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EX-3.1 - AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF ENVESTNET, INC. - ENVESTNET, INC.dex31.htm
EX-3.2 - AMENDED AND RESTATED BYLAWS OF ENVESTNET, INC. - ENVESTNET, INC.dex32.htm
EX-21.1 - LIST OF SUBSIDIARIES - ENVESTNET, INC.dex211.htm
EX-10.8 - PLATFORM SERVICES AGREEMENT - ENVESTNET, INC.dex108.htm
EX-23.1 - CONSENT OF MCGLADREY & PULLEN, LLP - ENVESTNET, INC.dex231.htm
EX-10.10 - 2010 LONG-TERM INCENTIVE PLAN - ENVESTNET, INC.dex1010.htm
EX-10.11 - 2004 STOCK INCENTIVE PLAN - ENVESTNET, INC.dex1011.htm
Table of Contents

As filed with the Securities and Exchange Commission on July 1, 2010

Registration No. 333-165717

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 3 to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Envestnet, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware   7389   20-1409613
(State of incorporation)  

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

35 East Wacker Drive, Suite 2400

Chicago, Illinois 60601

(312) 827-2800

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Shelly O’Brien

General Counsel

Envestnet, Inc.

35 East Wacker Drive, Suite 2400

Chicago, Illinois 60601

(312) 827-2800

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Edward S. Best

Diego A. Rotsztain

Mayer Brown LLP

71 South Wacker Drive

Chicago, Illinois 60606

(312) 782-0600

 

Richard D. Truesdell, Jr.

Davis Polk & Wardwell LLP

450 Lexington Avenue

New York, New York 10017

(212) 450-4000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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  ¨      Accelerated filer  ¨    Non-accelerated filer  x   Smaller reporting company  ¨
        (Do not check if a smaller reporting company)  

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to Be Registered

  Amount to be
Registered (1)
  Proposed Maximum
Aggregate Offering Price
  Amount of
Registration Fee (2)(3)

Common Stock, par value $0.005 per share

      $100,000,000   $7,130
 
 
(1) Includes shares that the underwriters have the option to purchase to cover over-allotments, if any.
(2) Calculated pursuant to Rule 457(o) under the Securities Act of 1933.
(3) Previously paid.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission acting pursuant to said section 8(a), may determine.

 

 

 


Table of Contents

The information in this prospectus is not complete and may be changed. We and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED JULY 1, 2010

             Shares

LOGO

Envestnet, Inc.

Common Stock

We are selling              shares of common stock and the selling stockholders are selling              shares of common stock. We will not receive any of the proceeds from the sale of shares of common stock sold by the selling stockholders.

Prior to this offering, there has been no public market for our common stock. The initial public offering price of our common stock is expected to be between $             and $             per share. We have applied to list our common stock on the New York Stock Exchange under the symbol “ENV.”

Investing in our common stock involves risks. See “Risk Factors” beginning on page 15.

 

     Price  to
Public
   Underwriting
Discounts and
Commissions
   Proceeds to
Envestnet
   Proceeds to
Selling
Stockholders

Per Share

   $                 $                 $                 $             

Total

   $                 $                 $                 $             

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters have an option to purchase a maximum of              additional shares from us to cover over-allotments of shares.

Delivery of the shares of common stock will be made on or about                      , 2010.

 

Morgan Stanley   UBS Investment Bank   Barclays Capital
William Blair & Company   RBC Capital Markets   Stifel Nicolaus
            Sandler O’Neill    Melvin & Company

The date of this prospectus is                     , 2010


Table of Contents

LOGO


Table of Contents

You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document.

TABLE OF CONTENTS

 

     Page

Prospectus Summary

   1

Risk Factors

   15

Cautionary Note Regarding Forward-Looking Statements

   31

Use of Proceeds

   31

Dividend Policy

   31

Capitalization

   32

Dilution

   34

Selected Consolidated Financial Information

   36

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   39

Business

   64

Management

   83

Executive Compensation

   89

Principal and Selling Stockholders

   106

Certain Relationships and Related Party Transactions

   111

Description of Capital Stock

   115

Shares Eligible for Future Sale

   119

Material United States Federal Tax Considerations to Non-U.S. Holders

   121

Underwriting

   124

Legal Matters

   128

Experts

   128

Where You Can Find More Information

   128

Index to Consolidated Financial Statements

   F-1

Dealer Prospectus Delivery Obligation

Until                     , 2010 (25 days after the commencement of this offering), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter with respect to unsold allotments or subscriptions.


Table of Contents

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, especially the risks of investing in our common stock discussed under “Risk Factors” and our financial statements and the related notes included elsewhere in this prospectus, before making an investment decision. Unless otherwise indicated, the terms “Envestnet,” the “company,” “we,” “us” and “our” refer to Envestnet, Inc. and its subsidiaries.

Our Company

We are a leading independent provider of technology-enabled, Web-based investment solutions and services to financial advisors. By integrating a wide range of investment solutions and services, our technology platform provides financial advisors with the flexibility to address their clients’ needs. We work with financial advisors who are independent, as well as those who are associated with small or mid-sized financial advisory firms and larger financial institutions, which we refer to as enterprise clients. We focus our technology development efforts and our sales and marketing approach on addressing financial advisors’ front-, middle- and back-office needs. We believe that our investment solutions and services allow financial advisors to be more efficient and effective in the activities critical to their businesses by facilitating client interactions, supporting and enhancing portfolio management and analysis, and enabling reliable account support and administration.

Our centrally-hosted technology platform provides financial advisors with the flexibility to choose freely among a wide range of investment solutions, services, investment managers and custodians to identify those that are most appropriate for their clients. Given the flexibility of choice it provides, we refer to our technology platform as having “open architecture”. Our technology platform provides financial advisors with the following:

 

   

A series of integrated services to help them better serve their clients, including risk assessment and selection of investment strategies, asset allocation models, research and due diligence, portfolio construction, proposal generation, account rebalancing, account monitoring, overlay services, performance reporting and communication tools, as well as access to a wide range of leading third-party asset custodians;

 

   

Web-based access to a wide range of technology-enabled investment solutions, including:

 

   

separately managed accounts, which allow advisors to offer their investor clients a customized, professionally managed portfolio of securities with a personalized tax basis;

 

   

unified managed accounts, which are similar to separately managed accounts but allow the advisor to use different types of investment vehicles in one account;

 

   

advisor-directed portfolios, where advisors create, implement and maintain their own investment portfolio models to address specific client needs; and

 

   

mutual funds and portfolios of exchange-traded funds; and

 

   

Access to a broad range of investment managers and investment strategists, as well as to our internal investment management and portfolio consulting group, Portfolio Management Consultants.

Portfolio Management Consultants primarily engages in consulting services aimed at providing financial advisors with additional support in addressing their clients’ needs, as well as the creation of proprietary investment solutions and products. Portfolio Management Consultants’ investment solutions and products include managed account and multi-manager portfolios, mutual fund portfolios and exchange-traded fund portfolios.

 

 

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A majority of our revenues are derived from fees charged as a percentage of the assets that are managed or administered on our technology platform by financial advisors. Our asset-based fees vary based on the types of investment solutions and services that financial advisors utilize. As of March 31, 2010, approximately $41 billion of investment assets for which we receive asset-based fees were managed or administered utilizing our technology platform by approximately 8,500 financial advisors in approximately 185,000 investor accounts.

We also generate revenues from recurring, contractual licensing fees for providing access to our technology platform, generally from a small number of enterprise clients. Licensing fees are generally fixed for a specified contract term and are based on the level and types of investment solutions and services provided, rather than on the amount of client assets on our technology platform. As of March 31, 2010, approximately $54 billion of investment assets for which we receive licensing fees for utilizing our technology platform were serviced by approximately 5,700 financial advisors through approximately 545,000 investor accounts.

For over 90% of our asset-based fee arrangements, we bill customers at the beginning of each quarter based on the market value of customer assets on our technology platform as of the end of the prior quarter, providing for a high-degree of visibility for the current quarter. Furthermore, our licensing fees are highly predictable because they are generally set in multi-year contracts, providing longer term visibility regarding a portion of our total revenues.

In the year ended December 31, 2009, we had total revenues of $77.9 million, income from operations of $4.3 million, net loss of $0.9 million, adjusted EBITDA of $10.6 million, adjusted operating income of $6.1 million and adjusted net income of $2.4 million. In the three months ended March 31, 2010, we had total revenues of $21.6 million, loss from operations of $2.7 million, net loss of $2.5 million, adjusted EBITDA of $3.1 million, adjusted operating income of $1.7 million and adjusted net income of $1.2 million. See “—Summary Consolidated Financial Information and Other Data—Notes to Other Financial and Operating Data” for a reconciliation of these non-GAAP measures to the closest comparable measures calculated in accordance with U.S. GAAP.

The following tables set forth the assets and accounts that were managed or administered on our technology platform by financial advisors as of the end of the quarters indicated below:

 

LOGO

We were founded in 1999 and through organic growth and strategic transactions we have grown to become a leading independent provider of technology-enabled, Web-based investment solutions and services to financial advisors. Our headquarters are located in Chicago and we have offices in New York, Denver, Sunnyvale (CA), Boston, Landis (NC) and Trivandrum, India.

Recent Developments

In February 2010, we signed a seven-year platform services agreement with FundQuest Incorporated, a global investment and managed account services company and subsidiary of BNP Paribas Investment Partners.

 

 

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Pursuant to this agreement, FundQuest will continue to provide investment products to its clients, but our technology platform will replace FundQuest’s technology platform. As of April 30, 2010, FundQuest had approximately $13 billion in assets on its platform, managed by approximately 6,200 financial advisors through approximately 85,000 accounts. In May 2010, we substantially completed converting the assets on FundQuest’s platform to our technology platform.

Our Market Opportunity

The wealth management industry has experienced significant growth in terms of assets invested by retail investors in the past several years. According to the Federal Reserve, U.S. household and non-profit organization financial assets totaled $45.1 trillion as of December 31, 2009, up from $41.7 trillion in 2008 and $35.4 trillion in 2003. According to Cerulli Associates, an industry consulting firm, as of December 31, 2008, $8.5 trillion of assets were professionally managed compared to $6.8 trillion as of December 31, 2003.

In addition to experiencing significant growth in financial assets, the wealth management industry is characterized by a number of important trends, including those described below, which we believe create a significant market opportunity for technology-enabled investment solutions and services like ours.

 

   

Increased prevalence of independent financial advisors. Based on industry news reports, we believe that over the past several years an increasing percentage of financial advisors have elected to leave large financial institutions and start their own financial advisory practices or move to smaller, more independent firms.

 

   

Increased reliance on technology among independent financial advisors. In order to compete effectively in the marketplace, independent financial advisors are increasingly relying on technology service providers to help them provide comparable services cost effectively and efficiently, according to Cerulli Associates.

 

   

Increased use of financial advisors. We believe, based on an analysis done by Cerulli Associates, that the recent significant volatility and increasing complexity in securities markets has resulted in increased investor interest in receiving professional financial advisory services.

 

   

Increased use of fee-based investment solutions. Based on our industry experience, we believe that in order for financial advisors to effectively manage their clients’ assets, they are seeking account types that offer the flexibility to choose among the widest range of investment solutions. Financial advisors typically charge their clients fees for these types of flexible accounts based on a percentage of assets rather than on a commission or other basis.

 

   

More stringent standards applicable to financial advisors. Increased scrutiny of financial advisors to ensure compliance with current laws, coupled with the possibility of new laws focused on a fiduciary standard, may require changes to the way financial advisors offer advice. In order to adapt to these changes, we believe that financial advisors may benefit from utilizing a technology platform, such as ours, that allows them to address their clients’ wealth management needs.

Our Competitive Strengths

We believe we benefit from the following competitive strengths:

 

   

Superior integrated wealth management technology platform. Based on our industry experience, we believe that we offer financial advisors the widest range of tools, features, functionality and services in a single, integrated Web-based technology platform, which empowers financial advisors to be more productive and effective in addressing their clients’ needs.

 

 

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Access to a wide range of investment solutions. Our technology platform provides financial advisors with access to approximately 1,100 different investment solutions offered by more than 250 separate account managers and 28 third-party investment strategists, as well as our internal investment and research group, Portfolio Management Consultants, and access to a full range of investment programs.

 

   

Enabling choice through open architecture. Our centrally hosted technology platform is designed based on the principle of “open architecture,” which provides financial advisors with the flexibility to choose among many investment solutions, services, investment managers and custodians to identify those that are most appropriate for their clients.

 

   

Independent and unbiased technology services provider. We are not controlled by a financial institution, broker-dealer or other entity operating in the securities or wealth management industry, which we believe affords us a greater level of independence and impartiality.

 

   

Significant operating scale and efficiency. We believe, based on our discussions with customers, that the scale of our operations generates confidence among financial advisors in our ability to meet their needs, and enables us to provide investment solutions and services efficiently and cost-effectively.

 

   

Deep and loyal customer base. We have long-standing relationships with some of the most well-known and largest networks of financial advisors in the United States.

 

   

Proven management team. Our senior management team has a track record of working together, both at our company and at prior companies. Our founder and co-founders are still actively involved in our day-to-day operations.

Our Growth Strategy

We intend to increase our revenue and profitability by continuing to pursue the following strategies:

 

   

Increase the advisor base within our existing enterprise clients. Through the outreach and marketing activities of our regional sales and client service teams, we intend to continue the process of leveraging our existing enterprise client relationships to add new financial advisors to our technology platform. During the past four years, the number of financial advisors using our technology platform from existing enterprise clients has grown at a compound annual growth rate of 12%.

 

   

Extend the account base within a given advisor relationship. As our working relationships with our financial advisor customers develop over time, and through our sales and marketing efforts, we will seek to move more of their clients’ assets onto our technology platform. During the four year period ending December 31, 2009, the average number of accounts under management or administration per advisor on our technology platform has grown from approximately 11 to 21, an increase of 91%. As a result, total accounts under management or administration have grown at a compound annual growth rate of 39% during the past four years.

 

   

Expand the services we provide each advisor. We will continue to educate our financial advisor customers about our capabilities in order to expand the scope of our investment solutions and services they employ.

 

   

Obtain new enterprise clients. Through our enterprise sales team, we intend to continue to focus on obtaining new enterprise client relationships, which provide us with access to a large number of financial advisors that may be interested in utilizing our technology platform, as well as to the assets under management or administration that are managed by these financial advisors.

 

   

Continue to invest in our technology platform. In the years ended December 31, 2007, December 31, 2008 and December 31, 2009, we had technology development expenditures totaling $4.2 million, $4.5 million and $4.5 million, respectively. In the three months ended March 31, 2009 and 2010, we had technology development expenditures totaling $1.1 million and $1.2 million, respectively. We expect

 

 

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to have similar levels of technology development expenses in the remainder of 2010 and in 2011. We will continue to invest in our technology platform to provide access to investment solutions and services from a wide range of leading third-party providers, while also continuing to enhance the investment solutions and services we offer through Portfolio Management Consultants.

 

   

Continue to pursue transactions and other relationships. We believe we have been historically successful in identifying and executing transactions that have complemented our business and allowed us to compete more effectively in our industry. Though we have no transactions planned currently, we intend to continue to selectively pursue acquisitions, investments and other relationships that we believe can significantly enhance the attractiveness of our technology platform or expand our client base.

Our Business Model

We believe that a number of attractive characteristics significantly contribute to the success of our business model, including:

 

   

Attractive business model with operating leverage. Because we have designed our systems architecture to accommodate growth in the number of advisors and accounts and to provide the flexibility to add new investment solutions and services, our technology platform and infrastructure allow us to grow our business efficiently, without the need for significant additional expenditures and with low marginal costs required to add new investment solutions and services. This enables us to generate substantial operating leverage during the course of our relationship with a financial advisor.

 

   

Recurring and resilient revenue base. The majority of our revenues is recurring and is derived either from asset-based fees, which are billed primarily at the beginning of each quarter, or from fixed fees under multi-year license agreements.

 

   

Strong customer retention. We believe that financial advisors are less likely to move away from our technology platform due to the breadth of access to investment solutions and services that we provide and the significant time and resources that would be required to shift to another technology platform.

 

   

Favorable industry trends. We believe we are well-positioned to take advantage of favorable trends in the wealth management industry, particularly the growth in investable assets, the movement toward independent financial advisors and fee-based pricing structures and increased use of technology.

Risks

This offering involves a high degree of risk. You should carefully consider the risks described in “Risk Factors” before purchasing our common stock. Our results of operations, financial condition or business could be materially adversely affected by any of those risks. The principal risks we face, include, but are not limited to, difficulty in sustaining rapid revenue growth, which may place significant demands on our administrative, operational and financial resources, fluctuations in our revenue, the concentration of nearly all of our revenues from the delivery of investment solutions and services to clients in the financial advisory industry, our reliance on a limited number of clients for a material portion of our revenue, the renegotiation of fee percentages or termination of our services by our clients, the impact of market and economic conditions on our revenues, compliance failures, regulatory actions against us, the failure to protect our intellectual property rights and our inability to successfully execute the conversion of our clients’ assets from their technology platform to our platform in a timely and accurate manner.

The Offering and Related Transactions

In connection with this offering, our 41% shareholder, The EnvestNet Group, Inc., or the Envestnet Shareholder, will merge with and into our company, with our company being the surviving entity. Pursuant to the merger, all of the Envestnet Shareholder’s outstanding preferred shares will convert into Envestnet Shareholder

 

 

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common shares and the Envestnet Shareholder will liquidate and distribute all of the shares of our common stock then held by the Envestnet Shareholder pro rata to the holders of its common shares. In addition, pursuant to their terms, each series of our outstanding preferred stock outstanding immediately prior to this offering will convert into shares of our common stock, effective upon the closing of this offering. See “Certain Relationships and Related Party Transactions”.

Additional Information

We were incorporated in the State of Delaware in 2004. Our principal executive offices are located at 35 East Wacker Drive, Suite 2400, Chicago, Illinois 60601, and our telephone number is (312) 827-2800. Our website address is www.envestnet.com. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider information contained on our website as part of this prospectus.

 

 

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The Offering

 

Shares of common stock offered by Envestnet

             Shares

 

Shares of common stock offered by the selling stockholders

             Shares

 

Total shares of common stock offered

             Shares

 

Shares of common stock to be outstanding immediately after this offering

             Shares

 

Option to purchase additional shares offered by Envestnet

             Shares

 

Use of proceeds

The net proceeds from this offering may be used for general corporate purposes, including for selective strategic investments through acquisitions, alliances or other transactions. We will not receive any proceeds from the sale of common stock by the selling stockholders. See “Use of Proceeds.”

 

Dividend policy

We do not currently intend to declare dividends on shares of our common stock. See “Dividend Policy.”

 

Risk factors

You should carefully read the “Risk Factors” section of this prospectus for a discussion of factors that you should consider carefully before deciding to invest in shares of our common stock.

 

Proposed NYSE symbol

“ENV”

Except as otherwise noted, all information in this prospectus:

 

   

assumes that the 5 for 1 reverse stock split approved by our Board of Directors has taken effect;

   

assumes an initial public offering price of $             per share, the midpoint of the range set forth on the cover of this prospectus; and

 

   

assumes no exercise of the underwriters’ over-allotment option.

In addition, the number of shares of our common stock to be outstanding immediately after this offering is based on 26,043,153 shares outstanding as of March 31, 2010, assumes, unless otherwise noted, that the transactions described under “—The Offering and Related Transactions” were consummated on such date and excludes:

 

   

3,354,412 shares of common stock issuable upon the exercise of outstanding options issued under our 2004 Stock Incentive Plan, at a weighted average exercise price of $6.85;

 

   

1,875,230 options to be granted to our employees immediately prior to the consummation of this offering, representing a one-time grant of options to each of our employees, at an estimated exercise price of $            per share, the midpoint of the range set forth on the cover page of this prospectus;

 

 

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2,700,000 shares of common stock reserved for future issuance under our 2010 Long-Term Incentive Plan; and

 

   

             shares issuable under a warrant granted to FundQuest, Incorporated in February 2010. Terms of the warrant are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations found elsewhere in this prospectus.

 

 

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Summary Consolidated Financial Information and Other Data

The summary consolidated statements of operations data for the three months ended March 31, 2009 and 2010 and the summary consolidated balance sheet data as of March 31, 2010 have been derived from our unaudited condensed consolidated financial statements, which are included elsewhere in this prospectus. The summary consolidated statements of operations data presented for each of the years ended December 31, 2007, 2008 and 2009 and the summary consolidated balance sheet data as of December 31, 2008 and 2009 were derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated statements of operations data for each of the years ended December 31, 2005 and 2006 and the selected consolidated balance sheet data as of December 31, 2005, 2006 and 2007 have been derived from our unaudited consolidated financial statements that are not included in this prospectus. Historical results are not necessarily indicative of the results to be expected in the future, and the results of interim periods are not necessarily indicative of results for the entire year.

The information set forth below should be read together with “Capitalization,” “Selected Consolidated Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, our audited consolidated financial statements and related footnotes included elsewhere in this prospectus and our unaudited condensed consolidated financial statements and related footnotes included elsewhere in this prospectus.

 

 

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Consolidated Statements of Operations Data

 

    Year ended December 31,     Three Months Ended
March 31,
 
    2005     2006     2007     2008     2009     2009     2010  
    (Unaudited)     (Unaudited)                       (Unaudited)  
    (In thousands, except for share and per share information)  

Revenues:

             

Assets under management or administration

  $ 31,989      $ 49,806      $ 71,442      $ 71,738      $ 56,857      $ 13,334      $ 16,396   

Licensing and professional services

    7,962        9,245        10,027        20,104        21,067        5,347        5,236   
                                                       

Total revenues

    39,951        59,051        81,469        91,842        77,924        18,681        21,632   
                                                       

Operating expenses:

             

Cost of revenues

    17,677        25,221        34,541        34,604        24,624        5,920        7,020   

Compensation and benefits

    15,064        18,878        23,250        28,452        28,763        7,004        8,090   

General and administration (1)

    7,748        9,334        12,135        15,500        15,726        3,629        7,109   

Depreciation and amortization

    2,422        2,524        2,914        3,538        4,499        1,047        1,331   

Impairment of goodwill

    14,405        —          —          —          —          —          —     

Restructuring charges

    —          —          —          —          —          —          752   
                                                       

Total operating expenses

    57,316        55,957        72,840        82,094        73,612        17,600        24,302   
                                                       

Income (loss) from operations

    (17,365     3,094        8,629        9,748        4,312        1,081        (2,670

Total other income (expense)

    126        584        1,159        115        (3,368     37        47   
                                                       

Income (loss) before income tax provision (benefit)

    (17,239     3,678        9,788        9,863        944        1,118        (2,623

Income tax provision (benefit)

    38        14        (14,150     4,608        1,816        334        (112
                                                       

Net income (loss)

    (17,277     3,664        23,938        5,255        (872     784        (2,511

Less preferred stock dividends

    —          —          —          (203     (720     (178     (178

Less net income allocated to participating convertible preferred stock (restated) (2)

    —          (1,901     (11,358     (2,406     —          (300     —     
                                                       

Net income (loss) attributable to common stockholders (restated) (2)

  $ (17,277   $ 1,763      $ 12,580      $ 2,646      $ (1,592   $ 306      $ (2,689
                                                       

Net income (loss) per share attributable to common stockholders

             

Basic (restated) (2)

  $ (1.63   $ 0.16      $ 0.95      $ 0.20      $ (0.12   $ 0.02      $ (0.21
                                                       

Diluted

  $ (1.63   $ 0.16      $ 0.95      $ 0.19      $ (0.12   $ 0.02      $ (0.21
                                                       

Weighted average common shares outstanding:

             

Basic (restated) (2)

    10,603,499        11,065,612        13,213,503        13,354,845        12,910,998        12,917,627        12,966,820   
                                                       

Diluted

    10,603,499        11,065,612        13,213,503        13,675,013        12,910,998        13,610,256        12,966,820   
                                                       

Pro forma net loss per share (unaudited):

             

Basic (3)

          $ (0.03     $ (0.10
                         

Diluted (3)

          $ (0.03     $ (0.10
                         

Pro forma weighted average common shares outstanding (unaudited):

             

Basic (3)

            25,613,632          25,944,386   
                         

Diluted (3)

            25,613,632          25,944,386   
                         

Notes to the Consolidated Statements of Income

 

(1) Included in general and administration expenses for the year ended December 31, 2009 is $385 of bad debt expense and $601 of legal expenses related to the Fetter Logic litigation. See notes 7 and 15 to the notes to the audited consolidated financial statements. Included in general and administration expenses for the three months ended March 31, 2010 is $2,668 of bad debt expense and $724 of legal expenses related to the Fetter Logic litigation. See notes 5 and 14 to the notes to the unaudited condensed consolidated financial statements.
(2) In 2007 and 2008, the Company originally reported net income attributable to common stockholders of $23,938 and $5,052, respectively and net income per share attributable to common stockholders—basic of $1.81 and $.40 per share, respectively. These amounts did not include the allocation of net income to participating convertible preferred stock. The impact of including the allocation of net income to participating convertible preferred stock decreases net income attributable to common shareholders for 2007 and 2008 to $12,580 and $2,646, respectively and net income per share attributable to common stockholders to—basic of $0.95 per share and $0.20 per share, respectively. The change had no effect on our net income, diluted earnings per share, consolidated balance sheets, consolidated statements of stockholder’s equity and consolidated statements of cash flows. See note 19 to the notes to the audited consolidated financial statements.

 

 

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(3) Unaudited pro forma basic and diluted net loss per share and unaudited pro forma weighted average common shares outstanding as of December 31, 2009 and March 31, 2010 are presented after giving effect to the issuance of 12,702,634 shares and 12,977,566 shares, respectively of common stock issuable upon the conversion of all our outstanding shares of preferred stock upon completion of the offering. See note 14 to the notes to the audited consolidated financial statements and note 13 to the notes to the unaudited condensed consolidated financial statements.

Consolidated Balance Sheet Data

 

    December 31,   As of March 31, 2010
    2005   2006   2007   2008   2009   Actual   Pro Forma(1)   Pro Forma
As Adjusted(2)
    (In thousands, unaudited)

Cash and cash equivalents

  $ 7,131   $ 13,369   $ 25,255   $ 28,445   $ 31,525   $ 31,404   $ 30,303   $ —  

Working capital

    2,990     5,657     15,168     21,405     27,262     24,195     23,094     —  

Goodwill and intangible assets

    17,074     12,320     5,402     4,331     3,261     2,994     2,994     2,994

Total assets

    30,791     37,948     65,250     72,251     75,058     76,765     75,664     —  

Stockholders’ equity

    23,216     25,559     50,152     58,583     58,246     57,089     55,988     —  

Notes to the Consolidated Balance Sheet Data

 

  (1) On a pro forma basis to give effect to the payment of a dividend on our series C convertible preferred stock in the amount of approximately $1,101,000 in cash and the issuance of 12,977,566 shares of common stock issuable upon the conversion of all our outstanding shares of preferred stock upon completion of the offering; and

 

  (2) On a pro forma as adjusted basis to give effect to the issuance of 12,977,566 shares of common stock issuable upon the conversion of all our outstanding shares of preferred stock upon completion of the offering, as adjusted to further reflect the sale of              shares of common stock in this offering at an assumed initial public offering price of $              per share, the mid-point of the price range set forth on the cover of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. This amount will increase cash and cash equivalents, working capital, total assets and total stockholders’ equity by $            .

Upon completion of the offering, each share of our series A convertible preferred stock, series B convertible preferred stock and series C preferred stock will be automatically converted into shares of common stock at the then effective conversion price. The conversion price per share of the series A preferred stock is $6.25 (equates to 160 shares of common stock for each preferred share). The conversion price per share of the series B preferred stock is $5.00 (equates to 200 shares of common stock for each preferred share). The conversion price per share of the series C preferred stock is $11.65 (equates to 200 shares of common stock for each preferred share).

A $1.00 increase (decrease) in the assumed initial public offering price of $              per share would increase (decrease), on a pro forma basis, each of cash and cash equivalents, total assets and total stockholder’s equity by approximately $              million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

Other Financial and Operating Data

 

     Year ended December 31,    Three Months
Ended March 31,
     2005     2006    2007    2008    2009    2009    2010
     (In thousands, unaudited)

Adjusted EBITDA

   $ (538   $ 5,618    $ 11,564    $ 14,043    $ 10,595    $ 2,286    $ 3,052

Adjusted operating income (loss)

     (2,960     3,094      8,650      10,505      6,096      1,239      1,721

Adjusted net income (loss)

     (2,872     3,664      6,431      6,088      2,449      891      1,188

 

 

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     As of December 31,    As of March  31,
2010
     2005    2006    2007    2008    2009   
     (In millions, except account and advisor information)

Platform Assets

                 

Assets Under Management (AUM)

   $ 5,342    $ 7,099    $ 10,048    $ 7,136    $ 9,660    $ 10,916

Assets Under Administration (AUA)

     8,194      12,632      18,883      21,742      27,931      29,580
                                         

Subtotal AUM/A

     13,536      19,731      28,931      28,878      37,591      40,496

Licensing

     12,868      32,278      53,166      41,704      51,450      54,135
                                         

Total Platform Assets

   $ 26,404    $ 52,009    $ 82,097    $ 70,582    $ 89,041    $ 94,631
                                         

Platform Accounts

                 

AUM

     16,248      23,557      35,588      37,345      45,645      49,020

AUA

     31,112      49,466      77,713      121,645      129,530      136,335
                                         

Subtotal AUM/A

     47,360      73,023      113,301      158,990      175,175      185,355

Licensing

     191,793      327,328      485,011      547,283      510,865      545,299
                                         

Total Platform Accounts

     239,153      400,351      598,312      706,273      686,040      730,654
                                         

Advisors

                 

AUM/A

     4,472      5,669      7,118      7,771      8,408      8,465

Licensing

     3,079      3,747      4,651      5,299      5,542      5,740
                                         

Total Advisors

     7,551      9,416      11,769      13,070      13,950      14,205
                                         

Notes to Other Financial and Operating Data

“Adjusted EBITDA” represents net income (loss) before interest income, interest expense, net income tax expense (benefit), depreciation and amortization, non-cash stock-based compensation expense, unrealized gain (loss) on investments, impairment of investments, impairment of goodwill, litigation-related expense, bad debt expense and severance.

“Adjusted operating income (loss)” represents income (loss) from operations before non-cash stock-based compensation expense, impairment of goodwill, litigation-related expense, bad debt expense and severance.

“Adjusted net income (loss)” represents net income (loss) before impairment of goodwill, reversal of valuation allowance, non-cash stock-based compensation expense, impairment of investments, litigation-related expense, bad debt expense and severance. Reconciling items are tax effected using the income tax rates in effect on the applicable date.

Our Compensation Committee and our management uses adjusted EBITDA, adjusted operating income (loss) and adjusted net income (loss):

 

   

As measures of operating performance;

 

   

For planning purposes, including the preparation of annual budgets;

 

   

To allocate resources to enhance the financial performance of our business;

 

   

To evaluate the effectiveness of our business strategies; and

 

   

In communications with our Board of Directors concerning our financial performance.

Our Compensation Committee of the Board of Directors and our management may also consider adjusted EBITDA, among other factors, when determining management’s incentive compensation beginning in 2010.

We also present adjusted EBITDA, adjusted operating income (loss) and adjusted net income (loss) as supplemental performance measures because we believe that they provide our Board of Directors, management and investors with additional information to assess our performance. Adjusted EBITDA provides comparisons from period to period by excluding potential differences caused by variations in the age and book depreciation of fixed assets affecting relative depreciation expense and amortization of internally developed software, amortization of customer inducement costs, impairment of investments, impairment of goodwill, litigation-related expense, bad debt expense, severance, unrealized income (loss) on investments, and changes in interest expense and interest income that are influenced by capital

 

 

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structure decisions and capital market conditions. Our management also believes it is useful to exclude non-cash stock-based compensation expense from adjusted EBITDA, adjusted operating income (loss) and adjusted net income (loss) because non-cash equity grants made at a certain price and point in time do not necessarily reflect how our business is performing at any particular time.

We believe adjusted EBITDA, adjusted operating income (loss) and adjusted net income (loss) are useful to investors in evaluating our operating performance because securities analysts use adjusted EBITDA, adjusted operating income (loss) and adjusted net income (loss) as supplemental measures to evaluate the overall performance of companies, and we anticipate that our investor and analyst presentations after we are public will include adjusted EBITDA, adjusted operating income (loss) and adjusted net income (loss).

Adjusted EBITDA, adjusted operating income (loss) and adjusted net income (loss) are not measurements of our financial performance under U.S. GAAP and should not be considered as an alternative to net income (loss), operating income (loss) or any other performance measures derived in accordance with U.S. GAAP, or as an alternative to cash flows from operating activities as a measure of our profitability or liquidity.

We understand that, although adjusted EBITDA, adjusted operating income (loss) and adjusted net income (loss) are frequently used by securities analysts and others in their evaluation of companies, these measures have limitations as an analytical tool, and you should not consider them in isolation, or as a substitute for an analysis of our results as reported under U.S. GAAP. In particular you should consider:

 

   

Adjusted EBITDA, adjusted operating income (loss) and adjusted net income (loss) do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;

 

   

Adjusted EBITDA, adjusted operating income (loss) and adjusted net income (loss) do not reflect changes in, or cash requirements for, our working capital needs;

 

   

Adjusted EBITDA, adjusted operating income (loss) and adjusted net income (loss) do not reflect non-cash components of employee compensation;

 

   

Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in the future, and adjusted EBITDA does not reflect any cash requirements for such replacements;

 

   

Due to either net losses before income tax expenses or the use of federal and state net operating loss carryforwards in 2005, 2006, 2007, 2008 and 2009 we had cash income tax payments of $0.0 million, $0.0 million, $0.2 million, $1.1 million and $0.2 million, respectively and income tax payments of $0.1 million and $0.0 million in the three months ended March 31, 2009 and 2010, respectively. Income tax payments will be higher if we continue to generate taxable income and our existing net operating loss carryforwards for federal and state income taxes of approximately $40.2 million and $35.1 million, respectively, as of March 31, 2010, have been fully utilized or have expired; and

 

   

Other companies in our industry may calculate adjusted EBITDA, adjusted operating income (loss) and adjusted net income (loss) differently than we do, limiting their usefulness as a comparative measure.

Management compensates for the inherent limitations associated with using adjusted EBITDA, adjusted operating income (loss) and adjusted net income (loss) measures through disclosure of such limitations, presentation of our financial statements in accordance with U.S. GAAP and reconciliation of adjusted EBITDA to net income (loss), adjusted net income (loss) to the most directly comparable U.S. GAAP measure, net income (loss) and adjusted operating income (loss) to the most directly comparable U.S. GAAP measure, income (loss) from operations. Further, our management also reviews GAAP measures and evaluates individual measures that are not included in adjusted EBITDA, such as our level of capital expenditures and interest income, among other measures.

 

 

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The following table sets forth a reconciliation of net income (loss) to adjusted EBITDA based on our historical results:

 

     Year ended December 31,     Three Months Ended
March 31,
 
     2005     2006     2007     2008     2009         2009             2010      
     (In thousands, unaudited)  

Net income (loss)

   $ (17,277   $ 3,664      $ 23,938      $ 5,255      $ (872   $ 784      $ (2,511

Add (deduct):

              

Interest income

     (224     (584     (1,159     (816     (221     (54     (44

Interest expense

     98        —          —          —          —          —          —     

Income tax provision (benefit)

     38        14        (14,150     4,608        1,816        334        (112

Depreciation and amortization

     2,422        2,524        2,914        3,538        4,499        1,047        1,331   

Impairment of goodwill

     14,405        —          —          —          —          —          —     

Stock-based compensation expense

     —          —          21        458        780        158        232   

Unrealized (gain) loss on investments

     —          —          —          21        (19     —          (3

Impairment of investments

     —          —          —          680        3,608        17        —     

Restructuring charges (excluding severance)

     —          —          —          —          —          —          656   

Severance

     —          —          —          299        —          —          96   

Bad debt expense

     —          —          —          —          385        —          2,668   

Customer inducement costs

     —          —          —          —          18        —          15   

Litigation related expense

     —          —          —          —          601        —          724   
                                                        

Adjusted EBITDA

   $ (538   $ 5,618      $ 11,564      $ 14,043      $ 10,595      $ 2,286      $ 3,052   
                                                        

The following table sets forth the reconciliation of income (loss) from operations to adjusted operating income (loss) based on our historical results:

 

     Year ended December 31,    Three Months Ended
March 31,
 
     2005     2006    2007    2008    2009    2009    2010  
     (In thousands, unaudited)            

Income (loss) from operations

   $ (17,365   $ 3,094    $ 8,629    $ 9,748    $ 4,312    $ 1,081    $ (2,670

Add (deduct):

                   

Impairment of goodwill

     14,405        —        —        —        —        —        —     

Stock-based compensation expense

     —          —        21      458      780      158      232   

Restructuring charges (excluding severance)

     —          —        —        —        —        —        656   

Severance

     —          —        —        299      —        —        96   

Bad debt expense

     —          —        —        —        385      —        2,668   

Customer inducement costs

     —          —        —        —        18      —        15   

Litigation related expense

     —          —        —        —        601      —        724   
                                                   

Adjusted operating income (loss)

   $ (2,960   $ 3,094    $ 8,650    $ 10,505    $ 6,096    $ 1,239    $ 1,721   
                                                   

The following table sets forth the reconciliation of net income (loss) to adjusted net income (loss) based on our historical results:

 

     Year ended December 31,     Three Months Ended
March 31,
 
     2005     2006    2007 *     2008 *    2009 *     2009 *    2010 *  
           (In thousands, unaudited)                  

Net income (loss)

   $ (17,277   $ 3,664    $ 23,938      $ 5,255    $ (872   $ 784    $ (2,511

Impairment of goodwill

     14,405        —        —          —        —          —        —     

Valuation allowance reversal

     —          —        (17,520     —        —          —        —     

Stock-based compensation expense

     —          —        13        266      480        97      139   

Impairment of investments

     —          —        —          394      2,223        10      —     

Restructuring charges (excluding severance)

     —          —        —          —        —          —        392   

Severance

     —          —        —          173      —          —        58   

Bad debt expense

     —          —        —          —        237        —        2,668   

Customer inducement costs

     —          —        —          —        11        —        9   

Litigation related expense

     —          —        —          —        370        —        433   
                                                     

Adjusted net income (loss)

   $ (2,872   $ 3,664    $ 6,431      $ 6,088    $ 2,449      $ 891    $ 1,188   
                                                     

 

* Adjustments, excluding impairment of goodwill and valuation allowance reversal, are tax effected using income tax rates as follows: for 2007—40.1%; for 2008—42.0%; for 2009—38.4%; for the first quarter of 2010—40.2%.

 

 

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RISK FACTORS

This offering involves a high degree of risk. You should carefully consider the following risk factors in addition to the other information contained in this prospectus before purchasing our common stock.

Risks Related to Our Business

We have experienced rapid revenue growth over the past several years, which may be difficult to sustain and which may place significant demands on our administrative, operational and financial resources and any inability to maintain or manage our growth could have a material adverse effect on our results of operations, financial condition or business.

Our revenues during the five years ended December 31, 2009 have grown at a compound annual growth rate of 18%. We expect our growth to continue, which could place additional demands on our resources and increase our expenses. Our future growth will depend on, among other things, our ability to successfully grow our total assets under management and administration and add additional clients. If we are unable to implement our growth strategy, develop new investment solutions and services and gain new clients, our results of operations, financial condition or business may be materially adversely affected.

Sustaining growth will also require us to commit additional management, operational and financial resources and to maintain appropriate operational and financial systems. In addition, continued growth increases the challenges involved in:

 

   

recruiting, training and retaining sufficiently skilled technical, marketing, sales and management personnel;

 

   

preserving our culture, values and entrepreneurial environment;

 

   

successfully expanding the range of investment solutions and services offered to our clients;

 

   

developing and improving our internal administrative infrastructure, particularly our financial, operational, compliance, record-keeping, communications and other internal systems; and

 

   

maintaining high levels of satisfaction with our investment solutions and services among clients.

There can be no assurance that we will be able to manage our expanding operations effectively or that we will be able to maintain or accelerate our growth, and any failure to do so could adversely affect our results of operations, financial condition or business.

Our revenue can fluctuate from period to period, which could cause our share price to fluctuate.

Our revenue may fluctuate from period-to-period in the future due to a variety of factors, many of which are beyond our control. Factors relating to our business that may contribute to these fluctuations include the following events, as well as other factors described elsewhere in this prospectus:

 

   

a decline or slowdown of the growth in the value of financial market assets, which may reduce the value of assets under management and administration and therefore our revenues and cash flows;

 

   

negative public perception and reputation of the financial services industry, which would reduce demand for our investment solutions and services;

 

   

unanticipated changes to economic terms in contracts with clients, including renegotiations;

 

   

downward pressure on fees we charge our clients, which would therefore reduce our revenue;

 

   

changes in laws or regulations that could impact our ability to offer investment solutions and services;

 

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failure to obtain new clients;

 

   

cancellations or non-renewal of existing contracts with clients;

 

   

failure to protect our proprietary technology and intellectual property rights;

 

   

unanticipated delays in connection with the conversion of client assets onto our technology platform;

 

   

reduction in the suite of investment solutions and services provided to existing clients; or

 

   

changes in our pricing policies or the pricing policies of our competitors to which we have to adapt.

As a result of these and other factors, the results of operations for any quarterly or annual period may differ materially from the results of operations for any prior or future quarterly or annual period and should not be relied upon as indications of our future performance.

We operate in a highly competitive industry, with many firms competing for business from financial advisors on the basis of a number of factors, including the quality and breadth of investment solutions and services, ability to innovate, reputation and the prices of services and this competition could hurt our financial performance.

We compete with many different types of companies that vary in size and scope, including Pershing LLC (a subsidiary of BNY Mellon Corporation), The Charles Schwab Corporation, SEI Investments Company, Genworth Financial Inc. and Lockwood Advisors (a subsidiary of BNY Mellon Corporation) and which are discussed in greater detail under “Business—Competition”. In addition, some of our clients have developed or may develop the in-house capability to provide the technology and/or investment advisory services they have retained us to perform. These clients may also offer internally developed services to their financial advisors, obviating the need to hire us, and they may offer these services to third-party financial advisors or financial institutions, thereby competing directly with us for that business.

Many of our competitors have significantly greater resources than we do. These resources may allow our competitors to respond more quickly to changes in demand for investment solutions and services, to devote greater resources to developing and promoting their services and to make more attractive offers to potential clients and strategic partners, which could hurt our financial performance.

We may lose clients as a result of the sale or merger of a client, a change in a client’s senior management, competition from other financial advisors and financial institutions and for other reasons. We also face increased competition due to the current trend of industry consolidation. If large financial institutions that are not our clients are able to attract assets from our clients, our ability to generate future growth in revenues and earnings may be adversely affected.

Our failure to successfully compete in any of the above-mentioned areas could have a material adverse effect on our results of operations, financial condition or business. Competition could also affect the revenue mix of services we provide, resulting in decreased revenues in lines of business with higher profit margins.

We derive nearly all of our revenues from the delivery of investment solutions and services to clients in the financial advisory industry and our revenue could suffer if that industry experiences a downturn.

We derive nearly all of our revenues from the delivery of investment solutions and services to clients in the financial advisory industry and we are therefore subject to the risks affecting that industry. A decline or lack of growth in demand for financial advisory services would adversely affect our clients and, in turn, our results of operations, financial condition and business. For example, the availability of free or low-cost investment information and resources, including research and information relating to publicly traded companies and mutual funds available on the Internet or on company websites, could lead to lower demand by investors for the services provided by financial advisors. In addition, demand for our investment solutions and services among financial advisors could decline for many reasons. Consolidation or limited growth in the financial advisory industry could reduce the number of our clients and potential clients. Events that adversely affect our clients’ businesses, rates

 

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of growth or the numbers of customers they serve, including decreased demand for our clients’ products and services, adverse conditions in our clients’ markets or adverse economic conditions generally, could decrease demand for our investment solutions and services and thereby decrease our revenues. Any of the foregoing could have a material adverse effect on our results of operations, financial condition or business.

A limited number of clients account for a material portion of our revenue. Termination of our contracts with any of these clients could have a material adverse effect on our results of operations, financial condition or business.

For the years ended December 31, 2007, December 31, 2008 and December 31, 2009 and for the three months ended March 31, 2009 and 2010, revenues associated with our relationship with our single largest client, FMR LLC, an affiliate of FMR Corp., or Fidelity, accounted for 14%, 27%, 31%, 29% and 33% respectively, of our total revenues and our ten largest clients accounted for 58%, 63%, 66%, 66% and 65% respectively, of our total revenues. Our license agreements with large financial institutions are generally multi-year contracts that may be terminated upon the expiration of the contract term or prior to such time for cause, which may include breach of contract, bankruptcy, insolvency and other reasons. Our license agreement with Fidelity does not have a specified term, but the license fee payments made to us by Fidelity under the license agreement cease on December 31, 2011. At such time, Fidelity shall pay us ongoing platform services fees based upon usage, which include fees for ongoing technology services and software updates. A majority of our agreements with financial advisors generally provide for termination at any time. If our contractual relationship with Fidelity were to terminate, or if a significant number of our most important clients were to terminate their contracts with us and we were unable to obtain a significant number of new clients, our results of operations, financial condition or business could be materially adversely affected.

Our clients that pay us an asset-based fee may seek to negotiate a lower fee percentage or may cease using our services, which could limit the growth of, or decrease, our revenues.

A significant portion of our revenues are derived from asset-based fees. Our clients may, for a number of reasons, seek to negotiate a lower asset-based fee percentage. For example, an increase in the use of index-linked investment products by the clients of our financial advisor clients may result in lower fees being paid to our clients, and our clients may in turn seek to negotiate lower asset-based fee percentages for our services. In addition, as competition among our clients increases, they may be required to lower the fees they charge to their clients, which could cause them to seek to decrease our fees accordingly. Any of these factors could result in fluctuation or decline in our asset-based fees, which would have a material adverse effect on our results of operations, financial condition or business.

Changes in market and economic conditions could lower the value of assets on which we earn revenues and could decrease the demand for our investment solutions and services.

Asset-based fees make up a significant portion of our revenues and several of our largest clients pay us on this basis. Asset-based fees represented 88%, 78%, 73%, 71% and 76% of our total revenues in the fiscal years ended December 31, 2007, 2008 and 2009 and for the three months ended March 31, 2009 and 2010, respectively. In addition, as a result of the current trend of increased use of financial advisors by individual investors, we expect that asset-based fees will account for an increasing percentage of our total revenues in the future. Significant fluctuations in securities prices may materially affect the value of the assets managed by our clients and may also influence financial advisor and investor decisions regarding whether to invest in, or maintain an investment in, a mutual fund or other investment solution. If such market fluctuation led to less investment in the securities markets, our revenues and earnings derived from asset-based fees could be materially adversely affected.

We provide our investment solutions and services to the financial services industry. The financial markets, and in turn the financial services industry, are affected by many factors, such as U.S. and foreign economic conditions and general trends in business and finance that are beyond our control. In the event that the U.S. or international financial markets suffer a severe or prolonged downturn, investors may choose to withdraw assets from financial advisors and transfer them to investments that are perceived to be more secure, such as bank deposits and Treasury securities. For example, in late 2007 and through the first quarter of 2009, the financial

 

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markets experienced a broad and prolonged downturn, our redemption rates were higher than our historical average, and our results of operations, financial condition and business were materially adversely affected. Any prolonged downturn in financial markets, or increased levels of asset withdrawals could have a material adverse effect on our results of operations, financial condition or business.

Investors’ decisions regarding their investment assets are affected by many factors and investors may redeem or withdraw their investment assets generally at any time. Significant changes in investing patterns or large-scale withdrawal of investment funds could have a material adverse effect on our results of operations, financial condition or business.

The clients of our financial advisors are generally free to change financial advisors, forgo the advice and other services provided by financial advisors or withdraw the funds they have invested with financial advisors. These clients of financial advisors may elect to change their investment strategies, including by moving their assets away from equity securities to fixed income or other investment options, or by withdrawing all or a portion of their assets from their accounts to avoid all securities markets-related risks. These actions by investors are outside of our control and could materially adversely affect the market value of the investment assets that our clients manage, which could materially adversely affect the asset-based fees we receive from our clients.

We are subject to liability for losses that result from a breach of our fiduciary duties.

Our investment advisory services involve fiduciary obligations that require us to act in the best interests of our clients, and we may be sued and face liabilities for actual or claimed breaches of our fiduciary duties. Because we provide investment advisory services, both directly and indirectly, with respect to substantial assets, we could face substantial liability to our clients if it is determined that we have breached our fiduciary duties. In certain circumstances, which generally depend on the types of investment solutions and services we are providing, we may enter into client agreements jointly with advisors and retain third-party investment money managers on behalf of clients. As a result, we may be included as a defendant in lawsuits against financial advisors and third-party investment money managers that involve claims of breaches of the duties of such persons, and we may face liabilities for the improper actions and/or omissions of such advisors and third-party investment money managers. In addition, we may face claims based on the results of our investment advisory recommendations, even in the absence of a breach of our fiduciary duty. Such claims and liabilities could therefore have a material adverse effect on our results of operations, financial condition or business.

We are subject to liability for losses that result from potential, perceived or actual conflicts of interest.

Potential, perceived and actual conflicts of interest are inherent in our existing and future business activities and could give rise to client dissatisfaction, litigation or regulatory enforcement actions. In particular, we pay varying fees to third-party asset managers and custodians and our financial advisor customers, or their clients, could accuse us of directing them toward those asset managers or custodians that charge us the lowest fees. In addition, we offer proprietary mutual funds and portfolios of mutual funds through our internal investment management and portfolio consulting group, and financial advisors or their clients could conclude that we favor our proprietary investment products because of their belief that we earn higher fees when our proprietary investment products are used. Adequately addressing conflicts of interest is complex and difficult and if we fail, or appear to fail, to adequately address potential, perceived or actual conflicts of interest, the resulting negative public perception and reputational harm could materially adversely affect our client relations or ability to enter into contracts with new clients and, consequently, our results of operations, financial condition and business.

If our reputation is harmed, our results of operations, financial condition or business could be materially adversely affected.

Our reputation, which depends on earning and maintaining the trust and confidence of our clients, is critical to our business. Our reputation is vulnerable to many threats that can be difficult or impossible to control, and

 

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costly or impossible to remediate. Regulatory inquiries or investigations, lawsuits initiated by our clients, employee misconduct, perceptions of conflicts of interest and rumors, among other developments, could substantially damage our reputation, even if they are baseless or satisfactorily addressed. In addition, any perception that the quality of our investment solutions and services may not be the same or better than that of other providers can also damage our reputation. Any damage to our reputation could harm our ability to attract and retain clients, which would materially adversely affect our results of operations, financial condition and business.

If our investment solutions and services fail to perform properly due to undetected errors or similar problems, our results of operations, financial condition and business could be materially adversely affected.

Investment solutions and services we develop or license may contain undetected errors or defects despite testing. Such errors can exist at any point in the life cycle of our investment solutions or services, but are frequently found after introduction of new investment solutions and services or enhancements to existing investment solutions or services. We continually introduce new investment solutions and services and new versions of our investment solutions and services. Despite internal testing and testing by current and potential clients, our current and future investment solutions and services may contain serious defects or malfunctions. If we detect any errors before release, we might be required to delay the release of the investment solution or service for an extended period of time while we address the problem. We might not discover errors that affect our new or current investment solutions, services or enhancements until after they are deployed, and we may need to provide enhancements to correct such errors. Errors may occur that could have a material adverse effect on our results of operations, financial condition or business and could result in harm to our reputation, lost sales, delays in commercial release, third-party claims, contractual disputes, contract terminations or renegotiations, or unexpected expenses and diversion of management and other resources to remedy errors. In addition, negative public perception and reputational damage caused by such claims would adversely affect our client relationships and our ability to enter into new contracts. Any of these problems could have a material adverse effect on our results of operations, financial condition and business.

We could face liability or incur costs to remediate operational errors or to address possible customer dissatisfaction.

Operational risk generally refers to the risk of loss resulting from our operations, including, but not limited to, improper or unauthorized execution and processing of transactions, deficiencies in our operating systems, business disruptions and inadequacies or breaches in our internal control processes. We operate in diverse markets and are reliant on the ability of our employees and systems to process large volumes of transactions often within short time frames. In the event of a breakdown or improper operation of systems, human error or improper action by employees, we could suffer financial loss, regulatory sanctions or damage to our reputation.

In addition, there may be circumstances when our customers are dissatisfied with our investment solutions and services, even in the absence of an operational error. In such circumstances, we may elect to make payments or otherwise incur increased costs or lower revenues in order to maintain a strong customer relationship. In any of the forgoing circumstances, our results of operations, financial condition or business could be materially adversely affected.

We may become subject to liability based on the use of our investment solutions and services by our clients.

Our investment solutions and services support the investment processes of our clients, which, in the aggregate, manage billions of dollars of assets. Our client agreements have provisions designed to limit our exposure to potential liability claims brought by our clients or third parties based on the use of our investment

 

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solutions and services. However, these provisions have certain exceptions and could be invalidated by unfavorable judicial decisions or by federal, state, foreign or local laws. Use of our products as part of the investment process creates the risk that clients, or the parties whose assets are managed by our clients, may pursue claims against us for very significant dollar amounts. Any such claim, even if the outcome were to be ultimately favorable to us, would involve a significant commitment of our management, personnel, financial and other resources and could have a negative impact on our reputation. Such claims and lawsuits could therefore have a material adverse effect on our results of operations, financial condition or business.

Furthermore, our clients may use our investment solutions and services together with software, data or products from other companies. As a result, when problems occur, it might be difficult to identify the source of the problem. Even when our investment solutions and services do not cause these problems, the existence of these errors might cause us to incur significant costs and divert the attention of our management and technical personnel, any of which could materially adversely affect our results of operations, financial condition or business.

Our business relies heavily on computer equipment, electronic delivery systems and the Internet. Any failures or disruptions in such technologies could result in reduced revenues, increased costs and the loss of customers.

Our business relies heavily on our computer equipment (including our servers), electronic delivery systems and the Internet, but these technologies are vulnerable to disruptions, failures or slowdowns caused by fire, earthquake, power loss, telecommunications failure, terrorist attacks, wars, Internet failures, computer viruses and other events beyond our control. Furthermore, we rely on agreements with our suppliers, such as our current data hosting and service provider, to provide us with access to certain computer equipment, electric delivery systems and the Internet. We are unable to predict whether a future contractual dispute may arise with one of our suppliers that could cause a disruption in service, or whether our agreements with our suppliers can be obtained or renewed on acceptable terms, or at all. An unanticipated disruption, failure or slowdown affecting our key technologies or facilities may have significant ramifications, such as data-loss, data corruption, damaged software codes or inaccurate processing of transactions. We maintain off-site back-up facilities for our electronic information and computer equipment, but these facilities could be subject to the same interruptions that may affect our primary facilities. Any significant disruptions, failures, slowdowns, data-loss or data corruption could have a material adverse effect on our results of operations, financial condition or business and result in the loss of customers.

We could face liability related to disclosure or theft of the personal information we store on our technology platform.

Clients may maintain personal investment and financial information on our technology platform and we could be subject to liability if we were to inappropriately disclose any user’s personal information, inadvertently or otherwise, or if third parties were able to penetrate our network security or otherwise gain access to any user’s name, address, portfolio holdings or other financial information. Any such event could subject us to claims for misuses of personal information, such as unauthorized marketing or unauthorized access to personal portfolio information could therefore have a material adverse effect on our results of operations, financial condition or business.

We could incur significant costs protecting the personal information we store on our technology platform.

Users of our investment solutions and services are located in the United States and around the world. As a result, we collect and store the personal information of individuals who live in many different countries. Privacy regulators in some of those countries have publicly stated that foreign entities (including entities based in the United States) may render themselves subject to those countries’ privacy laws and the jurisdiction of such regulators by collecting or storing the personal data of those countries’ residents, even if such entities have no

 

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physical or legal presence there. Consequently, we may be obligated to comply with the privacy and data security laws of such foreign countries. Our exposure to foreign countries’ privacy and data security laws impacts our ability to collect and use personal information, increases our legal compliance costs and may expose us to liability.

We have incurred, and will continue to incur, expenses to comply with privacy and security standards and protocols imposed by law, regulation, industry standards or contractual obligations. Increased domestic or international regulation of data utilization and distribution practices could require us to modify our operations and incur significant additional expense, which could have a material adverse effect on our results of operations, financial condition or business.

We could face liability for certain information we provide, including information based on data we obtain from other parties.

We may be subject to claims for securities law violations, negligence, breach of fiduciary duties or other claims relating to the information we provide. For example, individuals may take legal action against us if they rely on information we have provided and it contains an error. In addition, we could be subject to claims based upon the content that is accessible from our website through links to other websites. Moreover, we could face liability based on inaccurate information provided to us by others. Defending any such claims could be expensive and time-consuming, and any such claim could materially adversely affect our results of operations, financial condition or business.

We depend on our senior management team and other key personnel and the loss of their services could have a material adverse effect on our results of operations, financial condition or business.

We depend on the efforts, relationships and reputations of our senior management team and other key personnel, including Judson Bergman, our Chief Executive Officer, William Crager, our President, and Scott Grinis, our Chief Technology Officer, in order to successfully manage our business. We believe that success in our business will continue to be based upon the strength of our intellectual capital. The loss of the services of any member of our senior management team or of other key personnel could have a material adverse effect on our results of operations, financial condition or business.

Our operations are subject to extensive government regulation, and compliance failures or regulatory action against us could adversely affect our results of operations, financial condition or business.

The financial services industry is among the most extensively regulated industries in the United States. We operate investment advisory, broker-dealer and mutual fund businesses, each of which is subject to a specific and extensive regulatory scheme. In addition, we are subject to numerous laws and regulations of general application. It is very difficult to predict the future impact of the legislative and regulatory requirements affecting our business and our clients’ businesses.

Certain of our subsidiaries are registered as “investment advisers” with the Securities and Exchange Commission under the Investment Advisers Act of 1940 and are regulated thereunder. In addition, many of our investment advisory services are conducted pursuant to the non-exclusive safe harbor from the definition of an “investment company” provided under Rule 3a-4 under the Investment Company Act of 1940. If Rule 3a-4 were to cease to be available, or if the Securities and Exchange Commission were to modify the rule or its interpretation of how the rule is applied, our business could be adversely affected. Certain of our registered investment adviser subsidiaries provide advice to mutual fund clients. Mutual funds are registered as “investment companies” under the Investment Company Act of 1940. The Investment Advisers Act of 1940 and the Investment Company Act of 1940, together with related regulations and interpretations of the Securities and Exchange Commission, impose numerous obligations and restrictions on investment advisers and mutual funds, including requirements relating to the safekeeping of client funds and securities, limitations on advertising,

 

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disclosure and reporting obligations, prohibitions on fraudulent activities, restrictions on transactions between an adviser and its clients, and between a mutual fund and its advisers and affiliates, and other detailed operating requirements, as well as general fiduciary obligations.

In addition, Portfolio Brokerage Services, Inc., our broker-dealer subsidiary, is registered as a broker-dealer with the Securities and Exchange Commission and with all 50 states and the District of Columbia, and is a member of the Financial Industry Regulatory Authority, a securities industry self-regulatory organization that supervises and regulates the conduct and activities of its members. Broker-dealers are subject to regulations that cover all aspects of their business, including sales practices, market making and trading among broker-dealers, use and safekeeping of customer funds and securities, capital structure, recordkeeping and the conduct of directors, officers, employees, representatives and associated persons. The Financial Industry Regulatory Authority conducts periodic examinations of the operations its members, including Portfolio Brokerage Services, Inc. As a broker-dealer, Portfolio Brokerage Services, Inc. is also subject to certain minimum net capital requirements under Securities and Exchange Commission and Financial Industry Regulatory Authority rules. Compliance with the net capital rules may limit our ability to withdraw capital from Portfolio Brokerage Services, Inc.

All of the foregoing laws and regulations are complex and we are required to expend significant resources in order to maintain our compliance with such laws and regulations. Any failure on our part to comply with these and other applicable laws and regulations could result in regulatory fines, suspensions of personnel or other sanctions, including revocation of our registration or that of our subsidiaries as an investment adviser or broker-dealer, as the case may be, which could, among other things, require changes to our business practices and scope of operations or harm our reputation, which, in turn could have a material adverse effect on our results of operations, financial condition or business.

Changes to the laws or regulations applicable to us or to our financial advisor clients could adversely affect our results of operations, financial condition or business.

We may be adversely affected as a result of new or revised legislation or regulations imposed by the Securities and Exchange Commission or other U.S. or foreign governmental regulatory authorities or self-regulatory organizations that supervise the financial markets around the world. In addition, we may be adversely affected by changes in the interpretation or enforcement of existing laws and rules by these governmental authorities and self-regulatory organizations. It is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether any current proposals will become law, and it is difficult to predict how any changes or potential changes could affect our business. Changes to laws or regulations could increase our potential liability in connection with the investment solutions and services that we provide. The introduction of any new laws or regulations could make our ability to comply with applicable laws and regulations more difficult and expensive. Any of the foregoing could have a material adverse affect on our results of operations, financial condition or business.

The offering of shares of our common stock may be deemed a change of control of our company and the method by which the company obtained the consent of its clients to the change of control could be challenged, which could adversely affect our results of operations, financial condition or business.

Under the Investment Advisers Act of 1940, the investment advisory agreements entered into by our investment adviser subsidiaries may not be assigned without the client’s consent. Under the Investment Company Act of 1940, advisory agreements with registered funds terminate automatically upon assignment and, if an assignment of an advisory agreement occurs, the board of directors and the shareholders of the registered fund must approve a new agreement. Under the Investment Advisers Act of 1940 and the Investment Company Act of 1940, such an assignment may be deemed to occur upon a change of control of the Company. A change of control could be deemed to occur if we, or one of our investment adviser subsidiaries, were to gain or lose a controlling person, or in other situations that may depend significantly on facts and circumstances.

 

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In case the offering of our common stock may be deemed to result in a change in control, we sought the consent of our financial advisor clients, as well as the clients of financial advisors receiving advisory services. We have obtained the consent for the change of control from substantially all such clients. While we expect the consent process to be completed prior to the consummation of this offering, we are still awaiting the consent of a relatively small number of clients of financial advisors. In addition, it is possible that the method by which we obtained consents could be challenged at a later time. If such a challenge were to be successful it could have a material adverse effect on our results of operations, financial condition or business.

We rely on exemptions from certain laws and if for any reason these exemptions were to become unavailable to us, we could become subject to regulatory action or third-party claims and our business could be materially and adversely affected.

We regularly rely on exemptions from various requirements of the Securities Exchange Act of 1934, the Investment Company Act of 1940 and the Employment Retirement Income Security Act in conducting our activities. These exemptions are sometimes highly complex and may in certain circumstances depend on compliance by third parties whom we do not control. If for any reason these exemptions were to become unavailable to us, we could become subject to regulatory action or third-party claims and our business could be materially and adversely affected.

If government regulation of the Internet or other areas of our business changes, or if consumer attitudes toward use of the Internet change, we may need to change the manner in which we conduct our business or incur greater operating expenses.

The adoption, modification or interpretation of laws or regulations relating to the Internet or other areas of our business could adversely affect the manner in which we conduct our business. Such laws and regulations may cover sales, practices, taxes, user privacy, data protection, pricing, content, copyrights, distribution, electronic contracts, consumer protection, broadband residential Internet access and the characteristics and quality of services. Moreover, it is not clear how existing laws governing these matters apply to the Internet. If we are required to comply with new regulations or legislation or new interpretations of existing regulations or legislation, we may be required to incur additional expenses or alter our business model, either of which could have a material adverse effect on our results of operations, financial condition or business.

We are substantially dependent on our intellectual property rights, and a failure to protect these rights could adversely affect our results of operations, financial condition or business.

We have made substantial investments in software and other intellectual property on which our business is highly dependent. We rely on trade secret, trademark and copyright laws, confidentiality and nondisclosure agreements and other contractual and technical security measures to protect our proprietary technology. Any loss of our intellectual property rights, or any significant claim of infringement or indemnity for violation of the intellectual property rights of others, could have a material adverse effect on our results of operations, financial condition or business.

None of our technologies, investment solutions or services is covered by any copyright registration, issued patent or patent application. We are the owner of four registered trademarks in the United States, including “ENVESTNET”, and we claim common law rights in other trademarks that are not registered. We cannot guarantee that:

 

   

our intellectual property rights will provide competitive advantages to us;

 

   

our ability to assert our intellectual property rights against potential competitors or to settle current or future disputes will not be limited by our agreements with third parties;

 

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our intellectual property rights will be enforced in jurisdictions where competition may be intense or where legal protection may be weak;

 

   

any of the trademarks, copyrights, trade secrets or other intellectual property rights that we presently employ in our business will not lapse or be invalidated, circumvented, challenged or abandoned;

 

   

our trademark applications will lead to registered trademarks; or

 

   

competitors will not design around our intellectual property rights or develop similar technologies, investment solutions or products; or that we will not lose the ability to assert our intellectual property rights against others.

We are also a party to a number of third-party intellectual property license agreements. Some of these license agreements require us to make one-time payments or ongoing subscription payments. We cannot guarantee that the third-party intellectual property we license will not be licensed to our competitors or others in our industry. In the future, we may need to obtain additional licenses or renew existing license agreements. We are unable to predict whether these license agreements can be obtained or renewed on acceptable terms, or at all. In addition, we have granted our customers certain rights to use our intellectual property in the ordinary course of our business. Some of our customer agreements restrict our ability to license or develop certain customized technology or services within certain markets or to certain competitors of our customers. For example, our agreement with Fidelity restricts our ability to develop an enterprise-level integration or combination of products and services substantially similar to the technology platform we have developed for Fidelity. Some of our customer agreements grant our customers ownership rights with respect to the portion of the intellectual property we have developed or customized for our customers. In addition, some of our customer agreements require us to deposit the source code to the customized technology and investment solutions with a source code escrow agent, which source code may be released in the event we enter into bankruptcy or are unable to provide support and maintenance of the technology or investment solutions we have licensed to our customers. These provisions in our agreements may limit our ability to grow our business in the future.

Third parties may sue us for intellectual property infringement or misappropriation which, if successful, could require us to pay significant damages or make changes to the investment solutions or services that we offer.

We cannot be certain that our internally developed or acquired technologies, investment solutions or services do not and will not infringe the intellectual property rights of others. In addition, we license content, software and other intellectual property rights from third parties and may be subject to claims of infringement if such parties do not possess the necessary intellectual property rights to the products they license to us. The risk of infringement claims against us will increase if more of our competitors are able to obtain patents for investment solutions or services or business processes. In addition, we face additional risk of infringement or misappropriation claims if we hire an employee who possesses third party proprietary information who decides to use such information in connection with our investment solutions, services or business processes without such third party’s authorization. We have in the past been and may in the future be subject to legal proceedings and claims that we have infringed or misappropriated the intellectual property rights of a third party. These claims sometimes involve patent holding companies who have no relevant product revenues and against whom our own proprietary technology may therefore provide little or no deterrence. In addition, third parties may in the future assert intellectual property infringement claims against our customers, which, in certain circumstances, we have agreed to indemnify. Any intellectual property related infringement or misappropriation claims, whether or not meritorious, could result in costly litigation and could divert management resources and attention. Moreover, should we be found liable for infringement or misappropriation, we may be required to enter into licensing agreements, if available on acceptable terms or at all, pay substantial damages or make changes to the investment solutions and services that we offer. Any of the foregoing could prevent us from competing effectively, result in substantial costs to us, divert management’s attention and our resources away from our operations and otherwise harm our reputation.

 

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If our intellectual property and proprietary technology are not adequately protected to prevent use or appropriation by our competitors, our business and competitive position would suffer.

Our future success and competitive position depend in part on our ability to protect our intellectual property rights. The steps we have taken to protect our intellectual property rights may be inadequate to prevent the misappropriation of our proprietary technology. There can be no assurance that others will not develop or patent similar or superior technologies, investment solutions or services. Unauthorized copying or other misappropriation of our proprietary technologies could enable third parties to benefit from our intellectual property rights without paying us for doing so, which could harm our business. Policing unauthorized use of proprietary technology is difficult and expensive and our monitoring and policing activities may not be sufficient to identify any misappropriation and protect our proprietary technology. In addition, third parties may knowingly or unknowingly infringe our trademarks and other intellectual property rights, and litigation may be necessary to protect and enforce our intellectual property rights. If litigation is necessary to protect and enforce our intellectual property rights, any such litigation could be very costly and could divert management attention and resources. If we are unable to protect our intellectual property rights or if third parties independently develop or gain access to our or similar technologies, investment solutions or services, our results of operations, financial condition and business could be materially adversely affected.

The use of “open source code” in investment solutions may expose us to additional risks and harm our intellectual property rights.

To a limited extent, we rely on open source code to develop our investment solutions and support our internal systems and infrastructure. While we monitor our use of open source code to attempt to avoid subjecting our investment solutions to conditions we do not intend, such use could inadvertently occur. Additionally, if a third-party software provider has incorporated certain types of open source code into software we license from such third party for our investment solutions, we could, under certain circumstances, be required to disclose the source code for our investment solutions. This could harm our intellectual property position and have a material adverse effect on our results of operations, financial condition and business.

Confidentiality agreements with employees, consultants and others may not adequately prevent disclosure of trade secrets and other proprietary information.

We have devoted substantial resources to the development of our proprietary technologies, investment solutions and services. In order to protect our proprietary rights, we enter into confidentiality agreements with our employees, consultants and independent contractors. These agreements may not effectively prevent unauthorized disclosure of confidential information or unauthorized parties from copying aspects of our technologies, investment solutions or products or obtaining and using information that we regard as proprietary. Moreover, these agreements may not provide an adequate remedy in the event of such unauthorized disclosures of confidential information and we cannot assure you that our rights under such agreements will be enforceable. In addition, others may independently discover trade secrets and proprietary information, and in such cases we could not assert any trade secret rights against such parties. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could reduce any competitive advantage we have developed and cause us to lose customers or otherwise harm our business.

Our failure to successfully integrate acquisitions could strain our resources. In addition, there are significant risks associated with growth through acquisitions, which may materially adversely affect our results of operations, financial condition or business.

We expect to grow our business by, among other things, making acquisitions. Acquisitions involve a number of risks. They can be time-consuming and may divert management’s attention from day-to-day operations. Financing an acquisition could result in dilution from issuing equity securities or a weaker balance sheet from using cash or incurring debt. Acquisitions might also result in losing key employees. In addition, we may fail to successfully complete any acquisitions. We may also fail to generate enough revenues or profits from an acquisition to earn a return on the associated purchase price.

 

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To the extent we grow our business through acquisitions, any such future acquisitions could present a number of other risks, including:

 

   

incorrect assumptions regarding the future results of acquired operations or assets or expected cost reductions or other synergies expected to be realized as a result of acquiring operations or assets;

 

   

failure to integrate the operations or management of any acquired operations or assets successfully and on a timely and cost effective basis;

 

   

insufficient knowledge of the operations and markets of acquired businesses;

 

   

loss of key personnel;

 

   

diversion of management’s attention from existing operations or other priorities;

 

   

increased costs or liabilities as a result of undetected or undisclosed legal, regulatory or financial issues related to acquired operations or assets; and

 

   

inability to secure, on terms we find acceptable, sufficient financing that may be required for any such acquisition or investment.

In addition, if we are unsuccessful in completing acquisitions of other businesses, operations or assets or if such opportunities for expansion do not arise, our results of operations, financial condition or business could be materially adversely affected.

Our failure to successfully execute the conversion of our clients’ assets from their technology platform to our platform in a timely and accurate manner could have a material adverse effect on our results of operations, financial condition or business.

When we begin working with a new client, or acquire new client assets through an acquisition or other transaction, such as our recent agreement with FundQuest Incorporated, we are required to convert the new assets from the clients’ technology platform to our technology platform. These conversions present significant technological and operational challenges, can be time-consuming and may divert management’s attention from other operational challenges. If we fail to successfully complete our conversions in a timely and accurate manner, we may be required to expend more time and resources than anticipated, which could erode the profitability of the client relationship. In addition, any such failure may harm our reputation and may make it less likely that prospective clients will commit to working with us. Any of these risks could materially adversely affect our results of operations, financial condition or business.

Our business will suffer if we do not keep up with rapid technological change, evolving industry standards or changing requirements of clients.

We expect technological developments to continue at a rapid pace in our industry. Our success will depend, in part, on our ability to:

 

   

continue to develop our technology expertise;

 

   

recruit and retain skilled technology professionals;

 

   

enhance our current investment solutions and services;

 

   

develop new investment solutions and services that meet changing client needs;

 

   

advertise and market our investment solutions and services;

 

   

protect our proprietary technology and intellectual property rights; or

 

   

influence and respond to emerging industry standards and other technological changes.

We must accomplish these tasks in a timely and cost-effective manner and our failure to do so could materially adversely affect our results of operations, financial condition or business.

 

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We must continue to introduce new investment solutions and services and investment solution and service enhancements to address our clients’ changing needs, market changes and technological developments and failure to do so could have a material adverse effect on our results of operations, financial condition or business.

The market for our investment solutions and services is characterized by shifting client demands, evolving market practices and, for some of our investment solutions and services, rapid technological change. Changing client demands, new market practices or new technologies can render existing investment solutions and services obsolete and unmarketable. As a result, our future success will continue to depend upon our ability to develop new investment solutions and services and investment solution and service enhancements that address the future needs of our target markets and respond to technological and market changes. In the years ended December 31, 2007, December 31, 2008 and December 31, 2009 and in the three months ended March 31, 2009 and 2010, we incurred technology development expenditures totaling approximately $4.2 million, $4.5 million, $4.5 million, $1.1 million and $1.2 million, respectively. We expect that our technology development expenditures will continue at this level or they may increase in the future. We may not be able to accurately estimate the impact of new investment solutions and services on our business or how their benefits will be perceived by our clients. Further, we may not be successful in developing, introducing, marketing and licensing our new investment solutions or services or investment solution or service enhancements on a timely and cost effective basis, or at all, and our new investment solutions and services and enhancements may not adequately meet the requirements of the marketplace or achieve market acceptance. In addition, clients may delay purchases in anticipation of new investment solutions or services or enhancements. Any of these factors could materially adversely affect our results of operations, financial condition or business.

Risks Relating to the Offering

An active market for our common stock may not develop, which may inhibit the ability of our stockholders to sell common stock following this offering.

An active or liquid trading market in our common stock may not develop upon completion of this offering, or if it does develop, it may not continue. If an active trading market does not develop, you may have difficulty selling any of our common stock that you buy. The initial public offering price of our common stock has been determined through our negotiations with the underwriters and may be higher than the market price of our common stock after this offering. Consequently, you may not be able to sell shares of our common stock at prices equal to or greater than the price paid by you in the offering. See “Underwriting” for a discussion of the factors that we and the underwriters will consider in determining the initial public offering price.

The price of our common stock may be highly volatile and may decline regardless of our operating performance.

The market price of our common stock could be subject to significant fluctuations in response to:

 

   

variations in our quarterly or annual operating results;

 

   

loss of a significant amount of existing business;

 

   

actual or anticipated changes in our growth rate relative to our competitors;

 

   

actual or anticipated fluctuations in our competitors’ operating results or changes in their growth rates;

 

   

changes in financial estimates, treatment of our tax assets or liabilities or investment recommendations by securities analysts following our business;

 

   

the public’s response to our press releases, our other public announcements and our filings with the Securities and Exchange Commission;

 

   

changes in accounting standards, policies, guidance or interpretations or principles;

 

   

sales of common stock by our directors, officers and significant stockholders;

 

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announcements of technological innovations or enhanced or new investment solutions by us or our competitors;

 

   

our failure to achieve operating results consistent with securities analysts’ projections;

 

   

issuance of new or updated research or reports by securities analysts;

 

   

the operating and stock price performance of other companies that investors may deem comparable to us;

 

   

regulatory developments in our target markets affecting us, our clients or our competitors;

 

   

fluctuations in the valuation of companies perceived by investors to be comparable to us;

 

   

broad market and industry factors;

 

   

other events or factors, including those resulting from war, incidents of terrorism or responses to such events; and

 

   

general economic and market conditions.

Furthermore, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. For example, in 2008 and the first quarter of 2009, the stock markets experienced extreme price decreases and in the last three quarters of 2009, the stock markets experienced extreme price increases. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may cause the market price of shares of our common stock to decline. If the market price of shares of our common stock after this offering does not exceed the initial public offering price, you may not realize any return on your investment in us and may lose some or all of your investment. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

Our insiders who are significant stockholders may have interests that conflict with those of other stockholders.

Our directors and executive officers, together with members of their immediate families, as a group, will beneficially own, in the aggregate, approximately     % of our outstanding capital stock at the closing of this offering. As a result, when acting together, this group has the ability to exercise significant influence over most matters requiring our stockholders’ approval, including the election and removal of directors and significant corporate transactions. The interests of our insider stockholders may not be aligned with the interests of our other stockholders and conflicts of interest may arise. In addition, the concentration of our shares may have the effect of delaying, deterring or preventing significant corporate transactions which may otherwise adversely affect the market price of our shares.

You will experience an immediate and substantial dilution in the net tangible book value of the common stock you purchase in this offering.

The initial public offering price is substantially higher than the pro forma net tangible book value per share of our outstanding common stock. As a result, investors purchasing common stock in this offering will incur immediate dilution of $              per share (based on an offering price of $              per share, the midpoint of the estimated price range set forth on the cover page of this prospectus). The exercise of outstanding options and future equity issuances may result in further dilution to investors. A $1.00 increase (decrease) in the assumed initial public offering price of $              per share would increase (decrease) our pro forma as adjusted net

 

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tangible book value per share after this offering by $            , and the dilution to new investors by $            , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. See “Dilution.”

If securities or industry analysts do not publish research or reports about our business, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of the analysts who cover us downgrade our stock, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fails to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

Future sales of our common stock, or the perception that such future sales may occur, may cause our stock price to decline and impair our ability to obtain capital through future stock offerings.

A substantial number of shares of our common stock could be sold into the public market after this offering. The occurrence of such sales, or the perception that such sales could occur, could materially and adversely affect our stock price and could impair our ability to obtain capital through an offering of equity securities. The shares of common stock being sold in this offering will be freely tradable, except for any shares sold to our affiliates.

Management may apply our net proceeds from this offering to uses that do not increase our market value or improve our operating results.

We intend to use the proceeds from this offering for general corporate purposes, including for selective strategic investments through acquisitions, alliances or other transactions. However, we have no transactions planned currently and, therefore, the timing and amount of our use of the proceeds from this offering will be based on many factors, including our ability to identify attractive transaction opportunities, the amount of our cash flows from operations and the anticipated growth of our business. Our management will have considerable discretion in applying our net proceeds and you will not have the opportunity, as part of your investment decision, to assess whether we are using our net proceeds appropriately. Until the net proceeds we receive are used, they may be placed in investments that do not produce income or that lose value. We may use our net proceeds for purposes that do not result in any increase in our results of operations, which could cause the price of our common stock to decline.

Certain provisions in our charter documents and agreements and Delaware law may inhibit potential acquisition bids for our company and prevent changes in our management.

Effective on the closing of this offering, our certificate of incorporation and bylaws will contain provisions that could depress the trading price of our common stock by acting to discourage, delay or prevent a change of control of our company or changes in management that our stockholders might deem advantageous. As a result of these provisions in our certificate of incorporation, the price investors may be willing to pay in the future for shares of our common stock may be limited.

In addition, we are subject to Section 203 of the Delaware General Corporation Law, which imposes certain restrictions on mergers and other business combinations between us and any holder of 15% or more of our common stock.

 

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We do not currently intend to pay dividends on our common stock for the foreseeable future and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

We do not anticipate paying any cash dividends to holders of our common stock in the foreseeable future. Consequently, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase our common stock.

We will incur increased costs as a result of being a public company and our management has limited experience managing a public company.

We have never operated as a public company and will incur significant legal, accounting and other expenses that we did not incur as a private company. The individuals who constitute our management team have limited experience managing a publicly traded company, and limited experience complying with the increasingly complex and changing laws pertaining to public companies. Our management team and other personnel will need to devote a substantial amount of time to new compliance initiatives and we may not successfully or efficiently manage our transition into a public company. We expect rules and regulations such as the Sarbanes-Oxley Act of 2002 to increase our legal and finance compliance costs and to make some activities more time-consuming and costly. We may need to hire additional employees with public accounting and disclosure experience in order to meet our ongoing obligations as a public company.

We expect that compliance with the public company requirements set forth in the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002 and New York Stock Exchange rules will increase our costs and make some activities more time consuming. For example, we will adopt certain new internal controls and disclosure controls and procedures. In addition, we will incur additional expenses associated with our Securities and Exchange Commission reporting requirements. A number of those requirements will require us to carry out activities we have not done previously. For example, under Section 404 of the Sarbanes-Oxley Act of 2002, for our annual report on Form 10-K for year ending December 31, 2011, we will need to document and test our internal control procedures, and our management will need to assess and report on our internal control over financial reporting. Furthermore, if we identify any issues in complying with those requirements (for example, if we or our registered public accounting firm identify a material weakness or significant deficiency in our internal control over financial reporting), we could incur additional costs rectifying those issues, and the existence of those issues could adversely affect our results of operations, financial condition or business, our reputation or investor perceptions of us. We cannot predict or estimate the amount of additional costs we may incur as a result of such requirements or the timing of such costs, and any such costs could have a material adverse effect on our results of operations, financial condition or business.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward looking statements. These forward-looking statements include, in particular, statements about our plans, strategies and prospects under the headings “Prospectus Summary,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” These statements are based on our current expectations and projections about future events and are identified by terminology such as “may,” “will,” “should,” “expect,” “scheduled,” “plan,” “seek,” “intend,” “anticipate,” “believe,” “estimate,” “aim,” “potential” or “continue” or the negative of those terms or other comparable terminology. Although we believe that our plans, intentions and expectations are reasonable, we may not achieve our plans, intentions or expectations.

These forward-looking statements involve risks and uncertainties. Important factors that could cause actual results to differ materially from the forward-looking statements we make in this prospectus are set forth in “Risk Factors.” We undertake no obligation to update any of the forward looking statements after the date of this prospectus to conform those statements to reflect the occurrence of unanticipated events, except as required by applicable law.

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement on Form S-1, of which this prospectus is a part, that we have filed with the Securities and Exchange Commission completely and with the understanding that our actual future results, levels of activity, performance and achievements may be different from what we expect and that these differences may be material. We qualify all of our forward-looking statements by these cautionary statements.

USE OF PROCEEDS

We estimate that the net proceeds from the sale of shares by us in the offering (based on an offering price of $              per share, the midpoint of the estimated price range set forth on the cover page of this prospectus), after deducting underwriting discounts and commissions and offering expenses payable by us, will be $              million or $             million assuming the underwriters exercise the over-allotment option in full. We intend to use the proceeds from this offering for general corporate purposes, including for selective strategic investments through acquisitions, alliances or other transactions. However, we have no transactions planned currently and, therefore, the timing and amount of our use of the proceeds from this offering will be based on many factors, including our ability to identify attractive transaction opportunities, the amount of our cash flows from operations and the anticipated growth of our business. An additional reason for this offering is to provide our stockholders with liquidity in the public equity markets.

We will not receive any proceeds from the sale of common stock by the selling stockholders.

A $1.00 increase (decrease) in the assumed initial public offering price of $              per share, the midpoint of the estimated price range set forth on the cover of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $              million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

DIVIDEND POLICY

We have never declared or paid cash dividends on our common stock, and we intend to retain our future earnings, if any, to fund the growth of our business. We therefore do not anticipate paying any cash dividends on our common stock in the foreseeable future. Our future decisions concerning the payment of dividends on our common stock will depend upon our results of operations, financial condition and capital expenditure plans, as well as any other factors that the Board of Directors, in its sole discretion, may consider relevant.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents, total current liabilities and capitalization as of March 31, 2010:

 

   

On an actual basis;

 

   

On a pro forma basis after giving effect to the payment of a dividend on our series C preferred stock in the amount of approximately $1,101,000 in cash and conversion of all outstanding shares of our preferred stock into a total of 12,977,566 shares of common stock upon the closing of this offering; and

 

   

On a pro forma as adjusted basis after giving effect to our receipt of the net proceeds from our sale of shares of common stock in this offering at an assumed public offering price of $             (the midpoint of the estimated price range set forth on the cover page of this prospectus), after deducting underwriting discounts and commissions and estimated offering expenses payable by us, as if the offering had occurred on March 31, 2010.

The following table assumes no exercise of the underwriters’ over-allotment option and excludes shares of our common stock and options for our shares of common stock issuable in certain circumstances, as described under “Prospectus Summary—The Offering”. You should read this table together with the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes included elsewhere in this prospectus.

 

     As of March 31, 2010
     Actual     Pro forma     Pro forma
As Adjusted
     (In thousands, except share data)
           (unaudited)      

Cash and cash equivalents

   $ 31,404      $ 30,303      $ —  
                      

Long-term debt

   $ —        $ —        $ —  

Stockholders’ equity:

      

Series A convertible preferred stock; 66,000 shares authorized; 65,649 shares issued and outstanding; pro forma, no shares issued and outstanding; pro forma as adjusted, no shares issued and outstanding

     —          —          —  

Series B convertible preferred stock; 10,000 shares authorized; 8,627 and 8,505 shares issued and outstanding respectively; pro forma, no shares issued and outstanding; pro forma as adjusted, no shares issued and outstanding

     —          —          —  

Series C convertible preferred stock; 5,000 shares authorized; 3,864 shares issued and outstanding; pro forma, no shares issued and outstanding; pro forma as adjusted, no shares issued and outstanding

     —          —          —  

Common stock, par value $0.005, 60,000,000 shares authorized; 13,680,991 shares issued and 13,065,588 shares outstanding; pro forma, 26,683,025 shares issued and 26,043,153 shares outstanding; pro forma as adjusted,             shares issued

     68        133     

Additional paid-in capital

     108,646        108,581     

Accumulated deficit

     (44,892     (45,993  

Treasury stock, common stock 615,403 shares and preferred stock 122 shares; pro forma, common stock 615,403 shares and preferred stock 122 shares; pro forma as adjusted, common stock              shares and preferred stock              shares

     (6,733     (6,733  
                      

Total stockholders’ equity

     57,089        55,988        —  
                      

Total capitalization

   $ 57,089      $ 55,988      $ —  
                      

 

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A $1.00 increase (decrease) in the assumed initial public offering price of $             per share would increase (decrease) the net proceeds to us from this offering by approximately $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

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DILUTION

If you invest in our common stock, your ownership interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock on an as adjusted basis to give effect to this offering. The pro forma net tangible book value of our common stock as of March 31, 2010 was $53.0 million, or approximately $2.03 per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less our total liabilities divided by the pro forma number of shares of common stock outstanding after giving effect to the conversion of all outstanding shares of our preferred stock into a total of 12,977,566 shares of common stock.

Net tangible book value dilution per share represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the pro forma net tangible book value per share of common stock on an as adjusted basis to give effect to this offering. After giving effect to the sale of the              shares of common stock by us in this offering at an assumed public offering price of $             per share which is the midpoint of the estimated price range set forth on the cover page of this prospectus, and the application of our estimated net proceeds from the offering and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value on an as adjusted basis as of March 31, 2010 would have been $             million, or approximately $             per share of common stock.

This represents an immediate increase in pro forma net tangible book value of $             per share of common stock to existing common stockholders and an immediate dilution in pro forma net tangible book value of $             per share to new investors purchasing shares of common stock in this offering. The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

      $ —  

Pro forma net tangible book value per share before this offering

   $ 2.03   

Increase in pro forma net tangible book value per share attributable to new investors

     
         

Pro forma net tangible book value per share as adjusted for this offering

     
         

Dilution in pro forma net tangible book value per share to new investors

      $ —  
         

A $1.00 increase (decrease) in the assumed initial public offering price of $             per share, the midpoint of the range set forth on the cover of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $              million, or approximately $             million if the underwriters exercise their over-allotment option in full, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

The following table summarizes as of March 31, 2010, on a pro forma basis described above, the number of shares of common stock purchased from us, the total consideration paid and the average price per share paid by existing stockholders and by new investors purchasing shares of our common stock in this offering before deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

     Shares Purchased     Total Consideration     Average
Price
per Share
     Number    Percent     Amount    Percent    

Existing shareholders

        $ —       

New investors

            
                            

Total

      0   $ —      0  
                            

 

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The foregoing table excludes shares of our common stock and options for our shares of common stock issuable in certain circumstances, as described under “Prospectus Summary—The Offering”.

Sales by selling stockholders in this offering will reduce the number of shares of common stock held by existing stockholders to                      or approximately     % of the total number of shares of common stock outstanding after this offering and will increase the number of shares of common stock held by new investors by                      to approximately     % of the total number of shares of common stock outstanding after this offering.

 

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SELECTED CONSOLIDATED FINANCIAL INFORMATION

The summary consolidated statements of operations data for the three months ended March 31, 2009 and 2010 and the summary consolidated balance sheet data as of March 31, 2010 have been derived from our unaudited condensed consolidated financial statements, which are included elsewhere in this prospectus. The selected consolidated balance sheet data as of December 31, 2008 and 2009 and the selected consolidated statements of operations data for each of the years ended December 31, 2007, 2008 and 2009 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated balance sheet data as of December 31, 2005, 2006 and 2007 and the selected consolidated statements of operations data for each of the years ended December 31, 2005 and 2006 have been derived from our unaudited consolidated financial statements that are not included in this prospectus. Historical results are not necessarily indicative of the results to be expected in the future, and the results of interim periods are not necessarily indicative of results for the entire year.

 

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The following table sets forth our selected financial information for the periods ended or as of the dates indicated. You should read this table together with the discussion under the headings “Use of Proceeds,” “Capitalization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, our audited consolidated financial statements and the related notes included elsewhere in this prospectus and our unaudited condensed consolidated financial statements and the related notes included elsewhere in this prospectus.

 

    Year ended December 31,     Three Months Ended
March 31,
 
    2005     2006     2007     2008     2009     2009     2010  
    (Unaudited)     (Unaudited)                       (Unaudited)  
    (In thousands, except for share and per share information)  

Revenues:

             

Assets under management or administration

  $ 31,989      $ 49,806      $ 71,442      $ 71,738      $ 56,857      $ 13,334      $ 16,396   

Licensing and professional services

    7,962        9,245        10,027        20,104        21,067        5,347        5,236   
                                                       

Total revenues

    39,951        59,051        81,469        91,842        77,924        18,681        21,632   
                                                       

Operating expenses:

             

Cost of revenues

    17,677        25,221        34,541        34,604        24,624        5,920        7,020   

Compensation and benefits

    15,064        18,878        23,250        28,452        28,763        7,004        8,090   

General and administration (1)

    7,748        9,334        12,135        15,500        15,726        3,629        7,109   

Depreciation and amortization

    2,422        2,524        2,914        3,538        4,499        1,047        1,331   

Impairment of goodwill

    14,405        —          —          —          —          —          —     

Restructuring charges

    —          —          —          —          —          —          752   
                                                       

Total operating expenses

    57,316        55,957        72,840        82,094        73,612        17,600        24,302   
                                                       

Income (loss) from operations

    (17,365     3,094        8,629        9,748        4,312        1,081        (2,670

Total other income (expense)

    126        584        1,159        115        (3,368     37        47   
                                                       

Income (loss) before income tax provision (benefit)

    (17,239     3,678        9,788        9,863        944        1,118        (2,623

Income tax provision (benefit)

    38        14        (14,150     4,608        1,816        334        (112
                                                       

Net income (loss)

    (17,277     3,664        23,938        5,255        (872     784        (2,511

Less preferred stock dividends

    —          —          —          (203     (720     (178     (178

Less net income allocated to participating convertible preferred stock (restated) (2)

    —          (1,901     (11,358     (2,406     —          (300     —     
                                                       

Net income (loss) attributable to common shareholders (restated) (2)

  $ (17,277   $ 1,763      $ 12,580      $ 2,646      $ (1,592   $ 306      $ (2,689
                                                       

Net income (loss) per share attributable to common stockholders

             

Basic (restated) (2)

  $ (1.63   $ 0.16      $ 0.95      $ 0.20      $ (0.12   $ 0.02      $ (0.21
                                                       

Diluted

  $ (1.63   $ 0.16      $ 0.95      $ 0.19      $ (0.12   $ 0.02      $ (0.21
                                                       

Weighted average common shares outstanding:

             

Basic (restated) (2)

    10,603,499        11,065,612        13,213,503        13,354,845        12,910,998        12,917,627        12,966,820   
                                                       

Diluted

    10,603,499        11,065,612        13,213,503        13,675,013        12,910,998        13,610,256        12,966,820   
                                                       

Pro forma net loss per share (unaudited):

             

Basic (3)

          $ (0.03     $ (0.10
                         

Diluted (3)

          $ (0.03     $ (0.10
                         

Pro forma weighted average common shares outstanding (unaudited):

             

Basic (3)

            25,613,632          25,944,386   
                         

Diluted (3)

            25,613,632          25,944,386   
                         

 

(1) Included in general and administration expenses for the year ended December 31, 2009 is $385 of bad debt expense and $601 of legal expenses related to the Fetter Logic litigation. See notes 7 and 15 to the notes to the audited consolidated financial statements. Included in general and administration expenses for the three months ended March 31, 2010 is $2,668 of bad debt expense and $724 of legal expenses related to the Fetter Logic litigation. See notes 5 and 14 to the notes to the unaudited condensed consolidated financial statements.
(2) In 2007 and 2008, the Company originally reported net income attributable to common stockholders of $23,938 and $5,052, respectively and net income per share attributable to common stockholders—basic of $1.81 and $.40 per share, respectively. These amounts did not include the allocation of net income to participating convertible preferred stock. The impact of including the allocation of net income to participating convertible preferred stock decreases net income attributable to common shareholders for 2007 and 2008 to $12,580 and $2,646, respectively and net income per share attributable to common stockholders—basic of $0.95 per share and $0.20 per share, respectively. The change had no effect on our net income, diluted earnings per share, consolidated balance sheets, consolidated statements of stockholder’s equity and consolidated statements of cash flows. See note 19 to the notes to the audited consolidated financial statements.

 

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(3) Unaudited pro forma basic and diluted net loss per share and unaudited pro forma weighted average common shares outstanding as of December 31, 2009 and March 31, 2010 are presented after giving effect to the issuance of 12,702,634 shares and 12,977,566 shares, respectively, of common stock issuable upon the conversion of all our outstanding shares of preferred stock upon completion of the offering. See note 14 to the notes to the audited consolidated financial statements and note 13 to the notes to the unaudited condensed consolidated financial statements.

 

     December 31,    March 31,
     2005    2006    2007    2008    2009    2010
     (In thousands, unaudited)

Cash and cash equivalents

   $ 7,131    $ 13,369    $ 25,255    $ 28,445    $ 31,525    $ 31,404

Working capital

     2,990      5,657      15,168      21,405      27,262      24,195

Goodwill and intangible assets

     17,074      12,320      5,402      4,331      3,261      2,994

Total assets

     30,791      37,948      65,250      72,251      75,058      76,765

Stockholders’ equity

     23,216      25,559      50,152      58,583      58,246      57,089

Other Financial and Operating Data (1)

 

     Year ended December 31,    Three Months Ended
March 31,
     2005     2006    2007    2008    2009    2009    2010
     (In thousands, unaudited)          

Adjusted EBITDA

   $ (538   $ 5,618    $ 11,564    $ 14,043    $ 10,595    $ 2,286    $ 3,052

Adjusted operating income (loss)

     (2,960     3,094      8,650      10,505      6,096      1,239      1,721

Adjusted net income (loss)

     (2,872     3,664      6,431      6,088      2,449      891      1,188

 

(1) See “Prospectus Summary—Notes to Other Financial and Operating Data” for a reconciliation of these non-GAAP measures to the closest comparable measures calculated in accordance with U.S. GAAP.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis along with our audited consolidated financial statements and the related notes included elsewhere in this prospectus and our unaudited condensed consolidated financial statements and the related notes included elsewhere in this prospectus. Except for the historical information contained herein, this discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed below; accordingly, investors should not place undue reliance upon our forward-looking statements. See “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” for a discussion of these risks and uncertainties.

Overview

We are a leading independent provider of technology-enabled, Web-based investment solutions and services to financial advisors. By integrating a wide range of investment solutions and services, our technology platform provides financial advisors with the flexibility to address their clients’ needs. We work with financial advisors who are independent, as well as those who are associated with small or mid-sized financial advisory firms and larger financial institutions, which we refer to as enterprise clients. We focus our technology development efforts and our sales and marketing approach on addressing financial advisors’ front-, middle- and back-office needs. We believe our investment solutions and services allow financial advisors to be more efficient and effective in the activities critical to their businesses by facilitating client interactions, supporting and enhancing portfolio management and analysis, and enabling reliable account support and administration. In addition, we are not controlled by a financial institution, broker-dealer or other entity operating in the securities or wealth management industry, which we believe affords us a greater level of independence and impartiality.

Our centrally-hosted technology platform provides financial advisors with the flexibility to choose freely among a wide range of investment solutions, services, investment managers and custodians to identify those that are most appropriate for their clients. Given the flexibility of choice it provides, we refer to our technology platform as having “open architecture”. In addition, our technology platform allows us to add new or upgrade existing features and functionality as the industry and financial advisors’ needs evolve. Our technology platform provides financial advisors with the following:

 

   

A series of integrated services to help them better serve their clients, including risk assessment and selection of investment strategies, asset allocation models, research and due diligence, portfolio construction, proposal generation and paperwork preparation, model management and account rebalancing, account monitoring, customized fee billing, overlay services covering asset allocation, tax management and socially responsible investing, aggregated multi-custodian performance reporting and communication tools, as well as access to a wide range of leading third-party asset custodians;

 

   

Web-based access to a wide range of technology-enabled investment solutions, including:

 

   

separately managed accounts, or SMAs, which allow advisors to offer their investor clients a customized, professionally managed portfolio of securities with a personalized tax basis;

 

   

unified managed accounts, or UMAs, which are similar to SMAs but allow the advisor to use different types of investment vehicles in one account;

 

   

advisor-directed portfolios, where advisors create, implement and maintain their own investment portfolio models to address specific client needs; and

 

   

mutual funds and portfolios of exchange-traded funds, or ETFs; and

 

   

Access to a broad range of investment managers and investment strategists, as well as to our internal investment management and portfolio consulting group, Portfolio Management Consultants, or PMC.

 

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PMC primarily engages in consulting services aimed at providing financial advisors with additional support in addressing their clients’ needs, as well as the creation of proprietary investment solutions and products. PMC’s investment solutions and products include managed account and multi-manager portfolios, mutual fund portfolios and ETF portfolios.

Revenues

Overview

We earn revenues primarily under two pricing models. First, a majority of our revenues are derived from fees charged as a percentage of the assets that are managed or administered on our technology platform by financial advisors. These revenues are recorded under revenues from assets under management or administration. Our asset-based fees vary based on the types of investment solutions and services that financial advisors utilize. Asset-based fees accounted for approximately 88%, 78% and 73% of our total revenues for the years ended December 31, 2007, 2008 and 2009, respectively. Asset-based fees accounted for approximately 71% and 76% of our total revenues for the three months ended March 31, 2009 and 2010, respectively. The percentage of our total revenues represented by asset-based fees declined in the periods under review principally due to the significant decline in the market value of the assets on our technology platform resulting from fluctuations in the securities markets, particularly from September 2007 to March 2009, and also due to our entering into a significant license agreement in 2008. U.S.-based equities appreciated significantly during the remainder of 2009 and contributed to an increase in our assets under management or administration, and our resulting revenues from asset-based fees, during the latter part of the year. Revenues from asset-based fees accounted for 75% of total revenues during the fourth quarter of 2009. In future periods, the percentage of our total revenues attributable to asset-based fees is expected to vary based on fluctuations in securities markets, whether we enter into significant license agreements, the mix of assets under management, or AUM, and assets under administration, or AUA, and other factors. As of March 31, 2010, approximately $41 billion of investment assets subject to asset-based fees were managed or administered utilizing our technology platform by approximately 8,500 financial advisors in approximately 185,000 investor accounts.

Second, we generate revenues from recurring, contractual licensing fees for providing access to our technology platform, generally from a small number of enterprise clients. These revenues are recorded under revenues from licensing and professional services. Licensing fees are generally fixed in nature for the contract term and are based on the level of investment solutions and services provided, rather than on the amount of client assets on our technology platform. Licensing fees accounted for 9%, 19% and 24% of our total revenues for the years ended December 31, 2007, 2008 and 2009. Licensing fees accounted for 25% and 22% of our total revenues for the three months ended March 31, 2009 and 2010, respectively. Fees received in connection with professional services accounted for the remainder of our total revenues. As of March 31, 2010, approximately $54 billion of investment assets for which we receive licensing fees for utilizing our technology platform were serviced by approximately 5,700 financial advisors through approximately 545,000 investor accounts.

Revenues from assets under management or administration

We generally charge our customers fees based on a higher percentage of the market value of AUM than the fees we charge on the market value of AUA, because we provide fiduciary oversight and/or act as the investment advisor in connection with assets we categorize as AUM. The level of fees varies based on the nature of the investment solutions and services we provide, as well as the specific investment manager, fund and/or custodian chosen by the financial advisor. A portion of our revenues from assets under management or administration include costs paid by us to third parties for sub-advisory, clearing, custody and brokerage services. These expenses are recorded under cost of revenues. We do not have fiduciary responsibility in connection with AUA and, therefore, charge lower fees on these assets. Our fees for AUA vary based on the nature of the investment solutions and services we provide.

For over 90% of our revenues from assets under management or administration, we bill customers at the beginning of each quarter based on the market value of customer assets on our technology platform as of the end

 

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of the prior quarter. For example, revenues from assets under management or administration recognized during the fourth quarter of 2009 were based on the market value of assets as of September 30, 2009. Our revenues from assets under management or administration are generally recognized ratably throughout the quarter based on the number of days in the quarter.

As noted above, the most significant factor affecting our revenues from assets under management or administration is changes in the market values of securities held in client accounts due to fluctuations in the securities markets. Certain types of securities have historically experienced greater market price fluctuations, such as equity securities, than other securities, such as fixed income securities, though in any given period the nature of securities that experience the greatest fluctuations may vary. For example, from October 2007 to March 2009, the equity markets, as measured by the value of the S&P 500 index, declined in value by approximately 57%, which significantly contributed to the 37% decrease in our revenues from assets under management or administration between the fourth quarter of 2007 and the second quarter of 2009.

Our revenues from assets under management or administration are also affected by the amount of new assets that are added to existing and new client accounts, which we refer to as gross sales, and the amount of assets that are withdrawn from client accounts, which we refer to as redemptions. We refer to the difference between asset in-flows and out-flows as net flows. Positive net flows indicate that the market value of assets added to client accounts exceeds the market value of assets that have been withdrawn from client accounts. During the year ended December 31, 2008, we increased the number of financial advisor client accounts supported by our technology platform and experienced positive net flows, but the decline in the market values of assets was greater than our positive net flows, which contributed to a decline in our revenues from assets under management or administration in the year ended December 31, 2009.

The following table provides information regarding the degree to which gross sales, redemptions, net flows and changes in the market values of assets contributed to changes in AUM or AUA in the periods indicated.

 

     Asset Rollforward—2008
     (in millions except account data)
     Actual
12/31/07
   Gross
Sales
   Redemp-
tions
    Net
Flows
   Market
Impact
    Actual
12/31/08

Assets under Management (AUM)

   $ 10,048    $ 3,255    $ (2,434   $ 822    $ (3,734   $ 7,136

Assets under Administration (AUA)

     18,883      13,802      (5,311     8,491      (5,632     21,742
                                           

Total AUM/A

   $ 28,931    $ 17,057    $ (7,745   $ 9,313    $ (9,366   $ 28,878
                                           

Total Fee-Based Accounts

     113,301      87,884      (42,195     45,689        158,990
     Asset Rollforward—2009
     (in millions except account data)
     Actual
12/31/08
   Gross
Sales
   Redemp-
tions
    Net
Flows
   Market
Impact
    Actual
12/31/09

Assets under Management (AUM)

   $ 7,136    $ 3,586    $ (2,799   $ 787    $ 1,737      $ 9,660

Assets under Administration (AUA)

     21,742      9,528      (6,494     3,034      3,155        27,931
                                           

Total AUM/A

   $ 28,878    $ 13,114    $ (9,293   $ 3,821    $ 4,892      $ 37,591
                                           

Total Fee-Based Accounts

     158,990      55,506      (39,321     16,185        175,175

 

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     Asset Rollforward—First Quarter 2010
     (in millions except account data)
     Actual
12/31/09
   Gross
Sales
   Redemp-
tions
    Net
Flows
   Market
Impact
   Actual
3/31/10

Assets under Management (AUM)

   $ 9,660    $ 1,055    $ (680   $ 375    $ 881    $ 10,916

Assets under Administration (AUA)

     27,931      2,905      (1,769     1,136      513      29,580
                                          

Subtotal AUM/A

   $ 37,591    $ 3,959    $ (2,449   $ 1,511    $ 1,394    $ 40,496
                                          

Total Fee-Based Accounts

     175,175      18,363      (8,183 )      10,180         185,355

The mix of assets under management and assets under administration was as follows for the periods indicated:

 

       December 31,     March 31,
2010
 
        2007     2008     2009    

Assets under Management (AUM)

     35   25   26   27

Assets under Administration (AUA)

     65      75      74      73   
                          

Total AUM/A

     100   100   100   100
                          

The percentage of assets under management decreased in 2008 compared to 2007 as a result of an increase in assets under administration and a decline in the value of assets under management between periods. The nature and type of services requested by our customers are the key drivers in determining whether customer assets are classified as AUM or AUA. Therefore, we do not have direct control over the mix of AUM and AUA.

As a result of the new platform services agreement we signed with FundQuest Incorporated, or FundQuest, as described below in “Recent Developments”, we expect the percentage of assets categorized as AUA to increase during the second quarter of 2010.

Revenues from licensing and professional services fees

Our revenues received under license agreements are recognized over the contractual term. To a lesser degree we also receive revenues from professional services fees by providing customers with certain technology platform software development services. In the years ended December 31, 2007, 2008 and 2009, and in the three months ended March 31, 2009 and 2010, our revenues from professional services fees were $2.5 million, $2.4 million, $2.4 million, $0.7 million and $0.5 million respectively. These revenues are generally recognized on a percentage-of-completion method basis, under which we recognize revenues based upon the number of hours spent providing the services in a given period as a percentage of our estimate for the total number of hours that will be required to complete our obligations under the contract.

During 2008, we entered into a multi-year license agreement with Fidelity. In connection with the Fidelity license agreement, we hired additional back-office, marketing and sales support personnel.

We may enter into license agreements in future periods if requested by our customers and commercially attractive to us.

Expenses

The following is a description of our principal expense items.

Cost of revenues

Cost of revenues primarily include expenses related to our receipt of sub-advisory and clearing, custody and brokerage services from third parties. The largest component of cost of revenues, sub-advisory fees paid to third- party investment managers, relates only to AUM since a sub-advisor is not utilized in connection with AUA.

 

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Clearing, custody and brokerage services are provided by third-party providers. All of these expenses are typically calculated based upon a contractual percentage of the market value of assets held in customer accounts measured as of the end of each fiscal quarter and are recognized ratably throughout the quarter based on the number of days in the quarter.

Compensation and benefits

Compensation and benefits expenses primarily relate to employee compensation, including salaries, commissions, non-cash stock-based compensation, profit sharing, benefits and employer-related taxes. We expect that the majority of any increase in compensation and benefits expenses in the next 12 months will arise in connection with additional non-cash stock-based compensation and increased headcount to support our growth strategy.

General and administration

General and administration expenses include occupancy costs and expenses relating to communications services, research and data services, website and system development, marketing, professional and legal services and travel and entertainment.

Depreciation and amortization

Depreciation and amortization expenses include depreciation related to:

 

   

fixed assets, including computer equipment and software, leasehold improvements, office furniture and fixtures and other office equipment;

 

   

internally developed software; and

 

   

intangible assets, primarily related to customer lists, the value of which was capitalized in connection with our prior acquisitions.

Furniture and equipment is depreciated using the straight-line method based on the estimated useful lives of the depreciable assets. Leasehold improvements are amortized using the straight-line method over their estimated economic useful lives or the remaining lease term, whichever is shorter. Improvements are capitalized, while repairs and maintenance costs are recorded as expenses in the period they are incurred. Assets are tested for recoverability whenever events or circumstances indicate that the carrying value of the assets may not be recoverable.

Internally developed software is amortized on a straight-line basis over its estimated useful life. We evaluate the useful lives of these assets on an annual basis and test for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.

Intangible assets are depreciated using the straight-line method over their estimated economic useful lives and are reviewed for possible impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.

Recent Developments

FundQuest Agreement

In February 2010, we signed a seven-year platform services agreement with FundQuest Incorporated, or FundQuest, a subsidiary of BNP Paribas Investment Partners. Pursuant to this agreement, we will provide FundQuest and its clients with our platform technology and support services, replacing FundQuest’s technology platform. FundQuest will continue to provide investment products to its clients. As of April 30, 2010, FundQuest had approximately $13 billion in assets on its platform, managed by approximately 6,200 financial advisors through approximately 85,000 accounts. In May 2010, we substantially completed converting the assets on FundQuest’s platform to our technology platform.

 

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In order to support the increase in assets under administration resulting from this agreement, we hired 20 staff from FundQuest to assist us with the ongoing administration of existing and new FundQuest customers. As a result, we expect total compensation and benefits expense, as a percentage of total revenues, to increase by approximately one percentage point.

In connection with this agreement, we have agreed to make various payments to FundQuest during the contract term. These payments include an up-front payment upon completion of the conversion of FundQuest’s clients’ assets to our technology platform, five annual payments and a payment after the fifth year of the agreement calculated based on the revenues we receive from FundQuest during the first five years of the contract term. Our current estimate of the present value of these payments is approximately $29.0 million. In connection with the agreement, we also issued FundQuest a warrant to purchase shares of our common stock, with an exercise price to be calculated as 120% of our initial public offering price per share of our common stock with an initial aggregate estimated fair value of $2.4 million (See note 6 to the notes to the unaudited condensed consolidated financial statements). The present value of all payments and the fair value of the warrant will be accounted for as customer inducement costs and will be amortized as a reduction to our revenues from assets under management or administration on a straight-line basis over the contract term.

We anticipate that our annual net revenues will increase in proportion to the increase in assets under administration resulting from the agreement. The revenue we recognize under this agreement will be net of customer inducement amortization of approximately $4.5 million per year. Additionally, we expect to recognize approximately $0.8 million of interest expense annually during the term of the agreement. Revenues, customer inducement costs and interest expense may change over the contractual term based upon changes in the market value of customer assets and in the net flows relating to new and existing customer accounts.

As a result of the reduction in our revenues due to the amortization of customer inducement costs, cash flows received under this agreement will exceed the recorded value of the revenues we recognize relating to the agreement for any given period during the term of the agreement.

Closure of Los Angeles Office

In January 2010, we announced that we would be closing our Los Angeles, CA office, effective March 31, 2010, in order to more appropriately align and manage our internal resources. The Los Angeles office was the headquarters of NetAssetManagement, Inc., or NAM, which we acquired in 2004. The office had three primary functional groups: our investment consulting group, Portfolio Management Consultants; operational processing; and technology operations support. In connection with the closing of the Los Angeles office, its investment consulting group functions were transferred to our Chicago headquarters, its operational processing functions were transferred to our Denver operations center and its technical operations support functions were transferred to our Sunnyvale office.

In connection with the closure of the Los Angeles office, we have incurred pretax restructuring charges of approximately $0.8 million in the three months ended March 31, 2010 and we expect to incur additional pretax restructuring charges of approximately $0.5 million in the remainder of 2010. Restructuring charges include expenses related to vacating rental office space, relocation expenses and severance charges. The closure of this office and related actions are expected to result in decreased costs in future periods.

Factors Affecting Comparability

We expect our stock-based compensation expenses to increase in future periods as a result of our award of 1,875,230 stock options to our employees upon the closing of this offering. In addition, we expect our compensation and benefits and general and administrative expenses to increase as a result of becoming an SEC-reporting company subject to the Sarbanes-Oxley Act and the other regulatory requirements applicable to public companies. Accordingly, our results of operations for future periods may not be comparable to our results of operations for the periods under review.

 

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Critical Accounting Policies

Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States, or U.S. GAAP. The accounting policies described below require management to apply significant judgment in connection with the preparation of our consolidated financial statements. In particular, judgment is applied to determine the appropriate assumptions to be used in calculating estimates that affect certain reported amounts in our consolidated financial statements. These estimates and assumptions are based on historical experience and on various other factors that we believe to be reasonable under the circumstances. If different estimates or assumptions were used, our results of operations, financial condition and cash flows could have been materially different than those reflected in our consolidated financial statements. For additional information regarding our critical accounting policies, see note 2 to the notes to the audited consolidated financial statements and note 1 to the notes to the unaudited condensed consolidated financial statements.

Revenue recognition

We recognize revenues when all four of the following criteria have been met:

 

   

Persuasive evidence of an arrangement exists;

 

   

The product has been delivered or the service has been performed;

 

   

The fee is fixed or determinable; and

 

   

Collectability is reasonably assured.

Types of revenues

We generate revenues from assets under management or administration and from licensing and professional service fees. Revenues from assets under management or administration are generated from fees based on a contractual percentage of assets under management or administration valued at each quarter-end. These fees are generally collected at the beginning of a quarter in advance based upon the previous quarter-end values. In less than 10% of our contracts, fees are collected at the end of the quarter based upon the current quarter-end value. The contractual fee percentages vary based upon the level and type of services we provide to our customers. Pursuant to the contracts with our customers, we calculate our fees based on the asset values in the customer’s account, without making any judgment or estimates. None of our fees are earned pursuant to performance-based or other incentive-based arrangements.

We generate revenues from licensing fees pursuant to recurring contractual fixed-fee agreements, principally with a portion of our enterprise clients. Our licensing fees vary based on the type of services we provide. We generate revenues from professional service fees by providing customers with customized technology platform software development services. These revenues are received pursuant to contracts that detail the nature of the services to be provided by us, the estimated number of hours such work will require and the total contract fee amount.

Recognition of revenues

Application of the applicable accounting principles of U.S. GAAP requires us to make judgments and estimates in connection with the measurement and recognition of revenues. Revenues are recognized in the period in which the related services are provided. In certain cases, management is required to determine whether revenues should be recognized in an amount equal to the gross fees we receive or as a net amount reflecting the payment of expenses to third-parties, such as sub-advisors and custodians, that provide services to us in connection with certain of our financial advisors’ client accounts. When fees are collected for sub-advisory, clearing, custody or brokerage services in circumstances where we do not have a direct contract with the third-party provider, the fees are recorded as revenue on a net basis. Fees we received in advance of the performance of services are recorded as deferred revenues on our consolidated balance sheets and are recognized as revenues when earned, generally over three months.

 

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Revenues from licensing are recognized over the contractual term. Contracts with nonstandard terms and conditions may require contract interpretation to determine the appropriate revenue recognition policy to apply.

Revenues from professional services are recognized under the percentage-of-completion method, as permitted by U.S. GAAP. Management measures the total number of service hours provided under the contract on a monthly basis and estimates the remaining hours to complete the project in order to determine the appropriate percentage of revenue to recognize during the period.

Our revenue recognition is also affected by our judgment in determining appropriate allowances for uncollectible receivables. We consider customer-specific information related to delinquent accounts and past lost experience, as well as current economic conditions in establishing the amount of the allowance.

Internally developed software

Costs relating to internally developed software that are incurred in the preliminary stages of development are expensed as incurred. Management determines when projects have met the criteria of the application development stage. This typically occurs when the conceptual formulation and evaluation of software functionality are finalized.

Once work on a software application has passed the preliminary stages, internal and external costs, if direct and incremental, are capitalized until the software application is substantially complete and ready for its intended use. These costs include expenditures related to software design, technical specifications, coding, installation of hardware and parallel testing. We cease capitalizing these costs upon completion of all substantial testing of the software application.

We also capitalize costs related to specific upgrades and enhancements of our internally developed software when we conclude that it is probable that the expenditures will result in additional functionality. Our maintenance and training costs are expensed as incurred.

As of December 31, 2008 and 2009 and March 31, 2010, we had net capitalized internally developed software of $4.0 million, $3.9 million and $3.8 million, respectively. We capitalized $1.7 million and $1.3 million in internally developed software during the years ended December 31, 2008 and 2009, respectively. We capitalized $0.3 million and $0.3 million in internally developed software during the three months ended March 31, 2009 and 2010, respectively.

Internally developed software is amortized on a straight-line basis over its estimated useful life. We evaluate the useful lives of these assets on an annual basis and test for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. There were no impairments to internally developed software during the years ended December 31, 2007, 2008 and 2009 or during the three month period ended March 31, 2010.

Non-cash stock-based compensation expense

Since our 2004 Stock Incentive Plan was adopted and in the periods under review, stock options have been an important component of our compensation structure. We expect that this will continue to be the case in the future. Our board of directors is responsible for determining the timing and magnitude of all option grants. Our board of directors is also responsible for determining the fair value of our common stock on the date of each stock option grant. The board of directors has delegated certain of its responsibilities to the compensation committee of the board of directors and certain members of management. As required under our 2004 Stock Incentive Plan, all of our options are granted with exercise prices at or above the fair value of our common stock on the grant date.

 

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The following table provides information regarding options granted since January 1, 2009.

 

Grant Date

   Shares    Stock Price    Exercise Price

2/16/2009

   1,000    $ 7.85    $ 7.85

4/8/2009

   8,230      7.85      7.85

5/15/2009

   232,732      7.15      7.15

7/6/2009

   10,000      7.15      7.15

11/16/2009

   12,000      11.50      11.50

2/22/2010

   71,000      13.45      13.45

As a private company, there is no market for our common stock and therefore no readily available price to reference when determining the fair value of our common stock in connection with the granting of stock options. The value of our common stock is dependent upon our company valuation and, as described below, we have periodically obtained independent valuations and performed internal valuations of our common stock. In each case, such valuations have been performed contemporaneously and we have determined the fair market value of our company in conformity with commonly accepted corporate valuation techniques and methodologies.

We generally obtain contemporaneous independent valuations at least annually and at the time of broad-based option grants, such as on May 15, 2009 and February 22, 2010. For our internal valuations, we apply the same approach and methodology used by the independent valuation firm. For any option grants made between quarterly valuations of our common stock, our board of directors assesses all available information in determining whether the stock price in effect at the time of the grant should otherwise be adjusted. As a private company, we have performed our quarterly valuations such that they are effective approximately 45 days following the end of each calendar quarter to approximate the date upon which, if we were a reporting company, we would be required to disclose to the public through filings with the Commission our financial performance and associated operating metrics, which include assets under management and administration. Until such date, any information about a given quarter’s financial performance, ending asset values, and other information that could be deemed material to investors, would not be known to the public even if we were a reporting company and therefore is not included in the valuation of our common stock during interim periods.

In the specific cases of option grants made after the dates of our quarterly valuations during the period under review, our board of directors concluded that no adjustment should be made to the most recent valuation of our common stock based on its assessment that, had we been a reporting company, no new material information would have been available to the public since the date of the prior valuation of our common stock.

Our company valuation, whether prepared by an independent valuation firm or performed internally, considers an income approach, also known as a discounted cash flow analysis, incorporating our historical and expected financial performance, the relevant market and industry and economic trends. Our valuation also considers a market approach, including recent capital transactions involving either our company or comparable companies, and comparable public-company valuations. The resulting calculation assigns a value for 100% of our company’s equity on a marketable equivalent, non-controlling interest basis. We consider, but do not include, an asset approach, as we do not believe the book value of our assets provides meaningful input into our expected revenue and earnings, or the value of our company.

We believe the value of our common stock has the potential to change each fiscal quarter in the normal course of our business, since the majority of our total revenues earned in a given quarter is calculated based on the value of AUM and AUA as of the end of the previous fiscal quarter. These revenues, and our resulting projections for earnings and cash flow, are inherently subject to fluctuations from quarter to quarter. Accordingly, we calculate the value of our common stock at least once each fiscal quarter. Our quarterly valuations can fluctuate significantly as the market value of our assets under management or administration drives our near term financial results and longer term projections. The value of our common stock could also change if a material financing transaction or other significant event occurs within a given fiscal quarter. In such circumstances we perform an additional valuation of our common stock at the time of the transaction or event, using the same valuation methodology that is utilized in connection with our quarterly valuations.

 

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After we determine a value for our company, we allocate the value to each class of our shares, including our common stock. Our value allocation methodology applies the principles set forth in the AICPA Practice Aid—Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or the Practice Aid. The Practice Aid defines appropriate methods to allocate enterprise value to common shares when multiple share classes exist. Based on various factors, including the stage of a company’s life and the timing and likelihood of various liquidity events, one method of allocation may be more appropriate than the others. We consider, but do not use, the probability-weighted expected return method due to the number of assumptions for each scenario that are difficult to estimate, and the fact that our most likely liquidation event is an initial public offering. Additionally, we do not apply the liquidation method because, as the Practice Aid indicates, it would be inappropriate for a later-stage company such as ours to use that method to allocate value to the various share classes. Furthermore, the more imminent a liquidity event becomes, the more aligned the liquidation model and option pricing model become in attributing value to each share class. Accordingly, we use the option pricing method, as defined in the Practice Aid, which treats each class of equity as having a “call option” on the enterprise value. The option pricing method considers the economic preferences and other rights attributable to each share class, resulting in a price for each of our share classes, including our common stock. Our valuations of our common stock also reflect a discount for lack of marketability, adjusted over time to reflect the expected likelihood and timing of a liquidity event subsequent to each valuation date. No other discounts were applied in determining the value of our common stock.

During the fifteen months prior to March 31, 2010, we performed the following contemporaneous valuations of our common stock:

 

Date

   Fair Value of
Common Stock

2/15/2009

   $ 7.85

5/15/2009

     7.15

8/15/2009

     9.90

11/15/2009

     11.50

2/15/2010

     13.45

As described above, the assets under management or administration on our technology platform at the end of a given quarter have a significant impact on our short- and long-term financial projections and resulting valuation. For example, the valuation conducted on May 15, 2009 incorporated financial projections based on assets under management or administration as of March 31, 2009. The value of those assets was 6% below the value of the assets as of December 31, 2008. This contributed to the decline in the estimated fair value of our common stock between periods. Conversely, assets under management or administration increased 16% between March 31, 2009 and June 30, 2009, contributing to an increase in the estimated fair value of our common stock between May 15, 2009 and August 15, 2009. In addition, assets under management and administration increased 15% between June 30, 2009 and September 30, 2009, which contributed to the increase in the fair value of our common stock between August 15, 2009 and November 15, 2009. Finally, a 4% increase in assets under management between September 30, 2009 and December 31, 2009, as well as our new agreement with FundQuest (see “—Recent Developments”), contributed to the increase in the fair value of our common stock between November 15, 2009 and February 15, 2010. Other factors, such as updated financial projections not related to changes in our assets under management or administration, as well as fluctuations in the value of comparable publicly-traded companies, also contributed to the differences in the estimated fair value of our common stock between periods.

Non-cash stock-based compensation expense for stock option grants is estimated at the grant date based on each grant’s fair value, calculated using the Black-Scholes option pricing model. Compensation and benefits expenses are recognized over the vesting period for each grant. The fair value of our stock options and the resulting expenses are based on various assumptions, including the expected volatility of our stock price, the expected term of the stock options, estimated forfeiture rates and the risk-free interest rate. The use of different assumptions would result in different fair values and compensation and benefits expenses for our option grants.

 

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Income taxes

We are subject to income taxes in the United States and India. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes.

We use the asset and liability method to account for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for net operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized under income tax provision in the period that includes the enactment date. We record a valuation allowance to reduce deferred tax assets to an amount that we determine is more-likely-than-not to be realized in the future.

In our ordinary course of business, we may enter into transactions for which the ultimate tax determination is uncertain. In such cases, we establish reserves for tax-related uncertainties based on our estimates of whether, and the extent to which, additional taxes will be due. The reserves are established when we believe that certain positions are likely to be challenged and may not be fully sustained on review by tax authorities. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or refinement of an estimate. Although we believe our reserves are reasonable, no assurance can be given that the final outcome of these matters will not be different from that which is reflected in our historical income tax provisions and accruals. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will be reflected in our provision for income taxes. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate.

Significant judgment is also required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence, including past operating results, estimates of future taxable income and the feasibility of tax planning strategies. In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.

Our effective tax rates differ from the statutory rates primarily due to adjustments in valuation allowances, state income taxes and changes in rates. Our provision for income taxes varies based on, among other things, changes in the valuation of our deferred tax assets and liabilities, the tax effects of non-cash stock-based compensation or changes in applicable tax laws, regulations and accounting principles or interpretations thereof.

As of March 31, 2010, we had net operating loss carry-forwards for federal and state income tax purposes of $40.2 million and $35.1 million, respectively, available to reduce future income subject to income taxes. The federal and state net operating loss carryforwards expire through 2026.

We are subject to examination of our income tax returns by the U.S. Internal Revenue Service and other tax authorities. We assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these examinations will not have a material adverse effect on our results of operations, financial condition and cash flows.

 

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Three months ended March 31, 2010 compared to three months ended March 31, 2009

 

     Three Months Ended March 31,     Increase (Decrease)  
           2009                 2010               Amount             %      
     (In thousands, unaudited)  

Revenues:

        

Assets under management or administration

   $ 13,334      $ 16,396      $ 3,062      23

Licensing and professional services

     5,347        5,236        (111   (2
                          

Total revenues

     18,681        21,632        2,951      16   
                          

Operating expenses:

        

Cost of revenues

     5,920        7,020        1,100      19   

Compensation and benefits

     7,004        8,090        1,086      16   

General and administration

     3,629        7,109        3,480      96   

Depreciation and amortization

     1,047        1,331        284      27   

Restructuring charges

     —          752        752      *   
                          

Total operating expenses

     17,600        24,302        6,702      38   
                          

Income (loss) from operations

     1,081        (2,670     (3,751   (347
                          

Other income (expense):

        

Interest income

     54        44        (10   (19

Unrealized gain (loss) on investments

     —          3        3      *   

Impairment of investments

     (17     —          17      (100
                          

Total other income (expense)

     37        47        10      27   
                          

Income (loss) before income tax provision

     1,118        (2,623     (3,741   (335

Income tax provision

     334        (112     (446   (135
                          

Net income (loss)

   $ 784      $ (2,511   $ (3,295   (420 )% 
                          

 

* Not meaningful.

Revenues

Total revenues increased 16% from $18.7 million in the three months ended March 31, 2009 to $21.6 million in the three months ended March 31, 2010. The increase was primarily due to an increase in revenues from assets under management or administration of $3.1 million. Revenues from assets under management or administration comprised 71% and 76% of total revenue in the three months ended March 31, 2009 and 2010, respectively.

Assets under management or administration

Revenues earned from assets under management or administration increased 23% from $13.3 million in the three months ended March 31, 2009 to $16.4 million in the three months ended March 31, 2010. The increase was primarily due to an increase in asset values applicable to our quarterly billing cycle in 2010, relative to the corresponding period in 2009. In the first quarter of 2010, revenues were positively affected by the increase in market value of AUM and AUA as of December 31, 2009, as well as new account growth and positive net flows of AUM and AUA during the fourth quarter of 2009.

New account growth and positive net flows of AUM and AUA in the fourth quarter of 2009 resulted from continued efforts to increase the number of financial advisors and accounts on our technology platform. The number of financial advisors with AUM or AUA that had client accounts on our technology platform increased from 7,771 as of December 31, 2008 to 8,408 as of December 31, 2009 and the number of AUM or AUA client accounts increased from approximately 159,000 as of December 31, 2008 to approximately 175,000 as of December 31, 2009.

 

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In the first quarter of 2009, revenues were negatively affected by the significant market decline that occurred during the fourth quarter of 2008, as our first quarter 2009 revenues were driven primarily by the value of AUM and AUA as of December 31, 2008.

Licensing and professional services

Licensing and professional services revenues decreased 2% from $5.3 million in the three months ended March 31, 2009 to $5.2 million in the three months ended March 31, 2010. This decrease was primarily due to a decrease in professional services revenue of $0.2 million, partially offset by an increase in licensing revenue of $0.1 million.

Cost of revenues

Cost of revenues increased 19% from $5.9 million in the three months ended March 31, 2009 to $7.0 million in the three months ended March 31, 2010. As a percentage of total revenues, cost of revenues remained flat at 32% in both periods.

Compensation and benefits

Compensation and benefits increased 16% from $7.0 million in the three months ended March 31, 2009 to $8.1 million in the three months ended March 31, 2010, primarily due to an increase in salaries and commissions of $1.1 million related to an increase in headcount. As a percentage of total revenues, compensation and benefits remained flat at 37% in both periods.

General and administration

General and administration expenses increased 96% from $3.6 million in the three months ended March 31, 2009 to $7.1 million in the three months ended March 31, 2010, primarily due to an increase in bad debt expense of $2.7 million in the three months ended March 31, 2010 related to the uncollectible portion of accounts and notes receivable from a private company (see note 5 to the notes to the unaudited condensed consolidated financial statements) and increased legal fees related to the Fetter Logic litigation of $0.7 million. See note 14 to the notes to the unaudited condensed consolidated financial statements. As a percentage of total revenues, general and administration expenses increased from 19% in the three months ended March 31, 2009 to 33% in the three months ended March 31, 2010. Excluding bad debt expense of $2.7 million and legal fees of $0.7 million related to the Fetter Logic litigation, general and administration expenses as a percentage of total revenues would have been 17% in the three months ended March 31, 2010.

Depreciation and amortization

Depreciation and amortization expense increased 27% from $1.0 million in the three months ended March 31, 2009 to $1.3 million in the three months ended March 31, 2010, primarily due to an increase in fixed assets and internally developed software depreciation and amortization of $0.2 million and $0.1 million, respectively. The increase in depreciation and amortization expense was primarily due to an increase in capitalized leasehold improvements of $2.8 million and an increase in capitalized hardware and outside software costs of $1.9 million to support the growth of our operations. As a percentage of total revenues, depreciation and amortization remained flat at 6% in both periods.

Restructuring charges

Effective March 31, 2010, we closed our Los Angeles office in order to more appropriately align and manage our resources and incurred restructuring charges of approximately $0.8 million for the three months ended March 31, 2010. These expenses related to vacating rental office space, relocation expenses and severance charges. We expect to incur an additional $0.5 million of expenses relating to the closure of our Los Angeles office during the remainder of 2010.

 

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Income tax provision

 

     Three Months
Ended March 31,
 
     2009     2010  

Provision for income taxes

   $ 334      $ (112

Effective tax rate

     29.9     4.3

Our effective tax rate for the three months ended 2009 differs from the statutory rate primarily as a result of a change in state tax apportionment laws that affect the tax rate requiring a re-valuation of our deferred tax items and the effect of state taxes.

Our effective tax rate for the three months ended 2010 differs from the statutory rate primarily as a result of the establishment of a full income tax valuation allowance of the deferred tax asset created as a result of the write-off of notes receivable from a private company (See note 5 to the notes to the unaudited condensed consolidated financial statements) that is considered a capital loss for income tax purposes.

Results of Operations

Year ended December 31, 2009 compared to year ended December 31, 2008

 

     Year Ended December 31,     Increase
(Decrease)
 
         2008             2009         Amount     %  
     (In thousands)        

Revenues:

        

Assets under management or administration

   $ 71,738      $ 56,857      $ (14,881   (21 )% 

Licensing and professional services

     20,104        21,067        963      5   
                          

Total revenues

     91,842        77,924        (13,918   (15
                          

Operating expenses:

        

Cost of revenues

     34,604        24,624        (9,980   (29

Compensation and benefits

     28,452        28,763        311      1   

General and administration

     15,500        15,726        226      1   

Depreciation and amortization

     3,538        4,499        961      27   
                          

Total operating expenses

     82,094        73,612        (8,482   (10
                          

Income from operations

     9,748        4,312        (5,436   (56
                          

Other income (expense):

        

Interest income

     816        221        (595   (73

Unrealized gain (loss) on investments

     (21     19        40      *   

Impairment of investments

     (680     (3,608     (2,928   431   
                          

Total other income (expense)

     115        (3,368     (3,483   *   
                          

Income before income tax provision

     9,863        944        (8,919   (90

Income tax provision

     4,608        1,816        (2,792   (61
                          

Net income (loss)

   $ 5,255      $ (872   $ (6,127   (117 )% 
                          

 

* Not meaningful.

Revenues

Total revenues decreased 15% from $91.8 million in 2008 to $77.9 million in 2009. The decrease was primarily due to a decrease in revenues from assets under management or administration of $14.9 million. Revenues from assets under management or administration comprised 78% and 73% of total revenue in 2008 and 2009, respectively.

 

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Assets under management or administration

Revenues earned from assets under management or administration decreased 21% from $71.7 million in 2008 to $56.9 million in 2009. This decrease was primarily due to a decline in asset values applicable to our quarterly billing cycles for 2009, relative to those used in 2008. In 2008, revenues were relatively unaffected by the significant market decline that occurred during the fourth quarter of 2008. Our fourth quarter 2008 revenues were driven primarily by the value of AUM and AUA as of September 30, 2008. In addition, the decline in market values in the fourth quarter of 2008 and first quarter of 2009 negatively impacted revenues in 2009.

The recovery in the equity markets in the second quarter of 2009 through the end of 2009 modestly affected our revenues from assets under management or administration in the second half of 2009, as market values at the end of a quarter primarily impact our revenues in the subsequent quarter.

The overall decline in revenues from assets under management or administration was partially offset by revenues from new account growth and positive net flows of AUM or AUA during 2009. New account growth and positive net flows of AUM or AUA resulted from our continued efforts to increase the number of financial advisors on our technology platform. The number of financial advisors with AUM or AUA that had client accounts on our technology platform increased from 7,771 as of December 31, 2008 to 8,408 as of December 31, 2009 and the number of AUM or AUA client accounts increased from approximately 159,000 as of December 31, 2008 to approximately 175,000 as of December 31, 2009.

Licensing and professional services

Licensing and professional services revenues increased 5% from $20.1 million in 2008 to $21.1 million in 2009, primarily due to increased fees on existing license agreements, including an increase in revenues from the Fidelity license agreement.

Cost of revenues

Cost of revenues decreased 29% from $34.6 million in 2008 to $24.6 million in 2009, primarily due to the decrease in the quarter-end market values of AUM and AUA, as well as a relative increase in AUA, for which we incur lower direct costs. As a percentage of total revenues, cost of revenues decreased from 38% in 2008 to 32% in 2009 due to the decrease in market values, as well as a relative increase in licensing revenues, for which we incur no direct costs.

Compensation and benefits

Compensation and benefits increased 1% from $28.5 million in 2008 to $28.8 million in 2009, primarily due to an increase in non-cash stock-based compensation expense of $0.4 million and an increase in profit sharing of $0.4 million, which was partially offset by a decrease in severance of $0.3 million. As a percentage of total revenues, compensation and benefits increased from 31% in 2008 to 37% in 2009, due to the decline in revenue between periods.

General and administration

General and administration expenses increased 1% from $15.5 million in 2008 to $15.7 million in 2009, primarily driven by increases in occupancy-related costs of $0.6 million as a result of new lease agreements related to the Chicago and Denver offices, communications expenses of $0.3 million, research and data costs of $0.3 million related to increased account activity and bad debt expense of $0.4 million related to uncollectible portion of accounts receivable from a private company (see note 7 to the notes to the audited consolidated financial statements), offset by lower professional services of $0.6 million, travel-related expenses of $0.4 million and marketing expenses of $0.3 million, primarily due to efforts to reduce expenses. As a percentage of total revenues, general and administration expenses increased from 17% in 2008 to 20% in 2009. This increase was primarily due to the decrease in revenues in 2009.

 

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Depreciation and amortization

Depreciation and amortization increased 27% from $3.5 million in 2008 to $4.5 million in 2009. This increase was driven by an increase in fixed asset and internally developed software depreciation and amortization of $0.7 million and $0.3 million, respectively. The increase in depreciation and amortization expense was primarily due to increased levels of capitalized leasehold improvements of $2.8 million, as well as increased levels of capitalized hardware and outside software costs of $1.9 million needed to support the growth of our operations. As a percentage of total revenues, depreciation and amortization increased from 4% in 2008 to 6% in 2009. This increase was primarily due to the decrease in revenues in 2009.

Interest income

Interest income decreased 73% from $0.8 million in 2008 to $0.2 million in 2009, primarily due to lower effective interest rates earned on our cash and cash equivalent balances in 2009 compared to 2008.

Impairment of investments

Impairment of investments increased $2.9 million from $0.7 million in 2008 to $3.6 million in 2009. In the fourth quarter of 2009, we evaluated the fair value of an investment in a private company and we recorded a $3.3 million impairment. See note 7 to the notes to the audited consolidated financial statements.

Income tax provision (benefit)

 

     Year Ended
December 31,
 
     2008     2009  

Provision for income taxes

   $ 4,608      $ 1,816   

Effective tax rate

     46.7     192.4

Our 2008 and 2009 effective tax rates differ from the statutory rate primarily as a result of changes in our estimates of our state income tax obligations for prior years and changes in state tax rates. The changes in state tax rates were primarily related to changes in state tax laws regarding the sourcing of state taxable income.

Our 2009 effective tax rate also differs from the statutory rate primarily as a result of an increase in our tax valuation allowance we recorded in 2009. In 2009, our management determined that newly generated deferred tax assets related to capital losses from investments were not expected to be utilized and correspondingly, we increased our tax valuation allowance.

 

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Year ended December 31, 2008 compared to year ended December 31, 2007

 

     Year Ended December 31,     Increase (Decrease)  
           2007                 2008           Amount     %  
     (In thousands)        

Revenues:

        

Assets under management or administration

   $ 71,442      $ 71,738      $ 296      0

Licensing and professional services

     10,027        20,104        10,077      100   
                          

Total revenues

     81,469        91,842        10,373      13   
                          

Operating expenses:

        

Cost of revenues

     34,541        34,604        63      0   

Compensation and benefits

     23,250        28,452        5,202      22   

General and administration

     12,135        15,500        3,365      28   

Depreciation and amortization

     2,914        3,538        624      21   
                          

Total operating expenses

     72,840        82,094        9,254      13   
                          

Income from operations

     8,629        9,748        1,119      13   
                          

Other income (expense):

        

Interest income

     1,159        816        (343   (30

Unrealized loss on investments

     —          (21     (21   100   

Impairment of investments

     —          (680     (680   100   
                          

Total other income (expense)

     1,159        115        (1,044   (90
                          

Income before income tax provision (benefit)

     9,788        9,863        75      1   

Income tax provision (benefit)

     (14,150     4,608        18,758      *   
                          

Net income

   $ 23,938      $ 5,255      $ (18,683   (78 )% 
                          

 

* Not meaningful.

Revenues

Total revenues increased 13% from $81.5 million in 2007 to $91.8 million in 2008. This increase was primarily due to an increase in licensing and professional services revenue of $10.1 million. Revenues from assets under management or administration services were 88% and 78% of total revenues in 2007 and 2008, respectively.

Assets under management or administration

Revenues earned from assets under management or administration remained flat in 2008 compared to 2007, due to several offsetting factors. Growth in accounts and positive net flows of AUM and AUA were offset by gradual declines in equity market values. The positive net flows of AUM and AUA were primarily attributable to an increase in the number of AUM or AUA client accounts on our technology platform, from approximately 113,000 as of December 31, 2007 to 159,000 as of December 31, 2008. The significant decline in market values during the fourth quarter of 2008 did not have material effect on revenues until 2009. Additionally, one customer with approximately $11 billion in AUA shifted from an asset-based fee schedule to a license agreement at the end of 2007. This shift resulted in a decline in revenues from assets under management or administration.

Licensing and professional services

Licensing and professional services revenue increased 100% from $10.0 million in 2007 to $20.1 million in 2008. This increase was primarily due to fees earned on a new license agreement with Fidelity, as well as the transition of an existing customer relationship from asset-based pricing at the end of 2007 to a license agreement in 2008, as described above.

 

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Cost of revenues

Cost of revenues remained flat in 2008 compared to 2007. As a percentage of total revenues, cost of revenues decreased from 42% in 2007 to 38% in 2008 due to the increase in revenues from licensing fees, for which we incur no direct costs.

Compensation and benefits

Compensation and benefits increased 22% from $23.3 million in 2007 to $28.5 million in 2008, primarily related to an increase in headcount and related expenses from 2007 to 2008 to support the growth in our operations, partially offset by a decrease in incentive compensation expense of $0.5 million. As a percentage of total revenues, compensation and benefits increased from 29% in 2007 to 31% in 2008.

General and administration

General and administration expenses increased 28% from $12.1 million in 2007 to $15.5 million in 2008, primarily driven by increases in communications expenses of $0.4 million, research and data costs of $0.2 million and marketing expenses of $0.6 million, in each case related to our increased breadth of our products and services in 2009. Professional services expenses increased $0.9 million due to increased legal and consulting fees. As a percentage of total revenues, general and administration expenses increased from 15% in 2007 to 17% in 2008. This increase was primarily due to an increase in our infrastructure to support the projected growth of our operations.

Depreciation and amortization

Depreciation and amortization increased 21% from $2.9 million in 2007 to $3.5 million in 2008, primarily driven by an increase in fixed asset depreciation and amortization expense of $0.3 million and an increase in internally developed software depreciation of $0.4 million. The increase in depreciation and amortization was primarily due to a $1.1 million increase in capitalized computer equipment and software and a $0.8 million increase in leasehold improvements in 2008, as well as an increase of $1.7 million in capitalized internally developed software-related costs as a result of continued enhancements to our technology platform. As a percentage of total revenues, depreciation and amortization remained flat at 4% for 2007 and 2008.

Interest income

Interest income decreased 30% from $1.2 million in 2007 to $0.8 million in 2008, primarily due to lower effective interest rates earned on our cash and cash equivalent balances in 2008 compared to 2007.

Impairment of investments

Impairment of investments increased $0.7 million from 2007 to 2008. This increase was primarily due to a $0.7 million impairment of an alternative investment in 2008. See note 7 to the notes to the audited consolidated financial statements.

Income tax provision (benefit)

 

     Year Ended
December 31,
 
     2007     2008  

Provision for income taxes

   $ (14,150   $ 4,608   

Effective tax rate

     (144.6 )%      46.7

Our 2007 effective tax rate differs from the statutory rate primarily as a result of the reversal of an income tax valuation allowance. Prior to 2007, we established income tax valuation allowances to reflect our estimate of the amount of deferred tax assets that might not be realized. Our management considers both positive and

 

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negative evidence in determining whether a valuation allowance is appropriate, and more weight is given to evidence that can be objectively verified. Valuation allowances are reassessed whenever there are changes in circumstances that may cause a change in our judgments. In fiscal 2007, additional objective evidence became available regarding the level of our future earnings that affected our judgment concerning the valuation allowance attributable to net operating losses. See note 11 to the notes to the audited consolidated financial statements.

Our 2008 effective tax rate differs from the statutory rate primarily as a result of changes in our estimates of our state income tax obligations for prior years and changes in state tax rates. The changes in state tax rates were primarily related to changes in state tax laws regarding the sourcing of state taxable income.

Quarterly Results of Operations

The following table sets forth our unaudited quarterly condensed consolidated statements of operations data for each fiscal quarter in the years ended December 31, 2008, 2009 and the quarter ended March 31, 2010. Our unaudited quarterly condensed consolidated statements of operations data has been prepared on the same basis as our audited consolidated financial statements and should be considered together with the audited consolidated financial statements and unaudited condensed consolidated financial statements included elsewhere in this prospectus. The unaudited quarterly condensed consolidated statements of operations data includes all the necessary adjustments, consisting only of normal recurring adjustments that we consider necessary for a fair presentation of this data. Our results of operations in historical periods are not necessarily indicative of our future results of operations.

Our revenues from assets under management or administration decreased during the period from September 30, 2008 through June 30, 2009 as a result of the decline in equity markets, which was partially offset by positive net flows during the same period. Our cost of revenues declined during the same time period, also as a result of the decline in the equity markets. Our total operating expenses have fluctuated both in absolute dollar terms and as a percentage of total revenues from quarter-to-quarter primarily as a result of changes in headcount, non-cash stock-based compensation expense, costs related to marketing, professional services expenses and depreciation and amortization of fixed assets and internally developed software.

 

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Condensed Consolidated Statements of Operations Data

 

    For the Three Months Ended  
    Mar. 31,
2008
  June 30,
2008
  Sept. 30,
2008
    Dec. 31,
2008
    Mar. 31,
2009
    June 30,
2009
    Sept. 30,
2009
  Dec. 31,
2009
    Mar. 31,
2010
 
    (In thousands, unaudited)  

Revenues:

                 

Assets under management or administration

  $ 18,781   $ 18,039   $ 18,691      $ 16,227      $ 13,334      $ 12,589      $ 14,507   $ 16,427      $ 16,396   

Licensing and professional services

    5,846     4,881     4,718        4,659        5,347        5,131        5,221     5,368        5,236   
                                                                 

Total revenues

    24,627     22,920     23,409        20,886        18,681        17,720        19,728     21,795        21,632   
                                                                 

Operating expenses:

                 

Cost of revenues

    9,373     8,697     8,905        7,629        5,920        5,510        6,264     6,930        7,020   

Compensation and benefits

    7,002     6,925     7,275        7,250        7,004        6,830        7,284     7,645        8,090   

General and administration (1)

    3,957     3,664     3,990        3,889        3,629        3,558        3,667     4,872        7,109   

Depreciation and amortization

    820     860     881        977        1,047        1,076        1,167     1,209        1,331   

Restructuring charges

    —       —       —          —          —          —          —       —          752   
                                                                 

Total operating expenses

    21,152     20,146     21,051        19,745        17,600        16,974        18,382     20,656        24,302   
                                                                 

Income from operations

    3,475     2,774     2,358        1,141        1,081        746        1,346     1,139        (2,670
                                                                 

Other income (expense):

                 

Interest income

    271     186     206        153        54        64        54     49        44   

Unrealized gain (loss) on investments

    —       —       (12     (9     —          8        9     2        3   

Impairment of investments

    —       —       —          (680     (17     (1     —       (3,590     —     
                                                                 

Total other income (expense)

    271     186     194        (536     37        71        63     (3,539     47   
                                                                 

Income (loss) before income tax provision

    3,746     2,960     2,552        605        1,118        817        1,409     (2,400     (2,623

Income tax provision

    1,516     1,200     1,069        823        334        336        563     583        (112
                                                                 

Net income (loss)

  $ 2,230   $ 1,760   $ 1,483      $ (218   $ 784      $ 481      $ 846   $ (2,983   $ (2,511