e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
|
|
þ |
|
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the Quarterly Period Ended June 30, 2006
OR
|
|
|
o |
|
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
for the transition period from to
Commission file number: 0-49992
TD AMERITRADE HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
|
|
|
Delaware
|
|
82-0543156 |
(State or other jurisdiction of
|
|
(I.R.S. Employer |
incorporation or organization)
|
|
Identification Number) |
4211 South 102nd Street, Omaha, Nebraska, 68127
(Address of principal executive offices) (Zip Code)
(402) 331-7856
(Registrants telephone number, including area code)
(Registrants former name)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months, and
(2) has been subject to such filing requirements for the past ninety days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ
As of July 28, 2006, there were 610,735,013 outstanding shares of the registrants common stock.
TD AMERITRADE HOLDING CORPORATION
INDEX
2
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
TD AMERITRADE Holding Corporation
We have reviewed the condensed consolidated balance sheet of TD AMERITRADE Holding Corporation (the
Company, formerly known as Ameritrade Holding Corporation) as of June 30, 2006, and the related
condensed consolidated statements of income for the three-month and nine-month periods then ended
and the condensed consolidated statements of cash flows for the nine-month period then ended.
These financial statements are the responsibility of the Companys management. We did not make a
similar review of these financial statements for the corresponding periods of the prior year
(2005).
We conducted our review in accordance with the standards of the Public Company Accounting Oversight
Board (United States). A review of interim financial information consists principally of applying
analytical procedures and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance with the standards
of the Public Company Accounting Oversight Board, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that should be made to the
condensed consolidated financial statements referred to above for them to be in conformity with
U.S. generally accepted accounting principles.
/S/ ERNST & YOUNG LLP
Chicago, Illinois
August 7, 2006
3
TD AMERITRADE HOLDING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
September 30, |
|
|
|
2006 |
|
|
2005 |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
395,306 |
|
|
$ |
171,064 |
|
Short-term investments |
|
|
24,775 |
|
|
|
229,819 |
|
Cash and investments segregated in compliance with federal regulations |
|
|
7,083,572 |
|
|
|
7,595,359 |
|
Receivable from brokers, dealers and clearing organizations |
|
|
3,994,844 |
|
|
|
3,420,226 |
|
Receivable from clients and correspondents net of allowance
for doubtful accounts |
|
|
7,799,378 |
|
|
|
3,784,688 |
|
Receivable from affiliate |
|
|
11,869 |
|
|
|
|
|
Other receivables |
|
|
128,324 |
|
|
|
70,036 |
|
Property and equipment net of accumulated depreciation and
amortization |
|
|
51,679 |
|
|
|
33,259 |
|
Goodwill |
|
|
1,687,483 |
|
|
|
769,215 |
|
Acquired intangible assets net of accumulated amortization |
|
|
1,070,722 |
|
|
|
259,759 |
|
Investments in equity securities |
|
|
15,859 |
|
|
|
68,575 |
|
Other assets |
|
|
54,399 |
|
|
|
15,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
22,318,210 |
|
|
$ |
16,417,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Payable to brokers, dealers and clearing organizations |
|
$ |
6,873,341 |
|
|
$ |
4,449,686 |
|
Payable to clients and correspondents |
|
|
11,153,427 |
|
|
|
10,095,837 |
|
Accounts payable and accrued liabilities |
|
|
368,111 |
|
|
|
171,290 |
|
Payable to affiliate |
|
|
12,150 |
|
|
|
|
|
Securities sold, not yet purchased |
|
|
2,745 |
|
|
|
26,002 |
|
Prepaid variable forward derivative instrument |
|
|
|
|
|
|
20,423 |
|
Prepaid variable forward contract obligation |
|
|
|
|
|
|
39,518 |
|
Broker-dealer short-term borrowings |
|
|
110,000 |
|
|
|
|
|
Long-term debt |
|
|
1,889,625 |
|
|
|
|
|
Capitalized lease and other long-term obligations |
|
|
7,949 |
|
|
|
6,218 |
|
Deferred income taxes |
|
|
251,545 |
|
|
|
89,269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
20,668,893 |
|
|
|
14,898,243 |
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value; 100,000,000 shares authorized, none issued |
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 1,000,000,000 shares authorized; |
|
|
|
|
|
|
|
|
June 30, 2006 631,381,860 shares issued and 609,901,841 shares outstanding; |
|
|
|
|
|
|
|
|
Sept. 30, 2005 435,081,860 shares issued and 406,058,970 shares outstanding |
|
|
6,314 |
|
|
|
4,351 |
|
Additional paid-in capital |
|
|
1,597,007 |
|
|
|
1,184,004 |
|
Retained earnings |
|
|
312,652 |
|
|
|
652,742 |
|
Treasury stock, common, at cost June 30, 2006 21,480,019 shares; Sept. 30, 2005 29,022,890 shares |
|
|
(270,028 |
) |
|
|
(364,794 |
) |
Deferred compensation |
|
|
736 |
|
|
|
952 |
|
Accumulated other comprehensive income |
|
|
2,636 |
|
|
|
41,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
1,649,317 |
|
|
|
1,518,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
22,318,210 |
|
|
$ |
16,417,110 |
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
4
TD AMERITRADE HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
June 30, |
|
|
June 24, |
|
|
June 30, |
|
|
June 24, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions and transaction fees |
|
$ |
213,173 |
|
|
$ |
113,077 |
|
|
$ |
564,366 |
|
|
$ |
394,596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-based revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest revenue |
|
|
297,949 |
|
|
|
137,396 |
|
|
|
729,351 |
|
|
|
366,797 |
|
Brokerage interest expense |
|
|
(98,580 |
) |
|
|
(38,678 |
) |
|
|
(228,982 |
) |
|
|
(93,526 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest revenue |
|
|
199,369 |
|
|
|
98,718 |
|
|
|
500,369 |
|
|
|
273,271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market deposit account fees |
|
|
69,043 |
|
|
|
|
|
|
|
114,350 |
|
|
|
|
|
Money market and other mutual fund fees |
|
|
49,492 |
|
|
|
6,347 |
|
|
|
89,656 |
|
|
|
17,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total asset-based revenues |
|
|
317,904 |
|
|
|
105,065 |
|
|
|
704,375 |
|
|
|
291,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues |
|
|
9,265 |
|
|
|
16,212 |
|
|
|
46,088 |
|
|
|
43,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
|
540,342 |
|
|
|
234,354 |
|
|
|
1,314,829 |
|
|
|
728,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits |
|
|
90,414 |
|
|
|
43,972 |
|
|
|
247,029 |
|
|
|
130,811 |
|
Fair value adjustments of compensation-related
derivative instruments |
|
|
2,234 |
|
|
|
|
|
|
|
1,248 |
|
|
|
|
|
Clearing and execution costs |
|
|
25,810 |
|
|
|
7,181 |
|
|
|
50,760 |
|
|
|
20,081 |
|
Communications |
|
|
20,604 |
|
|
|
8,307 |
|
|
|
46,522 |
|
|
|
27,203 |
|
Occupancy and equipment costs |
|
|
21,261 |
|
|
|
12,424 |
|
|
|
54,456 |
|
|
|
33,018 |
|
Depreciation and amortization |
|
|
6,171 |
|
|
|
2,492 |
|
|
|
14,835 |
|
|
|
7,324 |
|
Amortization of acquired intangible assets |
|
|
13,673 |
|
|
|
3,405 |
|
|
|
28,463 |
|
|
|
10,219 |
|
Professional services |
|
|
25,357 |
|
|
|
7,947 |
|
|
|
65,441 |
|
|
|
26,722 |
|
Interest on borrowings |
|
|
33,915 |
|
|
|
497 |
|
|
|
60,358 |
|
|
|
1,503 |
|
Other |
|
|
12,480 |
|
|
|
4,067 |
|
|
|
27,881 |
|
|
|
12,926 |
|
Advertising |
|
|
55,344 |
|
|
|
21,672 |
|
|
|
129,385 |
|
|
|
72,307 |
|
Fair value adjustments of investment-related
derivative instruments |
|
|
|
|
|
|
(14,495 |
) |
|
|
11,703 |
|
|
|
(11,826 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
307,263 |
|
|
|
97,469 |
|
|
|
738,081 |
|
|
|
330,288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before other income and income taxes |
|
|
233,079 |
|
|
|
136,885 |
|
|
|
576,748 |
|
|
|
398,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on disposal of investment |
|
|
|
|
|
|
|
|
|
|
78,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income |
|
|
233,079 |
|
|
|
136,885 |
|
|
|
655,588 |
|
|
|
398,552 |
|
Provision for income taxes |
|
|
93,262 |
|
|
|
53,299 |
|
|
|
256,939 |
|
|
|
153,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
139,817 |
|
|
$ |
83,586 |
|
|
$ |
398,649 |
|
|
$ |
245,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share basic |
|
$ |
0.23 |
|
|
$ |
0.21 |
|
|
$ |
0.76 |
|
|
$ |
0.61 |
|
Earnings per share diluted |
|
$ |
0.23 |
|
|
$ |
0.20 |
|
|
$ |
0.75 |
|
|
$ |
0.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic |
|
|
608,476 |
|
|
|
403,017 |
|
|
|
522,410 |
|
|
|
403,911 |
|
Weighted average shares outstanding diluted |
|
|
619,707 |
|
|
|
411,074 |
|
|
|
533,997 |
|
|
|
412,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share |
|
$ |
0.00 |
|
|
$ |
0.00 |
|
|
$ |
6.00 |
|
|
$ |
0.00 |
|
See notes to condensed consolidated financial statements.
5
TD AMERITRADE HOLDING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
June 30, 2006 |
|
|
June 24, 2005 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
398,649 |
|
|
$ |
245,366 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
14,835 |
|
|
|
7,324 |
|
Amortization of acquired intangible assets |
|
|
28,463 |
|
|
|
10,219 |
|
Deferred income taxes |
|
|
32,423 |
|
|
|
3,998 |
|
Gain on disposal of investment |
|
|
(78,840 |
) |
|
|
|
|
Gain on disposal of property |
|
|
(631 |
) |
|
|
(220 |
) |
Fair value adjustments of derivative instruments |
|
|
12,951 |
|
|
|
(11,826 |
) |
Other non-cash expenses, net |
|
|
6,931 |
|
|
|
2,666 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Cash and investments segregated in compliance
with federal regulations |
|
|
587,787 |
|
|
|
44,678 |
|
Brokerage receivables |
|
|
(569,470 |
) |
|
|
(1,358,386 |
) |
Other assets |
|
|
13,716 |
|
|
|
221,727 |
|
Brokerage payables |
|
|
(197,307 |
) |
|
|
1,050,371 |
|
Accounts payable and accrued liabilities |
|
|
(98,403 |
) |
|
|
9,237 |
|
Securities sold, not yet purchased |
|
|
(25,674 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by operating activities |
|
|
125,430 |
|
|
|
225,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(9,759 |
) |
|
|
(6,217 |
) |
Cash received (paid) in business combinations, net |
|
|
580,056 |
|
|
|
(25,919 |
) |
Purchase of short-term investments |
|
|
(872,100 |
) |
|
|
(246,625 |
) |
Proceeds from sale of short-term investments |
|
|
1,077,144 |
|
|
|
244,575 |
|
Proceeds from sale of investments in equity securities |
|
|
7,492 |
|
|
|
807 |
|
Other |
|
|
25 |
|
|
|
(185 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by (used in) investing activities |
|
|
782,858 |
|
|
|
(33,564 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt |
|
|
1,900,000 |
|
|
|
|
|
Payment of debt issuance costs |
|
|
(20,992 |
) |
|
|
|
|
Principal payments on long-term debt and notes payable |
|
|
(310,375 |
) |
|
|
|
|
Broker-dealer short-term borrowings, net |
|
|
110,000 |
|
|
|
|
|
Principal payments on capital leases and other long-term obligations |
|
|
(2,877 |
) |
|
|
|
|
Proceeds from exercise of stock options |
|
|
40,558 |
|
|
|
15,281 |
|
Payment of cash dividend |
|
|
(2,442,234 |
) |
|
|
|
|
Purchase of treasury stock |
|
|
(467 |
) |
|
|
(77,229 |
) |
Excess tax benefits on stock-based compensation |
|
|
42,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows used in financing activities |
|
|
(684,353 |
) |
|
|
(61,948 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
307 |
|
|
|
282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
224,242 |
|
|
|
129,924 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
171,064 |
|
|
|
137,392 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
395,306 |
|
|
$ |
267,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
273,583 |
|
|
$ |
87,776 |
|
Income taxes paid |
|
$ |
255,762 |
|
|
$ |
131,318 |
|
Tax benefit on exercises and distributions of stock-based compensation |
|
$ |
42,107 |
|
|
$ |
11,885 |
|
Noncash investing and financing activities: |
|
|
|
|
|
|
|
|
Issuance of capital lease and other long-term obligations |
|
$ |
4,608 |
|
|
$ |
|
|
Settlement of prepaid variable forward contract liabilities in exchange for investment |
|
$ |
72,077 |
|
|
$ |
|
|
Issuance of common stock in acquisition |
|
$ |
2,123,181 |
|
|
$ |
|
|
See notes to condensed consolidated financial statements.
6
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Three-Month and Nine-Month Periods Ended June 30, 2006 and June 24, 2005
(Unaudited)
(Columnar amounts in thousands, except per share amounts)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of TD AMERITRADE Holding
Corporation (formerly Ameritrade Holding Corporation) and its wholly owned subsidiaries
(collectively, the Company). Intercompany balances and transactions have been eliminated.
These financial statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC) and, in the opinion of management, reflect all
adjustments, which are all of a normal recurring nature, necessary to present fairly the financial
position, results of operations and cash flows for the periods presented in conformity with U.S.
generally accepted accounting principles. These financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the Companys annual
report filed on Form 10-K for the fiscal year ended September 30, 2005.
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN No. 48). FIN No. 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprises financial statements in accordance with
FASB Statement No. 109, Accounting for Income Taxes. FIN No. 48 prescribes a recognition threshold
and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also
provides guidance on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN No. 48 establishes a two-step process for evaluation of
tax positions. The first step is recognition, under which the enterprise determines whether it is
more likely than not that a tax position will be sustained upon examination, including resolution
of any related appeals or litigation processes, based on the technical merits of the position. The
enterprise is required to presume the position will be examined by the appropriate taxing authority
that has full knowledge of all relevant information. The second step is measurement, under which a
tax position that meets the more-likely-than-not recognition threshold is measured to determine the
amount of benefit to recognize in the financial statements. The tax position is measured at the
largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate
settlement. FIN No. 48 is effective for fiscal years beginning after December 15, 2006.
Therefore, FIN No. 48 will be effective for the Companys fiscal year beginning September 29, 2007.
The cumulative effect of adopting FIN No. 48 is required to be reported as an adjustment to the
opening balance of retained earnings (or other appropriate components of equity) for that fiscal
year, presented separately. The Company cannot presently estimate the impact of adopting FIN No.
48.
2. BUSINESS COMBINATION
On January 24, 2006, the Company completed the acquisition of TD Waterhouse Group, Inc. (TD
Waterhouse), a Delaware corporation, pursuant to an Agreement of Sale and Purchase, dated June 22,
2005, as amended (the Purchase Agreement), with the Toronto-Dominion Bank (TD). The Company
purchased from TD (the Share Purchase) all of the capital stock of TD Waterhouse in exchange for
196,300,000 shares of Company common stock and $20,000 in cash. The shares of common stock issued
to TD in the Share Purchase represented approximately 32.5 percent of the outstanding shares of the
Company after giving effect to the transaction. Upon the completion of the transaction, the
Company changed its name to TD AMERITRADE Holding Corporation and the authorized shares of common
stock of the Company were increased from 650 million to one billion. The Companys condensed
consolidated financial statements include the results of operations for TD Waterhouse
beginning January 25, 2006. In addition, on January 24, 2006, the Company completed the sale of
Ameritrade Canada, Inc. to TD for $60 million in cash. The Company has agreed not to compete or
own any portion of a business that competes with TD in Canada (including in the retail securities
brokerage business) after the consummation of the Share Purchase. The purchase price for the
acquisition of TD Waterhouse and the sale price for the sale of Ameritrade Canada were subject to
cash adjustments based on the closing date balance sheets of the Company, TD Waterhouse and
Ameritrade Canada. On May 5, 2006, the Company received approximately $45.9 million from TD for
the settlement of cash adjustments related to the purchase of TD Waterhouse and the sale of
Ameritrade Canada.
Pursuant to the Purchase Agreement, prior to the consummation of the Share Purchase, TD Waterhouse
conducted a reorganization in which it transferred its Canadian retail securities brokerage
business and TD Bank USA, N.A. (formerly TD Waterhouse Bank, N.A.) to TD such that, at the time of
consummation of the Share Purchase, TD Waterhouse retained only its United States retail securities
brokerage business. TD Waterhouse also distributed to TD excess capital of TD Waterhouse
7
above certain thresholds prior to the consummation of the Share Purchase. As contemplated in the
Purchase Agreement, on January 24, 2006, the Company commenced payment of a special cash dividend
of $6.00 per share in respect of the shares of Company common stock outstanding prior to the
consummation of the Share Purchase. The total amount of the dividend was approximately $2.4
billion.
In connection with the Purchase Agreement, TD was given rights to have its shares of common stock
of the Company registered for resale and TD licensed the Company to use the TD name in connection
with the operation of the Companys business. The parties also entered into agreements regarding
bank sweep accounts and mutual funds. See Note 13 for discussion of related party transactions.
In connection with the Purchase Agreement, the Company, TD and J. Joe Ricketts, the Companys
Chairman and Founder, and certain of his affiliates also entered into a Stockholders Agreement, as
amended (the Stockholders Agreement). The Stockholders Agreement sets forth certain governance
arrangements and contains various provisions relating to stock ownership, voting, election of
directors and other matters. The Companys certificate of incorporation and bylaws were amended
and restated as of January 24, 2006 to give effect to and facilitate the provisions contained in
the Stockholders Agreement.
The Companys board of directors considered various factors in approving the acquisition of TD
Waterhouse and the related agreements, including significant synergy opportunities identified by
the Companys management, the likelihood that the acquisition would enhance the Companys strategic
goal of increasing the scale of the Companys business and expanding its operations into the
long-term investor and registered investment advisor markets, the financial terms of the
transaction and the financial analysis and fairness opinion of the transaction performed by the
Companys investment banking firm.
The preliminary purchase price for TD Waterhouse was comprised of the following:
|
|
|
|
|
Common stock issued |
|
$ |
2,123,181 |
|
Cash acquired, net of cash paid |
|
|
(580,056 |
) |
Closing date capital adjustments |
|
|
(45,915 |
) |
Acquisition costs |
|
|
20,706 |
|
Exit and involuntary termination costs |
|
|
124,647 |
|
|
|
|
|
Total preliminary purchase price |
|
$ |
1,642,563 |
|
|
|
|
|
The value of the 196,300,000 shares of common stock issued is calculated using the $16.816 average
closing market price of Company common stock for the period beginning two business days before and
ending two business days after June 22, 2005, the date the proposed acquisition of TD Waterhouse
was agreed to and announced, less the $6.00 per share special cash dividend. The special dividend
is deducted from the average market price because the shares issued to TD did not include the right
to receive the special dividend.
The purchase price is preliminary, primarily due to estimates included for exit and involuntary
termination costs. Differences between these estimates and actual results may result in
adjustments to the purchase price. The Company began formulating plans to consolidate certain
facilities and functions prior to the closing of the acquisition of TD Waterhouse. Although the
Company believes its plans are reasonable, minor changes may still be made to the scope or timing
of such plans, which may result in changes to estimated exit and involuntary termination costs.
Exit and involuntary termination costs consist primarily of severance and other involuntary
termination costs for approximately 900 TD Waterhouse employees, costs associated with unfavorable
leases and other contract termination costs. See Note 5 for a summary of acquisition exit cost
activity.
The following table summarizes the major classes of TD Waterhouse acquired intangible assets and
the respective amortization periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization |
|
|
|
Amount |
|
|
Period (Years) |
|
Client relationships |
|
$ |
693,752 |
|
|
|
17 |
|
Trademark license TD |
|
|
145,674 |
|
|
None |
|
|
|
|
|
|
|
|
|
|
$ |
839,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts allocated to acquired intangible assets were based on preliminary results of an
independent valuation. The weighted average amortization period of the acquired intangible assets
subject to amortization is 17 years. The initial term of the trademark license agreement with TD
is ten years and the agreement is automatically renewable for additional ten-year
8
periods. The acquired intangible asset associated with the trademark license agreement is not
subject to amortization because the term of the agreement is considered to be indefinite.
The following unaudited pro forma financial information sets forth the results of operations of the
Company as if the acquisition of TD Waterhouse had occurred on September 24, 2004, the last day of
the Companys fiscal year 2004. The pro forma results for periods prior to the acquisition date do
not reflect any potential operating cost savings that may result from the consolidation of
operations of the Company with the acquired company and are not necessarily indicative of the
results of future operations.
Pro forma financial information (unaudited) for the periods ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
June 30, 2006 |
|
June 24, 2005 |
|
June 30, 2006 |
|
June 24, 2005 |
Net revenues |
|
$ |
540,342 |
|
|
$ |
453,509 |
|
|
$ |
1,613,043 |
|
|
$ |
1,343,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
139,817 |
|
|
$ |
98,475 |
|
|
$ |
427,552 |
|
|
$ |
242,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.23 |
|
|
$ |
0.16 |
|
|
$ |
0.71 |
|
|
$ |
0.40 |
|
Diluted earnings per share |
|
$ |
0.23 |
|
|
$ |
0.16 |
|
|
$ |
0.69 |
|
|
$ |
0.40 |
|
3. GOODWILL AND ACQUIRED INTANGIBLE ASSETS
The Company has recorded goodwill for purchase business combinations to the extent the purchase
price of each acquisition exceeded the fair value of the net identifiable tangible and intangible
assets of the acquired company. The following table summarizes changes in the carrying amount of
goodwill for the nine months ended June 30, 2006:
|
|
|
|
|
Balance as of September 30, 2005 |
|
$ |
769,215 |
|
|
|
|
|
|
Goodwill recorded in acquisition of TD Waterhouse (See Note 2) |
|
|
918,341 |
|
Tax benefit of option exercises (1) |
|
|
(73 |
) |
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2006 |
|
$ |
1,687,483 |
|
|
|
|
|
|
|
|
(1) |
|
Represents the tax benefit of exercises of replacement stock options that were issued in
connection with the Datek Online Holdings Corp. (Datek) merger. The tax benefit of an
option exercise is recorded as a reduction of goodwill to the extent the Company recorded fair
value of the replacement option in the purchase accounting. To the extent any gain realized
on an option exercise exceeds the fair value of the replacement option recorded in the
purchase accounting, the tax benefit on the excess is recorded as additional paid-in capital. |
The Companys acquired intangible assets consist of the following as of June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Client relationships |
|
$ |
991,522 |
|
|
$ |
(66,525 |
) |
|
$ |
924,997 |
|
Non-competition agreement |
|
|
300 |
|
|
|
(249 |
) |
|
|
51 |
|
Trademark license TD |
|
|
145,674 |
|
|
|
|
|
|
|
145,674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,137,496 |
|
|
$ |
(66,774 |
) |
|
$ |
1,070,722 |
|
|
|
|
|
|
|
|
|
|
|
The Company estimates amortization expense on acquired intangible assets outstanding as of June 30,
2006 will be $13.7 million for the remainder of fiscal 2006 and approximately $54.6 million for
each of the five succeeding fiscal years.
4. INVESTMENTS IN EQUITY SECURITIES
As of September 30, 2005, the Company owned approximately 7.9 million common shares of Knight
Capital Group, Inc. (Knight), representing approximately eight percent of Knights outstanding
common shares. In January 2006, the Company liquidated its position in Knight and the prepaid
variable forward contracts described below, resulting in a one-time pre-tax net gain of
approximately $78.8 million. The Company accounted for its investment in Knight as a marketable
equity security available-for-sale; therefore, the unrealized gain was reflected in other
comprehensive income, net of taxes, in the Condensed Consolidated Balance Sheets. Upon the disposal of the Knight investment, the unrealized gain was
reclassified from other comprehensive income into earnings, net of taxes. See Note 12 for a
complete summary of comprehensive income.
9
During fiscal 2003, the Company executed a series of prepaid variable forward contracts on the
Knight shares. Before the recent liquidation, these forward contracts were scheduled to mature on
various dates in fiscal years 2006 and 2007. The forward contracts each contained a zero-cost
embedded collar on the value of the Knight shares, with a weighted average floor price of $5.13 per
share and a weighted average cap price of $6.17 per share. The total fair value of the embedded
collars was included under the caption Prepaid variable forward derivative instrument in the
Condensed Consolidated Balance Sheets. Changes in the fair value of the embedded collars were
included under the caption Fair value adjustments of investment-related derivative instruments in
the Condensed Consolidated Statements of Income.
5. ACQUISITION EXIT LIABILITIES
The following tables summarize activity in the Companys acquisition exit liabilities for the
three-month and nine-month periods ended June 30, 2006, which are included in accounts payable and
accrued liabilities in the Condensed Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
Paid and |
|
|
|
|
|
|
Balance at |
|
|
Exit Costs |
|
|
Charged Against |
|
|
Balance at |
|
|
|
Mar. 31, 2006 |
|
|
Recorded |
|
|
Liability |
|
|
June 30, 2006 |
|
Employee compensation and benefits |
|
$ |
59,308 |
|
|
$ |
(4,734 |
) |
|
$ |
(12,539 |
) |
|
$ |
42,035 |
|
Clearing and execution costs |
|
|
8,850 |
|
|
|
|
|
|
|
|
|
|
|
8,850 |
|
Communications |
|
|
3,048 |
|
|
|
|
|
|
|
|
|
|
|
3,048 |
|
Occupancy and equipment costs |
|
|
49,701 |
|
|
|
(2,146 |
) |
|
|
(19,280 |
) |
|
|
28,275 |
|
Professional services |
|
|
7,122 |
|
|
|
(3,800 |
) |
|
|
(400 |
) |
|
|
2,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total acquisition exit liabilities |
|
$ |
128,029 |
|
|
$ |
(10,680 |
) |
|
$ |
(32,219 |
) |
|
$ |
85,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
Paid and |
|
|
|
|
|
|
Balance at |
|
|
Exit Costs |
|
|
Charged Against |
|
|
Balance at |
|
|
|
Sept. 30, 2005 |
|
|
Recorded |
|
|
Liability |
|
|
June 30, 2006 |
|
Employee compensation and benefits |
|
$ |
121 |
|
|
$ |
61,424 |
|
|
$ |
(19,510 |
) |
|
$ |
42,035 |
|
Clearing and execution costs |
|
|
|
|
|
|
8,850 |
|
|
|
|
|
|
|
8,850 |
|
Communications |
|
|
|
|
|
|
3,048 |
|
|
|
|
|
|
|
3,048 |
|
Occupancy and equipment costs |
|
|
3,217 |
|
|
|
48,003 |
|
|
|
(22,945 |
) |
|
|
28,275 |
|
Professional services |
|
|
|
|
|
|
3,322 |
|
|
|
(400 |
) |
|
|
2,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total acquisition exit liabilities |
|
$ |
3,338 |
|
|
$ |
124,647 |
|
|
$ |
(42,855 |
) |
|
$ |
85,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The exit costs recorded during the nine month period ended June 30, 2006 relate to the acquisition
of TD Waterhouse described in Note 2. The net exit costs recorded for the three months ended June
30, 2006 were negative due to adjustments reducing previously recorded purchase accounting
estimates. Adjustments to purchase accounting estimates were reflected as adjustments to the cost
of acquiring TD Waterhouse and therefore adjusted the amount of goodwill recorded. Acquisition
employee compensation liabilities are expected to be paid over contractual periods ending in fiscal
2013. Communications and professional services contract termination costs are expected to be paid
over the course of the TD Waterhouse integration during fiscal 2006 and fiscal 2007. Remaining
acquisition occupancy and equipment exit liabilities are expected to be utilized over the
respective lease periods through fiscal 2015.
6. CREDIT FACILITIES
On December 13, 2004, the Company entered into an amendment to its revolving credit agreement. The
revolving credit agreement, as amended, permitted borrowings of up to $105 million through December
12, 2005, and was secured primarily by the Companys stock in its subsidiaries and personal
property. On December 9, 2005, the lenders under the Companys revolving credit agreement agreed to
extend the length of the agreement, on substantially the same terms. The revolving credit
agreement, as extended, terminated upon the initial borrowing under the new syndicated loan
facility on January 23, 2006, as described below.
The Company entered into a credit agreement, as amended, on January 23, 2006 for $2.2 billion in
senior credit facilities with a syndicate of lenders. The senior credit facilities include: (a) a
senior secured term loan facility in the aggregate principal amount of $250 million (the Term A
Facility), (b) a senior secured term loan facility in the aggregate principal amount of
10
$1.65
billion (the Term B Facility) and (c) a senior secured revolving credit facility in the aggregate
principal amount of $300 million (the Revolving Facility) (together, the Financings). The
maturity date of the Term A Facility is December 31, 2011. The maturity date of the Term B
Facility is December 31, 2012. The maturity date of the Revolving Facility is December 31, 2010.
The Financings are subject to certain mandatory prepayments, which include prepayments based on
leverage ratios and amounts of excess cash flow and from the net cash proceeds of asset sales and
debt issuances, subject to certain exceptions. Pursuant to the Financings, the Company may prepay
borrowings without penalty.
The Company used $1.6 billion of the proceeds from the Term A Facility and Term B Facility to fund
a portion of the $6 per share special cash dividend paid in connection with the acquisition of TD
Waterhouse and $300 million for working capital purposes. No initial borrowings were made on the
Revolving Facility, which will be used for general corporate purposes.
The applicable interest rate under the Revolving Facility and the Term A Facility is calculated as
a per annum rate equal to, at the Companys option, (a) LIBOR plus an interest rate margin (LIBOR
loans) or (b) (i) the greater of (x) the prime rate or (y) the federal funds effective rate plus
0.50 percent plus (ii) an interest rate margin (Base Rate loans). With respect to the Revolving
Facility and the Term A Facility the interest rate margin for LIBOR loans is 1.50 percent if the
consolidated leverage ratio (as defined in the Financings) of the Company is 1.75 to 1.00 or
higher, 1.25 percent if the consolidated leverage ratio of the Company is less than 1.75 to 1.00
but greater than or equal to 1.00 to 1.00, and 1.00 percent if the consolidated leverage ratio of
the Company is less than 1.00 to 1.00. The interest rate margin for Base Rate loans under the
Revolving Facility and the Term A Facility is 1.00 percent less than the interest rate margin for
LIBOR loans. The applicable interest rate under the Term B Facility is calculated as a per annum
rate equal to (a) LIBOR plus 1.50 percent or (b) (i) the greater of (x) the prime rate or (y) the
federal funds effective rate plus 0.50 percent plus (ii) 0.50 percent. On June 30, 2006, the
applicable interest rate on both the Term A Facility and the Term B Facility was 6.85 percent,
based on 30-day LIBOR. As of June 30, 2006, the Company had outstanding indebtedness of $244
million, $1.646 billion and $0 under the Term A Facility, Term B Facility and Revolving Facility,
respectively. The Company has not made any borrowings under the Revolving Facility. The Financings
also provide that the Company is obligated to pay from time to time letter of credit fees equal to
the applicable margin in respect of LIBOR advances on each outstanding letter of credit under the
Revolving Credit Facility. In addition, the Financings provide that the Company pays fees to the
issuing bank in respect of the Letters of Credit in an amount agreed to by the Company and the
issuing bank. A commitment fee at the rate of 0.375 percent per annum accrues on any unused
amount of the Revolving Facility.
The obligations under the Financings are guaranteed by certain of the Companys subsidiaries, other
than broker-dealer subsidiaries, with certain exceptions, and are secured by a lien on
substantially all of the assets of each guarantor, including a pledge of the ownership interests in
each first-tier broker-dealer subsidiary held by a guarantor and 65 percent of the ownership
interests in each first-tier foreign subsidiary held by a guarantor, with certain exceptions. On
January 24, 2006, concurrently with the closing of the TD Waterhouse Transaction, TD Waterhouse was
added as an additional guarantor to the Financings and TD Waterhouse granted a lien on
substantially all of its assets (including its ownership interest in each of its first-tier broker
dealer subsidiaries) as additional security for the Financings.
The Financings contain certain covenants that limit or restrict the incurrence of liens,
investments (including acquisitions), sales of assets, indebtedness and mergers and consolidations,
subject to certain exceptions. The Financings also restrict the payment of dividends on the
Companys outstanding capital stock and repurchases or redemptions of the Companys outstanding
capital stock, subject to certain exceptions. The Company is also required to maintain compliance
with a maximum consolidated leverage ratio covenant and a minimum consolidated interest coverage
ratio covenant, and the Companys broker-dealer subsidiaries are required to maintain compliance
with a minimum regulatory net capital covenant. The Company was in compliance with all covenants
under the Financings as of June 30, 2006.
Prior to the closing of the Companys acquisition of TD Waterhouse described in Note 2, TD
Waterhouse and an affiliate of TD executed a promissory note whereby TD Waterhouse borrowed $270
million from TD (the Bridge Loan). The purpose of the Bridge Loan was to monetize non-cash assets
of TD Waterhouse to enable TD Waterhouse to retain cash equal to $1.00 per share of the $6.00 per
share special cash dividend declared by the Company, as required by the Purchase Agreement. The
Company assumed the Bridge Loan obligation upon the closing of the acquisition of TD Waterhouse.
The Bridge Loan was scheduled to mature on July 24, 2006 and bore interest at the daily effective
federal funds rate until the completion of the closing date balance sheet adjustments as specified
in the Purchase Agreement, and after that time bore interest at the federal funds rate plus 150
basis points. The Company repaid $200 million of the Bridge Loan during March 2006 and the
remaining $70 million balance during June 2006.
Upon the closing of the Companys acquisition of TD Waterhouse, the Company assumed $30 million of
Subordinated Debt Series B Notes (the Subordinated Notes), which were payable to an affiliate of
TD. The Subordinated Notes were unsecured and were redeemable in November 2012. The Subordinated Notes bore interest at a fixed rate of 6.64
percent. During June 2006, the Company repaid the entire $30 million of Subordinated Notes.
11
The Company, through its wholly owned broker-dealer subsidiaries, had access to secured uncommitted
credit facilities with financial institutions of up to $740 million and $180 million as of June 30,
2006 and September 30, 2005, respectively. The broker-dealer subsidiaries also had access to
unsecured uncommitted credit facilities of up to $435 million and $310 million as of June 30, 2006
and September 30, 2005, respectively. The financial institutions may make loans under line of
credit arrangements or, in some cases, issue letters of credit under these facilities. The secured
credit facilities require the Company to pledge qualified client securities to secure outstanding
obligations under these facilities. Borrowings under the secured and unsecured credit facilities
bear interest at a variable rate based on the federal funds rate. Covenants under the Financings
limit the broker-dealer subsidiaries to an aggregate outstanding principal balance of $1.0 billion
in borrowings on uncommitted lines of credit. As of June 30, 2006, the Company had outstanding
borrowings of $110 million and $0 under unsecured and secured credit facilities, respectfully. On
June 30, 2006, the applicable interest rate on the unsecured credit facilities was 5.425 percent.
There were no borrowings outstanding or letters of credit issued under the secured or unsecured
credit facilities as of September 30, 2005. As of June 30, 2006 and September 30, 2005,
approximately $890 million and $490 million, respectively, was available to the Companys
broker-dealer subsidiaries pursuant to uncommitted credit facilities for either loans or, in some
cases, letters of credit.
7. NET CAPITAL
The Companys broker-dealer subsidiaries are subject to the SEC Uniform Net Capital Rule (Rule
15c3-1 under the Securities Exchange Act of 1934 (the Exchange Act)), which requires the
maintenance of minimum net capital, as defined. Net capital and the related net capital
requirement may fluctuate on a daily basis.
The Companys broker-dealer subsidiaries had aggregate net capital of $801.9 million and $321.7
million as of June 30, 2006 and September 30, 2005, respectively, which exceeded aggregate minimum
net capital requirements by $595.2 million and $234.2 million, respectively. Each broker-dealer
subsidiary individually had net capital exceeding its minimum net capital requirement as of June
30, 2006 and September 30, 2005.
8. STOCK OPTION AND INCENTIVE PLANS
The Company has four stock incentive plans under which Company stock-based awards may be granted.
The Ameritrade Holding Corporation 1996 Long-Term Incentive Plan (the Long-Term Incentive Plan)
and the 1996 Directors Incentive Plan (the Directors Plan) were established by the Company. The
Ameritrade Holding Corporation 1998 Stock Option Plan (the 1998 Plan) (formerly known as the
Datek Online Holdings Corp. 1998 Stock Option Plan) and the Ameritrade Holding Corporation 2001
Stock Incentive Plan (the 2001 Plan) (formerly known as the Datek Online Holdings Corp. 2001
Stock Incentive Plan) were established by Datek Online Holdings Corp. (Datek) and amended and
restated by the Company effective September 9, 2002 in connection with the Datek merger.
The Long-Term Incentive Plan authorizes the award of options to purchase common stock, common stock
appreciation rights, shares of common stock, restricted stock units, performance shares and
performance units. The Long-Term Incentive Plan has reserved 42,104,174 shares of the Companys
common stock for issuance to eligible employees. The Directors Plan authorizes the award of options
to purchase common stock, restricted stock units and shares of common stock. The Directors Plan has
reserved 2,531,393 shares of the Companys common stock for issuance to non-employee directors.
The 1998 Plan and 2001 Plan authorize the award of options to purchase common stock. The 1998 Plan
has reserved 15,502,818 shares of the Companys common stock for issuance to employees or
consultants of the Company; non-employee directors of the Company; or employees of a corporation or
other business enterprise that has been acquired by the Company, who hold options to purchase the
acquired companys stock, if the Company has agreed to assume those options. The 2001 Plan has
reserved 18,628,031 shares of the Companys common stock for issuance to directors or non-voting
observers to the Board of Directors, officers and employees of the Company.
Stock options, except for replacement options granted in connection with business combinations, are
granted by the Company with an exercise price not less than the fair market value of the Companys
common stock on the grant date. Stock options generally vest over a one-to four-year period and
expire 10 years after the grant date. Restricted Stock Units (RSUs) are awards that entitle the
holder to receive shares of Company common stock following a vesting period. RSUs granted to
employees generally vest after the completion of a three-year period. RSUs granted to non-employee
directors generally vest ratably over a three-year period. Performance Restricted Stock Units
(PRSUs) are a form of RSUs in which the number of shares ultimately received depends on the
performance of the Company against specified performance goals, generally over a three year period.
At the end of the performance period, the number of shares of common stock issued will be
determined by adjusting upward or downward from the target in a range between 0% and 120%. Shares of common
stock will be issued following the end of the performance period.
12
Effective October 1, 2005, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 123 (revised 2004), Share-Based Payment (No. 123R) using a modified version of the
prospective transition method. Under the transition method, compensation cost is recognized on or
after the required effective date for the portion of outstanding awards for which the requisite
service has not yet been rendered, based on the grant-date fair value of those awards calculated
under SFAS No. 123 for either recognition or pro forma disclosures. Stock-based compensation
expense for the three and nine months ended June 30, 2006 was $3.9 million and $8.1 million,
respectively. Stock-based compensation expense for the three and nine months ended June 30, 2005
was $0.5 million and $1.3 million, respectively. The cumulative effect of initially adopting SFAS
No. 123R was not material.
The fair value of stock options granted was estimated using a Black-Scholes valuation model with
the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
June 30, |
|
June 24, |
|
|
2006 |
|
2005 |
Risk-free interest rate |
|
|
4.4 |
% |
|
|
3.5 |
% |
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
Expected volatility |
|
|
58 |
% |
|
|
62 |
% |
Expected option life (years) |
|
|
5.0 |
|
|
|
5.0 |
|
The risk free interest rate assumptions are based on 5-year U.S. Treasury note yields. The
expected volatility is based on historical daily price changes of the Companys stock since April
2001. The expected option life is the average number of years that the Company estimates that
options will be outstanding, based primarily on historical employee option exercise behavior.
The following is a summary of option activity in the Companys stock incentive plans for the nine
months ended June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number of |
|
|
Exercise |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Options |
|
|
Price |
|
|
Term (Years) |
|
|
Value |
|
|
|
|
Outstanding at beginning of period |
|
|
21,483 |
|
|
$ |
6.38 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
10 |
|
|
$ |
22.17 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(7,505 |
) |
|
$ |
5.40 |
|
|
|
|
|
|
|
|
|
Canceled |
|
|
(424 |
) |
|
$ |
10.82 |
|
|
|
|
|
|
|
|
|
Special Dividend Adjustment |
|
|
6,016 |
|
|
$ |
4.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period |
|
|
19,580 |
|
|
$ |
4.72 |
|
|
|
5.6 |
|
|
$ |
197,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period |
|
|
17,467 |
|
|
$ |
4.45 |
|
|
|
5.4 |
|
|
$ |
180,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of changes in nonvested options in the Companys stock incentive plans
for the nine months ended June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
Number of |
|
|
Grant Date |
|
|
|
Options |
|
|
Fair Value |
|
Nonvested at beginning of period |
|
|
3,430 |
|
|
$ |
4.39 |
|
Granted |
|
|
10 |
|
|
$ |
11.97 |
|
Vested |
|
|
(1,613 |
) |
|
$ |
3.33 |
|
Forfeited |
|
|
(347 |
) |
|
$ |
3.50 |
|
Special Dividend Adjustment |
|
|
633 |
|
|
$ |
3.89 |
|
|
|
|
|
|
|
|
|
Nonvested at end of period |
|
|
2,113 |
|
|
$ |
4.16 |
|
|
|
|
|
|
|
|
|
As of June 30, 2006, the total compensation cost related to nonvested stock option awards was
approximately $5.7 million and is expected to be recognized over a weighted average period of 10
months.
Immediately prior to the January 25, 2006 ex-dividend date for the $6.00 per share special cash
dividend discussed in Note 2, in accordance with the terms of the stock plans, the Company adjusted
outstanding equity awards under the plans to preserve their pre-dividend economic value. These
adjustments are reflected in the option activity tables above under the Special Dividend
Adjustment caption. These adjustments did not result in any additional compensation expense
because the aggregate fair value
13
of each award before and after the modifications to the equity
awards was the same as calculated pursuant to SFAS No. 123R. The exercise price, if any, was
adjusted downward and the number of shares covered by equity awards was adjusted upward pursuant to
the following formulas, where Average Market Price means the volume-weighted average market price
of a share of Ameritrade common stock on January 24, 2006, the last trading day before the
ex-dividend date for the special dividend.
The exercise price, if any, of equity awards outstanding immediately before the ex-dividend date
was adjusted downward by the ratio of the Average Market Price less the $6.00 per share special
dividend, to the Average Market Price. The number of shares covered by each equity award was
adjusted upward by the ratio of the Average Market Price to the Average Market Price less the $6.00
per share special dividend. The Average Market Price was $26.1983, which resulted in an exercise
price adjustment ratio of 0.7710 to 1.00 and a shares covered adjustment ratio of 1.2971 to 1.00.
The adjustment resulted in an incremental 6.0 million stock options outstanding immediately prior
to the ex-dividend date and affected 1,293 employees and directors.
The Company measures the fair value of RSUs and PRSUs based upon the volume-weighted average market
price of the underlying common stock as of the date of grant. RSUs and PRSUs are amortized over
their applicable vesting period using the straight-line method, reduced by expected forfeitures.
The following is a summary of RSU activity in the Companys stock incentive plans for the nine
months ended June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
Number of |
|
|
Grant Date |
|
|
|
Units |
|
|
Fair Value |
|
Nonvested at beginning of period |
|
|
|
|
|
$ |
|
|
Granted |
|
|
715 |
|
|
$ |
20.86 |
|
Vested |
|
|
(1 |
) |
|
$ |
20.92 |
|
Forfeited |
|
|
(33 |
) |
|
$ |
20.92 |
|
|
|
|
|
|
|
|
|
Nonvested at end of period |
|
|
681 |
|
|
$ |
20.85 |
|
|
|
|
|
|
|
|
|
The following is a summary of PRSU activity in the Companys stock incentive plans for the nine
months ended June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
Number of |
|
|
Grant Date |
|
|
|
Units |
|
|
Fair Value |
|
Nonvested at beginning of period |
|
|
|
|
|
$ |
|
|
Granted |
|
|
1,297 |
|
|
$ |
20.92 |
|
Vested |
|
|
|
|
|
$ |
|
|
Forfeited |
|
|
(17 |
) |
|
$ |
20.92 |
|
|
|
|
|
|
|
|
|
Nonvested at end of period |
|
|
1,280 |
|
|
$ |
20.92 |
|
|
|
|
|
|
|
|
|
The PRSU units reflected in the table above reflect the target number of awards assuming the
performance goals are attained at 100 percent. Actual performance may result in 0 to 120 percent
of the target units ultimately being earned; therefore, the actual number of shares issued may
differ.
As of June 30, 2006, there was $10.7 million and $23.1 million of estimated unrecognized
compensation cost related to nonvested RSUs and PRSUs, respectively. As of June 30, 2006, these
costs are expected to be recognized over a weighted average period of 2.7 years.
Pro forma information regarding stock-based compensation expense, net income and earnings per share
is required for periods prior to the adoption of SFAS No. 123R. This information is presented as
if the Company had accounted for its stock-based awards under the fair value method for all
periods:
14
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
June 24, |
|
|
June 24, |
|
|
|
2005 |
|
|
2005 |
|
Net income, as reported |
|
$ |
83,586 |
|
|
$ |
245,366 |
|
Add: Stock-based compensation expense included in
reported net income, net of related income tax effects
|
|
|
323 |
|
|
|
788 |
|
Less: Total stock-based compensation determined under the
fair value based method, net of related income tax effects
|
|
|
(1,601 |
) |
|
|
(8,460 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
82,308 |
|
|
$ |
237,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.21 |
|
|
$ |
0.61 |
|
Pro forma |
|
$ |
0.20 |
|
|
$ |
0.59 |
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
0.20 |
|
|
$ |
0.60 |
|
Pro forma |
|
$ |
0.20 |
|
|
$ |
0.58 |
|
Although the Company does not have a formal policy for issuing shares upon stock option exercises,
such shares are generally issued from treasury stock. The Stockholders Agreement entered into in
connection with the acquisition of TD Waterhouse, as amended, requires the Company to repurchase
its common stock from time to time to offset dilution resulting from stock option exercises and
other stock awards subsequent to the acquisition of TD Waterhouse on January 24, 2006. The
Companys initial obligation to repurchase its common stock had been deferred until the earlier of
August 22, 2006 or TDs acquisition of 15 million shares of the Companys common stock, pursuant to
Amendment No. 1 to the Stockholders Agreement, dated February 22, 2006. TD completed its
acquisition of 15 million shares of the Companys common stock on May 2, 2006. The Company
currently is obligated to repurchase shares as promptly as reasonably practicable. Based on stock
option exercises from January 24, 2006 through July 28, 2006, the Company will be obligated to
repurchase approximately 7.3 million shares of common stock. The Company cannot estimate the
amount and timing of repurchases that may be required as a result of future stock option exercises.
9. EARNINGS PER SHARE
The following is a reconciliation of the numerator and denominator used in the computation of basic
and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
June 30, |
|
|
June 24, |
|
|
June 30, |
|
|
June 24, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Net income |
|
$ |
139,817 |
|
|
$ |
83,586 |
|
|
$ |
398,649 |
|
|
$ |
245,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding basic |
|
|
608,476 |
|
|
|
403,017 |
|
|
|
522,410 |
|
|
|
403,911 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options |
|
|
11,190 |
|
|
|
8,036 |
|
|
|
11,531 |
|
|
|
8,318 |
|
Restricted stock units |
|
|
10 |
|
|
|
|
|
|
|
28 |
|
|
|
|
|
Deferred compensation shares |
|
|
31 |
|
|
|
21 |
|
|
|
28 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding diluted |
|
|
619,707 |
|
|
|
411,074 |
|
|
|
533,997 |
|
|
|
412,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share basic |
|
$ |
0.23 |
|
|
$ |
0.21 |
|
|
$ |
0.76 |
|
|
$ |
0.61 |
|
Earnings per share diluted |
|
$ |
0.23 |
|
|
$ |
0.20 |
|
|
$ |
0.75 |
|
|
$ |
0.60 |
|
The weighted average shares outstanding for the three months and nine months ended June 30, 2006
include the weighted-average impact of the 196,300,000 shares issued on January 24, 2006 in
connection with the acquisition of TD Waterhouse. As of June 30, 2006, there were approximately
609.9 million shares of Company common stock outstanding.
15
10. COMMITMENTS AND CONTINGENCIES
Legal In May 2005, four putative class action lawsuits were filed in the Delaware Court of
Chancery against the Company and its directors. The plaintiffs, Judith Friedman, Margaret Carroll,
Mirfred Partners LLC and Irgun Torah, brought the actions on behalf of themselves and other
stockholders of the Company. The complaints alleged that the defendants breached their fiduciary
duties by refusing to consider a merger and acquisition proposal by E*Trade Financial Corporation.
The complaints requested injunctive relief and unspecified damages. On May 31, 2005, the Court
entered an order consolidating the actions under the caption In re Ameritrade Holding Corp.
Shareholders Litigation. Under the order, the plaintiffs were to file a consolidated amended
complaint and the defendants were not required to respond to the original complaints. The
plaintiffs did not file a consolidated amended complaint. On February 3, 2006, the plaintiffs
dismissed the lawsuits without prejudice.
The nature of the Companys business subjects it to lawsuits, arbitrations, claims and other legal
proceedings. Management cannot predict with certainty the outcome of pending legal proceedings. A
substantial adverse judgment or other resolution regarding the proceedings could have a material
adverse effect on the Companys financial condition, results of operations and cash flows.
However, in the opinion of management, after consultation with legal counsel, the Company has
adequate legal defenses with respect to the legal proceedings to which it is a defendant or
respondent and the outcome of these pending proceedings is not likely to have a material adverse
effect on the financial condition, results of operations or cash flows of the Company.
Net Capital Matter On November 12, 2004, the Companys broker-dealer subsidiary Ameritrade, Inc.
was notified by the staff of the NASD and the staff of the SEC Division of Market Regulation
(collectively the Staffs) that they believed that for regulatory purposes certain funds held in
banks on behalf of clients are liabilities and assets of Ameritrade, Inc. rather than liabilities
and assets only of the banks. The resulting assets have not been allowed for purposes of
Ameritrade, Inc.s regulatory net capital calculation. Accordingly, in the Staffs view
Ameritrade, Inc.s net capital was below its minimum amount required under Exchange Act Rule
15c3-1. Ameritrade, Inc. cured the asserted deficiency on November 15, 2004, the first business
day following the notification.
The asserted deficiency was based upon the Staffs concerns regarding a Federal Deposit Insurance
Corporation (FDIC) insured deposit sweep program available to Ameritrade, Inc.s clients wherein
funds were deposited, through an intermediary agent, into FDIC-insured deposit accounts at banks
(Program Banks). The Staffs view is that Ameritrade, Inc. did not, for regulatory purposes,
effectively move client free credit balances to bank accounts established in client names at the
Program Banks. Ameritrade, Inc. was also notified, on November 5, 2004, by the NASD that client
funds deposited in the FDIC-insured sweep program should be included in Ameritrade, Inc.s
computation of reserve requirements under Exchange Act Rule 15c3-3. A deposit into Ameritrade,
Inc.s reserve account was made to fund the asserted Rule 15c3-3 requirement effective November 5,
2004.
Ameritrade, Inc. informed the Staffs that it believes that the free credit balances were
effectively transferred to the Program Banks in accordance with well-established banking law, that
the accounts held at the Program Banks were the obligations of the Program Banks to each client and
not obligations of Ameritrade, Inc., that the FDIC insurance passed through to each client in
accordance with FDIC regulations and that it has been in compliance with Rules 15c3-1 and 15c3-3.
At the direction of the NASD, Ameritrade, Inc. filed a notice describing the asserted net capital
deficiency as well as Ameritrade, Inc.s position on the matter on November 12, 2004 in accordance
with Exchange Act Rule 17a-11. Ameritrade, Inc. cured the asserted deficiency the first business
day following the notification by causing the transfer of the cash in the FDIC-insured accounts to
a money market fund in accounts in the names of the clients. No client funds were lost and the
Company believes that the client balances in the FDIC-insured deposit accounts at the Program Banks
were, at all times, protected by FDIC insurance on a pass-through basis and no client balance was
at risk. Ameritrade, Inc. has ceased offering the FDIC-insured product pending resolution of this
matter. At the direction of the NASD, Ameritrade, Inc. filed, on December 8, 2004, amended Form
X-17A-5 Financial and Operational Combined Uniform Single (FOCUS) Reports for the months of May
through September 2004 reflecting the Staffs position.
This matter had no impact on the Companys results of operations or net cash flows for any period
presented.
On November 14, 2005, the NASD advised the Company that NASD Staff has made a preliminary
determination to recommend disciplinary action against the Company based on allegations that it
violated SEC net capital and customer protection rules and NASD conduct rules. The Company has
submitted a response setting forth the reasons the Company believes that the NASD should not bring
a disciplinary action. Conditioned upon the final agreement of the NASD, the Company currently
expects to settle this matter for an amount that is not expected to have a material affect on our
financial condition, results of operations, or cash flows.
Other Regulatory Matters The Company is in discussions with its regulators about matters raised
during regulatory examinations or otherwise subject to their inquiry. These matters could result
in censures, fines or other sanctions.
16
Management believes the outcome of any resulting actions will not be material to the Companys
financial condition, results of operations or cash flows. However, the Company is unable to
predict the outcome of these matters.
Income Taxes The Companys federal and state income tax returns are subject to examination by
taxing authorities. Because the application of tax laws and regulations to many types of
transactions is subject to varying interpretations, amounts reported in the financial statements
could be changed at a later date upon final determinations by taxing authorities. TD has agreed to
indemnify the Company for tax obligations pertaining to activities of TD Waterhouse prior to the
acquisition, if any.
General Contingencies In the ordinary course of business, there are various contingencies that
are not reflected in the condensed consolidated financial statements. These include the Companys
broker-dealer subsidiaries client activities involving the execution, settlement and financing of
various client securities transactions. These activities may expose the Company to credit risk in
the event the clients are unable to fulfill their contracted obligations.
Client securities activities are transacted on either a cash or margin basis. In margin
transactions, the Company may extend credit to the client, subject to various regulatory and
internal margin requirements, collateralized by cash and securities in the clients account. In
connection with these activities, the Company also executes and clears client transactions
involving the sale of securities not yet purchased (short sales). Such margin-related
transactions may expose the Company to credit risk in the event each clients assets are not
sufficient to fully cover losses which clients may incur. In the event the client fails to satisfy
its obligations, the Company has the authority to purchase or sell financial instruments in the
clients account at prevailing market prices in order to fulfill the clients obligations.
The Company seeks to control the risks associated with its client activities by requiring clients
to maintain margin collateral in compliance with various regulatory and internal guidelines. The
Company monitors required margin levels throughout each trading day and, pursuant to such
guidelines, requires clients to deposit additional collateral, or to reduce positions, when
necessary.
The Company loans securities temporarily to other broker-dealers in connection with its
broker-dealer business. The Company receives cash as collateral for the securities loaned.
Increases in securities prices may cause the market value of the securities loaned to exceed the
amount of cash received as collateral. In the event the counterparty to these transactions does
not return the loaned securities, the Company may be exposed to the risk of acquiring the
securities at prevailing market prices in order to satisfy its client obligations. The Company
controls this risk by requiring credit approvals for counterparties, by monitoring the market value
of securities loaned on a daily basis and requiring additional cash as collateral when necessary,
and by participating in a risk-sharing program offered through a securities clearinghouse.
The Company borrows securities temporarily from other broker-dealers in connection with its
broker-dealer business. The Company deposits cash as collateral for the securities borrowed.
Decreases in securities prices may cause the market value of the securities borrowed to fall below
the amount of cash deposited as collateral. In the event the counterparty to these transactions
does not return the cash deposited, the Company may be exposed to the risk of selling the
securities at prevailing market prices. The Company controls this risk by requiring credit
approvals for counterparties, by monitoring the collateral values on a daily basis, and by
requiring collateral to be returned by the counterparties when necessary.
As of June 30, 2006, client margin securities of approximately $10.8 billion and stock borrowings
of approximately $3.9 billion were available to the Company to utilize as collateral on
various borrowings or for other purposes. The Company had loaned or repledged approximately $8.0
billion of that collateral as of June 30, 2006.
The Company is a member of and provides guarantees to securities clearinghouses and exchanges.
Under related agreements, the Company is generally required to guarantee the performance of other
members. Under the agreements, if a member becomes unable to satisfy its obligations to the
clearinghouse, other members would be required to meet shortfalls. The Companys liability under
these arrangements is not quantifiable and could exceed the cash and securities it has posted as
collateral. However, the potential for the Company to be required to make payments under these
agreements is considered remote. Accordingly, no contingent liability is carried on the Condensed
Consolidated Balance Sheets for these transactions.
Employment Agreements The Company has entered into employment agreements with several of its key
executive officers. These employment agreements generally provide for annual base salary and
incentive compensation, stock option acceleration and severance payments in the event of
termination of employment under certain defined circumstances or changes in control of the Company.
Compensation amounts are subject to adjustments according to the Companys financial performance
and other factors.
11. SEGMENT INFORMATION
In connection with the integration of TD Waterhouse, the Company is developing a new management
financial reporting structure and does not currently report results of operations internally on an
operating segment basis. The Company will
17
reevaluate its segment reporting in light of the new reporting structure upon its completion, which
is expected to occur during fiscal 2007.
12. COMPREHENSIVE INCOME
Comprehensive income is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
June 30, 2006 |
|
|
June 24, 2005 |
|
|
June 30, 2006 |
|
|
June 24, 2005 |
|
Net income |
|
$ |
139,817 |
|
|
$ |
83,586 |
|
|
$ |
398,649 |
|
|
$ |
245,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on investment
securities available-for-sale arising during the period
|
|
|
(50 |
) |
|
|
(14,866 |
) |
|
|
14,505 |
|
|
|
(8,554 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment for deferred income taxes on net
unrealized gains/losses
|
|
|
40 |
|
|
|
5,724 |
|
|
|
(5,563 |
) |
|
|
3,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for realized (gain)/loss on
investment securities included in net income, net of tax
|
|
|
|
|
|
|
|
|
|
|
(47,647 |
) |
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount transferred from cumulative foreign currency
translation adjustments due to disposal of Ameritrade
Canada, Inc.
|
|
|
|
|
|
|
|
|
|
|
(513 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
(7 |
) |
|
|
(49 |
) |
|
|
242 |
|
|
|
412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive loss, net of tax |
|
|
(17 |
) |
|
|
(9,191 |
) |
|
|
(38,976 |
) |
|
|
(4,461 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
139,800 |
|
|
$ |
74,395 |
|
|
$ |
359,673 |
|
|
$ |
240,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13. RELATED PARTY TRANSACTIONS
As a result of the acquisition of TD Waterhouse described in Note 2, TD became an affiliate of the
Company, owning approximately 39.5 percent of the Companys outstanding common stock as of June 30,
2006. Pursuant to the Stockholders Agreement, TD designated five of twelve members to the
Companys Board of Directors. The Company transacts business and has extensive relationships with
TD and certain of its affiliates. A description of significant transactions with TD and its
affiliates is set forth below.
Money Market Deposit Account (MMDA) Agreement
Two broker-dealer subsidiaries of the Company, TD AMERITRADE, Inc. (formerly TD Waterhouse Investor
Services, Inc.) (TDA Inc.) and National Investor Services Corp. (NISC), are party to a money
market deposit account agreement with TD Bank USA, N.A. (TD Bank USA) (formerly known as TD
Waterhouse Bank, N.A.) and TD, pursuant to which TD Bank USA makes available to clients of TDA Inc.
money market deposit accounts as designated sweep vehicles. TDA Inc. provides marketing and
support services with respect to the money market deposit accounts and NISC acts as agent for
clients of TDA Inc. and as recordkeeper for TD Bank USA, in each case with respect to the money
market deposit accounts. In exchange for providing these services, TD Bank USA pays TDA Inc. and
NISC collectively a fee based on the yield earned by TD Bank USA on the client MMDA assets, less
the actual interest paid to clients, a flat fee to TD Bank USA of 20 basis points and certain
direct expenses. The MMDA agreement has an initial term of two years from January 24, 2006 and is
automatically renewable for successive two year terms, provided that following the first
anniversary of the agreement, the agreement may be terminated by any party thereto upon one years
prior written notice. The Company earned fee income associated with the money market deposit
account agreement of $69.0 million and $114.4 million for the three months and nine months ended
June 30, 2006, respectively, which is reflected as money market deposit account fees in the
Condensed Consolidated Statements of Income.
Services Agreement
The Company and certain of its subsidiaries and an affiliate of TD are party to a services
agreement, pursuant to which certain funds are made available as money market sweep or direct
purchase options to Company clients, and the Company performs marketing support services with respect to those funds. In consideration for offering the funds and
performing the marketing support services, the affiliate of TD compensates the Company in
accordance with the provisions of the services agreement. The Company also performs certain
services for the applicable fund and receives fees for those services. The services agreement has
an initial term of two years from January 24, 2006 and is automatically renewable for successive
two year terms
18
(so long as certain related agreements are in effect), provided that following the
first anniversary of the agreement, the agreement may be terminated by any party thereto upon one
years prior written notice. The Company may terminate the services agreement upon 120 days notice
if it does not earn monthly fees greater than a specified level. The Company earned fee income
associated with the services agreement of $22.5 million and $37.8 million for the three months and
nine months ended June 30, 2006, respectively, which is included in money market and other mutual
fund fees in the Condensed Consolidated Statements of Income.
Interim Cash Management Services Agreement
Pursuant to an Interim Cash Management Services Agreement, TD Bank USA provides cash management
services to clients of TDA Inc., until the earlier of TDA Inc. successfully converting the cash
management services to another service provider or TD Bank USA and TDA Inc. entering into a formal
cash management services agreement. In exchange for such services, TDA Inc. pays TD Bank USA
service based fees agreed upon by the parties. The Company incurred expense associated with the
interim cash management services agreement of $0.8 million and $1.5 million for the three months
and nine months ended June 30, 2006, respectively, which is included in clearing and execution
costs in the Condensed Consolidated Statements of Income.
Bridge Loan and Subordinated Note
The Company had borrowings under a Bridge Loan and Subordinated Notes outstanding with TD and an
affiliate of TD, respectively. These notes are described in Note 6. The Company incurred interest
expense associated with these notes for the three months ended June 30, 2006 of $0.8 million and
$0.5 million for the Bridge Loan and Subordinated Notes, respectively. The Company incurred
interest expense associated with these notes for the nine months ended June 30, 2006 of $2.6
million and $0.8 million for the Bridge Loan and Subordinated Notes, respectively. The Company
repaid the Bridge Loan and Subordinated Notes in full in June 2006.
Indemnification Agreement for Phantom Stock Plan Liabilities
Pursuant to an Indemnification Agreement, the Company agreed to assume TD Waterhouse liabilities
related to the payout of awards under The Toronto-Dominion Bank 2002 Phantom Stock Incentive Plan
following the completion of the acquisition. Under this plan, participants were granted units of
stock appreciation rights (SARs) based on TDs common stock that generally vest over four years.
At the maturity date, the participant receives cash representing the appreciated value of the units
between the grant date and the redemption date. In connection with the payout of awards under the
2002 Phantom Stock Incentive Plan, TD Discount Brokerage Holdings LLC, a direct wholly-owned
subsidiary of TD (TDDBH), agreed to indemnify the Company for any liabilities incurred by the
Company in excess of the provision for such liability included on the closing date balance sheet of
TD Waterhouse. In addition, in the event that the liability incurred by the Company in connection
with the 2002 Phantom Stock Incentive Plan is less than the provision for such liability included
on the closing date balance sheet of TD Waterhouse, the Company agreed to pay the difference to
TDDBH. There were 300,245 SARs outstanding as of June 30, 2006, with an approximate value of $7.1
million. The Indemnification Agreement effectively protects the Company against fluctuations in
TDs common stock price with respect to the SARs, so there will be no net effect on the Companys
results of operations resulting from such fluctuations.
Restricted Share Units and Related Swap Agreements
The Company assumed TD Waterhouse restricted share unit plan liabilities following the completion
of the acquisition of TD Waterhouse. Restricted share units are phantom share units with a value
equivalent to the Toronto Stock Exchange closing price of TD common shares on the day before the
award issuance. These awards vest and mature on the third or fourth anniversary of the award date
at the average of the high and low prices for the 20 trading days preceding the redemption date.
The redemption value, after withholdings, is paid in cash. Under these plans, participants are
granted phantom share units equivalent to TDs common stock that are cliff vested over three or
four years. On the acquisition date of TD Waterhouse, the Company entered into equity swap
agreements with an affiliate of TD to offset changes in TDs common stock price. There were
337,555 restricted share units outstanding as of June 30, 2006, with an approximate value of $17.1
million. The Company recorded gains on fair value adjustments to the equity swap agreements of
$2.2 million and $1.2 million for the three months and nine months ended June 30, 2006,
respectively, which are included in fair value adjustments of compensation-related derivative
instruments in the Condensed Consolidated Statements of Income. Because the swap agreements were
not designated for hedge accounting, the fair value adjustments are not recorded in the same
category of the Condensed Consolidated Statements of Income as the related compensation expense, which is recorded in the
employee compensation and benefits category.
19
Canadian Call Center Services Agreement
Pursuant to the Canadian Call Center Services Agreement, as amended, TD will continue to receive
and service client calls at its London, Ontario site for clients of TDA Inc., until November 30,
2008, unless the agreement is terminated earlier in accordance with its terms. In consideration of
the performance by TD of the call center services, the Company pays TD, on a monthly basis, an
amount equal to TDs monthly cost. The Company incurred expenses associated with the Canadian Call
Center Services Agreement of $3.7 million and $5.8 million for the three months and nine months
ended June 30, 2006, respectively, which is included in professional services expense in the
Condensed Consolidated Statements of Income.
Other Related Party Transactions
NISC provides clearing services to a U.S. affiliate of TD. The Company earned fee income
associated with these clearing services of $0.4 million and $0.8 million for the three months and
nine months ended June 30, 2006, respectively, which is included in commissions and transaction
fees revenue in the Condensed Consolidated Statements of Income.
Receivables from and payables to TD and affiliates of TD resulting from the related party
transactions described above are included in receivable from affiliate and payable to affiliate,
respectively, in the Condensed Consolidated Balance Sheets. Such balances are generally settled in
cash on a monthly basis.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of the financial condition and results of operations of the Company should
be read in conjunction with the Selected Financial Data and the Consolidated Financial Statements
and Notes thereto included in the Companys annual report on Form 10-K for the fiscal year ended
September 30, 2005, and the Condensed Consolidated Financial Statements and Notes thereto contained
in this quarterly report on Form 10-Q. This discussion contains forward-looking statements that
involve risks and uncertainties that could cause actual results to differ materially from those
anticipated in such forward-looking statements. Important factors that may cause such differences
include, but are not limited to: general economic and political conditions, interest rates, stock
market fluctuations and changes in client trading activity, increased competition, systems failures
and capacity constraints, ability to service debt obligations, integration associated with the TD
Waterhouse acquisition, realization of synergies from the TD Waterhouse acquisition, regulatory and
legal matters and uncertainties and the other risks and uncertainties set forth under the heading
Risk Factors in Item 7 of the Companys annual report on Form 10-K for the fiscal year ended
September 30, 2005 and in Item 1A of Part II of this Form 10-Q. The forward-looking statements
contained in this report speak only as of the date on which the statements were made. We undertake
no obligation to publicly update or revise these statements, whether as a result of new
information, future events or otherwise.
In particular, forward-looking statements contained in this discussion include our expectations
regarding: the amount of annualized pre-tax synergies to be realized from the acquisition of TD
Waterhouse; the effect of client trading activity on our results of operations; the effect of
changes in interest rates on our net interest spread; the effect of changes in the number of
qualified accounts on our results of operations; average commissions and transaction fees per
trade; amounts of commissions and transaction fees, net interest revenue, money market deposit
account fees and money market and other mutual fund fees; amounts of employee compensation and
benefits, clearing and execution, communications, occupancy and equipment costs, depreciation and
amortization, amortization of acquired intangible assets, professional services, interest on
borrowings and advertising expenses; our effective income tax rate; our plan to move our Jersey
City, New Jersey operations into TD Waterhouse facilities; our capital and liquidity needs and our
plans to finance such needs; our contractual obligations; and the impact of recently issued
accounting pronouncements. The forward-looking statements regarding revenues reflect the
quantifiable effects of price reductions announced in March and April 2006, but do not assume any
potential client account growth or retention benefits.
The preparation of our financial statements requires us to make judgments and estimates that may
have a significant impact upon our financial results. Note 1 of our Notes to Consolidated
Financial Statements for the fiscal year ended September 30, 2005, contains a summary of our
significant accounting policies, many of which require the use of estimates and assumptions. We
believe that the following areas are particularly subject to managements judgments and estimates
and could materially affect our results of operations and financial position: valuation of goodwill
and intangible assets; valuation and accounting for derivative financial instruments; and estimates
of effective income tax rates, deferred income taxes and valuation allowances. These areas are
discussed in further detail under the heading Critical Accounting Policies and Estimates in Item
7 of our annual report on Form 10-K for the fiscal year ended September 30, 2005.
Unless otherwise indicated, the terms we, us or Company in this report refer to TD AMERITRADE
Holding Corporation (formerly Ameritrade Holding Corporation) and its wholly owned subsidiaries.
The term GAAP refers to U.S. generally accepted accounting principles.
20
GLOSSARY OF TERMS
In discussing and analyzing our business, we utilize several metrics and other terms that are
defined in a Glossary of Terms that is available in the Investors section of our website at
www.amtd.com and is included in Item 7 of our annual report on Form 10-K for the fiscal year ended
September 30, 2005.
BUSINESS COMBINATION
On January 24, 2006, we completed the acquisition of TD Waterhouse Group, Inc. (TD Waterhouse), a
Delaware corporation, pursuant to an Agreement of Sale and Purchase, dated June 22, 2005, as
amended (the Purchase Agreement), with the Toronto-Dominion Bank (TD). We purchased from TD
(the Share Purchase) all of the capital stock of TD Waterhouse in exchange for 196,300,000 shares
of Company common stock, and $20,000 in cash. The shares of common stock issued to TD in the Share
Purchase represented approximately 32.5 percent of the outstanding shares of the Company after
giving effect to the transaction. Upon the completion of the transaction, we changed our name to
TD AMERITRADE Holding Corporation and the authorized shares of common stock of the Company were
increased from 650 million to one billion. Our condensed consolidated financial statements
include the results of operations for TD Waterhouse beginning January 25, 2006. In addition,
on January 24, 2006, we completed the sale of Ameritrade Canada, Inc. to TD for $60 million in
cash. We have agreed not to compete or own any portion of a business that competes with TD in
Canada (including in the retail securities brokerage business) after the consummation of the Share
Purchase. The purchase price for the acquisition of TD Waterhouse and the sale price for the sale
of Ameritrade Canada were subject to cash adjustments based on the closing date balance sheets of
the Company, TD Waterhouse and Ameritrade Canada. On May 5, 2006, we received approximately $45.9
million from TD for the settlement of cash adjustments related to the purchase of TD Waterhouse and
the sale of Ameritrade Canada.
Pursuant to the Purchase Agreement, prior to the consummation of the Share Purchase, TD Waterhouse
conducted a reorganization in which it transferred its Canadian retail securities brokerage
business and TD Bank USA, N.A. (formerly TD Waterhouse Bank, N.A.) to TD such that, at the time of
consummation of the Share Purchase, TD Waterhouse retained only its United States retail securities
brokerage business. TD Waterhouse also distributed to TD excess capital of TD Waterhouse above
certain thresholds prior to the consummation of the Share Purchase. As contemplated in the
Purchase Agreement, on January 24, 2006, we commenced payment of a special cash dividend of $6.00
per share in respect of the shares of our common stock outstanding prior to the consummation of the
Share Purchase. The total amount of the dividend was approximately $2.4 billion.
In connection with the Purchase Agreement, TD was given rights to have its shares of common stock
of the Company registered for resale and TD licensed us to use the TD name in connection with the
operation of our business. The parties also entered into agreements regarding bank sweep accounts
and mutual funds.
In connection with the Purchase Agreement, the Company, TD and J. Joe Ricketts, our Chairman and
Founder, and certain of his affiliates also entered into a Stockholders Agreement, as amended (the
Stockholders Agreement). The Stockholders Agreement sets forth certain governance arrangements
and contains various provisions relating to stock ownership, voting, election of directors and
other matters. Our certificate of incorporation and bylaws were amended and restated as of January
24, 2006, to give effect to and facilitate the provisions contained in the Stockholders Agreement.
We expect to realize approximately $678 million of annualized pre-tax synergies from the
acquisition of TD Waterhouse within 18 months of the closing, consisting of $300 million in revenue
opportunities primarily related to our new banking relationship with TD and $378 million in cost
savings related to the elimination of duplicate expenditures.
CLIENT SEGMENTATION STRATEGY AND NEW CLIENT OFFERINGS
The TD Waterhouse acquisition is part of our long-term growth strategy that includes increasing our
focus beyond active traders to obtain greater market share from long-term investors and independent
financial advisors. This acquisition gives us a nationwide branch network, a sales force that
focuses on acquiring long-term investors and client assets and also gives us access to TD
Waterhouses network of registered investment advisors.
Following a year-and-a-half study, we announced new client offerings on April 24, 2006 that are
intended to help increase market share from these three client segments. Our new client offerings
include a $9.99 per trade flat-rate price for online equity trades and elimination of quarterly
account maintenance fees. Our client survey research indicated that clients want
simple, understandable pricing, coupled with innovative tools, comprehensive research, outstanding
service and excellent execution. Our new flat-rate commission is not intended to compete solely
based on price-point, but rather to be considered as a proposition for great value when combined
with the products and services that we have designed with the goal of improving market share.
21
RESULTS OF OPERATIONS
Our results of operations are significantly impacted by conditions in the U.S. equity markets.
There is a direct correlation between the volume of our clients trading activity and our results
of operations. We cannot predict future trading volumes in the U.S. equity markets. If client
trading activity increases, we expect that it would have a positive impact on our results of
operations. If client trading activity were to decline, we expect that it would have a negative
impact on our results of operations.
Changes in interest rates and in client margin and client cash balances also impact our results of
operations. We cannot predict the direction of interest rates or the level of client margin and
client cash balances. If interest rates rise, we generally expect to earn a larger net interest
spread. Conversely, a falling interest rate environment generally would result in our earning a
smaller net interest spread.
Financial Performance Metrics
Pre-tax income, net income, earnings per share, operating margin, EBITDA (earnings before interest,
taxes, depreciation and amortization) and EBITDA excluding investment gains are key metrics we use
in evaluating our financial performance. Operating margin, EBITDA and EBITDA excluding investment
gains are considered non-GAAP financial measures as defined by SEC Regulation G.
We define operating margin as pre-tax income, adjusted to remove advertising expense, fair value
adjustments of investment-related derivative instruments and any unusual gains or charges. We
consider operating margin an important measure of the financial performance of our ongoing
business. Advertising spending is excluded because it is largely at the discretion of the Company,
varies significantly from period to period based on market conditions and generally relates to the
acquisition of future revenues through new accounts rather than current revenues from existing
accounts. Fair value adjustments of investment-related derivative instruments and unusual gains
and charges are excluded because we believe they are not likely to be indicative of the ongoing
operations of our business. Operating margin should be considered in addition to, rather than as a
substitute for, pre-tax income, net income and earnings per share.
We consider EBITDA and EBITDA excluding investment gains important measures of our financial
performance and of our ability to generate cash flows to service debt, fund capital expenditures
and fund other corporate investing and financing activities. EBITDA eliminates the non-cash effect
of tangible asset depreciation and intangible asset amortization. EBITDA excluding investment
gains also eliminates the effect of unusual gains that are not likely to be indicative of the
ongoing operations of our business. EBITDA and EBITDA excluding investment gains should be
considered in addition to, rather than as a substitute for, pre-tax income, net income and cash
flows from operating activities.
The following tables set forth operating margin, EBITDA and EBITDA excluding investment gains in
dollars and as a percentage of net revenues for the periods indicated, and provide reconciliations
to pre-tax income, which is the most directly comparable GAAP measure (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
June 30, 2006 |
|
|
June 24, 2005 |
|
|
June 30, 2006 |
|
|
June 24, 2005 |
|
|
|
$ |
|
|
% of Rev. |
|
|
$ |
|
|
% of Rev. |
|
|
$ |
|
|
% of Rev. |
|
|
$ |
|
|
% of Rev. |
|
Operating Margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin |
|
$ |
288,423 |
|
|
|
53.3 |
% |
|
$ |
144,062 |
|
|
|
61.5 |
% |
|
$ |
717,836 |
|
|
|
54.6 |
% |
|
$ |
459,033 |
|
|
|
63.0 |
% |
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising |
|
|
(55,344 |
) |
|
|
(10.2 |
%) |
|
|
(21,672 |
) |
|
|
(9.2 |
%) |
|
|
(129,385 |
) |
|
|
(9.8 |
%) |
|
|
(72,307 |
) |
|
|
(9.9 |
%) |
Fair value adjustments of investment-
related derivative instruments
|
|
|
0 |
|
|
|
0.0 |
% |
|
|
14,495 |
|
|
|
6.1 |
% |
|
|
(11,703 |
) |
|
|
(0.9 |
%) |
|
|
11,826 |
|
|
|
1.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before other income and income taxes |
|
|
233,079 |
|
|
|
43.1 |
% |
|
|
136,885 |
|
|
|
58.4 |
% |
|
|
576,748 |
|
|
|
43.9 |
% |
|
|
398,552 |
|
|
|
54.7 |
% |
Gain on disposal of investment |
|
|
0 |
|
|
|
0.0 |
% |
|
|
0 |
|
|
|
0.0 |
% |
|
|
78,840 |
|
|
|
6.0 |
% |
|
|
0 |
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income |
|
$ |
233,079 |
|
|
|
43.1 |
% |
|
$ |
136,885 |
|
|
|
58.4 |
% |
|
$ |
655,588 |
|
|
|
49.9 |
% |
|
$ |
398,552 |
|
|
|
54.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA and EBITDA Excluding Investment Gains |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA excluding investment gains |
|
$ |
286,838 |
|
|
|
53.1 |
% |
|
$ |
143,279 |
|
|
|
61.1 |
% |
|
$ |
680,404 |
|
|
|
51.7 |
% |
|
$ |
417,598 |
|
|
|
57.3 |
% |
Plus: Gain on disposal of investment |
|
|
0 |
|
|
|
0.0 |
% |
|
|
0 |
|
|
|
0.0 |
% |
|
|
78,840 |
|
|
|
6.0 |
% |
|
|
0 |
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
|
286,838 |
|
|
|
53.1 |
% |
|
|
143,279 |
|
|
|
61.1 |
% |
|
|
759,244 |
|
|
|
57.7 |
% |
|
|
417,598 |
|
|
|
57.3 |
% |
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
(6,171 |
) |
|
|
(1.2 |
%) |
|
|
(2,492 |
) |
|
|
(1.0 |
%) |
|
|
(14,835 |
) |
|
|
(1.1 |
%) |
|
|
(7,324 |
) |
|
|
(1.0 |
%) |
Amortization of acquired intangible assets |
|
|
(13,673 |
) |
|
|
(2.5 |
%) |
|
|
(3,405 |
) |
|
|
(1.5 |
%) |
|
|
(28,463 |
) |
|
|
(2.1 |
%) |
|
|
(10,219 |
) |
|
|
(1.4 |
%) |
Interest on borrowings |
|
|
(33,915 |
) |
|
|
(6.3 |
%) |
|
|
(497 |
) |
|
|
(0.2 |
%) |
|
|
(60,358 |
) |
|
|
(4.6 |
%) |
|
|
(1,503 |
) |
|
|
(0.2 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income |
|
$ |
233,079 |
|
|
|
43.1 |
% |
|
$ |
136,885 |
|
|
|
58.4 |
% |
|
$ |
655,588 |
|
|
|
49.9 |
% |
|
$ |
398,552 |
|
|
|
54.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The dollar amounts of our pre-tax income, operating margin and EBITDA excluding investment gains
increased for the first nine months of fiscal 2006, compared to the first nine months of fiscal
2005, primarily due to the TD Waterhouse acquisition.
22
Pre-tax income decreased as a percentage of
net revenues for the first nine months of fiscal 2006 primarily due to an increase in interest on
borrowings, employee compensation and benefits, clearing and execution costs, professional services
and advertising expenses resulting from the TD Waterhouse acquisition and unfavorable fair value
adjustments of investment-related derivative instruments during the first nine months of fiscal
2006, partially offset by a one-time gain on the disposal of our investment in Knight Capital
Group, Inc. Operating margin decreased as a percentage of net revenues for the first nine months
of fiscal 2006 primarily due to an increase in interest on borrowings, employee compensation and
benefits, clearing and execution costs and professional services expenses resulting from the TD
Waterhouse acquisition. EBITDA excluding investment gains decreased as a percentage of net
revenues for the first nine months of fiscal 2006 primarily due to an increase in employee
compensation and benefits, clearing and execution costs, professional services and advertising
expenses resulting from the TD Waterhouse acquisition. More detailed analysis of net revenues and
expenses is presented later in this discussion.
Operating Metrics
Our largest sources of revenues are (1) asset-based revenues and (2) commissions and transaction
fees. For the three months ended June 30, 2006, asset-based revenues and commissions and
transaction fees accounted for 59 percent and 39 percent of our net revenues, respectively.
Asset-based revenues consist of (1) net interest revenue, (2) money market deposit account (MMDA)
fees and (3) money market and other mutual fund fees. The primary factors driving our asset-based
revenues are average client margin balances, average segregated cash balances, average client
credit balances, average client MMDA balances and the average interest rates and fees earned and
paid on such balances. The primary factors driving our revenues from commissions and transaction
fees are total client trades and average commissions and transaction fees per trade. We also
consider client account and client asset metrics, although we believe they are generally of less
significance to our results of operations for any particular period than our asset-based revenue
and trading activity metrics.
Asset-Based Revenue Metrics
The following tables set forth key metrics that we use in analyzing net interest revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2006 |
|
Three months ended June 24, 2005 |
|
Net Interest |
|
Percentage |
|
Average |
|
|
Interest |
|
Average |
|
Average |
|
Interest |
|
Average |
|
Average |
|
Revenue |
|
Change in |
|
Annualized |
|
|
Rev/(Exp) |
|
Balance |
|
Annualized |
|
Rev/(Exp) |
|
Balance |
|
Annualized |
|
Inc./(Dec.) |
|
Average |
|
Net Yield |
|
|
(millions) |
|
(millions) |
|
Yield/(Cost) |
|
(millions) |
|
(millions) |
|
Yield/(Cost) |
|
(millions) |
|
Balances |
|
Inc./(Dec.) |
Segregated cash |
|
$ |
86.0 |
|
|
$ |
7,220 |
|
|
|
4.71 |
% |
|
$ |
53.8 |
|
|
$ |
7,608 |
|
|
|
2.80 |
% |
|
$ |
32.2 |
|
|
|
(5 |
%) |
|
|
1.91 |
% |
Client margin balances |
|
$ |
155.7 |
|
|
$ |
7,886 |
|
|
|
7.81 |
% |
|
$ |
50.4 |
|
|
$ |
3,441 |
|
|
|
5.79 |
% |
|
$ |
105.3 |
|
|
|
129 |
% |
|
|
2.02 |
% |
Securities borrowing |
|
$ |
49.1 |
|
|
$ |
3,502 |
|
|
|
5.54 |
% |
|
$ |
30.7 |
|
|
$ |
3,811 |
|
|
|
3.19 |
% |
|
$ |
18.4 |
|
|
|
(8 |
%) |
|
|
2.35 |
% |
Client credit balances |
|
$ |
(27.9 |
) |
|
$ |
10,341 |
|
|
|
(1.07 |
%) |
|
$ |
(12.4 |
) |
|
$ |
9,311 |
|
|
|
(0.53 |
%) |
|
$ |
(15.5 |
) |
|
|
11 |
% |
|
|
(0.54 |
%) |
Securities lending |
|
$ |
(69.8 |
) |
|
$ |
6,547 |
|
|
|
(4.22 |
%) |
|
$ |
(26.1 |
) |
|
$ |
4,581 |
|
|
|
(2.25 |
%) |
|
$ |
(43.7 |
) |
|
|
43 |
% |
|
|
(1.97 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended June 30, 2006 |
|
Nine months ended June 24, 2005 |
|
Net Interest |
|
Percentage |
|
Average |
|
|
Interest |
|
Average |
|
Average |
|
Interest |
|
Average |
|
Average |
|
Revenue |
|
Change in |
|
Annualized |
|
|
Rev/(Exp) |
|
Balance |
|
Annualized |
|
Rev/(Exp) |
|
Balance |
|
Annualized |
|
Inc./(Dec.) |
|
Average |
|
Net Yield |
|
|
(millions) |
|
(millions) |
|
Yield/(Cost) |
|
(millions) |
|
(millions) |
|
Yield/(Cost) |
|
(millions) |
|
Balances |
|
Inc./(Dec.) |
Segregated cash |
|
$ |
236.3 |
|
|
$ |
7,382 |
|
|
|
4.22 |
% |
|
$ |
138.4 |
|
|
$ |
7,831 |
|
|
|
2.33 |
% |
|
$ |
97.9 |
|
|
|
(6 |
%) |
|
|
1.89 |
% |
Client margin balances |
|
$ |
351.9 |
|
|
$ |
6,141 |
|
|
|
7.56 |
% |
|
$ |
143.8 |
|
|
$ |
3,497 |
|
|
|
5.42 |
% |
|
$ |
208.1 |
|
|
|
76 |
% |
|
|
2.14 |
% |
Securities borrowing |
|
$ |
123.0 |
|
|
$ |
3,281 |
|
|
|
4.94 |
% |
|
$ |
79.7 |
|
|
$ |
3,983 |
|
|
|
2.63 |
% |
|
$ |
43.3 |
|
|
|
(18 |
%) |
|
|
2.31 |
% |
Client credit balances |
|
$ |
(71.9 |
) |
|
$ |
9,906 |
|
|
|
(0.96 |
%) |
|
$ |
(28.2 |
) |
|
$ |
9,501 |
|
|
|
(0.39 |
%) |
|
$ |
(43.7 |
) |
|
|
4 |
% |
|
|
(0.57 |
%) |
Securities lending |
|
$ |
(155.4 |
) |
|
$ |
5,415 |
|
|
|
(3.79 |
%) |
|
$ |
(65.7 |
) |
|
$ |
4,792 |
|
|
|
(1.81 |
%) |
|
$ |
(89.7 |
) |
|
|
13 |
% |
|
|
(1.98 |
%) |
The following table sets forth key metrics that we use in analyzing other asset-based revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2006 |
|
Three months ended June 24, 2005 |
|
Fee |
|
Percentage |
|
Average |
|
|
Fee |
|
Average |
|
Average |
|
Fee |
|
Average |
|
Average |
|
Revenue |
|
Change in |
|
Annualized |
|
|
Revenue |
|
Balance |
|
Annualized |
|
Revenue |
|
Balance |
|
Annualized |
|
Inc./(Dec.) |
|
Average |
|
Yield |
|
|
(millions) |
|
(millions) |
|
Yield |
|
(millions) |
|
(millions) |
|
Yield |
|
(millions) |
|
Balances |
|
Inc./(Dec.) |
Money market deposit account |
|
$ |
69.0 |
|
|
$ |
8,362 |
|
|
|
3.27 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
69.0 |
|
|
|
N/A |
|
|
|
N/A |
|
Money market mutual fund |
|
$ |
31.7 |
|
|
$ |
16,546 |
|
|
|
0.76 |
% |
|
$ |
5.3 |
|
|
$ |
2,863 |
|
|
|
0.73 |
% |
|
$ |
26.4 |
|
|
|
478 |
% |
|
|
0.03 |
% |
Other mutual fund |
|
$ |
17.8 |
|
|
$ |
34,676 |
|
|
|
0.20 |
% |
|
$ |
1.0 |
|
|
$ |
3,313 |
|
|
|
0.13 |
% |
|
$ |
16.8 |
|
|
|
947 |
% |
|
|
0.07 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended June 30, 2006 |
|
Nine months ended June 24, 2005 |
|
Fee |
|
Percentage |
|
Average |
|
|
Fee |
|
Average |
|
Average |
|
Fee |
|
Average |
|
Average |
|
Revenue |
|
Change in |
|
Annualized |
|
|
Revenue |
|
Balance |
|
Annualized |
|
Revenue |
|
Balance |
|
Annualized |
|
Inc./(Dec.) |
|
Average |
|
Yield |
|
|
(millions) |
|
(millions) |
|
Yield |
|
(millions) |
|
(millions) |
|
Yield |
|
(millions) |
|
Balances |
|
Inc./(Dec.) |
Money market deposit account |
|
$ |
114.4 |
|
|
$ |
4,946 |
|
|
|
3.05 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
114.4 |
|
|
|
N/A |
|
|
|
N/A |
|
Money market mutual fund |
|
$ |
61.3 |
|
|
$ |
10,817 |
|
|
|
0.75 |
% |
|
$ |
14.9 |
|
|
$ |
2,707 |
|
|
|
0.72 |
% |
|
$ |
46.4 |
|
|
|
300 |
% |
|
|
0.03 |
% |
Other mutual fund |
|
$ |
28.4 |
|
|
$ |
21,511 |
|
|
|
0.17 |
% |
|
$ |
2.9 |
|
|
$ |
3,125 |
|
|
|
0.13 |
% |
|
$ |
25.5 |
|
|
|
588 |
% |
|
|
0.04 |
% |
23
Trading Activity Metrics
The following table sets forth several key metrics regarding client trading activity, which we
utilize in measuring and evaluating performance and the results of our operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
% |
|
Nine months ended |
|
% |
|
|
June 30, 2006 |
|
June 24, 2005 |
|
Change |
|
June 30, 2006 |
|
June 24, 2005 |
|
Change |
Total trades (in millions) |
|
|
15.93 |
|
|
|
8.89 |
|
|
|
79 |
% |
|
|
41.46 |
|
|
|
29.99 |
|
|
|
38 |
% |
Average commissions and transaction fees per trade |
|
$ |
13.39 |
|
|
$ |
12.72 |
|
|
|
5 |
% |
|
$ |
13.61 |
|
|
$ |
13.16 |
|
|
|
3 |
% |
Average client trades per day |
|
|
252,784 |
|
|
|
138,930 |
|
|
|
82 |
% |
|
|
221,133 |
|
|
|
159,102 |
|
|
|
39 |
% |
Average client trades per account (annualized) |
|
|
10.4 |
|
|
|
9.7 |
|
|
|
7 |
% |
|
|
10.8 |
|
|
|
11.2 |
|
|
|
(4 |
%) |
Activity rate |
|
|
4.1 |
% |
|
|
3.8 |
% |
|
|
8 |
% |
|
|
4.3 |
% |
|
|
4.4 |
% |
|
|
(2 |
%) |
Trading days |
|
|
63.0 |
|
|
|
64.0 |
|
|
|
(2 |
%) |
|
|
187.5 |
|
|
|
188.5 |
|
|
|
(1 |
%) |
Client Account and Client Asset Metrics
The following table sets forth certain metrics regarding client accounts and client assets, which
we use to analyze growth and trends in our client base:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
% |
|
Nine months ended |
|
% |
|
|
June 30, 2006 |
|
June 24, 2005 |
|
Change |
|
June 30, 2006 |
|
June 24, 2005 |
|
Change |
Qualified accounts (beginning of period) |
|
|
3,293,000 |
|
|
|
1,730,000 |
|
|
|
90 |
% |
|
|
1,735,000 |
|
|
|
1,677,000 |
|
|
|
3 |
% |
Qualified accounts (end of period) |
|
|
3,260,000 |
|
|
|
1,730,000 |
|
|
|
88 |
% |
|
|
3,260,000 |
|
|
|
1,730,000 |
|
|
|
88 |
% |
Percentage increase (decrease) during period |
|
|
(1 |
%) |
|
|
0 |
% |
|
|
|
|
|
|
88 |
% |
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accounts (beginning of period) |
|
|
6,070,000 |
|
|
|
3,665,000 |
|
|
|
66 |
% |
|
|
3,717,000 |
|
|
|
3,520,000 |
|
|
|
6 |
% |
Total accounts (end of period) |
|
|
6,139,000 |
|
|
|
3,689,000 |
|
|
|
66 |
% |
|
|
6,139,000 |
|
|
|
3,689,000 |
|
|
|
66 |
% |
Percentage increase (decrease) during period |
|
|
1 |
% |
|
|
1 |
% |
|
|
|
|
|
|
65 |
% |
|
|
5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Client assets (beginning of period, in
billions) |
|
$ |
262.9 |
|
|
$ |
75.6 |
|
|
|
248 |
% |
|
$ |
83.3 |
|
|
$ |
68.8 |
|
|
|
21 |
% |
Client assets (end of period, in billions) |
|
$ |
255.3 |
|
|
$ |
78.8 |
|
|
|
224 |
% |
|
$ |
255.3 |
|
|
$ |
78.8 |
|
|
|
224 |
% |
Percentage increase (decrease) during period |
|
|
(3 |
%) |
|
|
4 |
% |
|
|
|
|
|
|
206 |
% |
|
|
15 |
% |
|
|
|
|
Qualified accounts are all open client accounts with a total liquidation value of $2,000 or more,
except clearing accounts. Qualified accounts are our most significant measure of client accounts
because they have historically generated the vast majority of our revenues. Total accounts are all
open client accounts (funded and unfunded), except clearing accounts.
Our total number of qualified accounts decreased slightly for the third quarter of fiscal 2006. We
are carefully monitoring the number of qualified accounts and are taking actions designed to
increase the number of qualified accounts. Such actions include our reorganization of our
operational structure to more closely align it with our client-focused strategy implemented in 2005
and our new pricing structure announced in April 2006. If we were to experience significant
decreases in the number of qualified accounts, it could have a material adverse effect on our
future results of operations.
24
Consolidated Statements of Income Data
The following table summarizes certain data from our Condensed Consolidated Statements of Income
for analysis purposes (in millions, except percentages and interest days):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
Nine months ended |
|
|
|
|
|
|
June 30, |
|
|
June 24, |
|
|
% |
|
|
June 30, |
|
|
June 24, |
|
|
% |
|
|
|
2006 |
|
|
2005 |
|
|
Change |
|
|
2006 |
|
|
2005 |
|
|
Change |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions and transaction fees |
|
$ |
213.2 |
|
|
$ |
113.1 |
|
|
|
89 |
% |
|
$ |
564.4 |
|
|
$ |
394.6 |
|
|
|
43 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-based revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest revenue |
|
|
297.9 |
|
|
|
137.4 |
|
|
|
117 |
% |
|
|
729.4 |
|
|
|
366.8 |
|
|
|
99 |
% |
Brokerage interest expense |
|
|
(98.6 |
) |
|
|
(38.7 |
) |
|
|
155 |
% |
|
|
(229.0 |
) |
|
|
(93.5 |
) |
|
|
145 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest revenue |
|
|
199.4 |
|
|
|
98.7 |
|
|
|
102 |
% |
|
|
500.4 |
|
|
|
273.3 |
|
|
|
83 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market deposit account fees |
|
|
69.0 |
|
|
|
|
|
|
|
N/A |
|
|
|
114.4 |
|
|
|
|
|
|
|
N/A |
|
Money market and other mutual fund fees |
|
|
49.5 |
|
|
|
6.3 |
|
|
|
680 |
% |
|
|
89.7 |
|
|
|
17.8 |
|
|
|
403 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total asset-based revenues |
|
|
317.9 |
|
|
|
105.1 |
|
|
|
203 |
% |
|
|
704.4 |
|
|
|
291.1 |
|
|
|
142 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
9.3 |
|
|
|
16.2 |
|
|
|
(43 |
%) |
|
|
46.1 |
|
|
|
43.1 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
|
540.3 |
|
|
|
234.4 |
|
|
|
131 |
% |
|
|
1,314.8 |
|
|
|
728.8 |
|
|
|
80 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits |
|
|
90.4 |
|
|
|
44.0 |
|
|
|
106 |
% |
|
|
247.0 |
|
|
|
130.8 |
|
|
|
89 |
% |
Fair value adjustments of compensation-related derivative instruments |
|
|
2.2 |
|
|
|
|
|
|
|
N/A |
|
|
|
1.2 |
|
|
|
|
|
|
|
N/A |
|
Clearing and execution costs |
|
|
25.8 |
|
|
|
7.2 |
|
|
|
259 |
% |
|
|
50.8 |
|
|
|
20.1 |
|
|
|
153 |
% |
Communications |
|
|
20.6 |
|
|
|
8.3 |
|
|
|
148 |
% |
|
|
46.5 |
|
|
|
27.2 |
|
|
|
71 |
% |
Occupancy and equipment costs |
|
|
21.3 |
|
|
|
12.4 |
|
|
|
71 |
% |
|
|
54.5 |
|
|
|
33.0 |
|
|
|
65 |
% |
Depreciation and amortization |
|
|
6.2 |
|
|
|
2.5 |
|
|
|
148 |
% |
|
|
14.8 |
|
|
|
7.3 |
|
|
|
103 |
% |
Amortization of acquired intangible assets |
|
|
13.7 |
|
|
|
3.4 |
|
|
|
302 |
% |
|
|
28.5 |
|
|
|
10.2 |
|
|
|
179 |
% |
Professional services |
|
|
25.4 |
|
|
|
7.9 |
|
|
|
219 |
% |
|
|
65.4 |
|
|
|
26.7 |
|
|
|
145 |
% |
Interest on borrowings |
|
|
33.9 |
|
|
|
0.5 |
|
|
|
6724 |
% |
|
|
60.4 |
|
|
|
1.5 |
|
|
|
3916 |
% |
Other |
|
|
12.5 |
|
|
|
4.1 |
|
|
|
207 |
% |
|
|
27.9 |
|
|
|
12.9 |
|
|
|
116 |
% |
Advertising |
|
|
55.3 |
|
|
|
21.7 |
|
|
|
155 |
% |
|
|
129.4 |
|
|
|
72.3 |
|
|
|
79 |
% |
Fair value adjustments of investment-related derivative instruments |
|
|
|
|
|
|
(14.5 |
) |
|
|
(100 |
%) |
|
|
11.7 |
|
|
|
(11.8 |
) |
|
|
(199 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
307.3 |
|
|
|
97.5 |
|
|
|
215 |
% |
|
|
738.1 |
|
|
|
330.3 |
|
|
|
123 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before other income and income taxes |
|
|
233.1 |
|
|
|
136.9 |
|
|
|
70 |
% |
|
|
576.7 |
|
|
|
398.6 |
|
|
|
45 |
% |
Other income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on disposal of investment |
|
|
|
|
|
|
|
|
|
|
N/A |
|
|
|
78.8 |
|
|
|
|
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income |
|
|
233.1 |
|
|
|
136.9 |
|
|
|
70 |
% |
|
|
655.6 |
|
|
|
398.6 |
|
|
|
64 |
% |
Provision for income taxes |
|
|
93.3 |
|
|
|
53.3 |
|
|
|
75 |
% |
|
|
256.9 |
|
|
|
153.2 |
|
|
|
68 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
139.8 |
|
|
$ |
83.6 |
|
|
|
67 |
% |
|
$ |
398.6 |
|
|
$ |
245.4 |
|
|
|
62 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of interest days in period |
|
|
91 |
|
|
|
91 |
|
|
|
0 |
% |
|
|
273 |
|
|
|
273 |
|
|
|
0 |
% |
Effective income tax rate |
|
|
40.0 |
% |
|
|
38.9 |
% |
|
|
|
|
|
|
39.2 |
% |
|
|
38.4 |
% |
|
|
|
|
Note: Details may not sum to totals and subtotals due to rounding differences. Change percentages are based on non-rounded
Consolidated Statements of Income amounts.
Three-Month Periods Ended June 30, 2006 and June 24, 2005
Net Revenues
Commissions and transaction fees increased 89 percent to $213.2 million, primarily due to the
addition of approximately 2.25 million accounts on January 24, 2006 in the TD Waterhouse
acquisition. Total trades increased 79 percent, as average client trades per day increased 82
percent to 252,784 for the third quarter of fiscal 2006 from 138,930 for the third quarter of
fiscal
25
2005. These factors were partially offset by one fewer trading day during the third quarter of
fiscal 2006 than the third quarter of fiscal 2005. Average client trades per account (annualized)
were 10.4 for the third quarter of fiscal 2006 compared to 9.7 for the third quarter of fiscal
2005. The number of qualified accounts, which have historically generated the vast majority of our
revenues, has increased by 88 percent since the third quarter of fiscal 2005, primarily due to the
acquisition of TD Waterhouse. Average commissions and transaction fees per trade increased to
$13.39 per trade for the third quarter of fiscal 2006 from $12.72 for the third quarter of fiscal
2005, primarily due to the acquired TD Waterhouse accounts earning higher average commissions and
transaction fees per trade than existing Ameritrade accounts for part of the quarter. On April 24,
2006, we announced new client offerings, which include a $9.99 per trade flat-rate pricing
structure for online equity trades. As a result of the new pricing structure being in effect for
the full quarter, we expect average commissions and transaction fees to range between $12.90 and
$13.40 per trade during the fourth quarter of fiscal 2006, depending on the mix of client trading
activity, level of payment for order flow revenue and other factors. We expect revenues from
commissions and transaction fees to range from $155.8 million to $205.3 million for the fourth
quarter of fiscal 2006, depending on the volume of client trading activity, average commissions and
transaction fees per trade and other factors.
Net interest revenue increased 102 percent to $199.4 million, due primarily to an increase in
average client margin balances to $7.9 billion for the third quarter of 2006 from $3.4 billion for
the third quarter of fiscal 2005, an increase of 202 basis points in the average interest rate
charged on client margin balances and an increase of 191 basis points in the average interest rate
earned on segregated cash. The increased client margin balances are primarily due to the TD
Waterhouse acquisition. The increased net interest revenue resulting from these factors was
partially offset by an increase of 54 basis points in the average interest rate paid on client
credit balances and a $25.3 million decrease in net interest from our securities borrowing/lending
program for the third quarter of fiscal 2006 compared to the third quarter of fiscal 2005. We
expect net interest revenue to increase to between $201.7 million and $212.5 million for the fourth
quarter of fiscal 2006, due primarily to an increase in average net interest rates earned on client
margin and segregated cash balances reflecting the full impact of two 25-basis point increases in
the Federal Funds Rate on May 10, 2006 and June 29, 2006.
Money market deposit account (MMDA) fees is a new revenue category resulting from the Money Market
Deposit Account Agreement with TD Bank USA, N.A. (a subsidiary of TD), which became effective upon
the closing of our acquisition of TD Waterhouse. Under the MMDA agreement, TD Bank USA makes
available to clients of former TD Waterhouse broker-dealer subsidiaries money market deposit
accounts as designated sweep vehicles. With respect to the MMDA accounts, the broker-dealer
subsidiaries provide marketing and support services and act as recordkeeper for TD Bank USA, and
act as agent for clients. In exchange for these services, TD Bank USA pays the broker-dealer
subsidiaries a fee based on the actual yield earned by TD Bank USA on the client MMDA assets, less
the actual interest cost paid to clients, a flat fee to TD Bank USA of 20 basis points and certain
direct expenses. We expect money market deposit account fees to increase from $69.0 million for
the third quarter of fiscal 2006 to between $72.4 million and $76.3 million for the fourth quarter
of fiscal 2006, due primarily to an increase in the average net yield earned.
Money market and other mutual fund fees increased to $49.5 million for the third quarter of fiscal
2006 compared to $6.3 million for the third quarter of fiscal 2005, primarily due to an increase in
average money market and other mutual fund balances resulting from the TD Waterhouse acquisition.
We expect money market and other mutual fund fees to range between $40.1 million and $44.3 million
for the fourth quarter of fiscal 2006.
Other revenues decreased 43 percent to $9.3 million, due primarily to the elimination of account
maintenance fees for all retail clients beginning April 21, 2006.
Expenses
Employee compensation and benefits expense increased 106 percent to $90.4 million, primarily due to
the TD Waterhouse acquisition. Full-time equivalent employees increased to 4,056 at June 30, 2006,
from 2,041 at June 24, 2005. The number of temporary employees also increased to 288 at June 30,
2006, from 22 at June 24, 2005, primarily due to the integration of TD Waterhouse. In the third
quarter of fiscal 2006, we also incurred approximately $1.7 million in severance costs for legacy
Ameritrade employees related to the TD Waterhouse integration. Stock-based compensation expense
increased by $3.4 million, as we began recognizing additional compensation cost for the unvested
portion of past stock option awards upon our adoption of SFAS No. 123R on October 1, 2005 and
because we issued a broad-based grant of Restricted Stock Units in March 2006. The above factors
were partially offset by approximately $14.3 million in incentive-based compensation accrual
reductions, as we adjusted accruals based on actual performance and to reflect new incentive plan
arrangements for certain executives and other management employees. We expect employee
compensation and benefits expense to range between $103.9 million and $106.1 million for the fourth
quarter of fiscal 2006 and decrease somewhat in early fiscal 2007 as the integration progresses.
Fair value adjustments of compensation-related derivative instruments of $2.2 million for the third
quarter of fiscal 2006 represent adjustments to equity swap agreements that are intended to
economically offset TD Waterhouse stock-based compensation that is based on the stock of TD.
Because the swap agreements were not designated for hedge accounting, the
26
fair value adjustments are not recorded in the same category of the Condensed Statements of Income
as the stock-based compensation expense, which is recorded in the employee compensation and
benefits category. The related $2.2 million of TD Waterhouse stock-based compensation expense is
included in employee compensation and benefits in the Condensed Consolidated Statements of Income.
Clearing and execution costs increased 259 percent to $25.8 million, due primarily to increased
expense for statement and confirmation processing, clearing expenses and order routing associated
with additional accounts and transaction processing volumes resulting from the TD Waterhouse
acquisition. We expect clearing and execution costs to range between $20.5 million and $21.1
million for the fourth quarter of fiscal 2006.
Communications expense increased 148 percent to $20.6 million, due primarily to increased expense
for telephone, quotes and market information associated with the additional accounts and
transaction processing volumes resulting from the TD Waterhouse acquisition. We expect
communications expense to range between $18.8 million and $19.4 million for the fourth quarter of
fiscal 2006.
Occupancy and equipment costs increased 71 percent to $21.3 million, due primarily to leased
facilities added in the TD Waterhouse acquisition. We expect occupancy and equipment costs to
range between $20.7 million and $21.7 million for the fourth quarter of fiscal 2006.
Depreciation and amortization increased 148 percent to $6.2 million, due primarily to depreciation
of assets recorded in the TD Waterhouse acquisition and increased software amortization related to
recently developed functionality. We expect depreciation and amortization to range between $5.3
million and $5.9 million for the fourth quarter of fiscal 2006.
Amortization of acquired intangible assets increased 302 percent to $13.7 million due to
amortization of client relationship intangible assets recorded in the TD Waterhouse acquisition.
We expect amortization of acquired intangible assets to be approximately $13.7 million for the
fourth quarter of fiscal 2006.
Professional services increased 219 percent to $25.4 million. This increase was primarily due to
increased usage of consulting and contract services during the third quarter of fiscal 2006 in
connection with the TD Waterhouse integration. We expect professional services expense to range
between $24.0 million and $26.0 million for the fourth quarter of fiscal 2006.
Interest on borrowings increased to $33.9 million for the third quarter of fiscal 2006, compared to
$0.5 million for the third quarter of fiscal 2005, due primarily to interest on the $1.9 billion of
long-term debt issued to fund a portion of the $6.00 per share special cash dividend paid in
January 2006 and working capital needs in connection with the TD Waterhouse acquisition. We expect
interest on borrowings to be approximately $33.3 million for the fourth quarter of fiscal 2006.
Other expenses increased 207 percent to $12.5 million, due primarily to additional expenses
resulting from the TD Waterhouse acquisition.
Advertising expense increased 155 percent to $55.3 million, due primarily to the promotion of the
new TD AMERITRADE brand and our new client offerings and pricing announced April 24, 2006. We
expect advertising expenditures to decrease to approximately $27.9 million to $32.9 million for the
fourth quarter of fiscal 2006, depending in part on market conditions. We generally adjust our
level of advertising spending in relation to stock market activity, in an effort to maximize the
number of new accounts while minimizing the advertising cost per new account.
Fair value adjustments of investment-related derivative instruments consisted of $14.5 million of
fair value adjustments on our Knight prepaid variable forward contracts for the third quarter of
fiscal 2005. We liquidated our investment in Knight and the related prepaid variable forward
contracts in January 2006.
Our effective income tax rate increased to 40.0 percent for the third quarter of fiscal 2006
compared to 38.9 percent for the third quarter of fiscal 2005, due primarily to a larger percentage
of our payroll and assets being located in higher tax states following the acquisition of TD
Waterhouse. We expect our effective income tax rate for the remainder of fiscal 2006 to range
between 39.0 percent and 40.0 percent.
Nine-Month Periods Ended June 30, 2006 and June 24, 2005
Net Revenues.
Commissions and transaction fees increased 43 percent to $564.4 million, primarily due to the
addition of approximately 2.25 million accounts on January 24, 2006 in the TD Waterhouse
acquisition. Total trades increased 38 percent and average client trades per day increased 39
percent to 221,133 for the first nine months of fiscal 2006 from 159,102 for the first nine months
of fiscal 2005. Average client trades per account (annualized) were 10.8 for the first nine months
of fiscal 2006, compared to 11.2 for the first nine months of fiscal 2005. The number of qualified
accounts, which have historically generated the vast majority of our revenues, has increased by 88
percent since June 2005, primarily due to the acquisition of TD Waterhouse. Average commissions
and transaction fees per trade increased to $13.61 per trade for the first nine months of fiscal
2006 from $13.16
27
for the first nine months of fiscal 2005, primarily due to the acquired TD Waterhouse accounts
earning higher average commissions and transaction fees per trade than existing Ameritrade accounts
until the implementation of our new pricing structure in April 2006, partially offset by the effect
of lowering our options contract pricing from $1.50 to $0.75 per contract in March 2005 and
decreased payment for order flow revenue per trade.
Net interest revenue increased 83 percent to $500.4 million, due primarily to an increase in
average client margin balances to $6.1 billion for the first nine months of 2006 from $3.5 billion
for the first nine months of fiscal 2005, an increase of 214 basis points in the average interest
rate charged on client margin balances and an increase of 189 basis points in the average interest
rate earned on segregated cash during the first nine months of fiscal 2006 compared to the first
nine months of fiscal 2005. The increased client margin balances are primarily due to the TD
Waterhouse acquisition. The increased net interest revenue resulting from these factors was
partially offset by an increase of 57 basis points in the average interest rate paid on client
credit balances and a $46.4 million decrease in net interest from our securities borrowing/lending
program for the first nine months of fiscal 2006 compared to the first nine months of fiscal 2005.
Money market deposit account fees is a new revenue category resulting from the Money Market Deposit
Account Agreement with TD Bank USA, which became effective upon the closing of our acquisition of
TD Waterhouse.
Money market and other mutual fund fees increased to $89.7 million for the first nine months of
fiscal 2006 compared to $17.8 million for the first nine months of fiscal 2005, primarily due to an
increase in average money market and other mutual fund balances resulting from the TD Waterhouse
acquisition.
Other revenues increased seven percent to $46.1 million, due primarily to an increase in account
maintenance, transfer and other fee revenue associated with additional accounts and transaction
processing volumes resulting from the TD Waterhouse acquisition.
Expenses.
Employee compensation and benefits expense increased 89 percent to $247.0 million, primarily due to
the TD Waterhouse acquisition. Full-time equivalent employees increased to 4,056 at June 30, 2006,
from 2,041 at June 24, 2005. The number of temporary employees also increased to 288 at June 30,
2006, from 22 at June 24, 2005, due to the integration of TD Waterhouse. In the first nine months
of fiscal 2006, we also incurred approximately $5.4 million in severance costs for legacy
Ameritrade employees, primarily related to the TD Waterhouse integration. Stock-based compensation
expense increased by $6.8 million, as we began recognizing additional compensation cost for the
unvested portion of past stock option awards upon our adoption of SFAS No. 123R on October 1, 2005
and because we issued a broad-based grant of Restricted Stock Units in March 2006.
Fair value adjustments of compensation-related derivative instruments of $1.2 million for the nine
months ended June 30, 2006 represent adjustments to equity swap agreements that are intended to
economically offset TD Waterhouse stock-based compensation that is based on the stock of TD.
Because the swap agreements were not designated for hedge accounting, the fair value adjustments
are not recorded in the same category of the Condensed Statements of Income as the stock-based
compensation expense, which is recorded in the employee compensation and benefits category. The
related $1.2 million of TD Waterhouse stock-based compensation expense is included in employee
compensation and benefits in the Condensed Consolidated Statements of Income.
Clearing and execution costs increased 153 percent to $50.8 million, due primarily to increased
expense for statement and confirmation processing, clearing expenses and order routing associated
with additional accounts and transaction processing volumes resulting from the TD Waterhouse
acquisition.
Communications expense increased 71 percent to $46.5 million, due primarily to increased expense
for telephone, quotes and market information associated with the additional accounts and
transaction processing volumes resulting from the TD Waterhouse acquisition.
Occupancy and equipment costs increased 65 percent to $54.5 million, due primarily to leased
facilities added in the TD Waterhouse acquisition and a $2.3 million early lease termination fee
associated with our facility in Jersey City, New Jersey during the first quarter of fiscal 2006.
Operations in the Jersey City facility are planned to be moved into TD Waterhouse facilities.
Depreciation and amortization increased 103 percent to $14.8 million, due primarily to depreciation
of assets recorded in the TD Waterhouse acquisition and increased software amortization related to
recently developed functionality.
Amortization of acquired intangible assets increased 179 percent to $28.5 million due to
amortization of client relationship intangible assets recorded in the TD Waterhouse acquisition.
Professional services increased 145 percent to $65.4 million. This increase was primarily due to
increased usage of consulting and contract services during the first nine months of fiscal 2006 in
connection with the TD Waterhouse acquisition and
28
integration. During the first nine months of fiscal 2006, there was also a $5.0 million
reimbursement of professional services related to the TD Waterhouse acquisition pursuant to the
terms of our Chairmans employment agreement.
Interest on borrowings increased to $60.4 million for the first nine months of fiscal 2006,
compared to $1.5 million for the first nine months of fiscal 2005, due primarily to interest on the
$1.9 billion of long-term debt issued to fund a portion of the $6.00 per share special cash
dividend paid in January 2006 and working capital needs in connection with the TD Waterhouse
acquisition.
Other expenses increased 116 percent to $27.9 million, due primarily to additional expenses
resulting from the TD Waterhouse acquisition and the effect of a favorable litigation settlement
during the first nine months of fiscal 2005.
Advertising expense increased 79 percent to $129.4 million, due primarily to the promotion of the
new TD AMERITRADE brand and our new client offerings and pricing announced April 24, 2006 and an
increase in expenditures to promote our Amerivest online advisory service.
Fair value adjustments of investment-related derivative instruments resulted in an $11.7 million
charge for the first nine months of fiscal 2006 compared to an $11.8 million gain for the first
nine months of fiscal 2005, due to fluctuations in the market price of the Knight stock underlying
the prepaid forward contracts. As discussed in Note 4 to the condensed consolidated financial
statements, we liquidated our investment in Knight Capital Group, Inc. and the related prepaid
variable forward contracts in January 2006, resulting in a one-time pre-tax net gain of
approximately $78.8 million.
Our effective income tax rate increased to 39.2 percent for the first nine months of fiscal 2006
compared to 38.4 percent for the first nine months of fiscal 2005, due primarily to a larger
percentage of our payroll and assets being located in higher tax states following the acquisition
of TD Waterhouse. During the first nine months of fiscal 2005, we also recorded a $1.8 million
benefit resulting from the amalgamation of our Canadian subsidiaries, which allowed previously
unrealizable tax loss carryforwards to be realized.
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed our liquidity and capital needs primarily through the use of funds
generated from operations and from borrowings under our credit agreements. We have also issued
common stock and long-term debt to finance mergers and acquisitions and for other corporate
purposes. Our liquidity and capital needs during fiscal 2006 have been financed primarily from our
earnings, cash on hand, cash acquired in the acquisition of TD Waterhouse and the issuance of
long-term debt. We plan to finance our ordinary capital and liquidity needs primarily from our
earnings and cash on hand. In addition, we may utilize our revolving credit facility or issue
equity or debt securities.
To complete our acquisition of the U.S. brokerage business of TD Waterhouse, we issued 196.3
million shares of common stock on January 24, 2006. We also paid a $6.00 per share special cash
dividend. We funded the approximately $2.4 billion special dividend with approximately $0.4
billion from cash and short-term investments on hand, approximately $0.4 billion from excess
capital in TD Waterhouse at closing and the remaining $1.6 billion by issuing private long-term
debt. We also issued another $300 million of private long-term debt, and entered into a $300
million revolving credit agreement, for working capital purposes. As a result of these debt
issuances and other debt assumed in connection with the acquisition of TD Waterhouse, our ratio of
total debt to total stockholders equity increased from three percent as of September 30, 2005 to
122 percent as of June 30, 2006. See Note 2 of the notes to condensed consolidated financial
statements for further information about the TD Waterhouse acquisition.
Dividends from our subsidiaries are another source of liquidity for the holding company. Some of
our subsidiaries are subject to requirements of the SEC and NASD relating to liquidity, capital
standards, and the use of client funds and securities, which may limit funds available for the
payment of dividends to the holding company.
Under the SECs Uniform Net Capital Rule (Rule 15c3-1 under the Securities Exchange Act of 1934),
our broker-dealer subsidiaries are required to maintain at all times at least the minimum level of
net capital required under Rule 15c3-1. This minimum net capital level is determined based upon an
involved calculation described in Rule 15c3-1 that is primarily based on each broker-dealers
aggregate debits, which primarily are a function of client margin balances at our broker-dealer
subsidiaries. Since our aggregate debits may fluctuate significantly, our minimum net capital
requirements may also fluctuate significantly from period to period. The holding company may make
cash capital contributions to broker-dealer subsidiaries, if necessary, to meet net capital
requirements.
Liquid Assets
We consider liquid assets an important measure of our liquidity and of our ability to fund
corporate investing and financing activities. Liquid assets is considered a non-GAAP financial
measure as defined by SEC Regulation G. We define liquid assets as the sum of (a) non
broker-dealer cash and cash equivalents, (b) non broker-dealer short-term investments and (c)
regulatory net capital of our broker-dealer subsidiaries in excess of five percent of aggregate
debit items. We include the excess regulatory
29
net capital of our broker-dealer subsidiaries in liquid assets rather than simply including
broker-dealer cash and cash equivalents, because regulatory net capital requirements may limit the
amount of cash available for dividend from the broker-dealer subsidiaries to the holding company.
Liquid assets should be considered as a supplemental measure of liquidity, rather than as a
substitute for cash and cash equivalents. The following table sets forth a reconciliation of cash
and cash equivalents to liquid assets for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
September 30, |
|
|
|
|
|
|
2006 |
|
|
2005 |
|
|
Change |
|
Cash and cash equivalents |
|
$ |
395,306 |
|
|
$ |
171,064 |
|
|
$ |
224,242 |
|
Less: Broker-dealer cash and cash equivalents |
|
|
(322,960 |
) |
|
|
(107,236 |
) |
|
|
(215,724 |
) |
|
|
|
|
|
|
|
|
|
|
Non broker-dealer cash and cash equivalents |
|
|
72,346 |
|
|
|
63,828 |
|
|
|
8,518 |
|
Plus: Non broker-dealer short-term investments |
|
|
24,775 |
|
|
|
229,819 |
|
|
|
(205,044 |
) |
Plus: Excess broker-dealer regulatory net capital |
|
|
323,934 |
|
|
|
103,061 |
|
|
|
220,873 |
|
|
|
|
|
|
|
|
|
|
|
Liquid assets |
|
$ |
421,055 |
|
|
$ |
396,708 |
|
|
$ |
24,347 |
|
|
|
|
|
|
|
|
|
|
|
The increase in liquid assets from September 30, 2005 to June 30, 2006 is primarily due to $399
million of net income, approximately $46 million of excess broker-dealer net capital acquired in
the TD Waterhouse acquisition and approximately $407 million of non broker-dealer cash provided by
TD Waterhouse to fund approximately $1.00 of the $6.00 per share special dividend, partially offset
by $794 million of non broker-dealer net cash used in financing activities (see Cash Flow below -
cash used in financing activities of approximately $684 million, excluding $110 million of
broker-dealer net short-term borrowings) and an increase in aggregate debit items that resulted in
increased regulatory net capital required of $8 million. The remaining $26 million of the net
change in liquid assets is due to timing of income tax and other payments, non-cash gains and
expenses that are reflected in net income, and other miscellaneous changes in excess regulatory net
capital.
Cash Flow
Cash provided by operating activities was $125.4 million for the first nine months of fiscal 2006,
compared to $225.2 million for the first nine months of fiscal 2005. The decrease was primarily
due to net changes in broker-dealer working capital, partially offset by higher net income in 2006.
Cash provided by investing activities was $782.9 million for the first nine months of fiscal 2006,
compared to cash used in investing activities of $33.6 million for the first nine months of fiscal
2005. The cash provided by investing activities in the first nine months of fiscal 2006 consisted
primarily of $580.1 million of net cash acquired in the TD Waterhouse acquisition and $205.0
million of net sales of short-term investments in auction rate securities.
Cash used in financing activities was $684.4 million for the first nine months of fiscal 2006,
compared to $61.9 million for the first nine months of fiscal 2005. The financing activities in the
first nine months of fiscal 2006 consisted primarily of $2.4 billion for payment of the $6.00 per
share special cash dividend and $310.4 million of principal payments on notes payable, partially
offset by $1.9 billion of proceeds from issuance of long-term debt and $110 million of
broker-dealer net short-term borrowings. The financing activities in the first nine months of
fiscal 2005 included $77.2 million of stock repurchases. Our broker-dealer subsidiary, Ameritrade,
Inc., also borrowed and subsequently repaid $280 million on its unsecured credit facilities during
the first nine months of fiscal 2005 to cure the asserted Exchange Act Rule 15c3-3 deficiency
described in Note 10 of the notes to condensed consolidated financial statements.
Loan Facilities
On December 13, 2004, we entered into an amendment to our revolving credit agreement. The
revolving credit agreement, as amended, permitted borrowings of up to $105 million through December
12, 2005, and was secured primarily by our stock in our subsidiaries and personal property. On
December 9, 2005, the lenders under our revolving credit agreement agreed to extend the length of
the agreement. The revolving credit agreement, as extended, terminated upon the initial borrowing
under the new syndicated loan facility on January 23, 2006, as described below.
We entered into a credit agreement, as amended, on January 23, 2006 for $2.2 billion in senior
credit facilities with a syndicate of lenders. The senior credit facilities include: (a) a senior
secured term loan facility in the aggregate principal amount of $250 million (the Term A
Facility), (b) a senior secured term loan facility in the aggregate principal amount of $1.65
billion (the Term B Facility) and (c) a senior secured revolving credit facility in the aggregate
principal amount of $300 million (the Revolving Facility) (together, the Financings). The
maturity date of the Term A Facility is December 31, 2011. The maturity date of the Term B
Facility is December 31, 2012. The maturity date of the Revolving Facility is December 31, 2010.
The Financings are subject to certain mandatory prepayments, which include prepayments based on
leverage ratios and amounts of excess cash flow and from the net cash proceeds of asset sales and
debt issuances, subject to certain exceptions. Pursuant to the Financings, the Company may prepay
borrowings without penalty.
30
We used $1.6 billion of the proceeds from the Term A Facility and Term B Facility to fund a portion
of the $6 per share special cash dividend paid in connection with the acquisition of TD Waterhouse
and $300 million for working capital purposes. No initial borrowings were made on the Revolving
Facility, which will be used for general corporate purposes.
The applicable interest rate under the Revolving Facility and the Term A Facility is calculated as
a per annum rate equal to, at our option, (a) LIBOR plus an interest rate margin (LIBOR loans)
or (b) (i) the greater of (x) the prime rate or (y) the federal funds effective rate plus 0.50
percent plus (ii) an interest rate margin (Base Rate loans). With respect to the Revolving
Facility and the Term A Facility the interest rate margin for LIBOR loans is 1.50 percent if the
consolidated leverage ratio (as defined in the Financings) of the Company is 1.75 to 1.00 or
higher, 1.25 percent if the consolidated leverage ratio of the Company is less than 1.75 to 1.00
but greater than or equal to 1.00 to 1.00, and 1.00 percent if the consolidated leverage ratio of
the Company is less than 1.00 to 1.00. The interest rate margin for Base Rate loans under the
Revolving Facility and the Term A Facility is 1.00 percent less than the interest rate margin for
LIBOR loans. The applicable interest rate under the Term B Facility is calculated as a per annum
rate equal to (a) LIBOR plus 1.50 percent or (b) (i) the greater of (x) the prime rate or (y) the
federal funds effective rate plus 0.50 percent plus (ii) 0.50 percent. On June 30, 2006, the
applicable interest rate on both the Term A Facility and the Term B Facility was 6.85 percent,
based on 30-day LIBOR. As of June 30, 2006, we had outstanding indebtedness of $244 million,
$1.646 billion and $0 under the Term A Facility, Term B Facility and Revolving Facility,
respectively. We have not made any borrowings under the Revolving Facility. The Financings also
provide that we are obligated to pay from time to time letter of credit fees equal to the
applicable margin in respect of LIBOR advances on each outstanding letter of credit under the
Revolving Credit Facility. In addition, the Financings provide that we pay fees to the issuing
bank in respect of the Letters of Credit in an amount agreed to by us and the issuing bank. A
commitment fee at the rate of 0.375 percent per annum accrues on any unused amount of the
Revolving Facility.
The obligations under the Financings are guaranteed by certain of our subsidiaries, other than
broker-dealer subsidiaries, with certain exceptions, and are secured by a lien on substantially all
of the assets of each guarantor, including a pledge of the ownership interests in each first-tier
broker-dealer subsidiary held by a guarantor and 65 percent of the ownership interests in each
first-tier foreign subsidiary held by a guarantor, with certain exceptions. On January 24, 2006,
concurrently with the closing of the TD Waterhouse Transaction, TD Waterhouse was added as an
additional guarantor to the Financings and TD Waterhouse granted a lien on substantially all of its
assets (including its ownership interest in each of its first-tier broker dealer subsidiaries) as
additional security for the Financings.
The Financings contain certain covenants that limit or restrict the incurrence of liens,
investments (including acquisitions), sales of assets, indebtedness and mergers and consolidations,
subject to certain exceptions. The Financings also restrict the payment of dividends on our
outstanding capital stock and repurchases or redemptions of our outstanding capital stock, subject
to certain exceptions. We are also required to maintain compliance with a maximum consolidated
leverage ratio covenant and a minimum consolidated interest coverage ratio covenant, and our
broker-dealer subsidiaries are required to maintain compliance with a minimum regulatory net
capital covenant. We were in compliance with all covenants under the Financings as of June 30,
2006.
Prior to the closing of our acquisition of TD Waterhouse, TD Waterhouse and an affiliate of TD
executed a promissory note whereby TD Waterhouse borrowed $270 million from TD (the Bridge Loan).
The purpose of the Bridge Loan was to monetize non-cash assets of TD Waterhouse to enable TD
Waterhouse to retain cash equal to $1.00 per share of the $6.00 per share special cash dividend
declared by us, as required by the Purchase Agreement. We assumed the Bridge Loan obligation upon
the closing of our acquisition of TD Waterhouse. The Bridge Loan was scheduled to mature on July
24, 2006 and bore interest at the daily effective federal funds rate until the completion of the
closing date balance sheet adjustments as specified in the Purchase Agreement, and after that time
bore interest at the federal funds rate plus 150 basis points. We repaid $200 million of the
Bridge Loan during March 2006 and the remaining $70 million balance during June 2006.
Upon the closing of our acquisition of TD Waterhouse, we assumed $30 million of Subordinated Debt
Series B Notes (the Subordinated Notes) which were payable to an affiliate of TD. The
Subordinated Notes were unsecured and were redeemable in November 2012. The Subordinated Notes bore
interest at a fixed rate of 6.64 percent. During June 2006, we repaid the entire $30 million of
Subordinated Notes.
Our wholly owned broker-dealer subsidiaries had access to secured uncommitted credit facilities
with financial institutions of up to $740 million and $180 million as of June 30, 2006 and
September 30, 2005, respectively. The broker-dealer subsidiaries also had access to unsecured
uncommitted credit facilities of up to $435 million and $310 million as of June 30, 2006 and
September 30, 2005, respectively. The financial institutions may make loans under line of credit
arrangements or, in some cases, issue letters of credit under these facilities. The secured credit
facilities require us to pledge qualified client securities to secure outstanding obligations under
these facilities. Borrowings under the secured and unsecured credit facilities bear interest at a
variable rate based on the federal funds rate. Covenants under the Financings limit the
broker-dealer subsidiaries to an aggregate outstanding principal balance of $1.0 billion in
borrowings on uncommitted lines of credit. As of June 30, 2006, we had outstanding borrowings of
$110 million and $0 under unsecured and secured credit facilities, respectfully. On June 30, 2006,
the applicable interest rate on the unsecured credit facilities was 5.425 percent. There were no
borrowings outstanding or
31
letters of credit issued under the secured or unsecured credit facilities as of September 30, 2005.
As of June 30, 2006 and September 30, 2005, approximately $890 million and $490 million,
respectively, was available to our broker-dealer subsidiaries pursuant to uncommitted credit
facilities for either loans or, in some cases, letters of credit.
Prepaid Variable Forward Contracts
During fiscal 2003, we executed a series of prepaid variable forward contracts (the forward
contracts) with a total notional amount of approximately $41.4 million on 7.9 million underlying
Knight shares. The forward contracts each contained a zero-cost embedded collar on the value of
the Knight shares, with a weighted average floor price of $5.13 per share and a weighted average
cap price of $6.17 per share. At the inception of the forward contracts, we received cash of
approximately $35.5 million, equal to approximately 86 percent of the notional amount. The forward
contracts were scheduled to mature on various dates in fiscal years 2006 and 2007. We liquidated
our position in Knight and the prepaid variable forward contracts in January 2006, resulting in a
one-time pre-tax net gain of approximately $78.8 million.
The embedded collars did not qualify for hedge accounting treatment, and were therefore accounted
for as non-hedging derivatives in the consolidated financial statements. The total fair value of
the embedded collars was included under the caption Prepaid variable forward derivative
instrument in the Condensed Consolidated Balance Sheets and changes in the fair value of the
embedded collars were included under the caption Fair value adjustments of investment-related
derivative instruments in the Condensed Consolidated Statements of Income.
The $35.5 million of cash received on the forward contracts was accounted for as an obligation in
the Condensed Consolidated Balance Sheets. We were accreting interest on the obligation to the
notional maturity amount of $41.4 million over the terms of the forward contracts using effective
interest rates with a weighted average of approximately 4.3 percent. Upon settlement of each
forward contract in January 2006, the realized gain on the Knight stock delivered to the
counterparty or otherwise sold has been reclassified from other comprehensive income into earnings,
net of taxes.
Stock Repurchase Program
On September 9, 2002, our Board of Directors authorized a program to repurchase up to 40 million
shares of our common stock from time to time over a two-year period beginning September 19, 2002.
On May 5, 2004, our Board of Directors extended the stock repurchase program through May 5, 2006.
The stock repurchase program expired on May 5, 2006. Under the stock repurchase program, as
extended, we were authorized to repurchase, from time to time, up to 70 million shares of our
common stock, a 30 million-share increase from the previous authorization. Through May 5, 2006, we
repurchased a total of approximately 48.4 million shares at a weighted average purchase price of
$10.15 per share. We did not make any repurchases under the program during the third
quarter of fiscal 2006.
See Contractual Obligations below for information regarding our obligation to repurchase common
stock pursuant to the Stockholders Agreement, as amended, entered into in connection with the
acquisition of TD Waterhouse. On August 2, 2006, our Board of Directors authorized a program to
repurchase up to 12 million shares of our common stock in the open market and in block trades.
Off-Balance Sheet Arrangements
The Company does not have any obligations that meet the definition of an off-balance sheet
arrangement and that have or are reasonably likely to have a material effect on our financial
statements.
Contractual Obligations
The new loan facilities discussed under Loan Facilities and the termination of the prepaid
variable forward contracts discussed under Prepaid Variable Forward Contracts constitute material
changes in our contractual obligations outside the ordinary course of business. In addition, we
assumed material contractual obligations in connection with our acquisition of TD Waterhouse. The
following is a summary of material contractual obligations incurred or assumed in connection with
the TD Waterhouse acquisition and resulting from the new loan facilities:
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period (fiscal years): |
|
Contractual Obligations |
|
Total |
|
|
2006-07 |
|
|
2008-09 |
|
|
2010 |
|
|
After 2010 |
|
Long-term debt obligations (1) |
|
$ |
1,889,625 |
|
|
$ |
51,875 |
|
|
$ |
104,875 |
|
|
$ |
72,750 |
|
|
$ |
1,660,125 |
|
Broker-dealer short-term borrowings |
|
|
110,000 |
|
|
|
110,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations |
|
|
219,866 |
|
|
|
41,226 |
|
|
|
56,357 |
|
|
|
23,826 |
|
|
|
98,457 |
|
Employee severance and involuntary
termination costs (2) |
|
|
41,922 |
|
|
|
38,772 |
|
|
|
1,200 |
|
|
|
600 |
|
|
|
1,350 |
|
Contract termination costs (2) |
|
|
14,820 |
|
|
|
14,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock repurchase obligation (3) |
|
|
120,742 |
|
|
|
120,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,396,975 |
|
|
$ |
377,435 |
|
|
$ |
162,432 |
|
|
$ |
97,176 |
|
|
$ |
1,759,932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents scheduled minimum principal payments under the Financings. The Financings are
also subject to certain mandatory prepayments, which include prepayments based on amounts of
excess cash flow and from the net cash proceeds of asset sales and debt issuances, subject to
certain exceptions. Pursuant to the Financings, the Company may prepay borrowings without
penalty. Because mandatory prepayments are based on future operating results and events, we
cannot predict the amount or timing of such prepayments. |
|
(2) |
|
Represents exit and involuntary termination costs incurred in connection with the planned
consolidation of certain facilities and functions following the TD Waterhouse acquisition. |
|
(3) |
|
Pursuant to the Stockholders Agreement, as amended, we are obligated to repurchase our common
stock from time to time to offset dilution resulting from stock option exercises and other
stock awards subsequent to the acquisition of TD Waterhouse on January 24, 2006. Our initial
obligation to repurchase our common stock had been deferred until the earlier of August 22,
2006 or TDs acquisition of 15 million shares of our common stock, pursuant to Amendment No. 1
to the Stockholders Agreement, dated February 22, 2006. TD completed its acquisition of 15
million shares of our common stock on May 2, 2006. We are currently obligated to repurchase
shares as promptly as reasonably practicable. Based on stock options exercised from January
24, 2006 through July 28, 2006, we will be obligated to repurchase approximately 7.3 million
shares of common stock. The estimated gross dollar amount of repurchase obligation presented
in the table assumes the purchase of 7.3 million shares at a weighted-average price of $16.54
per share, based on the closing market price of our common stock as of July 28, 2006. This
estimate does not reflect offsetting amounts of cash received from exercise prices or income
tax benefits. We cannot estimate the amount and timing of repurchases that may be required as
a result of future stock option exercises. |
NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN No. 48). FIN No. 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprises financial statements in accordance with
FASB Statement No. 109, Accounting for Income Taxes. FIN No. 48 prescribes a recognition threshold
and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also
provides guidance on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN No. 48 establishes a two-step process for evaluation of
tax positions. The first step is recognition, under which the enterprise determines whether it is
more likely than not that a tax position will be sustained upon examination, including resolution
of any related appeals or litigation processes, based on the technical merits of the position. The
enterprise is required to presume the position will be examined by the appropriate taxing authority
that has full knowledge of all relevant information. The second step is measurement, under which a
tax position that meets the more-likely-than-not recognition threshold is measured to determine the
amount of benefit to recognize in the financial statements. The tax position is measured at the
largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate
settlement. FIN No. 48 is effective for fiscal years beginning after December 15, 2006.
Therefore, FIN No. 48 will be effective for our fiscal year beginning September 29, 2007. The
cumulative effect of adopting FIN No. 48 is required to be reported as an adjustment to the opening
balance of retained earnings (or other appropriate components of equity) for that fiscal year,
presented separately. We cannot presently estimate the impact of adopting FIN No. 48.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk generally represents the risk of loss that may result from the potential change in the
value of a financial instrument as a result of fluctuations in interest rates and market prices.
We have established policies, procedures and internal processes governing our management of market
risks in the normal course of our business operations. We do not hold any material market
risk-sensitive instruments for trading purposes.
33
We seek to control the risks associated with our client activities by requiring clients to maintain
margin collateral in compliance with regulatory and internal guidelines. We monitor required
margin levels daily and, pursuant to such guidelines, require our clients to deposit additional
collateral, or to reduce positions, when necessary. We assess and monitor the suitability of
investors to engage in various trading activities. We continuously monitor client accounts to
detect excessive concentration, large orders or positions, patterns of day trading and other
activities that indicate increased risk to us. We seek to control risks associated with our
securities lending and borrowing activities by requiring credit approvals for counterparties, by
monitoring the market value of securities loaned and collateral values for securities borrowed on a
daily basis and requiring additional cash as collateral for securities loaned or return of
collateral for securities borrowed when necessary, and by participating in a risk-sharing program
offered through a securities clearinghouse.
As a fundamental part of our brokerage business, we hold interest earning assets, mainly funds
required to be segregated in compliance with federal regulations. These funds totaled $7.1 billion
and $7.6 billion at June 30, 2006 and September 30, 2005, respectively. We invest these funds in
repurchase agreements, fixed-rate U.S. Treasury securities and other qualified securities. Our
interest earning assets are financed primarily by short-term interest bearing liabilities, totaling
$11.2 billion at June 30, 2006 and $10.1 billion at September 30, 2005, in the form of client and
correspondent credit balances. We earn a net interest spread on the difference between amounts
earned on client margin balances and amounts paid on client credit balances. Because we establish
the rate paid on client credit balances and the rate charged on client margin balances, a
substantial portion of our interest rate risk is under our direct management. However, changes in
the level of interest rates may have a beneficial or adverse affect on our results of operations.
We might not change interest rates paid on client credit balances proportionately to changes in
interest rates charged on client margin balances. As a result, a rising interest rate environment
generally would result in our earning a larger net interest spread. Conversely, a falling interest
rate environment generally would result in our earning a smaller net interest spread.
In connection with the acquisition of TD Waterhouse, we are also party to a money market deposit
account (MMDA) agreement with TD Bank USA, pursuant to which TD Bank USA makes available to
clients of former TD Waterhouse broker-dealer subsidiaries money market deposit accounts as
designated sweep vehicles. With respect to the MMDA accounts, the broker-dealer subsidiaries
provide marketing and support services and act as recordkeeper for TD Bank USA, and act as agent
for clients. In exchange for these services, TD Bank USA pays the broker-dealer subsidiaries a fee
based on the actual yield earned by TD Bank USA on the client MMDA assets, less the actual interest
cost paid to clients, a flat fee to TD Bank USA of 20 basis points and certain direct expenses.
Because the fee we earn is substantially based on the actual yield earned by TD Bank USA, we have
exposure to interest rate risk on our MMDA fee revenues. As of June 30, 2006, client cash balances
of approximately $8.1 billion had been swept into MMDA accounts and were invested by TD Bank USA in
assets earning short- to medium-term interest rates.
On January 23, 2006, we borrowed $1.6 billion under new credit facilities in order to partially
fund our $6.00 per share special cash dividend and another $0.3 billion for working capital
purposes. These borrowings bear interest at a variable rate based on LIBOR. As of June 30, 2006,
we also had an additional $110 million of broker/dealer short-term borrowings outstanding, which
bear interest at a variable rate based on the federal funds rate. As of June 30, 2006, we had a
total of $2.0 billion of variable rate borrowings outstanding. A hypothetical one percent increase
in the underlying interest rates for our variable rate borrowings would result in an additional
$20.0 million of annual pre-tax interest expense.
Our revenues and financial instruments are denominated in U.S. dollars, and we generally do not
invest, except for hedging purposes, in derivative instruments.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Management, including the Chief Executive Officer and Chief Financial Officer, performed an
evaluation of the effectiveness of the Companys disclosure controls and procedures as of June 30,
2006. As part of this evaluation, management considered the changes in internal control over
financial reporting described later in this section. Management, including the Chief Executive
Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were
effective as of June 30, 2006.
Changes in Internal Control over Financial Reporting
As a result of the acquisition of TD Waterhouse on January 24, 2006, the Company has implemented
internal controls over financial reporting to include consolidation of TD Waterhouse, as well as
acquisition-related accounting and disclosures. The acquisition of TD Waterhouse represents a
material change in internal control over financial reporting since managements last assessment of
the Companys internal control over financial reporting, which was completed as of September 30,
2005. TD Waterhouse utilizes separate information and accounting systems and processes.
34
The Company intends to extend its Sarbanes-Oxley 404 compliance program to include TD Waterhouse.
The Companys management is reviewing and evaluating its internal control procedures and the design
of those control procedures relating to the TD Waterhouse acquisition and anticipates that it will
complete an evaluation and review of the TD Waterhouse internal control over financial reporting as
of September 29, 2006, the date of managements next assessment of the Companys internal control
over financial reporting.
There have been no other changes in the Companys internal control over financial reporting during
the most recently completed fiscal quarter that have materially affected, or are reasonably likely
to materially affect, the Companys internal control over financial reporting.
Part II OTHER INFORMATION
Item 1. Legal Proceedings
Legal The nature of the Companys business subjects it to lawsuits, arbitrations, claims and other legal
proceedings. We cannot predict with certainty the outcome of pending legal proceedings. A
substantial adverse judgment or other resolution regarding the proceedings could have a material
adverse effect on the Companys financial condition, results of operations and cash flows.
However, in the opinion of management, after consultation with legal counsel, the Company has
adequate legal defenses with respect to the legal proceedings to which it is a defendant or
respondent and the outcome of these pending proceedings is not likely to have a material adverse
effect on the financial condition, results of operations or cash flows of the Company.
Net Capital Matter On November 12, 2004, the Companys broker-dealer subsidiary Ameritrade, Inc.
was notified by the staff of the NASD and the staff of the SEC Division of Market Regulation
(collectively the Staffs) that they believe that for regulatory purposes certain funds held in
banks on behalf of clients are liabilities and assets of Ameritrade, Inc. rather than liabilities
and assets only of the banks. The resulting assets have not been allowed for purposes of
Ameritrade, Inc.s regulatory net capital calculation. Accordingly, in the Staffs view
Ameritrade, Inc.s net capital was below its minimum amount required under Exchange Act Rule
15c3-1. Ameritrade, Inc. cured the asserted deficiency on November 15, 2004, the first business
day following the notification.
The asserted deficiency was based upon the Staffs concerns regarding a Federal Deposit Insurance
Corporation (FDIC) insured deposit sweep program available to Ameritrade, Inc.s clients wherein
funds were deposited, through an intermediary agent, into FDIC-insured deposit accounts at banks
(Program Banks). The Staff indicated that Ameritrade, Inc. did not for regulatory purposes
effectively move client free credit balances to bank accounts established in client names at the
Program Banks. Ameritrade, Inc. was also notified, on November 5, 2004, by the NASD that client
funds deposited in the FDIC-insured sweep program should be included in Ameritrade, Inc.s
computation of reserve requirements under Exchange Act Rule 15c3-3. A deposit into Ameritrade,
Inc.s reserve account was made to fund the asserted Rule 15c3-3 requirement effective November 5,
2004.
Ameritrade, Inc. informed the Staffs that it believed that the free credit balances were
effectively transferred to the Program Banks in accordance with well-established banking law, that
the accounts held at the Program Banks were the obligations of the Program Banks to each client and
not obligations of Ameritrade, Inc., that the FDIC insurance passed through to each client in
accordance with FDIC regulations and that it has been in compliance with Rules 15c3-1 and 15c3-3.
At the direction of the NASD, Ameritrade, Inc. filed a notice describing the asserted net capital
deficiency as well as Ameritrade, Inc.s position on the matter on November 12, 2004 in accordance
with Exchange Act Rule 17a-11. Ameritrade, Inc. cured the asserted deficiency the first business
day following the notification by causing the transfer of the cash in the FDIC-insured accounts to
a money market fund in accounts in the names of the clients. No client funds were lost and the
Company believes that the client balances in the FDIC-insured deposit accounts at the Program Banks
were, at all times, protected by FDIC insurance on a pass-through basis and no client balance was
at risk. Ameritrade, Inc. ceased offering the FDIC-insured product pending NASD review. At the
direction of the NASD, Ameritrade, Inc. filed, on December 8, 2004, amended Form X-17A-5 Financial
and Operational Combined Uniform Single (FOCUS) Reports for the months of May through September
2004 reflecting the Staffs position.
This matter had no impact on the Companys results of operations or net cash flows for any period
presented.
On November 14, 2005, the NASD advised the Company that NASD Staff has made a preliminary
determination to recommend disciplinary action against the Company based on allegations that it
violated SEC net capital and customer protection rules and NASD conduct rules. The Company has
submitted a response setting forth the reasons the Company believes that the NASD should not bring
a disciplinary action. Conditioned upon the final agreement of the NASD, the
Company expects to
settle this matter for an amount that is not expected to have a material affect on our financial
condition, results of operations, or cash flows.
35
Other Regulatory Matters The Company is in discussions with its regulators about matters raised
during regulatory examinations or otherwise subject to their inquiry. These matters could result
in censures, fines or other sanctions. Management believes the outcome of any resulting actions
will not be material to the Companys financial condition, results of operations or cash flows.
However, the Company is unable to predict the outcome of these matters.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider
the following and the factors discussed under the heading Risk Factors in our annual report on
Form 10-K for the year ended September 30, 2005, which could materially affect our business,
financial condition or future results of operations. The risks described in this Form 10-Q and in
our Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently
known to us or that we currently deem to be immaterial also may materially adversely affect our
business, financial condition or results of operations. The risk factor presented below updates
and should be considered in addition to the risk factors previously disclosed in our Form 10-K for
the fiscal year ended September 30, 2005.
Our recently announced price reductions could adversely affect our results of operations.
In April 2006, we eliminated account maintenance fees for all retail clients and reduced our
commission rate on online equity trades to $9.99 per trade. As a result of these changes, we will
need to grow our client base, increase our asset-based revenues or reduce our expenses in order to
improve or maintain our results of operations.
There have been no other material changes from risk factors as previously disclosed in the
Companys Form 10-K for the fiscal year ended September 30, 2005.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The Toronto-Dominion Bank (TD), an affiliate of the Company, made purchases of Company
common stock pursuant to a stock purchase plan during the quarter covered by this report. On
February 22, 2006, the Company entered into Amendment No. 1 to the Stockholders Agreement, dated as
of June 22, 2005, among the Company, TD and certain other stockholders of the Company (the
Stockholders Agreement). Pursuant to the Stockholders Agreement, among other things, TD (or its
permitted designee) agreed to commence (or caused to be commenced) a cash tender offer (the Tender
Offer) at a price not less than $16.00 per share of common stock of the Company promptly following
the closing of the Companys acquisition of the United States retail brokerage business of TD
Waterhouse Group, Inc. (the Acquisition). Pursuant to Amendment No. 1 to the Stockholders
Agreement, in lieu of the Tender Offer, TD agreed to acquire 15 million shares of common stock of
the Company prior to August 22, 2006 by one or more stock purchase plans meeting the requirements
of Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the Exchange Act). TD agreed
that all such purchases would be effected by means of open market purchases in compliance with Rule
10b-18. TD subsequently expanded its plan to permit purchases up to an amount necessary to bring
its ownership to 39.9 percent of the Companys common stock. TD completed its purchases on May 25,
2006. The following table summarizes purchases reported by TD on Forms 4 for the quarter covered
by this report:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFFILIATE PURCHASES OF EQUITY SECURITIES |
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Maximum Number |
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
|
of Shares that May |
|
|
|
Total Number of |
|
|
Average Price |
|
|
Part of Publicly |
|
|
Yet Be Purchased |
|
Period |
|
Shares Purchased |
|
|
Paid per Share |
|
|
Announced Program |
|
|
Under the Program |
|
April 1, 2006 April 28, 2006 |
|
|
7,317,800 |
|
|
$ |
19.99 |
|
|
|
7,317,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 29, 2006 May 26, 2006 |
|
|
31,551,487 |
|
|
$ |
18.00 |
|
|
|
31,551,487 |
|
|
|
|
|
May 27, 2006 June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Three months ended June 30, 2006 |
|
|
38,869,287 |
|
|
$ |
18.37 |
|
|
|
38,869,287 |
|
|
None |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
Item 6. Exhibits
2.1 |
|
Agreement of Sale and Purchase between Ameritrade Holding Corporation and The
Toronto-Dominion Bank dated as of June 22, 2005 (incorporated by reference to Exhibit
2.1 of the Companys Form 8-K filed on June 28, 2005) |
|
2.2 |
|
Amendment No. 1 to the Agreement of Sale and Purchase between Ameritrade
Holding Corporation and The Toronto-Dominion Bank dated as of October 28, 2005
(incorporated by reference to Exhibit 99.1 of the Companys Form 8-K filed October 31,
2005) |
|
2.3 |
|
Amendment No. 2 to the Agreement of Sale and Purchase between Ameritrade
Holding Corporation and The Toronto-Dominion Bank dated as of December 23, 2005
(incorporated by reference to Exhibit 2.3 of the Companys Form 8-K filed December 29,
2005) |
|
3.1 |
|
Amended and Restated Certificate of Incorporation of TD AMERITRADE Holding
Corporation, dated January 24, 2006 (incorporated by reference to Exhibit 3.1 of the
Companys Form 8-K filed on January 27, 2006) |
|
3.2 |
|
Amended and Restated By-Laws of TD AMERITRADE Holding Corporation, effective
March 9, 2006 (incorporated by reference to Exhibit 3.1 of the Companys Form 8-K filed
on March 15, 2006) |
|
10.1 |
|
Form of Indemnification Agreements, dated as of May 30, 2006, between TD
AMERITRADE Holding Corporation and several current and previous members of the
Companys board of directors (incorporated by reference to Exhibit 10.1 of the
Companys Form 8-K filed on June 5, 2006) |
|
10.2 |
|
Employment Agreement, as amended, effective as of June 23, 2006, between Joseph
H. Moglia and TD AMERITRADE Holding Corporation (incorporated by reference to Exhibit
10.1 of the Companys Form 8-K filed on June 29, 2006) |
|
10.3 |
|
Employment Agreement, dated May 23, 2006, between Asiff S. Hirji and TD
AMERITRADE Holding Corporation (incorporated by reference to Exhibit 10.2 of the
Companys Form 8-K filed on May 25, 2006) |
|
10.4 |
|
Employment Agreement, dated May 23, 2006, between John R. MacDonald and TD
AMERITRADE Holding Corporation (incorporated by reference to Exhibit 10.3 of the
Companys Form 8-K filed on May 25, 2006) |
|
10.5 |
|
Employment Agreement, dated May 23, 2006, between T. Christian Armstrong and TD
AMERITRADE Holding Corporation (incorporated by reference to Exhibit 10.4 of the
Companys Form 8-K filed on May 25, 2006) |
|
10.6 |
|
Amended and Restated 1996 Directors Incentive Plan, effective May 10, 2006
(incorporated by reference to Exhibit 10.1 of the Companys Form 8-K filed on May 16,
2006) |
|
10.7 |
|
Form of Restricted Stock Unit Agreement for Non-employee Directors
(incorporated by reference to Exhibit 10.2 of the Companys Form 8-K filed on May 16,
2006) |
|
15.1 |
|
Awareness Letter of Independent Registered Public Accounting Firm |
|
31.1 |
|
Certification of Joseph H. Moglia, Principal Executive Officer, as required
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
31.2 |
|
Certification of John R. MacDonald, Principal Financial Officer, as required
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
32.1 |
|
Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 |
37
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: August 8, 2006
|
|
|
|
|
|
TD AMERITRADE Holding Corporation
(Registrant)
|
|
|
By: |
/s/ JOSEPH H. MOGLIA
|
|
|
|
Joseph H. Moglia |
|
|
|
Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
|
By: |
/s/ JOHN R. MACDONALD
|
|
|
|
John R. MacDonald |
|
|
|
Executive Vice President, Chief Financial Officer
and Chief Administrative Officer
(Principal Financial and Accounting Officer) |
|
|
38