S-1 1 ds1.htm FORM S-1 Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on March 26, 2010

Registration No. 333-                    

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

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)

Common Stock, par value $0.01 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.

 

 

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.

 

 

 


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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 MARCH 26, 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 intend to apply 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 16.

 

     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.

 

Joint Book-Running Managers
Morgan Stanley    UBS Investment Bank    Barclays Capital

The date of this prospectus is                     , 2010


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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

   16

Cautionary Note Regarding Forward-Looking Statements

   32

Use of Proceeds

   32

Dividend Policy

   32

Capitalization

   33

Dilution

   35

Selected Consolidated Financial Information

   37

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

   39

Business

   56

Management

   72

Executive Compensation

   77

Principal and Selling Stockholders

   88

Certain Relationships and Related Party Transactions

   91

Description of Capital Stock

   94

Shares Eligible for Future Sale

   98

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

   101

Underwriting

   104

Legal Matters

   108

Experts

   108

Where You Can Find More Information

   108

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.


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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. Our integrated technology platform allows financial advisors to provide their clients with highly flexible investment solutions and services. 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. 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, “open architecture” 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. 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.

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. 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. The percentage of our total revenues represented by asset-based fees declined in these periods 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. As of December 31, 2009, approximately $38 billion of investment assets for which we receive asset-based fees were managed or administered utilizing our technology platform by approximately 8,400 financial advisors in approximately 175,000 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. Licensing fees accounted for 9%, 19% and 24% of our total revenues for the years ended December 31, 2007, 2008 and 2009, respectively. Fees received in connection with professional services accounted for the remainder of our total revenues. As of December 31, 2009, approximately $51 billion of investment assets for which we receive licensing fees for utilizing our technology platform were serviced by approximately 5,500 financial advisors through approximately 511,000 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.

 

 

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The following table sets forth for the quarters indicated the assets that were managed or administered on our technology platform by financial advisors:

LOGO

The following table sets forth for the quarters indicated the number of accounts financial advisors serviced through our technology platform:

LOGO

 

 

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The following table sets forth as of December 31 of the year indicated the number of financial advisors that had client accounts on our technology platform:

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 and Trivandrum, India.

Recent Developments

In February 2010, we signed a seven-year platform services agreement with FundQuest Incorporated, or FundQuest, a global investment and managed account services company and subsidiary of BNP Paribas Investment Partners. Pursuant to this agreement, FundQuest will continue to provide investment products to its clients, but our technology platform will replace FundQuest’s technology platform. Upon completion of the conversion of FundQuest’s clients to our technology platform, which we expect to occur in 2010, the assets on our technology platform are expected to increase by approximately $13 billion, and the number of financial advisors that have access to our technology platform and the accounts they service are expected to increase by approximately 6,200 and 90,000, respectively.

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 $35.3 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, according to Cerulli Associates, in 2009, there were approximately 312,000 financial advisors registered with the Financial Industry Regulatory Authority, or FINRA, or the Securities and Exchange Commission, or SEC, that were focused on retail investors.

 

 

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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. 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. We believe this trend was accelerated in the past two to three years as a result of the reputational harm suffered by several of the largest financial institutions during the recent financial crisis. In particular, according to Cerulli Associates, an estimated 44% of financial advisors were considered independent in 2009, compared to 41% as of 2005, and Cerulli Associates projects that 50% of financial advisors will be independent by the end of 2012.

 

   

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. For example, an advanced platform technology with fully integrated tools helps reduce the need for the manual processing of data and the use of multiple incompatible technology applications, allowing financial advisors to spend more time interfacing with their clients, while also potentially allowing the financial advisor to reduce technology-related costs.

 

   

Increased use of financial advisors. We believe that the recent significant volatility and increasing complexity in securities markets has resulted in increased investor interest in receiving professional financial advisory services. According to Cerulli Associates, the percentage of households investing through a financial advisor increased from 50% to 58% from August 2008 to June 2009.

 

   

Increased use of fee-based investment solutions. In order for financial advisors to effectively manage their clients’ assets, we believe 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. According to Cerulli Associates, the percentage of commission-only financial advisors declined from 18% in 2003 to 12% in 2008. We believe that financial advisors will increasingly require a sophisticated technology platform to support their ability to address their clients’ needs.

 

   

More stringent standards applicable to financial advisors. In light of the economic crisis and related securities market volatility in 2008 and 2009, we believe that there will be increased attention on investor consumer protection, whether as a result of regulatory changes, voluntary industry initiatives or competitive dynamics. 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 will benefit from utilizing a technology platform, such as ours, that allows them to address their clients’ wealth management needs, manage and memorialize decisions made throughout the process, and that assists them with recordkeeping and account monitoring.

Our Competitive Strengths

We believe we benefit from the following competitive strengths:

 

   

Superior integrated wealth management technology platform. We believe 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.

 

   

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

 

 

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research group, PMC, and access to a full range of investment programs with the flexibility to add specific investment managers or investment solutions not currently available on our technology platform upon request.

 

   

Enabling choice through open architecture. Our centrally hosted technology platform is designed based on the principle of “open architecture” and 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. We provide access to investment solutions and services offered by third-party managers and those that we develop internally.

 

   

Independent and unbiased technology services provider. Unlike many of our competitors, 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 that the scale of our operations allows us to generate 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. Since December 31, 2005, we have retained 100% of our top ten enterprise client relationships.

 

   

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. We intend to work with more of the financial advisors employed by or affiliated with our enterprise clients. Generally, when we establish an enterprise client relationship, we are provided access to the client’s financial advisors and given the opportunity to move them 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%. Despite that growth, we have the opportunity to continue increasing the number of financial advisors we serve within our existing enterprise client relationships. For example, within three of our top enterprise clients, we estimate that we worked with only 22% to 36% of their financial advisors as of December 31, 2009. Through our regional sales and client service teams, we intend to continue the process of introducing and adding new financial advisors to our technology platform from our existing enterprise client relationships.

 

   

Extend the account base within a given advisor relationship. We intend to broaden our relationships with our existing financial advisor customers. During the four year period ending December 31, 2009, the average number of AUM or AUA accounts per advisor on our technology platform has grown from approximately 11 to 21, an increase of 91%. As a result, total AUM or AUA accounts have grown at a compound annual growth rate of 39% during the past four years. As our working relationship with our financial advisor customers develops, we will seek to move more of their clients’ assets onto our technology platform.

 

   

Expand the services we provide each advisor. We intend to expand the range of investment solutions and services that each of our financial advisor customers utilizes. Since in many cases, when we first enter into a client relationship with a financial advisor, the financial advisor utilizes some, but not all, of the investment solutions and services provided through our technology platform, we will continue to work with our financial advisor customers to expand the scope of the investment solutions and services they employ.

 

 

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Obtain new enterprise clients. Enterprise clients provide us with access to a large number of financial advisors that may be interested in utilizing our technology platform. Our enterprise sales team is focused exclusively on obtaining new enterprise client relationships. During the past four years, eight new enterprise client relationships have added over 1,700 financial advisors to our technology platform. In 2010, we expect the recently announced agreement with FundQuest will add over 6,200 financial advisors to our technology platform. Once we obtain a new enterprise client, we focus our efforts on developing relationships with the client’s financial advisors and then deepening and broadening these relationships, as discussed above. New enterprise clients provide further opportunities to execute on the strategies identified above.

 

   

Continue to invest in our technology platform. To continue to attract and retain enterprise clients and financial advisors, and to deepen our relationships with them, we intend to continue to invest in our technology platform to provide financial advisors with access to investment solutions and services that address the widest range of the financial advisors’ front-, middle- and back-office needs. 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. We will continue to invest to develop 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 our PMC group.

 

   

Continue to pursue strategic transactions and other relationships. We intend to continue to selectively pursue strategic acquisitions, investments and other relationships that we believe can significantly enhance the attractiveness of our technology platform or expand our client base. For example, we recently entered into a platform services agreement with FundQuest, described above. We believe we have been historically successful in identifying and executing strategic transactions that have complemented our business and allowed us to compete more effectively in our industry. Given our scale of operations and record of past transactions, we believe we are well-positioned to engage in such transactions in the future.

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. We have designed our technology platform and infrastructure to allow us to grow our business efficiently, without the need for significant additional investment 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 as the assets of the financial advisor’s clients grow, through the addition of financial advisors utilizing our technology platform and through the financial advisors’ use of additional investment solutions and services.

 

   

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. As an independent provider of technology services to financial advisors, 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.

 

 

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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 the following:

 

   

We have experienced rapid 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 revenue can fluctuate from period to period, which could cause our share price to fluctuate;

 

   

We derive nearly all of our revenues from the delivery of investment solutions and services to clients in the financial advisory industry;

 

   

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

 

   

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;

 

   

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;

 

   

Changes in investors’ decisions regarding their investment assets or large-scale withdrawals of investment funds;

 

   

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;

 

   

Our operations are subject to extensive government regulation, and compliance failures or regulatory action against us, or 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 are substantially dependent on our intellectual property rights, and a failure to protect our rights could adversely affect our results of operations, financial condition or business; and

 

   

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 affect on our results of operations, financial condition or business.

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 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

We intend to use the net proceeds from this offering 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 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.

The number of shares of our common stock to be outstanding immediately after this offering is based on 131,134,553 shares outstanding as of December 31, 2009, and excludes:

 

   

16,427,894 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 $1.34;

 

   

2,269,741 shares of common stock issuable upon the exercise of warrants outstanding as of December 31, 2009, at a weighted average exercise price of $0.66 per share;

 

   

             options to be granted to our employees immediately prior to the consummation of this offering, including an aggregate of              options related to 2010 compensation for certain employees and an aggregate of              options for all full-time employees, 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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             shares of common stock reserved for future issuance under our 2004 Stock Incentive Plan; and

 

   

shares issuable under a warrant granted to FundQuest, Incorporated in February 2010. Terms of the warrant are further 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 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.

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” and our consolidated financial statements and related footnotes included elsewhere in this prospectus.

Consolidated Statements of Operations Data

 

    Year ended December 31,  
    2005     2006   2007     2008     2009  
    (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   

Licensing and professional services

    7,962        9,245     10,027        20,104        21,067   
                                     

Total revenues

    39,951        59,051     81,469        91,842        77,924   
                                     

Operating expenses:

         

Cost of revenues

    17,677        25,221     34,541        34,604        24,624   

Compensation and benefits

    15,064        18,878     23,250        28,452        28,763   

General and administration

    7,748        9,334     12,135        15,500        15,726   

Depreciation and amortization

    2,422        2,524     2,914        3,538        4,499   

Impairment of goodwill

    14,405        —       —          —          —     
                                     

Total operating expenses

    57,316        55,957     72,840        82,094        73,612   
                                     

Income (loss) from operations

    (17,365     3,094     8,629        9,748        4,312   

Total other income (expense)

    126        584     1,159        115        (3,368
                                     

Income (loss) before income tax provision (benefit)

    (17,239     3,678     9,788        9,863        944   

Income tax provision (benefit)

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

Net income (loss)

    (17,277     3,664     23,938        5,255        (872

Less preferred stock dividends

    —          —       —          (203     (720
                                     

Net income (loss) attributable to common stockholders

  $ (17,277   $ 3,664   $ 23,938      $ 5,052      $ (1,592
                                     

Net income (loss) per share attributable to common stockholders

         

Basic

  $ (0.33   $ 0.07   $ 0.36      $ 0.08      $ (0.02
                                     

Diluted

  $ (0.33   $ 0.07   $ 0.19      $ 0.04      $ (0.02
                                     

Weighted average common shares outstanding:

         

Basic

    53,017,497        55,328,058     66,067,514        66,774,226        64,554,988   
                                     

Diluted

    53,017,497        55,328,058     125,716,714        131,888,239        64,554,988   
                                     

Pro forma net loss per share (unaudited):

         

Basic (1)

          $ (0.01
               

Diluted (1)

          $ (0.01
               

Pro forma weighted average common shares outstanding (unaudited):

         

Basic (1)

            128,068,160   
               

Diluted (1)

            128,068,160   
               

Notes to the Consolidated Statements of Income

 

(1) Unaudited pro forma basic and diluted net loss per share and unaudited pro forma weighted average common shares outstanding is presented after giving effect to the issuance of 63,513,172 shares 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 consolidated financial statements.

 

 

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Consolidated Balance Sheet Data

 

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

Cash and cash equivalents

   $ 7,131    $ 13,369    $ 25,255    $ 28,445    $ 31,525    $ 30,602    $ —  

Working capital

     2,990      5,657      15,168      21,405      27,262      26,339   

Goodwill and intangible assets

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

Total assets

     30,791      37,948      65,250      72,251      75,058      74,135   

Stockholders’ equity

     23,216      25,559      50,152      58,583      58,246      57,323   

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 $923,000 in cash and the issuance of 63,513,172 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 63,513,172 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 $1.25 (equates to 800 shares of common stock for each preferred share). The conversion price per share of the series B preferred stock is $1.00 (equates to 1,000 shares of common stock for each preferred share). The conversion price per share of the series C preferred stock is $2.33 (equates to 1,000 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,
     2005     2006    2007    2008    2009
     (In thousands, unaudited)

Adjusted EBITDA

   $ (538   $ 5,618    $ 11,564    $ 14,043    $ 10,595

Adjusted operating income (loss)

     (2,960     3,094      8,650      10,505      6,078

Adjusted net income (loss)

     (2,872     3,664      6,431      6,088      2,438

 

 

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     Year ended December 31,
     2005    2006    2007    2008    2009
     (In millions, except account and advisor information)

Assets

              

AUM

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

AUA

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

Subtotal AUM/A

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

Licensing

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

Total Platform Assets

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

Accounts

              

AUM

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

AUA

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

Subtotal AUM/A

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

Licensing

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

Total Platform Accounts

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

Advisors

              

AUM/A

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

Licensing

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

Total Advisors

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

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. 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 $40.9 million and $35.3 million, respectively, as of December 31, 2009, 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.

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

 

     Year ended December 31,  
     2005     2006     2007     2008     2009  
     (In thousands, unaudited)  

Net income (loss)

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

Add (deduct):

          

Interest income

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

Interest expense

     98        —          —          —          —     

Income tax provision (benefit)

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

Depreciation and amortization

     2,422        2,524        2,914        3,538        4,517 (1) 

Impairment of goodwill

     14,405        —          —          —          —     

Stock-based compensation expense

     —          —          21        458        780   

Unrealized (gain) loss on investments

     —          —          —          21        (19

Impairment of investments

     —          —          —          680        3,608   

Severance

     —          —          —          299        —     

Bad debt expense

     —          —          —          —          385   

Litigation related expense

     —          —          —          —          601   
                                        

Adjusted EBITDA

   $ (538   $ 5,618      $ 11,564      $ 14,043      $ 10,595   
                                        

 

(1) Includes approximately $18,000 of amortization of customer inducement costs.

 

 

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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,
     2005     2006    2007    2008    2009
     (In thousands, unaudited)

Income (loss) from operations

   $ (17,365   $ 3,094    $ 8,629    $ 9,748    $ 4,312

Add (deduct):

             

Impairment of goodwill

     14,405        —        —        —        —  

Stock-based compensation expense

     —          —        21      458      780

Severance

     —          —        —        299      —  

Bad debt expense

     —          —        —        —        385

Litigation related expense

     —          —        —        —        601
                                   

Adjusted operating income (loss)

   $ (2,960   $ 3,094    $ 8,650    $ 10,505    $ 6,078
                                   

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,  
     2005     2006    2007 *     2008 *    2009 *  
           (In thousands, unaudited)       

Net income (loss)

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

Impairment of goodwill

     14,405        —        —          —        —     

Valuation allowance reversal

     —          —        (17,520     —        —     

Stock-based compensation expense

     —          —        13        266      480   

Impairment of investments

     —          —        —          394      2,223   

Severance

     —          —        —          173      —     

Bad debt expense

     —          —        —          —        237   

Litigation related expense

     —          —        —          —        370   
                                      

Adjusted net income (loss)

   $ (2,872   $ 3,664    $ 6,431      $ 6,088    $ 2,438   
                                      

 

* 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%.

 

 

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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 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, or AUM, and administration, or AUA, 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. Growth of our business creates new and increased management and training responsibilities for our employees. 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 AUM and AUA and therefore our revenues and cash flows;

 

   

negative public perception and reputation of the financial services industry;

 

   

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

 

   

downward pressure on fees we charge our clients;

 

   

changes in laws or regulations;

 

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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.

Competition could hurt our financial performance.

We operate in a highly competitive industry, with many firms competing for business from financial advisors. We compete on the basis of a number of factors, including the quality and breadth of our investment solutions and services, our ability to innovate, our reputation and the prices of our services. We compete with many different types of companies that vary in size and scope, 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.

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 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.

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. 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, revenues associated with our relationship with our single largest client, FMR LLC, an affiliate of FMR Corp., or Fidelity, accounted for 14%, 27% and 31%, respectively, of our total revenues and our ten largest clients accounted for 58%, 63% and 66%, 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 expires on March 31, 2013. 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% and 73% of our total revenues in the fiscal years ended December 31, 2007, 2008 and 2009. 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 or conflicts of interest.

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, and may face liabilities for the improper actions and/or omissions of such advisors and third-party investment money managers. In addition, we may face other legal liabilities based on the results of our investment advisory recommendations, even in the absence of a breach of our fiduciary duty.

Potential, perceived and actual conflicts of interest are inherent in our existing and future business activities. 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 PMC 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.

Potential, perceived or actual conflicts of interest could give rise to client dissatisfaction, litigation or regulatory enforcement actions. 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.

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.

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.

 

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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 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.

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 our storage of personal information about our users and privacy concerns could require us to modify our operations.

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.

For a number of reasons, privacy groups, governmental agencies and individuals may seek to restrict or prevent our use of the personal investment and financial information we maintain. 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 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.

 

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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 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 future success depends on our ability to recruit and retain qualified employees, including our executive officers.

Our future success depends largely on our ability to attract, train, motivate and retain highly skilled professionals, particularly professionals with backgrounds in sales, technology and financial and investment services. We believe that success in our business will continue to be based upon the strength of our intellectual capital, and the loss of personnel integral to our business would harm our ability to maintain and grow our business. Consequently, we must hire and retain employees with the technical expertise and industry knowledge necessary to continue to develop our business and effectively manage our growing organization to ensure the growth and success of our business. There is significant competition for professionals with the skills we value and we may not be able to retain our existing employees or be able to recruit and retain new highly qualified personnel in the future. For example, other organizations may have greater resources than we do and therefore may be able to offer higher compensation packages. If we are unable to hire and retain qualified personnel, our ability to continue to expand our business would be impaired and our results of operations, financial condition or business could be materially adversely affected.

Our operations are subject to extensive government regulation, and compliance failures or regulatory action against us, or 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.

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 SEC under the Investment Advisers Act of 1940, or the Advisers Act, and are regulated thereunder. In addition, many of our investment

 

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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, or the Investment Company Act. If Rule 3a-4 were to cease to be available, or if the SEC 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. The Advisers Act and the Investment Company Act, together with related regulations and interpretations of the SEC, 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, 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. The requirements of the Advisers Act applicable to wrap fee programs are complex and the SEC has in the past scrutinized firms’ compliance with such requirements. The SEC conducts periodic examinations of registered investment advisers, which can result in citations for compliance deficiencies and referrals for enforcement action.

In addition, Portfolio Brokerage Services, Inc., or PBS, our broker-dealer subsidiary, is registered as a broker-dealer with the SEC and with all 50 states and the District of Columbia, and is a member of FINRA, 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. FINRA conducts periodic examinations of the operations its members, including PBS. The SEC also conducts periodic examinations of regulated broker dealers which can result in citations for compliance deficiencies and referrals for enforcement action. As a broker-dealer, PBS is also subject to certain minimum net capital requirements under SEC and FINRA rules. Compliance with the net capital rules may limit our ability to withdraw capital from PBS.

Violations of the laws and regulations governing an investment adviser’s or a broker-dealer’s business can result in censures, fines, cease-and-desist orders, revocation of licenses or registrations, the suspension or expulsion from the securities industry of the investment adviser or broker-dealer or its officers, employees or representatives or other similar consequences. Any such actions with respect to one subsidiary could have regulatory consequences for our other regulated subsidiaries. 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.

We may also be adversely affected as a result of new or revised legislation or regulations imposed by the SEC 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. For example, future legislation or regulation could change or eliminate certain existing restrictions relating to conflicts of interest, which might lower the relative value of our independence. 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.

 

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A change of control of our company could result in termination of our investment advisory agreements.

A change of control of our company could result in termination of our investment advisory agreements. Under the Advisers Act, the investment management and advisory agreements entered into by our investment adviser subsidiaries may not be assigned without the client’s consent. Under the Investment Company Act, 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 Advisers Act and the Investment Company Act, an “assignment” of the investment management and advisory agreements entered into by our investment adviser subsidiaries may occur if, among other things, we undergo a change of control. Such 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. If an assignment occurs as a result of a change of control, we cannot be certain that we will be able to obtain the necessary approvals from clients.

Because the offering of our shares may be deemed to result in a change of control of our company, we are seeking the consent of our clients for this transaction. We believe that substantially all of our clients will consent to such change of control, because the transaction is not expected to result in any substantive change in our management or operations. However, no assurance can be given that some clients may choose not to receive our services after this offering.

Exemptions from Certain Laws

We regularly rely on exemptions from various requirements of the Exchange Act, the Investment Company Act 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 businesses 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 our 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.

 

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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;

 

   

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. 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

 

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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.

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.

We also expect that the more successful we are the more likely it becomes that competitors will try to develop technologies, investment solutions or services that are similar to ours, which may infringe or misappropriate our intellectual property rights. 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.

 

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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.

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, 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;

 

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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.

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.

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, we incurred technology development expenditures totaling approximately $4.2 million, $4.5 million and $4.5 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;

 

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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 SEC;

 

   

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

 

   

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

 

   

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.

 

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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 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.

In connection with this offering, all members of our senior management, our directors and substantially all of our stockholders have entered into written “lock-up” agreements providing in general that, for a period of 180 days from the date of this prospectus, they will not, among other things, sell their shares without the prior written consent of the representatives of the underwriters. However, these lock-up agreements are subject to a number of specified exceptions. See “Shares Eligible for Future Sale—Lock-up Agreements” for more information regarding these lock-up agreements. Upon the expiration of the lock-up period, an additional              shares of our common stock will be tradable in the public market subject, in some cases, to volume and other restrictions under federal securities laws. In addition, upon completion of this offering, options and warrants exercisable for an aggregate of approximately              shares of our common stock will be outstanding. We have entered into agreements with the holders of approximately              shares of our common stock under which, subject to the applicable lock-up agreements, we may be required to register those shares.

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 our net proceeds from this offering for general corporate purposes, including for selective strategic investments through acquisitions, alliances or other transactions. 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.

 

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Certain provisions in our charter documents and agreements and Delaware law may inhibit potential acquisition bids for Envestnet 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.

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.

The Exchange Act, the Sarbanes-Oxley Act of 2002 and New York Stock Exchange rules were promulgated in response to the need to regulate corporate governance practices of public companies. We expect that compliance with these public company requirements 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 SEC 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, 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 also expect that it will be difficult and expensive to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the coverage we determine is necessary and prudent as a public company. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers. Advocacy efforts by stockholders and third parties may also prompt even more changes in governance and reporting requirements. 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.

 

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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 these proceeds 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.

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 December 31, 2009:

 

   

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 $923,000 in cash and conversion of all outstanding shares of our preferred stock into a total of 63,513,172 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 December 31, 2009.

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 December 31, 2009
     Actual     Pro forma     Pro forma
As Adjusted
     (In thousands, except share data)
     (audited)     (unaudited)     (unaudited)

Cash and cash equivalents

   $ 31,525      $ 30,602      $ —  
                      

Long-term debt

   $ —        $ —        $ —  

Stockholders’ equity:

      

Series A convertible redeemable 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 redeemable preferred stock; 10,000 shares authorized; 7,130 shares issued and outstanding; pro forma, no shares issued and outstanding; pro forma as adjusted, no shares issued and outstanding

     —          —          —  

Series C convertible redeemable 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 $0.001, 300,000,000 shares authorized; 67,621,381 shares issued; pro forma, 131,134,553 shares issued; pro forma as adjusted,             shares issued

     68        132     

Additional paid-in capital

     106,893        106,829     

Accumulated deficit

     (42,381     (43,304  

Treasury stock, 3,068,000 shares; pro forma, 3,068,000 shares; pro forma as adjusted,             shares

     (6,334     (6,334  
                      

Total stockholders’ equity

     58,246        57,323        —  
                      

Total capitalization

   $ 58,246      $ 57,323      $ —  
                      

 

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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 as adjusted net tangible book value per share of our common stock immediately after this offering. The pro forma net tangible book value of our common stock as of December 31, 2009 was $55.0 million, or approximately $0.42 per share. 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 63,513,172 shares of common stock and the completion of the offering at the public offering price and the application of the proceeds therefrom.

Dilution in pro forma net tangible book value 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 as adjusted net tangible book value per share of common stock immediately after the completion of this offering. After giving effect to the 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), and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of December 31, 2009 would have been $             million, or approximately $             per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $             per share to existing stockholders and an immediate dilution of $             per share to new investors. 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

   $ 0.42   

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

     
         

Pro forma net tangible book value per share after 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 presents, on a pro forma as adjusted basis, as of December 31, 2009, the differences among the number of shares of common stock purchased from us, the total consideration paid or exchanged 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. The table assumes an initial public offering price of $             per share, as specified above, and deducts 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 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.

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” and our consolidated financial statements and the related notes included elsewhere in this prospectus.

 

    Year ended December 31,  
    2005     2006   2007     2008     2009  
    (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   

Licensing and professional services

    7,962        9,245     10,027        20,104        21,067   
                                     

Total revenues

    39,951        59,051     81,469        91,842        77,924   
                                     

Operating expenses:

         

Cost of revenues

    17,677        25,221     34,541        34,604        24,624   

Compensation and benefits

    15,064        18,878     23,250        28,452        28,763   

General and administration

    7,748        9,334     12,135        15,500        15,726   

Depreciation and amortization

    2,422        2,524     2,914        3,538        4,499   

Impairment of goodwill

    14,405        —       —          —          —     
                                     

Total operating expenses

    57,316        55,957     72,840        82,094        73,612   
                                     

Income (loss) from operations

    (17,365     3,094     8,629        9,748        4,312   

Total other income (expense)

    126        584     1,159        115        (3,368
                                     

Income (loss) before income tax provision (benefit)

    (17,239     3,678     9,788        9,863        944   

Income tax provision (benefit)

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

Net income (loss)

    (17,277     3,664     23,938        5,255        (872

Less preferred stock dividends

    —          —       —          (203     (720
                                     

Net income (loss) attributable to common shareholders

  $ (17,277   $ 3,664   $ 23,938      $ 5,052      $ (1,592
                                     

Net income (loss) per share attributable to common stockholders

         

Basic

  $ (0.33   $ 0.07   $ 0.36      $ 0.08      $ (0.02
                                     

Diluted

  $ (0.33   $ 0.07   $ 0.19      $ 0.04      $ (0.02
                                     

Weighted average common shares outstanding:

         

Basic

    53,017,497        55,328,058     66,067,514        66,774,226        64,554,988   
                                     

Diluted

    53,017,497        55,328,058     125,716,714        131,888,239        64,554,988   
                                     

Pro forma net loss per share (unaudited):

         

Basic (1)

          $ (0.01
               

Diluted (1)

          $ (0.01
               

Pro forma weighted average common shares outstanding (unaudited):

         

Basic (1)

            128,068,160   
               

Diluted (1)

            128,068,160   
               

 

(1) Unaudited pro forma basic and diluted net loss per share and unaudited pro forma weighted average common shares outstanding is presented after giving effect to the issuance of 63,513,172 shares 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 consolidated financial statements.

 

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

Cash and cash equivalents

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

Working capital

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

Goodwill and intangible assets

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

Total assets

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

Stockholders’ equity

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

Other Financial and Operating Data (1)

 

     Year ended December 31,
     2005     2006    2007    2008    2009
     (In thousands, unaudited)

Adjusted EBITDA

   $ (538   $ 5,618    $ 11,564    $ 14,043    $ 10,595

Adjusted operating income (loss)

     (2,960     3,094      8,650      10,505      6,078

Adjusted net income (loss)

     (2,872     3,664      6,431      6,088      2,438

 

(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 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. Our integrated technology allows financial advisors to provide their clients with highly flexible investment solutions and services. 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. 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, “open architecture” 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. 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.

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.

 

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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. 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. 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 December 31, 2009, approximately $38 billion of investment assets subject to asset-based fees were managed or administered utilizing our technology platform by approximately 8,400 financial advisors in approximately 175,000 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. Fees received in connection with professional services accounted for the remainder of our total revenues. As of December 31, 2009, approximately $51 billion of investment assets for which we receive licensing fees for utilizing our technology platform were serviced by approximately 5,500 financial advisors through approximately 511,000 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 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

 

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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

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, our revenues from professional services fees were $2.5 million, $2.4 million and $2.4 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.

 

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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. Clearing, custody and brokerage services are provided by third-party custodians. 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.

 

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Recent Developments

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. Upon completion of the conversion of FundQuest’s clients to our technology platform, which we expect will occur in 2010, we expect the assets under administration on our technology platform to increase by approximately $13 billion, the number of advisors served to increase by approximately 6,200 and the number of accounts on our platform to increase by approximately 90,000.

In connection with the FundQuest 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. 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. 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. Based on our estimates, we expect that our annual amortization of customer inducement costs will equal approximately $4 million. Additionally, we expect to recognize approximately $0.8 of interest expense annually during the term of the agreement. These amounts will be adjusted as necessary over the contractual term. As a result of the reduction of our revenues due to the amortization of customer inducement costs, our cash flows received will exceed the revenues we recognize relating to the agreement for the same period. See note 19 in the notes to our consolidated financial statements.

Factors Affecting Comparability

We expect our stock-based compensation expenses to increase in future periods as a result of our award of              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.

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 consolidated financial statements.

Revenue recognition

Substantially all of our revenues are based on contractual arrangements. Revenues are recognized in the periods in which the related services are performed, provided that persuasive evidence of an agreement exists, the fee is fixed or determinable and collectability is reasonably assured. Cash received in advance of the performance

 

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of services is recorded under deferred revenue on our consolidated balance sheets and is recognized as revenue when earned. 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.

Internally developed software

Costs relating to internally developed software that are incurred in the preliminary stages of development are expensed as incurred. 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. 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, we had net capitalized internally developed software of $4.0 million and $3.9 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.

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.

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.

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

 

Grant Date

   Shares    Stock Price    Exercise Price

2/16/2009

   5,000    $ 1.57    $ 1.57

4/8/2009

   41,150    $ 1.57    $ 1.57

5/15/2009

   1,163,661    $ 1.43    $ 1.43

7/6/2009

   50,000    $ 1.43    $ 1.43

11/16/2009

   60,000    $ 2.30    $ 2.30

2/22/2010

   355,000    $ 2.69    $ 2.69

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. We determine the fair market value of our company in conformity with commonly accepted corporate valuation techniques and methodologies.

Our company valuation considers a market approach and an income approach, incorporating our historical and expected financial performance, relevant market, industry and economic trends, recent capital transactions,

 

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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 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.

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 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.

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.

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.

Effective January 1, 2007, we adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes, or FIN 48, codified into FASB ASC Topic 740, Income Taxes, which provides authoritative guidance as to how uncertain tax positions should be recognized, measured, disclosed and presented in financial statements. FIN 48 requires that we evaluate tax positions taken or expected to be taken in the course of preparing our tax returns to determine whether the tax positions are more likely than

 

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not to be sustained when challenged or when examined by the applicable tax authority. Tax positions determined not to meet the more likely than not standard would be required to be recorded as a tax benefit or expense and liability in the period such determination is made. The tax benefits recognized in our consolidated financial statements from tax positions are measured based on the largest benefit that is more likely than not to be realized upon ultimate settlement. As of December 31, 2008 and 2009, we had unrecognized tax benefits totaling $0.4 million and $0.5 million, respectively.

During the year ended December 31, 2007, we determined there was sufficient evidence to support a significant decrease in our tax valuation allowance. Accordingly, we reversed our tax valuation allowance and recognized a deferred tax asset in the amount of $23.4 million. This decrease in our tax valuation allowance resulted in a $17.5 million tax benefit and a reduction in goodwill of $5.8 million. The goodwill that was written down related to tax benefits that had been acquired in a prior period and were recognized in 2007.

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.

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.

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.

 

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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.

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 due to a decline in asset values used in 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, as our fourth quarter 2008 revenues were driven primarily by the value of AUM and AUA as of September 30, 2008. The decline in market values in the fourth quarter of 2008 and first quarter of 2009 negatively impacted revenues in 2009. That decline was partially offset by new account growth and positive net flows of AUM or AUA during 2009, and a recovery in equity market values during the second and third quarters of 2009. That recovery had only a partial impact on revenues in the latter half of 2009, as market values at the end of a quarter primarily impact the subsequent quarter.

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 as well as fees earned on new license agreements.

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, communications expenses, research and data costs and bad debt expense, offset by lower professional services and travel-related and marketing 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.

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. The increase in depreciation and amortization expense was primarily due to increased levels of

 

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capitalized leasehold improvements as well as increased levels of capitalized hardware and outside software costs 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 consolidated financial statements.

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.

 

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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 significant decline in market values during the fourth quarter of 2008 did not have material effect on revenues until 2009. Additionally, one customer with nearly $11 billion in AUA shifted from an asset-based fee schedule to a license agreement at the end of 2007. Revenues from this customer were reported as licensing fees beginning in 2008.

Licensing and professional services

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

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, offset by a decrease in incentive compensation expense. 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 and research and data costs and marketing and professional services expenses. These increases were primarily due to the increased breadth of our products and services in 2008. As a percentage of total revenues, general and administration 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 and an increase in internally developed software depreciation. The increase in depreciation and amortization was primarily due to increased levels of computer equipment and software and leasehold improvements in 2008, as well as increased levels of 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.

 

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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 consolidated financial statements.

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 and 2009. Our unaudited quarterly condensed consolidated statements of operations data has been prepared on the same basis as our consolidated financial statements and should be considered together with the consolidated financial statements. 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
 
    (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   

Licensing and professional services

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

Total revenues

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

Operating expenses:

               

Cost of revenues

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

Compensation and benefits

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

General and administration

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

Depreciation and amortization

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

Total operating expenses

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

Income from operations

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

Other income (expense):

               

Interest income

    271     186     206        153        54        64        54        49   

Unrealized gain (loss) on investments

    —       —       (12     (9     —          8        9        2   

Impairment of investments

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

Total other income (expense)

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

Income (loss) before income tax provision

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

Income tax provision

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

Net income (loss)

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

Less preferred stock dividends

    —       —       (22     (181     (178     (180     (181     (181
                                                           

Net income (loss) attributable to common stockholders

  $ 2,230   $ 1,760   $ 1,461      $ (399   $ 606      $ 301      $ 665      $ (3,164
                                                           

Other Quarterly Financial and Operating Data (1)

 

    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
 
    (In thousands, unaudited)  

Adjusted EBITDA

  $ 4,332   $ 3,742   $ 3,389   $ 2,580   $ 2,286   $ 2,023   $ 2,722   $ 3,564   

Adjusted operating income

    3,512     2,882     2,508     1,603     1,239     947     1,555     2,337   

Adjusted net income (loss)

    2,251     1,823     1,570     444     891     606     975     (34

 

(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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The following table sets forth a reconciliation of net income (loss) to adjusted EBITDA for the periods indicated:

 

    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
 
    (In thousands, unaudited)  

Net income (loss)

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

Add (deduct):

               

Interest income

    (271     (186     (206     (153     (54     (64     (54     (49

Income taxes

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

Depreciation and amortization

    820        860        881        977        1,047        1,076        1,167        1,227   

Stock-based compensation expense

    37        108        150        163        158        201        209        212   

Unrealized (gain) loss on investments

    —          —          12        9        —          (8     (9     (2

Impairment of investments

    —          —          —          680        17        1        —          3,590   

Severance

    —          —          —          299        —          —          —          —     

Bad debt expense

    —          —          —          —          —          —          —          385   

Litigation related expense

    —          —          —          —          —          —          —          601   
                                                               

Adjusted EBITDA

  $ 4,332      $ 3,742      $ 3,389      $ 2,580      $ 2,286      $ 2,023      $ 2,722      $ 3,564   
                                                               

The following table sets forth a reconciliation of income from operations to adjusted operating income for the periods indicated:

 

    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
    (In thousands, unaudited)

Income from operations

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

Add (deduct):

               

Stock-based compensation expense

    37     108     150     163     158     201     209     212

Severance

    —       —       —       299     —       —       —       —  

Bad debt expense

    —       —       —       —       —       —       —       385

Litigation related expense

    —       —       —       —       —       —       —       601
                                               

Adjusted income from operations

  $ 3,512   $ 2,882   $ 2,508   $ 1,603   $ 1,239   $ 947   $ 1,555   $ 2,337
                                               

The following table sets forth a reconciliation of net income (loss) to adjusted net income (loss) for the periods indicated:

 

    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 *
 
    (In thousands, unaudited)  

Net income (loss)

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

Add (deduct):

               

Stock-based compensation expense

    21     63     87     95        97     124     129     131   

Impairment of investments

    —       —       —       394        10     1     —       2,211   

Severance

    —       —       —       173        —       —       —       —     

Bad debt expense

    —       —       —       —          —       —       —       237   

Litigation related expense

    —       —       —       —          —       —       —       370   
                                                   

Adjusted net income (loss)

  $ 2,251   $ 1,823   $ 1,570   $ 444      $ 891   $ 606   $ 975   $ (34
                                                   

* Adjustments are tax effected using income tax rates as follows:  For 2008 – 42.0%; for 2009 – 38.4%.

 

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Liquidity and Capital Resources

Since our inception, our operations have been financed through cash flows from operations and private sales of our capital stock. As of December 31, 2009, we had received net cash proceeds of approximately $68 million through equity financings and from the exercise of options to purchase our common stock. As of December 31, 2009, we had total cash and cash equivalents of $31.5 million, compared to $28.5 million as of December 31, 2008.

Cash Flows

The following table presents information regarding our cash flows and cash and cash equivalents for the years ended December 31, 2007, 2008 and 2009:

 

     Year Ended December 31,  
     2007     2008     2009  
     (In thousands)  

Net cash provided by operating activities

   $ 14,868      $ 13,178      $ 8,365   

Net cash provided by (used in) investing activities

     (3,739     (12,706     (5,040

Net cash provided by (used in) financing activities

     757        2,718        (245

Net increase in cash and cash equivalents

     11,886        3,190        3,080   

Cash and cash equivalents, end of period

     25,255        28,445        31,525   

Operating Activities

Net cash provided by operating activities in 2009 decreased by $4.8 million compared to 2008, primarily due to lower net income and an increase in fees receivable, which was offset by an increase in impairment of investments and higher depreciation and amortization expense resulting from higher capitalized amounts of property and equipment and internally developed software.

Net cash provided by operating activities in 2008 decreased by $1.7 million compared to 2007, primarily due to a decrease in net income of $18.7 million. The decrease in net income was primarily due to the reversal of our tax valuation allowance in 2007, which resulted in a $17.5 million benefit to income tax expense. This net income decrease was offset by a $18.2 million year-over-year increase in deferred taxes and a decrease in the net change of operating assets and liabilities, which was partially offset by increases in depreciation and amortization expense, non-cash stock-based compensation expense and impairment of investments.

Investing Activities

Net cash used in investing activities in 2009 decreased by $7.7 million compared to 2008. During 2008, $7.7 million was invested in purchases of non-marketable securities.

Net cash used in investing activities in 2008 increased by $9.0 million compared to 2007. This increase in net cash used in investing activities was primarily due to a $7.7 million increase in investments in non-marketable securities in 2008 and a net increase in purchases of property and equipment and internally developed software.

Financing Activities

Net cash provided by (used in) financing activities in 2009 decreased by $3.0 million compared to 2008, primarily due to $6.1 million in purchases of our common stock in 2008, which was offset by the receipt of net proceeds of $8.8 million from the issuance of our series C preferred stock in 2008. In 2009, we purchased $0.2 million of our common stock.

 

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Net cash provided by financing activities in 2008 increased by $2.0 million compared to 2007, primarily due to the receipt of $8.8 million in net proceeds from the issuance of our series C preferred stock in 2008, which was offset by $6.1 million in purchases of our common stock in 2008. In 2007, we received net proceeds of $0.8 million from the issuance of our common stock.

We believe that our current level of cash generation, together with our existing current assets and the estimated proceeds from this offering will adequately support our operations and capital expenditures over the next 12 months.

Commitments

The following table sets forth information regarding our contractual obligations as of December 31, 2009:

 

     Payments Due by Period
     Total    Less than
1 year
   1-3
years
   3-5
years
   More than
5 years
     (In thousands)

Operating leases (1)

   $ 37,145    $ 2,409    $ 5,927    $ 6,956    $ 21,853
                                  

Total

   $ 37,145    $ 2,409    $ 5,927    $ 6,956    $ 21,853
                                  

 

(1) We lease facilities under non-cancelable operating leases expiring at various dates through 2020. These amounts include the effects of two leases entered into subsequent to December 31, 2009.

The table above does not reflect the following:

 

   

Amounts estimated for uncertain tax positions since the timing and likelihood of such payments cannot be reasonably estimated.

 

   

Voluntary employer matching contributions to our defined contribution benefit plans since the amount cannot be reasonably estimated. For the years ended December 31, 2007, 2008 and 2009, we made voluntary employer matching contributions of $0.2 million, $0.4 million and $0.4 million, respectively.

 

   

Payments to be made under our platform services agreement with FundQuest. The FundQuest agreement requires, among other things, that we make a payment to FundQuest after the fifth year of the agreement based on the average revenues we receive from FundQuest over the first five years of the contract’s term. We cannot reasonably estimate the amount of these payments. See “—Recent Developments”.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Recent Accounting Pronouncements

In May 2009, the FASB issued authoritative guidance to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events, whether that evaluation date is the date of issuance or the date the financials statements were available to be issued, and alerts all users of financial statements that an entity has not evaluated subsequent events after that evaluation date in the financial statements being presented. The guidance is effective for financial statements issued for fiscals years and interim periods after June 15, 2009. The adoption of this guidance had no impact on our consolidated financial statements. In preparing the consolidated financial statements included elsewhere in this prospectus, we have evaluated subsequent events through the date that the financial statements were available to be issued, and during this period there were no material subsequent events that required disclosure other than as described in note 19 to the notes to the consolidated financial statements.

 

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In October 2009, the FASB issued authoritative guidance that enables vendors to account for products or services sold to customers (deliverables) separately rather than as a combined unit, as was generally required by past guidance. The revised guidance provides for two significant changes to the existing multiple element revenue arrangement guidance. The first change relates to the determination of when individual deliverables included in a multiple element arrangement may be treated as separate units of accounting. The second change modifies the manner in which the transaction consideration is allocated across the separately identified deliverables. This guidance also significantly expands the disclosures required for multiple-element revenue arrangements. The guidance is required to be adopted in fiscal years beginning on or after June 15, 2010, but early adoption is permitted. We are currently evaluating the impact of the adoption of this guidance, if any, on our consolidated financial statements.

In October 2009, the FASB issued authoritative guidance that changes the accounting model for revenue arrangements that include both tangible products and software elements so that tangible products containing software components and nonsoftware components that function together to deliver the tangible product’s essential functionality are no longer within the scope of the software revenue guidance in Accounting Standards Codification (“ASC”) Subtopic 985-605. In addition, this guidance requires hardware components of a tangible product containing software components always be excluded from the software revenue guidance. The guidance is required to be adopted in fiscal years beginning on or after June 15, 2010, but early adoption is permitted. We are currently evaluating the impact of the adoption of this guidance, if any, on our consolidated financial statements.

Quantitative and Qualitative Disclosures About Market Risk

Market risk

Our exposure to market risk is directly related to revenues from asset management or administration services earned based upon a contractual percentage of AUM or AUA. 78% and 73% of our revenues for the years ended December 31, 2008 and 2009, respectively, were derived from revenues based on the market value of AUM or AUA. We expect this percentage to vary over time. A decrease in the aggregate value of AUM or AUA may cause our revenue and income to decline.

Foreign currency risk

The expenses of our India subsidiary, which primarily consist of expenditures related to compensation and benefits, are paid using the Indian Rupee. We are directly exposed to changes in foreign currency exchange rates through the translation of these monthly expenditures into U.S. dollars. We estimate that a hypothetical 10% increase in the value of the Indian Rupee to the U.S. dollar would result in a decrease of $0.4 million to pre-tax earnings and a hypothetical 10% decrease in the value of the Indian Rupee to the U.S. dollar would result in a $0.3 million increase to pre-tax earnings.

Interest rate risk

We have no debt and therefore we are not directly exposed to interest rate risk.

 

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BUSINESS

Our Company

We are a leading independent provider of technology-enabled, Web-based investment solutions and services to financial advisors. Our integrated technology platform allows financial advisors to provide their clients with highly flexible investment solutions and services. 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. 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, “open architecture” 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. 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, which allow advisors to use the research and recommendations of other investment experts, as well as to our internal investment management and portfolio consulting group, Portfolio Management Consultants, or PMC.

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.

While our technology platform is designed for financial advisors working at any size and type of financial services firm, we target our sales and marketing efforts towards:

 

   

Independent financial advisors that are part of small to mid-sized financial advisory firms; and

 

   

Enterprise clients. In some cases, enterprise clients establish relationships with more than one platform provider, allowing their financial advisors to choose the technology platform that best supports their

 

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needs. In these cases, we focus sales efforts on the firm’s affiliated financial advisors to demonstrate the distinguishing features of our technology solutions and to work with them on transitioning their assets onto our technology platform. Other enterprise clients hire us to be their exclusive technology platform provider, and all financial advisors with that firm will transition their client accounts to our technology platform.

Our small to mid-sized customers include registered investment advisors, or RIAs, which are financial advisors registered with a state securities commissioner and/or the Securities and Exchange Commission, or SEC, and who typically receive fees based on a percentage of the client assets they manage, independent broker-dealers, or IBDs, which provide processing and oversight for their affiliated financial advisors who are registered with the Financial Industry Regulatory Authority, or FINRA, and dually registered advisors, which are financial advisors registered with both the SEC and FINRA.

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. 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. As of December 31, 2009, approximately $38 billion of investment assets for which we receive asset-based fees were managed or administered utilizing our technology platform by approximately 8,400 financial advisors in approximately 175,000 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. Licensing fees are generally fixed for the 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. Generally, our licensing contracts range from two to five years and have annual renewal provisions. As of December 31, 2009, the average term of our license agreements was 3.7 years with an average remaining term of 1.5 years. Licensing fees accounted for 9%, 19% and 24% of our total revenues for the years ended December 31, 2007, 2008 and 2009, respectively. Fees received in connection with professional services accounted for the remainder of our total revenues. As of December 31, 2009, approximately $51 billion of investment assets for which we receive licensing fees for utilizing our technology platform were serviced by approximately 5,500 financial advisors through approximately 511,000 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.

 

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The following table sets forth for the quarters indicated the assets that were managed or administered on our technology platform by financial advisors:

LOGO

The following table sets forth for the quarters indicated the number of accounts financial advisors serviced through our technology platform:

LOGO

 

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The following table sets forth as of December 31 of the year indicated the number of financial advisors that had client accounts on our technology platform:

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 and Trivandrum, India.

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 financial assets totaled $45.1 trillion as of December 31, 2009, up from $41.7 trillion in 2008 and $35.3 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, according to Cerulli Associates, in 2009, there were approximately 312,000 financial advisors registered with FINRA or the SEC that were focused on retail investors.

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. 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. These independent firms include IBDs for FINRA-registered financial advisors, RIAs working as sole practitioners or as part of small firms with SEC registrations, and dually registered financial advisors. We believe this trend was accelerated in the past two to three years as a result of the reputational harm suffered by several of the largest financial institutions during the recent financial crisis. In particular, according to Cerulli Associates, an estimated 44% of financial advisors were considered independent in 2009, compared to 41% as of 2005, and Cerulli Associates projects that 50% of financial advisors will be independent by the end of 2012. Moreover, according to projections by Cerulli Associates, by December 31, 2012 the percentage of assets invested by retail clients with independent financial

 

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advisors is expected to nearly equal the percentage invested with financial advisors employed by large financial institutions—39% and 41%, respectively, as compared with 31% and 48%, respectively, as of December 31, 2007.

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. In addition, IBDs and RIA firms have been incented to enhance the sophistication of their technology platforms in order to attract financial advisors from larger financial institutions. In addition, we believe financial advisors generally favor technology solutions that enable them to spend more time on asset allocation, fund and manager selection and client interaction, rather than on administrative or technology-related activities. We believe that advanced technological support is a key driver for growth in an independent financial advisor’s business. For example, an advanced technology platform with fully integrated tools helps reduce the need for the manual processing of data and the use of multiple incompatible technology applications, allowing financial advisors to spend more time interfacing with their clients, while also potentially allowing the financial advisor to reduce technology-related costs.

Increased use of financial advisors. We believe that the recent significant volatility and increasing complexity in securities markets have resulted in increased investor interest in receiving professional financial advisory services. According to Cerulli Associates, the percentage of households investing through a financial advisor increased from 50% to 58% from August 2008 to June 2009 and independent financial advisors are well positioned to attract clients interested in managed account solutions over the next three years. From December 31, 2002 to September 30, 2009, managed account assets with independent financial advisor accounts grew from 17% to 27% of total separate account assets. In addition, according to Cerulli Associates, financial advisors that serve as portfolio managers have had their assets under management grow at a compound annual growth rate of 25% from $62 billion in 2002 to $293 billion in 2009.

Increased use of fee-based investment solutions. In order for financial advisors to effectively manage their clients’ assets, we believe they are utilizing 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. According to Cerulli Associates, the percentage of commission-only financial advisors declined from 18% in 2003 to 12% in 2008. We believe that financial advisors will increasingly require a sophisticated technology platform to support their ability to address their clients’ needs.

More stringent standards applicable to financial advisors. In light of the economic crisis and related securities market volatility in 2008 and 2009, we believe that there will be increased attention on investor consumer protection, whether as a result of regulatory changes, voluntary industry initiatives or competitive dynamics. 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 will benefit from utilizing a technology platform, such as ours, that allows them to address their clients’ wealth management needs, manage and memorialize decisions made throughout the process, and that assists them with recordkeeping and account monitoring.

Competitive Strengths

We believe we benefit from the following competitive strengths:

 

   

Superior integrated wealth management technology platform. We believe we offer financial advisors the widest range of tools, features, functionality and services in a single, integrated Web-based technology platform. By providing such a broad range of functionality and services, including, for example:

 

   

enabling the financial advisor’s employer, which we refer to as the home office, to monitor the activity of all of its financial advisors using our technology platform,

 

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providing access to UMAs that allow for flexible asset allocation and separate performance reporting relating to each investment solution held within the UMA account,

 

   

allowing third-party investment managers to be notified when financial advisors create client proposals which include an investment product offered by the investment manager,

 

   

providing reconciled trade-ready securities price data each day before securities markets open and

 

   

offering a tool that allows financial advisors and the home office to track account-related administrative processes, such as the account opening process, and account service issues efficiently and accurately,

our technology platform addresses financial advisors’ front-, middle- and back-office needs. In addition, our technology platform enables financial advisors to be more productive and efficient and allows them to more effectively address their clients’ needs.

 

   

Access to a wide range of investment solutions. We believe financial advisors value having access to the widest range of investment solutions through a single, integrated technology platform. 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 management and portfolio consulting group, PMC, that may be engaged to manage or assist in the management of assets of financial advisors’ clients. Our technology platform also provides financial advisors with access to a full range of investment solutions, including SMAs, UMAs, mutual funds, mutual fund wrap accounts, ETF portfolios and alternative investments, such as access to hedge funds, when appropriate. Our technology platform also has the flexibility to add separate account managers or investment solutions not currently available on our technology platform upon request.

 

   

Enabling choice through open architecture. Our centrally hosted technology platform is designed based on the principle of “open architecture” and 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. In addition, unlike many of our competitors, our technology platform provides financial advisors with the ability to freely choose from investment solutions and services offered by third-party providers, including a choice of 14 leading third-party custodians with whom financial advisors’ clients may hold their investment funds and a broad range of investment programs and products, as well as from investment solutions and services that we develop internally. We believe that this freedom of choice is a key distinguishing feature of our technology platform valued by clients.

 

   

Independent and unbiased technology services provider. Unlike many of our competitors, 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. Because we are not controlled by a custodian or large provider of investment products, we are not required to offer or recommend investment products or services provided by a parent company or affiliate. As a result, we offer a wider range of options to financial advisors than many of our competitors. In addition, investment products and services offered by our internal research team, PMC, compete openly with products and services available from third parties. We believe that financial advisors and their clients place significant value on working with independent and unbiased service providers and that financial advisors perceive us to be more independent and unbiased than our competitors.

 

   

Significant operating scale and efficiency. We believe that the scale of our operations provides us with a number of competitive advantages. First, we believe that because our technology platform supported approximately $89 billion of investment assets as of December 31, 2009, financial advisors have confidence in our ability to meet their needs through volatile securities markets and challenging macroeconomic conditions. Second, we believe that the scale of our operations enables us to provide investment solutions and services efficiently and cost-effectively. Third, we believe our scale better

 

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positions us to enter into strategic relationships, such as our recently announced platform services agreement with FundQuest. Fourth, the significant investment that has been required to build our technology platform, which includes our ability to connect to 14 third-party custodians and engage 250 separate account managers, presents a significant barrier to entry for potential competitors in our industry. In addition, our operating efficiency is enhanced through our India operations, which provide, among other services, daily portfolio accounting, trade reconciliation and technical support on a cost-effective basis.

 

   

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, including Advisor Group (formerly AIG), Fifth Third, Loring Ward, Mesirow, National Financial, NFP, NPH, Russell, TD Ameritrade and Thomas Weisel. As of December 31, 2009, we had 31 enterprise clients, worked with approximately 1,000 RIAs and IBDs and served approximately 14,000 financial advisors. We believe that our existing relationships with enterprise clients enhance our ability to obtain additional enterprise client relationships. In addition, we believe that once our clients begin to take advantage of the wide range of investment solutions and services to which our technology platform provides access, they are less likely to terminate their relationship with us and replace us with one of our competitors. Since December 31, 2005, we have retained 100% of our top ten enterprise client relationships.

 

   

Proven management team. Our senior management team has a track record of working together, both at our company and at prior companies. In addition, our senior management team has experienced extremely low turnover, with our founder and co-founders still actively involved in the 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. We intend to work with more of the financial advisors employed by or affiliated with our enterprise clients. Generally, when we establish an enterprise client relationship, we are provided access to the client’s financial advisors and given the opportunity to move them 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%. Despite that growth, we have the opportunity to continue increasing the number of financial advisors we serve within our existing enterprise client relationships. For example, within three of our top enterprise clients, we estimate that we worked with only 22% to 36% of their financial advisors as of December 31, 2009. Through our regional sales and client service teams, we intend to continue the process of introducing and adding new financial advisors to our technology platform from our existing enterprise client relationships.

 

   

Extend the account base within a given advisor relationship. We intend to broaden our relationships with our existing financial advisor customers. During the four year period ending December 31, 2009, the average number of AUM or AUA accounts per advisor on our technology platform has grown from approximately 11 to 21, an increase of 91%. As a result, total AUM or AUA accounts have grown at a compound annual growth rate of 39% during the past four years. As our working relationship with our financial advisor customers develops, we will seek to move more of their clients’ assets onto our technology platform.

 

   

Expand the services we provide each advisor. We intend to expand the range of investment solutions and services that each of our financial advisor customers utilizes. Since in many cases, when we first enter into a client relationship with a financial advisor, the financial advisor utilizes some, but not all, of the investment solutions and services provided through our technology platform, we will continue to work with our financial advisor customers to expand the scope of the investment solutions and services they employ.

 

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Obtain new enterprise clients. Enterprise clients provide us with access to a large number of financial advisors that may be interested in utilizing our technology platform. Our enterprise sales team is focused exclusively on obtaining new enterprise client relationships. During the past four years, eight new enterprise client relationships have added over 1,700 financial advisors to our technology platform. In 2010, we expect the recently announced agreement with FundQuest will add over 6,200 financial advisors to our technology platform. Once we obtain a new enterprise client, we focus our efforts on developing relationships with the client’s financial advisors and then deepening and broadening these relationships, as discussed above. New enterprise clients provide further opportunities to execute on the strategies identified above.

 

   

Continue to invest in our technology platform. To continue to attract and retain enterprise clients and financial advisors, and to deepen our relationships with them, we intend to continue to invest in our technology platform to provide financial advisors with access to investment solutions and services that address the widest range of the financial advisors’ front-, middle- and back-office needs. 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. We will continue to invest to develop 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 our PMC group.

 

   

Continue to pursue strategic transactions and other relationships. We intend to continue to selectively pursue strategic acquisitions, investments and other relationships that we believe can significantly enhance the attractiveness of our technology platform or expand our client base. For example, we recently entered into a platform services agreement with FundQuest, described above. We believe we have been historically successful in identifying and executing strategic transactions that have complemented our business and allowed us to compete more effectively in our industry. Given our scale of operations and record of past transactions, we believe we are well positioned to engage in such transactions in the future.

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. We have designed our technology platform and infrastructure to allow us to grow our business efficiently, without the need for significant additional expenditures as assets grow and with low marginal costs required to add additional accounts new investment solutions and services. Furthermore, after we have contracted with a financial advisor and transitioned the associated assets to our technology platform, we are able to add additional assets to our technology platform with minimal incremental costs. This enables us to generate substantial operating leverage during the course of our relationship with a financial advisor as the assets of the advisor’s clients grow, through the addition of advisors utilizing our technology platform and through the financial advisors’ use of additional investment solutions and services.

 

   

Recurring and resilient revenue base. The substantial majority of our revenues is recurring and is derived either from asset-based fees, which are billed at the beginning of each quarter and from fixed fees under multi-year license agreements. For the year ended December 31, 2009, we derived 73% and 27% of our total revenues from asset-based fees and from licensing and professional services revenues, respectively.

 

   

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 the multitude of services that we provide. Because a technology platform is involved in nearly all of a financial advisor’s activities needed to serve their clients, once a financial advisor has moved clients and their assets onto our technology platform, significant time, costs and/or resources would be required for the financial advisor to shift to another technology platform.

 

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Favorable industry trends. As an independent provider of technology services to financial advisors, we believe we are well positioned to take advantage of favorable secular 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.

Our Technology Platform

Our proprietary Web-based technology platform provides financial advisors with access to investment solutions and services that address, in one integrated, centrally hosted platform, what we believe is the widest range of front-, middle- and back-office needs in our industry. The “open architecture” design of our technology platform provides financial advisors with flexibility in terms of the investment solutions and services they access, and configurability in the manner in which the financial advisors utilize particular investment solutions and services. The multitenant architecture of the platform ensures that this level of flexibility and customization is achieved without requiring us to create unique application “instances” for each client, thereby reducing the need for additional technology personnel and associated expenses. In addition, though our technology platform is designed to deliver a breadth of functions, financial advisors are able to select from the various investment solutions and services we offer, without being required to subscribe to or purchase more than what they believe is necessary.

 

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The following provides a description of the investment solutions and services that financial advisors may access through our technology platform:

Broad Technology Service Offering with Multiple Access Points

LOGO

Financial Planning. Our technology platform integrates with a number of financial planning tools such as Monte Carlo simulations, portfolio diagnostics and estate and retirement planning that enables financial advisors to create and implement a financial plan for clients that is tailored to the client’s investment goals, risk tolerance and assets.

Risk Assessment and Investment Policy. Our technology platform provides financial advisors with a customizable risk tolerance questionnaire to complete with clients. The questionnaire assists financial advisors in understanding the investment objectives and preferences of their clients. Questionnaire content may be customized to reflect the client’s particular circumstances. The questionnaire also helps the financial advisor comply with applicable regulatory requirements regarding the suitability of investments and fiduciary obligations.

Asset Allocation Strategy. Our technology platform provides financial advisors with significant flexibility in determining the appropriate asset allocation strategy for their clients. The financial advisor may utilize asset allocation recommendations designed by the financial advisor, the financial advisor’s employer or affiliated financial institution, or an outside third-party asset manager or recommendations that are provided through our technology platform. As further described below, through our technology platform’s overlay services, our PMC group can provide ongoing review and monitoring of asset allocation decisions in order to make adjustments that may be necessary to respond to changing market conditions or client circumstances.

Research and Due Diligence. Our technology platform provides financial advisors with extensive resources to research and review information relating to third-party asset managers, investment solutions and other related

 

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services that the financial advisor may elect to recommend to clients. Through our technology platform, the financial advisor may utilize research and due diligence capabilities that are provided by the advisor’s firm, third-party service providers or PMC. The information obtained through research and due diligence activities may be organized and presented in highly customizable formats depending on the needs of the financial advisor’s clients.

Portfolio Construction. Once investment objectives, risk tolerance and asset allocation have been determined, and the financial advisor has completed any necessary research and due diligence, our technology platform allows the financial advisor to select investment solutions using a wide range of portfolio construction tools. The portfolio construction process is highly flexible, allowing the financial advisor to select the investment solutions, including through the creation of model portfolios, or to engage outside investment managers to assist in, or completely undertake, portfolio construction.

Asset Management and Investment Programs. Once the investment solutions have been selected, our technology platform allows the financial advisor to choose from a wide range of investment programs, including SMAs, UMAs, third-party strategist programs, mutual fund and ETF programs, and others, depending on the financial advisor’s assessment of the client’s needs. Because our technology platform supports nearly every investment program type that is currently available, financial advisors are able to keep more of a client’s assets on one technology platform, thereby simplifying the operation of their business, saving time and lowering costs.

Proposals, Presentation and Fee Calculation. Our technology platform provides financial advisors with a flexible proposal and presentation tool that is capable of creating highly customized documents. Presentations and proposals may be prepared utilizing the financial advisor’s personalized branding and content, while also integrating the client’s particular investment account information. In addition, extensive fee-related information may be prepared and included in such presentations or proposals.

Implementation and Account Administration. Our technology platform provides financial advisors with access to 14 third-party custodians, real-time data and Web-based service tools. In addition, the “open architecture” design of our technology platform allows us to respond to financial advisors’ needs that may not be currently addressed by our technology platform, including, for example, establishing relationships with additional custodians or third-party asset managers. Our technology platform also supports financial advisors through the management of account paperwork and by facilitating communications with any third-party asset managers that the financial advisor may have engaged.

Account Management and Overlay. After a financial advisor has created a client account and selected investment solutions and programs, our technology platform provides access to ongoing account management services, which we refer to as overlay services. These services include ongoing review of investment portfolios for compliance with asset allocation criteria, with rebalancing recommendations made as necessary, assistance with investment portfolio tax management and review of investment accounts to ensure that investment decisions are consistent with the client’s investment objectives. Ongoing account management tools may also be used to assist the financial advisor in reviewing compliance with their clients’ investment restrictions, including relating to securities issued by specific companies or from issuers in certain industries that the client does not want included in its investment account.

Reporting and Monitoring. Through our India operations, our technology platform provides financial advisors with access to client account data reconciled daily with records maintained by custodians. Accordingly, when securities markets open each day, financial advisors have the most up-to-date account data available. In addition, our technology platform is capable of producing highly configurable account performance reports for financial advisors to provide to their clients that can be downloaded, viewed on-line or printed.

Communications and Education. We believe that for financial advisors who operate within large financial institutions, the ability to communicate quickly and effectively with supervisors or firm management is important. Our technology platform provides supervisors or firm management with the ability to distribute notifications and announcements to advisors through the home page of the user interface. Resources are also available to assist financial advisors with practice management and education.

 

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Billing Services. Our technology platform supports a wide range of fee and billing structures, including breakpoint pricing, where lower fee rates are applied as asset levels meet or exceed pre-established thresholds, fees based on aggregated client funds across several accounts held by family members, fees tailored to different investment programs and investment solution types and other customized fee and billing arrangements.

Portfolio Management Consultants

Our PMC group primarily engages in two sets of activities:

 

   

Consulting services aimed at providing financial advisors with additional support in addressing their clients’ needs. The consulting services are focused on asset allocation modeling, asset manager and mutual fund due diligence, selection and ongoing monitoring, investment portfolio construction and overlay services, principally relating to ongoing portfolio management and asset allocation rebalancing.

 

   

Creation of proprietary investment solutions and products, including separate account strategies, multi-manager portfolios, mutual funds, mutual fund wrap and ETF portfolios. PMC’s investment solutions and products are discussed below.

PMC’s Investment Solutions and Products

PMC provides a wide range of investment solutions and products aimed at addressing different investor objectives and risk profiles. PMC’s investment solutions and products include:

 

   

Managed Account and Multi-Manager Portfolios. PMC provides financial advisors with access to SMAs, which allow advisors to offer their investor clients a customized, professionally-managed portfolio of securities with a personalized tax basis, manager blend portfolios, which utilize several asset managers to provide clients with diversification across multiple investment styles and asset classes within a single investment account, and multi-manager accounts, which provide clients, within a single investment account, with access to multiple separate account managers and mutual fund products in order to obtain diversification across asset classes, investment styles and investment products. PMC also conducts research and due diligence on a number of the separate asset managers to which it provides access.

 

   

Mutual Fund Portfolios. PMC offers a range of packaged mutual fund portfolios aimed at helping financial advisors address different client needs. These mutual fund portfolios include a series of products marketed under the “SIGMA Mutual Fund Solutions” brand, which provide for different allocations of a variety of equity- and fixed income-focused mutual funds tailored to address investors’ differing investment time horizons, portfolios of mutual funds marketed under the “PMC Select Portfolios” brand, which are tailored to be more attractive to smaller account sizes because they feature a full range of asset allocation targets built to meet various investment and risk levels in a single investment vehicle, portfolios of mutual funds marketed under the “PMC Enhanced Portfolio Strategies” brand, which offer asset class diversification strategies in a traditional mutual fund structure, and portfolios of mutual funds marketed under the “PMC Ultra Short Term Fixed Income” brand, which offer a fixed income portfolio aimed at providing investors with an attractive alternative to money market fund yields.

 

   

ETF Portfolios. PMC also offers pre-packaged portfolios of ETFs, ranging from products that simply track movements in a specified securities index to tailored products that are designed to outperform broad market indexes by focusing on expected increases in the value of securities issued by certain companies or issuers in specified industries.

 

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Our Customers

Independent financial advisors that are working alone or as part of small to mid-sized financial advisory firms. Our principal value proposition aimed at independent financial advisors working alone or as part of small to mid-sized firms is that our technology platform allows them to compete effectively with financial advisors employed by large financial institutions. We provide independent financial advisors with access to as many or more of the investment solutions and services that are typically available to financial advisors working at the larger firms. An example of one our smaller independent financial advisor clients is Commonwealth.

Enterprise clients. We provide enterprise clients with a customized, private-labeled technology platform that enables them to support their affiliated financial advisors with a broad range of investment solutions and services. Our enterprise clients generally have more than 50 financial advisors using our technology platform. Our contracts with enterprise clients establish the applicable terms and conditions, including pricing terms, service level agreements and basic platform configurations. Examples of our enterprise clients include Fidelity, Northwestern Mutual, National Financial Partners, National Planning Corporation and Russell Investments.

Sales and Marketing

Our sales and marketing staff is divided into three teams. The Enterprise Sales team, made up of 9 employees, focuses on entering into agreements with enterprise clients. The Advisory Sales team has 8 regions, 16 employees and is focused on selling to the individual financial advisors of IBDs and entering into agreements with RIA firms pursuant to which the financial advisors agree to convert some or all of their clients onto our technology platform. Our third sales and marketing team has 6 employees from our PMC group. This team is focused on assisting financial advisors with constructing client portfolios and provides information regarding PMC’s proprietary investment solutions and products.

The principal aim of our marketing efforts is to create greater visibility of our company and provide thought leadership to the wealth management industry. Our marketing efforts are focused on our core markets: financial advisors and enterprise clients. We use advertising and public relations to communicate our message to these target markets. Examples of these marketing efforts include:

 

   

quotes in wealth management industry publications regarding our views on financial advisor trends and challenges;

 

   

advertising and other marketing materials promoting our investment solutions and services;

 

   

frequent participation in industry conferences and tradeshows, including by making presentations and speaking on panels;

 

   

hosting conferences on wealth management solutions;

 

   

providing insights on industry trends through internal research and sponsoring and writing industry white papers; and

 

   

creating marketing tools for financial advisors to better communicate with their current and prospective clients.

 

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Competition

We generally compete on the basis of several factors, including the breadth and quality of investment solutions and services to which we provide access through our technology platform, the number of custodians that are connected through our technology platform, the price of our investment solutions and services, the ease of use of our technology platform and the nature and scope of investment solutions and services that each client believes are necessary to address their needs. Our competitors offer a variety of products and services that compete with one or more of the investment solutions and services provided through our technology platform, although we believe that none offer the same comprehensive set of products and services that we do. Our principal competitors include:

 

   

Custodians. A number of leading asset custodians, such as Pershing (a subsidiary of BNY Mellon Corporation) and The Charles Schwab Corporation, have expanded beyond their custodial businesses to also offer advisor trading tools that compete with our financial advisor-directed solutions.

 

   

Turnkey Asset Management Platform Providers. Providers of turnkey asset management platforms, including SEI Investments Company, Genworth Financial Inc. and Lockwood Advisors (a subsidiary of BNY Mellon Corporation), typically provide financial advisors with one or more types of products and services but generally offer fewer choices in terms of custodians, asset managers, technology features and functionality.

 

   

Providers of Specific Service Applications. A number of our competitors provide financial advisors with a product or service designed to address one specific issue or need, such as financial planning or performance reporting. Examples of such firms include Advent Software, Inc. and Morningstar, Inc. While our technology platform also provides access to these investment solutions or services, financial advisors may elect to utilize a single application rather than a fully integrated platform.

Technology

Our technology platform features a three-tier architecture integrating a Web-based user interface, an application tier that houses the Java-based business logic for all of the platform’s functionality and a SQL Server database. The application tier resides behind load balancers which distribute the workload demands across our servers. We believe our technology design allows for significant scalability.

We devote significant resources to ensuring sufficient platform capacity and system uptime. In 2009, our actual uptime was 99.6%. We have achieved Type I and Type II SAS70 compliance with our platform and we maintain multiple redundancies, back up our databases and safeguard technologies and proprietary information consistent with industry best practices. We also maintain a comprehensive business continuity plan and company-wide risk assessment program that is consistent with industry best practices and that complies with applicable regulatory requirements.

We have historically made significant investments in platform development in order to enhance and expand our technology platform and expect to continue to make significant investments in the future. In the years ended December 31, 2007, December 31, 2008 and December 31, 2009, we incurred technology development expenditures totaling approximately $4.2 million, $4.5 million and $4.5 million, respectively. Of these expenditures, we capitalized approximately $1.9 million, $1.7 million and $1.3 million, respectively, as internally developed software. We expect to continue focusing our technology development efforts principally on adding strategic features to increase our market competitiveness, enhancements to improve operating efficiency and reduce risk and client-driven requests for new capabilities.

Intellectual Property and Proprietary Rights

We rely on a combination of trademark, copyright and trade secret protection laws to protect our proprietary technology and our intellectual property. We seek to control access to and distribution of our proprietary information. We enter into confidentiality agreements with our employees, consultants, customers and vendors that generally provide that any confidential or proprietary information developed by us or on our behalf be kept

 

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confidential. In the normal course of business, we provide our intellectual property to third parties through licensing or restricted use agreements. We have proprietary know-how in algorithms, implementation and business on-boarding functions, along with a wide variety of applications software. We also pursue the registration of certain of our trademarks and service marks in the United States. We have registered the mark “ENVESTNET” with the U.S. Patent and Trademark Office. In addition, we have registered our domain name, www.envestnet.com with Register.com, Inc. and maintain several additional websites, such as www.envestnetpmc.com, investpmc.com and envestnetadvisor.com (registered with Network Solutions, LLC). We have established a system of security measures to protect our computer systems from security breaches and computer viruses. We have employed various technology and process-based methods, such as clustered and multi-level firewalls, intrusion detection mechanisms, vulnerability assessments, content filtering, antivirus software and access control mechanisms. We also use encryption techniques for data transmissions. We control and limit access to confidential and proprietary information on a “need to know” basis.

Regulation

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 regulatory scheme, including regulation at the Federal and state level, as well as regulation by self-regulatory organizations and non-U.S. regulatory authorities. In addition, we are subject to numerous laws and regulations of general application.

Our wholly-owned subsidiaries, Envestnet Asset Management, Inc., Portfolio Management Consultants, Inc. and Oberon Financial Technology, Inc. operate investment advisory businesses. These subsidiaries are registered with the SEC as “investment advisers” under the Advisers Act, and are regulated thereunder. Many of our investment advisory programs are conducted pursuant to the non-exclusive safe harbor from the definition of an “investment company” provided for under Rule 3a-4 under the Investment Company Act. If Rule 3a-4 were to cease to be available, or if the SEC were to modify the rule or its interpretation of how the rule is applied, it could have a substantial effect on our business. Envestnet Asset Management, Inc. serves as the investment adviser to four mutual funds. Mutual funds are registered as “investment companies” under the Investment Company Act. The Advisers Act and the Investment Company Act, together with related regulations and interpretations of the SEC, impose numerous obligations and restrictions on investment advisers and mutual funds, including recordkeeping requirements, limitations on advertising, disclosure and reporting obligations, prohibitions on fraudulent activities, and detailed operating requirements, including restrictions on transactions between an adviser and its clients, and between a mutual fund and its advisers and affiliates. The fiduciary obligations of investment advisers to their clients require advisers to, among other things, consider the suitability of the investment products and advice they provide, seek “best execution” for their clients’ securities transactions, conduct due diligence on third-party products offered to clients, consider the appropriateness of the adviser’s fees, and provide extensive and ongoing disclosure to clients. The application of these requirements to wrap fee programs is particularly complex and the SEC has in the past scrutinized firms’ compliance with these requirements. The SEC is authorized to institute proceedings and impose fines and sanctions for violations of the Advisers Act and the Investment Company Act and has the power to restrict or prohibit an investment adviser from carrying on its business in the event that it fails to comply with applicable laws and regulations. Though we believe we are in compliance in all material respects with the requirements of the Advisers Act and the Investment Company Act and the rules and interpretations promulgated thereunder, our failure to comply with such laws, rules and interpretations could have a material adverse effect on us.

Portfolio Brokerage Services, Inc., or PBS, our broker-dealer subsidiary, is registered as a broker-dealer with the SEC under the Securities Exchange Act of 1934, or the Exchange Act, in all 50 states and the District of Columbia. In addition, PBS is a member of FINRA, the securities industry self-regulatory organization that supervises and regulates the conduct and activities of broker-dealers. 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 customers’ funds and securities, capital structure, record-keeping and the conduct of directors, officers, employees, representatives and associated persons. FINRA and the SEC conduct periodic

 

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examinations of the operations of its members, including PBS. Violation of applicable regulations can result in the suspension or revocation of a broker-dealer’s registration, the imposition of censures or fines and the suspension or expulsion of the broker-dealer from FINRA. PBS is subject to minimum net capital requirements under the Exchange Act, SEC and FINRA rules and conducts its business pursuant to the exemption from the SEC’s customer protection rule provided by Rule 15c3-3(k)(2)(i) under the Exchange Act. As of December 31, 2009, PBS was required to maintain a minimum of $100,000 in net capital and its actual net capital was $696,396.

Our regulated subsidiaries are subject to various federal and state laws and regulations that grant supervisory agencies, including the SEC, broad administrative powers. In the event of a failure to comply with these laws and regulations, the possible sanctions that may be imposed include the suspension of individual employees, limitations on the permissibility of our regulated subsidiaries and our other subsidiaries to engage in business for specified periods of time, censures, fines, and the revocation of registration as a broker-dealer or investment adviser, as applicable. Additionally, the securities laws applicable to us and our subsidiaries provide for certain private rights of action that could give rise to civil litigation. Any litigation could have significant financial and non-financial consequences including monetary judgments and the requirement to take action or limit activities that could ultimately affect our business.

Additional legislation and regulations, including those relating to the activities of investment advisers and broker-dealers, changes in rules imposed by the SEC or other regulatory authorities and self regulatory organizations, or changes in the interpretation or enforcement of existing laws and rules may adversely affect our business and profitability. Our businesses may be materially affected not only by regulations applicable to it as an investment adviser or broker-dealer, but also by regulations that apply to companies generally.

Employees

As of December, 2009, we had 409 employees, including 53 in sales and marketing, 123 in engineering and systems, 184 in operations, 12 in investment management and research, and 37 in executive and corporate functions. Of these 409 employees, 184 were located in India. None of our employees are represented by a labor union. We have never experienced a work stoppage and believe our relationship with our employees is satisfactory.

Facilities

Our headquarters are located in Chicago, Illinois, and consist of approximately 30,000 square feet of leased space. We also lease office space in Denver, Colorado, New York, New York, Sunnyvale, California and two locations in Trivandrum, India. We believe that our office facilities are adequate for our immediate needs and that additional or substitute space is available if needed to accommodate the foreseeable growth of our operations.

Legal Proceedings

On November 23, 2009, we sued a private company and its chief executive officer seeking, among other things, unspecified damages for breaches of the investment agreement and operating agreement that we had entered into with the private company in December 2008 and a declaratory judgment that we own all rights in certain intellectual property. The private company has asserted claims against us in a separate suit and in a counterclaim filed on November 30, 2009, seeking, among other things, unspecified damages for breaches of the investment agreement and operating agreement and a declaratory judgment that the private company owns all rights in certain intellectual property related to a new product. The litigation is in its early stages. We believe that the claims against us are without merit and intend to defend ourselves and prosecute our claims vigorously.

We are also involved in other litigation arising in the ordinary course of our business. We do not believe that the outcome of any of the aforementioned proceedings, individually or in the aggregate, would, if determined adversely to us, have a material adverse effect on our results of operations, financial condition or business. However, the disclosed litigation is likely to result in higher than normal legal fees until it is resolved.

 

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MANAGEMENT

Directors, Executive Officers and Other Senior Management

The following table lists our directors expected to be in place upon effectiveness of the registration statement of which this prospectus forms a part, our executive officers and certain other member of our senior management:

 

Name

   Age   

Position(s)

Judson Bergman

   53    Chairman, Chief Executive Officer, Director

Ross Chapin

   57    Director

Gates Hawn

   61    Director

James Johnson

   71    Director

Paul Koontz

   49    Director

Yves Sisteron

   54    Director

William Crager

   46    President

Peter D’Arrigo

   42    Chief Financial Officer

Scott Grinis

   48    Chief Technology Officer

Shelly O’Brien

   44    General Counsel

Charles Tennant

   45    Chief Operating Officer

Brandon Thomas

   46    Chief Investment Officer

Lori Hardwick

   41    Executive Vice President, Advisory Services

James Lumberg

   44    Executive Vice President, Business Development

Karen McCue

   56    Executive Vice President, Family Office Services

Viggy Mokkarala

   50    Executive Vice President, Client Implementations

Babu Sivadasan

   37    Executive Vice President, Engineering

Michael Apker

   52    Managing Director, Strategic Development

Michael Henkel

   53    Managing Director, Retirement Services Group

James Patrick

   41    Managing Director, Advisor Managed Programs

Christopher Curtis

   38    Senior Vice President, Treasurer

Eric Fowler

   50    Senior Vice President, Director of Product Development

Dale Seier

   44    Senior Vice President, Finance

William Rubino, Jr.

   57    Chief Administrative Officer, PMC

Directors

Judson Bergman. Mr. Bergman is the founder of our company and has served as our Chairman, Chief Executive Officer and a director since 1999. Prior to founding our company, Mr. Bergman was Managing Director at Nuveen Investments, Inc., or Nuveen, a diversified investment manager. Mr. Bergman serves as a trustee of RS Investment Trust and RS Variable Products Trust, registered investment companies. Mr. Bergman received an MBA in finance and accounting from Columbia University and a BA in English from Wheaton College.

Ross Chapin. Mr. Chapin has served as a director of our company since 2001. Mr. Chapin is a Managing Director of Parametric Portfolio Associates LLC, a provider of structured portfolio management, which he joined as a senior executive in October 2005. Prior to Parametric, Mr. Chapin co-founded Orca Bay Partners, a private equity firm, in 1998 and remains a Managing Member of that firm. Mr. Chapin received an MBA from Columbia University in finance and accounting, and an undergraduate degree from Denison University.

 

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Gates Hawn. Mr. Hawn has served as a director of our company since 2004. Mr. Hawn is currently an independent Senior Advisor to Credit Suisse, an investment banking firm, and has worked for Credit Suisse or its predecessors since 2000, when the firm merged with Donaldson, Lufkin & Jenrette, or DLJ. Prior to the merger, Mr. Hawn had worked at DLJ since 1981. Mr. Hawn received an undergraduate degree from Williams College.

James Johnson. Mr. Johnson has served as a director of our company since 2000. Mr. Johnson is a General Partner and Founder of Apex Venture Partners, or Apex, a private equity firm, which he founded in 1988. Prior to founding Apex, Mr. Johnson was one of three founding partners of Knightsbridge Partners, a private investment firm. Mr. Johnson received an MBA from Northwestern University.

Paul Koontz. Mr. Koontz has served as a director of our company since 2004. Mr. Koontz has been a general partner at Foundation Capital Management, or Foundation Capital, a venture capital firm since 1996. Mr. Koontz serves on the boards of Financial Engines, Inc., Babycare (in Beijing), eBates, and the Stanford University DAPER Fund. Mr. Koontz received a masters in engineering management from Stanford University and a BS from Princeton University.

Yves Sisteron. Mr. Sisteron has served as a director of our company since 2004. Mr. Sisteron has been a Managing Partner and Co-Founder of GRP Partners, a private investment firm, since 2000. Mr. Sisteron serves on the boards of Ulta Salon, Cosmetics & Fragrance, Inc., HealthDataInsights, Inc., Kyriba Corp., Qualys, Inc., and Mobiclip, Inc. Mr. Sisteron holds a JD and an LLM from the University of Law (Lyon) and an LLM degree from the New York University School of Law.

Executive Officers

William Crager. Mr. Crager has served as our President since 2002. Prior to joining us, Mr. Crager served as Managing Director of Marketing and Client Services at Rittenhouse Financial Services, Inc., an investment management firm affiliated with Nuveen. Mr. Crager received an MA from Boston University and a BA from Fairfield University, with a dual major in economics and English.

Peter D’Arrigo. Mr. D’Arrigo has served as our Chief Financial Officer since 2008. Prior to joining us, Mr. D’Arrigo was Treasurer and VP/Managing Director at Nuveen. Mr. D’Arrigo received an MBA from the Northwestern University Kellogg Graduate School of Management and an undergraduate degree in applied mathematics from Yale University.

Scott Grinis. Mr. Grinis has served as our Chief Technology Officer since 2005. Prior to joining us, Mr. Grinis founded Aion, a company that developed expert systems and an inference engine and object technology used by financial services and insurance firms. Mr. Grinis received a BS and an MS degree in electrical engineering from Stanford University.

Shelly O’Brien. Ms. O’Brien has served as our General Counsel and Corporate Secretary since 2002. Prior to joining us, Ms. O’Brien was General Counsel and Director of Legal and Compliance for ING (U.S.) Securities, Futures & Options Inc., a broker-dealer, and futures commission merchant, Ms. O’Brien received a degree in political science from Northwestern University, a JD from Hamline University School of Law, and an LLM in taxation from John Marshall Law School.

Charles Tennant. Mr. Tennant has served as our Chief Operating Officer since 2007. Prior to joining us, Mr. Tennant was the Chief Operating Officer of Ameriprise Financial’s brokerage clearing services group from 2003 to 2007. Mr. Tennant received a degree in management information systems from the University of South Florida.

Brandon Thomas. Mr. Thomas is a Co-Founder of our company and has served as Chief Investment Officer and Managing Director of Portfolio Management Consultants, since 1999. Prior to joining us, Mr. Thomas was Director of Equity Funds for Nuveen. Mr. Thomas received an MBA from the University of Chicago, a JD from DePaul University and is a graduate of Brown University.

 

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Senior Management

Lori Hardwick. Ms. Hardwick has served as our Executive Vice President, Advisory Services since 2007. Prior to joining us in 2007, Ms. Hardwick ran the Registered Investment Advisor (RIA) Services Division at Nuveen where she founded the RIA division, creating unique services for the fee-based advisor community. Ms. Hardwick received an advanced executive education degree from the University of Chicago and an undergraduate degree from The Ohio State University, with honors.

James Lumberg. Mr. Lumberg is a Co-Founder of our company and has served as Executive Vice President, Business Development since 2000. Prior to joining us in 2000, Mr. Lumberg was employed by Nuveen from 1991 to 2000. At Nuveen, Mr. Lumberg served as Vice President and Director, Fixed Income Funds, where he worked with financial advisors in developing and implementing service and support programs that responded to the evolving demands of financial intermediaries, and as a portfolio manager responsible for managing fixed income mutual funds. Mr. Lumberg received an MLA in government studies from Harvard University and an undergraduate degree in business administration from Southern Methodist University.

Karen McCue. Ms. McCue has served as Executive Vice President, Family Office Services since 2004. Prior to joining us, Ms. McCue was Co-Founder and Chief Operation Officer of Net Asset Management in 2004, which merged with the company in 2004. Ms. McCue received a BA from the University of California at Los Angeles, earned the Personal Financial Planning designation in 1983, and received the Chartered Financial Analyst designation in 1986.

Viggy Mokkarala. Mr. Mokkarala has served as Executive Vice President, Client Implementations since 2004. Prior to joining us, Mr. Mokkarala co-founded Oberon Financial Technology, an asset management software company, which merged with the company in 2004. Mr. Mokkarala received a BS and an MS from the University of Wisconsin, Madison.