV>W.O?(=,]+PG<<%SV>W.O?(=,]+PG<<%SV>W.O?(=,]+PG<<%SV>W.O
M?(=,]+PG<<%SV>W.O?(=,]+PG<<%SV>W.O?(=,]+PG<<%SV>W.O?(=,]+PG<
M<%SV>W.O?(=,]+PG<<%SV>W.O?(=,]+PG<<%SV>W.O?(=,]+PG<<%SV>W.O?
M(=,]+PG<<%SV>W.O?(=,]+PG<<%SV>W.O?(=,]+PG<<%SV>W.O?(=,]+PG<<
M%SV>W.O?(=,]+PG<<%SV>W.O?(=,]+PG<<%SV>W.O?(=,]+PG<<%SV>W.O?(
M=,]+PG<<%SV>W.O?(=,]+PG<<%SV>W.O?(=,]+PG<<%SV>W.O?(=,]+PG<<%
MSV>W.O?(=,]+PG<<%SV>W.O?(=,]+PG<<%SV>W.O?(=,]+PG<<%SV>W.O?(=
M,]+PG<<%SV>W.O?(=,]+PG<<%SV>W.O?(=,]+PG<<%SV>W.O?(=,]+PG<<%S
MV>W.O?(=,]+PG<<%SV>W.O?(=,]+PG<<%SV>W.O?(=,]+PG<<%SV>W.O?(=,
M]+PG<<%SV>W.O?(=,]+PG<<%SV>W.O?(=,]+PG<<%SV>W.O?(=,]+PG<<%SV
M>W.O?(=,]+PG<<%SV>W.O?(=,]+PG<<%SV>W.O?(=,]+PG<<%SV>W.O?(=,]
M+PG<<%SV>W.O?(=,]+PG<<%SV>W.O?(=,]+PG<<%SV>W.O?(=,]+PG<<%SV>
MW.O?(=,]+PG<<%SV>W.O?(=,]+PG<<%SV>W.O?(=,]+PG<<%SV>W.O?(=,]+
MPG<<%SV>W.O?(=,]+PG<<%SV>W.O?(=,]+PG<<%SV>W.O?(=,]+PG<<%SV>W
M.O?(=,]+PG<<%SV>W.O?(=,]+PG<<%SV>W.O?(=,]+PG<<%SV>W.O?(=,]+P
MG<<%SV>W.O?(=,]+PG<<%SV>W.O?(=,]+PG<<%SV>W.O?(=,]+PG<<%SVAVQ
M-=Z_)K^]')1:<0Y*=9S%,6L0A3%,6$?"4Q3`Q`0,`AR@(8(F;C+_T.^+KG^W
MM#_9E7_HC'"SS+CTKUAXKUK;N)HWEML/FD'Q-^F:/$QT(]U=8M^1D1L
MRF5NOOZ*@I'QE4U%(">1GHJP6./?Q;!&1)^E/7#T[L8PQ\M>..5Y?=S)/JM?
M*A"-'EE6THVAJ_4)VMRE["JT5/3E+E)>"87B35U)-2"4^[N4[(A%"S?+H)).
MF:0`U0BX3_ 0B/0%^(;]K_:+9]:_665K'&2-0EF5'XKZ%(\/]Q=+]3CK2Z,>7T[;%
M0+R@O!WEKUEE$J'*4RBC=ZIS&J?-Z5QSS"0'K>=9N#V^-HJ5Y1_$IH^4V-)Z
ML8[%K;BVQ-70MSHB ":B:R:
M:R*A%4E2%4253,4Z:B9R@8BB9RB)3D.40$!`1`0'`\\!@,!@,!@,!@,!@>":
MB:I1,DH10H'43$R9BG*"B*AD5DQ$HB`'25(8I@_B4P"`_$,#SP&`P&`P&`P&
M`P&!X`HF*AD04(*I")J'2`Q14(FJ90J2ABDN(SQQ$HJCS>4?Y>
M0O)R
MS1Q5N4`.#.28JCRAT2@?"Q-9B7.=;Q,-)3,MP<"2BDKH+8T9Q0<,C8XJR/#_
M`&B\1#K;>LHHO(HLKJ*R'>+*6:-9E*821"B8J"7FII-U%E%7A=WKMSC9FMM>
M,PWQT;QA/$+3T[CKW8\$5%(4$9FOV5\RK=KK+]TQ^T4W23V5K
ME9))9*_TI5%=))=!5.U01TED%TRJH+)*%?B11)9(X&(8!$#%$!#X#F&N>'E[
MC:]\^4SU1"=^PM3T>XVO?/E,]40G?L%3T>XVO?/E,]40G?L%3T>XVO?/E,]4
M0G?L%3TQDUN#4]=BGEW+Q7:^T
MM5W8&%77W#Y.PZ,^+58I.1O([)FGJS]F_2*!B*@T*Z:*"(B'P$`!>L<1?\GK
MO/,TN;5VD.#_`%$X+*UA/7
7HD$N>8O2+*
+UMPV35FEZ!5WYW]@E#R%I?$N4BA+3R1FHOR'2
MY69.BY#"UGZ%T2VT?#N(LMC6LRA*[KZBQ+L[%W&]2HNJZLA4Z5'/D',W.%D[
M&1ITZ\E*%,WZ^X!N@FFDD43-K^PA@,!@,#1#<'!K8]NV>7N4GNGH;&BA8(
M>BO7VN6+U"N52TU'?])DX&PLHBT5E"VK0M>X@GK>&>(A%+-TXA@:0"47%XN[
M+:I'7XPJN$5,QD3LL\6G8+,\M,ZW)1D$XN=E9*\<5]N>RL,#MWRXK-(XMQQUZINXT]^K