Envestnet
Annual Report 2012

Plain-text annual report

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-K xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the year ended December 31, 2012 ¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934Commission file number 001-34835 Envestnet, Inc.(Exact name of registrant as specified in its charter) Delaware 20-1409613(State or other jurisdiction ofincorporation or organization) (I.R.S EmployerIdentification No.)35 East Wacker Drive, Suite 2400, Chicago, IL 60601(Address of principal executive offices) (Zip Code)Registrant’s telephone number, including area code:(312) 827-2800 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class: Name of Each Exchange on Which Registered:Common stock, par value $0.005 per share NYSESecurities registered pursuant to Section 12(g) of the Act:NoneIndicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No xIndicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No xIndicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period thatthe registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No xIndicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No xIndicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer”and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ¨ Accelerated filer xNon-accelerated filer ¨ Smaller reporting company ¨Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No xAggregate market value of registrant’s common stock held by non-affiliates of the registrant, based upon the closing price of a share of the registrant’s common stock on June 30, 2012 as reported on The New YorkStock Exchange on that date: $205,972,224. For purposes of this calculation, shares of common stock held by (i) persons holding more than 5% of the outstanding shares of stock, and (ii) officers and directors of theregistrant, as of June 30, 2012, are excluded in that such persons may be deemed to be affiliates. This determination is not necessarily conclusive of affiliate status.As of June 12, 2013, 32,411,665 shares of the common stock with a par value of $0.005 per share were outstanding.Table of ContentsTABLE OF CONTENTS Page PART I Forward-Looking Statements 3 Item 1. Business 4 Item 1A. Risk Factors 17 Item 1B. Unresolved Staff Comments 31 Item 2. Properties 31 Item 3. Legal Proceedings 32 Item 4. Mine Safety Disclosures 32 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 33 Item 6. Selected Financial Data 35 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 36 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 60 Item 8. Financial Statements and Supplementary Data 61 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 96 Item 9A. Controls and Procedures 96 Item 9B. Other Information 101 PART III Item 10. Directors, Executive Officers and Corporate Governance 101 Item 11. Executive Compensation 104 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 115 Item 13. Certain Relationships and Related Transactions, and Director Independence 116 Item 14. Principal Accountant Fees and Services 118 PART IV Item 15. Exhibits and Financial Statement Schedules 120 SIGNATURES 123 2Table of ContentsForward-Looking StatementsThis annual report on Form 10-K contains forward-looking statements regarding future events and our future results within the meaning of thePrivate Securities Litigation Reform Act of 1995. These forward-looking statements include, in particular, statements about our plans, strategies andprospects under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements are basedon our current expectations and projections about future events and are identified by terminology such as “anticipate,” “believe,” “continue,”“could,” “estimate,” “expect,” “expected,” “intend,” “will,” “may,” or “should” or the negative of those terms or variations of such words, andsimilar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our futurefinancial performance, our anticipated growth and trends in our business and other characteristics of future events or circumstances are forward-looking statements. Forward-looking statements may include, among others, statements relating to: • difficulty in sustaining rapid revenue growth, which may place significant demands on the Company’s administrative, operational andfinancial resources, • fluctuations in the Company’s revenue, • the concentration of nearly all of the Company’s revenues from the delivery of investment solutions and services to clients in the financialadvisory industry, • the Company’s reliance on a limited number of clients for a material portion of its revenue, • the renegotiation of fee percentages or termination of the Company’s services by its clients, • the Company’s ability to identify potential acquisition candidates, complete acquisitions and successfully integrate acquired companies, • the impact of market and economic conditions on the Company’s revenues, • compliance failures, • regulatory actions against the Company, • the failure to protect the Company’s intellectual property rights, • the Company’s inability to successfully execute the conversion of its clients’ assets from their technology platform to the Company’stechnology platform in a timely and accurate manner, • general economic conditions, and • political and regulatory conditions, as well as management’s response to these factors.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 theforward-looking statements we make in this annual report are set forth in Part I under “Risk Factors”; accordingly, investors should not place unduereliance upon our forward-looking statements. We undertake no obligation to update any of the forward-looking statements after the date of thisannual report to conform those statements to reflect the occurrence of unanticipated events, except as required by applicable law.You should read this annual report on Form 10-K 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-lookingstatements by these cautionary statements.The following discussion and analysis should also be read along with our consolidated financial statements and the related notes includedelsewhere in this annual report. Except for the historical information contained 3Table of Contentsherein, this discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from thosediscussed below.Unless the context requires otherwise, the words “Envestnet,” “the Company,” “we,” “us” and “our” are references to Envestnet, Inc. andits subsidiaries as a whole.Except where we have otherwise indicated or the context otherwise requires, dollar amounts presented in this Form 10-K are in thousands,except for Part III and per share amounts. Item 1.BusinessGeneralWe are a leading provider of unified wealth management software and services to financial advisors and institutions. By integrating a wide range ofinvestment solutions and services, our technology platform provides financial advisors with the flexibility to address their clients’ needs. As of December 31,2012, approximately 23,000 advisors used our technology platform, supporting approximately $368 billion of assets in approximately 1.7 million investoraccounts.Envestnet empowers financial advisors to deliver fee-based advice to their clients. We work with both Independent Registered Investment Advisors(“RIAs”), as well as advisors associated with financial institutions such as broker dealers and banks. The services we offer and market to financial advisorsaddress advisors’ ability to grow their practice as well as to operate more efficiently – the Envestnet platform spans the various elements of the wealthmanagement process, from the initial meeting an advisor has with a prospective client to the ongoing day-to-day operations of managing an advisory practice.Our centrally-hosted technology platform, which we refer to as having “open architecture” because of its flexibility, provides financial advisors withaccess to a series of integrated services to help them better serve their clients. These services include risk assessment and selection of investment strategies andsolutions, asset allocation models, research and due diligence, portfolio construction, proposal generation and paperwork preparation, model management andaccount rebalancing, account monitoring, customized fee billing, overlay services covering asset allocation, tax management and socially responsibleinvesting, aggregated multi-custodian performance reporting and communication tools, as well as access to a wide range of leading third-party assetcustodians.We offer these solutions principally through the following product and services suites: • Envestnet’s wealth management software empowers advisors to better manage client outcomes and strengthen their practice. Our softwareunifies the applications and services advisors use to manage their practice and advise their clients, including financial planning; capitalmarkets assumptions; asset allocation guidance; research and due diligence on investment managers and funds; portfolio management, tradingand rebalancing; multi-custodial, aggregated performance reporting; and billing calculation and administration. • Our Portfolio Management Consultants group (“Envestnet | PMC”) primarily engages in consulting services aimed at providing financialadvisors with additional support in addressing their clients’ needs, as well as the creation of proprietary investment solutions and products.Envestnet | PMC’s investment solutions and products include managed account and multi-manager portfolios, mutual fund portfolios andExchange Traded Fund (“ETF”) portfolios. Envestnet | PMC also offers Prima Premium Research, comprising institutional-quality researchand due diligence on investment managers, mutual funds, ETFs and liquid alternatives funds. • Envestnet | Tamarac provides leading portfolio accounting, rebalancing, trading, performance reporting and client relationship managementsoftware, principally to high-end RIAs. 4®Table of Contents • Envestnet Reporting Solutions software aggregates and manages investment data, provides performance reporting and benchmarking, givingadvisors an in-depth view of clients’ various investments, empowering advisors to give holistic, personalized advice and consulting.We believe that our business model results in a high degree of recurring and predictable financial results.The majority of our revenues is derived from fees charged as a percentage of the assets that are managed or administered on our technology platform byfinancial advisors. We also generate revenues from recurring, contractual licensing fees for providing access to our technology platform and from professionalservices.For the year ended December 31, 2012, we earned fees of $127,213 from assets under management (“AUM”) or assets under administration (“AUA”)or collectively (“AUM/A”) by advisors using our technology platform. Asset-based fees accounted for approximately 81%, 81% and 77% of our total revenuesfor the years ended December 31, 2012, 2011 and 2010, respectively. Licensing and professional services fees accounted for 19%, 19% and 23% of our totalrevenues for the years ended December 31, 2012, 2011 and 2010, respectively.For over 85% of our asset-based fee arrangements, we bill customers at the beginning of each quarter based on the market value of customer assets onour technology platform as of the end of the prior quarter, providing for a high degree of revenue visibility in the current quarter. Furthermore, our licensingfees are highly predictable because they are generally set in multi-year contracts providing longer-term visibility regarding that portion of our total revenues.As the tables below indicate, our business has experienced steady and significant growth over the last several years. We believe this growth isattributable not only to secular trends in the wealth management industry as described below but also to the uniqueness and comprehensiveness of our productset.The following table sets forth the assets under management (AUM) or administration (AUA) as of the end of the quarters indicated: 5Table of ContentsThe following table sets forth the number of accounts with assets under management (AUM) or administration (AUA) as of the end of the quartersindicated: The following table sets forth as of the end of the years indicated the number of financial advisors that had client accounts on our technology platform: We were founded in 1999 and through organic growth and strategic transactions we have grown to become a leading independent provider of integratedwealth management software and services to financial advisors and institutions. Our headquarters are located in Chicago and we have offices in New York,New York; Denver, Colorado; Seattle, Washington; Sunnyvale, California; Boston, Massachusetts; Landis and Raleigh, North Carolina; and two locationsin Trivandrum, India. 6Table of ContentsOur Market OpportunityThe wealth management industry has experienced significant growth in terms of assets invested by retail investors in the past several years. Accordingto the Federal Reserve, U.S. household and non-profit organization financial assets totaled $54.4 trillion as of December 31, 2012, up 7% from $50.6 trillionat December 31, 2011, and exceeding the 2007 peak of $52.2 trillion.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.Increase in independent financial advisors. Based on industry news reports, we believe that over the past several years an increasing percentage offinancial advisors have elected to leave large financial institutions and start their own financial advisory practices or move to smaller, more independent firms.According to an analysis done by Cerulli Associates, the number of RIAs and dually-registered advisors increased 7% annually from 34,000 in 2006 to 47,000in 2011.Increased reliance on technology among independent financial advisors. In order to compete effectively in the marketplace, independentfinancial advisors are increasingly relying on technology service providers to help them provide comparable services cost effectively and efficiently.Increased use of financial advisors. We believe, based on an analysis done by Cerulli Associates, that the recent significant volatility andincreasing complexity in securities markets have resulted in increased investor interest in receiving professional financial advisory services.Increased use of fee-based investment solutions. Based on our industry experience, we believe that in order for financial advisors to effectivelymanage their clients’ assets, they are seeking account types that offer the flexibility to choose among the widest range of investment solutions. Financialadvisors typically charge their fees for these types of flexible accounts based on a percentage of assets rather than on a commission or other basis.More stringent standards applicable to financial advisors. Increased scrutiny of financial advisors to ensure compliance with current laws,coupled with the possibility of new laws focused on a fiduciary standard, may require changes to the way financial advisors offer advice. In order to adapt tothese changes, we believe that financial advisors may benefit from utilizing a technology platform, such as ours, that allows them to address their clients’wealth management needs.Our Business ModelWe believe that a number of attractive characteristics significantly contribute to the success of our business model, including: • Positioned to capitalize on favorable industry trends. As a leading provider of unified wealth management software and services tofinancial advisors, we believe we are well positioned to take advantage of favorable secular trends in the wealth management industry,particularly the increased prevalence and use of independent financial advisors, the movement toward fee-based pricing structures andadvisors’ increased reliance on technology. • Recurring and resilient revenue base. The substantial majority of our revenues is recurring and derived either from asset-based fees, whichgenerally are billed at the beginning of each quarter or from fixed fees under multi-year license agreements. For the year ended December 31,2012, we derived 81% of our total revenues from asset-based fees and 19% from licensing and professional services revenues. 7Table of Contents • Strong customer retention. We believe that the breadth of access to investment solutions and the multitude of services that we provide allowfinancial advisors to address a wide range of their clients’ needs and, as a result, financial advisors are less likely to move away from ourtechnology platform. 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 berequired for the financial advisor to shift to another technology platform. • Substantial operating leverage. Because we have designed our systems architecture to accommodate growth in the number of advisors andaccounts we support and to provide the flexibility to add new investment solutions and services, our technology platform and infrastructureallow us to grow our business efficiently, without the need for significant additional expenditures as assets grow. This, combined with lowmarginal costs required to add additional accounts and new investment solutions and services, enables us to generate substantial operatingleverage during the course of our relationship with a financial advisor as the advisor adds accounts to our platform and the assets of theadvisor’s clients grow through financial advisors’ use of additional investment solutions and services we provide.Our Growth StrategyEnvestnet serves the fastest growing segments of the wealth management industry: independent financial advisors; fee-based solutions; and outsourcedinvestment and technology solutions. We intend to increase revenue and profitability by continuing to pursue the following strategies: • Increase the advisor base. Through the outreach and marketing activities of our sales and client service teams, we continue the process ofleveraging existing enterprise client relationships to add new financial advisors to our technology platform, and building new relationships toadd additional advisors. Generally, when we establish an enterprise client relationship, we are provided access to the client’s financial advisorsand are given the opportunity to convert them to our technology platform. During the five-year period ended December 31, 2012, within existingenterprises, we increased the number of advisors with AUM or AUA on our platform at a compound annual growth rate of 9%. We added acomparable number of advisors through new enterprise relationships established during the past five years, resulting in the total number ofadvisors with AUM or AUA on our platform growing at a compound annual growth rate of 18%. Even with that steady growth, we continue tohave the opportunity to increase the number of financial advisors we serve within our existing enterprise client relationships as advisorsincreasingly shift their businesses to fee-based practices. • Extend the account base within a given advisor relationship. We work with existing clients to shift an increasing portion of their businessto the Envestnet platform. During the five-year period ended December 31, 2012, the average number of AUM or AUA accounts per advisor onour technology platform grew from approximately 16 to 28, an increase of over 75%. As a result, total AUM or AUA accounts increased at acompound annual growth rate of 32% during the same period. • Expand the services utilized by each advisor. In most cases, an advisor will leverage only a portion of Envestnet’s services. Accordingly,through our sales and marketing efforts, we will continue to educate our financial advisor customers regarding our capabilities in order toexpand the scope of our investment solutions and services they employ. • Obtain new enterprise clients. Growing a fee-based offering has become a strategic priority for financial services firms. Envestnet ispositioned in the marketplace to empower these firms to deliver fee-based solutions to their advisors. These enterprise clients provide us withaccess to a large number of financial advisors that may be interested in utilizing our technology platform, as well as to the assets that aremanaged by these financial advisors. We believe that the current market opportunity for enterprise conversions continues to be significant.New enterprise clients also provide further opportunities to execute on the other strategies discussed above. 8Table of Contents • Continue to invest in our technology platform. We intend to continue to invest in our technology platform to provide financial advisorswith access to investment solutions and services that address the widest range of financial advisors’ front-, middle—and back-office needs. Inthe years ended December 31, 2012, 2011 and 2010, our technology development expenditures totaled $8,659, $6,424 and $5,588,respectively. • Continue to pursue strategic transactions and other relationships. We intend to continue to selectively pursue acquisitions, investmentsand other relationships that we believe can enhance the attractiveness of our technology platform or expand our client base. Given our scale ofoperations and record of past transactions, we believe we are well-positioned to engage in such transactions in the future. • In December 2011, we completed the acquisition of FundQuest Incorporated (“FundQuest”), a subsidiary of BNP Paribas Investment PartnersUSA Holdings, Inc. FundQuest (which was renamed Envestnet Portfolio Solutions, Inc.), a provider of fee-based managed services andsolutions with approximately $15 billion in AUM or AUA, was integrated fully into Envestnet during 2012. • In April 2012, we acquired Prima Capital Holding, Inc. (“Prima”). Prima, now part of Envestnet | PMC, provides Prima Premium Research,including investment manager due diligence, consulting, and custom research to the wealth management and retirement industries. Prima’sclientele includes banks, independent RIAs, regional broker-dealers, family offices and trust companies. • In May 2012, we acquired Tamarac, Inc. (“Tamarac”). Tamarac, now operating as Envestnet | Tamarac, provides leading portfolioaccounting, rebalancing, trading, performance reporting and client relationship management software, principally to high-end RIAs. • On April 11, 2013, we entered into a definitive agreement to acquire substantially all of the assets of the Wealth Management Solutions(“WMS”) division of Prudential Investments for $10,000 in cash upon closing, subject to certain post-closing adjustments, plus contingentconsideration of up to a total of $23,000 in cash, based upon meeting certain performance targets, to be paid over three years. WMS is aprovider of technology solutions that enables financial services firms to develop and enhance their wealth management offerings. We anticipatethe acquisition will be completed in the third quarter of 2013.Our Technology PlatformOur proprietary Web-based platform provides financial advisors with access to investment solutions and services that address, in one unified,centrally-hosted platform, based on our knowledge of the industry, the widest range of front-, middle—and back-office needs in our industry. The “openarchitecture” design of our technology platform provides financial advisors with flexibility in terms of the investment solutions and services they access, andconfigurability in the manner in which the financial advisors utilize particular investment solutions and services. The multi-tenant platform architectureensures that this level of flexibility and customization is achieved without requiring us to create unique applications for each client, thereby reducing the needfor 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 thanwhat they believe is necessary. 9Table of ContentsEnvestnet’s Advisor Suite enables advisors to better advise their clients, invest portfolios, manage their practice and those portfolios, and report ontheir clients’ holdings. Advise. Our technology platform provides financial advisors with a flexible proposal and presentation tool that is capable of creating highlycustomized documents, including signature-ready forms needed to open client accounts. Also, our platform includes a number of financial planning tools suchas Monte Carlo simulations, portfolio diagnostics and retirement planning which enable financial advisors to create and implement financial plans that aretailored to each client’s investment goals, risk tolerance and assets. Our technology platform provides financial advisors with a customizable risk tolerancequestionnaire, which assists advisors in understanding the investment objectives and preferences of their clients and also helps the advisor comply withapplicable regulatory requirements regarding the suitability of investments and fiduciary obligations. Based on answers to the questionnaire, the advisor cananalyze whether the current portfolio is appropriate to reach the client’s goals and suggest an investment policy. We also empower advisors to improve theirresearch and advice through the institutional quality research we provide on investment managers, funds, and alternative investments, and asset allocationguidance through Envestnet | PMC and Prima Premium Research.Invest. Once the investment solutions have been selected, our technology platform, through relationships we have established with a variety ofinvestment managers, allows the financial advisor to access and choose from a wide range of investment programs, including separately managed accounts,unified managed accounts, third-party strategist programs, mutual fund and ETF programs, and others, depending on the financial advisor’s assessment ofthe client’s needs. Because our technology platform supports nearly every investment program type that is currently available, financial advisors are able tokeep more of a client’s assets on one technology platform, thereby simplifying the operation of their practice, saving time and lowering costs. Envestnet | PMCprovides consulting services aimed at providing financial advisors with additional support in addressing their clients’ needs, including asset allocationmodeling, asset manager and mutual fund due diligence, manager and fund selection and ongoing monitoring, investment portfolio construction and overlayservices, principally relating to ongoing portfolio management and asset allocation rebalancing. Envestnet | PMC also creates proprietary investment solutionsand products, including separate account strategies, multi-manager portfolios, mutual funds, mutual fund wrap and ETF asset allocation strategies. 10®Table of ContentsManage. Once a financial advisor has created a client account and selected investment solutions and programs, our technology platform providesaccess to ongoing account management services. Additionally, Envestnet | PMC portfolio managers review all Envestnet | PMC models and proprietaryportfolios to determine when to rebalance across asset classes. We also offer overlay services that can help enhance an advisor’s ability to carry out his or herfiduciary responsibility. Financial advisors can receive risk and style drift alerts, enabling them to adjust their clients’ portfolios to ensure that the portfoliosremain in compliance with their clients’ stated investment objectives and risk tolerance levels. These services include ongoing review of investment portfoliosfor compliance with asset allocation criteria, with rebalancing recommendations made as necessary, assistance with investment portfolio tax management andreview of investment accounts to ensure that investment decisions are consistent with the client’s investment objectives. We also offer a socially responsibleoverlay which the financial advisor may use to maintain compliance with clients’ investment restrictions. These may include securities issued by specificcompanies or from issuers in certain industries that clients want to exclude from their investment accounts.Envestnet | Tamarac Advisor Xi integrates portfolio accounting, model management, monitoring, rebalancing, trading, performance reporting, andenterprise-level client relationship management (“CRM”) software. Advisor Xi also empowers advisors to receive drift alerts and rebalancing notifications tohelp ensure that asset allocations conform to a client’s investment policy. Envestnet | Tamarac’s rebalancing software also can be configured to rebalance assetsin the most tax-efficient manner for the client.Report. Our technology platform helps advisors to better report on their clients’ consolidated holdings through our Envestnet | Vantage and Envestnet |Tamarac offerings, which provide trade-ready, fully-reconciled aggregated performance reports to advisors and their end clients. Our technology platformprovides financial advisors with access to over 30 third-party custodians, real-time data and Web-based service tools. Our platform generates highlyconfigurable aggregated reports showing holdings, investment performance, capital gains and losses and other information for financial advisors to provide totheir clients that can be downloaded, viewed online or printed. In addition, through our India operations, our technology platform provides financial advisorswith access to client account data reconciled daily with records maintained by multiple custodians. Accordingly, when securities markets open each day,financial advisors have the most up-to-date account data available. Our technology platform also supports a wide range of fee and billing structures. Theseinclude breakpoint pricing, where lower fee rates are applied as asset levels meet or exceed pre-established thresholds, fees based on aggregated client fundsacross several accounts held by family members, fees tailored to different investment programs and investment solution types and other customized fee andbilling arrangements. Our technology platform includes configurable Fiduciary Oversight Notes (“FONs”) that help advisors understand implications of thedecisions they make via educational text boxes, and then memorialize those decisions for client service and reporting. The FONs may be searched andreviewed by home offices or the advisors themselves.Our CustomersIndependent financial advisors that are working alone or as part of financial advisory firms. Our principal value proposition aimed atindependent financial advisors working alone or as part of financial advisory firms is that our technology platform allows them to compete effectively withfinancial advisors employed by large financial institutions. We provide independent financial advisors with access to as many or more of the investmentsolutions and services that are typically available to financial advisors working at the largest firms. An example of one of our independent financial advisoryfirm clients is Commonwealth Financial Network.Enterprise clients. We provide enterprise clients with a customized, private-labeled technology platform that enables them to support their affiliatedfinancial advisors with a broad range of investment solutions and services. Our contracts with enterprise clients establish the applicable terms and conditions,including pricing terms, service level agreements and basic platform configurations. For the years ended December 31, 2012, 2011 and 2010, revenuesassociated with our relationship with our single largest enterprise client, FMR LLC, an affiliate of FMR Corp., or Fidelity, accounted for 22%, 31% and 31%,respectively, of our total revenues. No other client accounted for more than 10% of our total revenues. Examples of our other enterprise clients includeNorthwestern Mutual, National Financial Partners, National Planning Holdings and Russell Investments. 11Table of ContentsSales and MarketingOur sales and marketing staff of more than 100 employees is organized by sales channel and product offering. Our enterprise sales team focuses onentering into agreements with enterprise clients, which enable us to sell our platform capabilities to those firms and the advisors associated with them. Ouradvisory sales team sells to the individual financial advisors of broker dealers and enters into agreements with RIA firms. Envestnet | Tamarac sellsrebalancing, performance reporting and CRM solutions principally to large RIA firms. Envestnet | PMC offers portfolio and investment managementconsulting services, including Prima Premium Research and due diligence capabilities.The principal aim of our marketing efforts is to create greater visibility of our company and our brands, and to provide thought leadership to thewealth management industry. Our marketing efforts are focused on our core markets: financial advisors and enterprise clients. We use advertising and publicrelations 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 events sponsored by our custodian partners, by sponsorship,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.To implement our marketing efforts, we generally employ paid print and online advertisements in a variety of industry publications, as well aspromotions that include e-blast campaigns and sponsored webinars. We also partner with independent broker dealers (“IBDs”) on direct mail campaignstargeting such firms’ financial advisors to describe the investment solutions and services that we offer, produce brochures and presentations for financialadvisors to use with their clients and we create Internet pages or sites to promote our investment solutions and services.CompetitionWe generally compete on the basis of several factors, including the breadth and quality of investment solutions and services to which we provideaccess through our technology platform, the number of custodians that are connected through our technology platform, the price of our investment solutionsand 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 toaddress their needs. Our competitors offer a variety of products and services that compete with one or more of the investment solutions and services providedthrough our technology platform, although, based on our industry experience, we believe that none offers a more comprehensive set of products and servicesthan we do. Our principal competitors include: • 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 ormore types of products and services but generally offer fewer choices in terms of custodians, asset managers, technology features andfunctionality. 12Table of Contents • Providers of Specific Service Applications. A number of our competitors, including Advent Software, Inc., provide financial advisors witha product or service designed to address one specific issue or need, such as financial planning or performance reporting. While our technologyplatform also provides access to these investment solutions or services, financial advisors may elect to utilize a single application rather than afully integrated platform. • Custodians. A number of leading asset custodians, such as Pershing (a subsidiary of BNY Mellon Corporation) and The Charles SchwabCorporation, have expanded beyond their custodial businesses to also offer advisor trading tools that compete with our financial advisor-directed solutions.TechnologyOur technology platform features a three-tier architecture integrating a Web-based user interface, an application tier that houses the business logic for allof the platform’s functionality and a SQL Server database. The application tier resides behind load balancers which distribute the workload demands acrossour servers. We believe our technology design allows for significant scalability.We devote significant resources to ensuring sufficient platform capacity and system uptime. In 2012, our actual uptime was 99.8%. We have achievedService Organization Control Report (“SOC1”) compliance with our platform and we maintain multiple redundancies, back up our databases and safeguardtechnologies 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 tocontinue to make significant investments in the future. In the years ended December 31, 2012, 2011 and 2010, we incurred technology developmentexpenditures totaling approximately $8,659, $6,424 and $5,588, respectively. Of these expenditures, we capitalized approximately $2,350, $1,482 and$1,340, respectively, as internally developed software. The increase in the amount of technology development expenditures and the increase in the amount wecapitalized in 2012 compared to 2011 is a result of technology development expenditures related to Envestnet | Tamarac products. We expect to continuefocusing our technology development efforts principally on adding features to increase our market competitiveness, enhancements to improve operatingefficiency and reduce risk, and client-driven requests for new capabilities.Intellectual Property and Proprietary RightsWe 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 confidential. In thenormal course of business, we provide our intellectual property to third parties through licensing or restricted use agreements. We have proprietary know-howin algorithms, implementation and business on-boarding functions, along with a wide variety of applications software. We have registered the mark“ENVESTNET” with the U.S. Patent and Trademark Office in addition to several marks commonly used by Envestnet. We also pursue the registration ofcertain of our other trademarks and service marks in the United States. In addition, we have registered our domain name, www.envestnet.com and severalother websites, such as www.envestnetpmc.com, www.investpmc.com, www.fiduciaryopportunity.com and www.envestnetadvisor.com. We have establisheda system of security measures to protect our computer systems from security breaches and computer viruses. We have employed various technology andprocess-based methods, such as clustered and multi-level firewalls, intrusion detection mechanisms, vulnerability assessments, content filtering, antivirussoftware and access control mechanisms. We also use encryption techniques for data transmissions. We control and limit access to confidential andproprietary information on a “need to know” basis. 13Table of ContentsRegulationOverviewThe financial services industry is among the most extensively regulated industries in the United States. We operate investment advisory, broker-dealerand mutual fund advisory businesses, each of which is subject to a specific regulatory scheme, including regulation at the federal and state level, as well asregulation by self-regulatory organizations and non-U.S. regulatory authorities. In addition, we are subject to numerous laws and regulations of generalapplication.Our wholly-owned subsidiaries, Envestnet Asset Management, Inc., Portfolio Management Consultants, Inc. and Envestnet Portfolio Solutions, Inc.operate investment advisory businesses. These subsidiaries are registered with the U.S. Securities and Exchange Commission (“SEC”) as “investmentadvisers” under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), and are regulated thereunder. As described further below, many of ourinvestment advisory programs are conducted pursuant to the non-exclusive safe harbor from the definition of an “investment company” provided for underRule 3a-4 of the Investment Company Act of 1940, as amended (the “Investment Company Act”). If Rule 3a-4 were to cease to be available, or if the SEC wereto 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. servesas the investment adviser to two mutual funds and a series of collective investment trusts managed towards retirement target dates. Mutual funds are registeredas “investment companies” under the Investment Company Act. The Advisers Act and the Investment Company Act, together with related regulations andinterpretations 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, includingrestrictions on transactions between an adviser and its clients, and between a mutual fund and its advisers and affiliates. The fiduciary obligations ofinvestment 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 theadviser’s fees, and provide extensive and ongoing disclosure to clients. The application of these requirements to wrap fee programs is particularly complex andthe SEC has in the past scrutinized firms’ compliance with these requirements. The SEC is authorized to institute proceedings and impose fines and sanctionsfor violations of the Advisers Act and the Investment Company Act and has the power to restrict or prohibit an investment adviser from carrying on itsbusiness in the event that it fails to comply with applicable laws and regulations. Although we believe we are in compliance in all material respects with therequirements of the Advisers Act and the Investment Company Act and the rules and interpretations promulgated thereunder, our failure to comply with suchlaws, rules and interpretations could have a material adverse effect on us. Collective investment trusts are unregistered funds operated by a trust company or abank regulated by the Office of the Comptroller of Currency (the “OCC”). In our role as advisor to these funds, we operate under substantially similarobligations to those discussed above for mutual funds.Portfolio Brokerage Services, Inc., (“PBS”), our broker-dealer subsidiary, is registered as a broker-dealer with the SEC under the Securities ExchangeAct of 1934, (“Exchange Act”), in all 50 states and the District of Columbia. In addition, PBS is a member of the Financial Industry Regulatory Authority(“FINRA”), the securities industry self-regulatory organization that supervises and regulates the conduct and activities of broker-dealers. Broker-dealers aresubject to regulations that cover all aspects of their business, including sales practices, market making and trading among broker-dealers, use andsafekeeping of customers’ funds and securities, capital structure, record-keeping and the conduct of directors, officers, employees, representatives andassociated persons. FINRA and the SEC conduct periodic examinations of the operations of its members, including PBS. Violation of applicable regulationscan 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 pursuantto 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, 2012, PBS wasrequired to maintain a minimum of $100 in net capital and its actual net capital was $968. 14Table of ContentsOur regulated subsidiaries are subject to various federal and state laws and regulations that grant supervisory agencies, including the SEC, broadadministrative powers. In the event of a failure to comply with these laws and regulations, the possible sanctions that may be imposed include the suspensionof individual employees, limitations on the permissibility of our regulated subsidiaries and our other subsidiaries to engage in business for specified periods oftime, censures, fines, and the revocation of registration as a broker-dealer or investment adviser, as applicable. Additionally, the securities laws applicable tous and our subsidiaries provide for certain private rights of action that could give rise to civil litigation. Any litigation could have significant financial andnon-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 bythe SEC or other regulatory authorities and self-regulatory organizations, or changes in the interpretation or enforcement of existing laws and rules mayadversely affect our business and profitability. Our businesses may be materially affected not only by regulations applicable to it as an investment adviser orbroker-dealer, but also by regulations that apply to companies generally.Investment Advisory Program Conducted Under Rule 3a-4Under the Investment Company Act, an issuer that is engaged in the business of investing, reinvesting or trading in securities may be deemed an“investment company,” in which case the issuer may be subject to registration requirements and regulation as an investment company under the InvestmentCompany Act. In order to provide assurance that certain discretionary investment advisory programs would not be considered investment companies, the SECadopted Rule 3a-4 under the Investment Company Act, which provides a non-exclusive safe harbor from the definition of an investment company for programsthat meet the requirements of the rule. We conduct the following programs pursuant to the Rule 3a-4 safe harbor: • Separately managed accounts; • Unified managed account portfolios; • Mutual fund portfolios and exchange-traded fund portfolios; and • Advisor as portfolio manager.We believe that, to the extent we exercise discretion over accounts in any of these programs, these programs qualify for the safe-harbor because all of theprograms have the following characteristics, which are generally required in order for a program to be eligible for the Rule 3a-4 safe harbor: • Each client account is managed on the basis of the client’s financial situation, investment objectives and reasonable client-imposed investmentrestrictions; • At the opening of the account, the client’s financial advisor obtains information from the client and provides us with the client’s financialsituation, investment objectives and reasonable restrictions; • On no less than an annual basis, the client’s financial advisor contacts the client to determine whether there have been any changes in theclient’s financial situation or investment objectives, and whether the client wishes to impose any reasonable restrictions on the management ofthe account or reasonably modify existing restrictions. This information is communicated to us and reflected in our management of clientaccounts; • On a quarterly basis, we or another designated person (in most cases this will be the client’s financial advisor) notify the client to contact us oranother designated person if there have been any changes to the client’s financial position or investment objectives or if the client wishes toimpose any reasonable restrictions on the management of the account; • We, the client’s financial advisor and the manager of the client’s account, all of whom are knowledgeable about the account and itsmanagement, are reasonably available to the client for consultation; 15Table of Contents • All of the programs allow each client to impose reasonable restrictions on the management of his or her account; • On at least a quarterly basis, the client is provided with a statement containing a description of all activity in the client’s account during thepreceding period, including all transactions made on behalf of the account, all contributions and withdrawals made by the client, all fees andexpenses charged to the account, and the value of the account at the beginning and end of the period; and • For all of the programs, each client retains, with respect to all securities and funds in the client’s account, the right to withdraw securities orcash, vote securities, or delegate the authority to vote securities to another person, receive written confirmation or other notification of eachsecurities transaction by the client’s independent custodian, and proceed directly as a security holder against the issuer of any security in theclient’s account without the obligation to include us or any other client of the program in any such action as a condition precedent to initiatingsuch proceeding.EmployeesAs of December 31, 2012, we had 769 employees, including 115 in sales and marketing, 235 in engineering and systems, 342 in operations, 23 ininvestment management and research, and 54 in executive and corporate functions. Of these 769 employees, 326 were located in India. None of our employeesis represented by a labor union. We have never experienced a work stoppage and believe our relationship with our employees is good.Executive Officers of the RegistrantThe following table summarizes information about each one of our executive officers. Name Age Position(s)Judson Bergman 56 Chairman, Chief Executive Officer, DirectorWilliam Crager 49 PresidentPeter D’Arrigo 45 Chief Financial OfficerScott Grinis 51 Chief Technology OfficerShelly O’Brien 47 Chief Legal Officer, General Counsel and Corporate SecretaryBrandon Thomas 49 Chief Investment OfficerJudson Bergman, See information disclosed in “Item 10. Directors, Executive Officers and Corporate Governance.”William Crager, Age 49. Mr. Crager has served as our President since 2002. Prior to joining us, Mr. Crager served as Managing Director of Marketingand Client Services at Rittenhouse Financial Services, Inc., an investment management firm affiliated with Nuveen Investments, Inc. (“Nuveen”), adiversified investment manager. Mr. Crager received an MA from Boston University and a BA from Fairfield University, with a dual major in economics andEnglish.Peter D’Arrigo, Age 45. Mr. D’Arrigo has served as our Chief Financial Officer since 2008. Prior to joining us, Mr. D’Arrigo worked at Nuveenwhere he served as Treasurer since 1999, as well as holding a variety of other titles after joining them in 1990. Mr. D’Arrigo received an MBA from theNorthwestern University Kellogg Graduate School of Management and an undergraduate degree in applied mathematics from Yale University.Scott Grinis, Age 51. Mr. Grinis has served as our Chief Technology Officer since 2004. Prior to joining us, Mr. Grinis co-founded Oberon FinancialTechnology, Inc., our subsidiary, prior to its acquisition by us. Mr. Grinis received a BS and an MS degree in electrical engineering from Stanford University.Shelly O’Brien, Age 47. Ms. O’Brien has served as our Chief Legal Officer, General Counsel and Corporate Secretary since 2002. Prior to joining us,Ms. O’Brien was General Counsel and Director of Legal and 16Table of ContentsCompliance for ING (U.S.) Securities, Futures & Options Inc., a broker-dealer, and futures commission merchant. Ms. O’Brien received a degree in politicalscience from Northwestern University, a JD from Hamline University School of Law, and an LLM in taxation from John Marshall Law School.Brandon Thomas, Age 49. Mr. Thomas is a co-founder of our company and has served as Chief Investment Officer and Managing Director ofPortfolio Management Consultants, our internal investment management and portfolio consulting group, since 1999. Prior to joining us, Mr. Thomas wasDirector of Equity Funds for Nuveen. Mr. Thomas received an MBA from the University of Chicago, a JD from DePaul University and is a graduate ofBrown University. Item 1A.Risk FactorsInvestment in our securities involves risk. An investor or potential investor should consider the risks summarized in this section when makinginvestment decisions regarding our securities. These risks and uncertainties include, but are not limited to, the risk factors set forth below. The risks anduncertainties described in this section are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believeare immaterial may also affect our business. If any of these known or unknown risks or uncertainties actually occurs, our business, financial condition andresults of operations could be materially adversely affected.Risks Related to Our BusinessWe have experienced rapid revenue growth, 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 ofoperations, financial condition or business.Our revenues during the three years ended December 31, 2012 have grown at a compound annual growth rate of 27%. We expect our growth tocontinue, which could place additional demands on our resources and increase our expenses. Our future growth will depend on, among other things, ourability to successfully grow our total assets under management and administration and add additional clients. If we are unable to implement our growthstrategy, develop new investment solutions and services and gain new clients, our results of operations, financial condition or business may be materiallyadversely affected.Sustaining growth will also require us to commit additional management, operational and financial resources and to maintain appropriate operationaland financial systems. In addition, continued growth increases the challenges involved in: • recruiting, training and retaining sufficiently skilled technical, marketing, sales and management personnel; • preserving our culture, values and entrepreneurial environment; • successfully expanding the range of investment solutions and services offered to our clients; • developing and improving our internal administrative infrastructure, particularly our financial, operational, compliance, record-keeping,communications and other internal systems; and • maintaining high levels of satisfaction with our investment solutions and services among clients.There can be no assurance that we will be able to maintain or accelerate our growth, and any failure to do so could adversely affect our results ofoperations, financial condition or business. 17Table of ContentsOur 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 ourbusiness that may contribute to these fluctuations include the following events, as well as other factors described elsewhere in this document: • a decline or slowdown of the growth in the value of financial market assets, which may reduce the value of assets under management andadministration and therefore our revenues and cash flows; • negative public perception and reputation of the financial services industry, which would reduce demand for our investment solutions andservices; • unanticipated changes to economic terms in contracts with clients, including renegotiations; • downward pressure on fees we charge our clients, which would therefore reduce our revenue; • changes in laws or regulations that could impact our ability to offer investment solutions and services; • failure to obtain new clients; • cancellation 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 operationsfor any prior or future quarterly or annual period and should not be relied upon as indications of our future performance.We operate in a highly competitive industry, with many firms competing for business from financial advisors on the basis of a number of factors,including the quality and breadth of investment solutions and services, ability to innovate, reputation and the prices of services and thiscompetition could hurt our financial performance.We compete with many different types of companies that vary in size and scope, including Pershing LLC (a subsidiary of BNY Mellon Corporation),The Charles Schwab Corporation, SEI Investments Company, Genworth Financial Inc., Advent Software, Inc., and Lockwood Advisors (a subsidiary ofBNY Mellon Corporation) and which are discussed in greater detail under “Business—Competition” included in this Form 10-K. In addition, some of ourclients 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 tochanges in demand for investment solutions and services, to devote greater resources to developing and promoting their services and to make more attractiveoffers to potential clients and strategic partners, which could hurt our financial performance.We may lose clients as a result of the sale or merger of a client, a change in a client’s senior management, competition from other financial advisors andfinancial institutions and for other reasons. We also face increased competition due to the current trend of industry consolidation. If large financial institutionsthat are not our clients are able to attract assets from our clients, our ability to grow revenues and earnings may be adversely affected. 18Table of ContentsOur Envestnet | PMC group competes with other providers of investment solutions and products. These competitors may offer broader solutionsand/or products and their solutions and/or products may have better investment returns during one or more periods. If the investment returns on ourinvestment products are not perceived to be competitive, we could experience outflows of assets from these products and face difficulty attracting new assets tothese products.Our failure to successfully compete in any of the above-mentioned areas could have a material adverse effect on our results of operations, financialcondition or business. Competition could also affect the revenue mix of services we provide, resulting in decreased revenues in lines of business with higherprofit margins.We derive nearly all of our revenues from the delivery of investment solutions and services to clients in the financial advisory industry and ourrevenue could suffer if that industry experiences a downturn.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 informationrelating to publicly traded companies and mutual funds available on the Internet or on company websites, could lead to lower demand by investors for theservices provided by financial advisors. In addition, demand for our investment solutions and services among financial advisors could decline for manyreasons. Consolidation or limited growth in the financial advisory industry could reduce the number of our clients and potential clients. Events that adverselyaffect our clients’ businesses, rates 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 andthereby decrease our revenues. Any of the foregoing could have a material adverse effect on our results of operations, financial condition or business.A limited number of clients account for a material portion of our revenue. Termination of our contracts with any of these clients could have amaterial adverse effect on our results of operations, financial condition or business.For the years ended December 31, 2012, 2011 and 2010, revenues associated with our relationship with our single largest client, FMR LLC, anaffiliate of FMR Corp., or Fidelity, accounted for 22%, 31% and 31% respectively, of our total revenues and our ten largest clients accounted for 47%, 64%and 62%, respectively, of our total revenues. Our license agreements with large financial institutions are generally multi-year contracts that may be terminatedupon the expiration of the contract term or prior to such time for cause, which may include breach of contract, bankruptcy, insolvency and other reasons. Thelicense fee payments pursuant to our license agreement with Fidelity were renegotiated and reduced as of December 31, 2011 and were extended for anadditional five years. The agreement, as amended, includes receiving ongoing platform services fees through the Fidelity relationship based upon asset-basedfees. No assurance can be given as to whether any projected increase in asset-based fees will offset the reduction in license fees. A majority of our agreementswith financial advisors generally provides for termination at any time. If our contractual relationship with Fidelity were to terminate, or if a significant numberof 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 ofoperations, 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 thegrowth 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-basedfee 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 feesbeing 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 ourclients increases, they may be required to lower the fees they charge to their 19Table of Contentsclients, which could cause them to seek to decrease our fees accordingly. Any of these factors could result in fluctuation or a 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 ourinvestment solutions and services.Asset-based fees make up a significant portion of our revenues. Asset-based fees represented 81%, 81% and 77% of our total revenues for the yearsended December 31, 2012, 2011 and 2010, respectively. We expect that asset-based fees will continue to represent a significant percentage of our total revenuesin the future. Significant fluctuations in securities prices may materially affect the value of the assets managed by our clients and may also influence financialadvisor and investor decisions regarding whether to invest in, or maintain an investment in, a mutual fund or other investment solution. If such marketfluctuation 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 theevent that the U.S. or international financial markets suffer a severe or prolonged downturn, investors may choose to withdraw assets from financial advisors,which we refer to as “redemptions”, and transfer them to investments that are perceived to be more secure, such as bank deposits and Treasury securities. Forexample, in late 2007 and through the first quarter of 2009, the financial markets experienced a broad and prolonged downturn, our redemption rates werehigher than our historical average, and our results of operations, financial condition and business were materially adversely affected. Any prolonged downturnin 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 investmentassets generally at any time. Significant changes in investing patterns or large-scale withdrawal of investment funds could have a materialadverse 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 advisorsor withdraw the funds they have invested with financial advisors. These clients of financial advisors may elect to change their investment strategies, bymoving their assets away from equity securities to fixed income or other investment options, or by withdrawing all or a portion of their assets from theiraccounts to avoid all securities markets-related risks. These actions by investors are outside of our control and could materially adversely affect the marketvalue of the investment assets that our clients manage, which could materially adversely affect the asset-based fees we receive from our clients.We are subject to liability for losses that result from a breach of our fiduciary duties.Our investment advisory services involve fiduciary obligations that require us to act in the best interests of our clients, and we may be sued and faceliabilities for actual or claimed breaches of our fiduciary duties. Because we provide investment advisory services, both directly and indirectly, with respect tosubstantial 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 andretain third-party investment money managers on behalf of clients. As a result, we may be included as a defendant in lawsuits against financial advisors andthird-party investment money managers that involve claims of breaches of the duties of such persons, and we may face liabilities for the improper actionsand/or omissions of such advisors and third-party investment money managers. In addition, we may face claims based on the results of our investmentadvisory recommendations, even in the absence of a breach of our fiduciary duty. Such claims and liabilities could therefore have a material adverse effect onour results of operations, financial condition or business. 20Table of ContentsWe are subject to liability for losses that result from potential, perceived or actual conflicts of interest.Potential, perceived and actual conflicts of interest are inherent in our existing and future business activities and could give rise to clientdissatisfaction, litigation or regulatory enforcement actions. In particular, we pay varying fees to third-party asset managers and custodians and our financialadvisor customers, or their clients, could accuse us of directing them toward those asset managers or custodians that charge us the lowest fees. In addition, weoffer proprietary mutual funds and portfolios of mutual funds through our internal investment management and portfolio consulting group, and financialadvisors or their clients could conclude that we favor our proprietary investment products because of their belief that we earn higher fees when our proprietaryinvestment products are used. Adequately addressing conflicts of interest is complex and difficult and if we fail, or appear to fail, to adequately addresspotential, perceived or actual conflicts of interest, the resulting negative public perception and reputational harm could materially adversely affect our clientrelations 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 isvulnerable to many threats that can be difficult or impossible to control, and costly or impossible to remediate. Regulatory inquiries or investigations, lawsuitsinitiated by our clients or stockholders, employee misconduct, perceptions of conflicts of interest and rumors, among other developments, could substantiallydamage our reputation, even if they are baseless or satisfactorily addressed. In addition, any perception that the quality of our investment solutions andservices 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 toattract 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, financialcondition 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 inthe life cycle of our investment solutions or services, but are frequently found after introduction of new investment solutions and services or enhancements toexisting investment solutions or services. We continually introduce new investment solutions and services and new versions of our investment solutions andservices. Despite internal testing and testing by current and potential clients, our current and future investment solutions and services may contain seriousdefects 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 extendedperiod of time while we address the problem. We might not discover errors that affect our new or current investment solutions, services or enhancements untilafter 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 ourresults 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. Inaddition, negative public perception and reputational damage caused by such claims would adversely affect our client relationships and our ability to enter intonew contracts. Any of these problems could have a material adverse effect on our results of operations, financial condition and business. 21Table of ContentsWe 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 andprocessing of transactions, deficiencies in our operating systems, business disruptions and inadequacies or breaches in our internal control processes. Weoperate 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, regulatorysanctions 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 anoperational error. In such circumstances, we may elect to make payments or otherwise incur increased costs or lower revenues in order to maintain a strongcustomer relationship. In any of the forgoing circumstances, our results of operations, financial condition or business could be materially adversely affected.We may become subject to liability based on the use of our investment solutions and services by our clients.Our investment solutions and services support the investment processes of our clients, which, in the aggregate, manage billions of dollars of assets.Our client agreements have provisions designed to limit our exposure to potential liability claims brought by our clients or third parties based on the use of ourinvestment 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 ourclients, may pursue claims against us for very significant dollar amounts. Any such claim, even if the outcome were to be ultimately favorable to us, wouldinvolve a significant commitment of our management, personnel, financial and other resources and could have a negative impact on our reputation. Suchclaims and lawsuits could therefore have a material adverse effect on our results of operations, financial condition or business.Furthermore, our clients may use our investment solutions and services together with software, data or products from other companies. As a result,when problems occur, it might be difficult to identify the source of the problem. Even when our investment solutions and services do not cause theseproblems, the existence of these errors might cause us to incur significant costs and divert the attention of our management and technical personnel, any ofwhich could materially adversely affect our results of operations, financial condition or business.Our business relies heavily on computer equipment, electronic delivery systems and the Internet. Any failures or disruptions in such technologiescould 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 arevulnerable 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 serviceprovider, to provide us with access to certain computer equipment, electric delivery systems and the Internet. We are unable to predict whether a futurecontractual dispute may arise with one of our suppliers that could cause a disruption in service, or whether our agreements with our suppliers can be obtainedor renewed on acceptable terms, or at all. An unanticipated disruption, failure or slowdown affecting our key technologies or facilities may have significantramifications, such as data-loss, data corruption, damaged software codes or inaccurate processing of transactions. We maintain off-site back-up facilities forour electronic information and computer equipment, but these facilities could be subject to the same interruptions that may 22Table of Contentsaffect our primary facilities. Any significant disruptions, failures, slowdowns, data-loss or data corruption could have a material adverse effect on our resultsof operations, financial condition or business and result in the loss of customers.We could face liability related to disclosure or theft of the personal information we store on our technology platform.Clients may maintain personal investment and financial information on our technology platform and we could be subject to liability if we were toinappropriately disclose any user’s personal information, inadvertently or otherwise, or if third parties were able to penetrate our network security or otherwisegain access to any user’s name, address, portfolio holdings or other financial information. Any such event could subject us to claims for misuses of personalinformation, such as unauthorized marketing or unauthorized access to personal portfolio information and could therefore have a material adverse effect on ourresults of operations, financial condition or business.We could incur significant costs protecting the personal information we store on our technology platform.Users of our investment solutions and services are located in the United States and around the world. As a result, we collect and store the personalinformation 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 bycollecting or storing the personal data of those countries’ residents, even if such entities have no physical or legal presence there. Consequently, we may beobligated to comply with the privacy and data security laws of such foreign countries. Our exposure to foreign countries’ privacy and data security lawsimpacts our ability to collect and use personal information, increases our legal compliance costs and may expose us to liability.We have incurred, and will continue to incur, expenses to comply with privacy and security standards and protocols imposed by law, regulation,industry standards or contractual obligations. Increased domestic or international regulation of data utilization and distribution practices could require us tomodify our operations and incur significant additional expense, which could have a material adverse effect on our results of operations, financial condition orbusiness.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 besubject to claims based upon the content that is accessible from our website through links to other websites. Moreover, we could face liability based oninaccurate information provided to us by others. Defending any such claims could be expensive and time-consuming, and any such claim could materiallyadversely 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 ourresults of operations, financial condition or business.We depend on the efforts, relationships and reputations of our senior management team and other key personnel, including Judson Bergman, our ChiefExecutive Officer, William Crager, our President, and Scott Grinis, our Chief Technology Officer, in order to successfully manage our business. We believethat 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 seniormanagement team or of other key personnel could have a material adverse effect on our results of operations, financial condition or business. 23Table of ContentsOur operations are subject to extensive government regulation, and compliance failures or regulatory action against us could adversely affect ourresults 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,mutual fund and collective investment trust lines of business, each of which is subject to a specific and extensive regulatory scheme. In addition, we aresubject to numerous laws and regulations of general application. It is very difficult to predict the future impact of the legislative and regulatory requirementsaffecting our business and our clients’ businesses.Certain of our subsidiaries are registered as “investment advisers” with the SEC under the Advisers Act and are regulated thereunder. In addition,many of our investment advisory services are conducted pursuant to the non-exclusive safe harbor from the definition of an “investment company” providedunder 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 howthe rule is applied, our business could be adversely affected. Certain of our registered investment adviser subsidiaries provide advice to mutual fund clientsand collective investment trusts. Mutual funds are registered as “investment companies” under the Investment Company Act. The Advisers Act and theInvestment Company Act, together with related regulations and interpretations of the SEC, impose numerous obligations and restrictions on investmentadvisers and mutual funds, including requirements relating to the safekeeping of client funds and securities, limitations on advertising, disclosure andreporting obligations, prohibitions on fraudulent activities, restrictions on transactions between an adviser and its clients, and between a mutual fund and itsadvisers and affiliates, and other detailed operating requirements, as well as general fiduciary obligations. Collective investment trusts are unregistered fundsoperated by a trust company or a bank regulated by the OCC. In our role as advisor to these funds, we operate under substantially similar obligations to thosediscussed above for mutual funds.In addition, PBS, our broker-dealer subsidiary, is registered as a broker-dealer with the SEC and with all 50 states and the District of Columbia, andis 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 andsafekeeping of customer funds and securities, capital structure, recordkeeping and the conduct of directors, officers, employees, representatives andassociated persons. FINRA conducts periodic examinations of the operations of its members, including PBS. As a broker-dealer, PBS is also subject to certainminimum net capital requirements under SEC and FINRA rules. Compliance with the net capital rules may limit our ability to withdraw capital from PBS.All of the foregoing laws and regulations are complex and we are required to expend significant resources in order to maintain our compliance with suchlaws and regulations. Any failure on our part to comply with these and other applicable laws and regulations could result in regulatory fines, suspensions ofpersonnel 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 amaterial adverse effect on our results of operations, financial condition or business.Changes to the laws or regulations applicable to us or to our financial advisor clients could adversely affect our results of operations, financialcondition or business.We may be adversely affected as a result of new or revised legislation or regulations imposed by the SEC or other U.S. or foreign governmentalregulatory authorities or self-regulatory organizations that supervise the financial markets around the world. In addition, we may be adversely affected bychanges in the interpretation or enforcement of existing laws and rules by these governmental authorities and self-regulatory organizations. It is impossible todetermine 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 isdifficult to predict how any changes or potential changes could affect our business. Changes to laws or regulations could increase our potential liability in 24Table of Contentsconnection with the investment solutions and services that we provide. The introduction of any new laws or regulations could make our ability to comply withapplicable laws and regulations more difficult and expensive. Any of the foregoing could have a material adverse effect on our results of operations, financialcondition or business.A deemed “change of control” of our company could require us to obtain the consent of our clients and a failure to do so properly could adverselyaffect our results of operations, financial condition or business.Under the Advisers Act, the investment advisory agreements entered into by our investment adviser subsidiaries may not be assigned without theclient’s consent. Under the Investment Company Act, advisory agreements with registered funds terminate automatically upon assignment and, anyassignment of an advisory agreement must be approved by the board of directors and the shareholders of the registered fund. Under the Advisers Act and theInvestment Company Act, such an assignment may be deemed to occur upon a change of control of the Company. A change of control includes both gaining orlosing a “controlling person.” Whether someone is a controlling person for these purposes depends significantly on the specific facts and circumstances. Therecan be no assurance that if we undergo a change of control, we would be successful in obtaining all necessary consents or that the method by which we obtainsuch consents could not be challenged at a later time. If we are unable to obtain all necessary consents or if such a challenge were to be successful it could havea material adverse effect on our results of operations, financial condition or business.We rely on exemptions from certain laws and if for any reason these exemptions were to become unavailable to us, we could become subject toregulatory action or third-party claims and our business could be materially and adversely affected.We regularly rely on exemptions from various requirements of the Exchange Act, the Investment Company Act and the Employee Retirement IncomeSecurity Act of 1974 in conducting our activities. These exemptions are sometimes highly complex and may in certain circumstances depend on complianceby 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 orthird-party claims and our business could be materially and adversely affected.If government regulation of the Internet or other areas of our business changes, or if consumer attitudes toward use of the Internet change, wemay 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 themanner 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 newinterpretations of existing regulations or legislation, we may be required to incur additional expenses or alter our business model, either of which could have amaterial adverse effect on our results of operations, financial condition or business.We are substantially dependent on our intellectual property rights, and a failure to protect these rights could adversely affect our results ofoperations, 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 proprietarytechnology. Any loss of our intellectual property rights, or any significant claim of infringement or indemnity for violation of the intellectual property rights ofothers, could have a material adverse effect on our results of operations, financial condition or business. 25Table of ContentsNone of our technologies, investment solutions or services is covered by any copyright registration, issued patent or patent application. We are theowner of eight registered trademarks in the United States, including “ENVESTNET,” and we claim common law rights in other trademarks that are notregistered. 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 ouragreements 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 orbe 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 wewill 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-timepayments or ongoing subscription payments. We cannot guarantee that the third-party intellectual property we license will not be licensed to our competitors orothers in our industry. In the future, we may need to obtain additional licenses or renew existing license agreements. We are unable to predict whether theselicense agreements can be obtained or renewed on acceptable terms, or at all. In addition, we have granted our customers certain rights to use our intellectualproperty in the ordinary course of our business. Some of our customer agreements restrict our ability to license or develop certain customized technology orservices within certain markets or to certain competitors of our customers. For example, our agreement with Fidelity restricts our ability to develop anenterprise-level integration or combination of products and services substantially similar to the technology platform we have developed for Fidelity. Some of ourcustomer agreements grant our customers ownership rights with respect to the portion of the intellectual property we have developed or customized for ourcustomers. In addition, some of our customer agreements require us to deposit the source code to the customized technology and investment solutions with asource 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 thetechnology or investment solutions we have licensed to our customers. These provisions in our agreements may limit our ability to grow our business in thefuture.Third parties may sue us for intellectual property infringement or misappropriation which, if successful, could require us to pay significantdamages 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 intellectualproperty rights of others. In addition, we license content, software and other intellectual property rights from third parties and may be subject to claims ofinfringement if such parties do not possess the necessary intellectual property rights to the products they license to us. The risk of infringement claims againstus will increase if more of our competitors are able to obtain patents for investment solutions or services or business processes. In addition, we face additionalrisk of infringement or misappropriation claims if we hire an employee who possesses third party proprietary information who decides to use suchinformation in connection with our investment solutions, services or business processes without such third-party’s authorization. We have in the past beenand 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 maytherefore provide little or no deterrence. In addition, third parties may in the future 26Table of Contentsassert intellectual property infringement claims against our customers, which, in certain circumstances, we have agreed to indemnify. Any intellectual propertyrelated infringement or misappropriation claims, whether or not meritorious, could result in costly litigation and could divert management resources andattention. Moreover, should we be found liable for infringement or misappropriation, we may be required to enter into licensing agreements, if available onacceptable terms or at all, pay substantial damages or make changes to the investment solutions and services that we offer. Any of the foregoing could preventus from competing effectively, result in substantial costs to us, divert management’s attention and our resources away from our operations and otherwise harmour reputation.If our intellectual property and proprietary technology are not adequately protected to prevent use or appropriation by our competitors, ourbusiness 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 protectour intellectual property rights may be inadequate to prevent the misappropriation of our proprietary technology. There can be no assurance that others will notdevelop or patent similar or superior technologies, investment solutions or services. Unauthorized copying or other misappropriation of our proprietarytechnologies could enable third parties to benefit from our intellectual property rights without paying us for doing so, which could harm our business. Policingunauthorized use of proprietary technology is difficult and expensive and our monitoring and policing activities may not be sufficient to identify anymisappropriation and protect our proprietary technology. In addition, third parties may knowingly or unknowingly infringe our trademarks and otherintellectual property rights, and litigation may be necessary to protect and enforce our intellectual property rights. If litigation is necessary to protect and enforceour intellectual property rights, any such litigation could be very costly and could divert management attention and resources. If we are unable to protect ourintellectual property rights or if third parties independently develop or gain access to our or similar technologies, investment solutions or services, our resultsof 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 wemonitor 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 ourinvestment solutions, we could, under certain circumstances, be required to disclose the source code for our investment solutions. This could harm ourintellectual 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 proprietaryinformation.We have devoted substantial resources to the development of our proprietary technologies, investment solutions and services. In order to protect ourproprietary rights, we enter into confidentiality agreements with our employees, consultants and independent contractors. These agreements may not effectivelyprevent unauthorized disclosure of confidential information or unauthorized parties from copying aspects of our technologies, investment solutions or productsor obtaining and using information that we regard as proprietary. Moreover, these agreements may not provide an adequate remedy in the event of suchunauthorized disclosures of confidential information and we cannot assure you that our rights under such agreements will be enforceable. In addition, othersmay 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 tradesecret protection could reduce any competitive advantage we have developed and cause us to lose customers or otherwise harm our business. 27Table of ContentsOur failure to successfully integrate acquisitions could strain our resources. In addition, there are significant risks associated with growth throughacquisitions, 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. In December 2011, we completed the acquisition of FundQuest and inthe second quarter of 2012, we completed the acquisitions of Prima, Tamarac, and on April 11, 2013, we entered into a definitive agreement to acquiresubstantially all of the assets of the WMS, which we anticipate will be completed in the third quarter of 2013. Acquisitions involve a number of risks. Theycan be time-consuming and may divert management’s attention from day-to-day operations. Financing an acquisition could result in dilution from issuingequity securities or a weaker balance sheet from using cash or incurring debt. Acquisitions might also result in losing key employees. In addition, we may failto successfully integrate acquisitions successfully. We may also fail to generate enough revenues or profits from an acquisition to earn a return on theassociated 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 berealized 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; • failure to obtain necessary customer consents or retain key customers; • 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 notarise, 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 accuratemanner 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, we are often required to convert thenew 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 activities. If we fail to successfully complete our conversions in a timelyand accurate manner, we may be required to expend more time and resources than anticipated, which could erode the profitability of the client relationship. Inaddition, 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 riskscould materially adversely affect our results of operations, financial condition or business. 28Table of ContentsOur business will suffer if we do not keep up with rapid technological change, evolving industry standards or changing requirements of clients.We expect technological developments to continue at a rapid pace in our industry. Our success will depend, in part, on our ability to: • continue to develop our technology expertise; • recruit and retain skilled technology professionals; • enhance our current investment solutions and services; • develop new investment solutions and services that meet changing client needs; • advertise and market our investment solutions and services; • protect our proprietary technology and intellectual property rights; or • influence and respond to emerging industry standards and other technological changes.We must accomplish these tasks in a timely and cost-effective manner and our failure to do so could materially adversely affect our results ofoperations, 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 and failure to do so could have a material adverse effect on our results ofoperations, financial condition or business.The market for our investment solutions and services is characterized by shifting client demands, evolving market practices and, for some of ourinvestment solutions and services, rapid technological change. Changing client demands, new market practices or new technologies can render existinginvestment solutions and services obsolete and unmarketable. As a result, our future success will continue to depend upon our ability to develop newinvestment solutions and services and investment solution and service enhancements that address the future needs of our target markets and respond totechnological and market changes. We incurred technology development expenditures of $8,659, $6,424 and $5,588 in the years ended December, 31,2012, 2011 and 2010, respectively. We expect that our technology development expenditures will continue at this level or they may increase in the future. Wemay 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 ourclients. Further, we may not be successful in developing, introducing, marketing and licensing our new investment solutions or services or investmentsolution or service enhancements on a timely and cost effective basis, or at all, and our new investment solutions and services and enhancements may notadequately meet the requirements of the marketplace or achieve market acceptance. In addition, clients may delay purchases in anticipation of new investmentsolutions or services or enhancements. Any of these factors could materially adversely affect our results of operations, financial condition or business.In preparing our financial statements for 2012, we identified a material weakness in our internal control over financial reporting, and our failureto remedy this or other material weaknesses that we may identify in the future could result in material misstatements in our financialstatements.Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f)under the Exchange Act. Our management identified a material weakness in our internal control over financial reporting as of December 31, 2012. A materialweakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility thata material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. 29Table of ContentsThe material weaknesses identified by management as of December 31, 2012 consisted of inadequate and ineffective controls over income taxaccounting. As a result of this material weakness, our management concluded as of December 31, 2012 that our internal control over financial reporting wasnot effective based on criteria set forth by the Committee of Sponsoring Organization of the Treadway Commission in Internal Control—An IntegratedFramework (September 1992).If the remedial measures we have begun implementing that are designed to address this material weakness are insufficient to address this materialweakness, or if additional material weaknesses or significant deficiencies in our internal control are discovered or occur in the future, our consolidatedfinancial statements may contain material misstatements and we could be required to restate our financial results.Risks Related to our Common StockOur share price may be volatile, and the value of an investment in our common stock may decline.An active, liquid and orderly market for our common stock may not be sustained, which could depress the trading price of our common stock. Theprice of our common stock has been, and is likely to continue to be, volatile, which means that it could decline substantially within a short period of time.The market price of shares of our common stock could be subject to wide fluctuations in response to many risk factors listed in this section, many of whichare beyond our control, including: • actual or anticipated fluctuations in our financial condition and operating results; • changes in the economic performance or market valuations of other companies engaged in providing wealth management software and services; • loss of a significant amount of existing business; • actual or anticipated changes in our growth rate relative to our competitors; • actual or anticipated fluctuations in our competitors’ operating results or changes in their growth rates; • issuance of new or updated research reports by securities analysts; • our announcement of actual results for a fiscal period that are higher or lower than projected results or our announcement of revenue or earningsguidance that is higher or lower than expected; • regulatory developments in our target markets affecting us, our customers or our competitors; • fluctuations in the valuation of companies perceived by investors to be comparable to us; • share price and volume fluctuations attributable to inconsistent trading volume levels of our shares; • sales or expected sales of additional common stock; • terrorist attacks or natural disasters or other such events impacting countries where we or our customers have operations; 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 ofequity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. Thesebroad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or internationalcurrency fluctuations, may cause the market price of shares of our common stock to decline. In the past, companies that have experienced volatility in themarket 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 litigationagainst us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business. 30Table of ContentsOur 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, beneficially own, in the aggregate, approximately24% of our outstanding capital stock as of December 31, 2012. As a result, when acting together, this group has the ability to exercise significant influenceover most matters requiring our stockholders’ approval, including the election and removal of directors and significant corporate transactions. The interests ofour insider stockholders may not be aligned with the interests of our other stockholders and conflicts of interest may arise. In addition, the concentration of ourshares may have the effect of delaying, deterring or preventing significant corporate transactions which may otherwise adversely affect the market price of ourshares.The future sale of shares of our common stock may negatively impact our stock price.If our stockholders sell substantial amounts of our common stock, the market price of our common stock could fall. A reduction in ownership by alarge stockholder could cause the market price of our common stock to fall. In December 2012, we filed a registration statement on Form S-3 for the potentialresale of shares representing up to approximately 24% of our outstanding common stock. While that Form S-3 is no longer effective, such registration couldindicate a present desire to sell those shares. In addition, the average daily trading volume in our stock is relatively low. The lack of trading activity in ourstock may lead to greater fluctuations in our stock price. Low trading volume may also make it difficult for stockholders to execute transactions in a timelyfashion.Certain provisions in our charter documents and agreements and Delaware law may inhibit potential acquisition bids for our company andprevent changes in our management.Our certificate of incorporation and bylaws contains 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 provisionsin our certificate of incorporation, the price investors may be willing to pay 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 businesscombinations 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 onyour 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 salesof their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cashdividends should not purchase our common stock. Item 1B.Unresolved Staff CommentsNone. Item 2.PropertiesOur headquarters are located in Chicago, Illinois, and consist of approximately 38,000 square feet of leased space. We also lease office space inDenver, Colorado; New York, New York; Sunnyvale, California; Boston, Massachusetts; Seattle, Washington; Raleigh and Landis, North Carolina and twolocations in Trivandrum, India. We believe that our office facilities are adequate for our immediate needs and that additional or substitute space is available ifneeded to accommodate the foreseeable growth of our operations. 31Table of ContentsItem 3.Legal ProceedingsWe are involved in litigation arising in the ordinary course of our business. We do not believe that the outcome of any of these proceedings,individually or in the aggregate, would, if determined adversely to us, have a material adverse effect on our results of operations, financial condition orbusiness. Item 4.Mine Safety DisclosuresThis section is not applicable. 32Table of ContentsPART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities(a) Market InformationOur common stock is listed on the New York Stock Exchange.The following table sets forth, for the periods indicated, the high and low closing sale prices of our common stock, for each of the periods presentedbelow as reported in the consolidated reporting system for the New York Stock Exchange Composite Transactions. 2011Quarter ended March 31, 2011 $16.78 to $11.91Quarter ended June 30, 2011 $15.02 to $12.99Quarter ended September 30, 2011 $14.94 to $9.67Quarter ended December 31, 2011 $12.24 to $9.60 2012Quarter ended March 31, 2012 $13.01 to $11.34Quarter ended June 30, 2012 $12.98 to $10.94Quarter ended September 30, 2012 $12.75 to $11.23Quarter ended December 31, 2012 $13.98 to $11.77(b) HoldersThe approximate number of common stockholders was 228 as of June 12, 2013.(c) DividendsWe have not paid dividends for the most recent two years.Common StockAs of December 31, 2012, we had 500,000,000 common shares authorized at a par value of $0.005, of which 32,355,675 shares were outstanding.Preferred StockAs of December 31, 2012, we had 50,000 preferred shares authorized at a par value of $0.001, of which no shares were outstanding.(d) Securities Authorized for Issuance Under Equity Compensation PlanFor a description of securities authorized under our equity compensation plans, see note 13 to the notes to consolidated financial statements in Part II,Item 8.(e) Stock Performance GraphThe following graph compares the cumulative return to stockholders on our common stock relative to the cumulative total returns of the Russell 2000Index and The S&P North American Technology-Services Index from the effective date of our initial public offering on July 28, 2010 through December 31,2012. In calculating total annual stockholder return, reinvestment of dividends, if any, is assumed. The indices are included for comparative purposes only.This graph is not “soliciting material,” is not deemed filed with the SEC and is not to be incorporated by reference in any of our filings under the SecuritiesAct of 1933, as amended, or the Exchange Act, as amended, whether made before or after the date hereof and irrespective of any general incorporation languagein any such filing. 33®TMTable of Contents29 MONTH STOCK PERFORMANCE GRAPH 7/28/2010 12/31/2010 12/31/2011 12/31/2012 Envestnet, Inc. (“ENV”) $ 100.00 $ 189.55 $ 132.89 $ 155.00 Russell 2000 Index 100.00 119.02 114.05 132.70 S&P North American Technology-Services Index 100.00 112.38 126.21 153.33 The stock price performance included in this graph is not necessarily indicative of future stock price performance.(f) Recent Sales of Unregistered SecuritiesNone(g) Issuer Purchases of Equity SecuritiesNone 34®TMTable of ContentsItem 6. Selected Financial DataConsolidated Statements of Operations Year ended December 31, 2012 2011 2010 2009 2008 (In thousands, except share and per share information) Revenues: Assets under management oradministration $127,213 $99,236 $75,951 $56,857 $71,738 Licensing and professionalservices 30,053 23,942 22,101 21,067 20,104 Total revenues 157,266 123,178 98,052 77,924 91,842 Operating expenses: Cost of revenues 56,119 42,831 31,444 24,624 34,604 Compensation and benefits 54,973 40,305 37,027 28,763 28,452 General and administration 30,617 21,856 21,607 15,726 15,500 Depreciation and amortization 12,400 6,376 5,703 4,499 3,538 Restructuring charges 115 434 961 - - Total operating expenses 154,224 111,802 96,742 73,612 82,094 Income from operations 3,042 11,376 1,310 4,312 9,748 Total other income (expense) 26 (796) (403) (3,368) 115 Income before income tax provision 3,068 10,580 907 944 9,863 Income tax provision 2,603 2,975 1,533 1,816 4,608 Net income (loss) 465 7,605 (626) (872) 5,255 Less preferred stock dividends - - (422) (720) (203) Less net income allocated toparticipating convertible preferredstock - - - - (2,406) Income (loss) attributable to commonshareholders $465 $7,605 $(1,048) $(1,592) $2,646 Net income (loss) per shareattributable to commonstockholders Basic $0.01 $0.24 $(0.05) $(0.12) $0.20 Diluted $0.01 $0.23 $(0.05) $(0.12) $0.19 Weighted average common sharesoutstanding: Basic 32,162,672 31,643,390 20,805,911 12,910,998 13,354,845 Diluted 33,341,615 32,863,834 20,805,911 12,910,998 13,354,845 Consolidated Balance Sheet Data December 31, 2012 2011 2010 2009 2008 (In thousands) Cash and cash equivalents $29,983 $64,909 $67,668 $31,525 $28,445 Working capital 14,178 64,944 62,979 27,262 21,405 Goodwill and intangible assets 92,794 33,559 3,213 3,261 4,331 Total assets 162,399 137,702 141,029 74,064 71,257 Stockholders’ equity 125,996 115,639 101,480 57,252 57,589 35Table of ContentsItem 7.Management’s Discussion and Analysis of Financial Condition and Results of OperationsExcept where we have otherwise indicated or the context otherwise requires, dollar amounts presented in this Form 10-K are in thousands,except for Part III and per share amounts.OverviewWe are a leading provider of unified wealth management software and services to financial advisors and institutions. By integrating a wide range ofinvestment solutions and services, our Web-based platform provides financial advisors with the flexibility to address their clients’ needs.Envestnet empowers financial advisors to deliver fee-based advice to their clients. We work with both independent advisors (RIAs), as well as advisorsassociated with financial institutions (broker dealers, banks). The services we offer and market to financial advisors address advisors’ ability to grow theirpractice as well as operate more efficiently – the Envestnet platform spans from the initial meeting an advisor has with a prospective client to the ongoing day-to-day operations of managing an advisory practice.Our centrally-hosted technology platform, which we refer to as having “open architecture” because of its flexibility, provides financial advisors withaccess to a series of integrated services to help them better serve their clients. These services include risk assessment and selection of investment strategies andsolutions, asset allocation models, research and due diligence, portfolio construction, proposal generation and paperwork preparation, model management andaccount rebalancing, account monitoring, customized fee billing, overlay services covering asset allocation, tax management and socially responsibleinvesting, aggregated multi-custodian performance reporting and communication tools, as well as access to a wide range of leading third-party assetcustodians.We offer these solutions principally through the following product and services suites: • Envestnet’s wealth management software empowers advisors to better manage client outcomes and strengthen their practice. Our softwareunifies the applications and services advisors use to manage their practice and advise their clients, including financial planning; capitalmarkets assumptions; asset allocation guidance; research and due diligence on investment managers and funds; portfolio management, tradingand rebalancing; multi-custodial, aggregated performance reporting; and billing calculation and administration. • Our Portfolio Management Consultants group (“Envestnet | PMC”) primarily engages in consulting services aimed at providing financialadvisors with additional support in addressing their clients’ needs, as well as the creation of proprietary investment solutions and products.Envestnet | PMC’s investment solutions and products include managed account and multi-manager portfolios, mutual fund portfolios andETF portfolios. Envestnet | PMC also offers Prima Premium Research, comprising institutional-quality research and due diligence oninvestment managers, mutual funds, ETFs and liquid alternatives funds. • Envestnet | Tamarac provides leading portfolio accounting, rebalancing, trading, performance reporting and client relationship managementsoftware, principally to high-end RIAs. • Envestnet Reporting Solutions software aggregates and manages investment data, provides performance reporting and benchmarking, givingadvisors an in-depth view of clients’ various investments, empowering advisors to give holistic, personalized advice.We believe that our business model results in a high degree of recurring and predictable financial results.RevenuesOverviewWe earn revenues primarily under two pricing models. First, a majority of our revenues is derived from fees charged as a percentage of the assets thatare managed or administered on our technology platform by 36®Table of Contentsfinancial advisors. These revenues are recorded under revenues from assets under management (“AUM”) or administration (“AUA”) or collectively(“AUM/A”). Our asset-based fees vary based on the types of investment solutions and services that financial advisors utilize. Asset-based fees accounted forapproximately 81%, 81% and 77% of our total revenues for the years ended December 31, 2012, 2011 and 2010, respectively. In future periods, the percentageof our total revenues attributable to asset-based fees is expected to vary based on fluctuations in securities markets, whether we enter into significant licenseagreements, the mix of AUM or AUA, and other factors. As of December 31, 2012, approximately $98 billion of investment assets subject to asset-based feeswere managed or administered utilizing our technology platform by approximately 16,100 financial advisors through approximately 450,000 investoraccounts.We also generate revenues from recurring, contractual licensing fees for providing access to our technology platform. These revenues are recorded underrevenues from licensing and professional services. Licensing fees are generally fixed in nature for the contract term and are based on the level of investmentsolutions and services provided, rather than on the amount of client assets on our technology platform. Licensing fees accounted for 15%, 16% and 20% ofour total revenues for the years ended December 31, 2012, 2011 and 2010, respectively. Fees received in connection with professional services accounted forthe remainder of our total revenues. As of December 31, 2012, approximately $270 billion of investment assets for which we receive licensing fees for utilizingour technology platform were serviced by approximately 6,900 financial advisors through approximately 1,228,000 investor accounts.The following table provides information regarding the amount of assets utilizing our platform, financial advisors and investor accounts in the periodsindicated. As of December 31, 2012 2011 2010 (in millions except accounts and advisors data) Platform Assets Assets Under Management (AUM) $30,970 $22,936 $14,486 Assets Under Administration (AUA) 67,368 47,148 49,202 Subtotal AUM/A 98,338 70,084 63,688 Licensing 269,729 69,514 75,668 Total Platform Assets $ 368,067 $ 139,598 $ 139,356 Platform Accounts AUM 156,327 124,636 65,663 AUA 293,151 216,038 241,162 Subtotal AUM/A 449,478 340,674 306,825 Licensing 1,228,016 588,038 603,950 Total Platform Accounts 1,677,494 928,712 910,775 Advisors AUM/A 16,085 13,887 13,833 Licensing 6,941 5,709 7,746 Total Advisors 23,026 19,596 21,579 Revenues from assets under management or administrationWe 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 onthe nature of the investment solutions and services we provide, as well as the specific investment manager, fund and/or custodian chosen by the financialadvisor. 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. 37Table of ContentsFor over 85% of our revenues from assets under management or administration, we bill customers at the beginning of each quarter based on the marketvalue of customer assets on our technology platform as of the end of the prior quarter. For example, revenues from assets under management or administrationrecognized during the fourth quarter of 2012 were primarily based on the market value of assets as of September 30, 2012. Our revenues from assets undermanagement or administration are generally recognized ratably throughout the quarter based on the number of days in the quarter.Our revenues from assets under management or administration are affected by the amount of new assets that are added to existing and new clientaccounts, 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 thedifference between asset in-flows and outflows as net flows. Positive net flows indicate that the market value of assets added to client accounts exceeds themarket value of assets that have been withdrawn from client accounts.Our revenues from assets under management or administration are also affected by changes in the market values of securities held in client accountsdue to fluctuations in the securities markets. Certain types of securities have historically experienced greater market price fluctuations, such as equitysecurities, than other securities, such as fixed income securities, though in any given period the nature of securities that experience the greatest fluctuationsmay 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 byapproximately 57%, which significantly contributed to the 21% decrease in our revenues from assets under management or administration from 2008 to 2009.The following table provides information regarding the degree to which gross sales, redemptions, net flows and changes in the market values of assetscontributed to changes in AUM or AUA in the periods indicated. Asset Rollforward - 2012 As of12/31/11 GrossSales Redemp-tions NetFlows MarketImpact As of12/31/12 (in millions except account data) Assets under Management (AUM) $22,936 $12,487 $(6,850) $5,637 $2,397 $30,970 Assets under Administration (AUA) 47,148 28,381 (12,520) 15,861 4,359 67,368 Subtotal AUM/A $70,084 $40,868 $(19,370) $21,498 $6,756 $98,338 Number of Fee-Based Accounts 340,674 191,551 (82,747) 108,804 449,478 During 2012, we added $10.4 billion of conversions included in the above AUM/A gross sales figures, and an additional $13.2 billion of conversionsin licensing. Asset Rollforward - 2011 As of12/31/10 GrossSales Redemp-tions NetFlows MarketImpact FundQuest As of12/31/11 (in millions except account data) Assets under Management (AUM) $14,486 $7,737 $(4,795) $2,942 $(317) $5,825 $22,936 Assets under Administration (AUA) 49,202 24,873 (18,537) 6,336 (1,089) (7,301) 47,148 Subtotal AUM/A $63,688 $32,610 $(23,332) $9,278 $(1,406) $(1,476) $70,084 Number of Fee-Based Accounts 306,825 135,963 (92,060) 43,903 (10,054) 340,674 On December 13, 2011, we completed our acquisition of FundQuest. At that time, $5.8 billion of FundQuest assets previously reported as AUA werereclassified to AUM. Also during the fourth quarter, one of FundQuest’s clients with $1.5 billion in assets transitioned to licensing for a flat fee and is nolonger reflected in AUA as of December 31, 2011. During 2011, we added $8.3 billion of conversions, which are included in the above AUM/A gross salesfigures and an additional $1.0 billion in conversions under licensing agreements. 38Table of ContentsThe mix of assets under management and assets under administration was as follows for the periods indicated: December 31, 2012 2011 2010 Assets under management (AUM) 31% 33% 23% Assets under administration (AUA) 69% 67% 77% 100% 100% 100% We expect the percentage of AUM and AUA will fluctuate in future periods. The nature and type of services requested by our customers are the keydrivers in determining whether customer assets are classified as AUM or AUA. Therefore, we do not have direct control over the mix of AUM and AUA.Revenues from licensing and professional services feesOur revenues received under license agreements are recognized over the contractual term. To a lesser degree we also receive revenues from professionalservices fees by providing customers with certain technology platform software development services. In the years ended December 31, 2012, 2011 and 2010,our revenues from professional services fees were $6,145, $3,818 and $2,907, respectively. These revenues are generally recognized under a proportionalperformance model utilizing an output based approach. Our contracts have fixed prices, and generally specify or quantify interim deliverables.We may enter into license agreements in future periods if requested by our customers and commercially attractive to us.ExpensesThe following is a description of our principal expense items.Cost of revenuesCost of revenues primarily includes 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 utilizedin connection with AUA. Clearing, custody and brokerage services are provided by third-party providers. These expenses are typically calculated based upona contractual percentage of the market value of assets held in customer accounts measured as of the end of each fiscal quarter and are recognized ratablythroughout the quarter based on the number of days in the quarter. Also included in cost of revenues are vendor specific expenses related to the direct supportof revenues associated with the Envestnet | Tamarac products.Compensation and benefitsCompensation and benefits expenses primarily relate to employee compensation, including salaries, commissions, non-cash stock-basedcompensation, incentive compensation, benefits and employer-related taxes.General and administrationGeneral and administration expenses include occupancy costs and expenses relating to communications services, research and data services, websiteand system development, marketing, professional and legal services and travel and entertainment. 39Table of ContentsDepreciation and amortizationDepreciation and amortization expenses include depreciation and amortization 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, proprietary technology and trade names, the value of which are capitalized in connectionwith our acquisitions.Furniture and equipment is depreciated using the straight-line method based on the estimated useful lives of the depreciable assets. Leaseholdimprovements 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 recoverabilitywhenever 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 annualbasis and test for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets.Intangible assets are depreciated using an accelerated basis over their estimated economic useful lives and are reviewed for possible impairmentwhenever events or changes in circumstances occur that could impact the recoverability of these assets.Recent Developments2013 DevelopmentsWealth Management SolutionsOn April 11, 2013, we entered into a definitive agreement to acquire substantially all of the assets of the Wealth Management Solutions (“WMS”)division of Prudential Investments for $10,000 in cash upon closing, subject to certain post-closing adjustments, plus contingent consideration of up to a totalof $23,000 in cash, based upon meeting certain performance targets, to be paid over three years. WMS is a provider of technology solutions that enablesfinancial services firms to develop and enhance their wealth management offerings. We anticipate the acquisition will be completed in the third quarter of 2013.2012 DevelopmentsPrima Capital Holding, Inc. AgreementOn April 5, 2012, we completed the acquisition of Prima. In accordance with the stock purchase agreement, we acquired all of the outstanding sharesof Prima for consideration of $13,925. Prima, now part of Envestnet | PMC, provides investment management due diligence, research applications, assetallocation modeling and multi-manager portfolios to the wealth management and retirement industries. Prima’s clientele includes banks, independent RIAs,regional broker-dealers, family offices and trust companies.Tamarac, Inc. AgreementOn May 1, 2012, we completed the acquisition of Tamarac. In accordance with the merger agreement, a newly formed subsidiary of Envestnet mergedwith and into Tamarac, and Tamarac became a wholly-owned subsidiary of Envestnet. Under the terms of the merger agreement, net consideration was$48,427 for all of the outstanding stock of Tamarac. Tamarac provides leading portfolio accounting, rebalancing, trading, performance reporting and clientrelationship management software, principally to high-end RIAs. 40Table of ContentsIn accordance with the terms of the merger agreement between Envestnet and Tamarac, Tamarac senior management were required to apply at least 50%(up to 100%) of the aggregate proceeds of the Tamarac change of control payment totaling $2,759 to purchase registered shares of Envestnet common stock(232,150 shares) in an amount equal to 95% multiplied by the Envestnet closing market price on the day before the merger closed (See notes 3 and 12 to thenotes to consolidated financial statements).In addition, we adopted the Envestnet, Inc. Management Incentive Plan for Envestnet | Tamarac Management Employees (the “2012 Plan”). The 2012Plan provides for the grant of up to 559,551 shares of unvested common stock. The unvested common stock vests based upon Tamarac meeting certainperformance conditions and then a subsequent two-year service condition. We also granted to certain Tamarac employees 232,150 stock options to acquireEnvestnet common stock at an exercise price of $12.51. These stock options vest on the second anniversary of the grant date (See notes 3 and 13 to the notesto consolidated financial statements).2011 DevelopmentsFundQuest AgreementOn December 13, 2011, we acquired all of the outstanding shares of FundQuest for total consideration of $27,796. FundQuest, operating asEnvestnet Portfolio Solutions, Inc., provides managed account programs, overlay portfolio management, mutual funds, institutional asset management andinvestment consulting to registered investment advisors, independent advisors, broker-dealers, banks and trust organizations. Upon closing of thetransaction, the existing platform services agreement between us and FundQuest was terminated (see note 3 to the notes to consolidated financial statements)and approximately $5.8 billion of FundQuest’s assets were reclassified to assets under management from assets under administration. In addition, one ofFundQuest’s clients with $1.5 billion in assets transitioned to licensing from assets under administration.Fidelity AgreementFor the years ended December 31, 2012, 2011 and 2010, revenues associated with our relationship with our single largest client, Fidelity, accounted for22%, 31% and 31%, respectively, of our total revenues. As of December 31, 2011, we renegotiated a five-year license agreement with Fidelity which resulted ina reduction in 2012 license fee revenues. In addition, as a part of the renegotiated agreement, we will continue to receive ongoing platform services fees throughthe Fidelity relationship based upon asset-based fees.Critical Accounting PoliciesOur 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 consolidatedfinancial statements. In particular, judgment is applied to determine the appropriate assumptions to be used in calculating estimates that affect certain reportedamounts in our consolidated financial statements. These estimates and assumptions are based on historical experience and on various other factors that webelieve to be reasonable under the circumstances. If different estimates or assumptions were used, our results of operations, financial condition and cash flowscould have been materially different than those reflected in our consolidated financial statements. For additional information regarding our critical accountingpolicies, see note 2 to the notes to the consolidated financial statements.Revenue recognitionWe recognize revenues when all four of the following criteria have been met: • Persuasive evidence of an arrangement exists; • The product has been delivered or the service has been performed; 41Table of Contents • The fee is fixed or determinable; and • Collectability is reasonably assured.Types of revenuesWe generate revenues from assets under management or administration and from licensing and professional service fees. Revenues from assets undermanagement or administration are generated from fees based on a contractual percentage of assets under management or administration valued at each quarter-end. These fees are generally collected at the beginning of a quarter in advance based upon the previous quarter-end values. In less than 15% of our contracts,fees are collected at the end of the quarter based upon the average daily balance. The contractual fee percentages vary based upon the level and type of serviceswe provide to our customers. Pursuant to the contracts with our customers, we calculate our fees based on the asset values in the customer’s account, withoutmaking any judgment or estimates. None of our fees is earned pursuant to performance-based or other incentive-based arrangements.We generate revenues from licensing fees pursuant to recurring contractual fixed-fee agreements, principally with a portion of our enterprise clients. Ourlicensing fees vary based on the type of services we provide. We generate revenues from professional service fees by providing customers with customizedtechnology platform software development services. These revenues are received pursuant to contracts that detail the nature of the services to be provided byus, the estimated number of hours such work will require and the total contract fee amount.Recognition of revenuesApplication of the applicable accounting principles of U.S. GAAP requires us to make judgments and estimates in connection with the measurementand recognition of revenues. Revenues are recognized in the period in which the related services are provided. In certain cases, management is required todetermine whether revenues should be recognized in an amount equal to the gross fees we receive or as a net amount reflecting the payment of expenses to third-parties, such as sub-advisors and custodians, that provide services to us in connection with certain of our financial advisors’ client accounts. When fees arecollected for sub-advisory, clearing, custody or brokerage services in circumstances where we do not have a direct contract with the third-party provider, thefees are recorded as revenue on a net basis. Fees we received in advance of the performance of services are recorded as deferred revenues on our consolidatedbalance sheet and are recognized as revenues when earned, generally over three months.Revenues from licensing are recognized over the contractual term. Contracts with nonstandard terms and conditions may require contract interpretationto determine the appropriate revenue recognition policy to apply. For non-software multiple-element arrangements, we allocate the revenue in the arrangementusing our best estimate of selling price, when vendor-specific objective evidence (“VSOE”) or third-party evidence (“TPE”) of selling price is not available. Wegenerally recognize revenue for consideration allocated to implementation and consulting services in a multiple-element arrangement as services are performedbecause these services have standalone value separate from the license fees.Revenues from professional services are recognized under a proportional performance model utilizing an output-based approach. Our contracts havefixed prices, and generally specify or quantify interim deliverables.Our revenue recognition is also affected by our judgment in determining appropriate allowances for uncollectible receivables. We consider customer-specific information related to delinquent accounts and past lost experience, as well as current economic conditions in establishing the amount of the allowance.Customer inducementsIn certain instances, we have entered into agreements which include inducement payments to the customer. In accordance with U.S. GAAP, inducementpayments made to customers are capitalized and amortized against 42Table of Contentsrevenue on a straight-line basis over the term of the agreement. Customer inducement amortization totaled zero, $4,568 and $3,238 for 2012, 2011 and 2010,respectively. Customer inducement assets are reviewed for impairment whenever events or circumstances occur that may impact the fair value of these assets.There were no customer inducement assets as of December 31, 2012 and 2011.Purchase accountingDuring the fourth quarter of 2011, we completed the acquisition of FundQuest for consideration totaling $27,796 and in the second quarter of 2012,we completed the acquisitions of Prima and Tamarac for consideration totaling $13,925 and $48,427, respectively. For more information on the acquisitionssee note 3 to the notes to consolidated financial statements.Assigning fair market values to the assets acquired and liabilities assumed at the date of an acquisition requires knowledge of current market values,and the values of assets in use, and often requires the application of judgment regarding estimates and assumptions. While the ultimate responsibility resideswith management, for material acquisitions, we retain the services of certified valuation specialists to assist with assigning estimated values to certain acquiredassets and assumed liabilities, including intangible assets.Acquired intangible assets, excluding goodwill, are valued using a discounted cash flow methodology based on future cash flows specific to the type ofintangible asset purchased. This methodology incorporates various estimates and assumptions, the most significant being projected revenue growth rates,earnings margins, and forecasted cash flows based on the discount rate and terminal growth rate. Management projects revenue growth rates, earnings marginsand cash flows based on the historical operating results of the acquired entity adjusted for synergies anticipated to be achieved through integration, expectedfuture performance, operational strategies, and the general macroeconomic environment. We review finite-lived intangible assets for triggering events such assignificant changes in operations, customers or future revenue that might indicate the need to impair the assets acquired or change the useful lives of the assetsacquired. There was no impairment or change in useful lives recognized on other intangible assets in 2012, 2011 or 2010.Assumed liabilities are valued based on estimates of anticipated expenditures to be incurred to satisfy the assumed obligations, including contractualliabilities assumed, which require the exercise of professional judgment.Assumed contracts may have favorable or unfavorable terms that must be valued as of the acquisition date. Such valuation is subject to managementjudgment regarding the evaluation and interpretation of contract terms in relation to other economic circumstances, such as the market rates for office spaceleases.If we assume a performance obligation to customers as of the acquisition date, a deferred revenue obligation is recognized. Judgment is required toevaluate whether a future performance obligation exists and to assign a value to the performance obligation.Estimation of working capital settlement amounts, if not resolved prior to the first reporting period after an acquisition, but before the end of thepurchase measurement period, requires exercise of management judgment. We measure these amounts at the acquisition date fair value, if their fair value canbe determined during the measurement period. If these estimated working capital settlement amounts are not resolved prior to the first reporting period afteracquisition, we recognize the asset or liability if it can be reasonably estimated. Subsequent adjustments to these provisional working capital settlementamounts are evaluated by management to determine the proper accounting treatment under relevant U.S. GAAP authoritative guidance.Assumed acquired tax liabilities for uncertain tax positions are dependent on assessing the past practices of the acquisition target based on our reviewof actual tax filings and information obtained through due diligence procedures. Evaluation of the validity of tax positions taken by the acquisition target aresubject to management judgment.Transaction costs associated with business combinations are expensed as they are incurred. 43Table of ContentsInternally developed softwareCosts relating to internally developed software that are incurred in the preliminary stages of development are expensed as incurred. Managementdetermines when projects have met the criteria of the application development stage. This typically occurs when the conceptual formulation and evaluation ofsoftware functionality are finalized.Once work on a software application has passed the preliminary stages, internal and external costs, if direct and incremental, are capitalized until thesoftware application is substantially complete and ready for its intended use. These costs include expenditures related to software design, technicalspecifications, coding, installation of hardware and parallel testing. We cease capitalizing these costs upon completion of all substantial testing of the softwareapplication.We also capitalize costs related to specific upgrades and enhancements of our internally developed software when we conclude that it is probable thatthe expenditures will result in additional functionality. Our maintenance and training costs are expensed as incurred.As of December 31, 2012 and 2011, we had net capitalized internally developed software of $4,324 and $3,524, respectively. We capitalized $2,350,$1,482 and $1,340 in internally developed software during the years ended December 31, 2012, 2011 and 2010, respectively.Internally developed software is amortized on a straight-line basis over its estimated useful life. We evaluate the useful lives of these assets on an annualbasis and test for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. There were noimpairments to internally developed software during the years ended December 31, 2012, 2011 and 2010.Non-cash stock-based compensation expenseSince our 2004 Stock Incentive Plan, 2010 Long-Term Incentive Plan and the 2012 Plan were adopted, stock-based awards have been an importantcomponent of our compensation structure. We expect that this will continue to be the case in the future. Our Board of Directors is responsible for determiningthe timing and magnitude of all equity grants. Prior to our initial public offering on July 28, 2010, our Board of Directors was responsible for determining thefair value of our common stock on the date of each stock option grant. The Board of Directors had delegated certain of its responsibilities to the CompensationCommittee of the Board of Directors and certain members of management. As required under our 2004 Stock Incentive Plan and our 2010 Long-Term IncentivePlan, all of our stock 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 stock options granted from January 1, 2009 through our initial public offering on July 28, 2010: Date Shares Stock Price Exercise Price Intrinsic ValueAs of December 31, 2012 Options: 2/16/2009 1,000 $ 7.85 $ 7.85 $ 6.10 4/8/2009 8,230 7.85 7.85 6.10 5/15/2009 232,732 7.15 7.15 6.80 7/6/2009 10,000 7.15 7.15 6.80 11/16/2009 12,000 11.50 11.50 2.45 2/22/2010 71,000 13.45 13.45 0.50 Prior to our initial public offering in July 2010, there was no market for our common stock and therefore no readily available price to reference whendetermining the fair value of our common stock in connection with the granting of stock options. The value of our common stock was dependent upon ourcompany valuation and, as described below, we had periodically obtained independent valuations and performed internal valuations of our 44Table of Contentscommon stock. In each case, such valuations had been performed contemporaneously and we had determined the fair market value of our company inconformity with commonly accepted corporate valuation techniques and methodologies.Prior to our initial public offering, we generally had obtained contemporaneous independent valuations at least annually and at the time of broad-basedoption grants, such as on May 15, 2009. For our internal valuations, we applied the same approach and methodology used by the independent valuation firm.For any option grants made between quarterly valuations of our common stock, our Board of Directors assessed all available information in determiningwhether the stock price in effect at the time of the grant should otherwise be adjusted. As a private company, we had performed our quarterly valuations suchthat they were effective approximately 45 days following the end of each calendar quarter to approximate the date upon which, if we were a reporting company,we would be required to disclose to the public through filings with the Securities and Exchange Commission (“SEC”) our financial performance andassociated operating metrics, which include assets under management and administration. Until such date, any information about a given quarter’s financialperformance, ending asset values, and other information that could be deemed material to investors, would not be known to the public even if we were areporting company and therefore is not included in the valuation of our common stock during interim periods.In the specific cases of option grants made after the dates of our quarterly valuations during the period under review, our Board of Directors concludedthat no adjustment should have been made to the most recent valuation of our common stock based on its assessment that, had we been a reporting company,no new material information would have been available to the public since the date of the prior valuation of our common stock.Prior to our initial public offering, our company valuation, whether prepared by an independent valuation firm or performed internally, considered anincome approach, also known as a discounted cash flow analysis, incorporating our historical and expected financial performance, the relevant market andindustry and economic trends. Our valuation also considered a market approach, including recent capital transactions involving either our company orcomparable companies, and comparable public company valuations. The resulting calculation assigned a value for 100% of our company’s equity on amarketable equivalent, non-controlling interest basis. We considered, but did not include, an asset approach, as we did not believe the book value of our assetsprovides meaningful input into our expected revenue and earnings, or the value of our company.We believe the value of our common stock had the potential to change each fiscal quarter in the normal course of our business, since the majority ofour 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, andour historical resulting projections for earnings and cash flow, were inherently subject to fluctuations from quarter to quarter.Accordingly, prior to our initial public offering, we calculated the value of our common stock at least once each fiscal quarter. The historical quarterlyvaluations did at times fluctuate significantly as the market value of our assets under management or administration drives our near term financial results andlonger term projections. The value of our common stock could also change if a material financing transaction or other significant event occurred within a givenfiscal quarter. In such circumstances we performed an additional valuation of our common stock at the time of the transaction or event, using the samevaluation methodology that was utilized in connection with our quarterly valuations.After we determined a value for our company, we allocated the value to each class of our shares, including our common stock. Our value allocationmethodology applied the principles set forth in the AICPA Practice Aid—Valuation of Privately-Held-Company Equity Securities Issued as Compensation, orthe Practice Aid. The Practice Aid defines appropriate methods to allocate enterprise value to common shares when multiple share classes exist. Based onvarious factors, including the stage of a company’s life and the timing and likelihood of various liquidity events, one method of allocation may be moreappropriate than the others. We considered, but did not use, the probability-weighted expected return method due to the number of assumptions for eachscenario that are difficult to estimate, and the fact that our most likely liquidation event was an initial public offering. 45Table of ContentsAdditionally, we did not apply the liquidation method because, as the Practice Aid indicates, it would be inappropriate for a later-stage company such as oursto use that method to allocate value to the various share classes. Furthermore, the more imminent a liquidity event becomes, the more aligned the liquidationmodel and option pricing model become in attributing value to each share class. Accordingly, we used the option pricing method, as defined in the PracticeAid, which treats each class of equity as having a “call option” on the enterprise value. The option pricing method considers the economic preferences andother rights attributable to each share class, resulting in a price for each of our share classes, including our common stock. Our valuations of our commonstock also reflected a discount for lack of marketability, adjusted over time to reflect the expected likelihood and timing of a liquidity event subsequent to eachvaluation date. No other discounts were applied in determining the value of our common stock.During 2009 and through the date our initial public offering on July 28, 2010, we performed the following contemporaneous valuations of our commonstock: Date Fair Value ofCommon Stock 2/15/2009 $ 7.85 5/15/2009 7.15 8/15/2009 9.90 11/15/2009 11.50 2/15/2010 13.45 As described above, the assets under management or administration on our technology platform at the end of a given quarter have a significant impacton our short—and long-term financial projections and resulting valuation. For example, the valuation conducted on May 15, 2009 incorporated financialprojections based on assets under management or administration as of March 31, 2009. The value of those assets was 6% below the value of the assets as ofDecember 31, 2008. This contributed to the decline in the estimated fair value of our common stock between periods. Conversely, assets under management oradministration increased 16% between March 31, 2009 and June 30, 2009, contributing to an increase in the estimated fair value of our common stockbetween May 15, 2009 and August 15, 2009. In addition, assets under management or administration increased 15% between June 30, 2009 andSeptember 30, 2009, which contributed to the increase in the fair value of our common stock between August 15, 2009 and November 15, 2009. A 4%increase in assets under management or administration between September 30, 2009 and December 31, 2009, as well as the platform services agreement signedwith FundQuest in February of 2010, contributed to the increase in the fair value of our common stock between November 15, 2009 and February 15, 2010.The decrease between the fair value of our common stock on November 15, 2009 and February 15, 2010 and the initial public offering price was principallyattributable to volatility in the trading prices of the common stock of comparable companies and the difficult conditions in the market for initial publicofferings at and immediately prior to our determination of the initial public offering price. Other factors, such as updated financial projections not related tochanges in our assets under management or administration, as well as fluctuations in the value of comparable publicly-traded companies, also contributed tothe differences in the estimated fair value of our common stock between periods.Since our initial public offering on July 28, 2010, we have not performed internal valuations or obtained independent valuations in order to determinethe Company’s stock price to reference when determining the fair value of our common stock in connection with the granting of stock options or restrictedstock.Non-cash stock-based compensation expense for stock option and restricted stock grants is estimated at the grant date based on each grant’s fair value,calculated using the Black-Scholes option pricing model for stock options, and intrinsic value for restricted stock. Compensation and benefits expenses arerecognized over the vesting period for each grant. The fair value of our stock options and the resulting expenses are based on various assumptions, includingthe 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 differentassumptions would result in different fair values and compensation and benefits expenses for our option grants. 46Table of ContentsThe 2012 Plan provides for the grant of up to 559,551 shares of unvested common stock (“Target Incentive Awards”). The Target Incentive Awardsvest based upon Tamarac meeting certain performance conditions and then a subsequent two-year service condition. We measured the cost of these awardsbased on the estimated fair value of the award as of the market closing price on the day before the acquisition closed. We are recognizing the estimated expenseon a graded-vesting method over a requisite service period of three to five years, which is the estimated vesting period. We have estimated expected forfeitures atthe grant date and will recognize compensation expense only for those awards expected to vest. The initial forfeiture assumption is reassessed by managementin subsequent periods and may change based upon new facts and circumstances. Changes in the forfeiture assumptions may impact the total amount ofexpense ultimately recognized over the vesting period.Income taxesWe are subject to income taxes in the United States and India. Significant judgment is required in evaluating our tax positions and determining ourprovision for income taxes.We use the asset and liability method to account for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for net operatingloss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which thosetemporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in theCompany’s income tax provision in the period that includes the enactment date. We record a valuation allowance to reduce deferred tax assets to an amount thatwe determine is more-likely-than-not to be realized in the future.In our ordinary course of business, we may enter into transactions for which the ultimate tax determination is uncertain. In such cases, we establishreserves for tax-related uncertainties based on our estimates of whether, and the extent to which, additional taxes will be due. The reserves are established whenwe believe that certain positions are likely to be challenged and may not be fully sustained on review by tax authorities. We adjust these reserves in light ofchanging facts and circumstances, such as the closing of a tax audit or refinement of an estimate. Although we believe our reserves are reasonable, noassurance can be given that the final outcome of these matters will not be different from that which is reflected in our historical income tax provisions andaccruals. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will be reflected in our provision forincome taxes. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate.The amount of income tax we pay is subject to audits by federal, state and foreign tax authorities, which may result in proposed assessments. Ourestimate of the potential outcome for any uncertain tax issue is highly judgmental. We believe that we have adequately provided for the foreseeable outcomerelated to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period theassessments are made or resolved, audits are closed or when statutes of limitations on potential assessments expire. Additionally, the jurisdictions in which ourearnings or deductions are realized may differ from our current estimates. As a result, our effective tax rate may fluctuate significantly on a quarterly basis.Significant judgment is also required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuationallowance, we consider all available evidence, including past operating results, estimates of future taxable income and the feasibility of tax planning strategies.In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with acorresponding impact to the provision for income taxes in the period in which such determination is made.Our effective tax rates differ from the statutory rates primarily due to adjustments in valuation allowances, unrecognized tax benefits, state incometaxes and changes in rates. Our provision for income taxes varies based on, among other things, changes in the valuation of our deferred tax assets andliabilities, the tax effects of non-cash stock-based compensation or changes in applicable tax laws, regulations and accounting principles or interpretationsthereof. 47Table of ContentsAs of December 31, 2012, we had net operating loss carryforwards for federal and state income tax purposes of $42,912 and $30,271, respectively,available to reduce future income subject to income taxes. The federal and state net operating loss carryforwards expire through 2033. In addition, we havealternative minimum tax credit carryforwards of approximately $445, which are available to reduce future federal regular income taxes, if any, over anindefinite period.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 ofadverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomesfrom these examinations will not have a material adverse effect on our results of operations, financial condition and cash flows.Our India subsidiary is currently under examination by the India Taxing Authority for the fiscal years ended March 31, 2009 and March 31, 2010.Based on the outcome of examinations of our subsidiary or the result of the expiration of statutes of limitations, it is reasonably possible that the relatedunrecognized tax benefits could change from those recorded in the consolidated balance sheets. It is possible that one or more of these audits may be finalizedwithin the next twelve months.Results of OperationsYear ended December 31, 2012 compared to year ended December 31, 2011 Year Ended December 31, Increase (Decrease) 2012 2011 Amount % (In thousands) Revenues: Assets under management or administration $ 127,213 $ 99,236 $ 27,977 28% Licensing and professional services 30,053 23,942 6,111 26% Total revenues 157,266 123,178 34,088 28% Operating expenses: Cost of revenues 56,119 42,831 13,288 31% Compensation and benefits 54,973 40,305 14,668 36% General and administration 30,617 21,856 8,761 40% Depreciation and amortization 12,400 6,376 6,024 94% Restructuring charges 115 434 (319) -74% Total operating expenses 154,224 111,802 42,422 38% Income from operations 3,042 11,376 (8,334) -73% Other income (expense): Interest income 29 77 (48) -62% Interest expense (3) (786) 783 -100% Other income - 1,100 (1,100) -100% Other expense - (1,183) 1,183 -100% Unrealized gain (loss) on investments - (4) 4 -100% Total other income (expense) 26 (796) 822 -103% Income before income tax provision 3,068 10,580 (7,512) -71% Income tax provision 2,603 2,975 (372) -13% Net income $465 $7,605 $(7,140) -94% 48Table of ContentsRevenuesTotal revenues increased 28% from $123,213 in 2011 to $157,266 in 2012. The increase was primarily due to an increase in revenues from assetsunder management or administration of $27,977. Revenues from assets under management or administration comprised 81% of total revenues in both 2012and 2011.Assets under management or administrationRevenues earned from assets under management or administration increased 28% from $99,236 in 2011 to $127,213 in 2012. This increase wasprimarily due to an increase in asset values applicable to our quarterly billing cycles in 2012, relative to those used in 2011. Our 2012 revenues werepositively affected by new account growth and positive net flows of AUM and AUA during 2011 and through September 2012, as well as an increase inrevenues related to FundQuest.The number of financial advisors with AUM or AUA on our technology platform increased from 13,887 as of December 31, 2011 to 16,085 as ofDecember 31, 2012 and the number of AUM or AUA client accounts increased from approximately 341,000 as of December 31, 2011 to approximately450,000 as of December 31, 2012.Licensing and professional servicesLicensing and professional services revenues increased 26% from $23,942 in 2011 to $30,053 in 2012. This increase was primarily due to anincrease in licensing revenue of $3,787 and an increase in professional services revenue of $2,327. The increase in licensing revenue was primarily a result ofthe acquisitions of Prima and Tamarac, partially offset by the renegotiated license agreement with Fidelity.Cost of revenuesCost of revenues increased 31% from $42,831 in 2011 to $56,119 in 2012, primarily due to the corresponding increase in revenues from AUM orAUA. As a percentage of total revenues, cost of revenues increased from 35% in 2011 to 36% in 2012.Compensation and benefitsCompensation and benefits increased 36% from $40,305 in 2011 to $54,973 in 2012, primarily due to an increase in salaries, benefits andcommissions of $12,416 related to an increase in headcount as a result of the FundQuest, Prima and Tamarac acquisitions. In addition, incentivecompensation and non-cash compensation expense increased $1,137 and $1,280, respectively, over the prior year period. Headcount increased from anaverage of 486 in 2011 to an average of 655 in 2012, primarily to support the growth of our operations, as well as increased headcount from acquisitions. Asa percentage of total revenues, compensation and benefits increased from 33% in 2011 to 35% in 2012.General and administrationGeneral and administration expenses increased 40% from $21,856 in 2011 to $30,617 in 2012, primarily due to increases in transaction-related costsof $2,051, occupancy costs of $1,814, communication, research and data services expense of $1,283, travel and entertainment costs of $998, marketingexpenses of $655 and website hosting and development expenses of $600. As a percentage of total revenues, general and administration expenses increasedfrom 18% in 2011 to 19% in 2012.Depreciation and amortizationDepreciation and amortization expense increased 94% from $6,376 in 2011 to $12,400 in 2012, primarily due to an increase in intangible assetamortization of $5,230 and fixed asset depreciation of $823. The increase in intangible asset amortization was due to an increase in intangible assets as aresult of the FundQuest, Prima and 49Table of ContentsTamarac acquisitions (see note 3 to the notes to consolidated financial statements). The increase in depreciation and amortization expense was primarily due toincreases in capitalized computer equipment and software to support the growth of our operations. As a percentage of total revenues, depreciation andamortization increased from 5% in 2011 to 8% in 2012.Restructuring chargesIn 2012, we incurred restructuring charges of $115 primarily for severance charges related to the termination of certain Prima and Tamarac employeesrelated to these acquisitions. In 2011, we incurred restructuring charges of $434 primarily for severance charges related to the termination of certain FundQuestand Envestnet employees related to the FundQuest acquisition.Interest expenseInterest expense decreased from $786 in 2011 to $3 in 2012, primarily due to eleven months of imputed interest on payments due to FundQuest in2011 compared to no imputed interest in 2012. As discussed in note 3 to the notes to consolidated financial statements, as a result of the FundQuestacquisition and the related termination of the Platform Services Agreement with FundQuest, we ceased imputing interest expense as of the date of acquisition.Other incomeOther income decreased from $1,100 in 2011 to zero in 2012. In 2011, the Company received proceeds from an insurance recovery (see note 15 to thenotes to consolidated financial statements).Other expenseOther expense decreased from $1,183 in 2011 to zero in 2012. In 2011, the Company incurred non-cash contract settlement charges related to thetermination of the Platform Services Agreement between the Company and FundQuest (see note 3 to the notes to consolidated financial statements).Income tax provision Year Ended December 31, 2012 2011 (in thousands) Income tax provision $ 2,603 $ 2,975 Effective tax rate 84.8% 28.1% Our 2012 effective tax rate differs from the statutory rate primarily as a result of unrecognized tax benefits recorded in India, the effect of state tax ratechanges, permanent differences, and changes in the valuation of federal and state net operating losses and adjustments to state deferred tax assets. Theunrecognized tax benefits recorded relate to India tax exposure resulting from an examination performed by the India Taxing Authority. The change in state taxrates was primarily related to recognizing the benefit of state tax deductions on our federal tax return as well as changes in state tax laws regarding the sourcingof state taxable income. The adjustments to state deferred tax assets result from an analysis performed on the tax basis of fixed assets. It was determined thatour net deferred tax assets did not properly reflect the future state tax benefits that will be recorded, and therefore we adjusted our balances accordingly.Our 2011 effective tax rate differs from the statutory rate primarily as a result of changes in our estimates of our state income tax obligations for prioryears, changes in state tax rates and the effect of permanent differences. Our 2011 effective tax rate also differs from the statutory rate primarily as a result ofthe reversal of certain deferred income tax liabilities totaling $1,186 related to the termination of the Platform Services Agreement between Envestnet andFundQuest (see note 3 to the notes to consolidated financial statements). 50Table of ContentsYear ended December 31, 2011 compared to year ended December 31, 2010 Year Ended December 31, Increase (Decrease) 2011 2010 Amount % (In thousands) Revenues: Assets under management or administration $ 99,236 $ 75,951 $ 23,285 31% Licensing and professional services 23,942 22,101 1,841 8% Total revenues 123,178 98,052 25,126 26% Operating expenses: Cost of revenues 42,831 31,444 11,387 36% Compensation and benefits 40,305 37,027 3,278 9% General and administration 21,856 21,607 249 1% Depreciation and amortization 6,376 5,703 673 12% Restructuring charges 434 961 (527) -55% Total operating expenses 111,802 96,742 15,060 16% Income from operations 11,376 1,310 10,066 * Other income (expense): Interest income 77 149 (72) -48% Interest expense (786) (564) (222) 39% Other income 1,100 - 1,100 100% Other expense (1,183) - (1,183) 100% Unrealized gain (loss) on investments (4) 12 (16) -133% Total other (expense) (796) (403) (393) 49% Income before income tax provision 10,580 907 9,673 * Income tax provision 2,975 1,533 1,442 94% Net income (loss) $7,605 $(626) $8,231 * *Not meaningful.RevenuesTotal revenues increased 26% from $98,052 in 2010 to $123,178 in 2011. The increase was primarily due to an increase in revenues from assetsunder management or administration of $23,285. Revenues from assets under management or administration comprised 81% and 77% of total revenues in2011 and 2010, respectively.Assets under management or administrationRevenues earned from assets under management or administration increased 31% from $75,951 in 2010 to $99,236 in 2011. This increase wasprimarily due to an increase in asset values applicable to our quarterly billing cycles in 2011, relative to those used in 2010. Our 2011 revenues were positivelyaffected by new account growth and positive net flows of AUM and AUA during the fourth quarter of 2010 through September 30, 2011. This increase waspartially offset by a decrease in the market value of AUM and AUA from the fourth quarter of 2010 to September 30, 2011.New account growth and positive net flows of AUM and AUA resulted from continued efforts to increase the number of financial advisors andaccounts on our technology platform and the implementation of the FundQuest assets on our technology platform. The number of financial advisors withAUM or AUA on our technology platform increased from 13,833 as of December 31, 2010 to 13,887 as of December 31, 2011 and the number of AUM orAUA client accounts increased from approximately 307,000 as of December 31, 2010 to approximately 341,000 as of December 31, 2011. 51Table of ContentsLicensing and professional servicesLicensing and professional services revenues increased 8% from $22,101 in 2010 to $23,942 in 2011, primarily due to an increase in licensingrevenue of $935 and an increase in professional services revenue of $911.Cost of revenuesCost of revenues increased 36% from $31,444 in 2010 to $42,831 in 2011, primarily due to an increase in revenues from assets under management oradministration. As a percentage of total revenues, cost of revenues increased from 32% in 2010 to 35% in 2011.Compensation and benefitsCompensation and benefits increased 9% from $37,027 in 2010 to $40,305 in 2011, primarily due to an increase in salaries and commissions of$2,048 related to an increase in headcount, an increase in non-cash stock-based compensation expense of $1,331 primarily due to the grant of stock optionson the date of our initial public offering and an increase in benefits and payroll taxes of $960, offset by a decrease in incentive compensation expense of$976. Headcount increased from an average of 437 in 2010 to an average of 486 in 2011, primarily to support the growth of our operations, as well asincreased headcount from acquisitions. As a percentage of total revenues, compensation and benefits decreased from 38% in 2010 to 33% in 2011.General and administrationGeneral and administration expenses increased 1% from $21,607 in 2010 to $21,856 in 2011. Significant changes from 2010 to 2011 include adecrease of $2,668 in bad debt expense related to the uncollectible portion of accounts and notes receivable from Fetter Logic (see note 16 to the notes toconsolidated financial statements) and a decrease of $1,897 in legal fees related to the Fetter Logic litigation, offset by increases in communication, researchand data services expense of $925, occupancy costs of $580, insurance and bank charges of $404, travel and entertainment costs of $401 and professionaland other legal fees of $804. As a percentage of total revenues, general and administration expenses decreased from 22% in 2010 to 18% in 2011. Excludingbad debt expense of $2,668 and legal fees of $1,933 related to the Fetter Logic litigation, general and administration expenses as a percentage of total revenueswould have been 17% in 2010.Depreciation and amortizationDepreciation and amortization expense increased 12% from $5,703 in 2010 to $6,376 in 2011, primarily due to an increase in fixed asset depreciationand amortization of $855. The increase in depreciation and amortization expense was primarily due to increases in capitalized computer equipment andsoftware to support the growth of our operations. As a percentage of total revenues, depreciation and amortization decreased from 6% in 2010 to 5% in 2011.Restructuring chargesEffective March 31, 2010, we closed our Los Angeles office in order to more appropriately align and manage our resources and incurred restructuringcharges of approximately $961 in 2010 and $53 in 2011. These expenses related to vacating rental office space, relocation expenses and severance charges. In2011, we incurred restructuring charges of approximately $381 primarily for severance charges related to the termination of certain FundQuest and Envestnetemployees related to the FundQuest acquisition (see note 9 to the notes to consolidated financial statements).Interest expenseInterest expense increased from $564 in 2010 to $786 in 2011, primarily due to imputed interest on the payments due to FundQuest. Due to theFundQuest acquisition and the related termination of the Platform Services Agreement with FundQuest, we have ceased imputing interest expense as of the dateof acquisition (see note 3 to the notes to consolidated financial statements). 52Table of ContentsOther incomeOther income increased from zero in 2010 to $1,100 in 2011, due to the proceeds from an insurance recovery in 2011 (see note 15 to the notes toconsolidated financial statements).Other expenseOther expense increased from zero in 2010 to $1,183 in 2011, due to the contract settlement charges related to the termination of the Platform ServicesAgreement between Envestnet and FundQuest (see note 3 to the notes to consolidated financial statements).Income tax provision Year Ended December 31, 2011 2010 (in thousands) Income tax provision $ 2,975 $ 1,533 Effective tax rate 28.1% * *Not meaningful.Our 2011 effective tax rate differs from the statutory rate primarily as a result of changes in our estimates of our state income tax obligations for prioryears, changes in state tax rates and the effect of permanent items. The changes in state tax rates were primarily related to changes in state tax laws regardingthe sourcing of state taxable income. Our 2011 effective tax rate also differs from the statutory rate primarily as a result of the reversal of certain deferredincome tax liabilities totaling $1,187 related to the termination of the Platform Services Agreement between Envestnet and FundQuest (see note 3 to the notes toconsolidated financial statements).Our 2010 effective tax rate differs from the statutory rate primarily as a result of changes in our estimates of our state income tax obligations for prioryears and changes in state tax rates. The changes in state tax rates were primarily related to changes in state tax laws regarding the sourcing of state taxableincome. Our 2010 effective tax rate also differs from the statutory rate primarily as a result of an increase in our tax valuation allowance we recorded in 2010.In 2010, our management determined that newly generated deferred tax assets related to capital losses from investments and bad debts were not expected to beutilized and correspondingly, we increased our tax valuation allowance.Non-U.S. GAAP Financial Measures Year Ended December 31, 2012 2011 2010 (in thousands) Adjusted revenues $ 158,514 $ 123,178 $ 98,052 Adjusted EBITDA 23,988 27,436 18,115 Adjusted net income 10,570 13,754 7,629 Adjusted net income per share 0.32 0.42 0.24 “Adjusted revenues” excludes the effect of purchase accounting on the fair value of acquired deferred revenue. Under U.S. GAAP, we record at fairvalue the acquired deferred revenue for contracts in effect at the time the entities were acquired. Consequently, revenue related to acquired entities for periodssubsequent to the acquisition does not reflect the full amount of revenue that would have been recorded by these entities had they remained stand-alone entities.“Adjusted EBITDA” represents net income (loss) before deferred revenue fair value adjustment, interest income, interest expense, income taxprovision, depreciation and amortization, non-cash compensation expense, 53Table of Contentsrestructuring charges and transaction costs, severance, litigation-related expense, gain (loss) on investments, other income, impairment of customerinducement asset, contract settlement charges, bad debt expense and customer inducement costs.“Adjusted net income” represents net income (loss) before deferred revenue fair value adjustment, non-cash compensation expense, severance,amortization of acquired intangibles, litigation-related expense, non-recurring tax items, bad debt expense, customer inducement costs, contract settlementcharges, contract settlement – reversal of deferred taxes, impairment of customer inducement asset, other income and imputed interest expense. Reconcilingitems, excluding bad debt expense, contract settlement charges, contract settlement – reversal of deferred taxes and non-deductible transaction costs, are taxeffected using the income tax rates in effect on the applicable date.“Adjusted net income per share” represents adjusted net income attributable to common stockholders divided by the diluted number of weighted-average shares outstanding.Our Board of Directors and our management use adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share: • 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, Board of Directors and our management may also consider adjusted EBITDA, among other factors, when determiningmanagement’s incentive compensation.We also present adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share as supplemental performance measuresbecause we believe that they provide our Board of Directors, management and investors with additional information to assess our performance. Adjustedrevenues provide comparisons from period to period by excluding the effect of purchase accounting on the fair value of acquired deferred revenue. AdjustedEBITDA provide comparisons from period to period by excluding potential differences caused by variations in the age and book depreciation of fixed assetsaffecting relative depreciation expense and amortization of internally developed software, amortization of acquired intangible assets, amortization of customerinducement costs, litigation-related expense, severance, gain on investments, and changes in interest expense and interest income that are influenced by capitalstructure decisions and capital market conditions. Our management also believes it is useful to exclude non-cash stock-based compensation expense fromadjusted EBITDA and adjusted net income because non-cash equity grants made at a certain price and point in time do not necessarily reflect how ourbusiness is performing at any particular time.We believe adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share are useful to investors in evaluating ouroperating performance because securities analysts use adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share assupplemental measures to evaluate the overall performance of companies, and we anticipate that our investor and analyst presentations will include adjustedrevenues, adjusted EBITDA, adjusted net income and adjusted net income per share.Adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share are not measurements of our financial performanceunder U.S. GAAP and should not be considered as an alternative to revenues, net income, operating income or any other performance measures derived inaccordance with U.S. GAAP, or as an alternative to cash flows from operating activities as a measure of our profitability or liquidity. 54Table of ContentsWe understand that, although adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share are frequently used bysecurities analysts and others in their evaluation of companies, these measures have limitations as an analytical tool, and you should not consider them inisolation, or as a substitute for an analysis of our results as reported under U.S. GAAP. In particular you should consider: • Adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share do not reflect our cash expenditures, or futurerequirements for capital expenditures or contractual commitments; • Adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share do not reflect changes in, or cash requirementsfor, our working capital needs; • Adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per share do not reflect non-cash components of employeecompensation; • Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized often will have to be replaced in thefuture, 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 2012, 2011 and 2010, wehad cash income tax payments of $796, $813 and $171 in the years ended December 31, 2012, 2011 and 2010, respectively. Income taxpayments will be higher if we continue to generate taxable income and our existing net operating loss carryforwards for federal and state incometaxes have been fully utilized or have expired; and • Other companies in our industry may calculate adjusted revenues, adjusted EBITDA, adjusted net income and adjusted net income per sharedifferently than we do, limiting their usefulness as a comparative measure.Management compensates for the inherent limitations associated with using adjusted revenues, adjusted EBITDA, adjusted operating income, adjustednet income and adjusted net income per share through disclosure of such limitations, presentation of our financial statements in accordance with U.S. GAAPand reconciliation of adjusted revenues to revenues, the most directly comparable U.S. GAAP measure and adjusted EBITDA, adjusted net income andadjusted net income per share to net income and net income per share, the most directly comparable U.S. GAAP measure. Further, our management alsoreviews U.S. GAAP measures and evaluates individual measures that are not included in some or all of our non-U.S. GAAP financial measures, such as ourlevel of capital expenditures and interest income, among other measures.The following table sets forth a reconciliation of total revenues to adjusted revenues based on our historical results: Year Ended December 31, 2012 2011 2010 (in thousands) Total revenues $ 157,266 $ 123,178 $ 98,052 Deferred revenue fair value adjustment 1,248 - - Adjusted revenues $158,514 $123,178 $98,052 55Table of ContentsThe following table sets forth the reconciliation of net income (loss) to adjusted EBITDA based on our historical results: Year Ended December 31, 2012 2011 2010 (in thousands) Net income (loss) $ 465 $ 7,605 $(626) Add (deduct): Deferred revenue fair value adjustment 1,248 - - Interest income (29) (77) (149) Interest expense 3 786 564 Income tax provision 2,603 2,975 1,533 Depreciation and amortization 12,400 6,376 5,703 Non-cash compensation expense 4,037 3,062 1,731 Restructuring charges and transaction costs 2,718 1,054 961 Severance 278 698 570 Litigation-related expense 265 128 1,933 (Gain) loss on investments - 4 (12) Other income - (1,100) - Impairment of customer inducement asset - 174 - Contract settlement charges - 1,183 - Bad debt expense - - 2,668 Customer inducement costs - 4,568 3,239 Adjusted EBITDA $23,988 $27,436 $18,115 56Table of ContentsThe following table sets forth the reconciliation of net income (loss) to adjusted net income and adjusted net income per share based on our historicalresults: Year Ended December 31, 2012 * 2011 * 2010 * (in thousands) Net income (loss) $ 465 $7,605 $(626) Add: Deferred revenue fair value adjustment 746 - - Non-cash compensation expense 2,414 1,831 1,077 Restructuring charges and transaction costs 1,810 630 598 Severance 166 417 355 Amortization of acquired intangible assets 3,687 559 694 Litigation-related expense 158 77 1,202 Non-recurring tax items 1,124 - - Bad debt expense - - 2,668 Customer inducement costs - 2,732 2,015 Contract settlement charges - 1,183 - Contract settlement - reversal of deferred taxes - (1,187) - Impairment of customer inducement asset - 104 - Other income - (658) - Imputed interest expense - 461 340 Adjusted net income 10,570 13,754 8,323 Less: Preferred stock dividends - - (422) Less: Net income allocated to participating preferred stock - - (2,069) Adjusted net income attributable to common stockholders $10,570 $13,754 $5,832 Basic number of weighted-average shares outstanding 32,162,672 31,643,390 20,805,911 Effect of dilutive shares: Options to purchase common stock 954,056 974,192 992,753 Common warrants 177,257 211,495 154,364 Restricted stock 47,630 34,757 - Diluted number of weighted-average shares outstanding 33,341,615 32,863,834 21,953,028 Adjusted net income per share $0.32 $0.42 $0.27 *Adjustments, excluding non-recurring tax items, bad debt expense, contract settlement charges, contract settlement – reversal of deferred taxes and non-deductible transaction costs, are tax effected using income tax rates as follows: for 2012 and 2011—40.2%; for 2010—37.8%.Liquidity and Capital ResourcesAs of December 31, 2012, we had total cash and cash equivalents of $29,983, compared to $64,909 as of December 31, 2011. We plan to useexisting cash as of December 31, 2012 and cash generated in the ongoing operations of our business to fund our current operations and capital expenditures in2013. 57Table of ContentsCash FlowsThe following table presents information regarding our cash flows and cash and cash equivalents for the periods indicated: Year Ended December 31, 2012 2011 2010 (In thousands) Net cash provided by operating activities $ 28,541 $ 24,721 $ 1,467 Net cash used in investing activities (69,707) (30,133) (5,501) Net cash provided by financing activities 6,240 2,653 40,177 Net increase (decrease) in cash and cash equivalents (34,926) (2,759) 36,143 Cash and cash equivalents, end of period 29,983 64,909 67,668 Operating ActivitiesNet cash provided by operating activities in 2012 increased by $3,820 compared to 2011, primarily due to a decrease in net earnings of $7,140 in2012 compared to the prior year period, a decrease in amortization of customer inducements of $4,568, offset by an increase in $6,024 in depreciation andamortization expense, and an overall net increase in operating assets and liabilities of $12,939.Net cash provided by operating activities in 2011 increased by $23,254 compared to 2010, primarily due to an increase in net earnings of $8,231 forthe year ended December 31, 2011 compared to the prior year period and a decrease in customer inducement liability payments of $10,300, primarily a resultof a $1,000 payment to FundQuest in 2011 compared to a payment of $11,300 to FundQuest in 2010.Investing ActivitiesNet cash used in investing activities in 2012 increased by $39,574 compared to 2011. In 2012, the Company acquired Prima and Tamarac for netcash totaling $62,352 combined and in 2011, the Company acquired FundQuest for net cash totaling $23,719 (see notes 3 to the notes to consolidatedfinancial statements). Additionally, cash disbursements in 2012 and 2011 totaled $7,188 and $6,280, respectively, for purchases of property and equipmentand capitalization of internally developed software.Net cash used in investing activities in 2011 increased by $24,632 compared to 2010. In 2011, the Company acquired FundQuest for net cashtotaling $23,719. Additionally, cash disbursements in 2011 and 2010 totaled $6,280 and $5,509, respectively, for purchases of property and equipmentand capitalization of internally developed software.Financing ActivitiesNet cash provided by financing activities in 2012 increased by $3,587 compared 2011, primarily a result of the proceeds from the issuance ofrestricted stock in the Tamarac acquisition of $2,759 (see notes 3 and 12 to the notes to consolidated financial statements) offset by a decrease in proceedsfrom the exercise of stock options of $678.Net cash provided by financing activities in 2011 decreased by $37,524 million compared to 2010, primarily due to the receipt of net proceeds of$42,066 from our initial public offering after deducting underwriting discounts and offering costs in 2010, net proceeds of $1,525 for the exercise ofwarrants in 2010 and net proceeds of $1,925 from the exercise of stock options in 2010, partially offset by $3,993 used in purchases of our common stockin 2010 and payments of preferred stock dividends of $1,346 in 2010. In 2011, we received net proceeds of $2,747 from the exercise of stock options. 58Table of ContentsCommitmentsThe following table sets forth information regarding our contractual obligations as of December 31, 2012: Payments Due by Period Total Less than1 year 1-3 years 3-5 years More than5 years (In thousands) Operating leases (1) $ 46,571 $ 4,488 $ 10,364 $ 10,646 $ 21,073 Purchase obligations 710 637 73 - - Total $47,281 $5,125 $10,437 $10,646 $21,073 (1)We lease facilities under non-cancelable operating leases expiring at various dates through 2023.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 theyears ended December 31, 2012, 2011 and 2010, we made voluntary employer matching contributions of $660, $474 and $427, respectively.Off-Balance Sheet ArrangementsOther than operating leases as indicated above, we do not have any other off-balance sheet arrangements.Recent Accounting PronouncementsIn June 2011, the FASB issued authoritative guidance that amends ASC Topic 220, Comprehensive Income, to require that all non-owner changes instockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements, and iteliminates the option to present components of other comprehensive income as a part of the statement of changes in stockholders’ equity. In addition, thisguidance requires an entity to present on the face of the financial statements reclassification adjustments for items that are reclassified from othercomprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented.These amendments are to be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15,2011; however, early adoption is permitted. The adoption of this guidance on January 1, 2012 did not have a material impact on our consolidated financialstatements.In September 2011, the FASB issued authoritative guidance regarding the testing of goodwill for impairment. This guidance allows companies toperform a “qualitative” assessment to determine whether or not the current two-step quantitative testing method, in which a company compares the fair value ofreporting units to their carrying amounts including goodwill, must be followed. If a qualitative assessment indicates that it is more-likely-than-not that the fairvalue of a reporting unit is greater than its carrying amount, then the quantitative impairment test is not required. A company may choose to use the qualitativeassessment on none, some, or all of its reporting units or to bypass the qualitative assessment and proceed directly to the two-step quantitative testing method.This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011; however, earlyadoption is permitted. The adoption of this guidance on January 1, 2012 did not have a material impact on our consolidated financial statements. 59Table of ContentsItem 7A. Quantitative and Qualitative Disclosures About Market RiskMarket riskOur exposure to market risk is directly related to revenues from asset management or administration services earned based upon a contractualpercentage of AUM or AUA. In the years ended December 31, 2012, 2011 and 2010, 81%, 81% and 77% of our revenues, respectively, were derived fromrevenues 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 maycause our revenue and income to decline.Foreign currency riskThe 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. As ofDecember 31, 2012, 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 $470 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 $385 increase to pre-tax earnings.Interest rate riskWe have no floating interest rate debt, therefore we are not directly exposed to interest rate risk. 60Table of ContentsItem 8. Financial Statements and Supplementary DataReport of Independent Registered Public Accounting FirmTo the Board of Directors and StockholdersEnvestnet, Inc.:We have audited the accompanying consolidated balance sheets of Envestnet, Inc. and subsidiaries (the “Company”) as of December 31, 2012 and 2011, andthe related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2012.These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as ofDecember 31, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2012,in conformity with U.S. generally accepted accounting principles.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal controlover financial reporting as of December 31, 2012, based on the criteria established in Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission and our report dated June 14, 2013 expressed an adverse opinion on the effectiveness of theCompany’s internal control over financial reporting./s/ KPMG LLPChicago, IllinoisJune 14, 2013 61Table of ContentsEnvestnet, Inc.Consolidated Balance Sheets(In thousands, except share information) December 31, 2012 2011 Assets Current assets: Cash and cash equivalents $29,983 $64,909 Fees receivable 9,188 9,644 Deferred tax assets, net 2,089 2,605 Prepaid expenses and other current assets 2,501 4,929 Total current assets 43,761 82,087 Property and equipment, net 11,791 11,091 Internally developed software, net 4,324 3,524 Intangible assets, net 27,150 12,225 Goodwill 65,644 21,334 Deferred tax assets, net 6,194 4,279 Other non-current assets 3,535 3,162 Total assets $162,399 $137,702 Liabilities and Stockholders’ Equity Current liabilities: Accrued expenses $20,201 $14,919 Accounts payable 2,614 1,974 Note payable - 171 Deferred revenue 5,768 79 Total current liabilities 28,583 17,143 Deferred rent liability 2,195 1,414 Lease incentive liability 3,886 2,933 Other non-current liabilities 1,739 573 Total liabilities 36,403 22,063 Commitments and contingencies Stockholders’ equity Preferred stock - - Common stock, par value $0.005, 500,000,000 shares authorized as of December 31, 2012 and 2011;44,071,564 and 43,515,899 shares issued as of December 31, 2012 and 2011, respectively;32,355,675 and 31,810,726 shares outstanding as of December 31, 2012 and 2011, respectively 220 218 Additional paid-in capital 173,611 163,584 Accumulated deficit (37,277) (37,742) Treasury stock at cost, 11,715,889 and 11,705,173 shares as of December 31, 2012 and 2011,respectively (10,558) (10,421) Total stockholders’ equity 125,996 115,639 Total liabilities and stockholders’ equity $162,399 $137,702 See accompanying notes to Consolidated Financial Statements. 62Table of ContentsEnvestnet, Inc.Consolidated Statements of Operations(In thousands, except share and per share information) Year ended December 31, 2012 2011 2010 Revenues: Assets under management or administration $127,213 $99,236 $75,951 Licensing and professional services 30,053 23,942 22,101 Total revenues 157,266 123,178 98,052 Operating expenses: Cost of revenues 56,119 42,831 31,444 Compensation and benefits 54,973 40,305 37,027 General and administration 30,617 21,856 21,607 Depreciation and amortization 12,400 6,376 5,703 Restructuring charges 115 434 961 Total operating expenses 154,224 111,802 96,742 Income from operations 3,042 11,376 1,310 Other income (expense): Interest income 29 77 149 Interest expense (3) (786) (564) Other income - 1,100 - Other expense - (1,183) - Gain (loss) on investments - (4) 12 Total other income (expense) 26 (796) (403) Income before income tax provision 3,068 10,580 907 Income tax provision 2,603 2,975 1,533 Net income (loss) 465 7,605 (626) Less preferred stock dividends - - (422) Net income (loss) attributable to common stockholders $465 $7,605 $(1,048) Net income (loss) per share attributable to common stockholders: Basic $0.01 $0.24 $(0.05) Diluted $0.01 $0.23 $(0.05) Weighted average common shares outstanding: Basic 32,162,672 31,643,390 20,805,911 Diluted 33,341,615 32,863,834 20,805,911 See accompanying notes to Consolidated Financial Statements. 63Table of ContentsEnvestnet, Inc.Consolidated Statements of Stockholders’ Equity(In thousands, except share information) Preferred Stock Common Stock Treasury Stock AdditionalPaid-inCapital AccumulatedDeficit TotalStockholders’Equity Shares Amount Shares Amount CommonShares PreferredShares Amount Balance, December 31, 2009 76,643 $- 13,524,276 $68 (613,600) - $(6,334) $106,893 $(43,375) $57,252 Exercise of Series B warrants 1,497 - - - - - - 1,497 - 1,497 Conversion of preferred stock to common stock effective uponinitial public offering (45,890) - 7,842,034 39 - - - (39) - - Merger transactions between EnvestNet Group, Inc. and Envestnet, Inc.: Issuance of Envestnet, Inc. common stock toEnvestNet Group, Inc. shareholders - - 10,680,000 54 - - - (54) - - Conversion of Envestnet, Inc. preferred and commonstock held by EnvestNet Group, Inc., into treasury stock (commonequivalents) (32,250) - 5,160,000 26 (10,680,000) - - (26) - - Net operating loss tax benefit recognized fromEnvestNet Group, Inc. merger - - - - - - - 839 - 839 Initial public offering of common stock, net of offering costs 5,411,325 27 - - - 42,039 - 42,066 Issuance of warrant to FundQuest, Inc. - - - - - - - 2,946 - 2,946 Exercise of common warrants - - 154,548 - - - - 28 - 28 Exercise of stock options - - 296,188 1 - - - 1,924 - 1,925 Stock-based compensation - - - - - - - 1,731 - 1,731 Purchase of treasury stock (at cost) - - - - (381,480) (122) (3,993) - - (3,993) Conversion of preferred stock in treasury to common stock - - - - (24,469) 122 - - - - Preferred stock dividends - - - - - - - - (1,346) (1,346) Net loss - - - - - - - - (626) (626) Balance, December 31, 2010 - $ - 43,068,371 $215 (11,699,549) - $(10,327) $157,778 $(45,347) $102,319 Exercise of stock options - - 447,528 3 - - - 2,744 - 2,747 Stock-based compensation - - - - - - - 3,062 - 3,062 Purchase of treasury stock (at cost) - - - - (5,624) - (94) - - (94) Net income - - - - - - - - 7,605 7,605 Balance, December 31, 2011 - $- 43,515,899 $218 (11,705,173) - $(10,421) $163,584 $(37,742) $115,639 Exercise of stock options - - 298,947 1 - - - 2,068 - 2,069 Issuance of common stock: Vesting of restricted stock - - 24,568 - - - - - - - Issuance of restricted stock - - 232,150 1 - - - 2,758 - 2,759 Stock-based compensation - - - - - - - 4,342 - 4,342 Tax benefit attributable to exercise of stock options - - - - - - - 1,549 - 1,549 Reversal of net operating loss tax benefit recognized fromEnvestNet Group, Inc. merger - - - - - - - (690) - (690) Purchase of treasury stock (at cost) - - - - (10,716) - (137) - - (137) Net income - - - - - - - - 465 465 Balance, December 31, 2012 - $- 44,071,564 $220 (11,715,889) - $(10,558) $173,611 $(37,277) $125,996 See accompanying notes to Consolidated Financial Statements. 64Table of ContentsEnvestnet, Inc.Consolidated Statements of Cash Flows(In thousands) Year ended December 31, 2012 2011 2010 OPERATING ACTIVITIES: Net income (loss) $465 $7,605 $(626) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 12,400 6,376 5,703 Amortization of customer inducements - 4,568 3,238 Deferred rent and lease incentive 1,389 332 58 Deferred income taxes 83 2,162 1,215 Stock-based compensation 4,342 3,062 1,731 Excess tax benefits from stock-based compensation (1,549) - - Non-cash interest expense 3 786 564 Loss (gain) on investments - 4 (12) Impairment of customer inducement asset - 174 - Contract settlement charges - 1,183 - Provision for doubtful accounts - - 2,668 Changes in operating assets and liabilities, net of acquisitions: Fees receivable 1,017 1,940 (3,718) Prepaid expenses and other current assets 4,645 (1,988) (599) Other non-current assets (188) (1,006) (52) Customer inducements, net - (1,000) (11,300) Accrued expenses 3,100 802 2,437 Accounts payable 640 267 (185) Deferred revenue 1,028 (507) 208 Other non-current liabilities 1,166 (39) 137 Net cash provided by operating activities 28,541 24,721 1,467 INVESTING ACTIVITIES: Purchase of property and equipment (4,838) (4,798) (4,169) Capitalization of internally developed software (2,350) (1,482) (1,340) Repayment of notes payable assumed in acquisition (174) (162) - Proceeds from repayment of notes receivable - - 985 Increase in notes receivable - - (90) Proceeds from investments 7 28 30 Acquisition of businesses, net of cash acquired (62,352) (23,719) (917) Net cash used in investing activities (69,707) (30,133) (5,501) FINANCING ACTIVITIES: Proceeds from exercise of stock options 2,069 2,747 1,925 Issuance of restricted stock 2,759 - - Excess tax benefits from stock-based compensation expense 1,549 - - Proceeds from exercise of warrants - - 1,525 Net proceeds from issuance of common stock - - 42,066 Purchase of treasury stock (137) (94) (3,993) Preferred stock dividends - - (1,346) Net cash provided by financing activities 6,240 2,653 40,177 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (34,926) (2,759) 36,143 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 64,909 67,668 31,525 CASH AND CASH EQUIVALENTS, END OF PERIOD $29,983 $64,909 $67,668 Supplemental disclosure of cash flow information – cash paid during the period for income taxes, net of refunds $796 $813 $171 Supplemental disclosure of non-cash investing and financing activities: Leasehold improvements funded by lease incentive 1,054 491 119 Non-cash consideration issued in a business acquisition - 4,897 - Issuance of warrant for customer inducement - - 2,946 Customer inducement payable - - 19,261 Note payable assumed in a business acquisition - - 300 Contingent consideration issued in a business acquisition - - 150 See accompanying notes to Consolidated Financial Statements. 65Table of ContentsEnvestnet, Inc.Notes to Consolidated Financial Statements(In thousands, except share and per share amounts)1. Organization and Description of BusinessEnvestnet, Inc. (“Envestnet”) and its subsidiaries (collectively, the “Company”) provide open-architecture wealth management services and technologyto independent financial advisors and financial institutions. These services and related technology are provided via the Envestnet Advisor Suite, Envestnet |PMC, Envestnet | Vantage™, and Envestnet | Tamarac™.Advisor Suite is a platform of integrated, internet-based technology applications and related services that provide portfolio diagnostics, proposalgeneration, investment model management, rebalancing and trading, portfolio performance reporting and monitoring solutions, billing, and back-office andmiddle-office operations and administration.The Company’s investment consulting group, Envestnet | PMC, provides investment manager due diligence and research, a full spectrum ofinvestment offerings supported by both proprietary and third-party research, and overlay portfolio management services.Envestnet | Tamarac provides leading portfolio accounting, rebalancing, trading, performance reporting and client relationship management software,principally to high-end Registered Investment Advisors (“RIAs”).Through these platform and service offerings, the Company provides open-architecture support for a wide range of investment products (separatelymanaged accounts, multi-manager accounts, mutual funds, exchange-traded funds, stock baskets, alternative investments, and other fee-based investmentsolutions) from Envestnet | PMC and other leading investment providers via multiple custodians, and also account administration and reporting services.Envestnet operates four RIAs and a registered broker-dealer. The RIAs are registered with the Securities and Exchange Commission (“SEC”). Thebroker-dealer is registered with the SEC, all 50 states and the District of Columbia and is a member of the Financial Industry Regulatory Authority(“FINRA”).2. Summary of Significant Accounting PoliciesThe Company follows accounting standards established by the Financial Accounting Standards Board (“FASB”) to ensure consistent reporting offinancial condition, results of operations and cash flows. References to Generally Accepted Accounting Principles (“GAAP”) in these footnotes are to the FASBAccounting Standards Codification , sometimes referred to as the codification or ASC.Principles of Consolidation—The consolidated financial statements include the accounts of Envestnet and its wholly-owned subsidiaries: OberonFinancial Technology, Inc. (“Oberon”); NetAssetManagement, Inc. (“NAM”); Envestnet Asset Management, Inc.; Envestnet Portfolio Solutions, Inc. (“EPS”)(formerly “FundQuest Incorporated”); Prima Capital Holding, Inc.; Tamarac, Inc. (“Tamarac”); Sigma Asset Management, LLC; PMC International, Inc.and its wholly-owned subsidiaries, Portfolio Management Consultants, Inc. and Portfolio Brokerage Services, Inc. (“PBS”). All significant intercompanytransactions and balances have been eliminated in consolidation. Accounts denominated in a non-U.S. currency have been re-measured using the U.S. dollaras the functional currency.Management Estimates—Management of the Company has made certain estimates and assumptions relating to the reporting of assets, liabilities,revenues and expenses and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with GAAP.Significant areas requiring the use of management estimates relate to estimating uncollectible receivables, revenue recognition, costs capitalized for internallydeveloped software, valuations and assumptions used for impairment testing of goodwill, intangible and other long-lived assets, fair value of stock and stockoptions issued, fair value of customer inducement assets and liabilities, realization of deferred tax assets and assumptions used to allocate purchase prices inbusiness combinations. Actual results could differ materially from these estimates under different assumptions or conditions. 66®®TMTable of ContentsEnvestnet, Inc.Notes to Consolidated Financial Statements (Continued)(In thousands, except share and per share amounts) Revenue Recognition—The Company recognizes revenue from services related to asset management and administration, licensing and professionalservices fees. The Company recognizes revenue when all of the following conditions are satisfied: (i) there is persuasive evidence of an arrangement, (ii) theservice or product has been provided to the customer and no uncertainties exist surrounding product acceptances (iii) the amount of fees to be paid by thecustomer is fixed or determinable; and (iv) the collection of fees is reasonably assured. • Asset management and administration fees – The Company derives revenues from fees charged as a percentage of the assets that aremanaged or administered on its technology platform by financial advisors, financial institutions, and their clients (collectively “customers”)and for services the Company provides to its customers. Such services include investment manager due diligence and research, portfoliodiagnostics, proposal generation, investment model management, rebalancing and trading, portfolio performance reporting and monitoringsolutions, billing, and back office and middle-office operations and administration. Investment decisions for assets under management oradministration are made by our customers. The asset management and administration fees the Company earns are generally based upon acontractual percentage of assets managed or administered on our platform based on preceding quarter-end values. The contractual feepercentages vary based on the level and type of services the Company provides to its customers. Fees related to assets under management oradministration increase or decrease based on values of existing customer accounts. The values are affected by inflows or outflows of customerfunds and market fluctuations. • Licensing and professional services fees—Licensing—The Company derives licensing fees from recurring contractual fixed fee contracts with larger financial institutions orenterprise clients. Licensing contracts allow the customer to provide a unique configuration of platform features and investment solutions fortheir advisors. The licensing fees vary based on the type of services provided and our revenues received under license agreements arerecognized over the contractual term. The Company’s license agreements do not generally provide its customers the ability to take possession ofthe software or host the software on the customers’ own systems or through a hosting arrangement with an unrelated party.When the Company enters into arrangements with multiple deliverables, exclusive of arrangements with software deliverables, itapplies the FASB’s guidance for revenue arrangements with multiple deliverables and evaluates each deliverable to determine whether itrepresents a separate unit of accounting based on the following criteria: (i) whether the delivered item has value to the customer on a stand-alonebasis, and (ii) if the contract includes a general right of return relative to the delivered item, delivery or performance of the undelivered item(s)is considered probable and substantially in the control of the Company. Revenue is allocated to each unit of accounting or element based onrelative selling prices. The Company determines relative selling prices by using either (i) vendor-specific objective evidence (“VSOE”) if itexists; or (ii) third-party evidence (“TPE”) of selling price. When neither VSOE nor TPE of selling price exists for a deliverable, the Companyuses its best estimate of the selling price for that deliverable.After determining which deliverables represent a separate unit of accounting, each unit is then accounted for under the applicablerevenue recognition guidance. In cases where elements cannot be treated as separate units of accounting, the elements are combined into a singleunit of accounting for revenue recognition purposes.When the Company enters into arrangements with multiple deliverables involving software, the Company applies the AmericanInstitute of Certified Public Accountants’ (“AICPA”) accounting guidance for software. The entire arrangement fee is allocated to each elementin the arrangement based on the respective VSOE of fair value of each element. 67Table of ContentsEnvestnet, Inc.Notes to Consolidated Financial Statements (Continued)(In thousands, except share and per share amounts) • Professional services—The Company derives professional service fees from providing contractual customized service platform softwaredevelopment, which are recognized under a proportional performance model utilizing an output-based approach. The Company’s contractshave fixed prices, and generally specify or quantify interim deliverables.Revenues are recognized in the periods in which the related services are performed provided that persuasive evidence of an agreement exists, the fee isfixed or determinable, and collectability is reasonably assured. Cash received by the Company in advance of the performance of services is deferred andrecognized as revenue when earned. Certain portions of the Company’s revenues require management’s consideration of the nature of the client relationship indetermining whether to recognize as revenue the gross amount billed or net amount retained after payments are made to providers for certain services related tothe product or service offering.The Company uses the following factors to determine whether to record revenue on a gross or net basis is based on whether: • the Company has a direct contract with the third party service provider; • the Company has discretion in establishing fees paid by the customer and fees due to the third party service provider; and • the Company has credit riskWhen customer fees include charges for third party service providers where the Company has a direct contract with such third party serviceproviders, gross revenue recognized by the Company equals the fee paid by the customer. The cost of revenues recognized by the Company is the amount dueto the third party service provider.In instances where the Company does not have a direct contract with the third party service provider, the Company cannot exercise discretion inestablishing fees paid by the customer and fees due to the third party service provider, and the Company does not have credit risk, the Company records therevenue on a net basis.Deferred Revenue—Deferred revenue primarily consists of implementation and set up fees, professional services, and license fee payments received inadvance from customers.Cost of Revenues—Cost of revenues primarily include expenses related to sub-advisory and clearing, custody and brokerage services. Generally, theseexpenses are calculated based upon a contractual percentage of the market value of assets held in customer accounts measured as of the end of each quarter andare recognized ratably throughout the quarter based on the number of days in the quarter.Allowance for Doubtful Accounts—The Company evaluates the need for an allowance for doubtful accounts for potentially uncollectible feereceivables. In establishing the amount of the allowance, if any, customer-specific information is considered related to delinquent accounts, including historicalloss experience and current economic conditions. As of December 31, 2012 and 2011, the Company’s allowance for doubtful accounts was zero.Segments—The Company’s chief operating decision maker is its chief executive officer, who reviews financial information presented on aconsolidated basis. Historically, the Company has determined that it has a single reporting segment and operating unit structure. As a result of the acquisitionsas discussed in Note 3, the Company has re-examined its reporting and operating structure and has determined it continues to maintain a single reportingsegment and operating unit structure. 68Table of ContentsEnvestnet, Inc.Notes to Consolidated Financial Statements (Continued)(In thousands, except share and per share amounts) Fair Value of Financial Instruments—The carrying amounts of financial instruments, net of any allowances, including cash equivalents, feesreceivable, accounts payable and accrued expenses are considered to be reasonable estimates of their fair values due to their short-term nature.Cash and Cash Equivalents—The Company considers all highly liquid investments purchased with an original maturity of three months or less tobe cash equivalents. Cash and cash equivalents are recorded at cost, which approximates fair value. The Company’s financial instruments that are exposed toconcentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains its cash accounts at financial institutions in excess ofamounts insured by the Federal Deposit Insurance Corporation (“FDIC”). The Company monitors such credit risk and has not experienced any losses relatedto such risk.Investments—Investments are recorded at cost and reviewed for impairment. Investments are included in “Other non-current assets” on theconsolidated balance sheets and consist of non-marketable investments in privately held companies, as well as other alternative investments. The Companyreviews these investments on a regular basis to evaluate the carrying amount and economic viability of these investments. This policy includes, but is notlimited to, reviewing each of the investee’s cash position, financing needs, earnings/revenue outlook, operational performance, management/ownership changesand competition. The evaluation process is based on information that the Company requests from these investees. This information is not subject to the samedisclosure regulations as U.S. publicly traded companies, and as such, the basis for these evaluations is subject to the timing and accuracy of the datareceived from these investees.The Company’s investments are assessed for impairment when a review of the investee’s operations indicates that there is a decline in value of theinvestment and the decline is other than temporary. Such indicators include, but are not limited to, limited capital resources, limited prospects of receivingadditional financing, and prospects for liquidity of the related securities. Impaired investments are written down to estimated fair value. The Companyestimates fair value using a variety of valuation methodologies, including comparing the investee with publicly traded companies in similar lines of business,applying valuation multiples to estimated future operating results and estimated discounted future cash flows.Property and Equipment—Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation of furniture andequipment is computed using the straight-line method based on estimated useful lives of the depreciable assets. Leasehold improvements are amortized on astraight-line basis over their estimated economic useful lives or the remaining lease term, whichever is shorter. Improvements are capitalized, while repairs andmaintenance costs are charged to operations as incurred. Assets are reviewed for recoverability whenever events or circumstances indicate the carrying valuemay not be recoverable.Customer Inducements—Payments made to customers as an inducement are capitalized and amortized against revenue on a straight-line basis overthe term of the agreement.Internally Developed Software—Costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reachedthe development stage, internal and external costs, if direct and incremental, are capitalized until the software is substantially complete and ready for itsintended use. Capitalization ceases upon completion of all substantial testing. The Company also capitalizes costs related to specific upgrades andenhancements when it is probable the expenditures will result in additional functionality. Maintenance and training costs are expensed as incurred. Internallydeveloped software is amortized on a straight-line basis over its estimated useful life. Management evaluates the useful lives of these assets on an annual basisand tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. There were no impairments ofinternally developed software during the years ended December 31, 2012, 2011 and 2010. 69Table of ContentsEnvestnet, Inc.Notes to Consolidated Financial Statements (Continued)(In thousands, except share and per share amounts) Goodwill and Intangible Assets—Goodwill consists of the excess of the purchase price over the fair value of identifiable net assets of businessesacquired. Goodwill is reviewed for impairment each year using a two-step process that is performed at least annually or whenever events or circumstancesindicate that impairment may have occurred. The Company has concluded that it has a single reporting unit. The first step is a comparison of the fair value ofan internal reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying value, goodwill of thereporting unit is not considered impaired and the second step is unnecessary. If the carrying value of the reporting unit exceeds its fair value, a second test isperformed to measure the amount of impairment by comparing the carrying amount of the goodwill to a determination of the implied fair value of the goodwill.If the carrying amount of the goodwill is greater than the implied value, an impairment loss is recognized for the difference. The implied value of the goodwillis determined as of the test date by performing a purchase price allocation, as if the reporting unit had just been acquired, using currently estimated fair valuesof the individual assets and liabilities of the reporting unit, together with an estimate of the fair value of the reporting unit taken as a whole. The estimate of thefair value of the reporting unit is based upon information available regarding prices of similar groups of assets, or other valuation techniques including presentvalue techniques based upon estimates of future cash flow. No impairment charges have been recorded for the years ended December 31, 2012, 2011 and2010.Intangible assets are recorded at cost less accumulated amortization. Intangible assets are reviewed for impairment whenever events or changes incircumstances may affect the recoverability of the net assets. Such reviews include an analysis of current results and take into consideration the undiscountedvalue of projected operating cash flows.Long-Lived Assets—Long-lived assets, such as property, equipment, capitalized internal use software and intangible assets subject to amortization arereviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable.Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to estimated undiscounted future cashflows expected to be generated by the asset group. If the carrying amount of an asset group exceeds its estimated future cash flows, an impairment charge isrecognized by the amount by which the carrying amount of the asset group exceeds the fair value of the asset group. All long-lived assets of the Company arelocated in the U.S., except for approximately $764 and $822 as of December 31, 2012 and 2011, respectively, which are located in India.Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occurthat could impact recoverability of these assets. There were no impairments to long-lived assets during the years ended December 31, 2012, 2011 and 2010.Leases—In certain circumstances, the Company enters into leases with free rent periods, rent escalations or lease incentives over the term of the lease.In such cases, the Company calculates the total payments over the term of the lease and records them ratably as rent expense over that term.Income Taxes—The Company uses the asset and liability method to account for income taxes. Deferred tax assets and liabilities are recognized for thefuture tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective taxbases and net operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in theyears 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 isrecognized in income in the period that includes the enactment date. The Company records a valuation allowance to reduce deferred tax assets to an amount thatis more likely than not to be realized.The Company follows authoritative guidance related to how uncertain tax positions should be recognized, measured, disclosed and presented in theconsolidated financial statements. This requires the evaluation of tax 70Table of ContentsEnvestnet, Inc.Notes to Consolidated Financial Statements (Continued)(In thousands, except share and per share amounts) positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” ofbeing sustained “when challenged” or “when examined” by the applicable tax authority. Tax positions deemed to meet the more-likely-than-not threshold wouldbe recorded as a tax benefit or expense and liability in the current year. The tax benefits recognized in the consolidated financial statements from tax positionsare measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.Advertising Costs—The Company expenses all advertising costs as incurred and they are classified within general and administration expenses.Advertising costs totaled approximately $1,504, $1,388 and $1,160 for the years ended December 31, 2012, 2011 and 2010, respectively.Business Combinations—The Company accounts for business combinations under the acquisition method. The cost of an acquired company isassigned to the tangible and intangible assets acquired and the liabilities assumed on the basis of their fair values at the date of acquisition. The determinationof fair values of assets acquired and liabilities assumed requires management to make estimates and use valuation techniques when market values are notreadily available. Any excess of purchase price over the fair value of net tangible and intangible assets acquired is allocated to goodwill. Transaction costsassociated with business combinations are expensed as incurred.Stock-Based Compensation—Compensation cost relating to stock-based awards made to employees and directors is recognized in the consolidatedfinancial statements using the Black-Scholes option-pricing model in the case of non-qualified stock option awards, and intrinsic value in the case of restrictedstock awards. The Company measures the cost of such awards based on the estimated fair value of the award measured at the grant date and recognizes theexpense on a straight-line basis over the requisite service period, which is the vesting period.Determining the fair value of stock options requires the Company to make several estimates, including the volatility of its stock price, the expected lifeof the option, forfeiture rate, dividend yield and interest rates. Prior to July 28, 2010, the Company was not a publicly traded company. Accordingly, theCompany had limited historical information on the price of its stock as well as employees’ stock option exercise behavior. Because of this limitation, theCompany cannot rely on its historical experience alone to develop assumptions for stock-price volatility and the expected life of its options. The Companyestimates the expected life of its options using the “Simplified Method.” The Company estimates stock-price volatility with reference to a peer group of publiclytraded companies. Determining the companies to include in this peer group involves judgment. The Company utilizes a risk-free interest rate, which is basedon the yield of U.S. zero coupon securities with a maturity equal to the expected life of the options. The Company has not and does not expect to pay dividendson its common shares.The Company is required to estimate expected forfeitures of stock-based awards at the grant date and recognize compensation cost only for thoseawards expected to vest. The forfeiture assumption is ultimately adjusted to the actual forfeiture rate. Therefore, changes in the forfeiture assumptions mayimpact the total amount of expense ultimately recognized over the vesting period. Estimated forfeitures will be reassessed in subsequent periods and maychange based on new facts and circumstances.Reclassifications—Certain reclassifications were made to the December 31, 2011 consolidated balance sheet to conform to the 2012 presentation.Recent Accounting PronouncementsIn June 2011, the FASB issued authoritative guidance that amends ASC Topic 220, Comprehensive Income, to require that all non-owner changes instockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements, and iteliminates the option to 71Table of ContentsEnvestnet, Inc.Notes to Consolidated Financial Statements (Continued)(In thousands, except share and per share amounts) present components of other comprehensive income as a part of the statement of changes in stockholders’ equity. In addition, this guidance requires an entityto present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income inthe statement(s) where the components of net income and the components of other comprehensive income are presented. These amendments are to be appliedretrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011; however, early adoption ispermitted. The adoption of this guidance on January 1, 2012 did not have a material impact on the Company’s consolidated financial statements.In September 2011, the FASB issued authoritative guidance regarding the testing of goodwill for impairment. This guidance allows companies toperform a “qualitative” assessment to determine whether or not the current two-step quantitative testing method, in which a company compares the fair value ofreporting units to their carrying amounts including goodwill, must be followed. If a qualitative assessment indicates that it is more-likely-than-not that the fairvalue of a reporting unit is greater than its carrying amount, then the quantitative impairment test is not required. A company may choose to use the qualitativeassessment on none, some, or all of its reporting units or to bypass the qualitative assessment and proceed directly to the two-step quantitative testing method.This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011; however, earlyadoption is permitted. The adoption of this guidance on January 1, 2012 did not have a material impact on the Company’s consolidated financial statements. 3.Business AcquisitionsFundQuest IncorporatedOn December 13, 2011, the Company acquired all of the outstanding shares of FundQuest Incorporated (“FundQuest”), a subsidiary of BNP ParibasInvestment Partners USA Holdings, Inc. for total consideration of $27,796. FundQuest was renamed Envestnet Portfolio Solutions, Inc. (“EPS”) subsequentto the acquisition. EPS provides managed account programs, overlay portfolio management, mutual funds, institutional asset management and investmentconsulting to registered investment advisors, independent advisors, broker-dealers, banks and trust organizations. The goodwill arising from the acquisitionrepresents the expected synergistic benefits of the transaction and the knowledge and experience of the workforce in place. The goodwill recognized is notdeductible for income tax purposes.In February 2010, the Company signed a seven-year platform services agreement (the “Agreement”) with FundQuest. Pursuant to the Agreement withFundQuest, the Company provided FundQuest and its clients with the Company’s platform technology and support services, replacing FundQuest’stechnology platform. The Company earned fees based upon a contractual percentage of assets under administration. In connection with the Agreement, theCompany was required to make various payments to FundQuest during the contract term as defined in the Agreement. These payments included an up-frontpayment upon completion of the conversion of FundQuest’s clients’ assets to the Company’s technology platform, five annual payments and a payment afterthe fifth year of the Agreement calculated based on the average annual revenues the Company was to receive from FundQuest during the first five years of thecontract term. In addition, the Company also issued to FundQuest a warrant to purchase 1,388,888 shares of its common stock, with an exercise price of$10.80 for an estimated fair value of $2,946 (see Notes 8 and 12). The present value of all payments and the fair value of the warrant was originallyaccounted for as customer inducement costs and were amortized as a reduction to the Company’s revenues from assets under management or administrationon a straight-line basis over the contract term of seven years. Customer inducement amortization totaled zero, $4,568 and $3,239 for 2012, 2011 and 2010,respectively, and imputed interest totaled zero, $771 and $546 for 2012, 2011 and 2010, respectively. 72Table of ContentsEnvestnet, Inc.Notes to Consolidated Financial Statements (Continued)(In thousands, except share and per share amounts) Upon the acquisition, the Agreement between the Company and FundQuest was effectively settled. The Company analyzed the Agreement to determinethe amount by which the contract was favorable or unfavorable when compared to current market pricing. The Company, using the discounted cash flowmethod, determined the Agreement resulted in a favorable amount of $4,897. The favorable amount of the Agreement was compared to the net book value ofthe customer inducement asset and liability at the date of the business combination resulting in a charge of approximately $1,183, which is included in otherexpense in the consolidated statements of operations for the year ended December 31, 2011. The net cash portion of the total consideration paid is included in“Cash flows from investing activities” in the consolidated statements of cash flows.The consideration transferred in the acquisition was as follows: Cash paid to owners $ 24,390 Non-cash consideration: Favorable contract 4,897 Other 1,241 Cash acquired (671) Working capital adjustment (2,061) $27,796 During 2012, the Company finalized the estimated working capital adjustment, which resulted in a decrease in goodwill of approximately $889 andan increase in prepaid expense and other current assets, which was retrospectively adjusted in the December 31, 2011 consolidated balance sheet and therelated notes to the consolidated financial statements.The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date of December 13, 2011,adjusted. December 31, 2011(As Adjusted) Accounts receivable $ 2,603 Prepaid expenses and other current assets 46 Property and equipment 442 Intangible assets 11,830 Goodwill 19,303 Accounts payable and accrued liabilities (1,364) Deferred income taxes (4,710) Deferred revenue (354) Total assets acquired $27,796 A summary of intangible assets acquired, estimated useful lives and amortization method was as follows: Amount Weighted-AverageUseful LifeIn Years AmortizationMethod Customer list $ 11,830 7 Accelerated The results of EPS’s operations are included in the consolidated statements of operations beginning December 13, 2011 and were not material to the2011 results of operations. 73Table of ContentsEnvestnet, Inc.Notes to Consolidated Financial Statements (Continued)(In thousands, except share and per share amounts) Prima Capital Holding, Inc. AcquisitionOn April 5, 2012, the Company completed the acquisition of Prima Capital Holding, Inc. (“Prima”). In accordance with the stock purchaseagreement, the Company acquired all of the outstanding shares of Prima for total consideration of approximately $13,925. Prima provides investmentmanagement due diligence, research applications, asset allocation modeling and multi-manager portfolios to the wealth management and retirement industries.Prima’s clientele includes banks, independent RIAs, regional broker-dealers, family offices and trust companies. The goodwill arising from the acquisitionrepresents the expected synergistic benefits of the transaction and the knowledge and experience of the workforce in place. The goodwill recognized is notdeductible for income tax purposes.The consideration transferred in the acquisition was as follows: Cash paid to owners $ 13,750 Cash acquired (1,767) Cash paid for working capital settlement 1,942 $13,925 The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition: Accounts receivable $ 72 Prepaid expenses and other current assets 36 Notes receivable 860 Property and equipment 103 Deferred income taxes - non current 1,328 Intangible assets 4,940 Goodwill 9,283 Accounts payable and accrued liabilities (171) Deferred income tax liabilities (1,796) Deferred revenue (730) Total net assets acquired $13,925 A summary of intangible assets acquired, estimated useful lives and amortization method is as follows: Amount Weighted-AverageUseful Lifein Years AmortizationMethod Customer list $ 3,740 10 Accelerated Proprietary technology 700 5 Accelerated Trade names 500 5 Accelerated Total $4,940 The results of Prima’s operations are included in the consolidated statement of operations beginning April 5, 2012. Prima’s revenues and net loss forthe nine months ended December 31, 2012 totaled $3,626 and ($791), respectively. The net loss for the nine months ended December 31, 2012 included pre-tax acquired intangible asset amortization of $1,005. 74Table of ContentsEnvestnet, Inc.Notes to Consolidated Financial Statements (Continued)(In thousands, except share and per share amounts) Tamarac, Inc. AcquisitionOn May 1, 2012, the Company completed the acquisition of Tamarac, Inc. (“Tamarac”). In accordance with the merger agreement, a newly formedsubsidiary of Envestnet merged with and into Tamarac, and Tamarac became a wholly-owned subsidiary of Envestnet. Under the terms of the mergeragreement, total consideration was approximately $48,427 for all of the outstanding stock of Tamarac. Tamarac provides leading portfolio accounting,rebalancing, trading, performance reporting and client relationship management software, principally to high-end RIAs. The goodwill arising from theacquisition represents the expected synergistic benefits of the transaction and the knowledge and experience of the workforce in place. The goodwill recognizedis not deductible for income tax purposes.The consideration transferred in the acquisition was as follows: Cash paid to owners $ 54,000 Non-cash consideration 101 Cash acquired (2,533) Receivable from working capital settlement (3,141) $48,427 The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. Accounts receivable $ 489 Other receivables 681 Prepaid expenses and other current assets 216 Deferred income tax assets 7,235 Property and equipment 444 Deposits 379 Intangible assets 16,150 Goodwill 35,027 Accounts payable and accrued liabilities (2,356) Deferred income tax liabilities (5,907) Deferred revenue (3,931) Total net assets acquired $48,427 A summary of intangible assets acquired, estimated useful lives and amortization method is as follows: Amount Weighted-AverageUseful Lifein Years AmortizationMethod Customer list $ 8,680 12 Accelerated Proprietary technology 5,880 8 Accelerated Trade names 1,590 5 Accelerated Total $ 16,150 75Table of ContentsEnvestnet, Inc.Notes to Consolidated Financial Statements (Continued)(In thousands, except share and per share amounts) The results of Tamarac’s operations are included in the consolidated statement of operations beginning May 1, 2012. Tamarac’s revenues and net lossfor the eight-month period ended December 31, 2012 totaled $9,971 and ($1,236), respectively. The net loss for the eight months ended December 31, 2012included pre-tax acquired intangible asset amortization of $1,304.In accordance with the terms of the merger agreement between Envestnet and Tamarac, Tamarac senior management were required to apply at least 50%(up to 100%) of the aggregate proceeds of the Tamarac change of control payment totaling $2,759 to purchase registered shares of Envestnet common stock(232,150 shares) in an amount equal to 95% multiplied by the Envestnet closing market price on the day before the merger closed (see Note 12).In addition, the Company adopted the Envestnet, Inc. Management Incentive Plan for Envestnet | Tamarac Management Employees (the “2012 Plan”).The 2012 Plan provides for the grant of up to 559,551 shares of unvested common stock. The unvested common stock vests based upon Tamarac meetingcertain performance conditions and then a subsequent two-year service condition (see Note 13). The Company also granted to certain Tamarac employees232,150 stock options to acquire Envestnet common stock at an exercise price of $12.51. These stock options vest on the second anniversary of the grantdate (see Note 13).Acquisition related costs of $2,317 and $405 are included in general and administration expenses in the consolidated statements of operations for theyears ended December 31, 2012 and 2011, respectively.Pro forma results for Envestnet, Inc. giving effect to the FundQuest, Prima and Tamarac acquisitionsThe following unaudited pro forma financial information presents the combined results of operations of Envestnet, Prima and Tamarac for the yearended December 31, 2012 and Envestnet, FundQuest, Prima and Tamarac for the year ended December 31, 2011. The unaudited pro forma financialinformation presents the results as if the acquisitions had occurred as of the beginning of 2011.The unaudited pro forma results presented include amortization charges for acquired intangible assets and stock-based compensation expense, and theelimination of intercompany transactions, unrealized gain or loss on warrant, imputed interest expense, and transaction-related expenses and the related taxeffect on the aforementioned items.Pro forma financial information is presented for informational purposes and is not indicative of the results of operations that would have been achievedif the acquisitions had taken place as of the beginning of 2011. At December 31, 2012 2011 Revenues $ 162,859 $ 148,695 Net income 528 3,772 Net income per share: Basic 0.02 0.12 Diluted 0.02 0.11 76Table of ContentsEnvestnet, Inc.Notes to Consolidated Financial Statements (Continued)(In thousands, except share and per share amounts) 4.Property and EquipmentProperty and equipment consists of the following: At December 31, Estimated Useful Life 2012 2011 Cost: Office furniture and fixtures 5-7 years $3,613 $2,713 Computer equipment and software 3 years 22,098 18,942 Other office equipment 5 years 598 598 Leasehold improvements Shorter of the lease term oruseful life of the asset 7,638 5,833 33,947 28,086 Less accumulated depreciation andamortization (22,156) (16,995) Property and equipment, net $ 11,791 $ 11,091 Depreciation and amortization expense was as follows: Year ended December 31, 2012 2011 2010 Depreciation and amortization expense $4,685 $3,862 $2,980 5.Internally Developed SoftwareInternally developed software consists of the following: At December 31, Estimated Useful Life 2012 2011 Internally developed software 5 years $ 13,232 $ 10,882 Less accumulated amortization (8,908) (7,358) Internally developed software, net $ 4,324 $ 3,524 Amortization expense was as follows: Year ended December 31, 2012 2011 2010 Amortization expense $ 1,550 $ 1,579 $ 1,606 77Table of ContentsEnvestnet, Inc.Notes to Consolidated Financial Statements (Continued)(In thousands, except share and per share amounts) 6.Goodwill and Intangible AssetsChanges in the carrying amount of the Company’s goodwill were as follows: Balance at December 31, 2010 $ 2,031 FundQuest acquisition 19,303 Balance at December 31, 2011 21,334 Prima acquisition 9,283 Tamarac acquisition 35,027 Balance at December 31, 2012 $65,644 Intangible assets consist of the following: December 31, 2012 December 31, 2011 Useful Life GrossCarryingAmount AccumulatedAmortization NetCarryingAmount GrossCarryingAmount AccumulatedAmortization NetCarryingAmount Customer lists 4 - 12 years $ 28,103 $ (8,720) $ 19,383 $ 15,683 $ (3,458) $ 12,225 Proprietary technologies 5 - 8 years 6,580 (657) 5,923 - - - Trade names 5 years 2,090 (246) 1,844 - - - Total intangible assets $ 36,773 $ (9,623) $ 27,150 $ 15,683 $ (3,458) $ 12,225 Amortization expense was as follows: Year ended December 31, 2012 2011 2010 Amortization expense $ 6,165 $ 935 $ 1,117 Future amortization expense of the intangible assets as of December 31, 2012, is expected to be as follows: Years ending December 31: 2013 $6,222 2014 5,399 2015 4,582 2016 3,787 2017 2,687 Thereafter 4,473 $ 27,150 78Table of ContentsEnvestnet, Inc.Notes to Consolidated Financial Statements (Continued)(In thousands, except share and per share amounts) 7. Other Non-Current AssetsOther non-current assets consist of the following: At December 31, 2012 2011 Investment in private company $1,250 $1,250 Deposits: Lease 1,655 1,313 Other 264 259 Other 366 340 $ 3,535 $ 3,162 In April 2008, the Company entered into an agreement to purchase 1,250,000 Preferred A Units of a private company for a total purchase price of$1,250. The Preferred A Units are entitled to a preferred distribution at a cumulative rate of 8% per annum of unreturned capital contributions, as defined inthe agreement.8. Fair Value MeasurementsFinancial assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon a fair value hierarchy established byU.S. GAAP, which prioritizes the inputs used to measure fair value into the following levels: Level 1: Inputs based on quoted market prices in active markets for identical assets or liabilities at the measurement date.Level 2: Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets and liabilities inmarkets that are not active; or inputs that are observable and can be corroborated by observable market data.Level 3: Inputs reflect management’s best estimates and assumptions of what market participants would use in pricing the asset orliability at the measurement date. The inputs are unobservable in the market and significant to the valuation of theinstruments.Fair Value on a Recurring Basis:The Company periodically invests excess cash in money-market funds not insured by the FDIC. The Company believes that the investments inmoney market funds are on deposit with creditworthy financial institutions and that the funds are highly liquid. The fair values of the Company’sinvestments in money-market funds are based on the daily quoted market prices for the net asset value of the various money market funds. These money-market funds are considered Level 1 assets and totaled approximately $20,682 and $52,383 as of December 31, 2012 and 2011, respectively, and areincluded in cash and cash equivalents in the consolidated balance sheets.On February 8, 2010, the Company issued a warrant to FundQuest to acquire a certain amount of the Company’s common stock (see Note 3) whichwas initially recorded as a current liability. As a result of the Company’s initial public offering effective July 28, 2010, certain terms of the warrant weredetermined in accordance with the warrant agreement and the Company reclassified the estimated fair value of the warrant to additional paid-in capital during2010. 79Table of ContentsEnvestnet, Inc.Notes to Consolidated Financial Statements (Continued)(In thousands, except share and per share amounts) The table below presents a reconciliation of all assets and liabilities of the Company measured at fair value on a recurring basis using significantunobservable inputs (Level 3) for the period from December 31, 2009 to December 31, 2010: Warrant Balance at December 31, 2009 $ - Issuance 2,360 Change in fair value 586 Transfer to additional paid-in capital (2,946) Balance at December 31, 2010 $- The Company assesses the levels of the investments at each measurement date, and transfers between levels are recognized on the actual date of theevent or change in circumstances that caused the transfer, in accordance with the Company’s accounting policy regarding the recognition of transfers betweenlevels of the fair value hierarchy. There were no transfers between Levels 1, 2 and 3 during the year.9. Accrued ExpensesAccrued expenses consist of the following: At December 31, 2012 2011 Accrued investment manager fees $12,937 $8,451 Accrued compensation and related taxes 5,726 4,230 Accrued professional services 408 481 Accrued restructuring charges - 290 Other accrued expenses 1,130 1,467 $ 20,201 $ 14,919 Effective March 31, 2010, the Company closed its Los Angeles office in order to more appropriately align and manage the Company’s resources. In theyear ended December 31, 2010, the Company recognized pretax restructuring charges of $961 consisting primarily of $451 for accrued lease payments, $414for relocation and other expenses and $96 for severance charges. In the year ended December 31, 2011, the Company recognized pretax restructuring chargesof $53 consisting primarily of relocation and other expenses.As a result of the FundQuest acquisition in 2011, the Company incurred restructuring charges of $381 in the year ended December 31, 2011,primarily severance charges related to the termination of certain FundQuest and Envestnet employees.As a result of the FundQuest, Prima and Tamarac acquisitions, the Company incurred restructuring charges of $115 in the year ended December 31,2012, primarily severance charges for certain Tamarac employees and lease abandonment charges related to Prima. 80Table of ContentsEnvestnet, Inc.Notes to Consolidated Financial Statements (Continued)(In thousands, except share and per share amounts) The summary of activity in accrued restructuring charges was as follows: Balance at December 31, 2009 $ - Restructuring provision incurred 961 Payments (733) Balance at December 31, 2010 228 Restructuring provision incurred 434 Payments (372) Balance at December 31, 2011 290 Restructuring provision incurred 115 Payments (405) Balance at December 31, 2012 $- 10. Note PayableIn connection with the acquisition of B-Ready Outsourcing Solutions, Inc. on April 1, 2010, the Company assumed a note payable in the amount of$300 that bears simple interest of 8% per annum. A principal payment of $150 plus interest was paid on April 30, 2011, and an additional principal paymentof $150 plus interest was paid on April 30, 2012.11. Income TaxesIncome before income tax provision was generated in the following jurisdictions: Year ended December 31, 2012 2011 2010 Domestic $2,702 $10,291 $619 Foreign 366 289 288 Total $ 3,068 $ 10,580 $ 907 The components of the income tax provision charged to operations are summarized as follows: Year ended December 31, 2012 2011 2010 Current: Federal $1,280 $261 $- State 235 459 (16) Foreign 946 94 76 2,461 814 60 Deferred: Federal (48) 2,243 1,207 State 170 (60) 266 Foreign 20 (22) - 142 2,161 1,473 Total $ 2,603 $ 2,975 $ 1,533 81Table of ContentsEnvestnet, Inc.Notes to Consolidated Financial Statements (Continued)(In thousands, except share and per share amounts) Net deferred tax assets (liabilities) consist of the following: At December 31, 2012 2011 Current: Deferred revenue $346 $30 Prepaid expenses and accruals (108) 162 Net operating loss and tax credit carryforwards 2,563 3,716 Total current deferred tax assets 2,801 3,908 Less valuation allowance (712) (1,303) Net current deferred tax assets 2,089 2,605 Non-current: Deferred rent and lease incentives 2,212 1,666 Net operating loss and tax credit carryforwards 13,980 7,559 Loss on investments 2,157 2,157 Property and equipment and intangible assets (13,284) (5,617) Stock compensation expense 3,058 537 Other 180 118 Total long-term deferred tax assets 8,303 6,420 Less valuation allowance (2,109) (2,141) Net long-term deferred tax assets $ 6,194 $ 4,279 During 2010, the write-off of notes receivable from Fetter Logic (see Note 16) was considered a capital loss for tax purposes. In assessing therealizability of this deferred tax asset, management determined that it was more-likely-than-not that the asset would not be realized and accordingly recorded anincrease to the valuation allowance in the amount of $926. The valuation allowance for net deferred tax assets as of December 31, 2012 and 2011 was $2,821and $3,444, respectively. The valuation allowance as of December 31, 2012 and 2011 was related to capital losses of $2,157 and federal and state netoperating losses of $644 for 2012 and $1,287 for 2011, primarily due to Internal Revenue Code Section 382 limitations. In assessing the realizability ofdeferred tax assets, management considers whether it is more-likely-than-not that some or all of the deferred tax assets will be realized.The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which net operating losses andtemporary differences are deductible. Management considers the scheduled reversal of deferred tax assets and liabilities (including the impact of availablecarryback and carryforward periods), projected taxable income, and tax-planning strategies in making this assessment. In order to fully realize the deferred taxassets, the Company will need to generate future taxable income before the expiration of the deferred tax assets governed by the tax code. Based on the level oftaxable income and projections for future taxable income over the periods for which the net operating losses are available and deferred tax assets are deductible,management believes that it is more-likely-than-not that in consideration of its recorded valuation allowance, it will realize the benefits of the net operatinglosses and any other deferred tax assets. The amount of the deferred tax assets considered realizable however, could be reduced in the near term if estimates offuture taxable income during the carryforward period are reduced.Upon exercise of stock options, the Company recognizes any difference between GAAP compensation expense and income tax compensation expense asa tax windfall or shortfall. The difference is charged to equity 82Table of ContentsEnvestnet, Inc.Notes to Consolidated Financial Statements (Continued)(In thousands, except share and per share amounts) in the case of a windfall. When the exercise results in a windfall and the windfall results in net operating loss (“NOL”), or the windfall increases an NOLcarryforward, no windfall is recognized until the deduction reduces the income tax payable. For GAAP purposes, the Company has recognized all previouslysuspended windfall tax benefits, as they will be utilized on the Company’s 2012 tax return to reduce taxes payable. The benefit was recorded in stockholders’equity, and as such, does not impact the Company’s effective tax rate.The expected tax provision calculated at the statutory federal rate differs from the actual provision as follows: Year ended December 31, 2012 2011 2010 Tax provision, at U.S. federal statutory tax rate $1,043 $3,597 $308 State income tax, net of federal tax benefit 64 449 42 Effect of permanent items 414 487 66 Change in assertion over permanent reinvestment of foreign earnings - (234) - Effect of return to provision adjustment (81) (113) Change in valuation allowance (620) - 927 Effect of contract settlement - (1,186) - Effect of change in state income tax rate 691 - - Unrecognized tax benefits 1,105 (25) 106 Effect of foreign tax credits (87) - - Effect of adjustments to state deferred taxes (576) - - Adjustments to state net operating losses 638 - - Foreign income taxes (6) - 76 Other 18 - 8 Income tax provision $ 2,603 $ 2,975 $ 1,533 At December 31, 2012, the Company had NOL carryforwards for federal income tax purposes of $42,912, which are available to offset future federaltaxable income, if any, and expire as follows: Years ending December 31: 2019 $1,484 2020 - 2021 - 2022 988 2023 10,990 2024 9,630 2025 696 2026 1,386 2027 1,687 2028 3,363 2029 3,969 2030 1,491 2031 1,808 2032 4,322 2033 1,098 $ 42,912 Of the $42,912 in NOLs, due to Internal Revenue Code Section 382 limitations, approximately $1,938 in NOLs will not be utilized. In addition, asof December 31, 2012, we had net operating loss carryforwards for state income tax purposes of $30,271, available to reduce future income subject to incometaxes. The federal and state net operating loss carryforwards expire through 2033. In addition, the Company has alternative minimum 83Table of ContentsEnvestnet, Inc.Notes to Consolidated Financial Statements (Continued)(In thousands, except share and per share amounts) tax credit carryforwards of approximately $445, which are available to reduce future federal regular income taxes, if any, over an indefinite period.A reconciliation of the beginning and ending amount of unrecognized tax benefit was as follows: Year ended December 31, 2012 2011 2010 Unrecognized tax benefits balance at beginning of year $364 $415 $326 Additions based on tax positions related to the current year 517 128 107 Additions (deletions) based on tax positions related to prior years 474 (55) (9) Reductions for lapses of statute of limitations (258) (235) (8) Unrecognized tax benefits balance at end of year $ 1,097 $ 364 $ 415 At December 31, 2012, the amount of unrecognized tax benefits that would benefit the Company’s effective tax rate, if recognized, was $844. At thistime, the Company estimates it is reasonably possible that the liability for unrecognized tax benefits will decrease by as much as $400 in the next twelvemonths due to the completion of reviews by tax authorities, the voluntary filing of certain state income taxes and the expiration of certain statutes of limitations.The Company recognizes potential interest and penalties related to unrecognized tax benefits in income tax expense. For the years ended December 31,2012, 2011 and 2010, income tax expense includes $448, $14 and $53, respectively, of potential interest and penalties related to unrecognized tax benefits.The Company had accrued interest and penalties of $642 and $194 as of December 31, 2012 and 2011, respectively.The Company files a consolidated federal income tax return and separate tax returns with various states. Additionally, a subsidiary of the Companyfiles a tax return in a foreign jurisdiction. The Company’s tax returns for the calendar years ended December 31, 2011, 2010 and 2009 remain open toexamination by the Internal Revenue Service in their entirety. With respect to state taxing jurisdictions, the Company’s tax returns for fiscal year ended March31, 2009, as well as calendar years ended December 31, 2011, 2010 and 2009 remain open to examination by various state revenue services.The Company’s India subsidiary is currently under examination by the India Taxing Authority for the fiscal year ended March 31, 2009 andMarch 31, 2010. Based on the outcome of examinations of the Company’s subsidiary or the result of the expiration of statutes of limitations it is reasonablypossible that the related unrecognized tax benefits could change from those recorded in the statement of financial position. It is possible that one or more of theseaudits may be finalized within the next twelve months. The Company’s subsidiary’s tax returns for the fiscal years ended March 31, 2007 through March 31,2012 remain open to examination by the India Taxing Authority in their entirety. 84Table of ContentsEnvestnet, Inc.Notes to Consolidated Financial Statements (Continued)(In thousands, except share and per share amounts) 12. Stockholders’ EquityPreferred StockPrior to the closing of the Company’s initial public offering in July of 2010, the Company had the following $0.001 par value convertible preferredstock authorized, issued and outstanding: SharesAuthorized SharesIssued andOutstanding Amount AggregateLiquidationPreference Series A Convertible Preferred Stock 66,000 65,649 $ 31,475 $ 65,649 Series B Convertible Preferred Stock 10,000 7,130 5,330 7,130 Series C Convertible Preferred Stock 5,000 3,864 8,787 9,000 Undesignated 119,000 - - - 200,000 76,643 $ 45,592 $ 81,779 Each share of preferred stock was convertible at any time after the date of issuance and was convertible at various prices and into various amounts ofcommon stock. The preferred stock had liquidation and voting rights as defined in each preferred stock agreement. The holders of Series C ConvertiblePreferred Stock (“Series C”) were entitled to receive preferred dividends annually at a rate of 8% of the Series C original issue price, accruing and cumulativefrom the date of issue, whether or not earned or declared.As noted below, upon closing of the Company’s initial public offering, all of the Company’s outstanding Series A, Series B and Series C ConvertiblePreferred Stock converted into an aggregate 13,002,034 shares of common stock. In addition, the holders of Series C were paid cumulative preferred dividendstotaling approximately $1,346.On August 3, 2010, the Company amended its certificate of incorporation which increased the amount of authorized preferred stock to 50,000,000shares and increased the par value to $0.005 per share. There were no shares of preferred stock issued or outstanding as of December 31, 2012 and 2011.WarrantsOn March 24, 2005, in connection with the sale of Series B Convertible Preferred Stock (“Series B”), the Company issued detachable warrants toholders of Series B to purchase 1,497 shares of Series B at a price of $1,000 per share. In 2010, all of the warrants were exercised and the Company issued1,497 shares of Series B. In addition, during 2010, the Company acquired 122 shares of Series B for approximately $378.On September 18, 2008, in connection with the sale of Series C Convertible Preferred Stock (“Series C”), the Company issued detachable warrants toholders of Series C to purchase 154,548 shares of common stock at a price of $0.05 per share. During 2010, all of the warrants were exercised and theCompany issued 154,548 shares of common stock.In February 2010, in connection with the Agreement (see Note 3), the Company issued to FundQuest a warrant to purchase shares of the Company’scommon stock, with an exercise price to be calculated as 120% of the Company’s initial public offering price per share of the Company’s common stock. As aresult of the closing of the Company’s initial public offering, the number of shares of common stock issuable to FundQuest under the warrant was determinedto be 1,388,888 shares at an exercise price of $10.80 per share and the estimated fair value of the warrant of $2,946 is classified in equity as additional paid-in capital. During 2011, the warrant was sold by FundQuest to a third party. As of December 31, 2012, the warrant with issuable shares totaling 1,388,888was outstanding. 85Table of ContentsEnvestnet, Inc.Notes to Consolidated Financial Statements (Continued)(In thousands, except share and per share amounts) Common StockOn June 29, 2010, in connection with the cashless exercise of 179,624 expiring stock options, the Company repurchased 135,827 shares of itscommon stock from certain of its former employees for an aggregate purchase price of $1,616 to fund the purchase price and tax obligations of suchexercises, resulting in a net issuance of 43,797 shares. Included in the above amounts, were 90,000 expiring stock options from a former officer and directorof the Company in which the Company repurchased 63,279 shares for an aggregate purchase price of $753, resulting in a net issuance of 26,721 shares tothis former officer and director.On July 28, 2010, the Company completed its initial public offering whereby the Company sold 4,705,500 shares of common stock for a price of$9.00 per share, which resulted in proceeds, before deducting underwriting discounts and commissions and other offering expenses, of approximately$42,350.Upon closing of the Company’s initial public offering: • as approved by the Board of Directors on June 22, 2010, one newly issued share of the Company’s stock was exchanged for every fiveoutstanding shares of stock, effective immediately prior to the effectiveness of the Company’s registration statement on July 28, 2010. Allshare amounts and per share information referenced throughout the consolidated financial statements have been retroactively adjusted to reflectthis reverse stock split; • all of the Company’s outstanding Series A, Series B and Series C convertible preferred stock converted into an aggregate 13,002,034 shares ofcommon stock. In addition, the holders of Series C were paid cumulative preferred dividends totaling approximately $1,346; • The EnvestNet Group, Inc., the Company’s 41% shareholder prior to the initial public offering (the “Envestnet Shareholder”) merged with andinto the Company, with the Company being the surviving entity. Pursuant to the merger, all of the shareholders of the Envestnet Shareholderexchanged their Envestnet Shareholder common shares and preferred shares for 10,680,000 shares of the Company’s common stock; and • each share of the Company’s common and Series A convertible preferred stock held by the Envestnet Shareholder was automatically convertedinto treasury stock of the Company.On August 3, 2010, the Company amended its certificate of incorporation, which increased the amount of authorized common stock to 500,000,000shares and increased the par value to $0.005 per share.On August 31, 2010, the underwriters exercised their overallotment option to purchase an additional 705,825 shares of common stock for a price of$9.00 per share, which resulted in proceeds, before deducting underwriting discounts and commissions, of approximately $6,352.In accordance with the terms of the merger agreement between Envestnet and Tamarac (see Note 3), Tamarac senior management were required to applyat least 50% (up to 100%) of the aggregate proceeds of the Tamarac change of control payment totaling $2,759 to purchase registered shares of Envestnetcommon stock (232,150 shares) in an amount equal to 95% multiplied by the Envestnet closing market price on the day before the merger closed. Theseshares cannot be sold or otherwise transferred for a period of two years following the date of merger. If a participant terminates their employment with theCompany or is terminated for cause, the participant shall be required to pay the Company an amount equal to 5% multiplied by the closing market price onthe day before the merger closed for each of the shares purchased by the participant.During the fourth quarter of 2012, the Company reversed a $690 net operating loss tax benefit that was recognized incorrectly in 2010 as a result ofthe EnvestNet Group, Inc. merger. 86Table of ContentsEnvestnet, Inc.Notes to Consolidated Financial Statements (Continued)(In thousands, except share and per share amounts) 13.Stock-Based CompensationOn December 31, 2004, the Company adopted a stock incentive plan (the “2004 Plan”). The 2004 Plan provided for the grant of options to employees,consultants, and non-employee directors to purchase common stock, which vest over time and have a ten-year contractual term. To satisfy options grantedunder the 2004 Plan, the Company made common stock available from authorized but unissued shares or shares held in treasury, if any, by the Company.Stock options granted under the 2004 Plan were non-qualified stock options, as defined in the 2004 Plan agreement. Stock options were granted with anexercise price no less than the fair-market-value price of the common stock at the date of the grant.The 2004 Plan has a change in control provision whereby if a change in control occurs and the participant’s awards are not equitably adjusted, suchawards shall become fully vested and exercisable and all forfeiture restrictions on such awards shall lapse. Based on the terms of the 2004 Plan, theCompany’s initial public offering did not trigger the change in control provision and did not result in any modifications to the outstanding equity awardsunder the 2004 Plan.On February 3, 2010, the Board of Directors approved an increase to the number of shares of the Company’s common stock available for issuanceunder the 2004 Plan by 1,875,230 shares.On June 22, 2010, the Board of Directors approved the 2010 Long-Term Incentive Plan (“2010 Plan”), effective upon the closing of the Company’sinitial public offering. The 2010 Plan provides for the grant of options, stock appreciation rights, Full Value Awards (as defined in the 2010 Plan) and cashincentive awards to employees, consultants, and non-employee directors to purchase common stock, which vest over time and have a ten-year contractualterm. The maximum number of shares of common stock that may be delivered under the 2010 Plan is equal to the sum of 2,700,000 plus the number ofshares of common stock that are subject to outstanding awards under the 2004 Plan which are forfeited, expire or are cancelled after the effective date of theCompany’s initial public offering. Stock options and stock appreciation rights are granted with an exercise price no less than the fair-market-value price of thecommon stock at the date of the grant.As a result of the merger between Envestnet and Tamarac (see Note 3), the Company adopted the Envestnet, Inc. Management Incentive Plan forEnvestnet | Tamarac Management Employees (the “2012 Plan”). The 2012 Plan provides for the grant of restricted common stock, stock options and thepurchase of common stock for certain Tamarac employees. The maximum number of shares of stock which may be issued with respect to awards under the2012 Plan is 1,023,851.The 2012 Plan provides for the grant of up to 559,551 shares of unvested common stock (“Target Incentive Awards”). The Target Incentive Awardsvest based upon Tamarac meeting certain performance conditions and then a subsequent two-year service condition. The Company measured the cost of theseawards based on the estimated fair value of the award as of the market closing price on the day before the acquisition closed. The Company is recognizing theestimated expense on a graded-vesting method over a requisite service period of three to five years, which is the estimated vesting period. The Company hasestimated expected forfeitures at the grant date and will recognize compensation expense only for those awards expected to vest. The initial forfeiture assumptionwill be reassessed in subsequent periods and may change based upon new facts and circumstances. Changes in the forfeiture assumptions may impact thetotal amount of expense ultimately recognized over the vesting period.The Company also granted to certain Tamarac employees 232,150 stock options to acquire Envestnet common stock at an exercise price of $12.51.These stock options vest on the second anniversary of the grant date.As of December 31, 2012, the maximum number of options and restricted stock available for future issuance under the Company’s plans is1,733,230. 87Table of ContentsEnvestnet, Inc.Notes to Consolidated Financial Statements (Continued)(In thousands, except share and per share amounts) Employee stock-based compensation expense was as follows: Year ended December 31, 2012 2011 2010 Employee stock-based compensation expense $4,342 $3,062 $1,731 Tax effect on employee stock-based compensation expense (1,643) (1,159) (655) Net effect on income $ 2,699 $ 1,903 $ 1,076 Stock OptionsThe following weighted average assumptions were used to value options granted during the periods indicated: Year ended December 31, 2012 2011 2010 Grant date fair value of options $4.96 $5.14 $3.71 Volatility 39.7% 39.4% 37.5% Risk-free interest rate 1.2% 2.37% 2.2% Dividend yield 0.0% 0.0% 0.0% Expected term (in years) 6.0 6.0 6.2 The following table summarizes option activity under the Company’s plans: Shares Weighted-AverageExercise Price Weighted-AverageRemainingContractual Life(Years) AggregateIntrinsic Value Outstanding as of December 31, 2009 3,285,579 $ 6.70 Granted 2,049,461 9.18 Exercised (296,188) 6.50 Forfeited (40,515) 7.81 Outstanding as of December 31, 2010 4,998,337 7.64 7.5 $47,083 Granted 486,833 12.37 Exercised (447,528) 6.14 Forfeited (173,924) 9.36 Outstanding as of December 31, 2011 4,863,718 8.19 6.8 18,704 Granted 738,915 12.53 Exercised (298,947) 6.92 Forfeited (26,274) 11.03 Outstanding as of December 31, 2012 5,277,412 8.86 6.3 26,885 Options exercisable 3,378,591 7.70 5.2 21,124 The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value (the aggregate difference between the fair value of theCompany’s common stock on December 31, 2012, 2011 and 2010 of $13.95, $11.96 and $17.06, respectively, and the exercise price of in-the-moneyoptions) that would have been received by the option holders had all option holders exercised their options as of that date. 88Table of ContentsEnvestnet, Inc.Notes to Consolidated Financial Statements (Continued)(In thousands, except share and per share amounts) Exercise prices of stock options outstanding as of December 31, 2012 range from $1.10 to $13.98.Other information was as follows: Year ended December 31, 2012 2011 2010 Total intrinsic value of options exercised $1,611 $3,082 $1,511 Cash received from exercises of stock options 2,069 2,747 1,925 Cash received from issuance of restricted stock 2,759 - - The following table summarizes the prices whereby the Company granted employee stock options from the period January 1, 2010 through July 27,2010 (the date prior to the Company’s initial public offering): Grant Date Options Granted Fair Market Valueof Common Stock(per share) February 22, 2010 71,000 $ 13.45 Prior to our initial public offering on July 28, 2010, the Board of Directors determined the exercise price was the fair market value on the respectivegrant dates. Historically, determining the fair value of our common stock required making subjective judgments. The valuation of the Company’s commonstock considered a market approach and an income approach, incorporating the Company’s historical and expected financial performance, relevant market,industry and economic trends, recent capital transactions, involving either the Company or comparable companies, and comparable public companyvaluations. The resulting calculation assigned a value for 100% of the Company’s equity on a marketable equivalent, non-controlling interest basis.After the value of the Company had been determined, the Company allocated the value to each class of its shares, including common stock. The valueallocation methodology applies the principles set forth in the AICPA Practice Aid—Valuation of Privately-Held-Company Equity Securities Issued asCompensation (“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 bemore appropriate than the others. The Company used 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, resultingin a price for each of the share classes, including common stock. The valuations of common stock also reflected a discount for lack of marketability, adjustedover time to reflect the expected likelihood and timing of a liquidity event subsequent to each valuation date. No other discounts were applied in determining thevalue of the Company’s common stock. There was inherent uncertainty in the estimates used in the valuations. If different discount rates, assumptions orweightings had been used, the valuations would have been different. From January 1, 2010 through July 27, 2010, the Company performed contemporaneousvaluations to determine the fair value of the Company’s common stock.Since our initial public offering on July 28, 2010, the Company has not performed internal valuations or obtained independent valuations in order todetermine the Company’s stock price to reference when determining the fair value of our common stock in connection with the granting of stock options. 89Table of ContentsEnvestnet, Inc.Notes to Consolidated Financial Statements (Continued)(In thousands, except share and per share amounts) Restricted Stock AwardsPeriodically, the Company grants restricted stock awards under the 2010 Plan to employees that vest one-third on each of the first three anniversaries ofthe grant date. The Company also granted restricted stock awards under the 2012 Plan that vest upon Tamarac meeting certain performance conditions andthen a subsequent two-year service condition.The following is a summary of the activity for unvested restricted stock awards granted under the Company’s plans: Number ofShares Weighted-Average GrantDate Fair Valueper Share Balance at December 31, 2010 - $- Granted 77,224 12.38 Vested - - Forfeited (3,404) 12.55 Balance at December 31, 2011 73,820 12.37 Granted 714,934 12.50 Vested (24,568) - Expired/cancelled (1,064) 12.45 Forfeited (4,132) 12.49 Balance at December 31, 2012 758,990 12.49 At December 31, 2012, there was $5,736 of unrecognized compensation cost related to unvested stock options which the Company expects torecognize over a weighted-average period of 1.7 years. At December 31, 2012, there was $1,605 of unrecognized compensation cost related to restricted stockawards which the Company expects to recognize over a weighted-average period of 3.6 years. This excludes $6,865 of potential unrecognized stockcompensation cost related to the Target Incentive Awards, which the Company expects to recognize over the remaining estimated vesting period of 2.3 to 4.3years. The amount of stock compensation cost related to the Target Incentive Awards is dependent upon Tamarac meeting certain performance conditions andthen a subsequent two-year service condition. 14.Earnings per ShareNet income per common share reflects the application of the two-class method for the year ended December 31, 2010. Under the two-class method, netincome is allocated between common stock and other participating securities based on their respective participating rights. All classes of convertible preferredstock would participate pro rata in dividends and therefore are considered participating securities.Basic net income per common share excludes dilution for potential common stock issuances and is computed by dividing net income attributable tocommon stockholders by the weighted average number of common shares outstanding for the period. Diluted net income per common share reflects thepotential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, unless they are anti-dilutive. For the year ended December 31, 2010, convertible preferred securities were excluded from the computation of diluted net income per share as theirinclusion on an as if converted basis would have been anti-dilutive. For the year ended December 31, 2010, the convertible preferred securities are 90Table of ContentsEnvestnet, Inc.Notes to Consolidated Financial Statements (Continued)(In thousands, except share and per share amounts) considered anti-dilutive as a result of such securities not having the contractual obligation to participate in losses of the Company. For the calculation of dilutednet income per common share, the basic weighted average number of shares is increased by the dilutive effective of stock options, common warrants andrestricted stock using the treasury stock method.The following table provides a reconciliation of the numerators and denominators used in computing basic and diluted net income (loss) per shareattributable to common stockholders: Year ended December 31, 2012 2011 2010 Basic income per share calculation: Net income (loss) $465 $7,605 $(626) Less: Preferred stock dividends - - (422) Net income (loss) attributable to common stockholders $465 $7,605 $(1,048) Basic number of weighted-average shares outstanding 32,162,672 31,643,390 20,805,911 Basic net income (loss) per share attributable to common stockholders $0.01 $0.24 $(0.05) Diluted income (loss) per share calculation: Net income (loss) attributable to common stockholders $465 $7,605 $(1,048) Basic number of weighted-average shares outstanding 32,162,672 31,643,390 20,805,911 Effect of dilutive shares: Options to purchase common stock 954,056 974,192 - Common warrants 177,257 211,495 - Restricted stock 47,630 34,757 - Diluted number of weighted-average shares outstanding 33,341,615 32,863,834 20,805,911 Diluted net income (loss) per share attributable to commonstockholders $0.01 $0.23 $(0.05) Common share equivalents for securities that were anti-dilutive and therefore excluded from the computation of diluted earnings per share are asfollows: Year ended December 31, 2012 2011 2010 Options to purchase common stock 1,209,748 121,000 4,998,337 Common warrants - - 1,388,888 Unvested restricted stock 559,551 - - Total 1,769,299 121,000 6,387,225 91Table of ContentsEnvestnet, Inc.Notes to Consolidated Financial Statements (Continued)(In thousands, except share and per share amounts) 15.Insurance RecoveryOn April 26, 2011, the Company and its directors’ and officers’ liability insurance carrier entered into an agreement under which the insurance carrieragreed to pay the Company $1,100 to reimburse the Company for defense fees and expenses incurred by the Company in 2010 related to certain litigation (seeNote 16). This amount was received in 2011 and is included in other income in the consolidated statements of operations. 16.Commitments and ContingenciesLeasesThe Company rents office space under leases that expire at various dates through 2023. Future annual minimum lease commitments under theseoperating leases were as follows: Years ending December 31: 2013 $4,488 2014 5,083 2015 5,281 2016 5,537 2017 5,109 Thereafter 21,073 Total $46,571 Rent expense for all operating leases totaled: Year ended December 31, 2012 2011 2010 Rent expense $ 4,008 $ 2,930 $ 2,529 Purchase Obligations and IndemnificationsThe Company enters into unconditional purchase obligations arrangements for certain of its services that it receives in the normal course of business.Future minimum unconditional purchase obligations are as follows: Years ending December 31: 2013 $637 2014 73 2015 - 2016 - 2017 - Thereafter - $ 710 The Company includes various types of indemnification and guarantee clauses in certain arrangements. These indemnifications and guarantees mayinclude, but are not limited to, infringement claims related to intellectual property, direct or consequential damages and guarantees to certain service providers.The type and amount of any potential indemnification or guarantee varies substantially based on the nature of each 92Table of ContentsEnvestnet, Inc.Notes to Consolidated Financial Statements (Continued)(In thousands, except share and per share amounts) arrangement. The Company has experienced no previous claims and cannot determine the maximum amount of potential future payments, if any, related tosuch indemnification and guarantee provisions. The Company believes that it is unlikely it will have to make material payments under these arrangementsand therefore has not recorded a contingent liability in the consolidated balance sheets.LitigationOn November 23, 2009, the Company sued Fetter Logic, Inc. (“Fetter Logic”), a private company, and its chief executive officer seeking, among otherthings, unspecified damages for breaches of the investment agreement and operating agreement that the Company had entered into with Fetter Logic inDecember 2008 and a declaratory judgment that the Company owns certain rights in certain intellectual property. Fetter Logic asserted claims against theCompany in a separate suit and in a counterclaim filed on November 30, 2009, for breaches of the investment agreement and operating agreement, breach ofthe implied covenant of good faith and fair dealing, breach of fiduciary duty, copyright infringement, misappropriation of trade secrets, an accounting, unjustenrichment and a declaratory judgment that Fetter Logic owns all rights in the contested intellectual property. Fetter Logic sought declaratory and injunctiverelief, as well as unspecified compensatory and punitive damages. Both cases arose out of (1) an investment agreement, pursuant to which the Companypurchased shares in Fetter Logic for approximately $5,700, and (2) an operating agreement, under which the parties agreed to integrate their respective softwareapplications and develop and sell joint product offerings. Fetter Logic alleged that the Company did not comply with the terms of the operating agreement todevelop joint product offerings, but instead misappropriated Fetter Logic’s intellectual property to develop products for its own benefit.On July 8, 2010, the Company and Fetter Logic agreed to dismiss their respective lawsuits. As a result, the Company wrote off net fees receivable andnotes receivable totaling $2,283 in the year ended December 31, 2010. This amount is included in general and administration expenses in the consolidatedstatements of operations.In connection with this settlement, none of the parties was required to make any payments to any other party, the Company relinquished its ownershipinterest in Fetter Logic, as well as operating receivables for services the Company provided during the term of the operating agreement and its rights under apromissory note issued to the Company in December 2009 in connection with its redemption of a portion of its ownership interest in Fetter Logic. In addition,the Company has the right to use any intellectual property developed or obtained by the Company in connection with the operating agreement. For the yearended December 31, 2010, the Company incurred legal fees of $1,933 related to this matter.The Company is also involved in other litigation arising in the ordinary course of its business. The Company does not believe that the outcome of anyof these proceedings, individually or in the aggregate, would, if determined adversely to it, have a material adverse effect on its results of operations, financialcondition, cash flows or business. 17.Major CustomersOne customer accounted for the following percentage of the Company’s fees receivable: December 31, 2012 2011 Fidelity 11% 34% 93Table of ContentsEnvestnet, Inc.Notes to Consolidated Financial Statements (Continued)(In thousands, except share and per share amounts) One customer accounted for the following percentage of the Company’s revenues: December 31, 2012 2011 2010 Fidelity 22% 31% 31% 18.Benefit PlanThe Company sponsors a profit sharing and savings plan under Section 401(k) or the Internal Revenue Code, covering substantially all domesticemployees. The Company made voluntary employer matching contributions as follows: Year ended December 31, 2012 2011 2010 Voluntary employer matching contributions $ 660 $ 474 $ 427 19.Net Capital RequirementsPBS is a broker-dealer subject to the SEC Uniform Net Capital Rule (SEC Rule 15c3-1), which requires the maintenance of minimum net capital andrequires that the ratio of aggregate indebtedness to net capital (“net capital ratio”), both as defined, shall not exceed 15 to 1. SEC Rule 15c3-1 also providesthat equity capital may not be withdrawn or cash dividends paid if the resulting net capital ratio would exceed 10 to 1. At December 31, 2012, the Companyhad net capital of $968, which was $868 in excess of its required net capital of $100. At December 31, 2012, the Company’s net capital ratio was .12 to 1.Additionally, PBS is subject to net capital requirements of certain self-regulatory organizations and at December 31, 2012, PBS was in compliancewith such requirements. 20.Subsequent EventsOn April 11, 2013, the Company entered into a definitive agreement to acquire substantially all of the assets of the Wealth Management Solutions(“WMS”) division of Prudential Investments for $10,000 in cash upon closing, subject to certain post-closing adjustments, plus contingent consideration ofup to a total of $23,000 in cash, based upon meeting certain performance targets, to be paid over three years. WMS is a provider of technology solutions thatenables financial services to firms develop and enhance their wealth management offerings. The Company anticipates the acquisition will be completed in thethird quarter of 2013.On April 11, 2013, the Company amended the 2012 Plan (see Note 13). The purpose of the amendment was to amend the methodology for determiningthe vesting requirements of performance awards granted under the 2012 Plan as well as the inclusion of additional Envestnet | Tamarac employees eligible toparticipate in the 2012 Plan. The amendment may result in changes to the timing or amount of expense to be recognized in future periods in connection withany performance awards granted under the 2012 Plan, compared to that which may have occurred without the amendment. 94Table of Contents21.Quarterly Financial Data (Unaudited)Quarterly results for the years ended December 31, 2012 and 2011 were as follows: 2012 First Second Third Fourth Total revenues $ 32,642 $ 37,962 $ 42,283 $ 44,379 Income (loss) from operations (1) (2) 1,232 (1,132) 920 2,022 Net income (loss) (3) 740 (668) 551 (158) Net income (loss) per share Basic 0.02 (0.02) 0.02 (0.01) Diluted 0.02 (0.02) 0.02 (0.01) 2011 First Second Third Fourth Total revenues $ 29,262 $ 31,334 $ 32,040 $ 30,542 Income from operations (4) 2,554 3,151 3,226 2,445 Net income 1,404 2,447 1,925 1,829 Net income per share Basic 0.04 0.08 0.06 0.06 Diluted 0.04 0.07 0.06 0.06 (1)During the fourth quarter, the Company recorded an adjustment to non-cash compensation expense that resulted in an increase of $305 to incomefrom operations. (2)Included in income (loss) from operations for the first quarter, second quarter, third quarter and fourth quarter of 2012 is $644, $1,353, $215and $506, respectively, of restructuring and transaction related costs. (3)During the fourth quarter, the Company recorded certain adjustments to income taxes including $848 related to additional India income taxes, and$392 in additional income taxes primarily to adjust deferred tax assets related to net operating loss carryforwards. (4)Included in income from operations for the first quarter, second quarter, third quarter and fourth quarter of 2011 is $10, $53, $302 and $689,respectively, of restructuring and transaction related costs. 95Table of ContentsItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureOn February 13, 2013, our Audit Committee terminated McGladrey LLP (“McGladrey”) as our independent registered public accountants and onFebruary 14, 2013 engaged KPMG LLP (“KPMG”) as our independent registered public accounting firm for our fiscal year ended December 31, 2012 and tore-audit our financial statements for the year ended December 31, 2011. In addition, on March 29, 2013, our Audit Committee determined that it needed toretain new independent registered public accountants to re-audit our financial statements for the year ended December 31, 2010. As a result, on April 2, 2013,the Audit Committee engaged KPMG to re-audit our financial statements for the year ended December 31, 2010.Information regarding the change in independent accountants was reported in our Current Reports on Form 8-K filed with the SEC on February 14,2013 and on April 3, 2013. McGladrey’s reports on our consolidated financial statements for each of the years ended December 31, 2011 and 2010 did notcontain an adverse opinion or disclaimer of opinion, and such reports were not qualified or modified as to uncertainty, audit scope, or accounting principle.During the years ended December 31, 2011 and 2010, and the period from January 1, 2012 through March 29, 2013, we did not have any disagreements withMcGladrey on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if notresolved to McGladrey’s satisfaction, would have caused them to make reference thereto in their reports on Envestnet’s consolidated financial statements forsuch periods. During the years ended December 31, 2011 and 2010, there were no reportable events as the term is described in Item 304(a)(1)(v) of RegulationS-K.Item 9A. Controls and ProceduresEvaluation of Disclosure Controls and ProceduresOur management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controlsand procedures as of December 31, 2012. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the ExchangeAct, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports thatit files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by acompany in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including itsprincipal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that anycontrols and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and managementnecessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosurecontrols and procedures as of December 31, 2012, and due to the material weakness in our internal control over financial reporting described in ouraccompanying Management’s Report on Internal Control Over Financial Reporting, our chief executive officer and chief financial officer concluded that,as of such date, our disclosure controls and procedures were not effective.Management has excluded Tamarac, Inc. and Prima Capital Holding, Inc., from its assessment of internal control over financial reporting as ofDecember 31, 2012, because those entities were acquired by the Company in purchase business combinations in the second quarter of 2012. Tamarac, Inc.and Prima Capital Holding, Inc. are wholly-owned subsidiaries whose total assets represent approximately 39% and 9%, respectively, and whose revenuesrepresent approximately 6% and 2%, respectively, of the Company’s consolidated financial statement amounts as of and for the year ended December 31,2012.Management’s Report on Internal Control Over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting for our company. Internal controlover financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act, as a process designed by, or under the supervisionof, a company’s 96Table of Contentsprincipal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonableassurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally acceptedaccounting principles, and includes those policies and procedures that: • pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets ofthe company; • provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that receipts and expenditures of the company are being made in accordance with authorizationsof management and directors of the company; and • provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assetsthat could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate.Our management, including our chief executive officer and chief financial officer, assessed the effectiveness of our internal control over financialreporting as of December 31, 2012. In connection with this assessment, we identified a material weakness, as described below, in internal control overfinancial reporting as of December 31, 2012. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reportingsuch that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timelybasis. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission inInternal Control—An Integrated Framework (September 1992). Because of the material weakness described below, management concluded that, as ofDecember 31, 2012, our internal control over financial reporting was not effective.Inadequate and ineffective controls over accounting for income taxesWe did not have adequate design or operation of controls that provide reasonable assurance that the accounting for income taxes, including the relatedfinancial statement disclosures, were in accordance with U.S. GAAP. Specifically, we relied on third-party subject matter experts and did not have sufficienttechnical expertise in the income tax function to provide adequate review and control with respect to the (a) identification and ongoing evaluation of uncertaintax positions in foreign tax jurisdictions; (b) complete and accurate recording of deferred tax assets and liabilities due to differences in accounting treatment forbook and tax purposes; and (c) complete and accurate recording of inputs to the consolidated income tax provision and related accruals.This material weakness resulted in post-closing adjustments to deferred income tax assets and liabilities, income taxes receivable, uncertain taxliabilities as included in other non-current liabilities, and income tax expense, which were corrected by management prior to the issuance of the Company’sconsolidated financial statements included herein.KPMG, our independent registered public accounting firm, has audited our consolidated financial statements and the effectiveness of our internalcontrol over financial reporting as of December 31, 2012. Their report appears below. 97Table of ContentsRemediation PlansManagement is committed to remediating the material weakness in a timely fashion. We have begun the process of executing remediation plans thataddress the material weakness in internal control over financial reporting relating to accounting for income taxes. Specifically, we replaced our third-partysubject matter experts and also hired internal personnel dedicated to managing the income tax function to enhance our expertise in determining the appropriateaccounting for material and complex tax transactions. In addition, management’s planned actions to further address the material weakness include: • Review of tax accounting process to identify and implement enhanced tax accounting processes and related internal control procedures; • Enhancement of our process and internal controls related to the preparation of tax accounting position papers documenting our analysis andconclusions for all technical tax accounting matters, and • Establish training and education programs for financial personnel responsible for income tax accounting.The Audit Committee has directed management to develop a detailed plan and timetable for the implementation of the foregoing remedial measures (tothe extent not already completed) and will monitor their implementation. In addition, under the direction of the Audit Committee, management will continue toreview and make necessary changes to the overall design of the Company’s internal control environment, as well as policies and procedures to improve theoverall effectiveness of internal control over financial reporting.Management believes the measures described above and others that will be implemented will remediate the control deficiencies identified and willstrengthen our internal control over financial reporting. Management is committed to continuous improvement of the Company’s internal control processes andwill continue to diligently review our financial reporting controls and procedures. As management continues to evaluate and work to improve internal controlover financial reporting, we may take additional measures to address control deficiencies or determine to modify, or in appropriate circumstances not tocomplete, certain of the remediation measures described above. We expect these remedial actions and or other actions related to this maternal weakness to beeffectively implemented in 2013 in order to successfully remediate the material weakness reported within this Form 10-K by December 31, 2013.If the remedial measures described above are insufficient to address the identified material weakness or are not implemented effectively, or additionaldeficiencies arise in the future, material misstatements in our interim or annual financial statements may occur in the future. Among other things, anyunremediated material weakness could result in material post-closing adjustments in future financial statements. Furthermore, any such unremediated materialweakness could have the effects described in “Item 1A, Risk Factors – In preparing our financial statements for 2012, we identified a material weakness inour internal control over financial reporting, and our failure to remedy this or other material weaknesses that we may identify in the future could result inmaterial misstatements in our financial statements” in Part I of this Form 10-K.Changes in Internal Control Over Financial ReportingThere were no changes in internal control over financial reporting during the quarter ended December 31, 2012 that have materially affected, or arereasonably likely to materially affect, our internal control over financial reporting. 98Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo The Board of Directors and StockholdersEnvestnet, Inc.:We have audited Envestnet, Inc.’s (the Company’s) internal control over financial reporting as of December 31, 2012, based on criteria establishedin Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). TheCompany’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibilityis to express an opinion on the Company’s internal control over financial reporting based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performingsuch other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internalcontrol over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately andfairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary topermit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluationof effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate.A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonablepossibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A materialweakness related to the ineffective controls over income tax accounting and disclosure has been identified and included in management’s assessment.Envestnet, Inc. management excluded Tamarac, Inc. and Prima Capital Holding, Inc., from its assessment of the effectiveness of the Company’sinternal control over financial reporting as of December 31, 2012, because those entities were acquired by the Company in purchase business combinations inthe second quarter of 2012. Tamarac, Inc. and Prima Capital Holding, Inc. are wholly-owned subsidiaries whose total assets represent approximately 39% and9%, respectively, and whose revenues represent approximately 6% and 2%, respectively, of the related consolidated financial statement amounts as of and forthe year ended December 31, 2012. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal controlover financial reporting of Tamarac, Inc. and Prima Capital Holding, Inc.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balancesheets of the Company as of December 31, 2012 and 2011, and the related consolidated statements of operations, stockholders’ equity, and cash flows foreach of the years in the 99Table of Contentsthree-year period ended December 31, 2012 and our report dated June 14, 2013 expressed an unqualified opinion on those consolidated financial statements.This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of 2012 consolidated financialstatements, and this report does not affect our report dated June 14, 2013, which expressed an unqualified opinion on those financial statements.We do not express an opinion or any other form of assurance on management’s statements referring to corrective actions taken after December 31,2012, relative to the aforementioned material weakness in internal control over financial reporting./s/ KPMG LLPChicago, IllinoisJune 14, 2013 100Table of ContentsItem 9B. Other InformationNone.Part IIIItem 10. Directors, Executive Officers and Corporate GovernanceDirectorsThe following summarizes information concerning each of our directors. Judson BergmanMr. Bergman, age 56, is the founder of our company and has served as our Chairman, Chief Executive Officer and adirector since 1999. Prior to founding our company, Mr. Bergman was Managing Director at Nuveen. Mr. Bergman servesas a trustee of RS Investment Trust and RS Variable Products Trust, registered investment companies. Mr. Bergman receivedan MBA in finance and accounting from Columbia University and a BA from Wheaton College. Mr. Bergman has extensive familiarity with the financial services industry acquired through his years with the company andhis experience at Nuveen as well as his education in finance and accounting. Ross ChapinMr. Chapin, age 60, has served as a director of our company since 2001. Mr. Chapin is a Managing Director of ParametricPortfolio Associates LLC, a provider of structured portfolio management, which he joined as a senior executive in October2005. Prior to Parametric, Mr. Chapin co-founded Orca Bay Partners, a private equity firm in 1998. Mr. Chapin received anMBA from Columbia University in finance and accounting, and an undergraduate degree from Denison University. Mr. Chapin has broad knowledge of the financial services industry and financial products acquired through his experience atParametric. In addition, the Board benefits from Mr. Chapin’s experience with a broad range of companies and industriesacquired as a result of the review and analysis of investments by Orca Bay Partners and his education in finance andaccounting. Gates HawnMr. Hawn, age 64, has served as a director of our company since 2004. Mr. Hawn is currently retired. He had previouslyworked as a Senior Advisor for Credit Suisse, an investment banking firm or its predecessors from 2000 to 2004. In 2000Donaldson, Lufkin & Jenrette, or DLJ, merged with Credit Suisse, and Mr. Hawn was with DLJ from 1981 to 2000. Mr.Hawn received an undergraduate degree from Williams College. Mr. Hawn’s has extensive knowledge of the financial services industry and financial products acquired through hisexperience at DLJ and Credit Suisse. James JohnsonMr. Johnson, age 75, has served as a director of our company since 2000. Mr. Johnson is a General Partner and Founder ofApex Venture Partners, or Apex, a private equity firm, which he founded in 1988. Prior to founding Apex, Mr. Johnson wasone of three founding partners of Knightsbridge Partners, a private investment firm. Prior to Knightsbridge, Mr. Johnsonserved in senior management roles with Beatrice Foods, including corporate Chief Financial Offer and Senior Vice Presidentof the $6 billion U.S. Foods subsidiary. Mr. Johnson received an MBA from Northwestern University and a BS fromLoyola University. 101Table of Contents Mr. Johnson has experience with a broad range of companies and industries acquired as a result of the review and analysis ofinvestments by Apex and Knightsbridge Partners. The Board also benefits from Mr. Johnson’s experience in senior financialand management roles at Beatrice Foods and his education in business administration. Paul KoontzMr. Koontz, age 53, has served as a director of our company since 2004. Mr. Koontz has been a general partner atFoundation Capital Management, or Foundation Capital, a venture capital firm since 1996. Mr. Koontz serves as theChairman of the Board of Financial Engines, Inc. and is on the boards of Yaolan Media (in Beijing), Numerate, eBates, andthe Stanford University DAPER Fund. Mr. Koontz received a master’s in engineering management from Stanford Universityand a BS from Princeton University. Mr. Koontz has experience with a broad range of early stage and developing companies and industries acquired as a result ofthe review and analysis of investments by Foundation Capital. The Board also benefits from Mr. Koontz’s experience servingon the boards of directors of other companies in the financial services and other industries and his education in engineeringmanagement. Charles RoameMr. Roame, age 47, has served as a director of our company since August 2011. Mr. Roame has served as Managing Partnerof Tiburon Strategic Advisors, a provider of research, strategy consulting, and other related services primarily to financialservices firms, since 1998. Mr. Roame has served on the boards of a variety of start-up ventures. Mr. Roame received anMBA from the University of Michigan and a BA from Michigan State University. Mr. Roame’s qualifications to serve on our Board of Directors are primarily based on his industry experience. Yves SisteronMr. Sisteron, age 58, 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 GumGum, KyribaCorp. and Qualys, Inc. Mr. Sisteron holds a JD and an LLM from the University of Law (Lyon) and an LLM degree fromthe New York University School of Law. Mr. Sisteron has experience with a broad range of companies and industries acquired as a result of the review and analysis ofinvestments by GRP Partners. The Board also benefits from Mr. Sisteron’s experience serving on the boards of directors ofother companies and his education in law.The Committees of the Board of DirectorsOur Board of Directors, or our Board, has established an Audit Committee, a Compensation Committee and a Nominating and GovernanceCommittee. The Audit CommitteeThe Audit Committee provides oversight of the integrity of our financial statements and financialreporting process, our compliance with legal and regulatory requirements, the system of internalcontrols, the audit process, the performance of our internal audit program and the performance,qualification and independence of the independent auditors. The Audit Committee is composed entirely of directors who are independent of us and ourmanagement, as defined by the New York Stock Exchange, or NYSE, listing standards. 102Table of Contents The Board has determined that each member of the Audit Committee satisfies the financial literacyrequirements of the NYSE, and that Messrs. Chapin, Johnson and Hawn are each auditcommittee financial experts, as that term is defined under the rules of the SEC. The members of the Audit Committee are Mr. Johnson (Chairman), Mr. Chapin and Mr. Hawn. The Compensation CommitteeThe Compensation Committee has responsibility for evaluating the performance of our chiefexecutive officer, or our CEO, and senior management and determining executive compensation inconjunction with the independent directors. The Compensation Committee also works with theNominating and Governance Committee and the CEO on succession planning. The Compensation Committee is composed entirely of directors who are independent of us and ourmanagement, as defined by the NYSE listing standards. The members of the Compensation Committee are Mr. Sisteron (Chairman), Mr. Chapin, Mr.Koontz and Mr. Roame. Mr. Roame joined the Compensation Committee in February 2012. The Nominating and Governance CommitteeThe responsibilities of the Nominating and Governance Committee include identifying individualsqualified to become Board members, recommending director nominees to the Board anddeveloping and recommending corporate governance guidelines. The Nominating and GovernanceCommittee also has responsibility to review and make recommendations to the full Boardregarding director compensation. In addition to general corporate governance matters, theNominating and Governance Committee assists the Board and the Board committees in their self-evaluations. The Nominating and Governance Committee is composed entirely of directors who areindependent of us and our management, as defined by the NYSE listing standards. The members of the Nominating and Governance Committee are Mr. Hawn (Chairman),Mr. Johnson, Mr. Koontz and Mr. Roame. Mr. Roame joined the Committee in February 2012.Compliance with Section 16(a) of the Exchange ActOur executive officers and directors are subject to the reporting requirements of Section 16 of the Exchange Act. Except as disclosed in the nextsentence, we believe that all of our executive officers and directors complied with all filing requirements imposed by Section 16(a) of the Exchange Act on atimely basis during fiscal year 2012. Mr. Sisteron filed a Form 4 late regarding the purchase of 15,000 shares of our common stock in February and March of2012 and Mr. Roame filed a Form 4 late regarding the purchase of 2,075 shares of our common stock in August 2012.Executive OfficersThe information required by this item relating to our executive officers and other corporate officers is included under the caption “Executive Officers ofthe Registrant” in Item 1 of this report. 103Table of ContentsCode of EthicsWe have adopted a code of ethics that applies to all of our employees, including our principal executive officer, our principal financial officer and ourprincipal accounting officer. This code of ethics is posted on our Website. The Internet address for our Website is www.envestnet.com, and the code of ethicsmay be found from our main Web page by clicking first on “Investor Information” and then “Corporate Governance,” and then on “Code of BusinessConduct and Ethics.”We intend to disclose any amendment to, or waiver from, a provision of this code of ethics that are required to be publicly disclosed pursuant to therules of the SEC or the New York Stock Exchange by posting such information to our Website, at the address and location specified above.Item 11. Executive CompensationCompensation Discussion and AnalysisWe operate in a highly competitive environment and our executive compensation program is designed to attract and retain talented executives who canexecute our strategy. The discussion below describes the material elements of the 2012 compensation program for our named executive officers and the mannerin which compensation decisions were made.Philosophy and ObjectivesOur executive compensation philosophy, as established by our Compensation Committee, is designed to: • Attract and retain skilled executive officers; • Support our business strategy and objectives; and • Align the interests of our executive officers with those of our stockholders through a pay-for-performance philosophy.We do not utilize formulas to determine compensation amounts and have established a set of guiding principles that have provided the foundation forall compensation programs for executive officers and all other employees. These guiding principles are as follows: • Pay for performance in such a way as to drive our business strategy and objectives and create shareholder value, consistent with an acceptablerisk profile and through legal and ethical means. • The amount of overall total compensation should be attractive to executive officers, affordable for the company, proportional to the executiveofficer’s contribution, and fair to shareholders and employees, while providing payouts that are clearly aligned with actual performance. • Avoid controversial pay practices. • Compensation should be transparent, understandable and effectively communicated to shareholders and employees.We are committed to providing a comprehensive total rewards program to attract, retain, and reward highly qualified, diverse and productiveemployees. The total rewards program emphasizes alignment of employee efforts to support our corporate strategies. The components of the program includecompensation, benefits, learning and development opportunities and recognition of employee performance. We strive to remain externally competitive inrelevant labor markets while maintaining internal equity. The program also promotes fiscally responsible pay decisions, encourages efficient use of ourresources and ensures compliance with applicable legal and contractual requirements.To our employees, our compensation philosophy means fair pay based on their role in the company, a subjective determination of the market value oftheir job and their performance in that position. In addition, there is opportunity for additional rewards when we meet or exceed business objectives.Performance rewards provide employees with the opportunity to earn additional compensation beyond their base salary. 104Table of ContentsCompensation for our executive officers consists of three primary elements. They receive a base salary which is paid in semi-monthly cashinstallments, they receive an annual incentive-based cash payment, which is typically paid in February of the subsequent year or in quarterly installmentsand they receive an annual grant of restricted stock and stock options. For details regarding why we pay each element and how the amounts are determined, see“—Our 2012 Executive Compensation Program—Base Salary”, “—Our 2012 Executive Compensation Program—Annual Incentive-Based CashCompensation”, and “—Our 2012 Executive Compensation Program—Equity Awards”. Although these sections discuss our practices employed in 2012,generally we plan to continue these practices in future years.We do not have a specific policy that governs the allocation of compensation between cash and non-cash compensation or between long-term or currentcompensation. The allocations are driven primarily through a desire to pay what we view as competitive compensation, as determined solely by us based onour review of broad-based third party surveys and other generally available information, which we have historically used to obtain a general understanding ofmarket compensation practices.Role of Compensation Committee and ManagementThe Compensation Committee consists of four independent non-employee members of our Board of Directors. The Compensation Committee reviewsand, as it deems appropriate, recommends to the Board of Directors policies, practices and procedures relating to the compensation of officers and othermanagerial employees and the establishment and administration of employee benefit plans.The Compensation Committee determines, and recommends to the Board of Directors for approval, the Chief Executive Officer’s compensationwithout the participation of the Chief Executive Officer. The Compensation Committee is also responsible for reviewing the performance of the Chief ExecutiveOfficer. Our Chief Executive Officer is the only executive officer that has a role in determining the compensation of our named executive officers other thanhimself. The Chief Executive Officer will provide the Compensation Committee with recommendations, which the Compensation Committee has the discretionto approve or disapprove, for (a) changes to base salary, (b) distribution of incentive-based annual bonus and (c) restricted stock and stock option grants.Competitive Market ReviewIn December of 2012, the Compensation Committee retained an independent third-party compensation specialist, McLagan, a subsidiary of AonCorporation, to assist in identifying and facilitating any future changes to our compensation program, including the amounts of compensation paid to oursenior management, including the named executive officers.McLagan was engaged to analyze the pay levels of senior management, including those of our named executive officers. In particular, McLagan’sengagement involved (a) defining the roles and responsibilities of senior management, (b) identifying comparable firms within the relevant competitivemarketplace and (c) assessing the comparability of senior management roles and compensation from those firms to our senior management. The comparablefirms included companies with similar size, number of employees or business model.In 2010, the Compensation Committee had engaged McLagan to perform a similar review.Our 2012 Executive Compensation ProgramOur 2012 executive compensation program had three primary components: base salary, cash incentive compensation and equity awards.Base Salary. Base salaries are intended to provide our executives with a degree of financial certainty and stability that does not depend on companyperformance. In determining the base salaries for our Chief Executive 105Table of ContentsOfficer and the other named executive officers, the Compensation Committee, at the beginning of each year, reviews the overall scope of each executive officer’sresponsibilities while taking into account the base salaries paid by companies with which we compete for talent. For 2012, base salary adjustments were basedon a subjective determination of competitive market rates, individual performance, changes in job duties and responsibilities and our overall budget for basesalary increases. We did not follow a specific formula or set of criteria in determining base salary adjustments in 2012.Market data, such as the base salary of comparable jobs at comparable companies, were reviewed to provide guidance as to what constitutescompetitive base salaries. In addition, individual performance of the executive’s duties and responsibilities is also considered. If the executive has performedhis or her duties above expectations, then an increase in the base salary may be justified. Similarly, if the executive is given different duties or responsibilitiesor if they have changed jobs within the company, then their base salary may be increased or decreased accordingly.In all cases where base salaries may be changed, the overall compensation budget must be sufficient for such changes. In certain extreme cases, ourfinancial results and performance may lead to reductions in base salaries as a cost cutting measure.Annual Incentive-Based Cash Compensation. We maintain an annual incentive-based cash compensation program comprising two elements: theAnnual Incentive Program, which is intended to reward executives and employees based on our revenue growth and profitability; and Incentive Compensation,which is intended to reward executives for gross sales.Annual Incentive Program. Under the Annual Incentive Program, a predetermined percentage of the revenues and profits from the preceding year aredistributed to employees, including our executive officers. At the beginning of each year, the Compensation Committee approves the calculation methodology,or formula, which will be used at the end of the year to determine the amount of the annual bonus distribution. The formula includes the distribution amountas a percentage of revenues and Adjusted EBITDA, as well as a stretch incentive target and a minimum threshold. The distribution percentage, as determinedby the Compensation Committee, is generally derived by (a) investigating the annual compensation practices of comparable financial services firms and (b)considering the resulting aggregate incentive for management and employees to meet or exceed the firm’s financial expectations.In calculating the amount to be paid under the Annual Incentive Program, the Compensation Committee utilizes revenues and Adjusted EBITDA,which is prior to the payment of any amount paid pursuant to the Annual Incentive Program and certain extraordinary non-cash or non-recurring general andadministrative expenses. The amounts paid for 2012 under the Annual Incentive Program were based on our financial performance during the 12-month periodending December 31, 2012. The Compensation Committee established a minimum threshold amount of revenue and Adjusted EBITDA, defined as describedabove, of $121.8 million and $19.4 million, respectively. Performance above either or both of the minimum threshold amounts would result in an aggregateannual bonus pool amount of 0.101% of total revenue of revenue equal to or in excess of the threshold amount plus 0.101% of total revenue for eachincremental $1.5 million of revenue between $121.8 million and $129.5 million plus 1.0% of the excess revenue above $129.5 million plus 2.2% of theincremental revenue above $144.7 million plus 3.85% of incremental revenue above $152.3 million plus 1.0% of revenue above $167.5 million and 3.1% ofthreshold Adjusted EBITDA if the threshold amount has been achieved plus 3.9% of the excess Adjusted EBITDA above the threshold amount. TheCompensation Committee has final authority to exercise its discretion in setting compensation amounts or awards for the company as a whole and forindividuals and is not bound by the formula or by recommendations of Mr. Bergman nor of any consultant. For the amount to be earned in 2012, theCompensation Committee agreed with management’s recommendation and approved the amount to be paid under the Annual Incentive Program of $1.8million.At the end of each year, an allocation of the Annual Incentive Program to each eligible employee, including executive officers, is made. The ChiefExecutive Officer (“CEO”) recommends to the Compensation 106Table of ContentsCommittee the distribution amounts for each executive officer, including himself, based on a subjective analysis of his or her performance. For the namedexecutive officers, the CEO subjectively assesses their performance broadly with consideration given to four general categories: integrity, intelligence/businessknowledge, qualitative considerations and effectiveness. No quantitative criteria are used. The CEO’s analysis is based on his sole and absolute discretionwhen assessing performance. Similarly, the amounts he recommends for individual Annual Incentive Program recommendations are based on his sole andabsolute discretion. The CEO presents his recommendations to the Compensation Committee for their consideration along with his individual Annual IncentiveProgram distribution recommendations. The Compensation Committee reviews and makes the final approval for annual bonus distributions for the namedexecutive officers, including the CEO. For the year ending December 31, 2012, the Compensation Committee chose to accept the individual annual bonusdistribution recommendations which it received from the CEO. Distributions of the Annual Incentive Program earned for a fiscal year are paid in thesubsequent fiscal year, generally within the first two months.Incentive Compensation. We maintain a compensation program with amounts paid to eligible employees as incentive compensation based on a targetpercentage of gross sales. The target percentage is revised annually. Incentive Compensation amounts are calculated quarterly and paid out in 20% installmentsover the subsequent five quarters. Incentive Compensation payments are not guaranteed. The recipient must still be employed at the time of payment. IncentiveCompensation payments are allocated among sales and service personnel and sales management, and the allocation of the incentive compensation payments isapproved at the discretion of Mr. Bergman and Mr. Crager. The amount of the Incentive Compensation payments may also be adjusted based on our overallperformance. In 2012, approximately $4.3 million in incentive compensation was earned by eligible employees, of which Mr. Crager received $142,511. Mr.Crager is the only executive officer who receives Incentive Compensation. The amount of Mr. Crager’s Incentive Compensation was based on our total grosssales and the CEO’s subjective assessment of his leadership of the sales organization.Equity Awards. We grant stock options and restricted stock awards to our current and newly hired executive officers to enable them to share in oursuccess and to reinforce a corporate culture that aligns employee interests with the interests of our stockholders. All equity grants to date have been awardedunder the Envestnet Asset Management Group, Inc. 2004 Stock Incentive Plan, or the Envestnet, Inc. 2010 Long-Term Incentive Plan (the “Equity Plans”). Ithas been our practice to annually grant equity awards to employees, including executives, in recognition of performance and as an incentive for retention, aswell as to align their interests with the interests of our stockholders. The size of these grants is based on a number of factors, including our subjective analysisof competitive practices, individual performance as determined in the discretion of the Compensation Committee, changes in the scope of the individual’sposition, internal equity and retention potential. Ultimately, all amounts were determined in the sole and absolute discretion of the Compensation Committeebased on its conclusions as to what was appropriate and necessary after consideration of these factors. The Compensation Committee does not use a formulanor does it have formal procedures regarding grants of stock options. Historically, vesting for equity award grants occurs annually on the anniversary of thegrant date with one-third vesting on each of the first three anniversaries. In keeping with the annual practice of issuing equity grants in the first quarter of thecompany’s fiscal year, the Compensation Committee authorized equity grants equal to 1.2% of our outstanding number of fully-diluted shares as of December31, 2011. In total, equity grants with respect to 72,792 shares of common stock were made on February 29, 2012 to our executive officers. Consistent withour executive compensation philosophy and to better align the interests of our employees with those of our stockholders through pay-for-performance, eachaward was made half in shares of restricted common stock and half in stock options. In addition, the recipient had the option to alter the mix of the equityaward by exchanging one share of restricted common stock for options to purchase three shares of common stock, or options to purchase three shares ofcommon stock for one share of restricted common stock, subject to the limitation that in the aggregate no more than 67% of the equity award could consist ofshares of restricted common stock or options to purchase common stock, as applicable.Our CEO, with the help of his management team, recommended to the Compensation Committee individuals who should receive stock option awardsand the size of each individual award. The individual distribution amounts that were recommended were based on the CEO’s subjective review of eachindividual’s 107Table of Contentsperformance within his or her role in our company since the previous year’s grant, as well as a subjective determination of the competitive practices necessaryto retain key employees. This distribution was submitted to the Compensation Committee for its consideration and approval. As noted above, theCompensation Committee has final authority to exercise its discretion in setting compensation amounts or awards and is not bound by the use of any formulaor recommendations of the CEO nor of any consultant. In its discretion, the Compensation Committee approved the recommendations as submitted. Theequity grants to our named executive officers on February 29, 2012 were as follows: Name Number of SharesUnderlying2012 Equity Award Judson Bergman 12,951 William Crager 16,713 Peter D’Arrigo 12,534 Scott Grinis 12,534 Brandon Thomas 10,836 Supplemental BenefitsWe provide the following benefits to our executives on the same basis as provided to all of our employees: • Health, dental and vision insurance; • Life insurance; • Medical and dependent care flexible spending account; • Short- and long-term disability, accidental death and dismemberment; • A 401(k) plan, with company match; and • A college scholarship plan for employees’ children.We believe these benefits are consistent with companies with which we compete for talent. Other than certain parking privileges to certain of ourexecutive officers, we provide no perquisites to any of our employees, including our named executive officers.Recoupment of earned awardsWe do not currently have a formal policy requiring a fixed course of action with respect to compensation adjustments following later restatements offinancial results. Under those circumstances, the Board of Directors or the Compensation Committee would evaluate whether compensation adjustments wereappropriate, or required under applicable law, based on the facts and circumstances relating to the restatement.Regulatory limitationsSection 162(m) of the Internal Revenue Code generally limits the deductibility for federal income tax purposes of compensation in excess of $1 millionto the chief executive officer or any of the next three most highly paid executive officers of a publicly held corporation (other than the chief financial officer). Weexpect that on an ongoing basis we will generally consider whether a form of compensation will be deductible under section 162(m) in determining executivecompensation, though other factors will also be considered. However, we may authorize compensation payments that do not comply with the exemptions undersection 162(m) when we believe that such payments are appropriate to attract and retain executive talent.In light of the strong shareholder support on our say-on-pay proposal in 2011, we made no significant changes to the executive compensation programbased on concerns or issues raised by our shareholders. We continue to desire feedback from our shareholders on our executive compensation program andwill consider the views of our shareholders as we evaluate our compensation program in 2013. 108Table of Contents2012 Summary Compensation TableThe following table contains compensation information for our Chief Executive Officer, our Chief Financial Officer, and the three other most highlycompensated executive officers. We refer to these individuals as our “named executive officers” in other parts of this Form 10-K. The information included inthis table reflects compensation paid to our named executive officers for services rendered to us. Name and PrincipalPosition Year Salary ($) Bonus ($) StockAwards ($) OptionAwards ($) All OtherCompensation ($) Total Judson Bergman 2012 $400,000 $110,000 $62,250 $39,062 $5,000 $616,312 Chief Executive Officer 2011 400,000 115,000 52,336 4,900 572,236 2010 391,667 160,000 1,366,572 4,900 1,923,139 William Crager 2012 334,583 38,832 66,786 147,511 587,712 President 2011 330,000 30,000 130,840 144,190 635,030 2010 327,500 596,058 211,531 1,135,089 Peter D’Arrigo 2012 275,000 58,000 29,121 50,087 5,000 417,208 Chief Financial Officer 2011 275,000 50,000 52,336 4,900 382,236 2010 275,000 65,000 312,567 4,900 657,467 Scott Grinis 2012 245,000 60,000 29,121 50,087 5,000 389,208 Chief Technology Officer 2011 245,000 55,000 52,336 4,900 357,236 2010 243,333 65,000 203,532 4,900 516,765 Brandon Thomas 2012 240,000 54,000 39,703 37,547 5,000 376,250 Chief Investment Officer 2011 240,000 50,000 52,336 4,900 347,236 2010 238,333 65,000 225,339 4,900 533,572 (1)Bonuses earned for a fiscal year are paid in the subsequent fiscal year, generally within the first two months (e.g., the bonuses earned for 2012 werepaid in February 2013). The amounts disclosed in the Bonus column relate to amounts paid under our Annual Incentive Program.(2)Amounts disclosed in the Equity Awards column relate to grants of restricted stock and stock options in the identified year. With respect to each equitygrant, the amounts disclosed reflect the full grant-date fair value in accordance with Financial Accounting Standards Board Accounting StandardsCodification topic 718. Our assumptions with regard to determining the 2012 stock option values are set forth in note 1 to the 2012 Grants of Plan-Based Awards table.(3)For each person other than Mr. Crager, the amounts disclosed in the All Other Compensation column reflect matching contributions to the executive’s401(k) account. For Mr. Crager, the amounts disclosed reflect $142,511 earned as incentive compensation in 2012, $139,290 earned as incentivecompensation in 2011, $191,638 earned as incentive compensation in 2010 and matching contributions to his 401(k) account of $5,000 in 2012 and$4,900 in 2011 and 2010. 109Table of Contents2012 Grants of Plan-Based AwardsThe following table contains information concerning grants of plan-based awards made in 2012 to our named executive officers. Name GrantDate (1) All OtherStock Awards:Number ofShares ofStock or Units (#) All OtherOptionAwards:Number ofSecuritiesUnderlyingOptions (#) Exerciseor BasePrice ofOptionAwards($/Sh) Grant DateFair Valueof Stockand OptionAwards Judson Bergman 2/29/2012 5,000 7,951 $12.45 $101,312 William Crager 2/29/2012 3,119 13,594 12.45 105,618 Peter D’Arrigo 2/29/2012 2,339 10,195 12.45 79,208 Scott Grinis 2/29/2012 2,339 10,195 12.45 79,208 Brandon Thomas 2/29/2012 3,189 7,647 12.45 77,272 (1)All restricted stock awards and stock option grants were approved by the Compensation Committee and the Board of Directors on February 8, 2012.The grants were made on February 29, 2012.(2)The fair value of stock options granted was determined using the Black-Scholes model as of the grant date. The model assumes: (i) the stock optionwould be exercised 6 years after grant date, (ii) expected stock price volatility of 39.76%, (iii) a risk-free yield equal to 1.13% US Treasury STRIPS,and (iv) our dividend yield (0%) would remain constant from grant date to exercise date.Narrative to 2012 Summary Compensation Table and 2012 Grants of Plan-Based Awards TableSee “—Compensation Discussion and Analysis” above for a complete description of compensation plans pursuant to which the amounts listed underthe 2012 Summary Compensation Table and 2012 Grants of Plan-Based Awards Table were paid or awarded, and the criteria on which such payments werebased. The Compensation Discussion and Analysis also describes certain grants of stock options to our named executive officers. 110Table of Contents2012 Outstanding Equity Awards at Fiscal Year-EndThe following table lists all outstanding equity awards held by our named executive officers (“NEO”) as of December 31, 2012: Option Awards (1) Stock Awards (2) Name Number ofSecuritiesUnderlyingUnexercisedOptions (#)Exercisable Number ofSecuritiesUnderlyingUnexercisedOptions (#)Unexercisable EquityIncentivePlanAwards:Number ofSecuritiesUnderlyingUnexercisedUnearnedOptions(#) OptionExercisePrice($) OptionExpirationDate Number ofShares orUnits ofStock thathave notVested(#) MarketValueofSharesorUnitsofStockThatHaveNotYetVested($) EquityIncentivePlanAwards:Number ofUnearnedShares,Units orOtherRightsThatHaveNotVested(#) EquityIncentivePlanAwards:MarketorPayoutValue ofUnearnedShares,Units orOtherRightsThatHave NotVested($)Judson Bergman 170,000 $5.00 11/14/2015 170,000 7.50 11/14/2015 200,000 7.50 4/26/2017 36,000 7.50 4/30/2018 15,000 7.15 5/15/2019 188,000 188,000 9.00 7/28/2020 3,333 6,667 12.55 2/28/2021 7,951 12.45 2/28/2022 5,000 69,750 William Crager 80,000 5.00 11/14/2015 80,000 7.50 11/14/2015 20,000 1.08 4/26/2017 80,000 7.50 4/26/2017 2,806 0.11 4/26/2017 14,000 7.50 4/30/2018 12,000 7.15 5/15/2019 82,000 82,000 9.00 7/28/2020 8,333 16,667 12.55 2/28/2021 13,594 12.45 2/28/2022 3,119 43,510 Peter D’Arrigo 220,000 7.50 6/16/2018 6,000 7.15 5/15/2019 43,000 43,000 9.00 7/28/2020 3,333 6,667 12.55 2/28/2021 10,195 12.45 2/28/2022 2,339 32,629 Scott Grinis 12,000 7.50 4/26/2017 9,000 7.50 4/30/2018 6,000 7.15 5/15/2019 28,000 28,000 9.00 7/28/2020 3,333 6,667 12.55 2/28/2021 10,195 12.45 2/28/2022 2,339 32,629 Brandon Thomas 32,500 5.00 11/14/2015 32,500 7.50 11/14/2015 12,000 7.50 4/26/2017 9,000 7.50 4/30/2018 6,000 7.15 5/15/2019 31,000 31,000 9.00 7/28/2020 3,333 6,667 12.55 2/28/2021 7,647 12.45 2/28/2022 3,189 44,487 (1)Except as otherwise noted, vesting for stock option grants that expire on November 14, 2015, April 26, 2017 and June 16, 2018 occurs annually on the anniversary of the grant date where one fourth vests on thegrant date, and one fourth vests on the anniversary of the grant date for the next three years. Vesting for stock option grants that expire on April 30, 2018, May 15, 2019, February 28, 2021 and February 28, 2022occurs annually on the anniversary of the grant date where one third vests on the first anniversary, one third vests on the second anniversary and the remainder vests on the third anniversary. The 20,000 share grant toWilliam Crager, which expires on April 26, 2017, vested immediately. Vesting for stock option grants that expire on July 28, 2020 occurs annually on the anniversary of the grant date where one fourth vests each ofthe first four anniversaries. 111Table of Contents2012 Option Exercises and Stock VestedThere were no options exercised or restricted stock that vested with respect to any of our NEOs for the calendar year ending December 31, 2012.Nonqualified Deferred CompensationWe do not currently have a nonqualified deferred compensation plan. However, we may consider implementing such a plan in the future.Potential Payments Upon Termination of Change of ControlNone of our named executive officers has an employment agreement or change of control agreement.Equity Incentive Plans. We currently maintain equity-based incentive plans –the 2004 Stock Incentive Plan, the 2010 Long-Term Incentive Plan andthe Envestnet, Inc. Management Incentive Plan for Envestnet | Tamarac Management Employees. No new awards are being made under the 2004 StockIncentive Plan. We established the 2010 Long-Term Incentive Plan to (i) attract and retain key employees and other persons providing services to us and ourrelated companies; (ii) motivate plan participants by means of appropriate incentive to achieve long-range goals; (iii) provide incentive compensationopportunities that are competitive with those of other similar corporations; and (iv) further align plan participants’ interests with those of ourstockholders. Under the 2010 Long-Term Incentive Plan, we may issue stock options, stock appreciation rights, restricted stock, restricted stock units andother full value awards, as well as cash incentive awards.Change in Control. In the event that (a) a participant’s employment or service, as applicable, is terminated by us, our successor or one of our relatedcompanies that is the participant’s employer for reasons other than cause (as defined in the 2010 Long-Term Incentive Plan) within 24 months following achange in control (as defined in the 2010 Long-Term Incentive Plan) or (b) the 2010 Long-Term Incentive Plan is terminated by us or our successor following achange in control without provision for the continuation of outstanding awards under the 2010 Long-Term Incentive Plan, all stock options and related awardswhich have not otherwise expired will become immediately exercisable and all other awards will become fully vested.Under our equity compensation plans, outstanding and unvested stock options will become fully vested and exercisable, and outstanding andunvested restricted stock will become fully vested and be distributed upon a participant’s death, disability, retirement, or involuntary termination. In addition,the awards will vest upon a change-in-control irrespective of a termination of employment. In the event of a change-in-control where the company ceases to havepublicly traded equity securities, after the consummation of the change-in-control, if no replacement awards are issued in lieu of outstanding awards under theequity plans, then the plans and all outstanding awards granted under the plans will terminate, and the company (or successor) will pay the participants anamount for their outstanding awards determined using the change in control price. These provisions apply to all employees who participate in the company’sequity plans. The outstanding equity awards held by the NEO as of December 31, 2012 are described above under “2012 Outstanding Equity Awards atFiscal Year-End.”We have estimated the amount of incremental compensation for each of Messrs. Bergman, Crager, D’Arrigo, Grinis and Thomas due to acceleratedvesting of outstanding restricted stock awards upon termination of the officer’s employment in the event of the officer’s death, disability, retirement orinvoluntary termination, or upon a change in control irrespective of a termination of employment, as follows: Mr. Bergman, $951,860; Mr. Crager,$449,625; Mr. D’Arrigo $237,476; Mr. Grinis $163,226; and Mr. Thomas, $174,254. These amounts assume that the termination of employment orchange in control was effective as of December 31, 2012 and that the price of Common Stock on which the calculations are made was the closing price of$20.23 on that date. We have estimated the value for the acceleration of stock options as of December 31, 2012 for each NEO as follows: Mr. Bergman,$69,750; Mr. Crager, $43,510; Mr. D’Arrigo $32,629; Mr. Grinis $32,629; and Mr. Thomas, $44,487. The amounts shown above are estimates of theincremental compensation these officers would receive upon such terminations or a change in control. The actual amounts to be received can only bedetermined at the time of the officer’s termination of employment or at the time of a change in control. 112Table of ContentsTransferability. Awards under the 2010 Long-Term Incentive Plan are not transferable except as designated by the participant by will or by laws ofdescent and distribution or, to the extent provided by the Compensation Committee, pursuant to a qualified domestic relations order or to or for the benefit ofthe participant’s family (including, without limitation, to a trust or partnership for the benefit of a participant’s family).Withholding. All awards and other payments under the 2010 Long-Term Incentive Plan are subject to withholding of all applicable taxes. With theconsent of the Compensation Committee, withholding obligations may be satisfied with previously-owned shares of common stock or shares of common stockto which the participant is otherwise entitled under the 2010 Long-Term Incentive Plan. Such shares may only be used to satisfy minimum withholdingrequirements.Amendment and Termination. The Board may, at any time, amend or terminate the 2010 Long-Term Incentive Plan, and the Board or theCompensation Committee may amend any award, provided that no amendment or termination may adversely affect the rights of any participant without theparticipant’s written consent. Adjustments to the 2010 Long-Term Incentive Plan and awards on account of business transactions (as described above) are notsubject to the foregoing prohibition. The provisions of the 2010 Long-Term Incentive Plan that prohibit repricing of stock options and stock appreciation rightscannot be amended unless the amendment is approved by our stockholders. The 2010 Long-Term Incentive Plan also permits the Board to amend the 2010Long-Term Incentive Plan and any awards that are subject to Section 409A of the Internal Revenue Code (relating to nonqualified deferred compensation) as itdeems necessary to conform to Section 409A.Director CompensationUntil July 30, 2012 each non-employee director received an annual retainer of $30,000 with an additional meeting attendance stipend of $2,000 for eachboard meeting attended in person, including all coinciding committee meetings. The chairperson of our Audit Committee received an additional annual retainerof $15,000. The chairpersons of our other committees received an additional annual retainer of $10,000. The lead independent director received an additionalannual retainer of $15,000. All non-chairperson committee members received an additional annual retainer of $5,000 for each committee on which they serve.Directors received one-half of such amounts in cash and could receive one-half in either restricted stock or in options to acquire shares of our common stock atthe discretion of the company.Effective July 31, 2012, the non-employee director compensation policy was amended so that each non-employee director receives an annual retainer of$60,000 with an additional meeting attendance stipend of $5,000 for each board meeting attended in person, including all coinciding committee meetings. Thechairperson of our Audit Committee receives an additional annual retainer of $15,000. The chairpersons of our other committees receive an additional annualretainer of $10,000. The lead independent director receives an additional annual retainer of $15,000. All non-chairperson committee members receive anadditional annual retainer of $5,000 for each committee on which they serve. Directors receive 33% of such amounts in cash and may receive 67% in eitherrestricted stock or in options to acquire shares of our common stock at the discretion of the company. 113Table of ContentsWe also reimburse all of our directors for their reasonable expenses incurred in attending meetings of our Board of Directors or committees. Equitygrants to our non-employee directors vest monthly over a four-year period, except that the shares that would otherwise vest over the first 12 months do not vestuntil the first anniversary of the grant. All equity grants to our non-employee directors are made pursuant to our 2010 Long-Term Incentive Plan. See “—Compensation Discussion and Analysis—2010 Long-Term Incentive Plan”.The following table sets forth our 2012 independent director compensation:Director Compensation Name FeesEarned orPaid inCash($) OptionAwards($)(*) Total($) Ross Chapin 30,150 26,035 56,185 Gates Hawn 33,225 29,538 62,763 James Johnson 35,300 32,044 67,344 Paul Koontz 31,350 26,533 57,883 Charles Roame 31,150 11,515 42,665 Yves Sisteron 34,725 32,044 66,769 *Option awards were granted on February 28, 2012, in connection with 2011 service.As of December 31, 2012, the following option awards were outstanding for each director in connection with option awards granted on February 29,2012, with an exercise price of $12.45 for 2011 service: Ross Chapin 5,277 optionsGates Hawn 5,987 optionsJames Johnson 6,495 optionsPaul Koontz 5,378 optionsCharles Roame 2,344 optionsYves Sisteron 6,495 optionsCompensation Committee ReportThe Compensation Committee has reviewed and discussed the above Compensation Discussion and Analysis with management and, based on suchreview and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included inthe company’s Annual Report on Form 10-K for the year ended December 31, 2012.The foregoing report has been approved by the following members of the Compensation Committee.Yves Sisteron, ChairmanRoss ChapinPaul KoontzCharles RoameThe section captioned “Compensation Committee Report on Compensation Discussion and Analysis” is hereby “furnished” and not “filed” with thisannual report on Form 10-K. 114Table of ContentsItem 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe following table sets forth information, as of May 31, 2013, regarding the beneficial ownership of our common stock by our directors and namedexecutive officers and by our directors and executive officers as a group. Unless otherwise indicated, the named individual has sole voting and investmentpower over the common stock under the column “Common Stock Beneficially Owned.” SharesHeld OptionsExercisablewithin 60Days (1) UnvestedRestrictedCommonStock TotalBeneficialOwnership BeneficialOwnershipPercentages Jud Bergman (2) 644,746 822,317 6,969 1,534,032 4.6% Ross Chapin 78,816 3,475 78,351 * Gates Hawn 128,000 3,870 131,870 * Jim Johnson (3) 1,117,381 4,193 1,121,574 3.5% Paul Koontz (4) 1,450,457 3,511 1,453,968 4.5% Charles Roame 2,075 827 2,902 * Yves Sisteron (5) 2,269,313 4,108 2,273,421 7.0% Bill Crager (6) 149,935 433,004 7,720 549,659 1.8% Pete D’Arrigo 491 300,565 4,679 305,735 * Scott Grinis 245,138 79,065 4,679 328,882 1.0% Brandon Thomas (7) 241,184 147,716 5,246 394,146 1.2% All Directors and Executive Officers as a Group 6,324,038 1,991,920 33,510 8,345,251 24.2% *Denotes beneficial ownership of less than one percent.(1)Includes options vested and exercisable within 60 days of May 31, 2013.(2)Includes 200,000 shares held as security in a margin account(3)Includes 1,774 shares held by Mr. Johnson and 1,115,607 shares held by various funds managed by Apex Venture Partners. As a result of positionsheld with these entities, Mr. Johnson may be deemed to share voting and dispositive power over the securities held by these funds. Mr. Johnsondisclaims beneficial ownership of the reported securities except to the extent of his pecuniary interests therein.(4)Includes 9,610 shares held by Paul Koontz 2010 Annuity Trust, 9,610 shares held by Andrea Koontz 2010 Annuity Trust and 1,431,237 shares heldby entities affiliated with Foundation Capital.(5)Includes 15,000 shares held by Mr. Sisteron individually and 2,254,313 held by entities affiliated with GRP Partners. See footnote (1) under thefollowing table.(6)Includes 100 shares indirectly held by Mr. Crager’s wife.(7)Includes 13,938 shares held by a trust in which Mr. Thomas is the trustee. 115Table of ContentsThe following table shows all persons we know to be direct or indirect owners of more than 5% of our common stock as of the close of business onMay 31, 2013, unless otherwise indicated. Our information is based on reports filed with the SEC by each of the firms listed in the table below. You mayobtain these reports from the SEC. Name and Address of Beneficial Owner Number of SharesBeneficially Owned Percentof Class Entities associated with GRP Partners (1)2121 Avenue of the StarsSuite 1630Los Angeles, CA 90067 6,801,017 21.0% Janus Capital Management LLC (2)151 Detroit StreetDenver, CO 80206 1,997,187 6.2% William Blair & Company LLC (3)222 W. Adams StreetChicago, IL 60606 1,777,244 5.5% (1)Based on a Schedule 13G filed by GRP II Investors, L.P. (“GRP II Investors”), GRP II Partners, L.P. (“GRP II Partners”), GRP Management ServicesCorp. (“GRPMS”), GRPVC, L.P. (“GRPVC”), and AOS Partners, L.P, (“AOS”) on February 15, 2012, reporting the amount of securities beneficiallyowned as of December 31, 2011. Hique, Inc. is the general partner of AOS. GRPVC is the general partner of GRP II Partners. GRPMS is the generalpartner of each of GRPVC and GRP II Investors. Steven Dietz, Brian McLoughlin and Mark Suster are members of the investment committee of AOS.Yves Sisteron, one of our directors, together with Steven Dietz and Brian McLoughlin, is an officer of GRPMS. Mr. Sisteron, together with StevenDietz, Brian McLoughlin and Mark Suster, is a member of the investment committee of GRP II Partners. Pursuant to contractual arrangements, GRP IIInvestors has granted GRPMS the authority to vote and dispose of the shares held by it in the same manner as the investment committee votes ordisposes of the shares held by GRP II Partners. While Mr. Sisteron may be deemed to possess indirect beneficial ownership of the shares owned byGRPVC, GRP II Partners and GRP II Investors, he does not have sole voting or investment power with respect to such shares and, as a result, disclaimsbeneficial ownership of any and all such shares.(2)Based on a Schedule 13F filed by Janus Capital Management LLC on May 15, 2013, reporting the amount of securities beneficially owned as of March31, 2013. Janus has sole voting power over 1,770,210 shares and shared dispositive power over 226,977 shares.(3)Based on a Schedule 13F filed by William Blair & Company, LLC on May 8, 2013, reporting the amount of securities beneficially owned as of March31, 2013. William Blair has sole voting power over 1,567,144 shares and shared dispositive power over 210,100 shares.For a description of securities authorized under our equity compensation plans, see note 13 to the notes to consolidated financial statements in Part II,Item 8.Item 13. Certain Relationships and Related Transactions, and Director IndependenceRegistration RightsOn March 22, 2004, we entered into a registration rights agreement with certain holders of our common stock, or the registration rights agreement,pursuant to which these holders of our common stock are entitled to demand registration rights, Form S-3 registration rights and piggyback registration rightswith respect to the registration of their shares of our common stock under the Securities Act of 1933, as amended, or the Securities Act. We refer to shares ofour common stock that are subject to the registration rights agreement as “registrable securities.” 116Table of ContentsIn connection with our initial public offering, The EnvestNet Group, Inc., Envestnet’s 41% shareholder prior to the IPO (the “Envestnet Shareholder”),merged with and into Envestnet, with Envestnet being the surviving entity. Upon consummation of the merger of the Envestnet Shareholder with and intoEnvestnet, certain stockholders of the Envestnet Shareholder are entitled to become party to the registration rights agreement and to receive each of theregistration rights described below.Demand Registration Rights. The holders of registrable securities have rights, at their request, to have their shares registered for resale under theSecurities Act. Holders of at least 50% of registrable securities may demand the registration of their shares on up to two occasions within any 12-month periodif the gross proceeds from the registration of their shares would exceed $15,000,000.Registration on Form S-3. In addition to the demand registration rights discussed above, holders of at least 20% of the registrable securities mayrequire that we register their shares of our common stock for public resale on Form S-3 or similar short-form registration statement if the gross proceeds fromthe registration of their shares of our common stock would exceed $5,000,000 and our company is eligible to use Form S-3.Piggyback Registration Rights. The holders of approximately 13.3 million shares of registrable securities have rights to have their shares of ourcommon stock registered for resale under the Securities Act if we register any of our securities, either for our own account or for the account of otherstockholders, subject to the right of the underwriters involved in any such transaction to limit the number of shares of our common stock included in anunderwritten offering.The following Related Parties are currently party to the registration rights agreement: AOS Partners, L.P., GRP II Investors, L.P., GRP II Partners, L.P.,GRPVC, L.P., Apex Investment Fund IV, L.P., Apex Investment Fund V, L.P., Apex Strategic Partners IV, LLC, Foundation Capital III Principals, LLC,Foundation Capital III, L.P., Foundation Capital Leadership Principals Fund, LLC, Foundation Capital Leadership Fund, L.P., Judson Bergman (ourChairman and Chief Executive Officer and one of our directors), William Crager (our President), Scott Grinis (our Chief Technology Officer), BrandonThomas (our Chief Investment Officer), and James Johnson, one of our directors. Holders of our registrable securities are entitled to the registration rightsdescribed above. Collectively, these Related Parties hold approximately 10.8 million shares covered by the registration rights agreement as of May 31, 2013.Indemnification of Directors and Executive OfficersOn July 28, 2010, and upon the election of Mr. Roame as a director in August 2011, we entered into agreements to indemnify our directors and certainof our officers in addition to the right to indemnification provided to such persons in our certificate of incorporation and by-laws. These agreements will,among other things, require us to indemnify these individuals to the fullest extent permitted under Delaware law, including for certain expenses (includingattorneys’ fees), judgments, fines and settlement amounts incurred by such person in any action or proceeding, including any action by or in our right, onaccount of services by any such person as a director or officer of our company or as a director or officer of any of our subsidiaries, or as a director or officerof any other company or enterprise if any such person serves in such capacity at our request. We also intend to enter into indemnification agreements with ourfuture directors and executive officers.Director IndependenceIn March 2013, our Board determined that the following directors are independent under the listing standards of the NYSE: Ross Chapin, Gates Hawn, JamesJohnson, Paul Koontz, Charles Roame and Yves Sisteron. These independent directors constitute substantially more than a majority of the Board of Directors.In making its determination of independence, the Board applied the categorical standards for director independence set forth in the NYSE’s rules anddetermined that no other material relationships existed between us and these directors. The Board also considered the other directorships held by theindependent directors and determined that none of these directorships constituted a material relationship with us. 117Table of ContentsItem 14. Principal Accountant Fees and ServicesOn February 14, 2013, the Audit Committee engaged KPMG as our independent accountant for our fiscal year ended December 31, 2012 and to re-audit our financial statements for the year ended December 31, 2011. On February 14, 2013, we disclosed that the Audit Committee dismissed our previousauditor, McGladrey, from its engagement as our independent auditors effective February 13, 2013. McGladrey’s dismissal followed a determination thatcertain services (the “Services”) that McGladrey had provided in prior years to us may be inconsistent with the SEC’s rules on auditor independence. On April2, 2013, the Audit Committee engaged KPMG to re-audit our financial statements for the year ended December 31, 2010.During the years ended December 31, 2011 and 2010 and through February 14, 2013, we had not consulted with KPMG regarding either:(i) the application of accounting principles to any specified transaction, either completed or proposed, or the type of audit opinion that might berendered on our financial statements, and neither a written report was provided to us nor oral advice was provided that KPMG concluded was animportant factor considered by us in reaching a decision as to the accounting, auditing or financial reporting issue; or(ii) any matter that was either the subject of a disagreement (as defined in paragraph (a)(1)(iv) of Item 304 of the SEC’s Regulation S-K and therelated instructions thereto) or a reportable event (as described in paragraph (a)(1)(v) of Item 304 of the SEC’s Regulation S-K).Typically, the appointment of independent auditors is approved annually by the Audit Committee and ratified by our stockholders. The AuditCommittee reviews both the audit scope and estimated fees for professional services for the coming year. The Audit Committee has appointed, subject toratification by our stockholders, KPMG as our independent auditor for the year ending December 31, 2013.Independent Auditor Fee InformationThe following table sets forth the approximate aggregate fees for professional services rendered by KPMG for the audit of our consolidated financialstatements for 2012 and for the re-audit of 2011, as well as other fees paid to KPMG in 2011 and 2012 before they were appointed as our auditors. 2011 2012 Audit fees (1) $485,000 $590,000 Audit-related fees - - Tax fees (2) - 4,000 All other fees (3) 36,000 73,000 Total $521,000 $667,000 (1)Audit fees, related to the years ended December 31, 2011 and December 31, 2012 in connection with: • the audits of our consolidated financial statements for 2011 and 2012; • the audit of our internal control over financial reporting as of December 31, 2012; • reviews of quarterly consolidated financial statements; and • the statutory audit of one of our subsidiaries for 2012. (2)Tax fees for assistance with transfer pricing issues related to foreign income taxes. (3)All other fees include a review of the compliance program of the Company, including a review of our compliance policies, procedures and relatedcontrols to comply with Rule 206(4)-7 under the Investment Advisers Act of 1940. 118Table of ContentsPre-Approval Policy of Audit and Non-Audit ServicesThe Audit Committee pre-approved the audit services associated with the fees described above. The tax fees and all other fees described above wereincurred by the Company prior to the engagement of KPMG as the Company’s independent auditor.The Audit Committee has adopted policies and procedures for the pre-approval of all audit and permissible non-audit services provided by ourindependent auditor. The Audit Committee provides a general pre-approval of certain audit and non-audit services on an annual basis. The types of servicesthat may be covered by a general pre-approval include other audit services, audit-related services and permissible non-audit services. If a type of service is notcovered by the Audit Committee’s general pre-approval, the Audit Committee must review the service on a specific case by case basis and pre-approve it ifsuch service is to be provided by the independent auditor. Annual audit services engagement terms and fees require specific pre-approval of the AuditCommittee. Any proposed services exceeding the pre-approved fees also require specific pre-approval by the Audit Committee. For both types of pre-approval,the Audit Committee will consider whether such services are consistent with the SEC’s rules on auditor independence. The Audit Committee may delegateeither type of pre-approval authority to one or more of its members. 119Table of ContentsPart IVItem 15. Exhibits and Financial Statement Schedules Page Number inForm 10-K (a)(1) Consolidated Financial Statements Report of Independent Registered Public Accounting Firm 61 Consolidated Balance Sheets as of December 31, 2012 and 2011 62 Consolidated Statements of Operations for each of the years ended December 31, 2012, 2011, and 2010 63 Consolidated Statements of Stockholders’ Equity for each of the years ended December 31, 2012, 2011 and 2010 64 Consolidated Statements of Cash Flows for each of the years ended December 31, 2012, 2011 and 2010 65 Notes to Consolidated Financial Statements 66 (a)(2) Evaluation and Qualifying Accounts Financial statements and schedules are omitted for the reason that they are not applicable, are not required, or theinformation is included in the financial statements or the related footnotes. 120Table of ContentsINDEX TO EXHIBITS ExhibitNo. Description 3.1 Amended and Restated Certificate of Incorporation of Envestnet, Inc. (filed as Exhibit 3.1 to the Company’s Registration Statement on Form S-1, as amended (File No. 333-165717), filed with theSEC on July 1, 2010 and incorporated by reference herein). 3.2 Amended and Restated Bylaws of Envestnet, Inc. (filed as Exhibit 3.2 to the Company’s Registration Statement on Form S-1, as amended (File No. 333-165717), filed with the SEC on July 1,2010 and incorporated by reference herein). 4.1 Registration Rights Agreement dated as of March 22, 2004 (filed as Exhibit 4.2 to the Company’s Registration Statement on Form S-1, as amended (File No. 333-165717), filed with the SEC onMarch 26, 2010 and incorporated by reference herein). 4.2 First Amendment to Registration Rights Agreement dated as of August 30, 2004 (filed as Exhibit 4.3 to the Company’s Registration Statement on Form S-1, as amended (File No. 333-165717),filed with the SEC on March 26, 2010 and incorporated by reference herein). 4.3 Second Amendment to Registration Rights Agreement effective as of March 24, 2005 (filed as Exhibit 4.4 to the Company’s Registration Statement on Form S-1, as amended (File No. 333-165717), filed with the SEC on March 26, 2010 and incorporated by reference herein). 4.4 Joinder Agreements to Registration Rights Agreement (filed as Exhibit 4.5 to the Company’s Registration Statement on Form S-1, as amended (File No. 333-165717), filed with the SEC on March26, 2010 and incorporated by reference herein). 10.1 Technology and Services Agreement dated as of March 31, 2008, between Registrant and FMR LLC (filed as Exhibit 10.1 to the Company’s Registration Statement on Form S-1, as amended (FileNo. 333-165717), filed with the SEC on May 6, 2010 and incorporated by reference herein). 10.2 First Amendment to Technology and Services Agreement dated June 26, 2008 (filed as Exhibit 10.2 to the Company’s Registration Statement on Form S-1, as amended (File No. 333-165717),filed with the SEC on May 6, 2010 and incorporated by reference herein). 10.3 Second Amendment to Technology and Services Agreement dated May 5, 2009 (filed as Exhibit 10.3 to the Company’s Registration Statement on Form S-1, as amended (File No. 333-165717),filed with the SEC on May 6, 2010 and incorporated by reference herein). 10.4 Third Amendment to Technology and Services Agreement dated November 16, 2009 (filed as Exhibit 10.4 to the Company’s Registration Statement on Form S-1, as amended (File No. 333-165717), filed with the SEC on May 6, 2010 and incorporated by reference herein). 10.5 Services Agreement dated December 28, 2005 between Registrant and Fidelity Brokerage Services LLC (filed as Exhibit 10.5 to the Company’s Registration Statement on Form S-1, as amended(File No. 333-165717), filed with the SEC on May 6, 2010 and incorporated by reference herein). 10.6 Services Agreement effective March 24, 2005 between Registrant and National Financial Services LLC (filed as Exhibit 10.6 to the Company’s Registration Statement on Form S-1, as amended (FileNo. 333-165717), filed with the SEC on May 6, 2010 and incorporated by reference herein). 10.7 Services Agreement Amendment dated effective March 2008 (filed as Exhibit 10.7 to the Company’s Registration Statement on Form S-1, as amended (File No. 333-165717), filed with the SEC onMay 6, 2010 and incorporated by reference herein). 10.10 2010 Long-Term Incentive Plan (filed as Exhibit 10.10 to the Company’s Registration Statement on Form S-1, as amended (File No. 333-165717), filed with the SEC on July 1, 2010 andincorporated by reference herein).* 10.11 2004 Stock Incentive Plan (filed as Exhibit 10.11 to the Company’s Registration Statement on Form S-1, as amended (File No. 333-165717), filed with the SEC on July 1, 2010 and incorporated byreference herein).* 10.12 Form of Equity Award, filed as Exhibit 10.12 to the Company’s 2010 Form 10-K, (filed with the SEC on March 18, 2011 and incorporated by reference herein).* 10.13 Fourth Amendment to Technology Services Agreement, dated as of December 31, 2011, between Envestnet, Inc. and FMR LLC (filed as Exhibit 10.1 to the Company’s Form 8-K filed with theSEC on January 6, 2012 and incorporated by reference herein.). 10.14 Amendment to Services Agreement effective December 31, 2011, between Envestnet Asset Management, Inc. and Fidelity (filed as Exhibit 10.2 to the Company’s Form 8-K filed with the SEC onJanuary 6, 2012 and incorporated by reference herein.). 10.15 Third Amendment to Services Agreement effective December 31, 2011, between Envestnet Asset Management, Inc. and National Financial Services LLC. (filed as Exhibit 10.3 to the Company’sForm 8-K filed with the SEC on January 6, 2012 and incorporated by reference herein.). 10.16 Stock Purchase Agreement by and among The Sellers of Prima Capital Holding, Inc. Named Herein and Envestnet, Inc. dated as of February 9, 2012, (filed as Exhibit 10.16 to the Company’s 10-K filed with the SEC on March 9, 2012 and incorporated by reference herein.). 10.17 Merger Agreement by and among Tamarac Inc., Envestnet, Inc. and Titan Merger Corp and KLJ Consulting, LLC (as the Shareholder’s Representative) dated as of February 16, 2012 (filed asExhibit 10.17 to the Company’s 10-K filed with the SEC on March 9, 2012 and incorporated by reference herein.) 10.18 Envestnet, Inc. Management Incentive Plan for Envestnet | Tamarac Management Employees (filed as Exhibit 4.3 to the Company’s Registration Statement on Form S-8 (filed with the SEC on May1, 2012 and incorporated by reference herein.)* 10.19 First Amendment to Envestnet, Inc. Management Incentive Plan for Envestnet | Tamarac Management Employees (filed as Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on April 17,2013 and incorporated by reference herein.)* 121Table of ContentsExhibitNo. Description 10.20 Second Amendment to Envestnet, Inc. Management Incentive Plan for Envestnet | Tamarac Management Employees (filed as Exhibit 10.1to the Company’s Form 8-K filed with the SEC on May 13, 2013 and incorporated by reference herein.)* 10.21 Purchase and Sale Agreement between Prudential Investments LLC and Envestnet, Inc. dated as of April 11, 2013, filed herewith. ** 16.1 Letter re Change in Certifying Accountant dated February 27, 2013 (filed as Exhibit 16.1 to the Company’s 8-K filed with the SEC onMarch 1, 2013 and incorporated by reference herein.) 16.2 Letter re Change in Certifying Accountant dated March 4, 2013 (filed as Exhibit 16.1 to the Company’s 8-K filed with the SEC on March5, 2013 and incorporated by reference herein.) 16.2 Letter re Change in Certifying Accountant dated April 4, 2013 (filed as Exhibit 16.1 to the Company’s 8-K filed with the SEC on April 5,2013 and incorporated by reference herein.) 21.1 Subsidiaries of the Company, filed herewith. 23.1 Consent of Independent Registered Public Accounting Firm, filed herewith. 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002. 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of2002. 101.INS XBRL Instance Document *** 101.SCH XBRL Taxonomy Extension Schema Document *** 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document *** 101.LAB XBRL Taxonomy Extension Label Linkbase Document *** 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document *** 101.DEF XBRL Taxonomy Extension Definition Linkbase Document *** The material contained in Exhibit 32.1 and 32.2 is not deemed “filed” with the SEC and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933 or the SecuritiesExchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing, except to the extent that the registrant specifically incorporates it byreference. Management contract or compensation plan. **Application has been made with the Securities and Exchange Commission to seek confidential treatment of certain provisions omitted material for which confidential treatment has been requested has been filedseparately with the Securities and Exchange Commission. ***Attached as Exhibit 101 to this Annual Report on Form 10-K are the following materials, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets as of December 31,2012 and 2011; (ii) the Consolidated Statements of Operations for the year ended December 31, 2012, 2011 and 2010; (iii) the Consolidated Statements of Stockholders’ Equity for the years ended December 31,2012, 2011 and 2010; (iv) the Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2010; (v) Notes to Consolidated Financial Statements. The XBRL information in this Annual Report on Form 10-K, Exhibit 101, is not deemed “filed” for purposed of Section 11 or 12 of the Securities Act of 1933, as amended (the Securities Act), or Section 18 of theSecurities Act of 1934, as amended (the Exchange Act), or otherwise subject to the liabilities of those sections, and is not part of any registration statement to which it may relate, and is not incorporated by referenceinto any registration statement or other document filed under the Securities Act of the Exchange Act, except as is expressly set forth by specific reference in such filing or document. 122(1)(1)(1)*Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized. ENVESTNET, INC. Date: June 14, 2013 /s/ JUDSON BERGMAN Judson Bergman Chairman and Chief Executive Officer (Principal Executive Officer) Date: June 14, 2013 /s/ PETER H. D’ARRIGO Peter H. D’Arrigo Chief Financial Officer (Principal Financial Officer) Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in thecapacities on June 14, 2013. Name Position/S/ JUDSON BERGMANJudson Bergman Chairman and Chief Executive Officer; Director (Principal Executive Officer)/S/ PETER H. D’ARRIGOPeter H. D’Arrigo Chief Financial Officer (Principal Financial Officer)/S/ DALE SEIERDale Seier Senior Vice President, Finance (Principal Accounting Officer)/S/ ROSS CHAPINRoss Chapin Director/S/ GATES HAWNGates Hawn Director/S/ JAMES JOHNSONJames Johnson Director/S/ PAUL KOONTZPaul Koontz Director/S/ CHARLES ROAMECharles Roame Director/S/ YVES SISTERONYves Sisteron Director 123Confidential Treatment RequestedExhibit 10.21EXECUTION VERSIONPURCHASE AND SALE AGREEMENTBETWEENPRUDENTIAL INVESTMENTS LLC(the “Seller”)ANDENVESTNET, INC.(the “Buyer”)April 11, 2013Confidential Treatment RequestedTABLE OF CONTENTS ARTICLE I ASSET PURCHASE 1 1.1 Purchase and Sale of Assets; Assumption of Liabilities 1 1.2 Purchase Price and Related Matters 2 1.3 Allocation of Purchase Price 5 1.4 The Closing 5 1.5 Post-Closing Purchase Price Adjustment 6 1.6 Consents to Assignment 8 1.7 Further Assurances 8 1.8 Withholding 9 ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE SELLER 9 2.1 Organization, Qualification and Corporate Power 9 2.2 Authority 9 2.3 Noncontravention 10 2.4 Financial Information 10 2.5 Tax Matters 11 2.6 Acquired Assets 11 2.7 Leased Real Property 12 2.8 Intellectual Property 12 2.9 Contracts 14 2.10 Sufficiency of Assets 15 2.11 Litigation 15 2.12 Employment Matters 16 2.13 Employee Benefits 16 2.14 Legal Compliance 17 2.15 Permits 17 2.16 Business Relationships with Affiliates 17 2.17 Registration 17 2.18 Participating Sponsor Revenue 18 2.19 Absence of Certain Changes 18 2.20 Financial Capability 18 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE BUYER 19 3.1 Organization 19 3.2 Authority 19 3.3 Noncontravention 19 3.4 Litigation 20 3.5 Financial Capability 20 3.6 Registration 20 3.7 Due Diligence by the Buyer 20 3.8 Disclaimer of Warranties 21 Confidential Treatment Requested ARTICLE IV PRE-CLOSING COVENANTS 21 4.1 Closing Efforts 21 4.2 Operation of the Business 22 4.3 Access 24 4.4 Sponsor and Manager Contract Consents 25 4.5 Financial Statements 26 ARTICLE V CONDITIONS PRECEDENT TO CLOSING 28 5.1 Conditions to Each Party’s Obligations 28 5.2 Conditions to Obligations of the Buyer 28 5.3 Conditions to Obligations of the Seller 29 ARTICLE VI INDEMNIFICATION 30 6.1 Indemnification by the Seller 30 6.2 Indemnification by the Buyer 30 6.3 Claims for Indemnification 30 6.4 Survival 32 6.5 Limitations 32 6.6 Treatment of Indemnification Payments 34 6.7 Setoff Rights 34 ARTICLE VII TAX MATTERS 34 7.1 Transfer Taxes 34 7.2 Allocation of Certain Taxes 34 7.3 Cooperation on Tax Matters; Tax Audits 35 7.4 Post-Closing Actions 35 7.5 Termination of Tax Sharing Agreements 35 ARTICLE VIII TERMINATION 35 8.1 Termination of Agreement 35 8.2 Effect of Termination 36 ARTICLE IX EMPLOYEE MATTERS 36 9.1 Offer of Employment; Continuation of Employment 36 9.2 Cessation of Employee Benefit Plan Participation 37 9.3 Compensation; Employee Benefits; Severance Plans 38 9.4 Employment Related Liabilities 39 9.5 U.S. WARN Act 40 9.6 U.S. COBRA 40 9.7 Non-Solicitation 40 Confidential Treatment Requested ARTICLE X OTHER POST-CLOSING COVENANTS AND LICENSES 41 10.1 Access to Information; Record Retention; Cooperation 41 10.2 Trademarks and Tradenames 43 10.3 License Back 43 10.4 Accounts Receivable and Accounts Payable 44 10.5 Deletion of Non-Transferred Software 45 10.6 Brokers 45 ARTICLE XI DEFINITIONS 45 11.1 Defined Terms 45 11.2 Other Defined Terms 61 ARTICLE XII MISCELLANEOUS 63 12.1 Press Releases and Announcements 63 12.2 No Third Party Beneficiaries 64 12.3 Action to be Taken by Affiliates 64 12.4 Entire Agreement 64 12.5 Succession and Assignment 64 12.6 Notices 64 12.7 Amendments and Waivers 65 12.8 Severability 65 12.9 Expenses 65 12.10 Specific Performance 66 12.11 Governing Law 66 12.12 Submission to Jurisdiction 66 12.13 Bulk Transfer Laws 66 12.14 Construction 67 12.15 Waiver of Jury Trial 68 12.16 Incorporation of Exhibits and Schedules 68 12.17 Negotiation of Agreement 68 12.18 Counterparts and Facsimile Signature 68 Confidential Treatment Requested Exhibits: Exhibit A – Closing Adjustment Amount and Closing Net Asset Schedule ExampleExhibit B-1 – Form of Seller Bill of SaleExhibit B-2 – Form of Affiliate Bill of SaleExhibit C – Form of Assignment and Assumption AgreementExhibit D – Form of Transition Services AgreementExhibit E – Form of Gateway Sublease AgreementExhibit F – Form of MAPSA Subcontracting AgreementExhibit G-1 – Form of Pruco ContractExhibit G-2 – Form of Pruco/PI Termination AgreementExhibit H-1 – Form of Notice and Consent to Participating SponsorsExhibit H-2 – Form of Notice and Consent to Participating ManagersExhibit H-3 – Form of Negative Consent NoticeExhibit I – Form of Buyer Press ReleaseExhibit J – Calculation of Acquired Assets Revenue and Pruco RevenueConfidential Treatment RequestedPURCHASE AND SALE AGREEMENTThis PURCHASE AND SALE AGREEMENT (this “Agreement”) is entered into as of April 11, 2013 between PRUDENTIAL INVESTMENTSLLC, a New York limited liability company (the “Seller”) and ENVESTNET, INC., a Delaware corporation (the “Buyer”). The Seller and the Buyer are eachreferred to herein individually as a “Party” and collectively as the “Parties.”INTRODUCTIONWHEREAS, the Seller is engaged, among other matters, in the Business;WHEREAS, the Buyer desires to purchase from the Seller, and the Seller desires to sell to the Buyer, certain assets of the Seller relating exclusively tothe Business, subject to the assumption of certain related liabilities and upon the terms and subject to the conditions set forth herein; andWHEREAS, capitalized terms used in this Agreement shall have the meanings ascribed to them in ARTICLE XI.NOW, THEREFORE, in consideration of the representations, warranties, covenants and agreements contained in this Agreement and other good andvaluable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:ARTICLE IASSET PURCHASE1.1 Purchase and Sale of Assets; Assumption of Liabilities.(a) Transfer of Assets. On the terms and subject to the conditions set forth in this Agreement, at the Closing, the Seller shall sell, convey, assign,transfer and deliver to the Buyer, and the Buyer shall purchase and acquire from the Seller, all of the Seller’s right, title and interest in and to the AcquiredAssets.(b) Excluded Assets. Notwithstanding anything to the contrary in this Agreement, the Acquired Assets shall not include any of the ExcludedAssets.(c) Assumed Liabilities. On the terms and subject to the conditions set forth in this Agreement, at the Closing, the Buyer shall assume and agreeto pay, perform and discharge when due the Assumed Liabilities.(d) Excluded Liabilities. Notwithstanding anything to the contrary in this Agreement, the Assumed Liabilities shall not include the ExcludedLiabilities. 1Confidential Treatment Requested 1.2 Purchase Price and Related Matters.(a) Closing Date Adjusted Purchase Price. In consideration for the sale and transfer of the Acquired Assets and the Affiliate Assets, at the Closingthe Buyer shall assume the Assumed Liabilities and shall pay to the Seller the Closing Date Adjusted Purchase Price in cash in immediately available fundsinto an account designated by the Seller. Following the Closing, the Closing Date Adjusted Purchase Price shall be subject to verification and adjustment as setforth in Section 1.5.(b) Additional Purchase Price Payments and Excess Revenue Payments. As additional consideration for the sale and transfer of the AcquiredAssets, following the Closing, (i) for each Post-Closing Period, the Buyer shall make the applicable Additional Purchase Price Payment, if any, in respect ofsuch Post-Closing Period and (ii) for each of the Second Post-Closing Period and the Third Post-Closing Period, the Buyer shall make the Applicable ExcessRevenue Payment, if any, in respect of such Post-Closing Period. The payments contemplated by this Section 1.2(b) shall be made shall be made inaccordance with and subject to the procedures set forth in Section 1.2(c).(c) Calculation of Additional Purchase Price Payments and Excess Revenue Payments; Seller’s Audit Rights.(i) Not later than forty-five (45) days after the end of each Post-Closing Period, the Buyer shall prepare in good faith and deliver to theSeller a statement setting forth the Buyer’s calculation in accordance with Exhibit J of the Acquired Assets Revenue, the Annualized Revenue and theApplicable Additional Purchase Price Payment, in each case, as of the end of the applicable Post-Closing Period, and, if applicable, the Applicable ExcessRevenue Payment and Lost Pruco Revenue (each such statement, a “Revenue Statement”). Each Revenue Statement (x) shall include for the relevant calendarquarter (A) the amounts called for by clauses (a)(i), (a)(ii), (b)(i) and (b)(ii) of the definition of “Acquired Assets Revenue” (as set forth in Schedule 11.1) foreach Acquired Sponsor Contract and each Acquired Prospect Contract and (B) if applicable, the amounts called for by clauses (a)(i) and (a)(ii) of thedefinition of “Annualized Pruco Revenue” (as set forth in Schedule 11.1) and (y) shall be accompanied by the supporting materials set forth on Schedule1.2(c).(ii) As soon as practicable following delivery of the Revenue Statement for the most recently ended Post-Closing Period (but no later thanfifty (50) days after the end of such Post-Closing Period), the Buyer shall, subject to the Buyer’s setoff right under Section 6.7, pay to the Seller (in cash bywire transfer of immediately available funds into an account designated by the Seller) the Applicable Additional Purchase Payment and Applicable ExcessRevenue Payment, if any, for such Post-Closing Period.(iii) Upon the written request of the Seller provided within sixty (60) days after the date a Revenue Statement has been delivered pursuantto Section 1.2(c), the Buyer shall permit a mutually acceptable independent accounting firm (the “Section 1.2 Accounting Firm”), at the Seller’s expense, tohave access to the work papers and back-up materials used in preparing such Revenue Statement (but not any preceding Revenue Statement), as well as thepersonnel of the Buyer and its Affiliates with knowledge regarding the matters underlying such 2Confidential Treatment Requested Revenue Statement and the calculations set forth therein, at reasonable times and upon reasonable notice, for the purpose of determining the accuracy of theRevenue Statement and such calculations. The Seller shall use commercially reasonable efforts to cause the Section 1.2 Accounting Firm to work in good faithto complete any such inspection and audit within sixty (60) days of the date the Seller has made its request under the first sentence of this Section 1.2(c)(iii);provided that such sixty (60)-day period shall be extended to the extent the Buyer has delayed in agreeing to the identity of the Section 1.2 Accounting Firm oraccess to the relevant work papers, back-up materials and personnel of the Buyer and its Affiliates is not provided to the Section 1.2 Accounting Firmpromptly. If the Section 1.2 Accounting Firm concludes that Annualized Revenue was underreported, or that Annualized Pruco Revenue was overreported, ineach case, in such Revenue Statement by more than five percent (5%), the Buyer shall promptly reimburse the Seller for the reasonable out-of-pocket costs ofthe Section 1.2 Accounting Firm’s inspection and audit. If the Seller does not deliver the written request required under this Section 1.2(c)(iii) within sixty(60) days after the date a Revenue Statement has been delivered to the Seller pursuant to Section 1.2(c)(i), such Revenue Statement shall be conclusive andbinding, absent fraud or manifest error.(iv) Promptly following any determination by the Section 1.2 Accounting Firm that Annualized Revenue was underreported, or that, ifreported, Annualized Pruco Revenue was overreported, in each case in such Revenue Statement in a manner negatively impacting the amount of an ApplicableAdditional Purchase Price Payment or Applicable Excess Revenue Payment for the applicable Post-Closing Period (but no later than two (2) Business Daysfollowing such determination), the Buyer shall pay to the Seller (in cash by wire transfer of immediately available funds into an account designated by theSeller) the total amount by which the Applicable Additional Purchase Price Payment or Applicable Excess Revenue Payment previously made relating to suchPost-Closing Period was negatively impacted as a result of such underreporting of Annualized Revenue or, if reported, overreporting of Annualized PrucoRevenue (plus interest from the date that is fifty (50) days following the end of the applicable Post Closing Period to, but not including, the date of payment ata rate equal to one month LIBOR as of such date, calculated on a 360 day basis). In the event that the Section 1.2 Accounting Firm determines that the Buyerpaid to the Seller an amount greater than that to which the Seller was entitled pursuant to this Section 1.2, then, no later than two (2) Business Days followingsuch determination, the Seller shall pay to the Buyer in cash by wire transfer of immediately available funds into an account designated by the Buyer the totalamount by which the Applicable Purchase Price Payment or Applicable Excess Revenue Payment previously made by the Buyer relating to such Post-ClosingPeriod was overpaid.(v) The Parties understand and agree that the Post-Closing Payments are an integral part of the consideration payable to the Seller inconnection with the transactions contemplated hereby and, other than as specifically contemplated by Section 6.7, shall be payable without setoff orcounterclaim. Once paid, any and all amounts paid by the Buyer with respect to any Post-Closing Payments hereunder shall not be refundable or otherwisesubject to retroactive reduction.(vi) For all purposes of this Agreement, the Acquired Assets Revenue, the Annualized Revenue and the Annualized Pruco Revenue shall becalculated in accordance with the principles and procedures set forth on Exhibit J (it being understood and agreed that Annualized Pruco Revenue will becalculated in the same manner the Acquired Assets Revenue and the Annualized Revenue are calculated with respect to the other Sponsor Contracts in existenceon the date hereof). 3Confidential Treatment Requested (d) Post-Closing Conduct of the Business. From and after the Closing until the end of the Third Post-Closing Period, the Buyer shall and, ifapplicable, shall cause the Buyer Subsidiaries to operate the Business in a commercially reasonable manner. From and after the Closing until the FinalPayment Date, the Buyer shall not take any action or inaction in bad faith or with the intention of decreasing the amount of any Post-Closing Payment,including transferring any assets among the Buyer and the Buyer Subsidiaries with the intention of impairing the Buyer’s ability to make the Post-ClosingPayments. Notwithstanding the foregoing, the Parties acknowledge and agree that (i) the provisions of this Section 1.2(d) shall not (x) require the Buyer tocontinue any line of business conducted by the Business as of any date if the Buyer, in the exercise of its reasonable business judgment, believes that it is notreasonable for the Buyer to continue such line of business or (y) limit the Buyer from improving or modifying any aspect of the Business in the exercise of theBuyer’s reasonable business judgment and (ii) the Seller’s right to the Post-Closing Payments under this Section 1.2 is a contract right and shall not give riseto any rights or duties (including fiduciary duties), express or implied, other than those expressly set forth herein.(e) Sale of Acquired Assets. In the event that, prior to the Final Payment Date, the Buyer proposes to consummate a transaction pursuant to whichall or substantially all of the Acquired Sponsor Contracts and Acquired Prospect Contracts are sold or transferred to an entity that is not a Buyer Subsidiary(or the Buyer, or a Buyer Subsidiary that is party to any such contracts, is sold or transferred to an entity that is not the Buyer or another Buyer Subsidiary)(any such transaction, a “Divestiture”) in a transaction in which the proposed purchaser or transferee would assume the obligations of the Buyer under thisSection 1.2, the Buyer shall provide notice of such proposed Divestiture to the Seller, together with such information regarding the relevant purchaser ortransferee as the Seller shall reasonably request. The Seller shall have ten (10) Business Days from the date the Seller receives any such notice (or anyinformation the Seller may have reasonably requested within the initial ten (10) Business Day period) to provide an objection to any such proposed Divestitureon the basis that there is a reasonable likelihood that the proposed purchaser or transferee is not financially capable of making the remaining Post-ClosingPayments. The Buyer shall provide the Seller with prompt notice of the consummation of any Divestiture and thereafter shall have no further obligationspursuant to this Section 1.2 except to the extent (x) the Seller provides a timely notice of objection pursuant to the immediately preceding sentence or (y) thedefinitive documentation for the proposed Divestiture does not contain a written assumption of the Buyer’s obligations under this Section 1.2. For theavoidance of doubt, the Seller’s timely objection notice shall not prohibit the consummation of the Divestiture.(f) Books and Records. From the Closing Date until the Final Payment Date, the Buyer agrees to maintain true and accurate books and recordsrelating to the subject matter of this Section 1.2, which it shall make available to the Seller pursuant to Section 10.1. 4Confidential Treatment Requested 1.3 Allocation of Purchase Price. The Buyer shall prepare and deliver to the Seller, within sixty (60) days following the determination of the FinalAdjusted Purchase Price pursuant to Section 1.5(c)(i), a schedule setting forth the allocation of the Final Adjusted Purchase Price (including any AssumedLiabilities and any other capitalizable costs to the extent properly taken into account under the Code) among the Acquired Assets in accordance withSection 1060 of the Code and the Treasury Regulations thereunder (the “Allocation”). If within thirty (30) Business Days after receipt of the Allocation, theSeller notifies the Buyer in writing that the Seller objects to one or more items reflected in such Allocation, the Buyer and the Seller shall negotiate in good faithto resolve such dispute. If the Buyer and the Seller resolve any such dispute and agree to a final Allocation, the Buyer and the Seller shall file all Tax Returns(including Internal Revenue Service Form 8594) consistent with the final Allocation, and neither the Buyer nor the Seller shall take any Tax positioninconsistent with the final Allocation, except to the extent otherwise required by law. If the Buyer and the Seller fail to resolve any dispute with respect to theAllocation within thirty (30) Business Days after the Buyer’s receipt of the Seller’s notice of an objection to the Allocation, the Seller shall not be bound by theAllocation as prepared by the Buyer and shall be permitted to file any Tax Returns and take any Tax position consistent with the Seller’s determination of theproper Allocation, notwithstanding that such Allocation may be inconsistent with the Allocation as prepared by the Buyer. Any adjustment to the FinalAdjusted Purchase Price (including any Assume Liabilities and any other capitalizable costs to the extent properly taken into account under the Code) shall beallocated as provided by Treasury Regulations Section 1.1060-1(c).1.4 The Closing.(a) Time and Location. The Closing shall take place at the offices of Wilmer Cutler Pickering Hale and Dorr LLP located at 7 World TradeCenter, 250 Greenwich Street, New York, NY, 10007, or remotely via the exchange of documents and signatures, commencing at 10:00 a.m., local time, onthe Closing Date.(b) Actions Prior to the Closing. Not less than three (3) Business Days prior to the Closing Date, the Seller shall prepare in good faith and deliverto the Buyer the Seller’s estimate of (x) the Closing Net Asset Schedule (the “Seller’s Closing Net Asset Schedule”), which shall include updated informationwith respect to Schedule 1.1(a)(ii), (y) the Closing Adjustment Amount (the “Seller-Determined Closing Adjustment Amount”) and (z) the Final AdjustedPurchase Price (the “Closing Date Adjusted Purchase Price”). The Seller shall make the work papers and back-up materials used in preparing the Seller’sClosing Net Asset Schedule and the Seller-Determined Closing Adjustment Amount, as well as personnel of the Seller with knowledge regarding suchcalculations, available to the Buyer and its Representatives at reasonable times and upon reasonable notice.(c) Actions at the Closing. At the Closing:(i) the Seller shall deliver the Seller Certificate;(ii) the Buyer shall deliver the Buyer Certificate;(iii) the Seller shall execute and deliver a Bill of Sale in substantially the form attached hereto as Exhibit B-1 (the “Seller Bill of Sale”); 5Confidential Treatment Requested (iv) the Seller Affiliate shall execute and deliver a Bill of Sale in the form attached hereto as Exhibit B-2 (the “Affiliate Bill of Sale”);(v) the Buyer shall execute and deliver to the Seller an Assignment and Assumption Agreement in the form attached hereto as Exhibit C(the “Assignment and Assumption Agreement”);(vi) the Buyer and the Seller shall execute and deliver a Transition Services Agreement in substantially the form attached hereto as ExhibitD (the “Transition Services Agreement”);(vii) the Buyer and the Seller shall execute and deliver (A) a Gateway Sublease Agreement in the form attached hereto as Exhibit E (the“Gateway Sublease Agreement”) or (B) such other agreement for the purposes of documenting the alternative to the Gateway Sublease Agreement contemplatedby Section 5.2(i)(B);(viii) to the extent there are any Non-Consenting Sponsors or Terminating Sponsors as of the Closing, the Buyer and the Seller shallexecute and deliver a MAPSA Subcontracting Agreement in substantially the form attached hereto as Exhibit F (the “MAPSA Subcontracting Agreement”);(ix) the Seller shall execute and deliver to the Buyer a certificate as to the non-foreign status of the Seller, dated as of the Closing Date,complying with the requirements of Treasury Regulation Section 1.1445-2(b)(2);(x) (A) the Buyer and Pruco shall execute and deliver the Pruco Contract in substantially the form attached hereto as Exhibit G-1 and(B) the Seller and Pruco shall execute and deliver a termination agreement in substantially the form attached hereto as Exhibit G-2 (the “Pruco/PI TerminationAgreement);(xi) the Buyer shall pay to the Seller the Closing Date Adjusted Purchase Price in cash by wire transfer of immediately available fundsinto an account designated by the Seller; and(xii) the Seller shall cause to be filed such documents as are necessary to change the name of the Canadian Subsidiary to a name chosenby the Seller that does not include the phrase “Wealth Management Solutions” or “WMS”.1.5 Post-Closing Purchase Price Adjustment.(a) As soon as practicable following the Closing Date (but no later than thirty (30) Business Days after the Closing Date), the Buyer shall prepareand deliver to the Seller the Buyer’s version of the Closing Net Asset Schedule (the “Buyer’s Closing Net Asset Schedule”) together with a written statementthat sets forth the Buyer’s calculation of the Closing Adjustment Amount calculated as of the end of the day immediately preceding the Closing Date (the“Buyer-Determined Closing Adjustment Amount”), together with a summary of differences (if any) between the Buyer’s Closing Net Asset Schedule and theBuyer-Determined Closing Adjustment Amount, on the one hand, and the Seller’s Closing Net Asset Schedule and the 6Confidential Treatment Requested Seller-Determined Closing Adjustment Amount, on the other hand. The Buyer shall make the work papers and back-up materials used in preparing theBuyer’s Closing Net Asset Schedule and the Buyer-Determined Closing Adjustment Amount, as well as the personnel of the Buyer with knowledge regardingsuch calculations, available to the Seller and its Representatives at reasonable times and upon reasonable notice.(b) If the Seller fails to deliver to the Buyer a statement describing any objections to the Buyer’s Closing Net Asset Schedule or the Buyer-Determined Closing Adjustment Amount within thirty (30) Business Days after receipt by the Seller, then such Buyer-Determined Closing Adjustment Amountshall be deemed to be the “Stipulated Closing Adjustment Amount”. However, if the Seller delivers to the Buyer a statement describing any objections to theBuyer’s Closing Net Asset Schedule or the Buyer-Determined Closing Adjustment Amount within such thirty (30)-Business Day period, then the Seller andthe Buyer shall exercise commercially reasonable efforts to resolve, in good faith, any such objections. If the Buyer and the Seller reach a resolution of all suchobjections, then the Buyer-Determined Closing Adjustment Amount as modified by such resolution shall be deemed to be the “Stipulated Closing AdjustmentAmount”. If such a resolution is not reached within twenty (20) Business Days after the Buyer has received a statement describing the Seller’s objections to theBuyer’s Closing Net Asset Schedule or the Buyer-Determined Closing Adjustment Amount, then the Seller and the Buyer shall submit promptly and in anyevent no later than five (5) Business Days after the expiration of such twenty (20)-Business Day period any unresolved objections (the “Disputed Items”) to amutually acceptable independent accounting firm (the “Section 1.5 Accounting Firm”) for resolution in accordance with the following sentences of thisSection 1.5(b). The Buyer, on the one hand, and the Seller, on the other hand, may provide the Section 1.5 Accounting Firm, within ten (10) Business Daysof retaining the Section 1.5 Accounting Firm, with a definitive statement of their respective positions with respect to each Disputed Item (and only suchDisputed Items). The Section 1.5 Accounting Firm will be provided with access to the books and records of the Buyer and the Seller relevant to the preparationof the Closing Net Asset Schedule and the calculation of the Closing Adjustment Amount. The Section 1.5 Accounting Firm will be asked (i) to review each ofthe Disputed Items on an expedited basis, and shall in any event have no more than twenty (20) Business Days to carry out the procedures set forth in thisSection 1.5(b), (ii) to prepare a written statement of its decision with respect to each Disputed Item, which decision shall be the position of the Buyer or theSeller for such Disputed Item that is closest to the Accounting Firm’s independent determination of such Disputed Item based on the principles set forth onExhibit A, and (iii) to prepare the Closing Net Asset Schedule and the calculation of the Closing Adjustment Amount, in each case, as modified by theSection 1.5 Accounting Firm’s decision (as between the Buyer’s and the Seller’s position) with respect to each Disputed Item. The Closing Adjustment Amountso calculated shall be deemed to be the “Stipulated Closing Adjustment Amount”. The decision of the Section 1.5 Accounting Firm shall be conclusive andbinding, absent fraud or manifest error. The Parties shall each pay their own respective costs and expenses incurred under this Section 1.5, and the Partywhose proposed Closing Adjustment Amount differed the most and was the farthest away from the Stipulated Closing Adjustment Amount, as determined bythe Section 1.5 Accounting Firm pursuant to the second preceding sentence, shall be responsible for the fees and expenses of the Section 1.5 Accounting Firm. 7Confidential Treatment Requested (c) Within two (2) Business Days of the determination of the Stipulated Closing Adjustment Amount in accordance with Section 1.5(b), thefollowing shall occur:(i) Using the Stipulated Closing Adjustment Amount as the Closing Adjustment Amount, the Seller and the Buyer shall calculate the FinalAdjusted Purchase Price.(ii) If the Final Adjusted Purchase Price is greater than the Closing Date Adjusted Purchase Price, then the Buyer shall pay to the Seller (incash by wire transfer of immediately available funds into an account designated by the Seller) the total amount by which the Final Adjusted Purchase Priceexceeds the Closing Date Adjusted Purchase Price (plus interest from the Closing Date to, but not including, the date of payment at a rate equal to one-monthLIBOR as of such date, calculated on a 360-day basis).(iii) If the Final Adjusted Purchase Price is less than the Closing Date Adjusted Purchase Price, then the Seller shall pay to the Buyer (incash by wire transfer of immediately available funds into an account designated by the Buyer) the total amount by which the Final Adjusted Purchase Price isless than the Closing Date Adjusted Purchase Price (plus interest from the Closing Date to, but not including, the date of payment at a rate equal to one-monthLIBOR as of such date, calculated on a 360-day basis).1.6 Consents to Assignment. If (a) any Assigned Contract other than any Sponsor Contract or any Manager Contract (each, a “Non-AssignedContract”) may not be assigned, delegated and transferred by the Seller to the Buyer (as a result of either the provisions thereof or applicable law) without theconsent or approval of a third party and (b) such consent or approval has not been obtained prior to the Closing, then, with respect to each such Non-Assigned Contract (other than any Non-Assigned Contract that has been cancelled or terminated by the applicable counterparty or has expired),(i) notwithstanding any other provision of this Agreement, such Non-Assigned Contract shall not be assigned, delegated and transferred by the Seller to theBuyer at the Closing, (ii) until the end of the Post-Closing Consent Period, the Seller and the Buyer shall cooperate, in all commercially reasonable respects, toobtain the necessary consent or approval as soon as practicable after the Closing, provided that neither the Seller nor the Buyer shall be required to make anypayments or agree to any material undertakings in connection with obtaining any such consent, and (iii) from and after the Closing until the earlier to occur of(x) the assignment of such Non-Assigned Contract following the receipt of the necessary consents or approvals or (y) such time as the Seller no longer has anyobligations remaining under any Non-Assigned Contract, the Seller and the Buyer shall cooperate, in all commercially reasonable respects (including, ifpermitted by applicable law and contract, by entering into a subcontracting arrangement), to provide to the Buyer all of the benefits under such Non-AssignedContract and to cause the Buyer to fulfill, satisfy and perform all of the liabilities and obligations under such Non-Assigned Contract.1.7 Further Assurances. At any time and from time to time after the Closing Date, as and when requested by either Party and at such Party’s expense,the other Party shall promptly execute and deliver, or cause to be executed and delivered, all such documents, instruments and certificates and shall take, orcause to be taken, all such further or other actions as are necessary to evidence and effectuate the transactions contemplated by this Agreement. 8Confidential Treatment Requested 1.8 Withholding. The Buyer shall be entitled to deduct and withhold from the amounts otherwise payable by it pursuant to this Agreement suchamounts as it is required to deduct and withhold with respect to the making of such payment under the Code or any provision of state, local or foreign TaxLaw; provided that the Parties agree to cooperate with one another and take all reasonable actions to minimize such amounts that need to be deducted andwithheld. In the event any amount is deducted and withheld, such amount shall be promptly paid to the appropriate Governmental Entity and shall be treatedfor all purposes of this Agreement as having been paid by the Buyer.ARTICLE IIREPRESENTATIONS AND WARRANTIES OF THE SELLERThe Seller represents and warrants to the Buyer that the statements contained in this ARTICLE II are true and correct as of the date hereof, except as setforth in the Disclosure Schedule. The Disclosure Schedule shall be arranged in sections and subsections corresponding to the numbered and lettered sectionsand subsections contained in this ARTICLE II. The information disclosed in any section or subsection of the Disclosure Schedule shall be considered to bedisclosed with respect to each other section and/or subsection of the Disclosure Schedule to the extent that it is reasonably apparent on the face of the DisclosureSchedule that such disclosed information is applicable to such other section or subsection. For purposes of this Agreement, the phrase “to the knowledge of theSeller” or any phrase of similar import shall mean and be limited to the actual knowledge following reasonable inquiry and investigation of the followingindividuals: Kevin Osborn, Laurie Campbell, Peter Laskaris, John Yackel, Tim Maroney, Gaurav Wadhwa and Robert Cohen.2.1 Organization, Qualification and Corporate Power. The Seller is duly formed, validly existing and in good standing under the laws of the State ofNew York. The Seller has the limited liability company power and authority to own or lease all of its properties and assets and to carry on its business as it isnow being conducted, and is duly qualified to conduct business under the laws of each jurisdiction where the character of the properties owned, leased oroperated by it or the nature of its activities, in each case as they relate exclusively to the Business, makes such qualification necessary, except for any suchfailure to be so qualified that would not reasonably be expected to result in a Business Material Adverse Effect.2.2 Authority. The Seller has all requisite limited liability company power and authority to execute and deliver this Agreement and the AncillaryAgreements to which it will be a party and to perform its obligations hereunder and thereunder. The execution and delivery by the Seller of this Agreement andsuch Ancillary Agreements and the consummation by the Seller of the transactions contemplated hereby and thereby have been validly authorized by allnecessary limited liability company action on the part of the Seller. This Agreement has been, and such Ancillary Agreements will be, validly executed anddelivered by the Seller and, assuming this Agreement and each such Ancillary Agreement constitute the valid and binding obligation of the Buyer, constitutesor will constitute a valid and binding obligation of the Seller, enforceable against the Seller in accordance with its terms, except as enforceability may be limitedby bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other similar laws relating to or affecting the rights of creditors generally andby equitable principles, including those limiting the availability of specific performance, injunctive relief and other equitable remedies and those providing forequitable defenses. 9Confidential Treatment Requested 2.3 Noncontravention. Subject to the making of the filings and receipt of the permits, authorizations, consents and approvals listed in Section 2.3 of theDisclosure Schedule, neither the execution and delivery by the Seller of this Agreement or the Ancillary Agreements to which the Seller will be a party, nor theconsummation by the Seller of the transactions contemplated hereby or thereby, will:(a) conflict with or violate any provision of the certificate of formation or limited liability company agreement of the Seller;(b) require on the part of the Seller any filing with, or any permit, authorization, consent or approval of, any (i) Governmental Entity or (ii) otherPerson, except in the case of this clause (ii), for any such filing, permit, authorization, consent or approval which if not obtained or made would notreasonably be expected to result in a Business Material Adverse Effect;(c) conflict with, result in a breach of, constitute (with or without due notice or lapse of time or both) a default under, result in the acceleration ofobligations under, create in any party the right to terminate or modify, or require any notice, consent or waiver under, any (i) Assigned Contract or (ii) othercontract or agreement to which the Seller is a party or by which the Seller is bound, except in the case of clause (ii) for (x) any conflict, breach, default,acceleration or right to terminate or modify that would not reasonably be expected to result in a Business Material Adverse Effect or (y) any notice, consent orwaiver the absence of which would not reasonably be expected to result in a Business Material Adverse Effect; or(d) violate any judgment, order, writ, injunction or decree of any Governmental Entity (each, an “Order”) specifically naming, or statute, rule orregulation applicable to, the Seller or any of or its properties or assets.2.4 Financial Information.(a) Section 2.4 of the Disclosure Schedule sets forth the pro forma divisional profit and loss statements of the Business for (i) each of the fiscalyears ended December 31, 2010, December 31, 2011 and December 31, 2012 and (ii) the two (2) month period ended February 28, 2013. Taking into accountthe methodology set forth on Section 2.4(a) of the Disclosure Schedule, the pro forma divisional profit and loss statements present fairly, in all materialrespects, the results of operations of the Business for the periods indicated in such profit and loss statements.(b) As of the Closing, taking into account the applicable methodologies set forth on Section 2.4(b) of the Disclosure Schedule, the RequiredFinancial Statements and the Specified Quarterly Financial Statements will present fairly, in all material respects, the results of operations of the Business forthe period indicated in such financial statements. 10Confidential Treatment Requested (c) As of the Closing, the Specified Quarterly Financial Statements will have been prepared in a manner consistent with (i) if the AbbreviatedFinancial Statements constitute the Required Financial Statements, the financial statements described in clause (ii) of the definition of Abbreviated FinancialStatements or (ii) if the Full Financial Statements constitute the Required Financial Statements, the applicable financial statements described in clause (ii) ofthe definition of Full Financial Statements.2.5 Tax Matters.(a) The Seller has filed or had filed on its behalf all material Tax Returns that it was required to file with respect to the Business and all such TaxReturns were correct and complete in all material respects to the extent they relate to the Business. The Seller has paid (or had paid on its behalf) all materialTaxes due and payable to the extent they relate to the Business or could reasonably be expected to give rise to a lien on the Acquired Assets (unless such Taxesare being contested in good faith).(b) There are no liens for Taxes against the Acquired Assets, other than Permitted Liens.(c) No claim has been made in writing by any Governmental Entity in a jurisdiction where Tax Returns are not filed with respect to the Businessasserting that the Seller may be subject to taxation in such jurisdiction with respect to the Business, and there is no dispute or claim pending concerning Taxliability with respect to the Business that has been raised in writing by any Governmental Entity.(d) The Seller has complied in all material respects with all withholding and information reporting requirements with respect to the Business.2.6 Acquired Assets.(a) Except as set forth in Section 2.6 of the Disclosure Schedule, the Seller has good and valid title to, a valid leasehold interest in or a validlicense or right to use, all of the Sponsor Contracts, Manager Contracts and all of the remaining material Acquired Assets, free and clear of all Liens (otherthan Permitted Liens). As of the date of this Agreement, except as set forth in Section 2.6 of the Disclosure Schedule, the Seller has the full right to sell,convey, transfer, assign and deliver the Sponsor Contracts, the Manager Contracts and the remaining material Acquired Assets to the Buyer, free and clear ofall Liens (other than Permitted Liens) (it being understood and agreed that any and all Liens set forth in Section 2.6 of the Disclosure Schedule shall bereleased as of the Closing). As of the Closing, except as set forth in Section 2.6 of the Disclosure Schedule, the Seller will have the full right to sell, convey,transfer, assign and deliver the Assigned Sponsor Contracts, the Assigned Manager Contracts and the remaining material Acquired Assets to the Buyer, freeand clear of all Liens (other than Permitted Liens).(b) All of the material tangible assets included in the Acquired Assets have been well maintained and are in good operating condition and repair(with the exception of normal wear and tear), and are free from defects other than such minor defects as do not interfere with the intended use thereof in theconduct of normal operations. 11Confidential Treatment Requested 2.7 Leased Real Property.(a) Section 2.7 of the Disclosure Schedule includes a correct and complete list of the lease and amendments or other modifications thereto to whichSeller’s Affiliate is a party covering the Leased Real Property (the “Real Property Lease”). The Seller has delivered to the Buyer a correct and complete copy ofthe Real Property Lease.(b) The Real Property Lease is in full force and effect, valid and enforceable in accordance with its terms. Neither the Seller nor any of itsAffiliates has received as of the date hereof any written notice of any dispute, claim, event of default or event that constitutes or would constitute (with notice orlapse of time or both) a default under the Real Property Lease which remains outstanding.(c) To the knowledge of the Seller, neither the Seller nor any of its Affiliates has received written notice from a Governmental Entity regarding anypending, threatened or proposed proceeding or governmental action to modify the zoning classification of, or to condemn or take by the power of eminentdomain (or to purchase in lieu thereof) all or any part of the Leased Real Property.2.8 Intellectual Property.(a) Ownership. The Seller, together with Seller Affiliate, is the sole and exclusive owner of all material Seller Owned Intellectual Property, free andclear of any Liens, other than (i) Permitted Liens and (ii) Liens existing pursuant to any license of Seller Intellectual Property that is described in Section 2.8(d)below. There are no Intellectual Property Registrations in the Seller Owned Intellectual Property.(b) Infringement by Seller. To the knowledge of the Seller, none of the Seller Owned Intellectual Property, or the Exploitation thereof by the Seller,infringes or violates, or constitutes a misappropriation of, any Intellectual Property rights of any third party. Section 2.8(b) of the Disclosure Schedule setsforth a true and correct list, as of the date of this Agreement, of any written complaint, claim or notice received by the Seller, or any pending proceedingswhich are known to Seller, alleging any such infringement, violation or misappropriation. To the knowledge of the Seller, there is no outstanding Orderregarding the Seller Owned Intellectual Property affecting the Seller’s use of any of the Seller Owned Intellectual Property or any of its rights thereto.(c) Infringement by Third Parties. To the knowledge of the Seller, no Person is misappropriating any of the Software.(d) Outbound IP Agreements. Section 2.8(d) of the Disclosure Schedule contains, as of the date of this Agreement, a true and complete list of eachlicense or other agreement pursuant to which the Seller has assigned, transferred, licensed, distributed or otherwise granted any right or access to any Person,or covenanted not to assert any right, with respect to any Seller Intellectual Property. 12Confidential Treatment Requested (e) Inbound IP Agreements. Section 2.8(e) of the Disclosure Schedule sets forth a true and complete list, as of the date of this Agreement, of (i) eachitem of Seller Licensed Intellectual Property (excluding licenses for off the shelf software that is generally or freely available or licenses with license fees of$5,000 or less per seat, user or workstation per annum) and the license or agreement pursuant to which the Seller Exploits it (excluding currently-available, offthe shelf software programs that are licensed by the Seller pursuant to “shrink wrap” licenses) and (ii) each agreement, contract, assignment or otherinstrument pursuant to which the Seller has obtained any joint or sole ownership interest in or to each item of Seller Owned Intellectual Property, other thanemployee and consultant agreements in the ordinary course of business.(f) Protection Measures. The Seller has taken reasonable measures to protect the proprietary nature of each item of Seller Intellectual Property, andto maintain in confidence all trade secrets and confidential information comprising a part thereof. The Seller has never disclosed or delivered to any escrowagent or any other Person any source code form of the Software (other than to the Seller’s employees and subcontractors who have a “need to know” inconnection with the performance of their duties to the Seller and who have executed reasonable non-disclosure agreements with the Seller), and no other Personhas the right, contingent or otherwise, to obtain access to or use any such source code. No event has occurred, and no circumstance or condition exists, that islikely to require the delivery, license or disclosure of such source code of the Software to any Person. Seller has taken and maintains reasonable measures toprotect the Software against unauthorized use, modification, or access thereto, or the introduction of any viruses or other unauthorized or damaging orcorrupting elements. To the knowledge of the Seller, none of the Software contains any disabling codes or instructions (including “viruses” or “worms”).(g) Public Rights. Except as set forth in Section 2.8(g) of the Disclosure Schedule, none of the Software contains or is derived in any manner (inwhole or in part) from any software that is distributed under the GNU General Public License, Lesser/Library GPL (LGPL), Artistic License (e.g., PERL),Mozilla Public License, Netscape Public License, Sun Community Source License (SCSL), Sun Industry Standards License (SISL) or any similar licensesor distribution models (“Open Source Materials”), to the extent that such use of such Open Source Materials would create, or purport to create, an obligation ofthe Seller that the Software be (x) disclosed or distributed in source code form, (y) licensed to a third party for the purpose of making derivative works, or(z) redistributable at no charge or minimal charge.(h) Privacy. Solely as related to the Business and the Acquired Assets, and except as set forth in Section 2.8(h) of the Disclosure Schedule, theSeller is in compliance in all material respects with its own privacy and security policies, in each case, as applicable to Personal Information of customers andemployees of the Business. As of the date of this Agreement, the Seller is not prohibited by any Privacy Law or its own privacy or security policies fromproviding the Buyer with, or transferring to the Buyer, all or any portion of Personal Information of customers and employees of the Business collected,processed, stored, acquired and used in the conduct of the Business by the Seller. Except as set forth in Section 2.8(h) of the Disclosure Schedule, neither theSeller nor, to the knowledge of the Seller, any third party service provider working on behalf of the Seller has had, at any time since September 30, 2010, abreach, security incident or unauthorized access, disclosure, use or loss of any information, in each case, solely to the extent related to the Business, forwhich the Seller is either required to notify individuals and/or to notify any Governmental Entity. 13Confidential Treatment Requested 2.9 Contracts.(a) Section 2.9 of the Disclosure Schedule lists, as of the date of this Agreement, all of the following contracts or agreements to which the Seller orany Affiliate of the Seller is a party and has or may have any rights or obligations and that (x) with respect to clauses (i), (ii), (iii), (iv), (v) and (xii), relateexclusively to the Business and (y) with respect to clauses (vi), (vii), (viii), (ix), (x), and (xi), relate to the Business:(i) Sponsor Contracts, Manager Contracts and all other similar contracts or agreements;(ii) each license or agreement pursuant to which the Seller Exploits the Seller Licensed Intellectual Property;(iii) any agreement (or group of related agreements with the same party) for the purchase of products or services under which theundelivered balance of such products and services is in excess of $25,000, other than the Assigned Contracts;(iv) any agreement (or group of related agreements with the same party) for the sale of goods or services that involves a payment to bemade to the Seller in excess of $25,000, other than agreements described in clause (i) above;(v) any agreement for capital expenditures that requires aggregate future payments in excess of $25,000;(vi) any agreement for the acquisition by the Seller of any operating business, whether by merger, equity purchase or asset purchase,except for any such business which did not or will not become part of the Business;(vii) any agreement establishing a partnership or joint venture;(viii) any agreement (or group of related agreements with the same party) under which the Seller has consented to the imposition of a Lien(other than a Permitted Lien) on any of the Acquired Assets;(ix) any agreement containing covenants that prohibit the Business from competing in any line of business or geographic area or thatprohibit the Business from soliciting customers, clients or employees, in each case whether in any specified geographic region or business or generally;(x) any employment agreement with any employee or officer of the Seller or the Canadian Subsidiary;(xi) any severance, “stay-pay” or termination agreement with any Seller Business Employee other than any such employee who is not aScheduled Employee or any such agreement that is an individual retention agreement or bonus guarantee agreement under which all liabilities will be retainedby Seller or its Affiliates as provided in Section 9.4(a); and(xii) any other contract that is material to the Business. 14Confidential Treatment Requested (b) As of the date hereof, the Seller has made available to the Buyer a complete and accurate copy of each Sponsor Contract, Manager Contractand Assigned Contract listed in Schedule 1.1(a)(vi) (as constituted as of the date hereof), together with each amendment or modification thereto, other thanManager Contracts, together with any amendments or modifications, that contain confidentiality provisions prohibiting their disclosure (the “ConfidentialManager Contracts”). The terms of each Confidential Manager Contract are substantially similar, in all material respects, to the terms provided for in therelevant template agreements identified on Section 2.9(b) of the Disclosure Schedule, copies of which have been made available to the Buyer as of the datehereof. As of the Closing, the Seller will have made available to the Buyer a complete and accurate copy of each Assigned Contract.(c) Each Sponsor Contract, Manager Contract and Assigned Contract is a valid and binding obligation of the Seller and, to the knowledge of theSeller, of each other party thereto.(d) As of the date hereof, neither the Seller nor, to the knowledge of the Seller, any third party is in breach or default, in any material respect, ofany Sponsor Contract, Manager Contract or contract listed in Schedule 1.1(a)(vi) (as constituted as of the date hereof) and, to the knowledge of the Seller, noevent has occurred which, with notice or lapse of time or both, would constitute a breach or default, in any material respect, or permit acceleration, terminationor modification under any Sponsor Contract, Manager Contract or contract listed in Schedule 1.1(a)(vi) (as constituted as of the date hereof). As of theClosing, neither the Seller nor, to the knowledge of the Seller, any third party is in breach or default, in any material respect, of any Assigned Contract and, tothe knowledge of the Seller, no event has occurred which, with notice or lapse of time or both, would constitute a breach or default, in any material respect, orpermit acceleration, termination or modification under any Assigned Contract.2.10 Sufficiency of Assets. Taking into account (i) the items set forth in Section 2.10 of the Disclosure Schedule, (ii) any services to be provided to theBuyer pursuant to the Transition Services Agreement or the Gateway Sublease Agreement (or the alternative to the Gateway Sublease Agreement contemplatedby Section 5.2(i)(B)), (iii) the alternative arrangements contemplated by Section 1.6, (iv) the MAPSA Subcontracting Agreement, (v) the Pruco Contract,(vi) the termination or expiration of any Sponsor Contract or Manager Contract and (vii) the Seller’s current access to the Overhead and Shared Services towhich the Buyer will not have access following the Closing (unless access is otherwise provided for pursuant to the Transition Services Agreement or theGateway Sublease Agreement), the Acquired Assets and the Affiliate Assets, when utilized by a labor force substantially similar to that employed by the Sellerin connection with the Business on the date hereof, constitute all of the assets, properties and rights that are necessary to conduct the Business immediatelyfollowing the Closing, in all material respects, as the Business is currently conducted as of the date hereof.2.11 Litigation. Section 2.11 of the Disclosure Schedule lists, as of the date of this Agreement, each material (a) Order specifically naming the Seller orthe Canadian Subsidiary that relates to the Business and (b) action, suit, claim or legal, administrative or arbitratorial proceeding by or before anyGovernmental Entity (each, an “Action”) to which the Seller or the Canadian Subsidiary is a party that relates primarily to the Business. 15Confidential Treatment Requested 2.12 Employment Matters.(a) The Seller has provided to the Buyer a list, as of the date of this Agreement, of all Seller Business Employees and Canadian Employees andwith respect to each such employee, the following information: (i) the name of the employee’s employer, (ii) position, (iii) annual rate of base compensation orsalary, (iv) bonus or incentive compensation paid for such individuals during the preceding three calendar years, (v) whether full-time or part-time,(vi) whether exempt or non-exempt (or such analogous classifications as may apply with respect to the Canadian Employees), and (vii) principal workplacelocation.(b) Neither the Seller nor the Canadian Subsidiary is a party to or bound by any collective bargaining agreement relating to the Business. Withrespect to the Business, the Seller and the Canadian Subsidiary are not currently subject to any material strikes, grievances, claims of unfair labor practicesor other collective bargaining disputes. No representation election petition has been filed by any employee or is pending with the NLRB and no unionorganizing campaign involving or affecting any employee has occurred, is in progress or is threatened against the Business. No NLRB unfair labor practicecharge (or litigation alleging such claim) has been filed or threatened or is presently pending relating to a Seller Business Employee.(c) Except as would not have a Business Material Adverse Effect, the Seller and the Canadian Subsidiary are in compliance with all applicablelaws respecting employment, employment practices and standards, terms and conditions of employment, wages and hours, overtime pay, occupational healthand safety, human rights and equal opportunity, immigration, labor relations, pay equity and workers compensation with respect to the Seller BusinessEmployees and with laws and regulations regarding tax and benefits treatment applicable to independent contractors, consultants, temporary and leasedemployees.2.13 Employee Benefits.(a) Section 2.13 of the Disclosure Schedule lists, as of the date of this Agreement, all Employee Benefit Plans that are Business Benefit Plans(other than any Business Benefit Plan that relates solely to Seller Business Employees who are not Scheduled Employees).(b) The Seller has provided the Buyer with true, complete and correct copies of plan documents, written summaries and other such summarydocumentation as is reasonably necessary for the Buyer to fulfill its obligations under ARTICLE IX, including, without limitation, to the extent applicable, themost recent summary plan description and all summaries of material modifications of each Business Benefit Plan.(c) Except as applicable solely to a Seller Business Employee who is not a Scheduled Employee or as set forth in Section 2.13 of the DisclosureSchedule, neither the execution of this Agreement nor consummation of the transactions contemplated by this Agreement will accelerate the time of vesting or thetime of payment, or increase the amount, of compensation due to any Seller Business Employee under any Business Benefit Plan. 16Confidential Treatment Requested (d) There are no circumstances under which it would be reasonably likely that the Buyer or any Affiliate thereof would be subject to liabilityunder Section 4069 or 4212 of ERISA or otherwise under Title IV of ERISA (or comparable provisions of Canadian law relating to defined benefit plans) withrespect to any Employee Benefit Plan.(e) Except to the extent any such Action would not reasonably be expected to result in any liability to the Buyer or its Affiliates, with respect toeach Business Benefit Plan, no Action is pending or, to the knowledge of the Seller, threatened other than claims for benefits in the ordinary course.2.14 Legal Compliance. Except for laws relating to Taxes, employment matters, and employee benefits, which shall be governed exclusively by Sections2.5, 2.12 and 2.13, respectively, with respect to the Business, each of the Seller and the Canadian Subsidiary is in compliance in all material respects with allapplicable laws (including rules and regulations thereunder) of any federal, state, provincial or foreign government, currently in effect with respect to theBusiness. Neither the Seller nor the Canadian Subsidiary has received written notice of any pending Action, hearing, investigation or demand relating to theBusiness alleging any failure to so materially comply.2.15 Permits. Section 2.15 of the Disclosure Schedule lists, as of the date of this Agreement, all Permits. As of the date of this Agreement, (a) eachPermit listed in Section 2.15 of the Disclosure Schedule is in full force and effect and the Seller is not in material violation of or default under any Permit and(b) no suspension or cancellation of any such Permit is currently threatened in writing.2.16 Business Relationships with Affiliates. Section 2.16 of the Disclosure Schedule lists those agreements with respect to the Business to which theSeller or any of its Affiliates, on the one hand, and the Buyer or any of its Affiliates, on the other hand, will be party after the Closing.2.17 Registration. The Seller is duly registered as an investment adviser under the Investment Advisers Act of 1940. The Seller is duly registered,licensed or qualified as in investment adviser in each state or any other jurisdiction where the conduct of the Business requires such registration, licensing orqualification, and the Seller is in good standing under the rules and regulations thereof, except where the failure to be so registered, licensed or qualified or to bein good standing would not reasonably be likely to result in a Business Material Adverse Effect. With respect to the Business, (i) the Seller is not (taking intoaccount any applicable exemption) ineligible pursuant to applicable laws to act as an investment adviser, and (ii) to the knowledge of Seller, no employee of theSeller or other person associated with the Seller who has performed any functions of an investment adviser representative or a person associated with aninvestment adviser is (taking into account any applicable exemption) ineligible under applicable laws to serve as an investment adviser representative or aperson associated with an investment adviser. With respect to the Business, there is no proceeding or investigation pending and served on the Seller or, to theknowledge of the Seller, pending and not so served or 17Confidential Treatment Requested threatened by any Governmental Entity, which would result in (A) the ineligibility under such laws of the Seller to act as an investment adviser or (B) theineligibility under such applicable laws of such investment adviser representative or a person associated with the Seller to serve as an investment adviserrepresentative or a person associated with an investment adviser.2.18 Participating Sponsor Revenue. Section 2.18 of the Disclosure Schedule sets forth, with respect to each Participating Sponsor, as of the Base Date:(a) the name of such Participating Sponsor;(b) the Assets Under Administration of such Participating Sponsor for each program type, including Separately Managed Accounts, Mutual FundWrap and Unified Managed Account;(c) the annualized Fee rates payable to the Seller by such Participating Sponsor under the applicable Sponsor Contract for each program type,including Separately Managed Accounts, Mutual Fund Wrap and Unified Managed Account;(d) the Revenue Run-Rate in respect of each program type, including Separately Managed Accounts, Mutual Fund Wrap and Unified ManagedAccount, for each Participating Sponsor; and(e) a detailed schedule of the actual invoiced amounts, together with related invoices and proof of payment of such invoices, for the quarterlybillings for the quarters ended December 31, 2012 and March 31, 2013.Section 2.18 of the Disclosure Schedule also sets forth the aggregate amount representing the Revenue Run-Rate as of the Base Date for all program types for allParticipating Sponsors (such aggregate amount, the “Base Revenue Run-Rate”). As of the date of this Agreement, since June 1, 2012, other than as disclosed inSection 2.18 of the Disclosure Schedule, (A) with respect to the Business, no Participating Sponsor has canceled any contract or agreement with the Seller orindicated in writing that it intended to cease business with the Seller or to materially reduce such business and (B) the Business has not experienced a materialnet outflow of assets under administration by Participating Clients. There are no (and since June 1, 2012 there have not been any) material disputes betweenthe Seller or the Canadian Subsidiary, on the one hand, and any Participating Sponsor, on the other hand.2.19 Absence of Certain Changes. Except as set forth in Section 2.19 of the Disclosure Schedule, since December 31, 2012 through the date hereof, theSeller has, in all material respects, carried on the Business in the ordinary course consistent with its past practices.2.20 Financial Capability. The Seller has, and at the Closing will have, sufficient funds in order to consummate the transactions contemplated by thisAgreement and to perform its obligations hereunder and under the Ancillary Agreements, including any amounts that may be required to be paid to Buyerhereunder and thereunder. Immediately after giving effect to the transactions contemplated by this Agreement, the Seller and its subsidiaries, on a consolidatedbasis shall be able to pay its debts as they become due. 18Confidential Treatment Requested ARTICLE IIIREPRESENTATIONS AND WARRANTIES OF THE BUYERThe Buyer represents and warrants to the Seller that the statements contained in this ARTICLE III are true and correct as of the date hereof.3.1 Organization. The Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware.3.2 Authority. The Buyer has all requisite corporate power and authority to execute and deliver this Agreement and the Ancillary Agreements to which itwill be a party and to perform its obligations hereunder and thereunder. The execution and delivery by the Buyer of this Agreement and such AncillaryAgreements and the consummation by the Buyer of the transactions contemplated hereby and thereby have been validly authorized by all necessary corporateaction on the part of the Buyer. This Agreement has been, and such Ancillary Agreements will be, validly executed and delivered by the Buyer and, assumingthis Agreement and each such Ancillary Agreement constitute the valid and binding obligation of the Seller, constitutes or will constitute a valid and bindingobligation of the Buyer, enforceable against the Buyer in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency,fraudulent transfer, reorganization, moratorium or other similar laws relating to or affecting the rights of creditors generally and by equitable principles,including those limiting the availability of specific performance, injunctive relief and other equitable remedies and those providing for equitable defenses.3.3 Noncontravention. Neither the execution and delivery by the Buyer of this Agreement or the Ancillary Agreements to which the Buyer will be a party,nor the consummation by the Buyer of the transactions contemplated hereby or thereby, will:(a) conflict with or violate any provision of the charter or bylaws of the Buyer;(b) require on the part of the Buyer any filing with, or any permit, authorization, consent or approval of, any (i) Governmental Entity or (ii) otherPerson, except in the case of this clause (ii), for any such filing, permit, authorization, consent or approval which if not obtained or made would notreasonably be expected to result in a Buyer Material Adverse Effect;(c) conflict with, result in a breach of, constitute (with or without due notice or lapse of time or both) a default under, result in the acceleration ofobligations under, create in any party the right to terminate or modify, or require any notice, consent or waiver under, any contract or agreement to which theBuyer is a party or by which the Buyer is bound, except for (x) any conflict, breach, default, acceleration or right to terminate or modify that would notreasonably be expected to result in a Buyer Material Adverse Effect or (y) any notice, consent or waiver the absence of which would not reasonably be expectedto result in a Buyer Material Adverse Effect; or 19Confidential Treatment Requested (d) violate any Order specifically naming, or statute, rule or regulation applicable to, the Buyer or any of its properties or assets, except for anysuch violation that would not reasonably be expected to result in a Buyer Material Adverse Effect.3.4 Litigation. There are no Actions pending against, or, to the Buyer’s knowledge, threatened against, the Buyer or any of its Affiliates which would bereasonably likely to materially impair or delay the Buyer’s ability to perform its obligations under this Agreement and the Ancillary Agreements to which it willbe a party or the consummation of the transactions contemplated by this Agreement.3.5 Financial Capability. The Buyer has, and at the Closing will have, sufficient funds in order to consummate the transactions contemplated by thisAgreement and to perform its obligations hereunder and under the Ancillary Agreements, including payment to the Seller of the Closing Date Adjusted PurchasePrice at the Closing and any additional amounts that may be required to be paid pursuant to Sections 1.2 and 1.4. Immediately after giving effect to thetransactions contemplated by this Agreement, the Buyer and the Buyer Subsidiaries, on a consolidated basis shall be able to pay their debts as they becomedue.3.6 Registration. Envestnet Asset Management Inc., a subsidiary of the Buyer, is duly registered as an investment adviser under the InvestmentAdvisers Act of 1940. Such subsidiary is duly registered, licensed or qualified as in investment adviser in each state or any other jurisdiction where theconduct of its business requires such registration, licensing or qualification, except where the failure to be so registered, licensed or qualified would notreasonably be likely to result in a Buyer Material Adverse Effect.3.7 Due Diligence by the Buyer. The Buyer acknowledges that none of the Seller, its Affiliates or Representatives, or any other Person, has made, andthe Buyer has not relied upon, any representation or warranty whatsoever, express or implied (including any implied warranty or representation as to thevalue, condition, merchantability or suitability as to any of the Acquired Assets), regarding the Business or other matters beyond those expressly given inARTICLE II of this Agreement. Without limiting the generality of the foregoing, the Buyer hereby acknowledges that (i) none of the Seller, its Affiliates orRepresentatives, or any other Person, has made a representation or warranty to the Buyer with respect to (A) any estimates, forecasts, projections, or otherpredictions for the Business or business plan information of the Business or (B) any materials, documents or information relating to the Business or AcquiredAssets, whether written or oral, made available to the Buyer or any of its Affiliates or Representatives in the confidential information memorandum, providedto the Buyer on January 30, 2013, or in any data room, presentation by management of the Business, due diligence discussion with Representatives of theSeller or Seller Business Employees or otherwise, except as expressly covered by a representation or warranty set forth in ARTICLE II, and (ii) the financialstatements referred to in Section 2.4(a) and the Required Financial Statements have been and will have been prepared using different methodologies, as morefully described in Section 2.4 of the Disclosure Schedule and that the Seller disclaims any and all liability for any difference in the information contained insuch financial statements to the extent that such difference in information relates to the difference in methodologies (in and of themselves, and not as any suchdifference relates to any error in the application of such methodologies or any error in the financial information therein contained) used to prepare suchfinancial statements. 20Confidential Treatment Requested The Buyer will not assert, except as provided in ARTICLE VI, any claim against the Seller or any of its Representatives or seek to hold the Seller (except asprovided in ARTICLE VI) or any of its Representatives liable, for any inaccuracies, misstatements or omissions with respect to information furnished by theSeller or its Representatives concerning the Business, the Acquired Assets, this Agreement or the transactions contemplated hereby.3.8 Disclaimer of Warranties. Notwithstanding anything herein to the contrary, it is the explicit intent of the Parties hereto that the Buyer is not making,nor has it made, any representation or warranty whatsoever, express or implied, beyond those expressly given in this ARTICLE III.ARTICLE IVPRE-CLOSING COVENANTS4.1 Closing Efforts. Subject to the terms hereof, including Section 4.5, each of the Parties shall use commercially reasonable efforts to take all actionsand to do all things reasonably necessary or advisable to consummate the transactions contemplated by this Agreement, including using commerciallyreasonable efforts to: (i) satisfy the conditions precedent to the obligations of either Party, (ii) pursuant to and consistent with the terms of Section 4.4, satisfythe applicable Assignment Requirements, if any, for each Assigned Contract, (iii) obtain all consents, licenses, permits, waivers, approvals, authorizationsfrom any Governmental Entity required to be obtained by a Party in connection with the consummation of the transactions contemplated by this Agreement,(iv) otherwise comply in all material respects with all applicable laws and regulations in connection with the consummation of the transactions contemplatedby this Agreement, (v) cause to be lifted or rescinded any Order adversely affecting the ability of the Parties to consummate the Closing and (vi) defend anyActions challenging this Agreement or any of the Ancillary Agreements or the consummation of the transactions contemplated hereby or thereby or theperformance of such Party’s obligations hereunder or thereunder. In furtherance of and not in limitation of the foregoing, in the event that a materialdevelopment with respect to the Business occurs between the date of this Agreement and the Closing as a result of the execution, announcement or pendency ofthis Agreement, which development (A) relates to the identity of, or the effect of any facts or circumstances relating to, the Buyer and (B) has had an adverseimpact on the Business, the Parties shall collaborate in good faith to identify any such development and mitigate the further impact of such development on theBusiness. In addition, neither Party shall take any action after the date hereof that could reasonably be expected to delay the satisfaction of, or result in notsatisfying, (1) the conditions set forth in ARTICLE V or (2) the applicable Assignment Requirements with respect to any Assigned Contract. Each of theParties shall promptly notify the other Party of any fact, condition or event known to it that would reasonably be expected to prohibit, make unlawful or delaythe consummation of the transactions contemplated by this Agreement. The failure of any Assignment Requirement to be satisfied with respect to any AssignedContract shall not constitute a failure to satisfy any condition set forth in Section 5.2 or relieve the Buyer from its obligation to consummate the transactionscontemplated by this Agreement and the Ancillary Agreements. 21Confidential Treatment Requested 4.2Operation of the Business.(a) Except (i) as contemplated by this Agreement including the consent process set forth in Section 4.4, (ii) as required by applicable law, (iii) asprovided in Employee Benefit Plans in effect as of the date hereof, (iv) as set forth in Section 4.2 of the Disclosure Schedule, or (v) as consented to in writingby the Buyer, during the period from the date of this Agreement until the earlier of the Closing Date or proper termination of this Agreement, the Seller shallconduct the operations of the Business in all material respects in the ordinary course, and without limiting the generality of the foregoing, the Seller shall not,and shall cause the Canadian Subsidiary not to, with respect to the Business and without written consent provided by the Buyer (which consent may bewithheld in Buyer’s sole discretion):(i) sell, assign or transfer any Sponsor Contract, Manager Contract or Acquired Asset (notwithstanding the foregoing, it is understood andagreed that the Seller shall be permitted to replace obsolete or worn-out Equipment in the ordinary course of business and to make updates to Schedule1.1(a)(iii) to reflect such replacement);(ii) knowingly consent to the imposition of any Lien (other than a Permitted Lien) upon any of the Sponsor Contracts, Manager Contractsor Acquired Assets;(iii) enter into any contract similar to a Manager Contract unless such contract (A) allows the Seller to terminate at will upon thirty(30) days’ or less notice, (B) does not require any obligations to be performed by Seller after the date that is six (6) months after any termination notice isdelivered thereunder and (C) includes a consent from the counterparty thereto that allows the Seller to assign such contract to the Buyer in connection with theconsummation of the Closing;(iv) enter into any contract similar to a Sponsor Contract unless such contract (A) allows the Seller to terminate at will upon thirty(30) days’ or less notice, (B) does not require any obligations to be performed by Seller after the date that is six (6) months after any termination notice isdelivered thereunder and (C) includes a consent from the counterparty thereto that allows the Seller to assign such contract to the Buyer in connection with theconsummation of the Closing;(v) make any change in its accounting systems, policies, principles, practices or methods, in each case, that would impact the method forcalculating the Revenue Run-Rate for the Participating Sponsors;(vi) with respect to the Acquired Assets or the Business, (A) make, revoke or amend any Tax election (outside the ordinary course ofbusiness), (B) compromise any claim, investigation, audit or controversy related to any material amount of Taxes, (C) consent to or execute any waiver ofrestrictions on a Tax claim or assessment, (D) enter into or amend any Tax agreement with a Tax authority or (E) file any amended Tax Return or claim for arefund of material Taxes, in the case of each of the foregoing subclauses (A) through (E), in a manner that would reasonably be expect to increase the Buyer’sTax liability with respect to the Acquired Assets or the Business following the Closing; 22Confidential Treatment Requested (vii) grant any rights to severance benefits, “stay-pay” or termination pay to any Scheduled Employee or increase the compensation orother benefits payable or potentially payable to any Scheduled Employee, in each case, other than grants or increases that are required by applicable law or theterms of any existing contract or Employee Benefit Plan as in effect as of the date hereof (or as amended in a manner also applicable generally to similarlysituated employees of Seller and/or its ERISA Affiliates who are not Scheduled Employees);(viii) enter into any employment, compensation or deferred compensation agreement (or any amendment to any such existing agreement)with any Scheduled Employee whose annual rate of base compensation exceeds $125,000;(ix) (A) accelerate, terminate, modify, amend, waive or otherwise alter or change any of the terms or provisions of any Assigned SponsorContract or pay any material amount in connection therewith not required by law or by any such contract or (B) accelerate, terminate, modify, amend, waiveor otherwise alter or change any of the terms or provisions of any Assigned Manager Contract outside of the ordinary course of business or pay any materialamount in connection therewith not required by law or by any such contract, in the case of clauses (A) and (B), other than as contemplated hereby inconnection with obtaining the required consents for the assignment thereof; or(x) agree in writing to take any of the foregoing actions.(b) During the period from the date of this Agreement until the earlier of the Closing Date or proper termination of this Agreement, (i) in the eventthat the Seller, with respect to the Business, (A) waives, releases or cancels any material claims against a Participating Sponsor or Participating Manager ordebts owing to it by a Participating Sponsor or Participating Manager, (B) pays any material amount or agrees to pay any material amount or perform anyobligation in settlement or compromise of any Action or claims of liability against the Seller or any of its directors, officers, employees or agents or (C) agreesin writing to take any of the actions described in the foregoing clauses (A) and (B) or (ii) (A) a Participating Sponsor cancels a Sponsor Contract or indicatesin writing that it intends to cease business with the Seller or to materially reduce such business or (B) the Business experiences a material net outflow of assetsunder administration by Participating Clients, in the case of the foregoing clauses (i) and (ii), the Seller shall provide prompt (and in any event, within five(5) Business Days) notice of the occurrence of such event to the Buyer.(c) In the event that, prior to the Closing, the Seller enters into a contract similar to a Manager Contract or a contract similar to a SponsorContract, as contemplated by clauses (iii) or (iv) of Section 4.2(a), the Seller shall provide prompt (and in any event, within five (5) Business Days) notice ofits entry into such contract to the Buyer, together with a copy of any such contract. The Buyer shall have an opportunity to review such contract and object tosuch contract becoming an Assigned Manager Contract or Assigned Sponsor Contract, as applicable, for purposes hereof. If the Buyer does not notify theSeller within ten (10) Business Days of receiving a copy thereof that Buyer agrees that such contract shall be an Assigned Manager Contract or an AssignedSponsor Contract, such contract shall be deemed to be rejected by the Buyer and shall, in the case of a contract similar to a Manager Contract, be terminatedat the Closing as contemplated by Section 5.2(h) or, in the case of a contract similar to a Sponsor Contract, be terminated at the Closing as contemplated bySection 5.2(h) or become subject to the MAPSA Subcontracting Agreement, as applicable, to the extent the Seller has any remaining obligations under suchcontract following the Closing. 23Confidential Treatment Requested 4.3 Access.(a) The Seller shall permit the Representatives of the Buyer to have access (at reasonable times during normal business hours, on reasonable priorwritten notice and in a manner so as not to interfere with the conduct of the Seller’s and its Affiliates’ business operations) to the premises, properties,financial and accounting records, contracts, and other records and documents, of or pertaining to the Business; provided, however, that any such accessshall be conducted at the Buyer’s sole expense. Notwithstanding the foregoing, the Seller shall not be obligated (i) to provide any information, documents oraccess to any Person unless the Buyer is responsible, pursuant to the terms of the Confidentiality Agreement, for the use and disclosure of any informationobtained by such Person from the Seller, (ii) to provide any information, documents or access (A) that would violate the provisions of any applicable laws orregulations or any agreement to which it is a party or, in the case of information or documents, the sharing of which would legally require the consent of anythird party (including any employee of the Seller or any of its Affiliates), (B) that would cause the loss of a claim of privilege (including attorney-client andwork product privileges) with respect thereto or (C) that would result in the disclosure of any information of the Seller or any of its Affiliates unrelated to theBusiness (and the Seller shall be permitted to redact any such information from any materials provided to the Buyer or its Representatives) or (iii) to provideany consolidated, combined, affiliated or unitary Tax Return that includes the Seller or any of its Affiliates or any Tax-related work papers. Prior to theClosing, the Buyer and its Representatives shall not contact or communicate with the employees, customers or suppliers of or other third parties havingbusiness relationships with the Seller in connection with the transactions contemplated by this Agreement, except with the prior written consent of the Seller.(b) The Buyer and the Seller acknowledge and agree that the Confidentiality Agreement remains in full force and effect and that informationprovided by the Seller or any of its Representatives to or on behalf of the Buyer pursuant to this Agreement prior to the Closing shall be treated in accordancewith the Confidentiality Agreement. If this Agreement is terminated prior to the Closing, the Confidentiality Agreement shall remain in full force and effect inaccordance with its terms. If the Closing occurs, the Confidentiality Agreement shall terminate effective as of the Closing.(c) Notwithstanding any provision of this Agreement to the contrary, the Buyer and its Representatives shall not have any access at any time priorto the Closing to any information regarding pending or proposed bids for new contracts or any related information where the Buyer or any of its Affiliates alsohas submitted or intends to submit a bid to provide the same or substantially similar services. 24Confidential Treatment Requested 4.4 Sponsor and Manager Contract Consents.(a) Subject to this Section 4.4, the Seller shall use commercially reasonable efforts to obtain the consents necessary to satisfy prior to the ClosingDate the Assignment Requirements with respect to each Sponsor Contract and Manager Contract. The Buyer shall use commercially reasonable efforts tocooperate with the Seller in its efforts to satisfy the Assignment Requirements with respect to each such contract.(b) Each of the Parties shall provide promptly in writing all information concerning itself and its Affiliates required to be included in the materialscontemplated by this Section 4.4. Each of the Parties shall promptly correct such information if and to the extent that such information becomes false ormisleading in any material respect.(c) Notwithstanding anything herein to the contrary, none of the Seller, the Canadian Subsidiary, the Buyer or any of their respective Affiliatesshall have any obligation under this Agreement to make any payments or agree to any material undertakings in connection with the assignment of any SponsorContract or Manager Contract or to initiate any Action against any counterparty thereto in order to obtain any consent necessary to satisfy any AssignmentRequirement.(d) With respect to each counterparty to a Sponsor Contract or Manager Contract (other than Pruco), as promptly as practicable following the dateof this Agreement and to the extent required by applicable law or the terms of the applicable contract, the Seller shall (i) provide notice of the transactionscontemplated by this Agreement to such counterparty (it being understood that any such notice to a Participating Sponsor or Participating Manager shall be insubstantially the form set forth as Exhibit H-1 and Exhibit H-2, respectively) and (ii) use commercially reasonable efforts to obtain any consents or approvalsnecessary to satisfy the applicable Assignment Requirements (it being understood that the countersignature by a Participating Sponsor or, subject to subsection(e) below, a Participating Manager of the notice referred to in clause (i) above shall be sufficient for purposes of this clause (ii)).(e) Notwithstanding clause (ii) of subsection (d) above, with respect to each Participating Manager that has not responded in writing within fifteen(15) days of the date the initial notice referred to in clause (i) of subsection (d) above was sent, the Seller shall provide a second notice to such ParticipatingManager with respect to such Participating Manager’s Manager Contract (other than any Canadian Manager Contract, the assignment of which shall besubject to clause (ii) of subsection (d) above) in substantially the form set forth as Exhibit H-3 (such notice a “Negative Consent Notice”) requesting writtenconsent as aforesaid and informing such Participating Manager, inter alia, that the consent of such Participating Manager will be deemed to have been grantedif such Participating Manager continues to provide services through the Business for a period of at least thirty (30) days after the date the Negative ConsentNotice was sent without otherwise terminating the applicable Manager Contract; provided that no consent shall be deemed to have been given for any purposeunder this Agreement if at any time prior to the Closing a Participating Manager terminates or notifies the Seller in writing that such Participating Manager hasnot consented to the transfer of, or is terminating, its Manager Contract (any such Participating Manager, a “Terminating Manager”).(f) On or before the Closing Date, the Seller shall (1) provide each Participating Sponsor with a list of the Terminating Managers and Non-Consenting Canadian Managers pertaining to such Participating Sponsor; (2) with respect to each Terminating Manager and Non-Consenting CanadianManagers, to the extent any such Terminating Manager 25Confidential Treatment Requested or Non-Consenting Canadian Manager has not previously terminated each of its Manager Contracts (other than, in the case of a Non-Consenting CanadianManager, any Manager Contract to which such Non-Consenting Manager has consented to (or is deemed to have consented to) the assignment of), give a noticeof termination to such Terminating Manager or Non-Consenting Canadian Manager with respect to each such Manager Contract (with the effective date of suchtermination to be Closing Date); and (3) provide the Buyer will a list of Non-Consenting Sponsors and Terminating Sponsors, as applicable, so that the Buyerand the Seller can execute and deliver the MAPSA Subcontracting Agreement at the Closing pursuant to Section 1.4(c)(viii). Following the terminationscontemplated by clause (2) of the first sentence of this Section4.4(f) and a reasonable period of good-faith consultation with the Seller, the Buyer shall provideto each affected Participating Sponsor replacement recommendations for the applicable Terminating Managers and Non-Consenting Canadian Managers.4.5 Financial Statements.(a) Requested Relief. Promptly, and in any event, within ten (10) days of the date hereof, the Buyer shall prepare and submit to the ChiefAccountant of the Division of Corporation Finance of the U.S. Securities and Exchange Commission (the “SEC”) a request (“Buyer’s Request Letter”) for aletter from the SEC staff expressing no objection to the Buyer’s use of the Abbreviated Financial Statements for purposes of Rule 3-05 of Regulation S-X (suchletter expressing no objection, the “Requested Relief”). The Buyer shall provide the Seller and its designated Representatives with a reasonable opportunity tocomment on the Buyer’s Request Letter and shall consider in good faith all comments provided to the Buyer in connection with such review. Each of theParties shall (i) use commercially reasonable efforts to obtain (and in the case of the Seller, to assist the Buyer in obtaining) the Requested Relief and (ii) makeany further information submissions pursuant to the SEC’s consideration of the Buyer’s Request Letter that may be reasonably necessary or advisable. Eachof the Parties shall use commercially reasonable efforts to resolve any objections that may be asserted by the SEC with respect to the Requested Relief;provided that neither Party shall be required to initiate any Action in pursuit of the Requested Relief; and provided further that Buyer shall not be required toagree to any condition to the receipt of the Requested Relief that would reasonably be expected to significantly increase Buyer’s costs of preparing its publicSEC reports. Each of the Parties shall promptly inform each other of any material communication received by such Party from the SEC regarding theRequested Relief (unless the provision of such information would (i) violate the provisions of any applicable laws or regulations or any confidentialityagreement or (ii) cause the loss of the attorney-client privilege with respect thereto).(b) Required Financial Statements. With respect to the Seller’s obligation to deliver the Required Financial Statements and Specified QuarterlyFinancial Statements as contemplated by Section 5.2(g), the Seller shall use commercially reasonable efforts to prepare, in accordance with the applicablemethodologies set forth in Section 2.4(b) of the Disclosure Schedule, and deliver the Abbreviated Financial Statements and the Specified Quarterly FinancialStatements as soon as is reasonably practicable; provided that, if, despite the Parties commercially reasonable efforts pursuant to Section 4.5(a) above, theSEC has not provided the Requested Relief by the date that is fifteen (15) Business Days from the date the Buyer submitted the Buyer’s Request Letter to theSEC, the Seller shall use commercially reasonable efforts to prepare, in accordance with the applicable methodologies set forth in Section 2.4(b) of the 26Confidential Treatment Requested Disclosure Schedule, and deliver the Full Financial Statements and the Specified Quarterly Financial Statements as soon as is reasonably practicable, it beingunderstood, however, that in the event that the Requested Relief is provided by the SEC, the covenant set forth in this Section 4.5(b) shall apply only withrespect to the Abbreviated Financial Statements and the Specified Quarterly Financial Statements; and provided further that if, despite Seller’s commerciallyreasonable efforts, the Seller is unable to prepare and deliver the Required Financial Statements and the Specified Quarterly Financial Statements by theOutside Date, the Seller shall have no further obligation or liability under this Section 4.5 (it being understood that the foregoing proviso shall not affect theclosing condition set forth in Section 5.2(g)).(c) In addition, prior to the Closing and, if not completed by the Closing, promptly thereafter, the Seller shall use commercially reasonable effortsto obtain reviews prepared by the Seller’s independent auditor in respect of such independent auditor’s performance of the procedures specified by the PCAOBfor a review of interim financial information as described in AU 722 with respect to the Specified Quarterly Financial Statements.(d) (i) In the event that the Closing occurs on or prior to June 30, 2013, the Seller shall prepare and deliver to the Buyer, on or prior to August 15,2013, unaudited financial statements of the same type as those constituting the Specified Quarterly Financial Statements with respect to the Business, as of,and for the period beginning on April 1, 2013 and ending on, the Closing Date, together with associated notes to such unaudited financial statements.(ii) In the event that the Closing occurs on or after July 1, 2013 and prior to August 15, 2013, the Seller shall prepare and deliver to theBuyer, on or prior to September 30, 2013, unaudited financial statements of the same type as those constituting the Specified Quarterly Financial Statementswith respect to the Business, as of, and for the quarter ended June 30, 2013, together with associated notes to such unaudited financial statements.(iii) In the event that the Closing occurs on or after July 1, 2013, the Seller shall prepare and deliver to the Buyer, on or prior to the later of(A) September 30, 2013 and (B) the date that is forty-five (45) days following the Closing, unaudited financial statements of the same type as thoseconstituting the Specified Quarterly Financial Statements with respect to the Business, as of, and for the period beginning on July 1, 2013 and ending on, theClosing Date, together with associated notes to such unaudited financial statements.The Seller shall use commercially reasonable efforts to obtain reviews prepared by the Seller’s independent auditor in respect of such independent auditor’sperformance of the procedures specified by the PCAOB for a review of interim financial information as described in AU 722 with respect to the applicablefinancial statements delivered pursuant to the immediately preceding clauses (i), (ii) or (iii). 27Confidential Treatment Requested ARTICLE VCONDITIONS PRECEDENT TO CLOSING5.1 Conditions to Each Party’s Obligations. The respective obligations of each Party to consummate the transactions to be consummated at the Closingare subject to the satisfaction (or waiver by both Parties) of the following conditions:(a) no law, rule or regulation shall have been enacted by a Governmental Entity that prohibits the consummation of the transactions contemplatedby this Agreement, and no Order enjoining or preventing the consummation of the transactions contemplated by this Agreement shall be in effect;(b) the Closing Run-Rate Percentage shall be equal to or greater than the percentage set forth in Schedule 11.1; and(c) to the extent any Negative Consent Notices are sent to Participating Managers, as contemplated by Section 4.4(e), at least seven (7) BusinessDays shall have elapsed following the passage of the thirty- (30-) day period referred to in Section 4.4(e).5.2 Conditions to Obligations of the Buyer. The obligation of the Buyer to consummate the transactions to be consummated at the Closing is subject tothe satisfaction (or waiver by the Buyer) of the following conditions:(a) (i) the representations and warranties of the Seller set forth in ARTICLE II (other than the representations and warranties set forth in Sections2.1, 2.2 and 2.10) shall be true and correct as of the date of this Agreement and as of the Closing Date as if made as of the Closing Date, except (i) for changespermitted by Section 4.2, (ii) for those representations and warranties that address matters only as of a particular date (which shall be true and correct as ofsuch date, subject to clause (iii) below) and (iii) where the failure of such representations and warranties to be true and correct would not reasonably beexpected to result, in the aggregate, in a Business Material Adverse Effect (it being agreed that any materiality or Business Material Adverse Effect qualificationin a representation and warranty shall be disregarded in determining whether any such failure would reasonably be expected to result in a Business MaterialAdverse Effect for purposes of this clause (iii));(b) the representations and warranties of the Seller set forth in Sections 2.1, 2.2 and 2.10 shall be true and correct in all respects as of the date ofthis Agreement and as of the Closing Date as if made as of the Closing Date, except for changes contemplated or permitted by this Agreement;(c) the Seller shall have performed or complied in all material respects with the agreements and covenants required to be performed or compliedwith by it under this Agreement as of or prior to the Closing;(d) the Buyer shall have received the Seller Certificate;(e) the Buyer shall have received from Pruco an executed copy of the Pruco Contract;(f) since the date of the Agreement, there shall not have occurred any Business Material Adverse Effect;(g) the Buyer shall have received the Required Financial Statements and the Specified Quarterly Financial Statements; 28Confidential Treatment Requested (h) on or prior to the Closing Date, the Seller shall have sent a termination notice under (A) each contract which has been deemed rejected byBuyer pursuant to Section 4.2(c) and thereafter not agreed in writing by Buyer to be an Assigned Sponsor Contract or Assigned Manager Contract and(B) each Sponsor Contract and each Manager Contract for which the applicable contract counterparty has not provided (or has not been deemed to haveprovided) its consent to the assignment of its contract pursuant to Section 4.4 prior to the date that is three (3) Business Days prior to the Closing (and anysuch termination notice given in respect of a Sponsor Contract or a contract similar to a Sponsor Contract shall include a notification by the Seller that certainnon-advisory services following the Closing shall be performed on behalf of the Seller by the Buyer); and(i) (A) the consent set forth in Schedule 5.2(i) shall have been received, and evidence thereof shall have been delivered to the Buyer prior to theClosing or (B) the Seller shall have provided the Buyer with a reasonably suitable alternative to the Gateway Sublease Agreement upon substantially the sameor better economic terms, with the location of such alternative space being no more than ten (10) miles from the location of the Leased Real Property.5.3 Conditions to Obligations of the Seller. The obligation of the Seller to consummate the transactions to be consummated at the Closing is subject tothe satisfaction (or waiver by the Seller) of the following conditions:(a) the representations and warranties of the Buyer set forth in ARTICLE III (other than the Buyer Fundamental Representations) shall be true andcorrect as of the date of this Agreement and as of the Closing Date as if made as of the Closing Date, except (i) for those representations and warranties thataddress matters only as of a particular date (which shall be true and correct as of such date, subject to clause (ii) below) and (ii) where the failure of suchrepresentations and warranties to be true and correct would not reasonably be expected to result, in the aggregate, in a Buyer Material Adverse Effect (it beingagreed that any materiality or Buyer Material Adverse Effect qualification in a representation and warranty shall be disregarded in determining whether anysuch failure would reasonably be expected to result in a Buyer Material Adverse Effect for purposes of this clause (ii));(b) the Buyer Fundamental Representations shall be true and correct in all respects as of the date of this Agreement and as of the Closing Date as ifmade as of the Closing Date, except for changes contemplated or permitted by this Agreement;(c) the Buyer shall have performed or complied in all material respects with its agreements and covenants required to be performed or compliedwith by it under this Agreement as of or prior to the Closing; and(d) the Seller shall have received the Buyer Certificate; and(e) Pruco shall have received from the Buyer an executed copy of the Pruco Contract. 29Confidential Treatment Requested ARTICLE VIINDEMNIFICATION6.1 Indemnification by the Seller. Subject to the terms and conditions of this ARTICLE VI, from and after the Closing, the Seller shall indemnify theBuyer in respect of, and hold the Buyer harmless against, all Damages incurred or suffered by the Buyer or any Affiliate thereof resulting from:(a) any breach of a representation or warranty of the Seller contained in ARTICLE II of this Agreement or of a representation or warranty of theSeller Affiliate contained in the Affiliate Bill of Sale;(b) any failure by the Seller to perform any covenant or agreement contained in this Agreement;(c) any Excluded Liabilities; or(d) any claim brought by a Seller Business Employee, a successor to the rights of a Seller Business Employee or a Governmental Authority(i) relating to such Seller Business Employee not being a Scheduled Employee or due to Buyer’s failure to offer employment to a Seller Business Employee or(ii) arising from or related to the Buyer’s determination of which Seller Business Employees are to be Scheduled Employees, Transitional New BuyerEmployees and Non-Transitional New Buyer Employees, in each case to the extent related to a charge of discrimination or disparate treatment by Buyer or bySeller (to the extent Seller was acting, or deemed to be acting, at the direction of Buyer).6.2 Indemnification by the Buyer. Subject to the terms and conditions of this ARTICLE VI from and after the Closing, the Buyer shall indemnify theSeller in respect of, and hold the Seller harmless against, any and all Damages incurred or suffered by the Seller or any Affiliate thereof resulting from:(a) any breach of a representation or warranty of the Buyer contained in ARTICLE III of this Agreement;(b) any failure by the Buyer to perform any covenant or agreement contained in this Agreement; or(c) any Assumed Liabilities.6.3 Claims for Indemnification.(a) Third-Party Claims. All claims for indemnification made under this Agreement resulting from, related to or arising out of a third-party claimagainst an Indemnified Party shall be made in accordance with the following procedures. An Indemnified Party shall give prompt (but in any event withinthirty (30) days) written notification to the Indemnifying Party of the commencement of any Action relating to a third-party claim for which indemnificationmay be sought or, if earlier, upon the assertion of any such claim by a third party. Such notification shall include a description in reasonable detail (to theextent known by 30Confidential Treatment Requested the Indemnified Party) of the facts constituting the basis for such third-party claim and a good faith estimate of the amount of the Damages claimed, if thendeterminable. Notwithstanding the foregoing, the failure or delay in notifying the Indemnifying Party will not relieve the Indemnifying Party of any liabilitythat it may have to any Indemnified Party, except to the extent that the defense of such Action is prejudiced by the Indemnifying Party’s failure or delay ingiving such notice. Within thirty (30) days after delivery of such notification, the Indemnifying Party may, upon written notice thereof to the IndemnifiedParty, assume control of the defense of such Action with counsel reasonably satisfactory to the Indemnified Party. If the Indemnifying Party does not assumecontrol of such defense, the Indemnified Party shall control such defense. The Party not controlling such defense may participate therein at its own expense.The Party controlling such defense shall keep the other Party advised of the status of such Action and the defense thereof and shall consider recommendationsmade by the other Party with respect thereto, and the Parties shall use commercially reasonable efforts to avoid production of confidential information(consistent with applicable local law), and to cause all communications among employees, counsel and others representing either Party with respect to a third-party claim to be made so as to preserve any applicable attorney-client or work-product privileges. If the Indemnifying Party assumes the defense of an Action,the Indemnified Party (1) shall not agree to any settlement of such Action without the prior written consent of the Indemnifying Party if such settlement wouldresult in the Indemnifying Party becoming liable for an indemnification claim hereunder and (2) shall agree to any settlement of such Action that theIndemnifying Party may recommend that by its terms (or pursuant to a binding commitment of the Indemnifying Party) obligates the Indemnifying Party topay the full amount of any Damages payable in connection with such settlement; provided, however, that the sole relief provided is such Damages paid in fullby the Indemnifying Party and such settlement would not result in (i) the imposition of a consent order, injunction or decree that would restrict the futureactivity or conduct of the Indemnified Party or any of its Affiliates or (ii) a finding or admission of a violation of law by the Indemnified Party.(b) Direct Claims. An Indemnified Party wishing to assert a claim for indemnification under this ARTICLE VI (other than a claim forindemnification arising out of a third-party claim) shall deliver to the Indemnifying Party a Claim Notice. Notwithstanding the foregoing, the failure or delayin delivering a Claim Notice to the Indemnifying Party will not relieve the Indemnifying Party of any liability that it may have to any Indemnified Party, exceptto the extent that the defense of such claim is prejudiced by the Indemnifying Party’s failure or delay in delivering such Claim Notice. Within thirty (30) daysafter delivery of a Claim Notice, the Indemnifying Party shall deliver to the Indemnified Party a written response in which the Indemnifying Party shall:(i) agree that the Indemnified Party is entitled to receive all of the Claimed Amount (in which case such response shall, subject to the limitations set forth inSections 6.5(a)(i) and 6.5(a)(ii), be accompanied by a payment by the Indemnifying Party to the Indemnified Party of the Claimed Amount, by check or bywire transfer), (ii) agree that the Indemnified Party is entitled to receive an Agreed Amount with respect to such claim for indemnification (in which case suchresponse shall, subject to the limitations set forth in Sections 6.5(a)(i) and 6.5(a)(ii), be accompanied by a payment by the Indemnifying Party to theIndemnified Party of the Agreed Amount, by check or by wire transfer) or (iii) contest that the Indemnified Party is entitled to receive any of the ClaimedAmount. If the Indemnifying Party in such response contests the payment of all or a portion of the Claimed Amount and the Indemnified Party disputes suchresponse, the Indemnifying Party and the Indemnified Party 31Confidential Treatment Requested shall use good faith efforts to resolve such dispute. If such dispute is not resolved within sixty (60) days following the delivery by the Indemnifying Party ofsuch response, the Indemnifying Party and the Indemnified Party shall each have the right to submit such dispute to a court of competent jurisdiction inaccordance with the provisions of Section 12.12.6.4 Survival.(a) The representations and warranties of the Seller and the Buyer set forth in this Agreement shall survive the Closing and the consummation ofthe transactions contemplated hereby and continue until the second anniversary of the Closing Date, at which time they shall expire. Notwithstanding theforegoing, (i) the Seller Fundamental Representations and the Buyer Fundamental Representations shall survive the Closing and the consummation of thetransactions contemplated hereby until the fifth anniversary of the Closing Date, at which time they shall expire and (ii) the representations and warranties ofthe Seller contained in Section 2.5 shall survive until sixty (60) days after the expiration of the applicable statute of limitations (including any applicableextensions).(b) The covenants and agreements of the Parties contained herein (i) that by their terms are to be performed in whole or in part, or that prohibitactions, prior to the Closing shall expire upon the occurrence of the Closing, except that claims for indemnification in respect of any breach thereof shallsurvive until the date that is twelve (12) months after the Closing and (ii) that by their terms are to be performed in whole or in part, or that prohibit actions,following the Closing shall survive until the date that is twelve (12) months after the expiration in accordance with their terms.(c) If an indemnification claim is properly and in good faith asserted in writing pursuant to Section 6.3 prior to the expiration as provided inSection 6.4(a) or Section 6.4(b) of the representation or warranty or covenant or agreement that is the basis for such claim, then such representation orwarranty or covenant or agreement shall survive until, but only for the purpose of, the resolution of such indemnification claim.6.5 Limitations.(a) Notwithstanding anything to the contrary contained in this Agreement, the following limitations shall apply to indemnification claims underthis Agreement:(i) no individual claim (or series of related claims) for indemnification under Sections 6.1(a) or 6.2(a) shall be valid and assertable unlessit is (or they are) for an amount in excess of $10,000;(ii) (A) except with respect to breaches of the Seller Fundamental Representations, the Seller shall be liable with respect to claims underSection 6.1(a) for only that portion of the aggregate Damages related to such claims (excluding any claims disallowed under Section 6.5(a)(i)), consideredtogether, which exceeds $250,000 and (B) except with respect to breaches of the Buyer Fundamental Representations, the Buyer shall be liable with respect toclaims under Section 6.2(a) for only that portion of the aggregate Damages related to such claims (excluding any claims disallowed under Section 6.5(a)(i)),considered together, which exceeds $250,000; 32Confidential Treatment Requested (iii) (A) the aggregate liability of the Seller for indemnification claims under Section 6.1(a) (other than indemnification claims with respectto breaches of the Seller Fundamental Representations) shall not exceed an amount equal to twenty-five percent (25%) of the Purchase Price and (B) theaggregate liability of the Buyer for indemnification claims under Section 6.2(a) (other than indemnification claims with respect to breaches of the BuyerFundamental Representations) shall not exceed an amount equal to twenty-five percent (25%) of the Purchase Price; and(iv) with respect to breaches of the Seller Fundamental Representations, the aggregate liability of the Seller for indemnification claimsunder Section 6.1(a) shall not exceed the Purchase Price.(b) Each Indemnified Party shall (and shall cause its Affiliates to) use commercially reasonable efforts (including by pursuing all legal rights andremedies available) in order to mitigate and minimize the Damages for which indemnification is contemplated by this ARTICLE VI, including pursuingcommercially reasonable insurance claims with respect to any Damages or pursuing in a commercially reasonable manner any indemnification obligations ofthird parties with respect to any Damages that are or may be the subject of an indemnification claim hereunder.(c) The amount of Damages recoverable by an Indemnified Party under this ARTICLE VI with respect to an indemnity claim shall be reduced bythe amount of any payment received by such Indemnified Party (or an Affiliate thereof), with respect to the Damages to which such indemnity claim relates,from an insurance carrier or any other Person. If an Indemnified Party (or an Affiliate) receives any insurance payment in connection with any claim forDamages for which it has already received an indemnification payment from the Indemnifying Party, it shall pay to the Indemnifying Party, within thirty(30) days of receiving such insurance payment, an amount equal to the excess of (A) the amount previously received by the Indemnified Party under thisARTICLE VI with respect to such claim plus the amount of the insurance payments received, over (B) the amount of Damages with respect to such claimwhich the Indemnified Party has become entitled to receive under this ARTICLE VI.(d) The representations and warranties of the Parties, and the right of any Indemnified Party with respect thereto, shall not be affected or deemedwaived by reason of any investigation made by or on behalf of such Indemnified Party (including by any of its Representatives) or by reason of the fact thatsuch Indemnified Party or any of its Representatives knew or should have known that any such representation or warranty is, was or might be inaccurate orby reason of such Indemnified Party’s waiver of any condition set forth in ARTICLE V, as the case may be.(e) The Parties agree that where one and the same set of facts qualifies under more than one provision entitling the Buyer or the Seller to a claim orremedy under this Agreement, there shall be only one claim or remedy. 33Confidential Treatment Requested (f) In no event shall any Indemnified Party be entitled to indemnification pursuant to this ARTICLE VI to the extent indemnifiable Damages wereattributable to such Indemnified Party’s gross negligence, willful misconduct or fraud.(g) Except with respect to claims for fraud or equitable relief, including specific performance, made with respect to breaches of any covenant oragreement contained in this Agreement, the rights of the Indemnified Parties under this ARTICLE VI and under ARTICLE VII shall be the sole and exclusiveremedies of the Indemnified Parties and their respective Affiliates with respect to claims covered by Section 6.1, Section 6.2, or ARTICLE VII or otherwiserelating to the transactions contemplated by this Agreement, the Seller Bill of Sale, the Affiliate Bill of Sale and the Assignment and Assumption Agreement.Without limiting the generality of the foregoing, in no event shall any Party, its successors or permitted assigns be entitled to claim or seek rescission of anytransactions consummated pursuant to this Agreement.6.6 Treatment of Indemnification Payments. Unless otherwise required by applicable law, all indemnification payments made under this Agreementshall be treated by the Parties as an adjustment to the Final Adjusted Purchase Price.6.7 Setoff Rights. The Buyer shall have the right to setoff, against each Post-Closing Payment, the amount of any Damages with respect to any ResolvedBut Unsatisfied Claims that the Buyer is entitled to recover under this ARTICLE VI (after giving effect to any applicable limitations provided for inSection 6.5).ARTICLE VIITAX MATTERS7.1 Transfer Taxes. The Buyer and the Seller shall each be responsible for one-half of any transfer, sales, use, stamp, conveyance, value added,recording, registration, documentary, filing and other non-Income Taxes and administrative fees (including notary fees) (“Transfer Taxes”) arising inconnection with the consummation of the transactions contemplated by this Agreement. The Party customarily responsible under applicable law shall file allnecessary Tax Returns and other documentation with respect to such Transfer Taxes. The Party responsible for filing any such Tax Returns shall provide tothe other Party evidence of timely filing and payment of all such Transfer Taxes. Within fifteen (15) days after receipt of such evidence, the receiving Partyshall pay to the filing Party its one-half share of such Transfer Taxes.7.2 Allocation of Certain Taxes.(a) Any real property Taxes, personal property Taxes or other Taxes imposed on a periodic basis, in each case, applicable to the Acquired Assetsfor a taxable period that includes but does not end on the Closing Date (a “Straddle Period”) shall be paid by the Buyer or the Seller, as required underapplicable law, and such Taxes shall be apportioned between the Buyer and the Seller based on the number of days in the portion of the taxable period thatends on the Closing Date (the “Pre-Closing Tax Period”) and the number of days in the entire taxable period. All Taxes imposed with respect to the Businessand the Assumed Assets for any taxable period that ends before the Closing Date and for any Pre-Closing Tax Period shall be borne by the Seller. All Taxesimposed for any taxable period beginning after the Closing date and any Straddle Period Taxes that are not allocable to the Pre-Closing Tax Period shall beborne by the Buyer. 34Confidential Treatment Requested (b) For purposes of this Section 7.2, transactions that occur on the Closing Date but after the Closing and that are not incurred in the ordinarycourse of business of the Business shall be considered attributable to the period that commences on the day following the Closing Date.7.3 Cooperation on Tax Matters; Tax Audits. The Buyer and the Seller and their respective Affiliates shall cooperate in the preparation of all Tax Returnsfor any taxable periods for which one Party could reasonably require the assistance of the other Party in obtaining any necessary information (including theprovision of applicable Tax books and records relating exclusively to the Business or reasonably redacted so as to relate exclusively to the Business). TheSeller shall have the right to control any Tax audit, initiate any claim for refund, and contest, resolve and defend against any assessment, notice of deficiency,or other adjustment or proposed adjustment relating to any and all Taxes for any taxable period ending on or before the Closing Date with respect to theBusiness.7.4 Post-Closing Actions. The Buyer shall not file, amend, re-file or otherwise modify any Tax Return or Tax election relating in whole or in part to theBusiness or agree to the waiver or any extension of the statute of limitations with respect to any taxable period (or portion thereof) ending on or before theClosing Date without the prior written consent of the Seller (which consent shall not be unreasonably withheld, delayed or conditioned).7.5 Termination of Tax Sharing Agreements. All Tax sharing agreements or similar arrangements with respect to or involving the Business (other thanany such agreements or arrangements that are ordinary course commercial agreements, credit agreements or other agreements not primarily related to Taxes)shall be terminated prior to the Closing Date and, after the Closing Date, the Buyer and its Affiliates shall not be bound thereby or have any liabilitythereunder for amounts due in respect of periods ending on or before the Closing Date.ARTICLE VIIITERMINATION8.1 Termination of Agreement. The Parties may terminate this Agreement prior to the Closing as provided below:(a) the Parties may terminate this Agreement by mutual written consent;(b) the Buyer may terminate this Agreement by giving written notice to the Seller in the event the Seller is in material breach of any representation,warranty, covenant or agreement contained in this Agreement, and such breach, individually or in combination with any other such breach, (i) would causethe conditions set forth in Sections 5.2(a), 5.2(b) or 5.2(c) not to be satisfied by the Outside Date and (ii) is not cured within thirty (30) days followingdelivery by the Buyer to the Seller of written notice of such breach; provided that the Buyer is not then in breach of any representations, warranties, covenantsor agreements contained in this Agreement that would cause any of the conditions in Sections 5.3(a), 5.3(b) or 5.3(c) not to be satisfied by the Outside Date; 35Confidential Treatment Requested (c) the Seller may terminate this Agreement by giving written notice to the Buyer in the event the Buyer is in material breach of any representation,warranty, covenant or agreement contained in this Agreement, and such breach, individually or in combination with any other such breach, (i) would causethe conditions set forth in Sections 5.3(a), 5.3(b) or 5.3(c) not to be satisfied by the Outside Date and (ii) is not cured within thirty (30) days followingdelivery by the Seller to the Buyer of written notice of such breach; provided that the Buyer is not then in breach of any representations, warranties, covenantsor agreements contained in this Agreement that would cause any of the conditions in Sections 5.2(a), 5.2(b) or 5.2(c) not to be satisfied by the Outside Date;(d) the Buyer may terminate this Agreement by giving written notice to the Seller if the Closing shall not have occurred on or before the OutsideDate by reason of the failure of any condition precedent under Section 5.1 or 5.2 (unless the failure results primarily from a breach by the Buyer of anyrepresentation, warranty, covenant or agreement contained in this Agreement); and(e) the Seller may terminate this Agreement by giving written notice to the Buyer if the Closing shall not have occurred on or before Outside Dateby reason of the failure of any condition precedent under Section 5.1 or 5.3 (unless the failure results primarily from a breach by the Seller of anyrepresentation, warranty, covenant or agreement contained in this Agreement).8.2 Effect of Termination. If any Party terminates this Agreement pursuant to Section 8.1, all obligations of the Parties hereunder shall terminate withoutany liability of any Party to the other Parties, except that the provisions of Section 3.7, Section 3.8, this Section 8.2 and ARTICLE XII and the ConfidentialityAgreement shall survive the termination of this Agreement. Notwithstanding the foregoing, termination of this Agreement shall not relieve any Party for anybreach by such Party, prior to the termination of this Agreement, of any covenant or agreement (but not any representation or warranty) contained in thisAgreement or impair the right of any Party to obtain such remedies as may be available to it at law or in equity with respect to such a breach by any otherParty.ARTICLE IXEMPLOYEE MATTERS9.1 Offer of Employment; Continuation of Employment.(a) As soon as practicable (but not more than ten (10) Business Days) following the date of this Agreement, the Buyer shall, or shall causeAffiliate to, make an offer of employment effective as of the Closing Date to each individual designated as a Scheduled Employee on Schedule 9.1(b) (i) in thesame job or position as in effect immediately prior to the Closing Date, (ii) at a worksite no more than twenty-five (25) miles from the current job’s position ineffect immediately prior to the Closing Date, (iii) unless otherwise agreed in writing by the Parties on the date hereof, at a salary or wage level and with a bonusopportunity, benefits 36Confidential Treatment Requested (other than severance benefits, any benefits provided under any agreement excluded from Section 2.9(a)(xi) or any defined benefit pension or retiree medical orother retiree welfare benefits), perquisites and other terms and conditions of employment that are substantially comparable in the aggregate to the salary or wagelevel, bonus opportunity, benefits (other than severance benefits, any benefits provided under any agreement excluded from Section 2.9(a)(xi) or any definedbenefit pension or retiree medical or other retiree welfare benefits), perquisites, and other terms and conditions that such Scheduled Employee was entitled toreceive immediately prior to the date of this Agreement and (iv) requiring such employee to accept or decline such offer within ten (10) Business Days afterreceiving such offer. The Seller has provided the Buyer the information set forth in clauses (i), (ii) and (iii). Notwithstanding the foregoing, following theClosing Date, the Buyer or one of its Affiliates shall provide each New Buyer Employee, as of the Closing Date, with compensation and benefits (includingincentive and equity-based compensation, but excluding any defined benefit pension or retiree medical or other retiree welfare benefits) at least as favorable asthe compensation and benefits provided to similarly-situated employees of the Buyer and its Affiliates as of the Closing Date. The Buyer or its Affiliates willcondition the offers to each Canadian Employee on such employee’s resigning in a manner that does not impose severance obligations on the CanadianSubsidiary nor trigger any rights to statutory or other benefits. The obligation of the Buyer to provide, or cause to provide, the conditions of employmentrelating to pay and employee benefits in accordance with this Section 9.1 shall continue for a period ending not earlier than one (1) year following the ClosingDate. The Buyer shall provide a list to the Seller twenty-one (21) Business Days following the date of this Agreement of all Scheduled Employees who haveaccepted offers of employment as of such date. For the avoidance of doubt, all provisions relating to severance benefits to be paid with respect to New BuyerEmployees after the Closing Date shall be governed by the provisions of Section 9.3(d) of this Agreement.(b) Notwithstanding any provision herein, any Scheduled Employee who is on short-term disability leave as of the Closing Date (an “On-LeaveBusiness Employee”) will not become a New Buyer Employee until such time, if any, as such On-Leave Business Employee has been approved to return toactive employment, at which time such employee shall be offered continued employment (with any reasonable accommodation, as necessary) with the Buyeror one of its Affiliates, but only if such employee is able to return to active employment within nine months after the Closing Date. If and when the On-LeaveBusiness Employee returns to active status (and has accepted the offer of employment from the Buyer and its Affiliates), such On-Leave Business Employeeshall be considered a New Buyer Employee and the On-Leave Business Employee shall become eligible for coverage and benefits under all employee benefitplans or programs maintained by the Buyer or its Affiliates under the same terms and conditions that apply to other New Buyer Employees, effective as ofsuch date of return and with service credit under Section 9.3(b) as though it referred to his or her date of return rather than the Closing Date.9.2 Cessation of Employee Benefit Plan Participation. Except as otherwise required by applicable law, the New Buyer Employees shall cease toparticipate in or accrue further benefits as active employees of the Seller or the Canadian Subsidiary under the Employee Benefit Plans effective as of theClosing Date (or, in the case of any On-Leave Business Employee who becomes a New Buyer Employee, such later date as of which such employee becomes aNew Buyer Employee). 37Confidential Treatment Requested 9.3 Compensation; Employee Benefits; Severance Plans.(a) The Seller and its Affiliates will retain, bear and discharge all liabilities for any accrued compensation, unused accrued vacation and otherpaid time off, “stay-pay,” and other accrued benefits (other than commissions and the 2013 annual incentive award payments) payable with respect to SellerBusiness Employees, applicable as of periods of service with the Seller or the Canadian Subsidiary, as the case may be, as of the Closing Date. The Buyerwill assume, bear, and discharge all liabilities with respect to commissions and 2013 annual incentive award payments that are accrued but unpaid as of theClosing Date or that, with respect to the period in 2013 following the Closing Date, will continue to accrue, other than any commission payments due to bepaid by the Seller or its Affiliates on or before the Closing Date.(b) The Buyer will take into account periods of service of the New Buyer Employees with the Seller and its Affiliates through the Closing Date, ascredited by the Seller or its Affiliates through the Closing Date under the Business Benefit Plans, for purposes of determining, as applicable, the eligibility ofNew Buyer Employees for participation in and vesting under (but not for benefit accrual) the employee benefit plans offered by the Buyer or any of itsAffiliates to the New Buyer Employees, including vacation plans or arrangements, 401(k) or other retirement savings plans and any severance or welfareplans, and the New Buyer Employee shall receive service credit for purposes of benefits levels under the vacation/paid time off and severance plans of Buyerand its Affiliates based on such prior service.(c) The Buyer shall cause the insurance carriers and administrators under the group health plans of the Buyer and its Affiliates to (i) waive anylimitation on health coverage of New Buyer Employees due to pre-existing conditions and/or waiting periods, active employment requirements, andrequirements to show evidence of good health under the applicable health plan of the Buyer or any of its Affiliates to the extent such New Buyer Employees arecurrently covered under a health plan of the Seller or its Affiliates (including the Canadian Subsidiary) and (ii) to credit any expenses incurred by the NewBuyer Employees and their beneficiaries or dependents under similar plans of the Seller or any of its Affiliates (including the Canadian Subsidiary) during theportion of the calendar year in which the Closing Date occurs for purposes of satisfying applicable deductible, co-insurance and maximum out-of-pocketexpenses or any like or similar expenses or costs.(d) If the Buyer or its Affiliates terminates the employment of a Transitional New Buyer Employee, a Non-Transitional New Buyer Employee or aSpecified Employee at any time after the Closing Date and on or prior to the Severance Outside Date without cause, the Buyer shall provide such TransitionalNew Buyer Employee, Non-Transitional New Buyer Employee or Specified Employee, as applicable, that executes and delivers a fully enforceable release ofany and all claims against the Buyer and its Affiliates, as well as Seller and its Affiliates as an additional released party, with a cash severance payment in anamount equal to the greatest of (i) the cash payment provided under the Buyer’s severance plan, policy, practice, or arrangement as may be in effect, (ii) thecash payment provided under any applicable Business Benefit Plan that is a severance plan, policy, practice, or arrangement or any other agreement entitlingsuch employee to severance as in effect as of the date of this Agreement and as set forth in Schedule 9.3(d), and (iii) the cash payment otherwise required to beprovided pursuant to local law, in the case of each of clauses (i) and (ii), taking into account such employee’s aggregate 38Confidential Treatment Requested periods of services with the Seller and its Affiliates and the Buyer and its Affiliates and, in the case of clause (iii), the periods of service as may be required bylocal law. The Seller or one of its Affiliates shall reimburse the Buyer and its Affiliates for such cash severance payments made by the Buyer or one of itsAffiliates with respect to each such terminated New Buyer Employee (other than any Specified Employee) if the sum of (x) total number of New BuyerEmployees who remain employed by the Buyer or one of its Affiliates immediately after the Severance Outside Date (the “Remaining Employees”) plus (y) thetotal number of New Buyer Employees who are terminated by Buyer or one of its Affiliates for cause on or prior to the Severance Outside Date or whovoluntarily terminate employment with the Buyer or one of its Affiliates on or prior to the Severance Outside Date (and in each case are not entitled to severanceon or prior to the Severance Outside Date under this Section 9.3(d)) (the “Non-Severance Terminated Employees”) is equal to, or exceeds, [***]. If the sum of(I) the Remaining Employees plus (II) the Non-Severance Terminated Employees is less than [***], the Buyer shall retain all liability for severance costs andexpenses for the number of such terminated New Buyer Employees that is equal to (AA) [***] minus (BB) the sum of the Remaining Employees and the Non-Severance Terminated Employees, and the Seller shall reimburse the Buyer and its Affiliates for any and all cash severance payments made by the Buyer andits Affiliates to all such other terminated New Buyer Employees; provided that the Buyer, in such case, shall be permitted in its sole discretion to designate theterminated New Buyer Employees (other than any Specified Employee) for whom the Seller or its Affiliates shall provide reimbursement to Buyer or itsAffiliates of cash severance payments. The Buyer shall provide the Seller with written notice of the making of any such severance payment to any suchemployee and the Seller or its Affiliates shall provide such reimbursement to the Buyer or its applicable Affiliates, as the case may be, within five(5) Business Days after receipt from the Buyer of such notice. The severance benefits, if any, to be provided by the Buyer and its Affiliates to any New BuyerEmployee during the period following the Severance Outside Date shall be determined by the Buyer in its sole discretion.9.4 Employment Related Liabilities.(a) Except as otherwise provided in Section 9.3(a) or (d) or this Section 9.4(a) of the Agreement, the Seller and its Affiliates shall solely beresponsible for and shall pay any and all liabilities or expenses arising out of or related to the employment of each New Buyer Employee with respect to theperiod on or before the Closing Date, including any individual retention or bonus guarantee agreements with Seller Business Employees, which will remain theresponsibility of Seller, and Buyer and its Affiliates shall solely be responsible for and shall pay any and all liabilities and expenses arising out of or related tothe employment of each New Buyer Employee after the Closing Date. For the avoidance of doubt, and except as provided in this Section 9.4(a), the Seller andits Affiliates (including the Canadian Subsidiary) shall retain, bear and discharge all liabilities, including, without limitation, liabilities for severance benefits,with respect to each Seller Business Employee who does not become a New Buyer Employee. Buyer will use its reasonable best efforts to make offers ofemployment in compliance with applicable laws. [***]Certain information has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omittedportions. 39Confidential Treatment Requested (b) Nothing in this Agreement shall be construed to grant any employee any right to continued employment after the Closing Date or be construedto modify, amend or establish any benefit plan, program or arrangement. No provision of this Agreement (including, for the avoidance of doubt,Section 6.1(d)) shall create any third party beneficiary rights in any New Buyer Employee, Canadian Employee, or former employee of the Seller with respectto the Business or former employee of the Canadian Subsidiary in respect of continued employment (or resumed employment) or any other matter.9.5 U.S. WARN Act. The Buyer agrees to provide any required notice under WARN and any other similar applicable law and to otherwise comply withany such law with respect to any “plant closing” or “mass layoff” (as defined in WARN) or similar event affecting employees and occurring on or after theClosing Date. The Buyer shall assume sole responsibility for any liabilities or obligations arising under WARN or other applicable law resulting from theactions (or inactions) of the Buyer or its Affiliates on or after the Closing Date or from the transactions contemplated hereby.9.6 U.S. COBRA. The Seller and its Affiliates shall retain, bear and discharge all liabilities with respect to the provision of COBRA rights and benefitswith respect to all qualifying events occurring on or prior to the Closing Date with respect to the Seller Business Employees and former employees of the Sellerwith respect to the Business (and, with respect to the On-Leave Business Employees, all qualifying events with respect to such employees occurring on orprior to the date of their termination from employment with the Seller and its Affiliates). The Buyer or its Affiliates shall have responsibility for any liabilitiesor obligations arising under COBRA or other similar applicable law with respect to the New Buyer Employees resulting from the actions (or inactions) of theBuyer or its Affiliates after the Closing Date.9.7 Non-Solicitation.(a) Except where such restrictions are prohibited by applicable law, from the Closing Date until the first (1) anniversary of the Closing Date,none of the Buyer or any of its Affiliates shall (i) solicit any individual who was a Seller Business Employee on the date hereof or on the Closing Date and whowas not a Scheduled Employee, to terminate his or her employment with the Seller (or any Affiliate of the Seller) or to become an employee of or consultant tothe Buyer (or any Affiliate of the Buyer) or any other Person or (ii) hire or engage any individual who was such an employee on the date hereof or on theClosing Date (other than as provided in Section 9.1); provided, however, that the foregoing shall not restrict general soliciting activity not specifically targetedat the Seller or its Affiliates (including the placement of general advertisements in trade media and the engagement of search firms that are not instructed totarget the Seller or its Affiliates) (provided that, for the avoidance of doubt, this proviso shall not be construed to permit the hiring of any Seller BusinessEmployee that was not a Scheduled Employee).(b) From the Closing Date until the first (1) anniversary of the Closing Date, Seller shall not and shall cause each of its Affiliates not to (i) solicitany Specified Employee, to terminate his or her employment with the Buyer (or any Affiliate of the Buyer) or to become an employee of or consultant of theSeller (or any Affiliate of the Seller) or any other Person or (ii) hire or engage any Specified Employee. 40ststConfidential Treatment Requested ARTICLE XOTHER POST-CLOSING COVENANTS AND LICENSES10.1 Access to Information; Record Retention; Cooperation.(a) Access to Information. Following the Closing, each Party shall afford to the other Party and to such other Party’s Representatives (at reasonabletimes, during normal business hours, on reasonable prior written notice and in a manner so as not to interfere with the conduct of the applicable Party’s andits Affiliates’ business operations) (i) reasonable access and duplicating rights to all Information within the possession or control of such Party and(ii) reasonable access to the personnel of such Party who have knowledge of the Information or the Business; provided, however, that neither Party (nor itsRepresentatives) shall be required (x) to provide any Information or access (A) that would violate the provisions of any applicable laws or regulations or anyagreement to which it is a party or, in the case of Information, the sharing of which would legally require the consent of any third party (including anyemployee of such Party of any of its Affiliates), (B) that would cause the loss of a claim of privilege (including attorney-client and work product privileges)with respect thereto or (C) that would result in the disclosure of any information of such Party or any of its Affiliates unrelated to the Business (and such Partyshall be permitted to redact any such information from any materials provided to the other Party or its Representatives) or (y) to provide any consolidated,combined, affiliated or unitary Tax Return that includes such Party or any of its Affiliates or any Tax-related work papers. Requests may be made under thisSection 10.1(a) for financial reporting and accounting matters, preparing financial statements, preparing and filing of any Tax Returns, prosecuting anyclaims for refund, defending any Tax claims or assessment, preparing securities law or securities exchange filings, prosecuting, defending or settling anylitigation, or insurance claim, performing obligations under this Agreement and the Ancillary Agreements, and all other proper business purposes. With respectto any Information, the Seller (i) shall not use, and shall cause its Representatives not to use, such Information for any purpose other than to confirm theaccuracy of each Revenue Statement and (ii) shall, consistent with Section 10.1(e), keep all such Information confidential and not disclose such Information toany third party (other than its Representatives, each of whom shall not use such Information for any purpose other than to confirm the accuracy of eachRevenue Statement).(b) Preparation of the Financial Statements. Without limitation of the provisions of, and subject to the limitations and standards of reasonablenessset forth in, Section 10.1(a), following the Closing, (i) the Buyer shall provide to the Seller all information relating to the Business prior to the Closing that isreasonably requested by the Seller for the preparation of the financial statements of the Seller and its Affiliates and (ii) the Seller shall provide to the Buyer allfinancial and accounting information relating the Business prior to the Closing that is reasonably requested by the Buyer for the preparation of the financialstatements of the Buyer required to be included in any periodic reports on Forms 10-K and 10-Q, any Current Report on Form 8-K (including the financialstatements required by Rule 3-05 of Regulation S-X in respect of the Business) and any registration statement to be filed with the SEC. In connection with thepreparation of such financial statements, upon the reasonable request of the either Party, the requested Party shall provide the requesting Party (and itsindependent auditors) with reasonable access to the books, accounts and records relating to the Business prior to the Closing. 41Confidential Treatment Requested (c) Reimbursement. A Party making Information or personnel available to the other Party under Section 10.1 shall be entitled to receive from suchother Party, upon the presentation of invoices therefor, payments for such amounts relating to supplies, disbursements and other out-of-pocket expenses, asmay reasonably be incurred in making such Information or personnel available; provided, however, that no such reimbursements shall be required for thesalary or cost of fringe benefits or similar expenses pertaining to employees of the providing Party.(d) Retention of Records. Except as may otherwise be required by law or agreed to in writing by the Parties, each Party shall use commerciallyreasonable efforts to preserve, until seven (7) years after the Closing Date, all Information in its possession or control that relates to the period prior to theClosing. Notwithstanding the foregoing, in lieu of retaining any specific Information, any Party may offer in writing to the other Party to deliver suchInformation to the other Party, and if such offer is not accepted within ninety (90) days, the offered Information may be disposed of at any time. From theClosing Date until the termination of the MAPSA Subcontracting Agreement the Buyer agrees to maintain true and accurate books and records relating to thesubject matter of the performance of its obligations under such agreement, which it shall make available to the Seller pursuant to this Section 10.1.(e) Confidentiality. From and after the Closing, each Party shall keep confidential, and shall cause its Representatives to keep confidential, all ofthe other Party’s Proprietary Information (except to the extent that such Proprietary Information (i) is or becomes generally available to the public other than as aresult of any disclosure directly or indirectly by the receiving Party or its Representatives, (ii) was available to the receiving Party on a non-confidential basisprior to its disclosure to the receiving Party by the other Party or the other Party’s Representatives or (iii) is or becomes available on a non-confidential basis tothe receiving Party from a Person other than the disclosing Party, provided that, the receiving Party reasonably believes that the source of such ProprietaryInformation was not prohibited from disclosing such Proprietary Information to it by a legal, contractual, fiduciary or other obligation to the disclosing Partyor any of its Representatives or to any other Person), and the receiving Party shall not (and shall cause its Representatives not to) use such ProprietaryInformation for purposes of trading securities, for competitive purposes or to obtain commercial advantage with respect to the disclosing Party. If a receivingParty or one of its Representatives is required (by oral questions, interrogatories, requests for information or documents in legal proceedings, subpoena, civilinvestigative demand or other similar legal process) to disclose such Proprietary Information, the receiving Party or its Representative, as applicable, shallprovide the disclosing Party with prompt notice of such requirement in order to enable the disclosing Party to seek an appropriate protective order or otherremedy, to consult with the receiving Party or its Representative, as applicable, with respect to taking steps to resist or narrow the scope of such requirement,or to waive compliance, in whole or in part, with the terms of this Section 10.1(e). In the event that such protective order or other remedy is not obtained or thedisclosing Party waives compliance with the terms of this Section 10.1(e), the receiving Party or its Representatives, as the case may be, shall disclose onlythat portion of the Proprietary Information which, in the opinion of its counsel, is legally required to be disclosed. In any such event, the receiving Party willuse its reasonable best efforts to ensure that all Proprietary Information that is so disclosed will be accorded confidential treatment. For purposes of thisSection 10.1, the Seller shall be deemed to be a “receiving Party” of all Business information. 42Confidential Treatment Requested 10.2 Trademarks and Tradenames.(a) Subject to the occurrence of the Closing, during the ninety- (90-) day period commencing on the Closing Date (the “Transition TrademarkPeriod”), the Buyer may use the Trademarks Prudential, the Prudential logo and the Rock design (the “Licensed Marks”), solely to the extent utilized by theBusiness in electronic or written materials immediately prior to the Closing, and solely (i) to use and distribute such materials, and/or (ii) to disclose that theBusiness was formerly associated with the Seller. The Buyer shall comply with such other reasonable requests as are made by the Seller or any of its Affiliatesto enable the Seller and its Affiliates to maintain and preserve the validity and enforceability of such trademarks and the goodwill associated therewith. TheBuyer agrees to display, within five (5) days of the Closing until the end of the Transition Trademark Period, on each page of its public-facing website and onany materials bearing the Seller’s or any of its Affiliates’ trademarks distributed after the Closing, the following statement (the “Non-Affiliation Statement”):“All Prudential trademarks and logos are used under license. Envestnet is not affiliated with The Prudential Insurance Company of America or with PrudentialFinancial, Inc.” The Buyer acknowledges that the Licensed Marks and all rights therein and thereto and the goodwill pertaining thereto belong exclusively tothe Seller and its Affiliates and agrees that it has no right, title or interest, express or implied, in and to the Licensed Marks, except as specifically provided inthis Agreement. Any and all goodwill generated by the Buyer’s use of the Licensed Marks or associated therewith shall inure solely to the benefit of ThePrudential Insurance Company of America. Except as otherwise provided in this Section 10.2, the Buyer shall have no rights to use any Retained Marks andwill not hold itself out as having any affiliations with the Seller or any of its Affiliates. During and after the Transition Trademark Period, the Buyer shall usecommercially reasonable efforts to ensure that there is no confusion regarding the Buyer’s lack of affiliation with the Seller or the Seller’s Affiliates and/or, ifany such confusion occurs, to promptly remediate such confusion and the causes thereof; provided that, the Buyer’s display of the Non-Affiliation Statementas noted above, during or after the Transition Trademark Period, shall constitute commercially reasonable efforts to ensure there is no such confusion.(b) Subject to the occurrence of the Closing, during the two- (2-) year period commencing on the Closing Date, the Seller and its Affiliates will notuse the phrase “Wealth Management Solutions” to denote the name or brand of any product or service competitive with those being offered by the Business onthe Closing Date; provided that (x) nothing in this Section 10.2(b) shall limit the Seller’s and its Affiliates’ rights to utilize any other phrase or any portion ofsuch phrase, including “Wealth Management”, “Wealth Solutions” and “Management Solutions”, and (y) Seller and its Affiliates may utilize the phrase“Wealth Management Solutions” to generically describe the attributes of any of their products or services that provide wealth management solutions.10.3 License Back. The Buyer hereby grants to the Seller and each of its Affiliates and their respective successors and assigns a perpetual, irrevocable,non-terminable, worldwide, royalty-free, fully paid-up, non-exclusive, sublicenseable to Affiliates, customers, end users and contractors (provided that suchcustomers, end users and contractors are not licensed to use the Licensed Software for any purpose other than for its intended use to provide services or toprocess business of the Seller or the applicable Affiliate), and non-transferable (except that the Seller and each of its Affiliates may transfer, as limited by theproviso to this parenthetical, the 43Confidential Treatment Requested foregoing rights and licenses to a Person in connection with sales or divestitures of a business using the Licensed Software, or mergers, reorganizations,consolidations or other change-in-control transactions; provided that the transferee’s license shall be no broader than that of the transferor) right and license,effective as of the Closing Date, in, to and under the Licensed Software for the continued use in the respective businesses of the Seller and/or any of itsAffiliates (other than in the field of the Business ) as of or prior to the Closing Date, including the right to use, reproduce, create derivative works of, performand display the Licensed Software. Any transfer made in violation of the foregoing shall be void and of no legal force and effect. The Buyer and its Affiliatesare not obligated to provide support to the Seller or any of its Affiliates for the Licensed Software or provide the Seller or any of its Affiliates with anymodifications, updates or upgrades to or any maintenance or other services for the Licensed Software. THE LICENSED SOFTWARE LICENSEDPURSUANT TO THIS SECTION 10.3 IS FURNISHED “AS IS” AND WITH ALL FAULTS AND BUYER EXPRESSLY DISCLAIMS ALLREPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE LICENSED SOFTWARE, WHETHER EXPRESS OR IMPLIED, EITHER INFACT OR BY OPERATION OF LAW, BY STATUTE OR OTHERWISE, INCLUDING ANY WARRANTY OF NON-INFRINGEMENT,MERCHANTABILITY, FITNESS FOR ANY PARTICULAR PURPOSE. ADEQUACY, UNINTERRUPTED OR ERROR-FREE PERFORMANCE, ORCOMPLIANCE WITH ANY LAW. The Seller shall at all times treat Licensed Software as confidential information of the Buyer; provided, however, that theforegoing shall not limit the rights and licenses granted pursuant to this Section 10.3. For the purposes of this Section 10.3, “Licensed Software” meansSoftware that was used in any of the Seller’s or its Affiliates’ systems, software or applications prior to the Closing Date (other than systems, software orapplications used exclusively by the Business) as well as any immaterial portions of Software that may also have been included in any part of other softwareof the Seller or any of its Affiliates in an incidental manner, and the Intellectual Property rights of the Buyer and its Affiliates associated therewith.10.4 Accounts Receivable and Accounts Payable.(a) Each Party agrees that it shall forward promptly to the other Party any monies, checks or instruments received by such Party after the Closingwith respect to any accounts receivable to which the other Party is entitled to the benefit of hereunder. The Seller hereby authorizes the Buyer, following theClosing, to endorse and cash any checks or instruments payable or endorsed to the Seller or its order which are received by the Buyer and which relate toaccounts receivable constituting Acquired Assets that were purchased by the Buyer pursuant hereto.(b) In the event that, following the Closing (i) the Seller or its Affiliate inadvertently pays or discharges any trade payable that represented anAssumed Liability or (ii) the Buyer or its Affiliate inadvertently pays or discharges any trade payable that represented an Excluded Liability, in the case ofclause (i) above, the Buyer shall, and in the case of clause (ii) above, the Seller shall, reimburse the other Party (or its Affiliate) for the amount so paid ordischarged within ten (10) days of being presented with written evidence of such payment or discharge. 44Confidential Treatment Requested 10.5 Deletion of Non-Transferred Software. The Buyer shall not use and shall cause each of its Affiliates not to use any third-party software loaded onthe Equipment included in the Acquired Assets as of the Closing Date if such software is not included in the Acquired Assets or otherwise licensed to theBuyer. The Buyer shall, as soon as is reasonably practical, and in any event no later than forty-five (45) days following the Closing, delete all such softwarefrom any of the Equipment on which it is installed.10.6 Brokers. Regardless of whether the Closing shall occur, (a) the Seller shall indemnify the Buyer and its Affiliates against, and hold the Buyer andits Affiliates harmless from, any liability for any brokers’ or finders’ fees or other commissions arising with respect to brokers, finders, financial advisors orother Persons retained or engaged by the Seller or its Affiliates in respect of the transactions contemplated by this Agreement and (b) the Buyer shall indemnifythe Seller and its Affiliates against, and hold the Seller and its Affiliates harmless from, any liability for any brokers’ or finders’ fees or other commissionsarising with respect to brokers, finders, financial advisors or other Persons retained or engaged by the Buyer or its Affiliates in respect of the transactionscontemplated by this Agreement.ARTICLE XIDEFINITIONS11.1 Defined Terms. For purposes of this Agreement, each of the following terms shall have the meaning set forth below.“Abbreviated Financial Statements” shall mean (a) (i) an audited statement of assets acquired and liabilities assumed and statement of revenues anddirect operating expenses, in each case, with respect to the Business as of, and for each of the years ended, December 31, 2011 and December 31, 2012,together with associated notes to those financial statements, (ii) unaudited statements of assets acquired and liabilities assumed and statements of revenues anddirect operating expenses, in each case, with respect to the Business as of, and for each of the quarters ended, March 31, 2012 and March 31, 2013, togetherwith associated notes to those unaudited financial statements (and, if the Closing Date occurs on or after August 15, 2013, as of, and for each of the quartersended, June 30, 2012 and June 30, 2013), in the case of clauses (i) and (ii), with such financial statements to be prepared in a manner consistent with theapplicable methodologies set forth in Section 2.4(b) of the Disclosure Schedule, (iii) quarterly reviews prepared by the Seller’s independent auditor in respect ofsuch independent auditor’s performance of the procedures specified by the PCAOB for a review of interim financial information as described in AU 722 withrespect to the statements of assets acquired and liabilities assumed and statements of revenues and direct operating expenses described in the foregoing clause(ii) and (iv) to the extent the parties reasonably determine the same are required to be filed by the Buyer under Rule 3-05 of Regulation S-X, an auditedstatement of assets acquired and liabilities assumed and statement of revenues and direct operating expenses, in each case, with respect to the Business, as of,and for the year ended, December 31, 2010, together with associated notes to those financial statements, with such financial statements to be preparedconsistent with the applicable methodologies set forth in Section 2.4(b) of the Disclosure Schedule or (b) (i) the Accepted Financial Statements, as of and forthe years ended December 31, 2011 and December 31, 2012 and as of and for the quarters ended March 31, 2012 and March 31, 2013 and (ii) to the extent theparties reasonably determine the same are required to be filed by the Buyer under Rule 3-05 of Regulation S-X, the Accepted Financial Statement mostcomparable to a statement of income, for the year ended December 31, 2010. 45Confidential Treatment Requested “Accepted Financial Statements” such financial statements as the staff of the SEC may advise the Buyer it will not raise an objection to for purposes ofRule 3-05 of Regulation S-X; provided that such financial statements are no more expansive than the Full Financial Statements.“Acquired Assets” shall mean the following assets:(a) all accounts receivable and other receivables related exclusively to the Business, whether or not billed, as set forth on Schedule 1.1(a)(ii), assuch Schedule shall be updated pursuant to Section 1.4(b);(b) all Equipment set forth on Schedule 1.1(a)(iii);(c) the Assigned Contracts, except as provided in Section 1.6;(d) all Seller Intellectual Property; and(e) all books, records, accounts, ledgers, files, documents, correspondence, studies, reports and other printed or written materials relatedexclusively to the Business, in each case, to the extent related to any items set forth in this definition and subject to any restrictions imposed by applicable law.“Acquired Assets Revenue” shall mean, for any Post-Closing Period, the amount calculated pursuant to the method set forth in Schedule 11.1. If theBuyer and the Buyer Subsidiaries do not continue the same invoicing practices used by the Business prior to the Closing, the amount of fees “invoiced” underthe Acquired Sponsor Contracts and the Acquired Prospect Contracts for any period shall be calculated based on the amount of fees that would have beeninvoiced under the Acquired Sponsor Contracts or Acquired Prospect Contracts during such period had the Buyer and the Buyer Subsidiaries continued thesame invoicing practices used by the Business prior to the Closing for invoicing under the Sponsor Contracts in existence on the date hereof.“Acquired Prospect Contract” shall mean any contract (as the same may be amended, restated or otherwise modified, replaced or succeeded from time totime) for the provision of wealth management solutions services by the Business or any Successor to the Business that is entered into or otherwise executedprior to December 31, 2013 with any of the prospective customers of the Business set forth on Schedule 11.1(a).“Acquired Sponsor Contract” shall mean, as applicable, (a) an Assigned Sponsor Contract (as the same may be amended, restated or otherwisemodified from time to time), (b) the Pruco Contract (as the same may be amended, restated or otherwise modified from time to time) or (c) any successor orreplacement contract to an Assigned Sponsor Contract with a Participating Sponsor that relates to the provision of wealth management solutions servicessubstantially similar to the services provided under such Assigned Sponsor Contract by the Business or any Successor to the Business. 46Confidential Treatment Requested “Affiliate” shall have the meaning assigned to it in Rule 12b-2 of the Securities and Exchange Act of 1934.“Affiliate Assets” shall mean (a) the personal computers and personal communications devices used immediately prior to the Closing by the New BuyerEmployees and (b) the Seller Affiliate’s right title and interest in the Seller Owned Intellectual Property.“Agreed Amount” shall mean, with respect to a claim for indemnification made hereunder, a portion, but not all, of the Claimed Amount.“Ancillary Agreements” shall mean the agreements and instruments referred to in clauses (iii) through (x) in Section 1.4(c).“Annualized Pruco Revenue” shall mean, for any Post-Closing Period, the amount calculated pursuant to the method set forth in Schedule 11.1. Theamount of fees “invoiced” under the Pruco Contract for any period shall be calculated based on the amount of fees that would have been invoiced under thePruco Contract during such period had the Buyer and the Buyer Subsidiaries continued the same invoicing practices used by the Business prior to theClosing for invoicing under the Sponsor Contracts in existence on the date hereof.“Annualized Revenue” shall mean, for each Post-Closing Period, (a) the related Acquired Assets Revenue, multiplied by (b) four (4).“Applicable Additional Purchase Price Payment” shall mean, for any Post-Closing Period, the amount set forth on line 4 of Schedule 11.1; provided,that if the Annualized Revenue relating to such Post-Closing Period is less than the amount set forth on line 5 of Schedule 11.1, such amount set forth on line 4of Schedule 11.1 shall be reduced by $1.00 for every $1.00 in shortfall until the Applicable Additional Purchase Price Payment for such Post-Closing Period isreduced to zero.“Applicable Excess Revenue Payment” shall mean, for the applicable Post-Closing Period the, the amount calculated pursuant to the method set forth inSchedule 11.1.“Assets Under Administration” shall mean, as of any date of determination, for any Participating Sponsor, the sum amount of assets of suchParticipating Sponsor’s Participating Clients that are managed through the Business.“Assigned Contracts” shall mean the contracts or agreements to which the Seller is party that are (i) Assigned Sponsor Contracts, (ii) Assigned ManagerContracts or (iii) listed in Schedule 1.1(a)(vi); provided that, for any such contracts listed on Schedule 1.1(a)(vi) that are specifically identified therein as notrelating exclusively to the Business, only the portions of such contracts that relate to the Business and may be assigned shall be “Assigned Contracts”hereunder.“Assigned Domain Names” shall mean the domain names listed under the heading “Domain Names” on Schedule 1.1(a)(i). 47Confidential Treatment Requested “Assigned Manager Contracts” shall mean (i) each Manager Contract listed in Schedule 1.1(a)(iv) for which consent has been obtained in accordancewith Section 4.4 and (ii) each other contract similar to a Manager Contract for which the Buyer has agreed in writing to such contract becoming an AssignedManager Contract pursuant to Section 4.2(c).“Assigned Sponsor Contracts” shall mean (i) each Sponsor Contract listed in Schedule 1.1(a)(v) for which consent has been obtained in accordancewith Section 4.4 and (ii) each other contract similar to a Sponsor Contract for which the Buyer has agreed in writing to such contract becoming an AssignedSponsor Contract pursuant to Section 4.2(c).“Assignment Requirements” shall mean, with respect to and Sponsor Contract, Manager Contract or other Assigned Contract, the necessary consentsunder applicable law or under such contract to effect the assignment and delegation or continuation of such contract in connection with the transactionscontemplated by this Agreement.“Assumed Liabilities” shall mean the following liabilities and obligations (whether known or unknown, whether absolute or contingent, whetherliquidated or unliquidated and whether due or to become due):(a) all liabilities reflected on the Closing Net Asset Schedule;(b) all liabilities and obligations arising under the Assigned Contracts to be satisfied or performed on or after the Closing, except (x) as the samemay be limited pursuant to the subcontracting arrangements contemplated by Section 1.6 or (y) to the extent relating to any pre-Closing breach thereof;(c) all liabilities and obligations arising from the operation of the Business or the ownership of the Acquired Assets on or after the Closing except tothe extent (x) relating to any indemnification obligation of the Seller pursuant to Section 6.1 or (y) relating to any indemnification obligation of the Sellerpursuant to any Ancillary Agreement;(d) all liabilities and obligations in respect of employees or employee benefits that are assumed by the Buyer pursuant to ARTICLE IX; and(e) all liabilities and obligations for any Taxes that have been apportioned to the Buyer pursuant to ARTICLE VII.“Base Date” shall mean December 31, 2013.“Base Purchase Price” shall mean $10 million.“Business” shall mean the business of the Seller and its Affiliates known as Wealth Management Solutions, as conducted on the date hereof and as ofthe Closing Date, which consists of providing outsourced wealth management services to financial institutions, insurance companies and independentbroker/dealer networks through a program under which asset managers provide asset management services to customers of such financial institutions,insurance companies and independent broker/dealer networks. 48Confidential Treatment Requested “Business Benefit Plan” shall mean any Employee Benefit Plan maintained by the Seller or any other Person (other than a Governmental Entity) for thebenefit of Seller Business Employees (and their respective beneficiaries) other than any agreement excluded from Section 2.9(a) by clause (xi) thereunder.“Business Day” shall mean any day other than (i) a Saturday or Sunday or (ii) a day on which banking institutions located in New York, New York orChicago, Illinois are permitted or required by law, executive order or governmental decree to remain closed.“Business Material Adverse Effect” shall mean any change, event, occurrence, state of facts or effect that (a) is materially adverse to the business,financial condition or results of operations of the Business, taken as a whole, or (b) materially impairs the ability of the Seller to consummate the transactionscontemplated by this Agreement; provided, however, that none of the following (or the results thereof) shall be considered in determining whether a “BusinessMaterial Adverse Effect” shall have occurred: (i) any changes in law or accounting standards or interpretations thereof applicable to the Business, (ii) anychanges in general political, economic, regulatory or business conditions (including acts of war, declared or undeclared, armed hostilities, sabotage andterrorism), or in financial, securities or other market conditions generally, including changes in interest rates or exchange rates, whether globally, in the UnitedStates or in Canada, (iii) any changes generally affecting any industry in which the Business operates, (iv) any changes resulting from or arising out ofnatural disasters, (v) any changes arising out of the negotiation, execution, announcement, pendency or consummation of this Agreement or the transactionscontemplated hereby, to the extent the same relate to the identity of, or the effects of any facts or circumstances relating to, the Buyer, (vi) so long as thecondition set forth in Section 5.1(b) has been satisfied, any changes arising out of any failure to retain Participating Sponsors or Participating Managers,(vii) any changes resulting from actions permitted to be taken or omitted (A) under Section 4.2 or (B) otherwise with the Buyer’s express written consent or(viii) any changes arising solely as the result of any failure of the Business to meet any estimates of revenues or earnings for any period ending on or after thedate hereof.“Buyer Certificate” shall mean a certificate to the effect that each of the conditions specified in clauses (a), (b) and (c) of Section 5.3 is satisfied.“Buyer Fundamental Representations” shall mean the representations and warranties of the Buyer contained in Sections 3.1 and 3.2.“Buyer Material Adverse Effect” shall mean a material adverse effect on the ability of the Buyer to consummate the transactions contemplated by thisAgreement.“Buyer Subsidiary” shall mean any direct or indirect subsidiary of the Buyer.“Canadian Assigned Manager Contract” shall mean each Canadian Manager Contract for which consent has been obtained in accordance withSection 4.4.“Canadian Employees” shall mean the employees of the Canadian Subsidiary, each of whom, as of the date of this Agreement, is identified on Schedule9.1(a) as a Canadian Employee. 49Confidential Treatment Requested “Canadian Manager Contract” shall mean each Manager Contract listed in Schedule 1.1(a)(vi) identified therein as a “Canadian Manager Contract”.“Canadian Subsidiary” shall mean Prudential Investments Wealth Management Solutions of Canada Ltd.“Claim Notice” shall mean a written notice that contains (i) a statement that the Indemnified Party is entitled to indemnification under ARTICLE VI anda reasonable explanation of the basis therefor, (ii) a description and a good faith estimate of the Claimed Amount of any Damages incurred by the IndemnifiedParty, if then determinable and (iii) a demand for payment of Damages related thereto.“Claimed Amount” shall mean the amount of any Damages claimed by an Indemnified Party.“Closing” shall mean the closing of the transactions contemplated by this Agreement and shall be deemed effective as of 11:59 p.m. on the Closing Date.“Closing Adjustment Amount” shall mean an amount equal to (i) the aggregate sum of the liabilities reflected on the Closing Net Asset Schedule minus(ii) the aggregate sum of the assets reflected on the Closing Net Asset Schedule (it being understood that if the aggregate sum of the assets reflected on theClosing Net Asset Schedule exceeds the aggregate sum of the liabilities reflected on the Closing Net Asset Schedule, the Closing Adjustment Amount shall be anegative number). An example of the calculation of the Closing Adjustment Amount as if the Closing shall have occurred as of June 30, 2013 is set forth inExhibit A.“Closing Date” shall mean, unless otherwise agreed by the Parties, the last calendar day of the month in which the conditions to the obligations of theParties to consummate the transactions contemplated hereby (excluding the delivery of any documents to be delivered at the Closing by any of the Parties, itbeing understood that the occurrence of the Closing shall remain subject to the delivery of such documents) have been satisfied or waived.“Closing Net Asset Schedule” shall mean a statement setting forth the balances of each of the specific categories of assets and liabilities of the Businessset forth on Exhibit A as of the end of the Closing Date, which statement shall be prepared consistent with the principles described on Exhibit A. For theavoidance of doubt, the Parties acknowledge that not all of the Acquired Assets or Assumed Liabilities will be reflected on the Closing Net Asset Schedule.“Closing Revenue Run-Rate” shall mean the aggregate Continuing Revenue Run-Rate for all Continuing Sponsors as of immediately prior to the ClosingDate.“Closing Run-Rate Percentage” shall mean the fraction (expressed as a percentage), the numerator of which is the Closing Revenue Run-Rate and thedenominator of which is the Base Revenue Run-Rate.“COBRA” shall mean the Consolidated Omnibus Budget Reconciliation Act of 1985.“Code” shall mean the Internal Revenue Code of 1986. 50Confidential Treatment Requested “Confidentiality Agreement” shall mean the confidentiality letter agreement dated January 30, 2013 between the Buyer and Prudential Financial, Inc.“Continuing Assets Under Administration” shall mean, as of any date of determination, for any Continuing Sponsor, the sum amount of assets of suchContinuing Sponsor’s Participating Clients that are managed through the Business.“Continuing Revenue Run-Rate” shall mean, with respect to a Continuing Sponsor as of any date of determination, the product of the Continuing AssetsUnder Administration with respect to such Continuing Sponsor, multiplied by the applicable Fee rates for such Continuing Sponsor as of such date ofdetermination (calculated in a manner consistent with the Revenue Run-Rate reflected in Section 2.18 of the Disclosure Schedule).“Continuing Sponsor” shall mean (i) any Participating Sponsor that has consented to the assignment of its Sponsor Contract to the Buyer and(ii) Pruco.“Damages” shall mean any and all liabilities, monetary damages, fines, fees, penalties, costs and expenses (including reasonable attorneys’ fees andexpenses), in each case, other than damages or other amounts that are consequential; in the nature of lost profits, lost revenues or lost opportunities oropportunity costs; based upon a multiple of earnings or similar financial measure, the loss of anticipated savings, claims or customer or businessinterruptions; special; incidental; exemplary; indirect or punitive, in each case, whether or not advised of the possibility of such damages, except (x) to theextent the same are required to be paid to a third-party pursuant to a third-party claim or (y) to the extent the Damages being measured relate to an AssignedSponsor Contract, lost revenues directly attributable to such Assigned Sponsor Contract may be included in the determination of Damages relating thereto.“Disclosure Schedule” shall mean the disclosure schedule provided by the Seller to the Buyer on the date hereof; provided that the mere inclusion of anitem in the Disclosure Schedule as an exception to a representation or warranty will not be deemed an admission by the Seller that such item (or any non-disclosed item or information of comparable or greater significance) represents a material exception or fact, event or circumstance, that such item has had, or isexpected to result in, a Business Material Adverse Effect, or that such item actually constitutes noncompliance with, or a violation of, any law, permit orcontract or other topic to which such disclosure is applicable, nor shall it establish a standard of materiality for any purpose whatsoever.“Employee Benefit Plan” shall mean (a) any “employee pension benefit plan” (as defined in Section 3(2) of ERISA) (whether or not subject to ERISA),(b) any “employee welfare benefit plan” (as defined in Section 3(1) of ERISA) (whether or not subject to ERISA), (c) any other plan, agreement, program,policy or arrangement providing vacation or other paid time off benefits, severance benefits, sales or other commissions, change in control benefits, stayincentive benefits, disability or other welfare-type benefits, retirement benefits, deferred compensation, bonuses, stock options, stock purchase, phantomstock, stock appreciation or other forms of incentive compensation or post-retirement or other post-employment compensation, or flexible spending or otherfringe benefits, and (d) any employment, consulting, services, termination, and severance plan, agreement or arrangement, in the case of (a)-(d), 51Confidential Treatment Requested maintained or contributed to by the Seller, the Canadian Subsidiary or any of its or their ERISA Affiliates, to which the Seller, the Canadian Subsidiary orany of its or their ERISA Affiliates has an obligation to contribute, or with respect to which the Seller, the Canadian Subsidiary or any of its or their ERISAAffiliates otherwise has any liability or contingent liability, whether or not funded and whether or not terminated.“Equipment” shall mean computers (including personal computers), furniture, fixtures, telecommunications, and other equipment and other interests intangible personal property, excluding in all cases any Intellectual Property covering, embodied in or connected to any of the foregoing.“ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended.“ERISA Affiliate” shall mean any entity that is, on the date hereof, a member of (a) a controlled group of corporations (as defined in Section 414(b) ofthe Code), (b) a group of trades or businesses under common control (as defined in Section 414(c) of the Code) or (c) an affiliated service group (as definedunder Section 414(m) of the Code or the regulations under Section 414(o) of the Code), any of which includes the Seller or the Canadian Subsidiary.“Excluded Assets” shall mean all assets, properties and rights of the Seller and its Affiliates that are not Acquired Assets, including:(a) all cash and cash equivalents or similar investments, bank accounts, commercial paper, certificates of deposit, Treasury bills and othermarketable securities;(b) all rights to insurance claims, related refunds and proceeds arising from or related to the Excluded Assets and Excluded Liabilities;(c) all rights that accrue or will accrue to the benefit of the Seller under this Agreement or the Ancillary Agreements;(d) all Tax refunds or credits and Tax deposits of the Seller and its Affiliates;(e) all Tax books and records and Tax Returns;(f) all Intellectual Property rights other than the Seller Intellectual Property;(g) all actions, claims, causes of action, rights of recovery, choses in action and rights of setoff of any kind arising before, on or after the Closingrelating to the items set forth in this definition or to any Excluded Liabilities;(h) the minute books, stock ledgers, charter documents, member interest record books, financial records and other books and records as pertainto the organization, existence or capitalization of the Seller and its Affiliates (other than the Canadian Subsidiary); 52Confidential Treatment Requested (i) all books, records, accounts, ledgers, files, documents, correspondence, studies, reports and other printed or written materials related to anyExcluded Assets or Excluded Liabilities and all personnel records;(j) any assets used primarily for the purpose of providing Overhead and Shared Services and, other than as provided in the Transition ServicesAgreement or the Gateway Sublease Agreement, any rights of the Business to receive from the Seller or any of its Affiliates any Overhead and Shared Services;(k) all Intellectual Property rights relating to the marks “Pru”, “Prudential”, the Prudential logo, the Rock design and all other Trademarks ownedby The Prudential Insurance Company of America (or any of its Affiliates) or any variation of the foregoing, together with all goodwill associated with suchTrademarks, including the right to use the name “Pru” or “Prudential” in any format and (ii) all Intellectual Property rights relating to websites owned by ThePrudential Insurance Company of America (or any of its Affiliates), except for the Assigned Domain Names;(l) other than to the extent the same specifically constitute Acquired Assets, any computer software systems that are a part of the systems ofPrudential Financial, Inc. or any of its Affiliates (including the Seller) or that are under a license agreement to Prudential Financial, Inc. or any of its Affiliates(including the Seller);(m) all stock or other equity interests in any Person;(n) all qualifications to do business as a foreign company and arrangements with registered agents relating to foreign qualifications; and(o) all assets, properties or rights listed on, or arising under any contracts or agreements listed on Schedule 1.1(b).“Excluded Liabilities” shall mean all liabilities and obligations of the Seller that are not Assumed Liabilities, including:(a) other than those liabilities and obligations arising under the Assigned Contracts to be satisfied or performed on or after the Closing that do notrelate to any pre-Closing breach thereof, all liabilities and obligations arising from the operation of the Business or ownership of the Acquired Assets prior tothe Closing;(b) all liabilities and obligations arising from the operation or ownership of the Canadian Subsidiary prior to the Closing;(c) all Taxes, except to the extent apportioned to the Buyer pursuant to ARTICLE VII, (i) imposed with respect to the Business or the AcquiredAssets for any taxable period ending on or prior to the Closing Date; (ii) with respect to the Excluded Assets; (iii) of the Seller (including all liabilities andobligations for any Taxes that have been apportioned to the Seller pursuant to ARTICLE VII); and (iv) of another Person for which the Seller is liable byreason of Treasury Regulations Section 1.1502-6 (or any comparable or similar provision of federal, state, local or foreign law) as a transferee or successor,by contract or pursuant to any law, rule or regulation; 53Confidential Treatment Requested (d) all liabilities and obligations of the Seller in respect of employees or employee benefits retained by the Seller pursuant to ARTICLE IX,including all liabilities under or with respect to the Employee Benefit Plans;(e) all liabilities and obligations of the Seller under this Agreement and the Ancillary Agreements; and(f) except as otherwise specifically provided herein, all liabilities and obligations of the Seller for costs and expenses incurred in connection withthis Agreement and the Ancillary Agreements or the consummation of the transactions contemplated by this Agreement and the Ancillary Agreements (includingany fees for financial advisors engaged by or on behalf of the Seller).“Exploit” shall mean develop, design, test, modify, make, use, sell, have made, used and sold, import, reproduce, market, distribute, commercialize,support, maintain, correct and create derivative works of.“Fees” shall mean all fees payable by a Participating Sponsor to the Seller pursuant to such Participating Sponsor’s Sponsor Contract (after giving effectto, and taking into account, any amounts owing to or to be collected for the account of Participating Managers).“Final Adjusted Purchase Price” shall mean an amount equal to (i) the Base Purchase Price minus (ii) the Closing Adjustment Amount.“Final Payment Date” means such time as the Buyer has made each payment, if any, to the Seller of the Applicable Additional Purchase Price Paymentsand Applicable Excess Revenue Payments under Section 1.2(c)(ii).“First Post-Closing Period” shall mean the period beginning on the Closing Date and ending on the first anniversary of the Closing Date.“Full Financial Statements” shall mean (i) an audited unconsolidated balance sheet, statement of income, statement of stockholders’ equity andstatement of cash flows for the Business as of, and for each of the years ended, December 31, 2011 and December 30, 2012, together with associated notes tothose financial statements, (ii) an unaudited unconsolidated balance sheet, statement of income, statement of stockholders’ equity and statement of cash flowsfor the Business as of, and for each of the quarters ended, March 31, 2012 and March 31, 2013, together with associated notes to those unaudited financialstatements (and, if the Closing Date occurs on or after August 15, 2013, as of, and for each of the quarters ended, June 30, 2012 and June 30, 2013), in thecase of each of clauses (i) and (ii), with such financial statements to be prepared in a manner consistent with the applicable methodologies set forth inSection 2.4(b) of the Disclosure Schedule, (iii) quarterly reviews prepared by the Seller’s independent auditor in respect of such independent auditor’sperformance of the procedures specified by the PCAOB for a review of interim financial information as described in AU 722 with respect to the financialstatements described in the foregoing clause (ii) and (iv) to the extent the parties reasonably 54Confidential Treatment Requested determine the same are required to be filed by the Buyer under Rule 3-05 of Regulation S-X, an audited statement of income, statement of stockholders’ equityand statement of cash flows for the Business for the year ended December 31, 2010, together with the associated notes to those audited financial statements,with such financial statements to be prepared in a manner consistent with the applicable methodologies set forth in Section 2.4(b) of the Disclosure Schedule.“Governmental Entity” shall mean any court, arbitrational tribunal, administrative agency or commission or other governmental or regulatory (includingany self-regulatory) authority, organization or agency.“Income Taxes” shall mean any taxes imposed upon or measured by net income.“Indemnified Party” shall mean, with respect to any claim for indemnification hereunder, the applicable Party seeking indemnification under ARTICLEVI.“Indemnifying Party” shall mean, with respect to any claim for indemnification hereunder, the applicable Party from whom indemnification is soughtby the Indemnified Party.“Information” shall mean all non-privileged records, books, contracts, instruments, documents, correspondence, computer data and other data andinformation (a) if requested by the Seller, (i) to the extent relating to the Business prior to the Closing, (ii) to the extent relating to the Business following theClosing and the Buyer’s performance of its obligations under the MAPSA Subcontracting Agreement or (iii) as contemplated by Section 1.2(e) or 10.1(b), or(b) if requested by the Buyer, to the extent relating to the Business; provided, however, that personnel records shall not constitute “Information”.“Intellectual Property” shall mean the following subsisting throughout the world:(a) Patent Rights;(b) Trademarks and all goodwill in Trademarks;(c) copyrights, designs, data and database rights and registrations and applications for registration thereof, including moral rights of authors;(d) Know How; and(e) other proprietary rights relating to any of the foregoing (including remedies against infringement thereof and rights of protection of interesttherein under the laws of all jurisdictions).“Intellectual Property Registrations” shall mean Patent Rights, registered Trademarks, registered copyrights and designs, and applications for each of theforegoing.“Know How” shall mean inventions, invention disclosures, statutory invention registrations, trade secrets and confidential business information,know-how, manufacturing and product processes and techniques, research and development information, financial, marketing and business data, pricingand cost information, business and marketing plans and customer and supplier lists and information, whether patentable or nonpatentable, whethercopyrightable or noncopyrightable and whether or not reduced to practice. 55Confidential Treatment Requested “Leased Real Property” shall mean the real property leased by the Seller Affiliate located at Three Gateway Center, Newark, New Jersey 07102,including the thirteenth (13) floor of the building located at such address.“Liens” shall mean any pledge, lien, charge, mortgage, claim, encumbrance or security interest of any kind or nature.“Lost Pruco Revenue” shall mean (a) if, prior to the end of the applicable Post Closing Period (including, for the avoidance of doubt, during any priorPost-Closing Period), Pruco has delivered a Pruco Termination Notice, an amount equal to the Annualized Pruco Revenue at the time the Pruco TerminationNotice is delivered and, (b) in all other cases, zero.“Manager Contract” shall mean each contract between the Seller, on the one hand, and a Participating Manager, on the other hand, listed in Schedule1.1(a)(iv).“New Buyer Employee” shall mean each Scheduled Employee who accepts an offer of employment from the Buyer.“Non-Consenting Canadian Manager” shall mean each Participating Manager, if any, that has not consented to the assignment of its Canadian AssignedManager Contract to the Buyer prior to the Closing.“Non-Consenting Sponsor” shall mean each Participating Sponsor, if any, that has not consented to the assignment of its Assigned Sponsor Contract tothe Buyer prior to the Closing.“Non-Transitional New Buyer Employees” shall mean the employees identified on Schedule 9.3(d)(i), in each case, that become New Buyer Employees.“Outside Date” shall mean September 30, 2013.“Overhead and Shared Services” shall mean ancillary corporate or shared services provided to or in support of the Business that are general corporate orother overhead services or provided to both the Business and other businesses of the Seller, including access to hardware and software related to research anddevelopment services, software development services provided by information technology consultants, travel and entertainment services, temporary laborservices, office supplies services (including copiers and faxes), personal telecommunications services, computer hardware and software services, fleetservices, energy/utilities services, treasury services, public relations, legal and risk management services (including workers’ compensation), payrollservices, information technology and telecommunications services, consolidation and technical accounting, tax services, internal audit services, employeebenefits services, credit, collections and accounts payable services, logistics services, property management services, environmental support services andcustoms and excise services, in each case including services relating to the provision of access to information, operating and reporting systems and databasesand all hardware and software used in connection therewith, including those services that are set forth on Schedule 11.1(b). 56thConfidential Treatment Requested “Participating Clients” shall mean, as of any date of determination, with respect to each Participating Sponsor, such Participating Sponsor’s clientswhose assets are managed through the Business.“Participating Manager” shall mean, as of any date of determination, a manager or sub-advisor that is participating in the Business as of such date,with such participation being evidenced by the existence of a Master Manager Agreement or a Master MSP Sub-Advisor Agreement with the Seller as of suchdate.“Participating Sponsor” shall mean, as of any date of determination, a financial institution, insurance company, independent broker/dealer network orother third party that is participating in the Business as of such date, with such participation being evidenced by the existence of a Managed Account ProgramService Agreement with the Seller as of such date.“Patent Rights” shall mean all patents, patent applications, utility models, design registrations and certificates of invention and other governmentalgrants for the protection of inventions or industrial designs (including all related continuations, continuations-in-part, divisionals, reissues andreexaminations).“Permits” shall mean all licenses, permits, franchises or authorizations issued by any Governmental Entity to the Seller relating exclusively to theBusiness.“Permitted Lien” shall mean (i) mechanics’, carriers’, workers’, repairers’, materialmen’s, warehousemen’s and other Liens which have arisen in theordinary course of business; (ii) Liens for Taxes that are not yet due and payable or that are being contested in good faith; (iii) Liens which, in the aggregate,are not reasonably likely to impair, in any material respect, the continued use of the asset or property to which they relate, as used on the date hereof;(iv) Liens under Intellectual Property contracts; and (v) Liens discharged at or prior to the Closing.“Person” shall mean any natural person, firm, limited liability company, general or limited partnership, association, corporation, unincorporatedorganization, company, joint venture, trust, Governmental Entity or other entity.“Personal Information” means: (x) any information that (i) identifies an individual (by name, signature, address, telephone number or other uniqueidentifier), or (ii) that can be used to authenticate that individual (including passwords or PINs, biometric data, unique identification numbers, answers tosecurity questions, or other personal identifiers).“Post-Closing Consent Period” shall mean the 90-day period beginning on the Closing Date.“Post-Closing Payments” means, collectively, the Applicable Additional Purchase Price Payments and Applicable Excess Revenue Payments.“Post-Closing Period” shall mean each of the First Post-Closing Period, the Second Post-Closing Period and the Third Post-Closing Period. 57Confidential Treatment Requested “Privacy Law” shall mean any federal, state, local, municipal, foreign, international, multinational or other statute, law, order, decree, constitution,rule, regulation, ordinance, principle of common law, treaty or other law relating to the collection, processing, storage, use, disclosure, loss, access, transfer orsecurity and safeguarding of Personal Information, or relating to notices, consents, sharing, opt-out rights, disclosure to parties other than the party thatcollected the Personal Information. Notwithstanding the foregoing, the Health Insurance Portability and Accountability Act, and any other federal, state, local,municipal, foreign, international, multinational or other statute, law, order, decree, constitution, rule, regulation, ordinance, dealing with personal healthinformation or protected health information shall not be considered a Privacy Law.“Proprietary Information” shall mean, (i) with respect to the Seller, all Information provided by or on behalf of the Seller hereunder and all otherinformation that does not relate to the Business, the Acquired Assets or the Affiliate Assets and was provided by or on behalf of the Seller under theConfidentiality Agreement, including any analyses, compilations, forecasts, studies, summaries, notes, reports, memoranda, interpretations, data and otherdocuments and materials, and (ii) with respect to the Buyer, all Information provided by or on behalf of the Buyer hereunder and all other information in theSeller’s or its Affiliates’ possession to the extent relating to the Business, the Acquired Assets or the Affiliate Assets, including any analyses, compilations,forecasts, studies, summaries, notes, reports, memoranda, interpretations, data and other documents and materials.“Pruco” shall mean Pruco Securities, LLC.“Pruco Contract” shall mean the contract entered into by Pruco and the Buyer at closing in the form attached hereto as Exhibit G-1, as such contractmay be amended, restated or otherwise modified, succeeded or replaced from time to time.“Pruco Termination Notice” shall mean a notice given by Pruco to the applicable counterparty to the Pruco Contract declaring Pruco’s intention toterminate the Pruco Contract other than pursuant to Section V.B.(1).(y) or (z) thereof; provided that, any such notice shall be deemed not to be a PrucoTermination Notice if Pruco and the Buyer or the applicable Buyer Subsidiary or Successor to the Business have separately provided for a successor orreplacement contract to the Pruco Contract.“Purchase Price” shall mean, as of any date of determination, an amount equal to the sum of (a) the Final Adjusted Purchase Price plus (b) to the extentthe same have been paid hereunder, the aggregate amount of Applicable Additional Purchase Price Payments.“Regulation S-X” shall mean Regulation S-X under the Securities Exchange Act of 1934.“Representatives” shall mean, with respect to each Party, its Affiliates and its and their respective directors, officers, managers, employees, controllingPersons, investment bankers, advisors, accountants, consultants, counsel and other designated representatives and agents.“Required Financial Statements” shall mean, (a) in the event the Requested Relief is provided by the SEC prior to the Closing, the Abbreviated FinancialStatements and (b) in the event the Requested Relief is not provided by the SEC prior to the Closing, the Full Financial Statements. 58Confidential Treatment Requested “Resolved But Unsatisfied Claim” shall mean a claim by the Buyer for indemnification pursuant to ARTICLE VI, which (A) has been agreed to inwriting by the Buyer and the Seller or (B) has been determined by a court of competent jurisdiction in a final, non-appealable order, but, in each case, only tothe extent such claim remains unsatisfied by the Seller and its Affiliates within two (2) Business Days of such claim becoming so agreed or otherwise resolved.“Retained Marks” shall mean any Trademarks of the Seller or one of its Affiliates or any contraction, abbreviation or simulation thereof.“Revenue Run-Rate” shall mean, with respect to a Participating Sponsor as of any date of determination, on an annualized basis, (a) the Assets UnderAdministration with respect to such Participating Sponsor, multiplied by (b) the applicable Fee rates for such Participating Sponsor as of such date ofdetermination.“Scheduled Employees” shall mean (i) the Seller Business Employees as selected by the Buyer and identified as such by the Buyer on Schedule 9.1(b)on the date of this Agreement and (ii) the Canadian Employees.“Schedules” shall mean the schedules provided by the Seller to the Buyer on the date hereof and that are attached to this Agreement.“Second Post-Closing Period” shall mean the period beginning on the day after first anniversary of the Closing Date and ending on the secondanniversary of the Closing Date.“Seller Affiliate” shall mean The Prudential Insurance Company of America.“Seller Business Employees” shall mean all employees of the Seller and the Canadian Subsidiary exclusively or primarily engaged in the Business as ofthe date hereof and listed on Schedule 9.1(a).“Seller Certificate” shall mean a certificate to the effect that each of the conditions specified in clauses (a), (b), (c) and (h) of Section 5.2 is satisfied.“Seller Fundamental Representations” shall mean the representations and warranties of the Seller contained in Sections 2.1, 2.2 and 2.6(a) (with respectto all Acquired Assets, tangible and intangible) and the representations and warranties of Seller Affiliate contained in Sections 3 and 5 of the Affiliate Bill ofSale.“Seller Intellectual Property” shall mean the Seller Owned Intellectual Property and the Seller Licensed Intellectual Property.“Seller Licensed Intellectual Property” shall mean third party software components licensed to Seller from a third party for use in connection with theSoftware. 59Confidential Treatment Requested “Seller Owned Intellectual Property” shall mean the Software, the Assigned Domain Names, all Know How and documentation exclusively used in theBusiness, and all rights to sue for past infringement or misappropriation of the foregoing.“Severance Outside Date” shall mean the date that is the later of (a) the date that is one (1) year following the Closing Date and (b) the earlier of (x) thedate that is the last day on which services are provided by the Seller under the Transition Services Agreement and (y) unless otherwise agreed in writing by theparties, the date that is two (2) years following the Closing Date.“Software” shall mean the computer software product and service offering set forth under the heading “Software” in Schedule 1.1(a)(i), whether insource code, interpreted code or object code form, excluding, for the avoidance of doubt, the Seller Licensed Intellectual Property.“Specified Employees” shall mean the employees identified on Schedule 9.3(d)(iii), in each case, that become New Buyer Employees.“Specified Quarterly Financial Statements” shall mean, (a) in the event the Requested Relief is provided by the SEC prior to the Closing, unauditedstatements of assets acquired and liabilities assumed and statements of revenues and direct operating expenses, in each case, with respect to the Business asof, and for each of the quarters ended, June 30, 2012 and September 30, 2012 or (b) in the event the Requested Relief is not provided by the SEC prior to theClosing, (i) the Accepted Financial Statements (other than any statement of cash flows or stockholders’ equity, or comparable financial statements) as of, andfor each of the quarters ended, June 30, 2012 and September 30, 2012 or (ii) an unaudited unconsolidated balance sheet and statement of income for theBusiness as of, and for each of the quarters ended, June 30, 2012 and September 30, 2012, in the case of clauses (a) and (b), prepared in a manner consistentwith the applicable methodologies set forth in Section 2.4(b) of the Disclosure Schedule.“Sponsor Contract” shall mean each contract between the Seller, on the one hand, and a Participating Sponsor, on the other hand, listed in Schedule1.1(a)(v).“Subsidiary” shall mean any corporation, partnership, trust, limited liability company or other non-corporate business enterprise in which the Seller (oranother Subsidiary) holds stock or other ownership interests representing more than fifty percent (50%) of the voting power of all outstanding stock orownership interests of such entity.“Successor to the Business” shall mean any entity that has succeeded (whether by merger, consolidation, operation of law or otherwise) to the Buyer’srights to all or substantially all of the Acquired Assets and/or the Business as it may be conducted by the Buyer or any of the Buyer Subsidiaries following theClosing.“Taxes” shall mean all taxes, charges, fees, levies, tariffs, duties, liabilities, impositions or other assessments in the nature of a tax, including income,gross receipts, ad valorem, value-added, goods and services, excise, real property, personal property, sales, use, transfer, withholding, employment, socialsecurity, escheat, unclaimed property, retirement, unemployment, workers’ compensation, occupation, license, payroll and franchise taxes imposed 60Confidential Treatment Requested by the United States of America or any state, local or foreign government, or any agency thereof, or other political subdivision of the United States or any suchgovernment, and any interest, penalties, assessments or additions to tax resulting from, attributable to or incurred in connection with any tax or any contest ordispute thereof.“Taxing Authority” shall mean any applicable governmental authority responsible for the imposition of Taxes.“Tax Returns” shall mean all reports, returns, declarations, schedules, forms or statements required to be supplied to a Taxing Authority in connectionwith Taxes.“Terminating Sponsor” shall mean (a) each Participating Sponsor, if any, that terminates its Sponsor Contract and (b) each Participating Sponsor, ifany, that, at the Closing, has its Sponsor Contract terminated pursuant to Section 5.2(h).“Third Post-Closing Period” shall mean the period beginning on the day after the second anniversary of the Closing Date and ending on thirdanniversary of the Closing Date.“Trademarks” shall mean registered trademarks and service marks, corporate names and doing business designations and all registrations andapplications for registration of the foregoing, common law trademarks and service marks and trade dress.“Transitional New Buyer Employees” shall mean the employees identified on Schedule 9.3(d)(ii), in each case, that become New Buyer Employees.“WARN” shall mean the Worker Adjustment and Retraining Notification Act.11.2 Other Defined Terms. The following capitalized terms have the meanings assigned to them in the corresponding Sections set forth in the tablebelow: Defined Term Section“Action” Section 2.11“Affiliate Bill of Sale” Section 1.4(c)(iv) “Agreement” Introduction“Allocation” Section 1.3“Assignment and Assumption Agreement” Section 1.3(c)(v)“Base Revenue Run-Rate” Section 2.18“Buyer’s Closing Net Asset Schedule” Section 1.5(a)“Buyer” Introduction 61Confidential Treatment Requested “Buyer-Determined Closing Adjustment Amount” Section 1.5(a)“Buyer’s Request Letter” Section 4.5(a)“Closing Date Adjusted Purchase Price” Section 1.4(b)“Confidential Manager Contracts” Section 2.9(b)“Disputed Items” Section 1.5(b)“Divestiture” Section 1.2(e)“Final Payment Date” Section 1.2(d)“Gateway Sublease Agreement” Section 1.4(c)(vii) “Licensed Marks” Section 10.2(a)“Licensed Software” Section 10.3“MAPSA Subcontracting Agreement” Section 1.4(c)(viii)“Negative Consent Notice” Section 4.4(e)“Non-Affiliation Statement” Section 10.2(a)“Non-Assigned Contract” Section 1.6“Non-Severance Terminated Employees” Section 9.3(d)“On-Leave Business Employee” Section 9.1(b)“Open Source Materials” Section 2.8(g)“Order” Section 2.3(d)“Parties” Introduction“Post-Closing Payments” Section 1.2(d)“Pre-Closing Tax Period” Section 7.2(a)“Pruco/PI Termination Agreement” Section 1.4(c)(x)“Real Property Lease” Section 2.7(a)“Remaining Employees” Section 9.3(d) 62Confidential Treatment Requested “Requested Relief” Section 4.5(a)“Revenue Statement” Section 1.2(c)(i)“Section 1.2 Accounting Firm” Section 1.2(c)(iii)“Section 1.5 Accounting Firm” Section 1.5(b)“SEC” Section 4.5(a)“Seller’s Closing Net Asset Schedule” Section 1.4(b)“Seller” Introduction“Seller Bill of Sale” Section 1.3(c)(iii) “Seller-Determined Closing Adjustment Amount” Section 1.4(b)“Seller Severance Arrangement” Section 9.3(d)“Stipulated Closing Adjustment Amount” Section 1.5(b)“Straddle Period” Section 7.2(a)“Terminating Manager” Section 4.4(e)“Transfer Taxes” Section 7.1“Transition Services Agreement” Section 1.4(c)(vi)“Transition Trademark Period” Section 10.2(a)ARTICLE XIIMISCELLANEOUS12.1 Press Releases and Announcements. As agreed between the Parties, at the opening of business on the day following the execution and delivery of thisAgreement, the Buyer will issue a press release announcing the execution and delivery of this Agreement, substantially in the form set forth in Exhibit I hereto.No Party shall issue or make (and each Party shall cause its Affiliates not to issue or make) any other press release or public disclosure relating to the subjectmatter of this Agreement without the prior written approval of the other Party; provided, however, that either Party may make any press release or publicannouncement it believes in good faith is required by law, regulation or stock exchange rule (in which case the disclosing Party shall advise the other Party andthe other Party shall, if practicable, have the right to review such press release or public announcement prior to its publication) and the Seller (or its Affiliates)may disclose any information concerning the transactions contemplated by this Agreement or any of the Ancillary Agreements that it or its direct or indirectparent entity deems appropriate in light of its or their status as a public company, including in any filing with a Governmental Entity or to securities analystsor institutional investors or in press interviews. 63Confidential Treatment Requested 12.2 No Third Party Beneficiaries. This Agreement shall not confer any rights or remedies upon any Person or entity other than the Parties and theirrespective successors and permitted assigns and, to the extent specified herein, their respective Affiliates.12.3 Action to be Taken by Affiliates. The Parties shall cause their respective Affiliates to comply with all of the obligations specified in this Agreementto be performed by such Affiliates.12.4 Entire Agreement. This Agreement (including the Disclosure Schedule, Schedules and other documents referred to herein), the Ancillary Agreements(to the extent the same are executed and delivered) and, prior to the Closing, the Confidentiality Agreement constitute the entire agreement among the Buyer, onthe one hand, and the Seller, on the other hand with respect to the subject matter hereof. This Agreement and the Ancillary Agreements supersede any prioragreements or understandings among the Buyer, on the one hand, and the Seller, on the other hand, with respect to the subject matter hereof.12.5 Succession and Assignment. No Party may assign either this Agreement or any of its rights, interests, or obligations hereunder without the priorwritten approval of the other Party; provided, that the Buyer may, without the prior written consent of, but with notice to, the Seller, assign all or any portionof its rights, interests, or obligations under this Agreement to any Buyer Subsidiary. No assignment shall relieve the assigning party of any of its obligationshereunder, except as contemplated by Section 1.2(e). This Agreement shall be binding upon and inure to the benefit of the Parties and their respectivesuccessors and permitted assigns.12.6 Notices. All notices, requests, demands, claims and other communications hereunder shall be in writing. Any notice, request, demand, claim orother communication hereunder shall be deemed duly delivered four (4) Business Days after it is sent by registered or certified mail, return receipt requested,postage prepaid, or one (1) Business Day after it is sent for next Business Day delivery via a reputable nationwide overnight courier service, in each case to theintended recipient as set forth below: If to the Buyer: Envestnet, Inc.35 East Wacker Drive, Suite 2400Chicago, IL 60601Attn: Shelly O’BrienFax: (312) 827-2801 Copy to: Mayer Brown LLP71 South Wacker DriveChicago, IL 60606Attn: Edward S. Best, Esq.Fax: (312) 706-2801 64Confidential Treatment Requested If to the Seller: c/o PRUDENTIAL FINANCIAL, INC.751 Broad StreetNewark, NJ 07102-3777Attn: Anthony TorreFax: (973) 802-2290 Copies to: Wilmer Cutler Pickering Hale and Dorr LLP1875 Pennsylvania Avenue, NWWashington, DC 20006Attn: Stephanie C. EvansFax: (202) 663-6363Either Party may give any notice, request, demand, claim, or other communication hereunder using any other means (including personal delivery, expeditedcourier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim or other communication shall bedeemed to have been duly given unless and until it actually is received by the Party for whom it is intended. Any Party may change the address to whichnotices, requests, demands, claims and other communications hereunder are to be delivered by giving the other Party notice in the manner herein set forth.12.7 Amendments and Waivers. The Parties may mutually amend or waive any provision of this Agreement at any time. Other than the updates to theSchedules contemplated by the definition of “Acquired Assets”, “Assigned Manager Contracts” and “Assigned Sponsor Contracts”, no amendment or waiverof any provision of this Agreement shall be valid unless the same shall be in writing and signed by both Parties. No waiver by either Party of any default,misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default,misrepresentation or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any such prior or subsequent occurrence.12.8 Severability. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect thevalidity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situationor in any other jurisdiction. If the final judgment of a court of competent jurisdiction declares that any term or provision hereof is invalid or unenforceable, theParties agree that the body making the determination of invalidity or unenforceability shall have the power to reduce the scope, duration or area of the term orprovision, to delete specific words or phrases, or to replace any invalid or unenforceable term or provision with a term or provision that is valid andenforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be enforceable as somodified.12.9 Expenses. Except as otherwise specifically provided to the contrary in this Agreement, each of the Parties shall bear its own costs and expenses(including legal fees and expenses) incurred in connection with this Agreement, the negotiation hereof and the transactions contemplated hereby.Notwithstanding the foregoing, the Buyer shall be responsible for, and shall promptly reimburse the Seller upon presentation of an invoice for, the reasonableexpenses of the Seller’s independent auditor incurred by the Seller in connection with the preparation, delivery, audit and review of the Required FinancialStatements and the Specified Quarterly Financial Statements and assistance in pursuing the Requested Relief. 65Confidential Treatment Requested 12.10 Specific Performance. Each Party acknowledges and agrees that the other Party would be damaged irreparably in the event that any of theprovisions of this Agreement are not performed in accordance with their specific terms or otherwise are breached. Accordingly, each Party agrees that the otherParty may be entitled to an injunction or injunctions, specific performance or other equitable relief to prevent breaches or threatened breaches of the provisionsof this Agreement and to enforce specifically this Agreement and the terms and provisions hereof in any action instituted in the courts described inSection 12.12, without proof of damages or otherwise, this being in addition to any other remedy to which the Parties may be entitled to under this Agreement.The Parties agree not to assert that a remedy of specific enforcement is unenforceable, invalid, contrary to law or inequitable for any reason, and not to assertthat a remedy of monetary damages would provide an adequate remedy or that the Parties otherwise have an adequate remedy at law. The Parties acknowledgeand agree that either Party seeking an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions ofthis Agreement in accordance with this Section 12.10 shall not be required to provide any bond or other security in connection with any such order orinjunction.12.11 Governing Law. This Agreement and any disputes hereunder shall be governed by and construed in accordance with the internal laws of the Stateof New York without giving effect to any choice or conflict of law provision or rule (whether of the State of New York or any other jurisdiction) that wouldcause the application of laws of any jurisdiction other than those of the State of New York.12.12 Submission to Jurisdiction. Other than as provided for in Sections 1.2(c)(iii) and 1.5(b), each Party (a) submits to the exclusive jurisdiction ofthe United States District Court for the Southern District of New York (or only if such court will not accept jurisdiction, the Supreme Court of the State ofNew York or a court of competent civil jurisdiction, in either case, sitting in New York County, New York) in any action or proceeding arising out of orrelating to this Agreement, (b) agrees that all claims in respect of such action or proceeding may be heard and determined only in any such court, (c) waivesany claim of inconvenient forum or other challenge to venue in such court and (d) agrees not to bring any action or proceeding arising out of or relating to thisAgreement or the transactions contemplated hereby in any other court; provided that a final judgment in any such action or proceeding shall be conclusive andmay be enforced in other jurisdictions by suit on the judgment or in any other manner provided by applicable law. Each Party agrees to accept service of anysummons, complaint or other initial pleading made in the manner provided for the giving of notices in Section 12.6. Nothing in this Section 12.12, however,shall affect the right of any Party to serve such summons, complaint or initial pleading in any other manner permitted by law.12.13 Bulk Transfer Laws. The Buyer and the Seller hereby waive compliance with the provisions of any and all applicable bulk transfer laws thatmay be applicable to the transactions contemplated by this Agreement; provided, that any liability for any claim against the Buyer based upon any such lawshall constitute an Excluded Liability. 66Confidential Treatment Requested 12.14 Construction.(a) The language used in this Agreement shall be deemed to be the language chosen by the Parties to express their mutual intent, and no rule ofstrict construction shall be applied against any Party.(b) Any reference to any federal, state, local, or foreign statute or law shall be deemed also to refer to all rules and regulations promulgatedthereunder, unless the context requires otherwise.(c) Any agreement, instrument or statute defined or referred to herein or in any agreement or instrument that is referred to herein means suchagreement, instrument or statue as from time to time amended, modified or supplemented, including (in the case of agreements or instruments) by waiver orconsent and (in the case of statutes) by succession or comparable successor statutes and references to all attachments thereto and instruments incorporatedtherein.(d) The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning orinterpretation of this Agreement.(e) Any reference herein to an ARTICLE, Section, subsection, clause, Exhibit or Schedule shall be deemed to refer to an ARTICLE, Section,subsection or clause of or Exhibit or Schedule to this Agreement, unless the context clearly indicates otherwise.(f) All references to “$”, “Dollars” or “US$” refer to currency of the United States of America.(g) Whenever the words “include”, “includes” or “including” are used in this Agreement, they shall be deemed to be followed by the words“without limitation”.(h) The words “date hereof” when used in this Agreement shall refer to the date of this Agreement.(i) The terms “or”, “any” and “either” are not exclusive.(j) The word “extent” in the phrase “to the extent” shall mean the degree to which a subject or other thing extends, and such phrase shall not meansimply “if”.(k) The word “will” shall be construed to have the same meaning and effect as the word “shall”.(l) All terms defined in this Agreement shall have the defined meanings when used in any document made or delivered pursuant hereto unlessotherwise defined therein.(m) The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine aswell as to the feminine and neuter genders of such term.(n) References to a Person are also to its permitted successors and assigns. 67Confidential Treatment Requested 12.15 Waiver of Jury Trial. To the extent permitted by applicable law, each Party hereby irrevocably waives all rights to trial by jury in any action,proceeding or counterclaim (whether based on contract, tort or otherwise) arising out of or relating to this Agreement or the transactions contemplated hereby orthe actions of any Party in the negotiation, administration, performance and enforcement of this Agreement. Each Party (a) certifies that no Representative,agent or attorney of the other Party has represented, expressly or otherwise, that such Party would not, in the event of any action, proceeding or counterclaim,seek to enforce the foregoing waiver and (b) acknowledges that it and the other Party have been induced to enter into this Agreement, by among other things, themutual waiver and certifications in this Section 12.15.12.16 Incorporation of Exhibits and Schedules. The Exhibits and Schedules identified in this Agreement are incorporated herein by reference and madea part hereof.12.17 Negotiation of Agreement. Each of the Buyer and the Seller acknowledges that it has been represented by independent counsel of its choicethroughout all negotiations that have preceded the execution of this Agreement and that it has executed the same with consent and upon the advice of saidindependent counsel. Each Party and its counsel cooperated in the drafting and preparation of this Agreement and the documents referred to herein, and anyand all drafts relating thereto shall be deemed the work product of the Parties and may not be construed against any Party by reason of its preparation.Accordingly, any rule of law or any legal decision that would require interpretation of any ambiguities in this Agreement against the Party that drafted it is ofno application and is hereby expressly waived. The provisions of this Agreement shall be interpreted in a reasonable manner to effect the intentions of theParties and this Agreement.12.18 Counterparts and Facsimile Signature. This Agreement may be executed in one or more counterparts, each of which shall be deemed an originalbut all of which together shall constitute one and the same instrument. This Agreement may be executed by facsimile signature.[Remainder of page intentionally left blank. Signature pages follow.] 68Confidential Treatment Requested IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date first above written. PRUDENTIAL INVESTMENTS LLCBy: /s/ Stuart S. ParkerName: Stuart S. ParkerTitle: President, Chief Executive Officerand Chief Operating OfficerENVESTNET, INC.By: /s/ Judson BergmanName: Judson BergmanTitle: Chairman and Chief Executive Officer[Signature page to Purchase and Sale Agreement] 69Exhibit 21.1Envestnet, Inc.Subsidiaries of the Registrant Name Jurisdiction of IncorporationSIGMA Asset Management, LLC DelawareOberon Financial Technology, Inc. DelawareNetAssetManagement, Inc. DelawareEnvestnet Asset Management, Inc. DelawareEnvestnet Portfolio Solutions, Inc. DelawareEnvestnet Securities, Inc. DelawareERS, Inc. DelawarePMC International, Inc. ColoradoPremier Advisors Fund Offshore, Ltd. Cayman IslandsPremier Advisors Fund, L.L.C. DelawareEnvestnet Asset Management (India) Pvt. Ltd. IndiaPortfolio Management Consultants, Inc. ColoradoPortfolio Brokerage Services, Inc. ColoradoPrima Capital Holding, Inc. ColoradoTamarac, Inc. WashingtonExhibit 23.1Consent of Independent Registered Public Accounting FirmThe Board of DirectorsEnvestnet, Inc.:We consent to the incorporation by reference in the registration statements (Nos. 333-169050 and 333-181071) on Form S-8 of Envestnet, Inc. (the Company)of our reports dated June 14, 2013, with respect to the consolidated balance sheets of Envestnet, Inc. as of December 31, 2012 and 2011, and the relatedconsolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2012, and theeffectiveness of internal control over financial reporting as of December 31, 2012, which reports appear in the December 31, 2012 annual report on Form 10-Kof Envestnet, Inc.Our report dated June 14, 2013, on the effectiveness of internal control over financial reporting as of December 31, 2012, expresses our opinion that Envestnet,Inc. did not maintain effective internal control over financial reporting as of December 31, 2012 because of the effect of a material weakness on the achievementof the objectives of the control criteria and contains an explanatory paragraph that states the Company did not have adequate design or operation of controlsthat provide reasonable assurance that the accounting for income taxes, including the related financial statement disclosures, were in accordance with GAAP.Our report dated June 14, 2013, on the effectiveness of internal control over financial reporting as of December 31, 2012, also contains an explanatoryparagraph that states that management excluded Tamarac, Inc. and Prima Capital Holding, Inc. from its assessment of the effectiveness of internal control overfinancial reporting as of December 31, 2012, because those entities were acquired by the Company in purchase business combinations in the second quarter of2012./s/ KPMG LLPChicago, IllinoisJune 14, 2013Exhibit 31.1CHIEF EXECUTIVE OFFICER CERTIFICATIONI, Judson Bergman, certify that: 1.I have reviewed this Annual Report on Form 10-K for the period ended December 31, 2012, of Envestnet, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have: a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared; b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financialreporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting. Date: June 14, 2013 /S/ JUDSON BERGMAN Judson Bergman Chairman and Chief Executive Officer(Principal Executive Officer)Exhibit 31.2CHIEF FINANCIAL OFFICER CERTIFICATIONI, Peter H. D’Arrigo, certify that: 1.I have reviewed this Annual Report on Form 10-K for the period ended December 31, 2012, of Envestnet, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have: a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this report is being prepared; b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s mostrecent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financialreporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internalcontrol over financial reporting. Date: June 14, 2013 /S/ PETER H. D’ARRIGO Peter H. D’Arrigo Chief Financial Officer(Principal Financial Officer)Exhibit 32.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Envestnet, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2012 as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), I, Judson Bergman, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to§906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief:(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Judson Bergman By: Judson BergmanChairman and Chief Executive Officer(Principal Executive Officer) Dated: June 14, 2013A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting thesignature that appears in typed form within the electronic version of this written statement has been provided to the Company and will be retained by theCompany and furnished to the Securities and Exchange Commission or its staff upon request.Exhibit 32.2CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report of Envestnet, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2012 as filed with theSecurities and Exchange Commission on the date hereof (the “Report”), I, Peter H. D’Arrigo, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to§906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief:(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Peter H. D’Arrigo By: Peter H. D’ArrigoChief Financial Officer(Principal Financial Officer) Dated: June 14, 2013A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting thesignature that appears in typed form within the electronic version of this written statement has been provided to the Company and will be retained by theCompany and furnished to the Securities and Exchange Commission or its staff upon request.

Continue reading text version or see original annual report in PDF format above