<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
Form S-1
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
------------------------------------
TD WATERHOUSE SECURITIES, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 6791 13-4056516
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
100 WALL STREET
NEW YORK, NEW YORK 10005
(212) 806-3500
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------------------
STEPHEN D. MCDONALD
CHIEF EXECUTIVE OFFICER
TD WATERHOUSE SECURITIES, INC.
100 WALL STREET
NEW YORK, NEW YORK 10005
(212) 806-3500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------------
COPIES TO:
<TABLE>
<S> <C> <C>
LEE MEYERSON, ESQ. R. GLENN BUMSTEAD, ESQ. STEPHEN L. BURNS, ESQ.
SIMPSON THACHER & BARTLETT SENIOR VICE PRESIDENT, CRAVATH, SWAINE & MOORE
425 LEXINGTON AVENUE GENERAL COUNSEL AND SECRETARY WORLDWIDE PLAZA
NEW YORK, NEW YORK 10017 THE TORONTO-DOMINION BANK 825 EIGHTH AVENUE
(212) 455-2000 TORONTO DOMINION CENTRE NEW YORK, NEW YORK 10019
TORONTO, ONTARIO M5K 1A2 (212) 474-1000
(416) 982-8345
</TABLE>
------------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to Rule
434 under the Securities Act, check the following box. [ ]
------------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO AGGREGATE OFFERING AMOUNT OF
BE REGISTERED PRICE(1)(2) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------
Common Stock, par value $.01 per share.................... $1,000,000,000 $278,000
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) A portion of the shares to be registered represents shares that are to be
offered outside of the United States but that may be resold from time to
time in the United States. Such shares are not being registered for the
purpose of sales outside the United States.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933.
------------------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
EXPLANATORY NOTE
This registration statement contains three forms of prospectus: one to be
used in connection with an offering in the U.S., one to be used in connection
with a concurrent offering in Canada and one to be used in connection with a
concurrent international offering outside the U.S. and Canada. The Canadian
prospectus is substantially the same as the U.S. prospectus except for certain
additional cover and other pages, which are labeled "Additional Pages for the
Canadian Prospectus." The international prospectus is substantially the same as
the U.S. prospectus except for the front outside cover page which is labeled
"Alternate Cover Page for International Prospectus." Each of the U.S.
prospectus, the Canadian prospectus and the international prospectus will be
filed with the Securities and Exchange Commission pursuant to Rule 424(b) under
the Securities Act of 1933.
<PAGE> 3
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED APRIL 30, 1999
Shares
TD WATERHOUSE SECURITIES, INC.
Common Stock
------------------
We are selling shares of our common stock. Of these shares,
shares are being offered in the United States by a syndicate of U.S.
underwriters, shares are being offered in Canada by a syndicate of Canadian
underwriters, and shares are being offered outside of the United States
and Canada by a syndicate of international managers. The underwriters and
managers have an option to purchase on a pro rata basis up to
additional shares to cover over-allotments.
Prior to these offerings, there has not been a public market for our common
stock. The initial public offering price is expected to be between $ and $
per share. We intend to apply to list our common stock on The New York Stock
Exchange and The Toronto Stock Exchange.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" STARTING ON
PAGE 8.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS TD WATERHOUSE
-------- ------------- -------------
<S> <C> <C> <C>
Per Share............................................ $ $ $
Total................................................ $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about ,
1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Joint Global Coordinators
CREDIT SUISSE FIRST BOSTON TD SECURITIES
------------------
<TABLE>
<S> <C> <C>
GOLDMAN, SACHS SALOMON SMITH MORGAN STANLEY
& CO. BARNEY DEAN WITTER
</TABLE>
The date of this Prospectus is , 1999.
<PAGE> 4
[inside front cover]
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY..................... 2
RISK FACTORS........................... 8
USE OF PROCEEDS........................ 18
DIVIDEND POLICY........................ 18
DILUTION............................... 19
CAPITALIZATION......................... 20
SELECTED FINANCIAL AND OTHER DATA...... 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL
CONDITION............................ 22
THE REORGANIZATION..................... 37
BUSINESS............................... 40
MANAGEMENT............................. 63
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PRINCIPAL STOCKHOLDER.................. 71
DESCRIPTION OF CAPITAL STOCK........... 74
CERTAIN ANTI-TAKEOVER AND
OTHER PROVISIONS..................... 79
SHARES ELIGIBLE FOR FUTURE SALE........ 84
CERTAIN U.S. FEDERAL INCOME TAX
CONSEQUENCES TO NON-U.S. HOLDERS..... 85
UNDERWRITING........................... 87
LEGAL MATTERS.......................... 91
EXPERTS................................ 91
ADDITIONAL INFORMATION................. 91
INDEX TO FINANCIAL STATEMENTS.......... F-1
</TABLE>
---------------------------
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking" statements which reflect our
expectations regarding our future growth, results of operations, performance and
business prospects and opportunities. Wherever possible, words such as
"anticipate," "believe," "plan," "expect" and similar expressions have been used
to identify these forward-looking statements. These statements reflect our
current beliefs and are based on information currently available to us.
Forward-looking statements involve significant risks and uncertainties. A number
of factors could cause actual results to differ materially from the results
discussed in the forward-looking statements, including those listed in the "Risk
Factors" section of this prospectus. Although the forward-looking statements
contained in this prospectus are based upon what we believe to be reasonable
assumptions, we cannot assure you that actual results will be consistent with
these forward-looking statements. These forward-looking statements are made as
of the date of this prospectus and we assume no obligation to update or revise
them to reflect new events or circumstances.
---------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS
DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE
INFORMATION CONTAINED IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS
DOCUMENT, REGARDLESS OF THE TIME OF DELIVERY OF THIS DOCUMENT OR ANY SALE OF
COMMON STOCK.
------------------------------------
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 1999 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERINGS),
ALL DEALERS THAT EFFECT TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THE OFFERINGS, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALER'S OBLIGATIONS TO DELIVER A PROSPECTUS WHEN ACTING AS
AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
1
<PAGE> 6
PROSPECTUS SUMMARY
The following section summarizes information presented later in this
prospectus. You should carefully read the entire prospectus, and particularly
the "Risk Factors" section, before investing in our common stock. Unless the
context indicates otherwise, the terms "TD Waterhouse," "we," "us," "our" and
similar terms refer to TD Waterhouse Securities, Inc. and its subsidiaries after
giving effect to the reorganization that will take place immediately prior to
the completion of this offering. In the reorganization, The Toronto-Dominion
Bank ("TD Bank"), which currently owns all of our common stock, will contribute
to TD Waterhouse all of TD Bank's discount brokerage businesses outside the U.S.
All of the financial and other information in this prospectus has been restated
to reflect this reorganization (which is described in detail later in this
prospectus under the caption "The Reorganization") as if it had occurred at the
beginning of the periods shown or discussed. Unless otherwise indicated, all
references in this prospectus to "dollars" or "$" are to U.S. dollars.
THE COMPANY
TD Waterhouse is one of the largest discount brokers in the world.
Leveraging our technological expertise, we have become one of the premier global
online brokers and a leading provider of online investing services and related
financial products. We have:
- the second largest discount brokerage operations globally with over 2.6
million customer accounts, including approximately 1.9 million active
accounts, and more than $100 billion in customer assets under
administration as of March 31, 1999;
- the third largest online discount brokerage operations globally by
trading volume and customer assets;
- a significant international presence with operations in the U.S.,
Canada, Australia, the United Kingdom and Hong Kong;
- the second largest global branch network of any discount broker with
over 200 branches worldwide and an additional 40 branches planned by the
end of 2000; and
- complemented our internal growth with a targeted acquisition program
that has included the acquisition and integration of six companies since
1993, with over 570,000 customer accounts.
We specialize in providing financial services to individual retail
investors who manage their own investments and personal finances and to
fee-based independent investment advisors. Customers in our major markets are
able to utilize our services 24 hours a day, seven days a week through a variety
of delivery channels, including the Internet and other electronic channels as
well as our extensive network of branches and service centers. At March 31,
1999, approximately 780,000 of our customer accounts were enabled for online
trading, and for the three months ended March 31, 1999, approximately 59% of our
average daily trading volume of 110,000 trades were conducted online.
We provide our customers with a broad range of brokerage, mutual fund,
banking and other consumer financial products and services on an integrated
basis. Our mutual fund offerings include over 9,600 mutual funds from over 400
fund families. At March 31, 1999, our customers had invested approximately $26
billion in these mutual funds through us, including over $10.8 billion in
proprietary funds that we advise. In addition to clearing for our own customer
accounts, we also provide correspondent clearing services for a number of other
broker-dealers.
Through our affiliates, Waterhouse National Bank and TD Bank, we provide
our customers with fully integrated banking services, including insured money
market accounts (which had approximately $3.4 billion in deposits at March 31,
1999), credit cards, checking, ATM access, insured certificates of deposit and
other banking products. We also provide our customers with a broad array of
investment news, research reports and personal investment management tools (such
as portfolio tracking and mutual fund and stock screening programs).
2
<PAGE> 7
RECENT OPERATING PERFORMANCE
We have achieved substantial growth in recent years while improving our
operating results, as indicated in the following table. The data in the table
are derived from the summary financial and operating data included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, THREE MONTHS ENDED JANUARY 31,
------------------------------------ ----------------------------------
1996 1997 1998 1998 1999 % CHANGE
---------- ---------- ---------- ---------- ---------- --------
PRO FORMA
<S> <C> <C> <C> <C> <C> <C>
Revenues (in millions)........................ $ 371 $ 447 $ 614 $ 124 $ 215 73%
Income before taxes and goodwill (in
millions)................................... $ 89 $ 100 $ 136 $ 23 $ 47 103%
Net income (in millions)...................... $ 26 $ 36 $ 49 $ 7 $ 20 209%
Total customer assets (in billions)........... $ 28.7 $ 42.0 $ 75.9 $ 52.0 $ 95.7 84%
Average trades per day........................ 23,197 32,471 56,173 42,237 97,981 132%
Total accounts (including acquired
accounts)................................... 1,028,000 1,373,000 2,302,000 1,695,000 2,467,000 46%
Number of new accounts........................ 246,000 324,000 531,000 99,000 167,000 69%
Advertising and marketing expense per new
account..................................... $ 59.00 $ 57.00 $ 63.00 $ 78.00 $ 69.00 (12)%
</TABLE>
According to estimates compiled by industry analysts, our market share of
online trading activity in the U.S. was approximately 12% in the first calendar
quarter of 1999. This ranks us third in the U.S. and globally based on online
trading volume. In Canada, we were the first in the industry to offer online
trading in 1992 and first to offer Internet-based trading in 1996. We continue
to be the market leader in Canadian discount brokerage, with a market share
based on client assets of approximately 50% of the total market as of December
31, 1998, which we believe is more than double that of our nearest discount
brokerage competitor. In addition, we had a market share for the calendar year
1998 of approximately 18% of total retail listed market orders, ranking us
number one in the Canadian retail brokerage industry.
In the U.S., we have been recognized as a leading provider of low-cost,
high quality financial services. In both 1997 and 1998, SmartMoney magazine
named us "America's #1 Discount Broker," and ranked our online trading service
first in 1998. In October 1998, Kiplinger's magazine ranked us as the best
discount broker for mutual funds.
OUR STRATEGY
The discount brokerage industry has grown rapidly over the past decade,
with the largest portion of this growth coming from the significant increase in
online brokerage activity. According to data compiled by International Data
Corporation, since the introduction of Internet access for online brokerage
services in 1996, the number of online brokerage accounts has increased to an
estimated 1.6 million at the end of 1996, 3.7 million at the end of 1997 and 6.4
million at the end of 1998, representing approximately $324 billion in assets.
Online trading is estimated to have reached an average of over 440,000 trades
per day during the first quarter of 1999 and now accounts for an estimated 25%
of all retail stock trades in the U.S.
Our strategy to date has focused on increasing our share of this growing
market, and particularly the important online trading segment, through a
combination of the following elements:
- offering our customers a broad range of financial products and services;
- providing a choice of diverse and integrated delivery channels to our
customers, including Internet, direct dial-up and touch-tone telephone
access, as well as our extensive network of branch offices;
- investing in advanced technology solutions and leveraging selected
strategic partnerships;
- maintaining a commitment to high-quality customer service; and
- offering highly competitive pricing.
3
<PAGE> 8
Our ongoing business strategy focuses on positioning us to take advantage
of the current industry dynamics by leveraging our position as the world's
second largest discount brokerage firm. Key elements of our strategy include:
- building brand awareness on a global basis;
- expanding our products and services;
- building customer assets by focusing on high growth, profitable market
segments;
- leveraging our technological expertise to enhance our customers'
experience and empower them to better manage their investments;
- continuing our international expansion both in existing markets and into
attractive new markets; and
- enhancing our financial performance by building key businesses, focusing
on low cost distribution and continuing to integrate and extract
economies of scale from acquisitions.
------------------
Our principal executive offices are located at 100 Wall Street, New York,
NY 10005, and our telephone number is (212) 806-3500.
4
<PAGE> 9
THE OFFERING
<TABLE>
<S> <C>
Common stock offered:
U.S. offering............................. shares
Canadian offering......................... shares
International offering.................... ________ shares
Total.................................. shares
Common stock to be outstanding following the
offerings................................. shares
Use of proceeds............................. We intend to use approximately $
million (or two-thirds) of the estimated net
proceeds from the offerings for working
capital and other general corporate
purposes, including investments in
technology and systems upgrades and
increases in our advertising and marketing
budget. We may also use a portion of these
net proceeds to finance acquisitions of
other companies, although we do not
currently have any pending or proposed
significant acquisitions.
We will use approximately $106 million of
the remaining net proceeds to repay certain
intercompany debt to TD Bank and we may use
up to $ million to redeem shares of
preferred stock of our subsidiaries held by
TD Bank.
Proposed NYSE and TSE listing symbol........
</TABLE>
The share totals listed above do not include additional shares
that will be offered by us if the underwriters and managers exercise their
over-allotment option in full. Some of the disclosure in this prospectus will be
different if the underwriters and managers exercise this option. Unless we state
otherwise, the information in this prospectus assumes that the underwriters and
managers will not exercise this option.
In addition, the number of shares of common stock shown in this prospectus
as outstanding following the offerings includes shares which are
issuable upon exchange of the exchangeable preference shares held by TD Bank
(see "The Reorganization"), and excludes shares to be reserved for
issuance pursuant to employee incentive and stock option plans.
5
<PAGE> 10
SUMMARY FINANCIAL AND OPERATING DATA
The following table presents the results of the Waterhouse Securities
Group, our U.S.-based operations that were acquired at the end of fiscal year
1996, and the Green Line Group, our Canada-based operations, as stand-alone
operations in fiscal years 1994 and 1995 and as combined operations thereafter.
Pro forma 1996 accounts have been prepared to present the combined results of
operations as if the acquisition of the Waterhouse Securities Group occurred as
of the beginning of fiscal year 1996. See "Selected Financial and Other Data,"
"The Reorganization" and our combined financial statements and the notes thereto
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
----------------------- ------------------------ PRO FORMA HISTORICAL HISTORICAL
CANADA U.S. CANADA U.S. COMBINED COMBINED COMBINED
---------- ---------- ---------- ----------- --------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues
Commissions and fees.............. $77,398 $83,917 $64,833 $113,881 $ 270,505 $ 313,572 $ 409,432
Mutual fund and related revenue... -- 6,018 5,831 9,286 23,515 35,762 59,022
Net interest revenue.............. 26,604 13,056 28,660 18,888 53,085 68,874 117,733
Other............................. 9,863 1,603 14,493 1,375 23,681 28,424 28,274
------- ------- ------- -------- --------- --------- ---------
TOTAL REVENUES.................. 113,865 104,594 113,817 143,430 370,786 446,632 614,461
------- ------- ------- -------- --------- --------- ---------
Expenses
Employee compensation and
benefits........................ 35,136 32,272 31,414 43,259 107,137 138,261 183,377
Execution and clearing costs...... 18,312 11,983 17,219 14,989 47,510 63,316 95,523
Occupancy and equipment........... 8,555 10,223 10,221 12,992 44,413 43,485 56,596
Advertising and marketing......... 3,120 4,677 3,572 9,441 14,439 18,511 33,184
Communications.................... 7,330 4,189 6,718 6,032 19,154 22,981 30,809
Amortization of goodwill.......... 1,638 -- 1,623 -- 21,121 21,630 33,000
Professional fees................. 4,172 2,480 5,799 4,095 15,034 14,871 15,350
Other............................. 15,219 9,477 11,313 13,969 34,311 44,956 63,144
------- ------- ------- -------- --------- --------- ---------
TOTAL EXPENSES.................. 93,482 75,301 87,879 104,777 303,119 368,011 510,983
------- ------- ------- -------- --------- --------- ---------
Income before income taxes......... 20,383 29,293 25,938 38,653 67,667 78,621 103,478
Income tax provision............... 9,689 11,731 12,127 15,228 41,363 42,416 54,765
------- ------- ------- -------- --------- --------- ---------
NET INCOME...................... $10,694 $17,562 $13,811 $ 23,425 $ 26,304 $ 36,205 $ 48,713
======= ======= ======= ======== ========= ========= =========
Pro forma earnings per share....... $
---------
Shares used to compute pro forma
per share data (1)................
=========
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
-----------------------
1998 1999
HISTORICAL HISTORICAL
COMBINED COMBINED
---------- ----------
<S> <C> <C>
STATEMENT OF INCOME DATA:
Revenues
Commissions and fees.............. $ 83,871 $ 152,044
Mutual fund and related revenue... 10,583 20,783
Net interest revenue.............. 23,768 34,004
Other............................. 6,277 8,204
--------- ---------
TOTAL REVENUES.................. 124,499 215,035
--------- ---------
Expenses
Employee compensation and
benefits........................ 40,181 59,859
Execution and clearing costs...... 19,259 34,679
Occupancy and equipment........... 12,403 17,754
Advertising and marketing......... 7,695 11,569
Communications.................... 6,639 10,717
Amortization of goodwill.......... 7,678 9,279
Professional fees................. 3,118 4,082
Other............................. 11,804 28,999
--------- ---------
TOTAL EXPENSES.................. 108,777 176,938
--------- ---------
Income before income taxes......... 15,722 38,097
Income tax provision............... 9,222 18,031
--------- ---------
NET INCOME...................... $ 6,500 $ 20,066
========= =========
Pro forma earnings per share....... $
---------
Shares used to compute pro forma
per share data (1)................
=========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
----------------------- ------------------------ PRO FORMA HISTORICAL HISTORICAL
CANADA U.S. CANADA U.S. COMBINED COMBINED COMBINED
---------- ---------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER OPERATING DATA:
Pre-tax operating margin,
excluding goodwill........... 19.3% 30.3% 24.2% 29.2% 23.9% 22.4% 22.2%
Average commissions per
revenue trade................ $ 62.42 $ 46.77 $ 47.42 $ 45.61 $ 47.72 $ 39.73 $ 28.82
Average trades per day
Electronic................... 650 209 970 1,645 5,415 11,200 28,621
Total........................ 6,488 6,431 6,532 8,774 23,197 32,471 56,173
Total accounts................ 335,000 363,000 358,000 455,000 1,028,000 1,373,000 2,302,000
Total active accounts(2)...... 235,000 171,000 251,000 251,000 708,000 960,000 1,609,000
Number of new accounts........ 78,000 82,000 83,000 90,000 246,000 324,000 531,000
Total customer assets (in
billions).................... $ 9.2 $ 7.3 $ 11.0 $ 11.6 $ 28.7 $ 42.0 $ 75.9
Total employees............... 990 655 916 1,023 2,773 3,006 4,217
Total branches................ 24 66 27 73 119 144 192
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
-----------------------
1998 1999
HISTORICAL HISTORICAL
COMBINED COMBINED
---------- ----------
<S> <C> <C>
OTHER OPERATING DATA:
Pre-tax operating margin,
excluding goodwill........... 18.8% 22.0%
Average commissions per
revenue trade................ $ 32.79 $ 24.14
Average trades per day
Electronic................... 19,038 61,562
Total........................ 42,237 97,981
Total accounts................ 1,695,000 2,467,000
Total active accounts(2)...... 1,172,000 1,736,000
Number of new accounts........ 99,000 167,000
Total customer assets (in
billions).................... $ 52.0 $ 95.7
Total employees............... 3,470 4,534
Total branches................ 167 200
</TABLE>
6
<PAGE> 11
<TABLE>
<CAPTION>
JANUARY 31, 1999
-------------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
COMBINED STATEMENT OF FINANCIAL CONDITION DATA:
Cash and cash equivalents................................... $ 484,137 $
Securities owned, at market value........................... 62,077
Receivable from customers................................... 3,470,265
Total assets................................................ 5,482,699
Deposits received for securities loaned..................... 2,048,999
Payable to customers........................................ 1,903,272
Equity...................................................... 1,035,648
</TABLE>
- ---------------
(1) Shares used to compute pro forma per share data for the year ended October
31, 1998 and the three months ended January 31, 1999 represent common stock
outstanding immediately after the reorganization described in Note 17 to our
combined financial statements included elsewhere in this prospectus but
before the offerings. The shares include shares of common stock
issuable on the exchange of the exchangeable preference shares of our
Canadian subsidiary to be issued to TD Bank in the reorganization.
(2) Active accounts are accounts that had purchase, sale or other activity
during the previous calendar quarter.
7
<PAGE> 12
RISK FACTORS
You should carefully consider the risks described below before making a
decision to invest in our company. There may be additional risks that we do not
currently know of or that we currently deem immaterial based on the information
available to us. All of these risks may impair our business operations. This
document also contains forward-looking statements that involve risks and
uncertainties, and actual results may differ materially from the results we
discuss in the forward-looking statements. If any of the negative results
associated with the following risks actually occur, our business, financial
condition or results of operations could be materially adversely affected. In
such case, the trading price of our common stock could decline, and you could
lose all or part of your investment.
OUR BUSINESS COULD BE HARMED BY MARKET VOLATILITY AND OTHER SECURITIES INDUSTRY
RISKS
Our revenues are derived primarily from securities brokerage and related
services, and we expect this business to continue to account for almost all of
our revenues. We, like other securities firms, are directly affected by economic
and political conditions, broad trends in business and finance and changes in
the conditions of the securities markets in which our customers trade. Over the
past several years the securities markets in the U.S. and Canada (which are the
principal trading markets for most of our customers) have fluctuated
considerably. A downturn in either of these markets would adversely affect our
operating results. Recently, the markets for technology and Internet-related
stocks have been especially volatile, and a significant downturn would have an
even greater effect on us because a substantial portion of our customers invest
in these types of stocks. In previous major stock market declines, many firms in
the securities industry suffered financial losses, and the level of individual
investor trading activity decreased after these events. When trading volume is
low, our profitability would likely be adversely affected because a significant
portion of our costs do not vary with revenue. For these reasons, severe market
fluctuations could have a material adverse effect on our business, financial
condition and operating results. Some of our competitors with more diversified
business lines might withstand such a downturn in the securities industry better
than we would. See "-- We Operate in a Very Competitive Industry."
CAPACITY CONSTRAINTS AND SYSTEM FAILURES COULD HARM OUR BUSINESS
We receive and process a majority of our trade orders through electronic
means such as the Internet, dial-up links to our private computer networks and
touch-tone telephones. In addition, we execute all of our trades through a
series of computerized processing systems and links to third parties. Thus, we
depend heavily on the capacity and reliability of the electronic systems
supporting this type of trading. Heavy use of our systems during peak trading
times or at times of unusual market volatility could cause our systems to
operate slowly or even to fail for periods of time. Recently, we have
experienced periods of extremely high trading volume and substantial volatility
in the securities markets. On several occasions during these periods, the volume
and volatility of trading activity caused individual system components or
processes to fail, resulting in the temporary unavailability of our web site for
electronic trading. On some other occasions, high trading volume has caused
significant delays in executing trading orders, resulting in some customers'
orders being executed at prices they did not anticipate. We cannot assure you
that these events will not occur again in the future. These occurrences are
dissatisfying to our customers, who may file formal complaints with us or
industry regulatory organizations, initiate regulatory inquiries or proceedings,
file lawsuits against us, switch brokerage firms or cease online trading
altogether. See "Business -- Legal and Administrative Proceedings." While we
constantly monitor system loads and performance and regularly implement system
upgrades to handle predicted increases in trading volume and volatility, we
cannot assure you that we will be able to accurately predict such future volume
increases or volatility or that our systems will be able to accommodate such
volume increases or volatility without failure or degradation.
Our electronic systems are also vulnerable to damage or interruption from
human error, natural disasters, power loss, sabotage, computer viruses and
similar events or the loss of support services from third parties.
As our business expands, we also face risks relating to the need to expand
and upgrade our transaction processing systems, network infrastructure and other
aspects of our technology. While many of our systems are
8
<PAGE> 13
designed to be scalable (that is, to accommodate additional growth without
redesign or replacement), we may nevertheless need to make significant
investments in additional hardware and software to accommodate growth. In
addition, we cannot assure you that we will be able to predict accurately the
timing or rate of such growth, or expand and upgrade our systems and
infrastructure on a timely basis.
WE OPERATE IN A HIGHLY REGULATED INDUSTRY AND COMPLIANCE FAILURES COULD
ADVERSELY AFFECT OUR BUSINESS
The securities industry in the U.S., Canada and the other jurisdictions in
which we operate is subject to extensive regulation covering all aspects of the
securities business, including:
- registration of offices and personnel;
- sales methods;
- acceptance and execution of customer orders;
- handling of customer funds and securities;
- trading practices;
- capital structure;
- record keeping;
- conduct of directors, officers and employees; and
- supervision.
As a clearing broker, we have to comply with additional laws and rules.
These include rules relating to possession and control of customer funds and
securities, margin lending and execution and settlement of transactions. See "--
Our Clearing Operations Expose Us to Potential Liability for Clearing Errors and
Require Us to Have Access to Significant Sources of Liquidity."
The various governmental authorities and industry self-regulatory
organizations that supervise and regulate us generally have broad enforcement
powers to censure, fine, issue cease-and-desist orders or suspend or expel us or
any of our officers or employees who violate applicable laws or regulations. Our
ability to comply with all applicable laws and rules is largely dependent on our
establishment and maintenance of compliance and reporting systems, as well as
our ability to attract and retain qualified compliance and other personnel. We
could be subject to disciplinary or other regulatory or legal actions in the
future due to noncompliance.
Recently, various regulatory and enforcement agencies have been reviewing
systems capacity, customer access, best execution practices, and other service
issues as they relate to the discount and online brokerage industry, including
TD Waterhouse. These could result in enforcement actions, new regulations, or
the retroactive application of existing regulations, any of which could have a
material adverse effect on our business, financial condition and operating
results. See "Business -- Legal and Administrative Proceedings."
In addition, we use the Internet as a major distribution channel to provide
products and services to our customers. Due to the increasing popularity of the
Internet, it is possible that new laws and regulations may be adopted dealing
with such issues as user privacy, content and pricing. Such laws and regulations
might increase our cost of using, or limit our ability to use, the Internet as a
distribution channel, which in turn could have a material adverse effect on our
business, financial condition and operating results.
THE FUTURE SUCCESS OF OUR ONLINE BROKERAGE BUSINESS WILL DEPEND ON THE CONTINUED
DEVELOPMENT AND MAINTENANCE OF THE INTERNET INFRASTRUCTURE
The Internet has experienced, and is expected to continue to experience,
significant growth in the number of users and amount of traffic. Our future
success will depend upon the development and maintenance of the Internet's
infrastructure to cope with this increased traffic. This will require a reliable
network backbone with the necessary speed, data capacity and security, and the
timely development of complementary products, such as high speed modems, for
providing reliable Internet access and services.
9
<PAGE> 14
Many Internet service providers, which provide our customers with access to
the Internet, and other suppliers of Internet systems and components have
experienced a variety of outages and other delays as a result of damage to
portions of their infrastructure and other technical problems and could face
similar outages and delays in the future. Such outages and delays are likely to
affect the level of Internet usage and the processing of transactions on our web
site and are not within our control. In addition, the Internet could lose its
viability due to delays in the development or adoption of new standards to
handle increased levels of activity or due to increased government regulation.
The adoption of new standards or government regulation may require us to incur
substantial data processing development and compliance costs.
WE OPERATE IN A VERY COMPETITIVE INDUSTRY
The market for brokerage services is rapidly evolving and intensely
competitive. We expect competition to continue and intensify in the future. We
face direct competition from other discount brokerage firms, many of which
provide touch-tone telephone and online brokerage services but do not maintain
significant branch networks. This may result in those other firms having a lower
cost structure and an ability to charge lower commissions.
We also encounter competition from established full commission brokerage
firms whose pricing and Internet strategies are continuing to evolve and who
could elect to market the same types of services that we offer. In addition, we
compete with financial institutions, mutual fund sponsors and other
organizations, some of which provide (or may in the future provide) electronic
and other discount brokerage services.
Some of our competitors have certain advantages over us, including:
- longer operating histories and greater financial, technical, marketing
and other resources;
- a wider range of services and financial products;
- greater name recognition and larger customer bases;
- more extensive promotional activities, better terms and lower prices
available to customers; and
- cooperative relationships among themselves or with third parties to
enhance services and products.
Increased financial profit levels within the securities industry over the
past several years have strengthened existing competitors. We believe that such
success will continue to attract new competitors to the industry, such as banks,
software development companies, insurance companies, providers of online
financial and information services and others. Commercial banks and other
financial institutions have become more competitive with us by offering their
customers certain corporate and individual financial services traditionally
provided by securities firms. The current trends toward consolidation and
product line expansion in the commercial banking industry could further increase
competition in all aspects of our business. To the extent our competitors are
able to attract and retain customers based on the convenience of one-stop
shopping, our business or ability to grow could be adversely affected. In many
instances, we are competing with such organizations both for the same customers
and for experienced brokers, technical and other personnel.
We cannot assure you that we will be able to compete effectively with
current or future competitors. See "Business -- Competition."
WE WILL NEED TO INTRODUCE NEW SERVICES AND PRODUCTS IN A TIMELY MANNER IN ORDER
TO REMAIN COMPETITIVE
Our future success will depend in large part on our ability to develop and
enhance our services and products. We operate in a very competitive industry in
which the ability to develop and deliver advanced services through the Internet
and other channels is a key competitive factor. There are significant technical
risks in the development of new or enhanced services and products, including the
risk that we will be unable to:
- effectively use new technologies;
- adapt our services and products to emerging industry standards; or
- develop, introduce and market enhanced or new services and products.
10
<PAGE> 15
If we are unable to develop and introduce enhanced or new services and
products quickly enough to respond to market or customer requirements or to
comply with emerging industry standards, or if these services and products do
not achieve market acceptance, our business, financial condition and operating
results could be materially adversely affected.
EXPANSION OF OUR OPERATIONS OUTSIDE NORTH AMERICA INVOLVES SPECIAL RISKS
To date, we have established or acquired operations in Australia, the
United Kingdom and Hong Kong and we plan to expand our operations into other
European and possibly Asian countries in the near future. There are certain
risks inherent in doing business in international markets, particularly in the
regulated brokerage industry, which could include for any particular market:
- less developed technological infrastructures, resulting in lower
customer acceptance of, or access to, electronic channels;
- less developed automation in exchanges, depositories and national
clearing systems;
- unexpected changes in regulatory requirements, tariffs and other trade
barriers;
- difficulties in staffing and managing foreign operations;
- fluctuations in currency exchange rates;
- reduced protection for intellectual property rights;
- seasonal reductions in business activity during the summer months; and
- potentially adverse tax consequences.
Any of the factors described above could have a material adverse effect on our
future international operations and consequently on our business, financial
condition and operating results.
We are required to comply with the laws and regulations of each country in
which we conduct business. Any failure to develop effective compliance and
reporting systems could result in regulatory penalties in the applicable
jurisdiction, which could have a material adverse effect on our business,
financial condition and operating results. The growth of the Internet as a means
of conducting international business has raised many legal issues regarding,
among other things, the circumstances in which countries or other jurisdictions
have the right to regulate Internet services that may be available to their
citizens from service providers located elsewhere. In many cases, there are no
laws, regulations, judicial decisions or governmental interpretations that
clearly resolve these issues. This uncertainty may adversely affect our ability
to use the Internet to expand our international operations, and creates the risk
that we could be subject to disciplinary sanctions or other penalties for
failure to comply with applicable laws or regulations.
OUR ACQUISITION STRATEGY INVOLVES CERTAIN RISKS
A significant portion of our growth to date has been based on acquisitions,
and we may acquire other companies or businesses in the future. Acquisitions
entail numerous risks, including:
- difficulties in the assimilation of acquired operations and products;
- diversion of management's attention from other business concerns;
- assumption of unknown material liabilities of acquired companies;
- amortization of acquired intangible assets, which would reduce future
reported earnings; and
- potential loss of customers or key employees of acquired companies.
We cannot assure you that we will be able to integrate successfully any
operations, personnel, services or products that might be acquired in the
future.
11
<PAGE> 16
OUR CLEARING OPERATIONS EXPOSE US TO POTENTIAL LIABILITY FOR CLEARING ERRORS AND
REQUIRE US TO HAVE ACCESS TO SIGNIFICANT SOURCES OF LIQUIDITY
We are a "self-clearing" broker in the U.S., Canada, Australia, the United
Kingdom and Hong Kong. We also provide clearing services for unaffiliated
broker-dealers (referred to as "introducing brokers") in the U.S. and Canada.
Self-clearing securities firms are subject to substantially more regulatory
control and examination than brokers that rely on others to perform those
functions, such as many of our competitors. Errors in performing clearing
functions, including clerical and other errors related to the handling of funds
and securities held by us on behalf of customers and introducing brokers, could
lead to civil penalties imposed by applicable authorities as well as losses and
liability in related lawsuits brought by customers and others. Any liability
that arises as a result of our clearing operations could have a material adverse
effect on our business, financial condition and operating results.
As a clearing firm, we extend credit to customers who purchase securities
through their margin accounts. A significant portion of our revenues is derived
from these margin loans. To the extent that these margin loans exceed customer
free credit balances (that is, customer cash balances maintained with us), we
generally must obtain financing from third parties. Currently, we obtain a
significant portion of our funds for customer margin loans and our operating
expenses from such excess customer free credit balances. To the extent customer
cash balances are available for use by us at interest costs lower than third
party financing, our cost of funds is reduced and our net income is enhanced.
Such interest savings contribute substantially to the profitability of our
operations. We cannot assure you that we will continue to be able to obtain such
financing on favorable terms or in sufficient amounts.
Securities industry regulators in the U.S. and Canada are currently
reviewing the extent to which clearing firms will be held accountable for the
improper activities of introducing brokers for which they provide clearing
services. We cannot assure you that our procedures will be sufficient to protect
us from liability for the acts of introducing brokers under current laws and
regulations or that securities industry regulators will not enact more
restrictive laws or regulations or change their interpretations of current laws
and regulations.
WE NEED TO COMPLY WITH STRINGENT CAPITAL REQUIREMENTS
Many of the regulatory agencies, securities exchanges and other industry
self-regulatory organizations that regulate us have stringent rules with respect
to the maintenance of specific levels of net capital by securities
broker-dealers. Net capital is the net worth (assets minus liabilities) of a
broker or dealer, less deductions for certain types of assets. If our brokerage
subsidiaries fail to maintain the required net capital, they may be subject to
suspension or revocation of their licenses, which could ultimately lead to their
being liquidated. If such net capital rules are changed or expanded, or if there
is an unusually large charge against net capital, we might be required to limit
or discontinue those portions of our business that require the intensive use of
capital. Such operations include our clearing operations and the financing of
customer account balances. Also, our ability to withdraw capital from our
brokerage subsidiaries could be restricted, which in turn could limit our
ability to pay dividends, repay debt and redeem or purchase shares of our
outstanding stock, if necessary. A large operating loss or charge against net
capital could adversely affect our ability to expand or even maintain our
present levels of business.
WE DEPEND ON THIRD PARTY SUPPLIERS FOR KEY SERVICES
We rely on a number of third parties to process transactions. These include
service bureaus for our customer account record keeping and data processing
services and market makers and stock exchanges to execute customer orders. In
the U.S., we depend on Automatic Data Processing and in Canada on Information
Systems Management Corporation, (a wholly-owned subsidiary of IBM Canada) for
back-office services, including broker terminal services and order entry
systems, and other information necessary to run our business, including
transaction summaries, data feeds for compliance and risk management, execution
reports, and trade confirmations. In addition, the key component of our Internet
trading technology is the webBroker front-end program and the middleware (which
links customer interface programs to our back office systems) provided to us by
our affiliate, Marketware International Inc. The inability of Marketware to
12
<PAGE> 17
support our business would put the ongoing viability and improvement of our
system at risk. We cannot assure you that any of these providers will be able to
continue to provide these services in an efficient, cost-effective manner or
that they will be able to adequately expand their services to meet our needs. An
interruption in or the cessation of service by any third-party service provider
as a result of systems failures or capacity constraints or for any other reason,
and our inability to make alternative arrangements in a timely manner, if at
all, would have a material adverse effect on our business, financial condition
and operating results. See "Business -- Products and Services."
OUR RELIANCE ON ENCRYPTION TECHNOLOGY COULD MAKE OUR BUSINESS VULNERABLE TO
SECURITY RISKS
A significant barrier to Internet commerce is the secure transmission of
confidential information over public networks. We rely on third-party encryption
and authentication technology to facilitate secure transmission of confidential
information. We cannot assure you that advances in computer and cryptography
capabilities or other developments will not result in a compromise of the
algorithms we use to protect customer transaction data. See "Business --
Technology and Information Systems."
WE ARE DEPENDENT ON OUR EXECUTIVE OFFICERS AND KEY PERSONNEL
Our continued success will depend to a significant extent on the efforts
and abilities of certain of our senior executive officers. The loss of a senior
executive officer could have a material adverse effect on our business,
financial condition and results of operations. While we intend to enter into
employment agreements with certain of our key senior executives in connection
with the offerings and while all members of senior management hold stock options
(and are expected to receive additional options in connection with the
offerings), we cannot assure you that any of such persons will not voluntarily
terminate his or her employment with us. See "Management -- Employment
Agreements" and "-- Anticipated Stock Option Grants."
WE MAY BE UNABLE TO MANAGE EFFECTIVELY OUR RAPID GROWTH
Our rapid growth has placed significant demands on our management and other
resources and is likely to continue. To manage the currently anticipated growth
of our business, we will need to attract, hire and retain highly skilled and
motivated officers and employees. In particular, we currently need to hire a
significant number of account representatives and other customer service
personnel to support the expansion of our service centers and expect that a need
for increased staffing will continue. In addition, most of our competitors are
facing similar staffing shortages, making the competition for qualified
employees particularly strong. We will also need to improve existing systems
and/or implement new systems for transaction processing, operational and
financial management and training, integrating and managing our growing employee
base. We cannot assure you that we will be able to attract the employees or
conduct the system improvements necessary to manage this growth effectively or
that we will be able to achieve the rate of growth we have experienced in the
past.
OUR EXPOSURE TO POSSIBLE SECURITIES LITIGATION COULD ADVERSELY AFFECT OUR
BUSINESS
Many aspects of the securities brokerage business, including online trading
services, involve substantial risks of liability. In recent years, there has
been an increasing incidence of litigation involving the securities brokerage
industry, including class action and other suits that generally seek substantial
damages, including in some cases punitive damages. Like other securities
brokerage firms, we have been named as a defendant in class action and other
suits. Any such litigation brought in the future could have a material adverse
effect on our business, financial condition and operating results. See "Business
- -- Legal and Administrative Proceedings."
LOSSES DUE TO CUSTOMER DEFAULTS AND FRAUD COULD HAVE AN ADVERSE EFFECT ON OUR
BUSINESS
Extending credit to our customers involves certain risks. We allow most of
our customers to purchase securities on margin. We also allow customers, subject
to certain internal approval requirements, to place trades up to specified
limits without first depositing any money into their accounts. We generally are
obligated
13
<PAGE> 18
to settle trades with the other party even if our customer fails to meet his or
her obligations to us. This risk is especially great when the market is
declining rapidly and the value of the collateral we hold, if any, could fall
below the amount of our customer's obligations to us for that trade. Under
applicable regulations and our internal policies, any time we extend credit to a
customer to purchase securities, we must require the customer to maintain a
minimum cash or securities deposit level in his or her account. We run the risk
of loss if there are sharp changes in the market values of securities pledged to
us and our customers fail to honor their commitments to supply additional cash
collateral.
In addition to the risks of extending credit to customers, we are exposed
to potential losses resulting from fraud and other misconduct by customers,
including fraudulent Internet trading (including fraudulent access to legitimate
customer accounts, or the use of a false identity to open an account) or the use
of forged or counterfeit checks for payment. Such types of fraud may be
difficult to prevent or detect, and we may not be able to recover the losses
caused by such activities. It is possible that as a higher proportion of our
trading volume is comprised of online transactions, it may be more difficult to
detect fraud or misconduct at an early stage. Any such losses could have a
material adverse effect on our business, financial condition and operating
results.
INEFFECTIVE RISK MANAGEMENT METHODS COULD HARM OUR BUSINESS
Our policies and procedures to identify, monitor and manage our risks may
not be fully effective. Certain of our methods to manage risk are based on
historical measures of market behavior and are not necessarily predictive of
future risk exposures, which could be greater than the historical measures and
correlations indicate. Other risk management methods depend upon evaluation of
information regarding markets, clients or other matters that is publicly
available or otherwise accessible by us. Such information may not in all cases
be accurate, complete, up-to-date or properly evaluated. Management of
operational, legal and regulatory risk requires, among other things, policies
and procedures to record properly and verify a large number of transactions and
events, and we cannot assure you that those policies and procedures will be
effective.
FAILURE TO ACHIEVE YEAR 2000 COMPLIANCE COULD CAUSE SIGNIFICANT LOSSES
Because many computer systems were not designed to handle dates beyond the
year 1999, computer hardware and software may need to be modified prior to the
year 2000 in order to remain functional.
We have assessed the potential impacts of the year 2000 issue on our
products, services and internal information systems and have successfully
completed industry-wide testing of all our systems. We believe that we have
budgeted sufficiently for the costs of all additional required testing and
remediation for year 2000 issues. Nevertheless, we cannot assure you that the
actual costs incurred by us for this testing and remediation will not be
significantly greater than planned. We also cannot assure you that our systems
will perform successfully after December 31, 1999.
We must rely on outside vendors to address year 2000 issues for their
hardware and software. We have assessed and evaluated potential year 2000 issues
with respect to our outside vendors and have performed tests to ensure that
their critical systems are year 2000 compliant. Based on these procedures, we
believe that all our back-office service providers worldwide are currently
running on systems that are year 2000 compliant. In addition, we are developing
contingency plans with respect to potential year 2000 issues in our
mission-critical systems and to address the risk of business disruption due to
vendor year 2000 issues. Nevertheless, we cannot assure you that our vendors'
systems will work properly after December 31, 1999 or that our contingency plans
will respond adequately to any such failures. Either occurrence would have an
adverse effect on our business, financial condition and operating results.
Certain of the methods of trading we employ depend heavily on the integrity
of electronic systems outside of our control, such as online and Internet
service providers, and third-party software, such as Internet browsers. A
failure of any of these systems due to year 2000 issues would interfere with the
trading process and, in turn, may have a material adverse effect on our
business, financial condition and operating results.
14
<PAGE> 19
Due to our dependence on computer technology to conduct our business, we
are particularly vulnerable to possible year 2000 processing failures, and their
effect on our business, financial condition and operating results could be
material. See "Management's Discussion and Analysis of Results of Operations and
Financial Condition -- Year 2000 Compliance."
CONTROL BY TD BANK COULD PREVENT A CHANGE OF CONTROL OF OUR COMPANY AND MAY
AFFECT THE MARKET PRICE OF OUR COMMON STOCK
We are currently a wholly-owned subsidiary of TD Bank. Upon completion of
the offerings of our common stock, TD Bank will beneficially own approximately
% of our common stock, including shares issuable upon exchange of the
exchangeable preference shares issued to TD Bank in the reorganization ( % if
the underwriters' over-allotment option is exercised in full). Accordingly, for
as long as TD Bank continues to beneficially own more than 50% of our common
stock, TD Bank will be able to elect our entire board of directors, control all
matters that require a stockholder vote (such as mergers, acquisitions and other
business combinations) and exercise a significant amount of influence over our
management and operations. This concentration of ownership could have the effect
of preventing us from undergoing a change of control in the future and might
affect the market price of our common stock.
CONFLICTS OF INTEREST AND COMPETITION WITH TD BANK MAY ARISE
Various conflicts of interest between us and TD Bank may arise in the
future in a number of areas relating to our past and ongoing relationships,
including potential acquisitions of businesses or properties, potential
competitive business activities, the election of new or additional directors,
payment of dividends, incurrence of indebtedness, tax matters, financial
commitments, marketing functions, indemnity arrangements, service arrangements,
issuances of our capital stock, sales or distributions by TD Bank of its
remaining shares of our common stock and the exercise by TD Bank of control over
our management and affairs. A majority of our anticipated directors after the
offerings also serve as officers or directors of TD Bank or its other
subsidiaries. Service as a director or officer of both us and TD Bank or its
other subsidiaries could create or appear to create potential conflicts of
interest when such directors and officers are faced with decisions that could
have different implications for us and for TD Bank. Our charter will include
certain provisions relating to the allocation of business opportunities that may
be suitable for both us and TD Bank. See "Certain Anti-Takeover and Other
Provisions -- Corporate Opportunities."
As part of the reorganization, TD Bank will contribute all of its worldwide
discount brokerage operations to us. TD Bank does not currently have any plans
to form or acquire any other discount brokerage operations, other than through
us. However, TD Bank, through its TD Evergreen Investment Services division, is
currently engaged in the full-service brokerage and related investment service
business, and TD Bank, directly and through its subsidiaries is engaged in the
investment banking business. TD Bank is not restricted from competing with us
and we cannot assure you that TD Bank will not expand its Evergreen or TD
Securities Inc. operations in ways that would result in direct or indirect
competition with us. It is also possible that changes in the markets in which we
operate may in the future result in us competing directly or indirectly with TD
Bank and its other subsidiaries.
AGREEMENTS BETWEEN US AND TD BANK AND ITS AFFILIATES ARE NOT THE RESULT OF
ARMS'-LENGTH NEGOTIATIONS
In connection with the reorganization of TD Bank's worldwide discount
brokerage operations into our company, we entered into an intercompany master
services agreement with TD Bank. This agreement provides that, among other
things, TD Bank may provide a broad range of administrative and support services
to our Canadian subsidiaries, lease space to us for our Canadian operations, and
purchase and maintain data processing and other equipment on our behalf. The
agreement also provides that we will furnish securities clearing and other
services to TD Bank and that Waterhouse National Bank and TD Bank will provide
us with a range of banking products and services. Although we believe that the
charges we will incur and the fees we will receive under the terms of this
agreement approximate the charges we would pay and the fees we would receive in
transactions with unaffiliated third parties, this agreement was not the result
of arms'-length negotiations because of TD Bank's ownership and control of us at
the time the agreement was entered into. As
15
<PAGE> 20
a result, the prices charged to us for services provided under the agreement may
be higher or lower than prices that may be charged by third parties. See
"Principal Stockholder -- Master Services Agrement."
Also in connection with the reorganization, we entered into a tax-sharing
agreement with Waterhouse Investor Services, Inc., a wholly-owned subsidiary of
TD Bank which acts as the U.S. holding company for certain of TD Bank's U.S.
subsidiaries (including both us and Waterhouse National Bank). Under the tax
sharing agreement, Waterhouse Investor Services, Inc. has sole authority to
respond to and conduct all tax proceedings (including tax audits) relating to
our federal and combined state returns, to file all such returns on our behalf
and to determine the amount of our liability to (or entitlement to payment from)
Waterhouse Investor Services, Inc. under the tax-sharing agreement. See
"Principal Stockholder -- Tax-Sharing Agreement." This arrangement may result in
conflicts of interests between us and Waterhouse Investor Services, Inc. and its
other subsidiaries.
CERTAIN PROVISIONS OF OUR CHARTER AND DELAWARE LAW COULD MAKE A TAKEOVER MORE
DIFFICULT
Our charter and bylaws and the laws of Delaware (the state in which we are
incorporated) contain provisions that might make it more difficult for someone
to acquire control of us in a transaction not approved by our board of
directors. These provisions could also discourage proxy contests and make it
more difficult for you and other stockholders to elect directors other than the
candidates nominated by our board of directors. The existence of these
provisions could adversely affect the market price of our common stock. Although
such provisions do not have a substantial practical significance to investors
while TD Bank controls us, such provisions could have the effect of depriving
stockholders of an opportunity to sell their shares at a premium over prevailing
market prices should TD Bank's combined voting power decrease to less than 50%.
See "Description of Capital Stock" and "Certain Anti-Takeover and Other
Provisions."
FUTURE SALES OF SHARES BY TD BANK COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR
COMMON STOCK
After completion of the offerings, there will be approximately
shares of our common stock outstanding, of which approximately shares
(including shares issuable upon exchange of exchangeable preference shares
issued to TD Bank in the reorganization) will be held beneficially by our
parent, TD Bank (or shares and shares, respectively, if the
underwriters and managers exercise their over-allotment option in full). TD Bank
will be able to sell these shares in the public markets from time to time,
subject to certain limitations on the timing, amount and method of such sales
imposed by SEC regulations. TD Bank has agreed with the underwriters for the
offerings that it will not sell any of its shares without their prior consent
until days after the date of this prospectus. If TD Bank were to sell
a large number of shares following these offerings, the market price of our
common stock could decline significantly. Moreover, the perception in the public
markets that such sales by TD Bank might occur could also adversely affect the
market price of our common stock. See "Shares Eligible for Future Sale."
THERE HAS BEEN NO PRIOR MARKET FOR OUR COMMON STOCK AND THE MARKET PRICE OF THE
SHARES MAY FLUCTUATE
Prior to these offerings, there has been no market for our common stock.
The price of our common stock after the offerings may fluctuate widely,
depending upon many factors, including the perceived prospects of our business
and the securities or financial services industries in general, differences
between our actual financial and operating results and those expected by
investors and analysts, changes in analysts' recommendations or projections,
changes in general economic or market conditions and broad market fluctuations.
In recent years, the securities markets have experienced substantial volatility
in prevailing price levels that is unrelated or disproportionate to the
operating performance of individual companies. Over this period the trading
prices of discount brokerage company stocks have been particularly volatile.
Accordingly, our common stock may trade at prices significantly below the
initial public offering price.
We intend to apply to list our common stock on the NYSE and the TSE. The
NYSE and TSE listings do not, however, guarantee that a trading market for the
common stock will develop or, if a market does develop,
16
<PAGE> 21
the depth of the trading market for the common stock or the prices at which the
common stock will trade in such market.
INVESTORS IN THE OFFERINGS WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION
If you purchase shares of our common stock in the offerings, you will
experience immediate and significant dilution in the tangible book value of the
shares you purchase. This means that the price you pay will be significantly
greater than the net tangible book value of the shares you acquire. This
dilution is due to the fact that the effective cash cost to TD Bank of the
shares of our common stock it has purchased in the past is significantly less
than the price at which our shares of common stock are being offered to the
public in these offerings. See "Dilution."
17
<PAGE> 22
USE OF PROCEEDS
Based upon an assumed initial public offering price of $ per share
(the midpoint of the range of estimated initial public offering prices set forth
on the cover page of this prospectus), we estimate that we will receive net
proceeds from the offerings of approximately $ million (or
$ million if the underwriters and managers exercise their
over-allotment option in full), after deducting the underwriting discounts and
commissions and estimated expenses that are payable by us in the offerings.
We intend to use approximately $ million (or two-thirds) of the
estimated net proceeds of the offerings for working capital and other general
corporate purposes, including investments in technology and systems upgrades and
increases in our advertising and marketing budget. We may also use a portion of
these net proceeds to help finance acquisitions of other companies, although we
do not currently have any pending or proposed significant acquisitions.
In addition, we will use a portion of the remaining net proceeds of the
offerings to repay an aggregate of $106 million of indebtedness we owe to TD
Bank under certain intercompany promissory notes. These intercompany notes bear
interest at rates ranging from % to % per annum, are payable upon demand
by TD Bank and generally were incurred by us in connection with the
reorganization. See "The Reorganization." We may also use approximately
$ million of the net proceeds of the offerings to redeem shares of
preferred stock issued by certain of our subsidiaries to TD Bank in connection
with the reorganization.
Pending such uses we may invest the net proceeds in short-term liquid
instruments, including deposit obligations, commercial paper and other debt
securities of TD Bank.
DIVIDEND POLICY
We intend to retain all of our earnings for use in our business and do not
anticipate paying any cash dividends in the foreseeable future. Any decision to
declare and pay dividends in the future will be made at the discretion of our
board of directors, after taking into account such matters as general business
conditions, financial results, capital requirements, contractual, legal and
regulatory restrictions on the payment of dividends by us to our stockholders or
by our subsidiaries to us and such other factors as the board of directors may
deem relevant. See "Business -- Government Regulation; Net Capital Requirements"
and "Description of Capital Stock."
18
<PAGE> 23
DILUTION
As of January 31, 1999, the net tangible book value of our common stock
(after giving effect to the reorganization) was approximately $ , or
approximately $ per share. Net tangible book value per share of common
stock represents the amount of our total consolidated tangible assets minus
total consolidated liabilities, divided by the million shares of
common stock outstanding (after giving effect to the reorganization). After
giving effect to the sale by us of million shares of common stock in
the offerings at an assumed initial public offering price of $ per
share (the midpoint of the range of estimated initial public offering prices set
forth on the cover page of this prospectus), and after deducting the
underwriting discounts and commissions and estimated expenses payable by us in
the offerings, our net tangible book value as of January 31, 1999 would have
been approximately $ , or approximately $ per share. This
represents an immediate increase in net tangible book value of $ per
share of common stock to our existing stockholder and an immediate dilution in
net tangible book value of $ per share to new investors purchasing
shares of our common stock at the assumed initial public offering price.
The following table illustrates this dilution on a per share basis(1):
<TABLE>
<S> <C>
Assumed initial public offering price per share of common
stock..................................................... $
Net tangible book value per share of common stock before the
offerings................................................. $
Increase in net tangible book value per share of common
stock attributable to the offerings(2).................... $
Pro forma net tangible book value per share of common stock
after giving effect to the offerings...................... $
Dilution in net tangible book value per share of common
stock to new investors.................................... $
</TABLE>
- ---------------
(1) Assumes that the underwriters and managers do not exercise their
over-allotment option which is described under "Underwriting."
(2) After deducting the underwriting discounts and commissions and estimated
expenses payable by us in the offerings.
The following table summarizes the differences, as of January 31, 1999
(after giving effect to the reorganization), among our existing stockholder, TD
Bank, and the new investors with respect to the number of shares purchased, the
total consideration paid and the average price paid per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- --------------------- PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
------ ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholder...................... % $ % $
New investors.............................
----- ---- -------- ---- ------
Total................................... 100% $ 100% $
===== ==== ======== ==== ======
</TABLE>
The computations in this section include as outstanding the number of
shares of common stock issuable upon exchange of the exchangeable preference
shares acquired by TD Bank in the reorganization. See "The Reorganization."
19
<PAGE> 24
CAPITALIZATION
The following table sets forth the consolidated capitalization of TD
Waterhouse (1) as of January 31, 1999 (after giving effect to the
reorganization) and (2) as adjusted for the sale of million shares of
common stock by us in the offerings at an assumed initial public offering price
of $ per share (the midpoint of the range of estimated initial public
offering prices set forth on the cover page of this prospectus) and after
deduction of the underwriting discounts and estimated expenses payable by us in
the offerings.
This table should be read in conjunction with our historical combined
financial statements and the notes thereto included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
AS OF JANUARY 31, 1999
-------------------------
ACTUAL AS ADJUSTED
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Stockholders' equity
Historical combined equity................................ $ $
Common stock, $.01 par value: shares authorized,
shares issued and outstanding, actual;
shares issued and outstanding, as adjusted............. --
Series common stock, $.01 par value: shares
authorized, no shares issued and outstanding, actual
and as adjusted........................................ --
Preferred stock, $.01 par value: shares
authorized, no shares
issued and outstanding, actual; one share issued and
outstanding as adjusted(1)............................. --
Additional paid-in capital................................ --
Retained earnings...................................... --
---------- ----------
Total stockholders' equity............................. $
---------- ----------
Total capitalization................................. $ $
========== ==========
</TABLE>
- ---------------
(1) See "Description of Capital Stock -- Special Voting Preferred Share".
20
<PAGE> 25
SELECTED FINANCIAL AND OTHER DATA
The following selected financial data should be read together with the
combined financial statements of TD Waterhouse and the notes thereto included
elsewhere in this prospectus and the discussion under "Management's Discussion
and Analysis of Results of Operations and Financial Condition." The combined
statement of income data for the years ended October 31, 1997 and 1998, and the
combined statement of financial condition data at October 31, 1997 and 1998,
have been derived from our audited historical combined financial statements
included elsewhere in this prospectus. The combined statement of income data for
the three months ended January 31, 1998 and January 31, 1999 and the combined
statement of financial condition data at January 31, 1999 have been derived from
our unaudited historical combined financial statements included elsewhere in
this prospectus. The pro forma combined statement of income data for the year
ended October 31, 1996 has been derived from our audited combined financial
statements and the audited combined financial statements of the Waterhouse
Securities Group, also included in this prospectus, as if the Waterhouse
Securities Group had been under the control of TD Bank as of the beginning of
1996. The Green Line Group's financial data and the Waterhouse Securities
Group's financial data as of and for the years ended October 31, 1994 and 1995
have been derived from their respective unaudited financial statements not
included in this prospectus. In our opinion, the unaudited statement of income
data has been prepared on substantially the same basis as the audited combined
financial statements included in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------------------------------------------------------
1994 1995 1996 1997 1998
----------------- ------------------ PRO FORMA HISTORICAL HISTORICAL
CANADA U.S. CANADA U.S. COMBINED COMBINED COMBINED
------- ------- ------- -------- --------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues
Commissions and fees....................... $77,398 $83,917 $64,833 $113,881 $270,505 $313,572 $409,432
Mutual fund and related revenue............ -- 6,018 5,831 9,286 23,515 35,762 59,022
Net interest revenue....................... 26,604 13,056 28,660 18,888 53,085 68,874 117,733
Other...................................... 9,863 1,603 14,493 1,375 23,681 28,424 28,274
------- ------- ------- -------- -------- -------- --------
TOTAL REVENUES........................... 113,865 104,594 113,817 143,430 370,786 446,632 614,461
------- ------- ------- -------- -------- -------- --------
Expenses
Employee compensation and benefits......... 35,136 32,272 31,414 43,259 107,137 138,261 183,377
Execution and clearing costs............... 18,312 11,983 17,219 14,989 47,510 63,316 95,523
Occupancy and equipment.................... 8,555 10,223 10,221 12,992 44,413 43,485 56,596
Advertising and marketing.................. 3,120 4,677 3,572 9,441 14,439 18,511 33,184
Communications............................. 7,330 4,189 6,718 6,032 19,154 22,981 30,809
Amortization of goodwill................... 1,638 -- 1,623 -- 21,121 21,630 33,000
Professional fees.......................... 4,172 2,480 5,799 4,095 15,034 14,871 15,350
Other...................................... 15,219 9,477 11,313 13,969 34,311 44,956 63,144
------- ------- ------- -------- -------- -------- --------
TOTAL EXPENSES........................... 93,482 75,301 87,879 104,777 303,119 368,011 510,983
------- ------- ------- -------- -------- -------- --------
INCOME BEFORE INCOME TAXES.................. 20,383 29,293 25,938 38,653 67,667 78,621 103,478
Income tax provision........................ 9,689 11,731 12,127 15,228 41,363 42,416 54,765
------- ------- ------- -------- -------- -------- --------
NET INCOME............................... $10,694 $17,562 $13,811 $ 23,425 $ 26,304 $ 36,205 $ 48,713
======= ======= ======= ======== ======== ======== ========
Pro forma earnings per share $
--------
Shares used to compute pro forma per share
data (1)...................................
========
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
-----------------------
1998 1999
HISTORICAL HISTORICAL
COMBINED COMBINED
---------- ----------
<S> <C> <C>
STATEMENT OF INCOME DATA:
Revenues
Commissions and fees....................... $ 83,871 $152,044
Mutual fund and related revenue............ 10,583 20,783
Net interest revenue....................... 23,768 34,004
Other...................................... 6,277 8,204
-------- --------
TOTAL REVENUES........................... 124,499 215,035
-------- --------
Expenses
Employee compensation and benefits......... 40,181 59,859
Execution and clearing costs............... 19,259 34,679
Occupancy and equipment.................... 12,403 17,754
Advertising and marketing.................. 7,695 11,569
Communications............................. 6,639 10,717
Amortization of goodwill................... 7,678 9,279
Professional fees.......................... 3,118 4,082
Other...................................... 11,804 28,999
-------- --------
TOTAL EXPENSES........................... 108,777 176,938
-------- --------
INCOME BEFORE INCOME TAXES.................. 15,722 38,097
Income tax provision........................ 9,222 18,031
-------- --------
NET INCOME............................... $ 6,500 $ 20,066
======== ========
Pro forma earnings per share $
--------
Shares used to compute pro forma per share
data (1)...................................
========
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
--------------------------------------------------------------------------------- -----------
1994 1995 1996 1997 1998 1999
------------------- ------------------- HISTORICAL HISTORICAL HISTORICAL HISTORICAL
CANADA U.S. CANADA U.S. COMBINED COMBINED COMBINED COMBINED
-------- -------- -------- -------- ---------- ---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF FINANCIAL CONDITION
DATA:
Cash and cash equivalents....... $ 43,484 $ 9,806 $ 42,441 $ 14,553 $ 246,097 $ 291,511 $ 522,029 $ 484,137
Securities owned, at market
value.......................... 28,965 -- 26,912 1,450 67,857 66,549 76,279 62,077
Receivable from customers....... 326,984 285,165 339,239 415,885 962,551 1,757,019 2,556,182 3,470,265
Total assets.................... 674,431 322,932 696,025 457,107 1,977,789 2,946,594 4,298,736 5,482,699
Securities loaned............... 74,689 -- 72,639 -- 403,765 916,700 1,033,964 2,048,999
Payable to customers............ 436,537 96,992 496,387 121,632 764,457 1,190,480 1,947,430 1,903,272
Equity.......................... 36,827 42,556 51,836 55,054 467,411 619,519 995,135 1,035,648
</TABLE>
- ---------------
(1) Shares used to compute pro forma per share data for the year ended October
31, 1998 and the three months ended January 31, 1999 represent common stock
outstanding immediately after the reorganization, described in Note 17 to
the Combined Financial Statements included elsewhere in this prospectus but
before the offerings. The shares include shares of common stock issuable
on the exchange of the exchangeable preference share of Canadian subsidiary
to be issued to TD Bank in the reorganization.
21
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
After completion of the offerings, our operations will be comprised of the
following businesses:
- TD Bank's U.S.-based Waterhouse Securities Group, which includes
Waterhouse Securities, Inc. and certain of its affiliates.
- TD Bank's Canada-based Green Line Group, which operates as discount
brokers in Canada, as well as Australia, the United Kingdom and Hong
Kong.
The Waterhouse Securities Group consists of certain subsidiaries of TD
Bank, acquired effective October 31, 1996. The Green Line Group consists of
certain divisions and subsidiaries of TD Bank. These assets will be combined to
form our business in a reorganization that is described under "The
Reorganization" below.
Accordingly the following discussion and analysis of our financial
condition and results of operations are based on the combined results of these
businesses. A more detailed discussion of the accounting principles used to
combine the assets, liabilities and results of operations of the businesses and
the specific entities and divisions included in the combination is set forth in
Notes 1 and 2 to our combined financial statements included elsewhere in this
prospectus.
REVENUES
Commissions and fees, which account for the majority of total revenues,
include commissions earned for executing customer trades, payments received by
us from market-makers, exchanges and other execution agents for order flow and
fees for providing trade execution and clearance services to financial
institutions in the U.S. and Canada. Commissions and fees are primarily affected
by changes in transaction volumes and changes in the commission or fee rates
charged per transaction. Commissions, which account for over 90% of commissions
and transaction fees, fluctuate based on the number of active customer accounts,
the average number of trades per account, and the average commission per revenue
trade. Active customer accounts have grown from approximately 0.7 million at
October 31, 1996 to over 1.7 million as of January 31, 1999. We define active
accounts as accounts that had purchase, sale or other activity during the
previous calendar quarter. Combined with the significant growth in daily average
trading volumes in the U.S. and major global equities markets, this account
growth has resulted in a 63% increase in the average number of trades per
account during this same period. The effect of such increases has been partially
offset by a decrease in the average commission per revenue trade from
approximately $47 per trade in the first fiscal quarter of 1997 to approximately
$24 per trade in the first fiscal quarter of 1999. This was primarily due to the
introduction of our online trading products in early 1997, which provided online
customers with significant discounts from our standard commission schedule. We
use other broker-dealers to execute our customers' orders and receive revenue
from these broker-dealers for such order flow. Payments for order flow have not
increased commensurate with increases in trading volumes as a result of changes
in regulations and market conventions that caused market-makers and execution
agents to change their payment policies for order flow by reducing the payment
per trade and by limiting the types of trades on which payments are made. Order
flow revenue has been consistently less than 5% of total revenue for the periods
reviewed herein. Transaction fees for execution and clearing services have grown
since 1996 due to the creation of a separate clearing entity in the U.S., the
addition of new clients in the U.S. and Canada and general increases in market
volumes.
Mutual fund and related revenue represent customary trailer fees from third
party and affiliated mutual funds in the U.S. and Canada and, in the U.S. only,
fees for shareholder services, administration and investment management services
provided to our proprietary money market and mutual funds. Such fees are
primarily based upon the daily amount of customer assets invested in third party
mutual funds and upon the average daily net asset value of our proprietary money
market and mutual funds. As of January 31, 1999, we held $3 billion of customer
assets in no-load no-fee mutual funds sponsored by third parties. Our
proprietary
22
<PAGE> 27
money market and mutual funds had net assets valued at $8.4 billion at January
31, 1999. Commissions fees relating to the purchase and sale of mutual funds are
included in commissions and fees.
We also receive fees for providing referral and administrative services to
our affiliate, Waterhouse National Bank ("WNB"), which is based on the daily
cash balances our customers choose to sweep into an FDIC insured money market
account. In addition, we provide investment advisory services to WNB with
respect to WNB's fixed income portfolio and receive a fee based on the market
value of the assets under management. Fees related to services provided to WNB
are classified as mutual fund and related revenues.
Net interest revenue is the difference between interest earned on our
interest-earning assets (which primarily consist of margin loans to customers)
and the interest expense associated with our interest-bearing liabilities (which
include free credit balances in customers' accounts, deposits received for stock
loaned and other borrowings.) Net interest revenue is principally affected by
changes in customer margin balances as well as the prevailing net interest
spread, which represents the difference between the rate we charge customers on
margin loans (based on the broker call rate) and the rate we pay our customers
and our secured creditors.
Other revenue consists primarily of revenues derived from ancillary
services such as floor brokerage and retirement account administration.
OPERATING EXPENSES
Our largest operating expense is employee compensation and benefits, which
includes salaries and wages, incentive compensation and related employee
benefits and taxes. We employ only a few commissioned sales representatives;
therefore, compensation and benefits do not vary directly with changes in
commission revenue. Most employees do, however, receive annual incentive
compensation based on the overall operating results of our operations in each
geographical region as well as the employee's individual performance. Therefore,
a significant portion of compensation and benefits expense will fluctuate based
on our operating results. Compensation expense also reflects the change in
intrinsic value of TD Bank stock options granted to our employees under TD
Bank's stock option plan.
Execution and clearing costs include fees paid to floor brokers and
exchanges for trade execution costs, fees paid to third-party vendors for data
processing services and fees paid to clearing entities for certain clearance and
settlement services. Execution and clearing costs, with the exception of data
processing expenses, generally fluctuate based on transaction volume. Data
processing services are generally provided under longer-term fixed fee
arrangements with the providers.
Occupancy and equipment expense includes the costs of leasing and
maintaining our office space and branch network, the leases and rental costs
related to computers and other equipment, and depreciation and amortization
expense associated with our fixed assets and leasehold improvements. Occupancy
and equipment expense is primarily affected by increases in the number of
branches and employees.
Advertising and marketing includes media, print and direct mail advertising
expenses and other costs incurred to create brand awareness, promote our product
and service offerings and introduce new products and services. Due to the rapid
development of new products and services and increased competition, advertising
and promotion has increased significantly from period to period and management
expects this trend to continue in the future.
Communications expense includes telephone expenses, which are generally
affected by changes in customer transaction volumes and the increased use of
electronic communication channels and online service offerings.
We have been active in acquiring new businesses to rapidly expand our
operations including: Marathon Brokerage in 1993, Waterhouse Securities Group in
1996, Pont Securities Limited in 1997 and Rivkin Croll Smith, Kennedy Cabot &
Co., Jack White & Co. and Gall & Eke in 1998. Goodwill relating to our major
acquisitions is generally being amortized over a period of 20 years from the
date of acquisition.
23
<PAGE> 28
Professional fees include fees paid to consultants engaged to support our
product, service and systems development efforts, as well as, legal and
accounting fees. These expenses generally fluctuate with overall changes in the
level of business activities.
Other expenses primarily consist of administrative expenses and other costs
including postage, printing, supplies and other administrative costs.
We are subject to income taxes in each country in which we operate. The
difference between our effective tax rate and the U.S. statutory rate of 35%
differs from period to period, but primarily results from state and local taxes
in the U.S., provincial taxes in Canada, and the effect of certain
non-deductible expenses, most notably the amortization of goodwill related to
our acquisition of Waterhouse Securities Group, which is approximately $19.5
million per year.
We adjust our expenses in anticipation of and in response to changes in
financial market conditions and customer trading patterns. Certain of our
expenses (including incentive compensation, portions of communications, and
execution and clearing costs) vary directly with changes in financial
performance or customer trading activity. Expenses relating to the level of
temporary employees, contractors, overtime hours, professional services, and
advertising and marketing are adjustable over the short-term to help us achieve
our financial objectives. Additionally, developmental spending (including branch
openings, product and service rollouts, and certain information technology
systems improvements) is discretionary and can be altered in response to market
conditions. However, a significant portion of our expenses such as salaries and
wages, occupancy and equipment, and depreciation and amortization of goodwill do
not vary directly, at least in the short term, with fluctuations in revenues or
securities trading volumes. Also, we view our developmental spending as
essential to our future growth, and therefore attempt to avoid major adjustments
in such spending unless faced with a sustained slowdown in customer trading
activity. Given the nature of our revenues and expenses, and the economic and
competitive factors discussed above, our earnings may be subject to significant
volatility from period to period. Our results for any interim period are not
necessarily indicative of results for a full year.
We have experienced substantial changes in and expansion of our business
and operations since we began offering our online Internet investing services in
the U.S. in 1997. We expect to continue to experience periods of rapid change in
the future. Our past expansion has placed, and any future expansion would place,
significant demands on our administrative, operational, financial and other
resources.
24
<PAGE> 29
RESULTS OF OPERATIONS
The following table sets forth the combined statement of income data for
the periods indicated as a percentage of total revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED OCTOBER 31, JANUARY 31,
--------------------------------------- --------------------------
1996 1997 1998 1998 1999
PRO FORMA HISTORICAL HISTORICAL HISTORICAL HISTORICAL
COMBINED COMBINED COMBINED COMBINED COMBINED
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Commissions and fees.................. 73.0% 70.2% 66.6% 67.4% 70.7%
Mutual fund and related revenue....... 6.3 8.0 9.6 8.5 9.7
Net interest revenue.................. 14.3 15.4 19.2 19.1 15.8
Other................................. 6.4 6.4 4.6 5.0 3.8
----- ----- ----- ----- -----
Total revenues........................ 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
EXPENSES
Employee compensation and benefits.... 28.9% 31.0% 29.8% 32.3% 27.8%
Execution and clearing costs.......... 12.8 14.2 15.5 15.5 16.1
Occupancy and equipment............... 12.0 9.7 9.2 10.0 8.3
Advertising and marketing............. 3.9 4.2 5.4 6.2 5.4
Communications........................ 5.2 5.2 5.0 5.3 5.0
Amortization of goodwill.............. 5.7 4.8 5.4 6.2 4.3
Professional fees..................... 4.1 3.3 2.5 2.5 1.9
Other................................. 9.3 10.1 10.3 9.5 13.5
----- ----- ----- ----- -----
Total expenses........................ 81.9% 82.5% 83.1% 87.5% 82.3%
===== ===== ===== ===== =====
INCOME BEFORE INCOME TAXES............ 18.1% 17.5% 16.9% 12.5% 17.7%
Income tax provision.................. 11.2 9.5 8.9 7.4 8.4
----- ----- ----- ----- -----
NET INCOME............................ 6.9% 8.0% 8.0% 5.1% 9.3%
===== ===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED JANUARY 31, 1999 VERSUS THREE MONTHS ENDED JANUARY 31, 1998
FINANCIAL OVERVIEW
Net income for the three months ended January 31, 1999 was a record $20.1
million, up 208.7% from $6.5 million for the comparable period in 1998. Revenues
for the three months ended January 31, 1999 were a record $215.0 million, up
72.7% from $124.5 million for the comparable period in 1998, primarily due to an
81.3% increase in commissions and transaction fees, a 96.4% increase in mutual
fund and related revenue and a 43.1% increase in net interest revenue. These
revenues reflect $16.8 million of incremental revenue related to Jack White &
Co., which was acquired in May 1998.
Total operating expenses of $176.9 million for the three months ended
January 31, 1999 were up 62.7% from $108.8 million for the comparable period in
1998, primarily resulting from additional business volume as well as
approximately $15 million of incremental expenses related to Jack White & Co.
REVENUES
COMMISSIONS AND FEES
Commissions and fees were $152.0 million for the three months ended January
31, 1999, up $68.2 million, or 81.3%, from the comparable period in 1998. The
total number of trades executed by us has increased 131.4% from the comparable
period in 1998 as our customer base has grown. Average commissions, per revenue
trade decreased 26.4%, due to the expanded popularity of our online brokerage
services, which are offered at a significantly lower price than traditional
agent based trading. For the three months ended
25
<PAGE> 30
January 31, 1999, total online and total electronic trades represented 58.0% and
62.8% of total trades, respectively, as compared to 37.3% and 45.1%,
respectively, in the comparable 1998 period.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
JANUARY 31,
------------------ PERCENT
1998 1999 CHANGE
------- ------- -------
<S> <C> <C> <C>
webBroker................................................... 11,898 50,801 327%
PC dial-up.................................................. 3,854 6,074 58%
------- -------
Total online trades....................................... 15,752 56,875 261%
Touch-tone.................................................. 3,286 4,687 43%
------- -------
Total electronic trades................................... 19,038 61,562 223%
Agent trades................................................ 23,199 36,419 57%
------- -------
Total daily average trades................................ 42,237 97,981 132%
======= =======
Average commissions, per revenue trade...................... $ 32.79 $ 24.14 (26)%
</TABLE>
We added approximately 167,000 new customer accounts during the three
months ended January 31, 1999, an increase of 68.7% from the approximately
99,000 new accounts added during the comparable period in 1998. Our advertising
and marketing expense per new account was approximately $69 for the three months
ended January 31, 1999 versus $78 for the comparable 1998 period.
MUTUAL FUND AND RELATED REVENUES
Mutual fund and related revenues were $20.8 million for the three months
ended January 31, 1999, up $10.2 million, or 96.4%, from the comparable period
in 1998. This increase was primarily due to a significant increase in customer
assets held in third party mutual funds and proprietary money market and mutual
funds, which was driven in part by the acquisition of Jack White & Co. in May
1998, whose customers held a large proportion of their assets in mutual funds.
NET INTEREST REVENUE
Net interest revenue was $34.0 million for the three months ended January
31, 1999, up $10.2 million, or 43.1%, from the comparable period in 1998. This
increase was primarily due to a 59.0% increase in average customer margin loans
from $1.8 billion during the three months ended January 31, 1998 to $2.9 billion
during the comparable period in 1999. Our net interest spread of 2.88% for the
three months ended January 31, 1999 was slightly lower than the spread of 3.10%
for the comparable period in 1998.
OPERATING EXPENSES
Compensation and benefits expense was $59.9 million for the three months
ended January 31, 1999, up $19.7 million, or 49.0%, from the comparable period
in 1998. This increase was primarily due to the addition of new employees to
support our rapid growth and an increase in incentive compensation to reflect
the improvement in our operating results. Compensation as a percentage of
revenues has decreased which reflects the fact that revenue growth has outpaced
our employee growth in the short term.
Execution and clearing costs were $34.7 million for the three months ended
January 31, 1999, up $15.4 million, or 80.1%, from the comparable period in
1998. This increase was primarily due to increased transaction volume offset by
productivity gains from our ability to leverage our large clearing operations.
Occupancy and equipment expense was $17.8 million for the three months
ended January 31, 1999, up $5.4 million, or 43.1%, from the comparable period in
1998. This increase was primarily due to additional lease expenses on our
expanded office space, as well as increased lease and maintenance expenses on
data processing equipment. During the quarter, we opened eight new branches.
26
<PAGE> 31
Advertising and marketing expense was $11.6 million for the three months
ended January 31, 1999, up $3.9 million, or 50.3%, from the comparable period in
1998. This increase primarily relates to increased national advertising in the
United States.
Communications expense was $10.7 million for the three months ended January
31, 1999, up $4.1 million, or 61.4%, from the comparable period in 1998. This
increase was primarily due to increased trading volumes and the opening of new
branches.
Amortization of goodwill was $9.3 million for the three months ended
January 31, 1999, up $1.6 million, or 20.9%, from the comparable period in 1998.
This increase was primarily due to the acquisition of Jack White & Co.
Professional fees were $4.1 million for the three months ended January 31,
1999, up $1.0 million, or 30.9%, from the comparable period in 1998. This
increase was primarily due to fees for computer programming and systems
consultants.
Other expenses were $29.0 million for the three months ended January 31,
1999, up $17.2 million, or 145.7%, from the comparable period in 1998. This
increase was consistent with the overall growth in the business. Additionally,
other expenses for the three months ended January 31, 1999 includes the
settlement of a claim approximating $5 million related to non-brokerage matters.
Our effective income tax rate for the three months ended January 31, 1999
and 1998 was 47.3% and 58.7%, respectively. The decrease in the effective tax
rate was primarily due to the significant increase in pre-tax income, which has
the effect of reducing the impact of permanent differences such as the
amortization of goodwill. Our effective tax rate, excluding the effects of
goodwill, was 40.1% and 43.9%, respectively, for the three months ended January
31, 1999 and 1998.
YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
FINANCIAL OVERVIEW
1998 VERSUS 1997
Net income for the fiscal year ended October 31, 1998 was a record $48.7
million, up 34.5% from fiscal year 1997 net income of $36.2 million. Fiscal year
1998 revenues were a record $614.5 million, up 37.6% from $446.6 million in
fiscal year 1997, primarily due to a 30.6% increase in commissions and
transaction fees, a 65.0% increase in mutual fund and related revenue and a
70.9% increase in net interest revenue. These increases reflect approximately
$87 million of incremental revenue related to the Kennedy Cabot & Co. and Jack
White & Co. acquisitions.
Total operating expenses during fiscal year 1998 were $511.0 million, up
38.8% from $368.0 million for fiscal year 1997, primarily resulting from the
significant growth in our business as well as approximately $75 million of
incremental expenses related to the acquisition of Kennedy Cabot & Co. and Jack
White & Co.
1997 VERSUS HISTORICAL 1996
Waterhouse Securities Group was purchased at the end of fiscal year 1996
and we accounted for the acquisition using the purchase method of accounting.
Pursuant to the purchase method, our 1996 financial statements and the financial
statements for all periods prior to the acquisition have not been restated to
include Waterhouse's results of operations. Accordingly, the fluctuations
between our total revenues, operating expenses and net income for 1997 of $446.6
million, $368.0 million and $36.2 million, respectively, versus our comparable
amounts in 1996 of $167.4 million, $113.2 million and $29.6 million,
respectively, are due primarily to the acquisition of Waterhouse. For the twelve
months ended October 31, 1996 Waterhouse's total revenues, operating expenses
and net income were $203.4 million, $170.4 million and $16.2 million,
respectively. Given the significant effect the Waterhouse acquisition had on our
1997 results of operations, we believe that a detailed discussion and analysis
of our 1997 versus 1996 historical financial statements would not be meaningful.
Accordingly, for purposes of comparing our results of operations for fiscal year
1997 versus 1996, we have made certain pro forma adjustments to our historical
combined financial statements to give
27
<PAGE> 32
effect to the acquisition of Waterhouse as if it had occurred as of the
beginning of fiscal year 1996. See "Selected Financial and Other Data." The
following discussion and analyses compares our 1997 historical results to the
pro forma 1996 amounts.
1997 VERSUS PRO FORMA 1996
Net income for the fiscal year ended October 31, 1997 was a record $36.2
million, up 37.6% from fiscal year 1996 net income of $26.3 million. Fiscal year
1997 revenues were a record $446.6 million, up 20.5% from $370.8 million for
fiscal year 1996, primarily due to a 15.9% increase in commissions and
transaction fees, a 52.1% increase in mutual fund and related revenue and a
29.7% increase in net interest revenue. These increases mainly resulted from
increases in overall trading volume, customer assets and increased margin loans
to customers.
Total operating expenses during fiscal year 1997 were $368.0 million, up
21.4% from $303.1 million for the fiscal year 1996 keeping pace with the
significant growth in our business.
REVENUES
COMMISSIONS AND TRANSACTION FEES
1998 VERSUS 1997
Commissions and fees were $409.4 million for the fiscal year ended October
31, 1998, up $95.9 million, or 30.6%, from fiscal year 1997. The total number of
trades executed by us has increased 71.9% as our customer base grew from recent
acquisitions and the rapid growth of our core franchise. The average commissions
per revenue trade decreased 27.5% to $29. This decrease was mainly due to our
integration of our online and traditional brokerage services and an increase in
the proportion of trades placed through our internet brokerage channels, which
have significantly lower commission rates.
We added approximately 531,000 new customer accounts during fiscal year
1998, an increase of 63.8% from the approximately 324,000 new accounts added
during fiscal year 1997. Our advertising and marketing expense per new account
was approximately $63 for fiscal year 1998 versus $57 for the 1997 fiscal year.
1997 VERSUS PRO FORMA 1996
Commissions and transaction fees were $313.6 million for the fiscal year
ended October 31, 1997, up $43.1 million, or 15.9%, from fiscal year 1996. The
total number of trades executed by us increased 39.4% as our customer base has
grown. Average commissions per revenue trade decreased 16.7% to $40. This
decrease was mainly due to the introduction of online trading in 1997, which has
substantially lower commission rates than traditional channels.
We added approximately 324,000 new customer accounts during fiscal year
1997, an increase of 31.8% from the approximately 246,000 new accounts added
during fiscal year 1996. Our advertising and marketing expense per new account
was approximately $57 for fiscal year 1997 versus $59 for fiscal year 1996.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED OCTOBER 31,
-----------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Electronic trades........................................... 5,415 11,200 28,621
Agent trades................................................ 17,782 21,271 27,552
------- ------- -------
Total daily average trades.................................. 23,197 32,471 56,173
======= ======= =======
Average commissions per revenue trade....................... $ 47.72 $ 39.73 $ 28.82
</TABLE>
28
<PAGE> 33
MUTUAL FUND AND RELATED REVENUES
1998 VERSUS 1997
Mutual fund and related revenue was $59.0 million for the fiscal year ended
October 31, 1998, up $23.3 million, or 65.0%, from the prior fiscal year 1997.
This increase was primarily due to a significant increase in customer assets
held in third party mutual funds and proprietary money market and mutual funds,
which was driven in part by the acquisition of Jack White & Co., whose customers
held a large proportion of their assets in mutual funds.
1997 VERSUS PRO FORMA 1996
Mutual fund and related revenues were $35.8 million for the fiscal year
ended October 31, 1997, up $12.2 million, or 52.1%, from the prior fiscal year.
This increase was primarily due to a significant increase in customer assets in
third party mutual funds and proprietary money market and mutual funds.
NET INTEREST REVENUE
1998 VERSUS 1997
Net interest revenue was $117.7 million for the fiscal year ended October
31, 1998, up $48.9 million, or 70.9%, from fiscal year 1997. This increase was
principally due to a 104.6% increase in average customer margin loans from $1.2
billion during 1997 to $2.4 billion during 1998. Our net interest spread
decreased from 3.28% in fiscal year 1997 to 3.02% in fiscal year 1998.
1997 VERSUS PRO FORMA 1996
Net interest revenue was $68.9 million for the fiscal year ended October
31, 1997, up $15.8 million, or 29.7%, from fiscal year 1996. This increase was
principally due to a 35.7% increase in average customer margin loans from $881
million during 1996 to $1.2 billion during 1997. Our net interest spread
decreased from 3.57% in fiscal year 1996 to 3.28% in fiscal year 1997.
OPERATING EXPENSES
1998 VERSUS 1997
Compensation and benefits expense was $183.4 million for the fiscal year
ended October 31, 1998, up $45.1 million, or 32.6%, from the prior fiscal year.
This increase was primarily due to a greater number of employees and increases
in incentive compensation consistent with our increased profits.
Execution and clearing costs were $95.5 million for the fiscal year 1998,
up $32.2 million, or 50.9%, from fiscal year 1997. This increase was primarily
due to the corresponding increase in trade volume during the year, partially
offset by the savings derived from the operational leverage of our clearing
business.
Occupancy and equipment expense was $56.6 million for the fiscal year ended
October 31, 1998, up $13.1 million, or 30.2%, from fiscal year 1997. This
increase was primarily due to additional lease expenses on our expanded office
space, as well as increased lease and maintenance expenses on data processing
equipment. During fiscal year 1998, we opened 31 new branches and acquired 17
branches and offices in connection with the acquisition of Kennedy Cabot & Co.
and Jack White & Co. and Gall & Eke in 1998.
Advertising and marketing expense was $33.2 million in fiscal year 1998, up
$14.7 million, or 79.3%, from fiscal year 1997. This increase primarily relates
to the increased national advertising campaigns.
Communications expense was $30.8 million during the fiscal year 1998, up
$7.8 million, or 34.1%, from fiscal year 1997. This increase was primarily due
to increased trading volumes and new branch opening.
Amortization of goodwill was $33.0 million for the fiscal year 1998, up
$11.4 million, or 52.6%, from fiscal year 1997. This increase was primarily due
to the full year effect of the acquisition of Kennedy Cabot & Co. and the
acquisition of Jack White & Co. in late May 1998.
29
<PAGE> 34
Professional fees were $15.4 million in fiscal year 1998, up $0.5 million,
or 3.2%, from the prior fiscal year. This increase was primarily due to fees for
computer programming and systems consultants.
Other expenses were $63.1 million for fiscal year 1998, up $18.2 million,
or 40.5%, from the prior fiscal year, consistent with the overall increase in
business activity.
Our effective income tax rate for the fiscal year 1998 and 1997 was 52.9%
and 53.9%, respectively. Our effective tax rate, excluding the effects of
goodwill, was 43.9% and 42.9%, respectively, for the fiscal years ended October
31, 1998 and 1997.
1997 VERSUS PRO FORMA 1996
Compensation and benefits expense was $138.3 million for the fiscal year
ended October 31, 1997, up $31.1 million, or 29.1%, from the prior fiscal year.
This increase was primarily due to a greater number of employees principally due
to increased trading volumes and branch openings, partially offset by
approximately $4.1 million of non-recurring costs at Waterhouse resulting from
the cash out of certain employee stock options prior to Waterhouse's acquisition
by TD Bank.
Execution and clearing costs were $63.3 million for the fiscal year 1997,
up $15.8 million, or 33.3%, from fiscal year 1996. This increase was primarily
due to a corresponding increase in customer trades.
Occupancy and equipment expense was $43.5 million for the fiscal year ended
October 31, 1997, slightly down from the prior fiscal year. This decrease was
primarily due to increased expenses due to additional employees and new branch
offices, mostly offset by the effect of certain write-downs of computer
equipment and other fixed assets in fiscal year 1996, which did not recur in
fiscal year 1997.
Advertising and marketing expense was $18.5 million in fiscal year 1997, up
$4.1 million, or 28.2%, from 1996. This increase primarily relates to the
increased national advertising campaigns in the U.S.
Communications expense was $23.0 million during the fiscal year 1997, up
$3.8 million, or 20.0%, from the prior fiscal year. This increase was primarily
due to increased trading volumes and branch openings.
Amortization of goodwill was $21.6 million for the fiscal year 1997, was
slightly higher than the fiscal year 1996 pro forma amount.
Professional fees were $14.9 million in fiscal year 1997, a slight decrease
from the prior fiscal year pro forma amount. This decrease was primarily due to
certain one-time costs consisting of investment banking, legal and accounting
fees Waterhouse incurred in fiscal year 1996 in connection with its acquisition
by TD Bank.
Other expenses were $45.0 million for fiscal year 1997, up $10.6 million,
or 31.0%, from the prior fiscal year. This increase was consistent with the
overall increase in business activity during the year.
Our effective income tax rate for the fiscal year 1997 and pro forma fiscal
year 1996 was 53.9% and 61.1%, respectively, which reflects the effect of
certain non-deductible expenses incurred in fiscal year 1996 and the favorable
effect in fiscal year 1997 of increased income before income taxes, which
reduces the impact of permanent differences, most notably the amortization of
goodwill. Our effective tax rate, excluding the effects of goodwill, was 42.9%
and 47.2%, respectively, for fiscal years 1997 and 1996.
30
<PAGE> 35
COMBINED QUARTERLY RESULTS
The following table sets forth certain unaudited combined quarterly
statement of income data, such data as a percentage of total revenues and
certain unaudited combined quarterly operating data for the nine quarters ended
January 31, 1999. In our opinion, this unaudited information has been prepared
on substantially the same basis as the combined financial statements appearing
elsewhere in this prospectus and includes all adjustments (consisting of normal
recurring adjustments) necessary to present fairly the unaudited combined
quarterly data. The unaudited combined quarterly data should be read in
conjunction with the combined financial statements and notes thereto appearing
elsewhere in this prospectus. The results for any quarter are not necessarily
indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------------
JANUARY 31, APRIL 30, JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31,
1997 1997 1997 1997 1998 1998 1998
----------- --------- -------- ----------- ----------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Commissions and fees.................... $ 78,227 $ 71,936 $ 74,246 $ 89,163 $ 83,871 $108,241 $105,634
Mutual fund and related revenue......... 7,337 8,579 9,727 10,119 10,583 12,803 16,790
Net interest revenue.................... 15,143 15,481 17,261 20,989 23,768 28,900 33,004
Other................................... 4,869 7,480 11,233 4,842 6,277 7,468 7,501
-------- -------- -------- -------- -------- -------- --------
TOTAL REVENUES......................... 105,576 103,476 112,467 125,113 124,499 157,412 162,929
-------- -------- -------- -------- -------- -------- --------
EXPENSES
Employee compensation and benefits...... 33,291 33,697 34,440 36,833 40,181 45,640 48,908
Execution and clearing costs............ 14,238 13,829 16,116 19,133 19,259 22,191 25,482
Occupancy and equipment................. 10,122 10,358 10,960 12,045 12,403 13,993 14,900
Advertising and marketing............... 4,330 4,684 4,342 5,155 7,695 8,124 8,351
Communications.......................... 5,945 5,579 5,081 6,376 6,639 7,277 8,971
Amortization of goodwill................ 5,283 5,275 5,539 5,533 7,678 7,685 8,534
Professional fees....................... 3,193 3,457 3,479 4,742 3,118 4,076 4,305
Other................................... 9,897 13,175 8,427 13,457 11,804 15,121 17,193
-------- -------- -------- -------- -------- -------- --------
TOTAL EXPENSES......................... 86,299 90,054 88,384 103,274 108,777 124,107 136,644
-------- -------- -------- -------- -------- -------- --------
Income before income taxes.............. 19,277 13,422 24,083 21,839 15,722 33,305 26,285
Income tax provision.................... 10,437 7,937 12,496 11,546 9,222 16,940 13,844
-------- -------- -------- -------- -------- -------- --------
NET INCOME............................. $ 8,840 $ 5,485 $ 11,587 $ 10,293 $ 6,500 $ 16,365 $ 12,441
======== ======== ======== ======== ======== ======== ========
<CAPTION>
QUARTER ENDED
-------------------------
OCTOBER 31, JANUARY 31,
1998 1999
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
REVENUES
Commissions and fees.................... $111,686 $152,044
Mutual fund and related revenue......... 18,846 20,783
Net interest revenue.................... 32,061 34,004
Other................................... 7,028 8,204
-------- --------
TOTAL REVENUES......................... 169,621 215,035
-------- --------
EXPENSES
Employee compensation and benefits...... 48,648 59,859
Execution and clearing costs............ 28,591 34,679
Occupancy and equipment................. 15,300 17,754
Advertising and marketing............... 9,014 11,569
Communications.......................... 7,922 10,717
Amortization of goodwill................ 9,103 9,279
Professional fees....................... 3,851 4,082
Other................................... 19,026 28,999
-------- --------
TOTAL EXPENSES......................... 141,455 176,938
-------- --------
Income before income taxes.............. 28,166 38,097
Income tax provision.................... 14,759 18,031
-------- --------
NET INCOME............................. $ 13,407 $ 20,066
======== ========
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------------
JANUARY 31, APRIL 30, JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31,
1997 1997 1997 1997 1998 1998 1998
----------- --------- -------- ----------- ----------- --------- --------
(AS PERCENTAGE OF TOTAL REVENUES)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Commissions and fees.................... 74.1% 69.5% 66.0% 71.3% 67.4% 68.8% 64.8%
Mutual fund and related revenue......... 7.0 8.3 8.7 8.1 8.5 8.1 10.3
Net interest revenue.................... 14.3 15.0 15.3 16.7 19.1 18.4 20.3
Other................................... 4.6 7.2 10.0 3.9 5.0 4.7 4.6
----- ----- ---- ----- ----- ----- -----
TOTAL REVENUES......................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ---- ----- ----- ----- -----
EXPENSES
Employee compensation and benefits...... 31.5 32.6 30.6 29.4 32.3 29.0 30.0
Execution and clearing costs............ 13.5 13.4 14.3 15.4 15.5 14.1 15.7
Occupancy and equipment................. 9.6 10.0 9.8 9.6 10.0 8.9 9.2
Advertising and marketing............... 4.1 4.5 3.9 4.1 6.2 5.2 5.1
Communications.......................... 5.6 5.4 4.5 5.1 5.3 4.6 5.5
Amortization of goodwill................ 5.0 5.1 4.9 4.4 6.2 4.9 5.2
Professional fees....................... 3.0 3.3 3.1 3.8 2.5 2.6 2.6
Other................................... 9.4 12.7 7.5 10.8 9.5 9.6 10.6
----- ----- ---- ----- ----- ----- -----
TOTAL EXPENSES......................... 81.7 87.0 78.6 82.6 87.5 78.9 83.9
----- ----- ---- ----- ----- ----- -----
Income before income taxes.............. 18.3 13.0 21.4 17.4 12.5 21.1 16.1
Income tax provision.................... 9.9 7.7 11.1 9.2 7.4 10.8 8.5
----- ----- ---- ----- ----- ----- -----
NET INCOME............................. 8.4% 5.3% 10.3% 8.2% 5.1% 10.3% 7.6%
===== ===== ==== ===== ===== ===== =====
<CAPTION>
QUARTER ENDED
-------------------------
OCTOBER 31, JANUARY 31,
1998 1999
----------- -----------
<S> <C> <C>
REVENUES
Commissions and fees.................... 65.8% 70.7%
Mutual fund and related revenue......... 11.1 9.7
Net interest revenue.................... 18.9 15.8
Other................................... 4.2 3.8
----- -----
TOTAL REVENUES......................... 100.0 100.0
----- -----
EXPENSES
Employee compensation and benefits...... 28.7 27.8
Execution and clearing costs............ 16.9 16.1
Occupancy and equipment................. 9.0 8.3
Advertising and marketing............... 5.3 5.4
Communications.......................... 4.7 5.0
Amortization of goodwill................ 5.4 4.3
Professional fees....................... 2.3 1.9
Other................................... 11.2 13.5
----- -----
TOTAL EXPENSES......................... 83.5 82.3
----- -----
Income before income taxes.............. 16.5 17.7
Income tax provision.................... 8.7 8.4
----- -----
NET INCOME............................. 7.8% 9.3%
===== =====
</TABLE>
31
<PAGE> 36
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------------------
JANUARY 31, APRIL 30, JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31,
1997 1997 1997 1997 1998 1998 1998
----------- ---------- ---------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER OPERATING DATA:
Pre-tax operating margin,
excluding goodwill............. 23.3% 18.1% 26.3% 21.9% 18.8% 26.0% 21.4%
Average commissions per revenue
trade.......................... $ 47.44 $ 45.43 $ 38.15 $ 32.89 $ 32.79 $ 30.66 $ 28.09
Average trades per day
Electronic..................... 4,943 8,122 12,004 19,407 19,038 28,825 29,293
Total.......................... 27,815 28,016 31,649 42,033 42,237 57,446 58,240
Total accounts.................. 1,093,000 1,178,000 1,239,000 1,373,000 1,695,000 1,856,000 2,124,000
Total active accounts(1)........ 756,000 812,000 864,000 960,000 1,172,000 1,258,000 1,485,000
Number of new accounts.......... 69,000 93,000 72,000 90,000 99,000 166,000 128,000
Total customer assets (in
billions)...................... $ 32.3 $ 32.9 $ 39.8 $ 42.0 $ 52.0 $ 61.2 $ 74.4
Total employees................. 2,953 3,088 2,911 3,006 3,470 3,786 4,242
Total branches.................. 126 130 142 144 167 177 183
<CAPTION>
QUARTER ENDED
-------------------------
OCTOBER 31, JANUARY 31,
1998 1999
----------- -----------
<S> <C> <C>
OTHER OPERATING DATA:
Pre-tax operating margin,
excluding goodwill............. 22.0% 22.0%
Average commissions per revenue
trade.......................... $ 25.72 $ 24.14
Average trades per day
Electronic..................... 36,876 61,562
Total.......................... 66,118 97,981
Total accounts.................. 2,302,000 2,467,000
Total active accounts(1)........ 1,609,000 1,736,000
Number of new accounts.......... 138,000 167,000
Total customer assets (in
billions)...................... $ 75.9 $ 95.7
Total employees................. 4,217 4,534
Total branches.................. 192 200
</TABLE>
(1) Active accounts are accounts which had purchase, sale or other activity
during the previous calendar quarter.
During fiscal year 1998, we added 16 new branches and approximately 332,000
total accounts in connection with our acquisition of Kennedy Cabot & Co. and
Jack White & Co.
We have experienced, and expect to continue to experience, significant
fluctuations in quarterly operating results as a result of a variety of factors,
including general volume and volatility in the securities markets, impact of
competition, levels of online trading, changes in interest rates, changes in
foreign currency rates, changes in regulations, our ability to manage personnel
and process online trading activity, the amount and timing of capital
expenditures, the incurrence of costs associated with acquisitions and general
economic conditions. Our expense structure is based on historical expense levels
and the levels of demand for our brokerage services. If demand for our brokerage
services declines and we are unable to adjust our cost structure on a timely
basis, it could have a material adverse effect on our business, financial
condition and operating results.
Due to all of the foregoing factors, period-to-period comparisons of our
revenues and operating results are not necessarily meaningful and such
comparisons cannot be relied upon as indicators of future performance. In
addition, we can not assure you that we will be able to sustain the rates of
revenue growth that we have experienced in the past, that we will be able to
improve our operating results or that we will be able to sustain our
profitability on a quarterly basis. See "Risk Factors."
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have financed our customer securities operations primarily
through customer credit balances, deposits received for securities loaned and
other short-term borrowings. As of January 31, 1999, more than 84% of our assets
consisted of cash and cash equivalents or assets readily convertible into cash
(principally receivables from customers, receivables from brokers and dealers,
deposits paid for stock borrowed, and securities owned). Receivables from
customers primarily consist of margin loans to customers, which are secured by
customers' readily marketable securities. Receivables from brokers and dealers
consists of amounts receivable for pending securities transactions, which can
generally be settled within three business days. Deposits paid for securities
borrowed represent cash deposits placed with brokers securing marketable
securities borrowed by us. Securities owned consist primarily of U.S. and
Canadian government securities and other securities, which trade in highly
liquid markets.
Capital expenditures and investments in new technology, services and
advertising have been primarily financed through earnings from operations.
Acquisitions of new businesses have been funded through capital contributions
from TD Bank.
Net income plus depreciation and amortization was $31.2 million, $64.9
million, $91.6 million, $16.4 million and $32.3 million, for the fiscal years
ended October 31, 1996, 1997 and 1998, and the three months ended January 31,
1998 and 1999, respectively. Depreciation and amortization expense which relates
32
<PAGE> 37
to fixed assets, leasehold improvements and goodwill, was $1.6 million, $28.6
million, $42.9 million, $9.9 million and $12.3 million, for the fiscal years
ended October 31, 1996, 1997 and 1998, and the three months ended January 31,
1998 and 1999, respectively. Capital expenditures were $26.8 million, $17.7
million, and $4.8 million and $5.4 million in the fiscal years ended October 31,
1997 and 1998 and the three months ended January 31, 1998 and 1999,
respectively, which represented, 6.0%, 2.9%, 3.9%% and 2.5% of total revenues in
each period. Capital expenditures, excluding acquisitions of new businesses,
during the fiscal years ended October 31, 1996, 1997 and 1998 and the first
quarter of 1999, primarily related to the purchase of communications and data
processing equipment and leasehold improvements related to new branches and
office facilities. The cost of acquiring new businesses, net of assets acquired
and liabilities assumed, was approximately $390 million during fiscal year 1996
related to the acquisition of Waterhouse Securities Group, $22 million during
the year ended October 31, 1997 and $291 million during the year ended October
31, 1998.
Our broker-dealer subsidiaries are subject to regulatory requirements
intended to ensure their general soundness and liquidity and require that the
broker-dealers comply with certain minimum capital requirements. These
regulations, which differ in each country, generally prohibit our broker-dealer
subsidiaries from repaying borrowings from TD Bank, paying cash dividends,
making loans to us or affiliates, or otherwise entering into transactions which
would result in a significant reduction in their regulatory capital position,
without prior notification and/or approval of the broker-dealer's principal
regulator. Our capital structure is designed to provide each entity and business
with capital and liquidity consistent with their business and regulatory
requirements.
We currently anticipate that the net proceeds from these offerings together
with our available cash resources and credit facilities will be sufficient to
meet anticipated working capital, capital expenditures and regulatory capital
requirements for at least the next twelve months.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On January 28, 1997, the SEC adopted new rules (Securities Act Release No.
7386) that require disclosure about the policies used to account for derivatives
and certain quantitative and qualitative information about market risk
exposures. 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 not traded or
otherwise transacted in derivatives nor do we expect to in the future. We have
established policies, procedures and internal processes governing our management
of market risks in the normal course of our business operations.
As a part of our brokerage business, we hold short-term interest-earning
assets, mainly margin loans to customers totaling $2.9 billion and $3.8 billion
at October 31, 1998 and January 31, 1999, respectively. Our interest earning
assets are financed by short-term interest-bearing liabilities in the form of
customer balances and deposits received for stock loaned. We earn a net interest
spread on the difference between amounts earned on customer margin loans and
amounts paid on stock loan and customer credit balances. Since we establish the
rate paid on customer cash balances, a substantial portion of our interest rate
risk is under our direct management. We generally move rates earned on loans in
lockstep with rates paid on credit balances to maintain a consistent net
interest spread, and, therefore, do not anticipate that changes in interest
rates will have a material adverse effect on our earnings and cash flows.
We held marketable securities (securities owned) at October 31, 1998 and
January 31, 1999, which were recorded at fair value of $76.3 million and $62.1
million, respectively, and Securities Sold Short (securities sold, not yet
purchased) at October 31, 1998 and January 31, 1999 with a fair value of $5.0
million and $5.2 million, respectively, thus have exposure to market price risk.
This risk is estimated as the potential loss in fair value resulting from a
hypothetical 10 percent adverse change in quoted market prices and amounts to
approximately $8.1 million and $6.7 million at October 31, 1998 and January 31,
1999, respectively. Actual results may differ.
33
<PAGE> 38
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies and governmental agencies may
need to be upgraded to comply with such Year 2000 requirements or risk system
failure or miscalculations causing disruptions of normal business activities.
State of Readiness. We have made an assessment of the Year 2000 readiness
of our trading-related, communications and data processing systems. Our
readiness plan consists of:
- quality assurance testing of our main trading-related systems including
all customer interfaces and links to exchanges and utilities;
- contacting third-party vendors and licensors of material hardware,
software and services that are both directly and indirectly related to
the main trading systems;
- contacting vendors of critical non-trading related communications and
data processing systems;
- assessment of repair or replacement requirements;
- repair or replacement;
- implementation; and
- creation of contingency plans in the event of Year 2000 failures.
In the U.S., we have successfully participated in the July Year 2000 Beta
test of the Securities Industry Association (SIA) and the March/April SIA Year
2000 Industry "streetwide" test. We have conducted extensive testing with ADP,
our primary vendor, and the various systems we use in conjunction with ADP
including electronic trading products. As a result we presently believe that our
main trading-related systems are currently Year 2000 compliant. We have required
vendors of material hardware and software components of our IT systems to assure
Year 2000 compliance. We plan to complete this process during the first half of
1999. We are currently assessing the materiality of our non-IT systems and will
seek assurances of Year 2000 compliance from providers of material non-IT
systems. Until such testing is complete and such vendors and providers are
contacted, we will not be able to completely evaluate whether our IT systems or
non-IT systems will need to be revised or replaced. We plan to conclude this
process by June 30, 1999.
In Canada, we have successfully completed extensive Year 2000 end-to-end
testing of the securities systems provided by our most critical third party
vendor, Information Systems Management Corporation (ISM). These tests were
conducted using forward dated transactions in a future dated environment. They
established our readiness to access customer account data, place orders, handle
back office accounting processes and link electronically to Clearing
Corporations and the exchanges. In addition, we are actively participating with
the Canadian Securities Association, other brokers and representatives of the
industry infrastructure in "Industry Street Tests." We have successfully
completed Beta tests with the securities and mutual fund industry, and full
industry tests for debt and money market instruments. As a result of this, we
believe that all of its systems that are necessary for inter-industry trading of
securities, mutual funds and debt instruments are Year 2000 compliant. Our final
demonstration of readiness will be established with the conclusion of the
Securities and Mutual Fund Street tests in June 1999. We have required suppliers
of all hardware and software components of its IT and non-IT systems to provide
assurances of their Year 2000 readiness. In every instance where there is a data
interface involving the system of a third party software supplier, we have a
program to conduct future date testing to confirm the readiness of the software.
We plan to conclude this process by June 30, 1999.
Costs. To date, we have incurred approximately $4.1 million in costs in
connection with identifying and evaluating Year 2000 compliance issues. Most of
our expenses have related to, and are expected to continue to relate to,
upgrading our communications systems in the U.S., as well as operating costs
associated with time spent by employees in the evaluation process and Year 2000
compliance matters in general. At this time, we
34
<PAGE> 39
estimate that the total cost of the Year 2000 project to be approximately $10
million. Although we do not anticipate that any additional amounts above this
estimate will be material, such expenses, if higher than anticipated, could have
a material adverse effect on our business, financial condition and operating
results. Our Year 2000 compliance costs are substantially less than many of our
competitors and other securities firms due primarily to the fact that we utilize
third party vendors for our back-office systems.
Risks. We are not currently aware of any Year 2000 compliance problems
relating to our main trading-related, communications or data processing systems
that would have a material adverse effect on our business, financial condition
and operating results, without taking into account our efforts to avoid or fix
such problems. We can not assure you that we will not discover Year 2000
compliance problems that will require substantial revisions. In addition, we can
not assure you that third-party software, hardware or services incorporated into
our systems will not need to be revised or replaced, all of which could be time
consuming and expensive. Our failure to fix our main trading-related,
communications or data processing systems or to fix or replace third-party
software, hardware or services on a timely basis could result in lost revenues,
increased operating costs, the loss of customers and other business
interruptions, any of which could have a material adverse effect on our
business, financial condition and operating results. Moreover, the failure to
adequately address Year 2000 compliance issues in our main trading-related,
communications or data processing systems could result in litigation, which
could be costly and time-consuming to defend.
In addition, there can be no assurance that governmental agencies, utility
companies, securities exchanges, Internet access companies, third-party service
providers and others outside our control will be Year 2000 compliant. The
failure by such entities to be Year 2000 compliant could result in a systemic
failure beyond our control, such as a prolonged Internet, telecommunications or
electrical failure, which could also prevent us from delivering our services to
our customers and could have a material adverse effect on our business, results
of operations and financial condition.
Contingency Plan. As discussed above, we are engaged in an ongoing Year
2000 assessment and are actively developing contingency plans. The result of our
industry testing and the responses received from third-party vendors, service
providers and customers will be taken into account in determining the nature and
extent of any contingency plans.
RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
was issued in 1998. This standard requires us to recognize all derivatives as
either assets or liabilities in our financial statements and measure such
instruments at their fair values. Hedging activities must be redesignated and
documented pursuant to the provisions of the statement. This statement becomes
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
At this time, we do not believe that adoption of this standard will have a
material impact on our financial condition and results of operations.
SFAS No. 134, Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise,
was issued in October 1998. SFAS No. 134 provides guidance for mortgage banking
entities on how to account for interests retained after securitizing mortgage
loans previously held for sale. SFAS No. 134 is effective for fiscal quarters
beginning after December 15, 1998. At this time, we do not believe that adoption
of this standard will have a material impact on our financial condition and
results of operations.
SFAS No. 135, Rescission of FASB Statement No. 75 and Technical
Corrections, was issued in February 1999. SFAS No. 135 is effective for fiscal
years ending after February 15, 1999. This statement is not applicable to us and
will have no impact on our financial position, results of operations, earnings
per share or cash flows.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use," effective for fiscal years beginning after December 15, 1998.
SOP 98-1 requires that certain costs of computer software developed or obtained
for internal use be
35
<PAGE> 40
capitalized and amortized over the useful life of the related software. We
currently expense the costs of all software development in the period in which
it is incurred. We intend to adopt this statement beginning in the fiscal year
ended October 31, 2000 and are currently assessing its impact.
36
<PAGE> 41
THE REORGANIZATION
Immediately prior to the completion of these offerings, TD Bank will
reorganize its worldwide discount brokerage operations so that they will be
consolidated into our company and our subsidiaries. This reorganization will
include the following steps:
- Waterhouse Investors Services, Inc., which prior to the reorganization
served as the U.S. holding company for TD Bank's U.S. discount brokerage
operations, will recapitalize its two registered broker-dealer
subsidiaries by exchanging the common stock it holds in those companies
for shares of new common stock and preferred stock. The preferred stock
will be redeemable at any time, in whole or in part, at the issuer's
option for an aggregate redemption price of $ million, will pay
dividends semi-annually at the rate of % per annum, and will have no
fixed maturity.
- Waterhouse Investor Services, Inc. will then contribute to us all of the
common stock of its registered broker-dealer subsidiaries as well as all
of the common stock of certain of its other U.S. subsidiaries.
Waterhouse Investor Services, Inc. will retain the shares of preferred
stock of the broker-dealer subsidiaries, which may be redeemed with a
portion of the proceeds of the offerings. See "Use of Proceeds."
- TD Bank will transfer its Canadian discount brokerage business and
brokerage clearing business to our newly-formed Canadian subsidiary, TD
Waterhouse Canada, in exchange for a series of exchangeable preference
shares of TD Waterhouse Canada (including one corresponding special
voting preferred share of TD Waterhouse) and promissory notes of TD
Waterhouse Canada totaling approximately $65 million. The special voting
preferred share will have voting rights equal to the number of shares of
our common stock into which the exchangeable preferred shares may be
exchanged. The exchangeable preference shares will be exchangeable at
any time at their holders' option for an equivalent number of shares of
our common stock, and will have dividend rights equal to the number of
shares of our common stock into which the exchangeable preference shares
may be exchanged. See "Description of Capital Stock -- Exchangeable
Preference Shares of TD Waterhouse Canada". As part of the transfer, TD
Waterhouse Canada will assume all past liabilities of these businesses
and each of TD Bank and TD Waterhouse Canada will indemnify the other
and its relevant subsidiaries, and its respective directors, officers,
agents and employees, against all past, present and future liabilities
related to the transferred and retained businesses.
- TD Bank will transfer all of the stock of its United Kingdom, Australia
and Hong Kong discount broker subsidiaries to us in exchange for shares
of our common stock and a promissory note of approximately $25 million.
- We will enter into a master services agreement with TD Bank pursuant to
which certain services will be made available to us and we will make
certain services available to TD Bank. See "Principal Stockholder --
Master Services Agreement."
In order to effect the third step described above, TD Bank and TD
Waterhouse Canada will enter into a transfer and assumption agreement which
generally provides for the transfer of assets used exclusively by the
transferred businesses. The assets to be transferred will consist of all
tangible assets, such as computers, equipment and furniture, which exclusively
relate to the transferred businesses as identified in TD Bank's accounting
records. All of the accounts receivable, cash and cash equivalents of the
transferred businesses will also be transferred. All intellectual property owned
by TD Bank or its non-transferred subsidiaries and used by the transferred
businesses will be licensed to TD Waterhouse Canada. The transferred businesses
currently operate in premises leased from third parties or in space owned or
leased by TD Bank. While these leases will remain in the name of TD Bank,
pursuant to the transfer agreement, TD Bank will grant or assign to TD
Waterhouse Canada the benefits under those leases for premises which are
exclusively used by the transferred businesses. In addition, pursuant to the
master services agreement described under "Principal Stockholder", TD Bank will
continue to make available shared space used by the transferred businesses.
Prior to the reorganization, all employees involved in the transferred
businesses have been employees of TD Bank. In most cases, those employees who
are exclusively engaged in performing the activities of the
37
<PAGE> 42
transferred businesses in Canada will be transferred to TD Waterhouse Canada. In
addition, employees who perform services for both TD Bank and us will be
retained by, or transferred to, the entity for which they predominantly provide
services, with appropriate exceptions where business needs require. The
employees to be transferred may remain with TD Bank for a transitionary period
after the completion of the offerings. Pursuant to the master services
agreement, TD Bank and TD Waterhouse Canada will make available to the other
employees who immediately prior to these offerings provided services to both TD
Bank and the transferred businesses.
As a result of these arrangements approximately 1,350 employees will be
transferred to us. TD Waterhouse Canada's employees will comprise all employees
working in its local branches, customer service centers and back office
activities. With the exception of certain support services to be provided by TD
Bank employees, TD Waterhouse Canada's employees will perform all day-to-day
compliance, technology and information systems management and human resources
functions for TD Waterhouse Canada.
The transfer and assumption agreement provides for TD Bank to transfer all
of its right, title and interest in the assets. The transfer and assumption
agreement provides that assets that cannot be legally transferred to TD
Waterhouse Canada prior to the effective date of the reorganization as a result
of the absence of a required third party or regulatory consent or approval will
be transferred as soon as practical following the receipt of any necessary
consents or approvals.
The transfer and assumption agreement provides for assumptions and
indemnities designed to place sole legal and financial responsibility on TD
Waterhouse Canada for all liabilities known or contingent relating to the
transferred businesses, its past and present operations and the assets
transferred or licensed to TD Waterhouse Canada. As a result, the liabilities to
be assumed by TD Waterhouse Canada include all liabilities and obligations,
actual or contingent, relating to the transferred businesses, such as accounts
payable, contractual obligations and ongoing or presently unknown claims and
suits. The transfer and assumption agreement contains indemnification provisions
in connection with the conduct of TD Waterhouse Canada's business after the
transfer of the transferred businesses, misstatements or omissions in this
prospectus with respect to the transferred businesses and the use of TD Bank's
trademarks, trade names, logos and other indemnities. TD Bank similarly is
obligated to indemnify TD Waterhouse in respect to TD Bank's past, present and
future business, other than the transferred businesses.
38
<PAGE> 43
Upon completion of the reorganization, the corporate structure of our
company reflecting our principal operations will be as follows:
[CHART]
The
Public Stockholders Toronto-Dominion Bank
Common Stock Common Stock Exchangeable Preference Shares
TD Waterhouse Securities, Inc.
<TABLE>
<CAPTION>
100% 100% 100% 100% 100% 100% 100%
<S> <C> <C> <C> <C> <C> <C>
Waterhouse National Waterhouse TD Waterhouse TD Waterhouse TD Waterhouse TD Waterhouse
Asset Investor Securities, Australia Europe Hong Kong Canada
Management, Services Inc. (Australian brokerage (U.K. brokerage (Hong Kong brokerage (Canadian brokerage
Inc. Corp. (U.S. brokerage operations) operations) operations) and clearing
(U.S. (U.S. operations) operations)
investment clearing
advisor) operations)
</TABLE>
The exchangeable preference shares held by TD Bank are exchangeable at any
time for an aggregate of shares of our common stock. TD Bank will also hold
a related special preferred voting share of TD Waterhouse Securities which will
give it voting rights equivalent to the number of shares of our common stock for
which the exchangeable preference shares are then exchangeable.
39
<PAGE> 44
BUSINESS
OVERVIEW
TD Waterhouse is one of the largest discount brokers in the world.
Leveraging our investment in technology, we have become one of the premier
global online brokers and a leading provider of online investing services and
related financial products. We have:
- the second largest discount brokerage operations globally with over 2.6
million customer accounts, including approximately 1.9 million active
accounts, and more than $100 billion in customer assets under
administration as of March 31, 1999;
- the third largest online discount brokerage operations globally by
trading volume and customer assets;
- a significant international presence with operations in the U.S.,
Canada, Australia, the United Kingdom and Hong Kong;
- the second largest global branch network of any discount broker with
over 200 branches worldwide and an additional 40 branches planned to
open by the end of the year 2000; and
- complemented our internal growth with a targeted acquisition program
that has included the acquisition and integration of six companies since
1993, with over 570,000 customer accounts.
Our primary markets are the U.S. and Canada, which accounted for 69% and
29%, respectively, of our fiscal 1998 consolidated revenues and 75% and 23%,
respectively, of our consolidated revenues for the first quarter of fiscal 1999.
Approximately 1.6 million of our total customer accounts at January 31, 1999
were held by customers in the U.S. and 600,000 were held by customers in Canada.
The table below shows the growth in our business over the past five years in
each of our operating regions:
<TABLE>
<CAPTION>
FISCAL
QUARTER
FISCAL YEAR ENDED OCTOBER 31, ENDED
------------------------------------------------------ JANUARY 31,
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
U.S.
Revenues (in thousands)....................... $104,594 $143,430 $203,377 $250,095 $ 423,789 $ 160,939
Number of accounts............................ 363,338 454,554 591,334 774,924 1,509,635 1,642,000
Average daily trades.......................... 6,431 8,774 13,114 19,260 42,165 81,234
Assets under administration (in billions)..... $ 7.3 $ 11.6 $ 16.2 $ 26.1 $ 58.6 $ 75.7
CANADA
Revenues (in thousands)....................... $113,865 $113,817 $167,409 $194,028 $ 180,051 $ 49,850
Number of accounts............................ 335,082 357,891 437,027 520,735 593,296 612,474
Average daily trades.......................... 6,488 6,532 10,084 12,744 12,886 15,093
Assets under administration (in billions)..... $ 9.2 $ 11.0 $ 12.5 $ 15.9 $ 16.1 $ 18.5
OUTSIDE NORTH AMERICA
Revenues (in thousands)....................... -- -- -- $ 2,508 $ 10,621 $ 4,246
Number of accounts............................ -- -- -- 77,513 198,695 212,264
Average daily trades.......................... -- -- -- 467 1,122 1,654
Assets under administration (in billions)..... -- -- -- -- $ 1.2 $ 1.5
</TABLE>
We specialize in providing financial services to individual retail
investors who manage their own investments and personal finances and to
fee-based independent investment advisors. Customers in our major markets are
able to utilize our services 24 hours a day, seven days a week through a variety
of delivery channels, including the Internet and other electronic channels as
well as our extensive network of branches and service centers. At March 31,
1999, approximately 780,000 of our customer accounts were enabled for online
trading, and for the three months ended March 31, 1999, approximately 59% of our
average daily trading volume of 110,000 trades were conducted online.
40
<PAGE> 45
In addition to securities trading services, we also provide our customers
with a broad range of banking, mutual fund and other consumer financial products
and services on an integrated basis, including:
- a broad range of investment news, third party research reports and
personal investment management tools such as portfolio tracking and
stock and mutual fund screening programs;
- over 9,600 mutual funds from over 400 fund families (including the
Waterhouse Dow 30 Fund and a series of money market funds that we
advise), with approximately $26 billion in assets held in these funds
through us as of March 31, 1999;
- insured transaction accounts, checking, ATM access, electronic funds
transfer, insured certificates of deposit and other banking products,
which are provided through our affiliates Waterhouse National Bank and
TD Bank; and
- clearing and execution services to correspondents and other
broker-dealers.
We use a multi-channel distribution system to provide our customers with
access to our products and services. Customers may utilize any of the following
delivery channels to access our services:
- online channels via either the Internet, using our webBroker for our
customers in the U.S., Canada and Australia, or by using a direct
personal computer dial-up link using free proprietary software;
- a network of branch offices, supported by service centers accessible by
toll-free telephone numbers that are available in each of our major
markets 24 hours a day, seven days a week;
- touch-tone telephone to access our automated trading systems; and
- TalkBroker, a real time voice recognition market information system,
which provides customers of our Canadian operations with real time stock
and option quotes and mutual fund pricing through the use of voice
recognition.
INDUSTRY OVERVIEW
The discount brokerage industry has grown rapidly over the past decade,
with the largest portion of this growth coming from the significant increase in
online brokerage activity. According to data compiled by International Data
Corporation, since the introduction of Internet access for online brokerage
services in 1996, the number of online brokerage accounts has increased to an
estimated 1.6 million at the end of 1996, 3.7 million at the end of 1997 and 6.4
million at the end of 1998, representing approximately $324 billion in assets.
Online trading activity is estimated to have reached an average of over 440,000
trades per day during the first quarter of 1999 and now accounts for an
estimated 25% of all retail stock trades in the U.S.
We believe that this growth has resulted from a number of key developments
and trends, including the following:
- - The unbundling of financial services -- Investors are able to select
specific products and services as they need them and can choose from a
variety of financial service providers for different products and services.
Many brokerage firms have begun to specialize and customize products, with
some providing investment advice and planning and others providing discount
and electronic brokerage services.
- - Increasing self-reliance and value consciousness of investors -- Investors
have become more knowledgeable about investment strategies and investment
alternatives and are becoming more willing to make their own financial and
investment decisions. These investors tend to seek greater value, often in
the form of lower transaction costs, and represent a key market for discount
brokerage services.
- - Growth in financial assets held by individuals -- As the population ages,
generational wealth transference is placing capital into the hands of new
investors who are actively seeking investment opportunities. This inflow of
investment dollars is not only contributing to the increase in valuation
levels of the overall market but is also increasing the number and size of
investment accounts.
41
<PAGE> 46
- - The democratization of market information -- The Internet and other
convenient and inexpensive channels have provided consumers with greater
access to real time market information and research. Individuals now have
the same information that many brokers do, and as a result, "self-directed"
investors have begun to manage their own portfolios, with decreasing
reliance on full-commission brokers.
- - Development of the Internet as a new investing channel -- The use of the
Internet and new technology to process and deliver large amounts of
information and to facilitate inexpensive communication of data has been
growing at an accelerating rate. The Internet has provided an alternate
delivery channel and provided an interface with the customer to facilitate
order placement and trade execution. We anticipate that this trend and the
others noted above will continue to benefit the discount brokerage industry,
particularly for brokerage firms with well-developed Internet delivery
channels.
BUSINESS STRATEGY
Our ongoing business strategy focuses on positioning us to take advantage
of the current industry dynamics by leveraging our position as the world's
second largest discount brokerage firm. Key elements of our strategy include:
- - Building brand awareness on a global basis -- Through advertising, branch
expansion, increased use of dedicated business development officers, and
development of strategic alliances and partnerships, we will continue to
build our global brand. Following completion of the offerings, we plan to
unify our operations, marketing and advertising under a single trade name
worldwide.
- - Expanding our products and services -- We plan to expand our current
products and services to include a full array of banking products, webBroker
in all our markets, expanded initial public offering and new issue access
and additional proprietary mutual funds.
- - Building customer assets by focusing on high growth, profitable market
segments -- We intend to continue to build customer assets through targeting
attractive market segments with specialized services and our business
development marketing approach.
- - Leveraging our technological expertise to enhance our customers' experience
and empower them to better manage their investments -- We plan to continue
to utilize and leverage technology to provide our customers the highest
level of service available in the industry.
- - Continuing our international expansion both in existing markets and into
attractive new markets -- We plan to continue our strategic international
growth strategy by expanding our current international presence and
evaluating opportunities in attractive new markets, including other European
and Asian markets.
- - Enhancing our financial performance -- By building key businesses, focusing
on low cost distribution, and continuing to integrate and extract economies
of scale from acquisitions, we plan to enhance current profitability.
OUR HISTORY
Our U.S. operations commenced in 1979 as Waterhouse Securities, Inc.
located in New York City. After a successful initial public offering in 1987,
Waterhouse Securities, Inc., a member of the NYSE, was able to develop its own
self-clearing capability in 1988 and subsequently launched Waterhouse National
Bank in 1994, Waterhouse Asset Management in 1995 and National Investor Services
Corp. in 1997. In 1998, Waterhouse became the third largest discount brokerage
firm in the U.S. measured by number of customer accounts.
Waterhouse Securities, Inc. was acquired in 1996 by TD Bank, which had
begun building its own discount brokerage operations under the name Green Line
Investor Services as early as 1984 following the deregulation of brokerage
commissions in Canada. In 1987 Green Line became a fully registered broker and
was the first bank-owned firm in Canada to purchase a seat on the TSE. By 1989,
through a series of acquisitions and internal growth, Green Line had become the
largest discount broker in Canada.
42
<PAGE> 47
We have expanded both the Waterhouse and Green Line discount brokerage
businesses through internal growth, the opening of offices in new domestic and
overseas markets and the acquisition of other discount brokerage companies.
These acquisitions complemented our internal growth strategy by providing us
with a cost effective means of acquiring new accounts, adding scale and
providing us with entry platforms in new markets. The table below sets forth
certain information concerning these acquisitions:
<TABLE>
<CAPTION>
ACQUISITION PURCHASE TOTAL
DATE PRICE ACCOUNTS
-------------- ------------ --------
<S> <C> <C> <C>
Gall & Eke....................................... September 1998 $ 13 million 50,000
(United Kingdom)
Jack White & Co.................................. May 1998 $103 million 130,000
(U.S.)
Kennedy Cabot & Co............................... November 1997 $154 million 202,000
(U.S.)
Rivkin Croll Smith............................... November 1997 $ 19 million 44,000
(Australia)
Pont Securities Limited.......................... May 1997 $ 23 million 53,000
(Australia)
Marathon Brokerage............................... October 1993 $ 46 million 92,000
(Canada)
</TABLE>
MULTI-CHANNEL DELIVERY SYSTEMS
Our strategy focuses on providing a wide array of high-quality, low-cost
products and services to our customers through a variety of distribution
channels. We differentiate ourselves from most of our competitors in the
brokerage industry by providing full-service multi-channel delivery systems
which allow customers to choose how they prefer to do business with us. We
provide a variety of electronic channels through which our customers can access
our products and services. Customers are able to obtain account information,
access a broad array of research information and enter trade orders on an
automated basis through these electronic channels at any time, thereby providing
added convenience for customers and minimizing our costs of responding to and
processing routine customer transactions. In addition to our electronic
distribution channels, we maintain an extensive and growing branch office
network, supported by 11 regional U.S. and Canadian telephone service centers
that support the branch offices during normal business hours, three of which
provide after-hours service, thereby providing personal service to the customers
of our U.S. and Canadian operations 24 hours a day, seven days a week.
Over the past two years, our Internet trading services have become an
increasingly important part of our business. Trades through our webBroker
services represented approximately 37% and 54% of our total trading volume for
fiscal 1998 and the three months ended March 31, 1999, respectively.
Internet Access
Customers of our brokerage operations in the U.S., Canada and Australia can
access their brokerage accounts online through the Internet, by utilizing online
service providers such as America Online and the Microsoft Network. Our Internet
web site, marketed under the name webBroker, allows customers to engage in a
full range of trading activities while online. In addition, webBroker provides
customers with access to a broad range of free investing information, including:
- real-time stock quotes;
- news and charts;
- research reports;
- investment management tools, such as portfolio tracking;
43
<PAGE> 48
- stock and mutual fund screening tools;
- market commentary;
- technical analysis and alerts; and
- account management tools which allow customers to review account
balances, transaction histories and order status.
In addition, to assist customers in using online channels, we maintain
Electronic Brokerage Support Centers which operate 24 hours a day, seven days a
week in the U.S. and extended hours in Canada. These services are available
through a toll-free number to all our online customers.
We are in the process of developing and implementing a number of
enhancements to our online delivery channels which we expect to be available
later this year. These enhancements are designed to expand the range of products
and services available to our customers at any time and to enhance our
customers' access to our online delivery channels. These enhancements include
the following:
- webBroker for our investment advisor customers in the U.S. and Canada,
which provides secure access to multiple accounts, block trading and
trade allocation and consolidated portfolio reports;
- webBroker in French for our Canadian customers;
- webBanking, which will permit our customers to access the full range of
banking products and services offered by our affiliated banks through
links to webBroker; and
- access to our products and services through hand-held wireless devices,
such as pagers, electronic organizers and cellular phones.
Other Electronic Channels
In addition to Internet access, we offer our customers access to our
products and services through the following other electronic channels:
- - Direct Dial-up Access. Our customers can use their personal computers to
access their brokerage accounts online by using free proprietary software
provided by us to dial directly into our private computer networks for
real-time online brokerage services and market information.
- - Touch-tone Telephone. Our interactive investing systems, TradeDirect(R) and
TeleMax, provide customers with a convenient way to obtain quotes, place
orders and review certain account information using a touch-tone telephone.
- - Voice Recognition. TalkBroker, currently available to the customers of our
Canadian operations, is our real time voice recognition market information
system which provides customers with real-time Canadian and U.S. equity and
stock option quotes and Canadian mutual fund pricing through the use of
voice recognition over the telephone. We are currently developing a similar
system for our U.S. business and are in the process of developing a voice
recognition system for placing trade orders in both Canada and the U.S. We
expect these systems to be available later this year.
Our direct dial-up access and touch-tone telephone services are available
in both French and English to our Canadian customers.
44
<PAGE> 49
Electronic distribution channels have become an increasingly important part
of our business in the past several years. We provide significant discounts from
our standard commission rates for trades executed through electronic brokerage
channels, reflecting the lower cost of providing these services through online
channels. The following table shows customer trading through electronic channels
by our customers as a percentage of total trades:
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1999
----------------------------------------------------- -----------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER 1ST QUARTER
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
webBroker............................ 28.2% 34.3% 37.5% 43.1% 51.8%
PC dial-up........................... 9.1 9.2 7.5 7.6 6.2
----- ----- ----- ----- -----
Total online....................... 37.3 43.5 45.0 50.7 58.0
Touch-tone........................... 7.8 6.7 5.3 5.1 4.8
----- ----- ----- ----- -----
Total electronic................... 45.1% 50.2% 50.3% 55.8% 62.8%
===== ===== ===== ===== =====
</TABLE>
Branch Office Network and Service Centers
We believe that having a significant branch network is an important
marketing tool in opening new customer accounts and in maintaining a high level
of customer satisfaction and retention. Customers can use branch offices to open
accounts, deliver and receive checks and securities, obtain market information,
place orders, and obtain related customer services in person. Many of our
branches also offer seminars to existing and prospective customers on a range of
topics relating to personal investment strategies. At March 31, 1999, we
operated 160 branch offices in 44 states in the U.S. and 38 branch offices in
nine provinces in Canada, as well as seven branch offices in Australia, one
branch office in Hong Kong and two branch offices in the United Kingdom. We
anticipate that we will have branches in all 50 states and Puerto Rico by the
end of 1999, and 200 branch offices in the U.S. by the end of 2000.
Our branch office network is supported by 11 regional U.S. and Canadian
telephone service centers during normal business hours, three of which provide
after-hour service in the U.S. and Canada, 24 hours a day, seven days a week.
United States. During normal business hours, our customers can visit or
call a toll-free number to reach an account officer at a local branch to place a
trade order, obtain account information or transact other business. During
business hours the account officers in our branches are supported by customer
service representatives at our regional customer service centers in New York
City, Jersey City, Phoenix, Chicago and Atlanta. Customer calls are routed to
service centers based on call volume at the branches in order to maximize
efficiency and customer service. In addition, after normal business hours and on
weekends and legal holidays, customers of our U.S. operations are provided with
a toll-free number to reach our after-hours service center. These service
centers enable us to make customer service representatives available 24 hours a
day, seven days a week to all of our U.S. customers. Customer orders placed
during nonmarket hours are routed to appropriate markets the following business
day.
To allow personnel at branch offices to focus on customer service, we
recently opened six account processing centers in the U.S. which provide
administrative support to the branch offices. These services include processing
customer securities and checks, processing account applications and processing
customer correspondence.
The capacity of the service centers and processing centers allows the
branch office network to be maintained at lower staffing levels and to focus on
customer service and business development. Every one of our registered
representatives at our service centers has immediate access to the customer
account and market-related information necessary to respond to an individual
customer's inquiries.
At March 31, 1999, our branch offices and service centers were staffed by
more than 2,300 account officers and customer service representatives. Recent
growth in our average daily trading volume has resulted in a need for
significantly higher staffing at our branches and service centers. As a result,
we are currently
45
<PAGE> 50
implementing a plan to increase our staffing levels to an estimated level of
3,000. We anticipate further increases in staffing levels will be necessary if
these increases in trading volume continue.
We are currently in the process of implementing a significant new
initiative focused on expanding and upgrading our call processing system in
order to support expected growth while maintaining high levels of customer
satisfaction. This project, which is scheduled to be completed in October 1999,
will replace all of our current telephone systems and links with a centralized
call processing system developed and installed by Lucent Technologies that will
automatically route calls to an available broker at one of three networked
service centers or in the branches. The system is designed to use advanced
technologies to route calls based on load and broker availability, prioritize
queuing of calls based on customer profiles, and direct calls requiring
specialized services to the appropriate location.
Once the call processing system and service center expansion programs have
been fully implemented, we estimate that a majority of customer calls will be
handled through service centers, thereby allowing branch staff to focus a
majority of their efforts on business development and customer assistance and
education. In addition, the new system will provide staffing efficiencies, by
limiting the number of managers needed to oversee operations, and natural
redundancy in the event of disaster or service downtime at one location.
Canada. Our customers in Canada can reach an investment representative 24
hours a day, seven days a week by using toll-free numbers to contact their local
branch office or calling a service center directly. In addition, the local
branches are supported by six regional customer service centers located in four
provinces. After market hours, customer calls are routed to one of our two
after-hours service centers in Canada. Customer orders placed after market hours
are routed to the appropriate markets the following business day. In addition,
further customer assistance is available through our customer support group,
which is separate from our call centers. These customer service representatives
respond to all customer correspondence and investigate all statement inquiries
and discrepancies. Our service centers are staffed with trained specialists
providing advice on mutual funds, options and fixed income investments.
Outside the U.S. and Canada. In Australia, approximately 75% of our
business is conducted over the telephone at our service center in Sydney. Our
customers may place orders, obtain account information and transact other
business through this service center five days a week until 8:00 p.m. In order
to maintain personal contact with our customers and to develop new business, we
operate seven full-service local branch offices.
In the United Kingdom, we operate a business development office in London
and a customer service center in Manchester. We currently operate out of one
branch office in Hong Kong, and are developing plans to expand our presence in
the region to include the offering of local securities trading and execution
services.
PRODUCTS AND SERVICES
We offer a broad range of products and services to meet customers' varying
investment and financial needs, as well as access to extensive investment news
and information. Our products and services are tailored to meet the needs of
self-directed individual investors and independent fee-based investment
advisors. For the first quarter of fiscal 1999, approximately 84%, 7% and 9% of
our customers' transactions were in equity securities, options and mutual funds,
respectively. We do not trade equity securities as principal for our own
account, maintain inventories of securities for sale, engage in commodities
transactions or otherwise deal in or underwrite securities.
46
<PAGE> 51
The following table outlines our products and services offered to our
customers in the U.S., Canada and internationally.
<TABLE>
<CAPTION>
INTERNET ACCESS ALL OTHER CHANNELS
----------------------------------- -------------------------------
U.S. CANADA INTERNATIONAL* U.S. CANADA INTERNATIONAL
--------- ------ -------------- ----- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
PRODUCTS
Equities...................... X X X X X X
IPOs.......................... X X X X X X
Mutual Funds.................. X X X X X
Options....................... X X X X X
Bonds......................... X X X X
Foreign Securities............ X X X X
Retirement Plans.............. X X X X
Money Market Investments...... X X X X
Variable Annuities............ X
Other Insurance............... X X X X
Commodities................... X
Credit Cards.................. X X
Banking Products.............. X X
SERVICES
Quotes........................ X X X X X X
Research...................... X X X X X X
News and Alerts............... X X X X X X
Charts and Tracking........... X X X X X
Margin Services............... X X X X
Cash Management Services...... X X X
Bill Payment.................. X X
Electronic Brokerage
Support.................... X X X X X
Web Banking................... ** X
</TABLE>
- ---------------
* Australia only.
** Pending.
BROKERAGE SERVICES FOR INDIVIDUAL INVESTORS
United States. We offer our customers the ability to buy and sell all U.S.
and major foreign exchange-listed, Nasdaq-listed and other equity securities,
options, mutual funds, unit investment trusts, variable annuities and fixed
income investments, including U.S. Treasuries, zero-coupon bonds, listed and
over-the-counter ("OTC") corporate bonds, municipal bonds, GNMAs and CDs. We
offer both margin accounts and cash accounts to our customers. Customers
approved for margin transactions may borrow a portion of the value of certain
securities purchased through us, or may sell securities short. We make
commodities transactions available to our customers by acting as an introducing
broker for commodities trading.
Customers must have specific approval to trade options. As of March 31,
1999, approximately 140,000 accounts were so approved. To write uncovered
options, customers must go through an additional approval process and must
maintain a significantly higher level of equity in their brokerage accounts.
Canada. We offer our customers in Canada the ability to buy and sell all
equity securities which are listed on U.S. and Canadian exchanges, Nasdaq and
all major foreign exchanges, as well as Canadian and U.S. options, mutual funds,
Canadian government and corporate bonds, zero-coupon bonds, strip bonds,
Eurobonds, Yankee bonds, U.S. Treasuries and mortgage-backed securities. In
addition, customers may buy and sell money market investments, including
guaranteed investment certificates, short-term government bonds, term deposits,
bankers acceptances, bearer deposit notes, commercial paper, finance company
paper
47
<PAGE> 52
and money market strips. Transactions in Canada Savings Bonds and provincial
savings bonds are available. We also offer our customers the ability to buy and
sell gold and silver certificates.
Customers must have specific approval to trade options. As of March 31,
1999, approximately 50,000 accounts were so approved. Our options specialists
offer information to our customers to assist them in their investments in
Canadian or U.S. exchange-traded options.
Over the past several years, an increasing percentage of the trading
activity of our Canadian customers has involved U.S. equity securities. For
fiscal years 1996, 1997 and 1998 and the first quarter of fiscal 1999,
approximately 10%, 12%, 16% and 23%, respectively, of all trading volume in our
Canadian operations involved U.S. equity securities.
We offer our customers the ability to choose from a variety of different
types of brokerage accounts and investment plans. Brokerage accounts include
margin accounts and cash accounts. Customers approved for margin transactions
may borrow a portion of the price of certain securities purchased through us or
may sell securities short. The only equity securities which may be traded on
margin are stocks which are listed on major Canadian and U.S. exchanges and
certain stocks listed on Nasdaq.
Outside the U.S. and Canada. In Australia, our customers can buy and sell
all Australian exchange-listed equities, options, derivatives and managed funds.
We do not currently provide margin trading services directly to our Australian
customers. We settle such transactions on behalf of our customers with a margin
lender. We plan to offer our customers the ability to trade U.S. and Canadian
securities later this year.
In the United Kingdom, our customers can buy and sell all London Stock
Exchange and U.S. and Canadian exchange-listed equity securities as well as
exchange-listed equity securities in other major markets. We do not currently
offer margin trading to our U.K. customers.
Our Hong Kong operations act primarily as an introducing broker and
marketing affiliate to our Canadian operations. This business serves as a
liaison between our customers in Hong Kong and our Canadian operations,
providing Hong Kong residents with access to all U.S. and Canadian
exchange-listed securities. In addition, our Hong Kong customers can also buy
and sell local unit trusts (or mutual funds) and fixed income products. We
currently are developing systems that will allow us to offer our customers
access to local Hong Kong exchange-listed securities later this year.
MUTUAL FUNDS
United States. Through the Waterhouse Mutual Fund Network, we currently
offer our U.S. customers access to over 8,500 mutual funds from over 350 fund
families, including over 1,300 no-load mutual funds in 210 fund families which
customers can trade with no transaction fees ("NTF"), which are part of our NTF
program. Under our NTF program, we receive fees from the funds and fund sponsors
for providing services for the Waterhouse Mutual Fund Network program, including
record keeping and shareholder services. These fees are based upon balances of
customer assets invested in the participating funds through us. For no-load
funds which are not part of the NTF program, we currently charge our customers a
flat fee per trade, regardless of the size of the transaction. Our broad mutual
fund offerings provide our customers with simplified record keeping and
investment monitoring through the use of one consolidated statement. Customer
assets held by us that have been purchased through the Waterhouse Mutual Fund
Network, excluding our proprietary funds, totaled $10 billion as of March 31,
1999. Assets held in mutual funds in our NTF program totaled $3.0 billion as of
March 31, 1999.
Our proprietary funds include four taxable and two tax exempt money market
funds and the Waterhouse Dow 30 Fund, all of which are advised by one of our
subsidiaries. Customer assets invested in the Waterhouse proprietary funds
totaled approximately $10.8 billion at March 31, 1999. Fees received by us from
these proprietary funds for providing transfer agent services, shareholder
services, administration and investment management are based upon daily balances
of customer assets invested in these funds.
Canada. We offer investors over 1,100 different mutual funds from 75 fund
families including over 40 funds in the Green Line Family of Funds which are
managed by our affiliate, TD Asset Management Inc. We
48
<PAGE> 53
receive customary trailer fees from the funds, including the funds managed by
our affiliate, based upon balances of customer assets invested in the
participating funds through us. We do not charge a commission on no-load funds
but we may charge a commission for load funds. There is a regular redemption fee
for all no-load funds with the exception of the Green Line Family of Funds.
Customer assets held by us in mutual funds totaled $5.1 billion as of March 31,
1999, including $3.2 billion of assets invested in the Green Line Family of
Funds.
In addition, our team of mutual fund specialists provide our customers with
important comparative information about the over 1,100 mutual funds we make
available to our Canadian customers. Our Green Line FundSelect Internet tool
allows our online customers to compare all the Canadian mutual funds available
through us by key criteria.
Under the Green Line Managed Assets Program, our mutual fund specialists
assess the investment needs of customers and assist them in designing a
portfolio made up of a selection of the mutual funds offered by us tailored to
their investment objectives. Funds in the Managed Assets Program include both
load funds and no-load funds, but are sold on a commission-free basis. The cost
to our customers participating in this program is much lower than a traditional
full-commission brokerage program for the benefits of having a portfolio manager
determine the appropriate asset mix, select the funds in which to invest,
monitor and rebalance the fund mix on a regular basis and provide a detailed
performance report of the customer's portfolio.
SPECIAL SERVICES
In addition to our primary services offered to our customers, we seek to
differentiate ourselves from other discount brokers and build long-term client
relationships by providing additional services to meet specific needs and
requirements of our customer base, including:
- - Business Development Officers. Our staff of specially trained business
development officers assists our customers in developing asset allocation
strategies and evaluating investment choices with the goal of enhancing
customer awareness of their investment options and encouraging customers to
consolidate their various investment assets at TD Waterhouse.
- - Services for Active Customers. In the U.S., our Investors Advantage program
provides special benefits and privileges to our more active customers,
including reduced margin rates and priority service. In Canada, a select
group of our most active investors may participate in our President's
Account program. Members of this program receive substantial savings on
commissions, reduced margin loan rates, premium rates on investment
balances, free online connect time, free real-time quotes, free investment
reports, priority telephone services, and an annual trading summary.
- - Multi-Lingual Services. Through selected branch offices and service centers
in our major markets, we provide brokerage services and access to all our
products and services to customers whose primary language is French,
Spanish, Mandarin, Cantonese and certain other Asian languages.
- - Investment Guidance. Through selected branch offices, we provide our
customers with guidance regarding fixed income investing and assistance
selecting among a full-range of mutual funds and money market investments.
- - IPOs and New Issues. In Canada and the U.S., we provide access to
registered offerings of new issues to our qualified customers through an
arrangement with our affiliate, TD Securities Inc., when it participates as
underwriter or a selling group member in these offerings. In March 1999 we
entered into an agreement with Wit Capital to provide our qualified U.S.
customers with online access through webBroker to initial public offerings
that Wit Capital underwrites.
RETIREMENT SERVICES AND REGISTERED PLANS
United States. We offer a variety of no-fee, no-minimum balance retirement
plan products for both individuals and businesses. We offer various IRAs for
individuals as well as SEP plans, profit sharing plans, 401(k) plans and other
retirement plans for businesses and self-employed individuals. Customers are
provided
49
<PAGE> 54
with investment and savings assistance through our Retirement Planning Guide to
assist in determining retirement needs, our Retirement Plans Customer Service
Desk or by using our online Retirement Planning Center.
Canada. In addition to brokerage accounts, our Canadian customers may open
registered accounts, which shelter eligible investments from income taxes while
saving for retirement or education. The registered accounts we offer include
self-directed RSPs, self-directed RIFs, registered education savings plans and
Quebec stock savings plans.
BROKERAGE SERVICES FOR INVESTMENT ADVISORS
United States. Through our Waterhouse Institutional Division, which
operates out of two regional offices, we offer a full range of brokerage
execution and operational support services to independent fee-based registered
investment advisors and to financial institutions, such as banks and trust
companies, which provide trust and other investment services for their clients.
The clients of such advisors benefit from our discounted commissions. Clients of
advisors generally pay a fee to their advisor for his or her advice and pay a
commission to us for execution and custodial services.
This division of our business has its own sales force and marketing
strategy. Specialized technology, including proprietary software and data
translation interfaces, is provided to all advisors. An experienced relationship
manager is assigned to each advisory firm. A range of products and services
which have been individualized to meet the needs of financial advisors are
available, including: block trading and trade allocation, processing management
fees payable to advisors, free investment research, trading online, downloads of
client account information and consolidated monthly statements of client
accounts. We anticipate that Internet trading services will be available to our
investment advisor clients through webBroker in July 1999. This division now
serves over 2,600 investment advisors who manage total customer assets through
accounts with us of over $7 billion.
Through the Waterhouse referral program, we provide qualified customers
with referrals to registered investment advisors meeting certain minimum
requirements, including registration with the SEC, and who agree to maintain
custody of their clients' assets at TD Waterhouse. In order to qualify for this
referral service, our customers must have a portfolio with a balance of at least
$100,000. While benefitting our retail customers, this program also benefits our
investment advisor clients by providing participating registered investment
advisors access to our U.S. customer base of over 1.3 million active individual
investors. We do not pay to or receive from the registered investment advisors
any fees or compensation for participation in the Waterhouse referral program.
Our managed assets network is a service we make available to the financial
advisors who conduct business through us and to their clients. This customized
portfolio management program offers advisors and their clients access to more
than 50 equity and fixed income portfolios managed by a select group of
institutional asset managers. Among the benefits of the managed assets network
are low asset management fees and substantially lower minimum investment
requirements than would be available to these financial advisors on their own.
In addition, it enables registered investment advisors to delegate sophisticated
analysis to institutional managers.
Canada. Since 1987, our Canadian operations have provided securities
trading, clearing, settlement and account administration services to independent
investment counselors across Canada. Capitalizing on a growing acceptance of
outsourcing in the Canadian investment community, we generate revenue by
providing an administration model for those counselor firms seeking an
alternative to running their own traditional proprietary back office.
By leveraging our investment in technology, economies of scale and
management expertise, we can offer investment counselors quality administration
services at a competitive price. Investment counselors manage private client
accounts under our product label. Trade commissions on the accounts are paid to
us, and we assume responsibility for account opening, trading, credit and
regulatory compliance. We currently service
50
<PAGE> 55
over 80 investment counselor firms and have approximately 10,700 accounts and
$1.2 billion under administration.
Outside the U.S. and Canada. Through our Australian operations, we offer a
broad range of brokerage execution and operation support services to independent
fee-based investment advisors. The clients of the investment advisors pay the
advisor a fee and pay us a commission for trades executed. Our webBroker permits
the independent advisor to link up multiple client accounts for ease of
reference. Our recently launched Premium webBroker facility, provides the
investment advisors with a full range of market and client data on an integrated
basis.
CASH MANAGEMENT SERVICES
United States. Our customers in the U.S. can choose to have cash balances
in their accounts automatically swept, on a daily basis, into any of a selection
of money market funds or an FDIC-insured money market deposit account offered
through Waterhouse National Bank, our affiliate. On certain existing brokerage
accounts, we pay interest on cash balances. Our customers with online accounts
are required to establish an Investor Money Management ("IMM") account which is
also available to all our other customers with a minimum balance of $1,000.
Customers with IMM accounts may access available funds in their accounts either
with a personal check or a VISA(R) CheckCard. When a customer with an IMM
account is approved for margin trading, the checks and CheckCard also provide
access to margin cash available. Other services available to our customers to
help them manage their finances and investments include direct deposits into
their brokerage account, automated transfers from their bank to brokerage
account, periodic investing whereby customers can add to a mutual fund position
each month or quarter, dividend reinvestment and electronic bill payment which
permits customers to pay bills by touch-tone telephone.
Canada. We pay interest at competitive rates on all cash balances in the
brokerage accounts of our Canadian customers, including all cash dividends and
interest earned on investments. We offer an automatic deposit service to a TD
Bank account. Customers may elect to have interest and dividend income in both
U.S. and Canadian funds automatically deposited to a Green Line Income
Generation Account. Our customers may also access funds in their brokerage
account through checking, ATM account access and electronic funds transfer,
which are provided through TD Bank. Other services available to our customers
include monthly investments in mutual funds with automatic withdrawals from the
customer's brokerage account or bank account.
INVESTOR INFORMATION SERVICES
We provide a broad spectrum of free investment information and research
tools to our active customer base in order to help the self-directed investor
with his or her investment decisions. These include printed research materials,
quote information, charts of stock prices, portfolio tracking, stock and mutual
fund performance and screening tools and links to significant Internet financial
services web sites.
Printed Research Materials
United States. We make the following printed research publications
available to all customers of our U.S. operations:
- - Standard & Poor's Stock Reports, Stock Guides, and S&P's The Outlook -- The
Mid-Year and Annual Forecast Issues. Together, these reports are published
on over 3,800 stocks, including all NYSE and American Stock Exchange
securities and over 1,000 Nasdaq securities, and include investment data on
over 7,000 securities, summaries and interpretations of stock market trends
and investment strategy recommendations.
- - Our Monthly Newsletter. Our monthly newsletter features research from
Standard & Poor's and covers investing subjects of topical interest and
information about our products and services.
- - Standard & Poor's Stock Market Leaders Guide and Credit Analysis
Reports. These publications rank stocks according to a variety of
investment criteria and profile corporate bond issuers.
51
<PAGE> 56
- - Mutual Fund Information & Comparison Guide and Mutual Fund Top Performers
Report. These reports contain rankings, commentary and data compiled by
Morningstar, Inc. regarding all 8,500 mutual funds we offer.
- - Annual Retirement Planning Guide and Annual Tax Planning Guide. These
guides help our customers plan for retirement with financial strategies and
worksheets and outline tax planning strategies and tax-saving ideas.
Canada. We make the following printed research publications available to
our customers in Canada:
- - Standard & Poor's research reports, First Call reports and Financial Post
reports are available on more than 7,500 listed companies in the U.S. and
Canada.
- - Green Line News. This monthly newsletter produced by us contains tips on
investment strategies and advice from experts and forecasts by TD Bank's
Economics Department.
- - Mutual Fund Review. These quarterly reports, which provide comprehensive
statistical information on the over 1,100 funds offered to our Canadian
customers, are automatically provided for free to our customers with a
mutual fund account value of Cdn. $1,000 or more.
- - Other Research Products. We also offer our customers access to financial
computer software, investment books and other third party reference guides
at special discounts.
Online Market Data
We also provide our customers with information and research online. Our
partnership with leading content providers gives our online customers access to
a broad range of financial information and facilitates their ability to make
informed investment decisions.
United States. In addition to the delayed quotes, charts, and personal
portfolio tracker which are freely available to anyone who visits our web site,
we provide our webBroker customers with access to the most up-to-the-minute
financial data and news to assist them in making investment decisions.
- - Quotes, Charts, and Portfolio Tracking. Online customers can obtain free
real-time quotes for stocks, mutual funds and options at any time. Free
access to historical charts that track intra-day, daily, weekly and monthly
stock and option prices are available for over 25,000 publicly traded
Canadian and U.S. companies stocks, over 7,500 mutual funds, and over
100,000 options as well as advanced charting from Big Charts, which features
comparison charting for comparing stocks and mutual funds to various
indices. Our customers can create their own personal portfolio tracker with
up to 25 stocks and mutual funds. S&P Comstock provides real-time quotes.
Quote.com provides our delayed quotes, charts and portfolio tracking.
Current news and charts are directly linked to the portfolio tracking and
quote lookup features.
- - Quote and News Alerts. Customers are alerted by pagers and e-mail when
there is current news on an identified stock or when a stock has reached a
pre-selected price threshold.
- - News. Customers can obtain headline and full-text news on over 6,000
companies. News sources include Reuters, AP, Businesswire, PR Newswire, and
other sources. News service is supplied by Quote.com.
- - S&P Stock Reports Online. Online customers have unlimited access to
Standard & Poor's reports containing information such as quantitative and
technical evaluations, overviews, valuations, key stock statistics,
quarterly and fiscal year statistics, business summaries and charts.
- - Zacks Investment Research. Zacks Investment Research Incorporated provides
our online customers with research recommendations from over 3,000 analysts
at 240 firms.
- - Stock Screening by Market Guide. Our webBroker's Stock Screening tool
enables our online customers to quickly identify stocks that fit their
specific parameters by selecting from any combination of search options to
search Market Guide's database of over 10,500 public companies.
52
<PAGE> 57
- - Morningstar, Inc. Morningstar, Inc. provides performance information and
proprietary "star" ratings on mutual funds within the Waterhouse Family of
Funds.
- - Briefing.com. Briefing.com, a service of Charter Media, Inc., provides
market commentary and analysis to our online customers. Updates are posted
throughout the day to keep investors informed of important developments
affecting the markets.
- - MarketEdge. MarketEdge supplies computer-generated opinions designed to
identify conditions that historically have demonstrated a high degree of
accuracy in forecasting an individual stock's price movement. These opinions
are based on a variety of quantitative and technical factors.
Canada. In addition to the delayed quotes, charts, and portfolio tracker
that are freely available to anyone who visits the Green Line web site, we
provide our Green Line webBroker customers with access to the following research
and financial data and news to assist them in making investment decisions:
- - Quotes, Charts, and Portfolio Tracking. Online customers can obtain free
real-time quotes for U.S. and Canadian stocks, mutual funds, and options any
time. Free access to historical charts that track intra-day, daily, weekly
and monthly stock prices are available for all publicly traded Canadian and
U.S. companies. Our customers can create their own personal portfolio
tracker for up to five model portfolios with up to ten stocks, options,
mutual funds and indicies. Bridge Information provides real-time quotes.
Quote.com provides our delayed quotes and charts and portfolio tracking.
- - News. Customers can obtain up to the minute news and in depth analysis from
Reuters, as well as the latest Canadian news from Canadian Corporation News
and Canadian Market News.
RETAIL BANKING PRODUCTS AND SERVICES
United States. We offer our customers related financial products and
services provided by our affiliate, Waterhouse National Bank. In addition to the
FDIC-insured money market sweep account offered through our retail brokerage
business, the products and services of Waterhouse National Bank include
interest-bearing checking accounts, fixed term certificates of deposits, Visa
and MasterCard credit cards, electronic bill paying via touch-tone telephone,
unsecured personal lines of credit and, through an arrangement with an
unaffiliated financial institution, home equity lines of credit and
single-family residential mortgages. In addition, Waterhouse National Bank is in
the process of developing Internet banking services. Customers can access their
brokerage account through a Waterhouse Investors Money Management Account,
which, in addition to providing for free credit balances in a customer's
brokerage account to be swept automatically each business day into such
customer's designated sweep portfolio, also provides access to a customer's
investment in such sweep portfolio by unlimited writing of checks or using an
ATM/VISA CheckCard. The products of Waterhouse National Bank have been designed
to assist our customers in managing their investments and personal finance. In
connection with the reorganization, we have entered into agreements with
Waterhouse National Bank with respect to marketing, distribution and management
support. See "Principal Stockholder -- Certain Transactions between Us and TD
Bank."
Canada. Our MoneyLink service provides our customers with access to their
brokerage account by offering a variety of banking services including Canadian
and U.S. dollar checking, TD Bank in-branch banking, automated banking machine
access, telephone banking and web banking. These services provide our customers
with access to the funds in their brokerage accounts 24 hours a day, seven days
a week. TD Access telephone and web banking services allows customers to
transfer funds from any personal TD Bank account to their brokerage account
using the "bill payment" function. Customers may also use electronic funds
transfer to transfer funds from their brokerage account to any bank account in
Canada.
INSURANCE PRODUCTS
We provide our Canadian customers with access to insurance professionals
who can offer travel, home, auto and life insurance. Life insurance is offered
by agents of TD Life Insurance Company. Travel insurance is provided under a
group insurance contract we hold for our customers. Home and auto insurance
products are offered to our clients through Vector Intermediaries Inc., an
unaffiliated insurance broker.
53
<PAGE> 58
CUSTOMER FINANCING
We conduct securities transactions for our customers on either a cash or
margin basis. In an account authorized for margin trading, we may lend our
customers a portion of the market value of certain securities up to the limit
imposed by applicable authorities, which for most equity securities is initially
50%. As a matter of policy, we generally require our customers to maintain
higher percentages of collateral values than the minimum percentages required
under these regulations. In specific situations involving stocks that are
exhibiting a high degree of volatility, we may elect to increase the required
collateral value percentage even higher or prohibit customers from buying shares
of those stocks on margin at all. Margin loans are collateralized by the
securities in the customer's account.
Interest on margin loans to customers provides an important source of our
revenue. During fiscal 1998, outstanding margin loans to customers averaged $1.8
billion to the customers of our U.S. operations and $659 million to the
customers of our Canadian operations. During the first quarter of fiscal 1999,
outstanding margin loans averaged $2.3 billion and $611 million in the U.S. and
Canada, respectively. In permitting a customer to engage in margin or short sale
transactions, we face credit risk if the customer fails to meet his or her
obligations in the event of adverse changes in the market value of the
securities positions in his or her account. In the event of such an adverse
change, we require our customers to deposit additional securities or cash, so
that the amount of the customer's obligation is not greater than specified
percentages of the cash and market values of the securities in the account.
We may use cash balances in our customers' brokerage accounts (other than
registered client accounts) to finance margin loans to other clients. With
respect to our Canadian operations, the portion of such cash balances not used
to finance margin loans to our customers may be utilized by us to finance our
day to day operations in Canada, which reduces our cost of funds.
MARKETING AND ADVERTISING
Our marketing strategy is focused on three goals: building brand awareness,
attracting new customers and retaining and cross-selling to our existing
customers value-added products and services. We pursue these goals through a
combination of marketing through our branch office network and new business
development offices, media, advertising, marketing on our own web sites and
other online opportunities, direct one-on-one marketing, public relations, and
co-marketing programs. In general, our marketing approach is tailored to fit the
investing needs and practices of the local market, the available technological
infrastructure, and other relevant factors.
Our advertising focuses on building awareness of the brand, products and
services and positioning us as the discount broker with the most value for the
individual self-directed investor offering the best combination of product
offerings, price and customer service. We regularly place print advertisements
in a broad range of business, technology and financial publications, including
Barron's, Investor's Business Daily, Money, Smart Money, the Wall Street
Journal, Kiplinger's and Fortune in the United States and The Globe and Mail,
National Post, Maclean's, La Presse and Les Affaires, in Canada. We also
advertise regularly on cable television including CNBC, MSNBC and CNN and
broadcast television in select local markets. In Canada, we advertise via
sponsorship of a daily business report segment on a national television news
broadcast and business reports on news broadcasts on regional radio networks.
Through our web sites, prospective customers can get detailed information
on our products and services, access account applications, view an online
demonstration and request additional information. We have alliances linking
webBroker with America Online, Microsoft Network and Yahoo!. We believe these
links are a significant factor in increasing brand awareness and generating
leads, as consumers increasingly look to the Internet as a key source of
information and commercial activity.
We also believe that providing an effective customer service team to handle
customer needs is critical to our success. Our customer service organization
helps customers get online, handles product and service inquiries and responds
to all brokerage and technical questions. Our U.S. and Canadian customers have
customer service access through a toll-free number 24 hours a day, seven days a
week.
54
<PAGE> 59
In Canada, our marketing strategy also focuses on leveraging the 900 TD
Bank branches. Over 6,500 personal bankers at these branches are trained to
assist in account acquisition and to cross-sell our products and services. In
Canada, we are also active in providing investment seminars across the country
to assist customers in learning about our products and services as well as
assisting in their investment decisions. We do community oriented advertising
for our Asian language and French communities. We also participate in financial
trade shows, which we believe are important in creating branch awareness.
We intend to use a portion of the proceeds from these offerings to
substantially increase our annual marketing and advertising budget. The
combination of this increased marketing funding in conjunction with our low
account acquisition costs will enable us to focus our efforts on building our
unified global brand. Following the completion of the offerings, we will begin
marketing under a uniform trade name worldwide. Our advertising and marketing
costs per new account were approximately $63 in fiscal 1998 and $57 for the
three months ended March 31, 1999, which we believe is significantly lower than
a number of our primary competitors.
ALLIANCES WITH ONLINE PROVIDERS
We have developed alliances with selected proprietary online service
providers to increase account development and expand distribution. These
providers attract significant numbers of users, and our relationships with them
give us access to expanded market opportunities. Set forth below are
descriptions of our key alliances:
- - America Online. In July 1998, we renewed our relationship with America
Online ("AOL"), a private network and Internet service provider, by entering
into a two-year agreement. Under the agreement, we are one of four exclusive
brokerage partners in the AOL Personal Finance Channel. The agreement
provides for extensive marketing and promotional opportunities across AOL
properties and for a "mini-Waterhouse" site that is resident on AOL's
private network and available to AOL members. We have buttons and banners
located primarily in the AOL Personal Finance Channel but also throughout
the AOL network, including the AOL home page, that link directly to our mini
site on AOL or the Waterhouse web site on the Internet. In April 1999, we
entered into a one-year agreement with AOL with respect to our Canadian
business. Under the agreement, we are one of four exclusive brokerage
partners in the AOL Personal Finance Channel that is accessible by Canadian
subscribers to AOL, with buttons and banners located in the channel.
- - MSN.com. In the U.S., we have developed a number of key relationships with
Microsoft Corporation that are designed to promote our online investing
services on the MSN web site. In January 1999, we entered into a one-year
advertising agreement pursuant to which Microsoft provides advertising of
our brokerage services in the form of buttons, banners, and text links, all
of which link directly to our web site on the Internet. We are one of three
exclusive broker participants in this "MSN Broker Package," which includes
advertising on the MSN.com home page, the MSN quotes return page, MSN's
MoneyCentral quotes return page and portfolio page.
- - Yahoo!. In March 1999, we entered into a three month advertising agreement
with Yahoo!, a web portal/search engine, to promote our U.S. online
investing services. Pursuant to the agreement, Yahoo! provides advertising
in the form of buttons on the Yahoo! quotes return page and banners in the
Yahoo! Finance area and throughout the Yahoo! site.
- - IPO and New Issue Access. We are currently implementing an arrangement with
Wit Capital to provide online access to IPOs to our customers. See "--
Products and Services -- Special Services."
CLEARING OPERATIONS
We perform clearing services for all securities transactions in our
customer accounts. These services involve issuing trade confirmations, settling
and transferring payment for securities on the settlement date, providing
custodial services for securities and cash held in the customers' accounts and
similar functions involved in all securities trading transactions.
55
<PAGE> 60
We also provide clearing services for approximately 18 other unaffiliated
broker-dealers (referred to as "introducing brokers") in the U.S. and Canada
representing approximately $1.8 billion in assets at March 31, 1999. As part of
our clearing services for third parties, we maintain certain books and records
for the introducing brokers, hold securities and free cash balances of the
introducing brokers' customers, execute and settle trades for those customers
and, when appropriate, extend margin loans to those customers. These clearing
operations have generated additional revenues as well as contributed to
increased operating margins.
The vast majority of our customer transactions are cleared through the
facilities of the National Securities Clearing Corporation or the Options
Clearing Corporation for our U.S. clearing operations, and through the
facilities of the Canadian Depository for Securities, the Canadian Derivative
Clearing Corp. and the Mutual Fund Clearing & Settlement Service for our
Canadian clearing transactions. Certain other transactions, such as mutual fund
transactions and transactions in securities not eligible for settlement through
a clearing corporation, are settled directly with the mutual funds or other
financial institutions or through agents in those markets.
Our U.K. and Australia operations also perform similar services for all
securities in their customer accounts. Our Hong Kong subsidiary clears its
customers' trades through our Canadian clearing operations.
In connection with our customers' activities, we borrow securities both to
cover short sales and to complete customer transactions in the event a customer
fails to deliver securities by the required settlement date. We collateralize
these borrowings by depositing cash or securities with the lender and receive a
rebate calculated to yield a negotiated rate of return. When lending securities,
we receive cash or securities and generally pay a rebate to the other party in
the transaction at a rate calculated to yield a negotiated return. Securities
lending and borrowing transactions are executed pursuant to written agreements
with counterparties that require that the securities borrowed be
"marked-to-market" on a daily basis and that excess collateral be refunded or
that additional collateral be furnished in the event of changes in the market
value of the securities. The securities usually are "marked-to-market" on a
daily basis through the facilities of the various national clearing
organizations.
COMPETITION
United States. All aspects of our business are highly competitive. We
compete directly with a broad range of companies seeking to attract consumer
financial assets, including full-service discount brokerage firms, mutual fund
companies, investment banking firms, commercial and savings banks, insurance
companies and others. The financial services industry has become considerably
more concentrated as numerous securities firms have been acquired by or merged
into other firms. Many of these competitors have greater financial resources and
offer a wider range of services and financial products than we do. In addition,
we expect competition from domestic and international commercial banks to
increase as a result of recent and proposed legislative and regulatory
initiatives in the U.S. to remove or relieve certain restrictions on mergers
between commercial banks and other types of financial services providers. We
primarily compete with these firms on the basis of quality of customer service,
breadth of products and services offered, prices, accessibility through delivery
channels, and technological innovation and expertise.
Discount brokerage firms and online-only financial services providers
compete vigorously with us with respect to commission charges. Full-commission
brokerage firms also offer discounted commissions to selected retail brokerage
customers. In addition, some of our competitors in both the full-commission and
discount brokerage industries have substantially increased their spending on
advertising and direct solicitation of customers.
Competition in the online-trading business has become similarly intense as
recent expansion and customer acceptance of conducting financial transactions
online has attracted new brokerage firms to the market. Price competition
continues to intensify in online investing as traditional brokerage firms have
entered the market and existing competitors have aggressively sought to gain
market share. We have experienced declines in our average commission per trade
as the proportion of our customers using electronic brokerage channels, which
provide discounts from our standard commission rates, has increased. As the
proportion of our
56
<PAGE> 61
customers who utilize electronic distribution channels continues to grow, we
expect that the average commission per trade will continue to decline.
Canada. In contrast to the U.S. market, market share in Canada is
concentrated amongst a limited number of institutions. Our client base as
measured by the total number of accounts is estimated to be more than twice that
of our nearest competitor, and which we believe represents in excess of 50% of
the total discount brokerage market.
Given the perceived attractiveness of the wealth management market segment
and the enhanced profile of discount brokerage over the past several years,
competition continues to be intense. In addition to the nine bank or trust owned
discount brokers, several dedicated operators have recently entered the Canadian
market. These include E*Trade Canada, a division of publicly listed Versus
Technologies and licensee of E*Trade Group, and Charles Schwab Canada, which
this year purchased the businesses of two small brokerage firms. We also expect
that a number of mutual fund and insurance companies will enter the discount
brokerage market in the near future. Many of these competitors have adopted
aggressive pricing as their primary strategy to obtain market share.
Outside the U.S. and Canada. The discount brokerage market in Australia is
just developing. Our competitors in Australia include Commonwealth Securities
Ltd., which is a bank-owned discount broker, E*Trade and Australia Discount
Securities. Currently we are the second largest discount broker in Australia,
based on trading volume, behind Commonwealth Securities. The discount brokerage
market in the United Kingdom is also relatively underdeveloped and very
fragmented.
TECHNOLOGY AND INFORMATION SYSTEMS
We maintain sophisticated and proprietary technology that automates
traditionally labor-intensive securities transactions and provides us with a
platform to support our operations. We believe that our ability to effectively
leverage technology to improve our products and services has been a key
component in the development of our franchise. Our systems provide customers
with efficient service and have the fundamental advantage of being scalable and
adaptable as usage increases and service and product offerings are expanded.
Our technology platform is supported by an internal staff of programmers,
developers and operators. In addition, we have dedicated quality control
analysts, web site developers, technical writers and design specialists who are
responsible for ensuring that our electronic access channels are easy to use,
dependable and reflect the most current enhancements and features.
Our standard development model is to build our electronic commerce systems
using a three-tier approach. The first tier is the "client presentation" layer,
which consists of our various delivery channels: Internet, PC dialup,
touch-tone, and voice recognition. We typically code these applications
ourselves, or in conjunction with an outside vendor, to ensure that we retain
the associated competitive advantage.
The second layer is our "middleware," which validates and logs
transactions, formats them for the appropriate back office systems, and returns
the completed transaction to the user. By separating the third layer from the
client presentation layer, we allow ourselves the ability to change presentation
easily or to change back office systems without affecting the client directly.
Finally, the third layer consists of back office systems, quotation
services, and other databases. Specific formats are required to communicate with
each of these systems, but the presentation and middleware layers are unaffected
by these complexities.
In the U.S., the primary component of our system with respect to online
trading is our middleware component, which we license from Marketware
International. Our middleware unifies front-end applications and multiple
interfaces, supports different languages, hardware platforms and protocols, and
establishes the interface between ADP, our back-office service provider, and our
customers who execute transactions via webBroker or TradeDirect. In Canada, our
middleware is currently used only on our web product.
ADP, in the U.S., and ISM, in Canada, are our providers of back office
services including broker terminal services, order entry systems and other
information necessary to run our business, including transaction
57
<PAGE> 62
summaries, data feeds for compliance and risk management, execution reports, and
trade confirmations. Our systems are maintained independently of their systems,
accept trading orders and forward them to the back-office service provider for
processing. Our data systems also contain our customer profile data base
functions, perform functions to enable our customers on webBroker and provide
other support to our clearing divisions.
We continue to make significant investments in systems technology. To
enhance the capacity and reliability of our systems, we have established two
separate data centers in each of Jersey City, New Jersey for our U.S. business
and in Toronto for our Canadian business. These facilities support network
services, trading and investor services. These are fully redundant data centers
which allow the business to be run from a single site should the other fail. To
provide for system continuity during potential outages, we also have equipped
our computer facilities in both countries with uninterruptible power supply
units, as well as back-up generators.
The secure transmission of confidential information over public networks is
a critical element of our operations. We use a combination of proprietary and
industry standard security measures to protect customers' accounts. Customers
are assigned unique account numbers, user identifications and trading passwords
that must be used each time they log on to the system. We rely on
industry-standard encryption and authentication technology, including public key
cryptography technology licensed from RSA Data Security, Inc., to provide the
security and authentication necessary to effect the secure exchange of
information. Touch-Tone telephone transactions are secured through a personal
identification number, the same technology used in the ATMs. We have an
agreement to provide digital certification and authentication services for
electronic commerce for our web servers through VeriSign, Inc.
EMPLOYEES
At March 31, 1999, on a full-time equivalent basis, we employed
approximately 5,070 persons. A total of 3,487 of these employees are based in
the U.S. and approximately 1,350 are based in Canada. Our Australia operations
employed approximately 130 persons, our U.K. operations employed approximately
95 persons and our Hong Kong operations employed 8 persons. None of our
employees is subject to a collective bargaining agreement. We believe that our
relations with our employees are good.
PROPERTIES
Our corporate headquarters are located at 100 Wall Street, New York, New
York. This office consists of approximately 110,000 square feet under a lease
which expires in 2002. We also lease approximately 65,000 square feet of space
at 55 Water Street, New York, New York for our clearing operations under a lease
that expires in 2006. We lease approximately 700,000 square feet worldwide for
our other branches and offices under various leases, the majority of which
expire on dates through 2006.
LEGAL AND ADMINISTRATIVE PROCEEDINGS
Many aspects of our business involve substantial risks of liability. In
recent years, there has been an increasing incidence of litigation involving the
securities brokerage industry, including class action suits that generally seek
substantial damages, including in some cases punitive damages. Like other
securities brokerage firms, we have been named as a defendant in law suits and
from time to time we have been threatened with, or named as a defendant in,
arbitrations and administrative proceedings. Compliance and trading problems
that are reported to federal, state and provincial securities regulators,
securities exchanges or other self-regulatory organizations by dissatisfied
customers are investigated by such regulatory bodies, and, if pursued by such
regulatory body or such customers, may rise to the level of arbitration or
disciplinary action. We are also subject to periodic regulatory audits and
inspections.
We are not, nor are our subsidiaries, currently a party to any litigation
that we believe could have a material adverse effect on our business, financial
condition or operating results.
Together with several other online brokers, we have received a letter from
the New York State Office of the Attorney General dated February 2, 1999
requesting that our U.S. brokerage subsidiary provide certain documents and make
certain employees available to discuss complaints that the Attorney General's
office has
58
<PAGE> 63
received regarding system outages or failures of online brokerage services. We
have met with representatives of the Attorney General's office, have provided
certain information to them and are continuing to produce information as
requested. In addition, we also understand that the Securities and Exchange
Commission and other federal and state regulatory authorities are conducting
inquiries into or reviewing similar matters.
We recently received correspondence from the SEC's Office of Compliance,
Inspections and Examinations, which conducts examinations of registered
broker-dealers, requesting information with respect to our execution policies
and practices regarding the handling of customer orders. We understand that
other discount brokerage firms have received similar correspondence from the
SEC. We have provided and will continue to provide information and documentation
to the SEC regarding our policies and practices in this area. In response to
concerns raised by the SEC staff regarding the practices followed by a number of
brokerage firms, including TD Waterhouse, to obtain best execution of trades for
customers, we have engaged in an ongoing review of our practices and policies in
the area in order to assure that they are in compliance with applicable rules.
Communications between ourselves and the SEC staff on this subject are ongoing.
We believe that obtaining the best execution of trades for our customers is key
to maintaining customer satisfaction and loyalty and therefore is a fundamental
requirement for our long term growth and profitability.
GOVERNMENT REGULATION; NET CAPITAL REQUIREMENTS
The businesses in which we operate are subject to extensive regulation and
supervision under federal, state and provincial law in the U.S. and Canada and
under the applicable laws of each other country in which we conduct business.
The various governmental authorities and industry self-regulatory organizations
which have supervisory and regulatory jurisdiction over us generally have broad
enforcement powers to censure, fine, issue cease-and-desist orders or suspend or
expel a broker-dealer or any of its officers or employees who violate applicable
laws or regulations.
Securities Regulation
United States. The securities industry in the U.S. is subject to extensive
regulation under both federal and state laws. The Securities and Exchange
Commission is the federal agency responsible for the administration of the
federal securities laws. Our U.S. brokerage and clearing subsidiaries are
registered as broker-dealers, and our subsidiary which acts as advisor to our
proprietary U.S. mutual funds is registered as an investment advisor, with the
SEC. Much of the regulation of broker-dealers has been delegated by the SEC to
self-regulatory organizations, principally the Municipal Securities Rulemaking
Board, the National Association of Securities Dealers and the New York Stock
Exchange, which has been designated by the SEC as our primary regulator. These
self-regulatory organizations adopt rules (subject to approval by the SEC) that
govern the industry and conduct periodic examinations of the operations of our
U.S. brokerage and clearing subsidiaries. Securities firms are also subject to
regulation by state securities administrators in those states in which they
conduct business. Our U.S. brokerage and clearing subsidiaries are registered as
broker-dealers in all 50 states, the District of Columbia and Puerto Rico.
Broker-dealers in the U.S. are subject to regulations covering all aspects
of the securities business, including sales methods, trade practices among
broker-dealers, use and safekeeping of customers' funds and securities, capital
structure, record keeping, the conduct of directors, officers and employees,
possession and control of customer funds and securities, margin lending and
execution and settlement of transactions.
Our U.S. brokerage and clearing subsidiaries are members of the Securities
Investor Protection Corporation ("SIPC"), which provides, in the event of the
liquidation of a broker-dealer, protection for customers' accounts of up to
$500,000 for each customer, subject to a limitation of $100,000 for claims for
cash balances. The SIPC is funded through assessments on registered
broker-dealers. In addition, we have arranged for supplemental insurance
coverage of customer securities in the amount of $149.5 million for each account
provided by National Union Fire Insurance Company, a subsidiary of American
International Group, one of the world's largest insurance companies. Neither
SIPC nor this supplemental coverage provides coverage for losses due to market
fluctuations.
59
<PAGE> 64
Canada. The securities industry in Canada is under the jurisdiction of the
provincial and territorial governments and is subject to extensive regulation.
Each province or territory has a securities commission (or equivalent) that is
responsible for the administration of the securities legislation of that
jurisdiction. After the reorganization, our Canadian brokerage subsidiary will
be registered as an investment dealer or its equivalent in all provinces and
territories in Canada and will be a member of The Investment Dealers Association
of Canada ("IDA"). Much of the regulation of investment dealers has been
delegated to the IDA, a self-regulatory organization, which is the primary
regulator of our Canadian brokerage subsidiary. The IDA adopts rules in
conjunction with the various securities commissions that govern the industry and
conducts yearly examinations of our Canadian brokerage subsidiary. Our Canadian
brokerage subsidiary may acquire a seat on one or more of the stock exchanges in
Canada.
Broker-dealers in Canada are subject to regulations covering all aspects of
the securities business including sales practices, possession and control of
customer funds and securities, capital structure, record keeping, the
registration and conduct of directors, officers and employees, margin lending,
execution and settlement of transactions and trade practices among
broker-dealers.
Upon consummation of the reorganization, our Canadian brokerage subsidiary
will be a member of the Canadian Investor Protection Fund ("CIPF") which
provides, in the event of the bankruptcy or insolvency of a broker-dealer,
protection for customers' accounts of up to Cdn.$500,000 for each customer,
subject to a limitation of Cdn.$60,000 for claims for cash balances. The CIPF is
funded through assessments on registered broker-dealers.
Outside the U.S. and Canada Our Australian operations are regulated by the
Australian Securities and Investment Commission which is the regulator of all
federal legal requirements for Australian broker-dealers. The Australian
corporations law delegates the power of specific regulation of stockbrokers to
the Australian Stock Exchange ("ASX"). The ASX Business Rules set out all
mandatory requirements of brokers including those relating to minimum liquid
capital, client relations, record keeping, dealing practice, trust accounts and
the conduct of directors and officers. ASX Business Rules require membership in
the National Guarantee Fund which acts to protect investors in the event of a
broker liquidating. There are minimum liquid capital requirements for a
broker-dealer set out in ASX Business Rules.
Our United Kingdom operations are primarily regulated by the Securities and
Futures Authority, which imposes minimum capital requirements. These
requirements are based on ongoing expenditures levels as well as market related
risk exposures.
The Securities and Futures Authority also issues and enforces numerous
rules and regulations covering such areas as handling of client assets, record
keeping and other activities. Compliance with these rules is subject to ongoing
verification. Noncompliance can result in reprimands, fines, suspensions and
authorization reductions or withdrawals. Our United Kingdom brokerage subsidiary
is also obliged to comply with the rules and regulations of the London Stock
Exchange.
Our Hong Kong brokerage subsidiary operates in Hong Kong as an introducing
broker and marketing affiliate of our Canadian brokerage operations. This
subsidiary is regulated by the Securities and Futures Commission of Hong Kong.
Capital Requirements
United States. As registered broker-dealers and members of the NASD, our
U.S. brokerage and clearing subsidiaries are subject to the SEC's net capital
rule, Rule 15c3-1, promulgated under the Securities Exchange Act of 1934. Net
capital is essentially defined as net worth (assets minus liabilities), plus
qualifying subordinated borrowings and certain discretionary liabilities, less
certain mandatory deductions that result from excluding assets that are not
readily convertible into cash and from valuing conservatively certain other
assets. Among these deductions are adjustments (called "haircuts") which reflect
the possibility of a decline in the market value of an asset prior to its
disposition.
The NYSE monitors the application of the net capital rule to our U.S.
brokerage and clearing subsidiaries. The net capital rule, which specifies a
minimum net capital requirement for registered broker-
60
<PAGE> 65
dealers, is designed to measure the general financial integrity and liquidity of
a broker-dealer and requires that at least a minimum part of its assets be kept
in relatively liquid form. Waterhouse Securities, Inc., our U.S. brokerage
subsidiary, computes net capital under the basic method, which requires minimum
net capital equal to the greater of $250,000 or 6 2/3% of aggregate
indebtedness. In addition, it may not permit its aggregate indebtedness to all
other persons to exceed 1,500 percent of its net capital. National Investor
Services, Inc., our U.S. clearing subsidiary, computes net capital under the
alternative method, which requires minimum net capital equal to the greater of
$250,000 or 2% of aggregate debit items arising from customer transactions. A
broker-dealer may be required to reduce its business if its net capital is less
than 4% of aggregate debit balances and may also be prohibited from expanding
its business or paying cash dividends if resulting net capital would be less
than 5% of aggregate debit balances (accounts due from customers). In addition,
the net capital rule does not allow withdrawal of subordinated capital if net
capital would be less than 5% of such debit balances. At March 31, 1999, our
U.S. brokerage and clearing subsidiaries had net capital of $8.2 million and
$300.0 million, respectively, which exceeded their minimum net capital
requirements by $5.0 million and $220.7 million.
The net capital rule also limits the ability of broker-dealers to transfer
capital to parent companies and other affiliates. Under the net capital rule,
equity capital cannot be withdrawn from a broker-dealer without the prior
approval of the SEC when net capital after the withdrawal would be less than 25%
of its securities position. In addition, the net capital rule requires a
broker-dealer to notify the SEC and the appropriate self-regulatory organization
two business days before a withdrawal of excess net capital if the withdrawal
would exceed 30% of the broker-dealer's excess net capital, and two business
days after a withdrawal that exceeds 20% of excess net capital, provided that no
such notice need be given if the withdrawal is less than $500,000. Finally, the
net capital rule authorizes the SEC to order a freeze on the transfer of capital
if a broker-dealer plans a withdrawal of more than 30% of its excess net capital
and the SEC believes that such a withdrawal would be detrimental to the
financial integrity of such broker-dealer or would jeopardize the
broker-dealer's ability to pay its customers.
Compliance with the net capital rule could limit those operations of our
registered broker-dealer subsidiaries in the U.S. that require the intensive use
of capital, such as our clearing operations and the financing of customer
account balances, and also could restrict their ability to pay dividends, repay
debt and redeem or purchase shares of their outstanding stock. Failure to
maintain the minimum net capital required by the net capital rule could subject
a firm to suspension or expulsion by the NYSE and the NASD, certain sanctions by
the SEC and other regulatory bodies, and ultimately could lead to a firm's
liquidation. A change in such rules, or the imposition of new rules, affecting
the scope, coverage, calculation or amount of such net capital requirements, or
a significant operating loss or any unusually large charge against net capital,
could adversely affect the ability of our brokerage and clearing subsidiaries in
the U.S. to expand or maintain present levels of business or pay dividends or
interest.
Canada. As a member of the IDA, our Canadian brokerage subsidiary must
meet rules regarding minimum levels of risk adjusted capital, which is
calculated in accordance with a prescribed financial questionnaire and report
and can generally be described as qualifying capital (equity, retained earnings
and qualifying subordinated debt) less non-allowable assets, i.e., items not
readily convertible to cash, margin charges which reflect an assessment of the
risk of a decline in market value of assets and the risk associated with the
ultimate collection of client receivables, and a securities concentration
charge. The IDA monitors the risk adjusted capital by means of a monthly and
annual financial reporting audit and early warning reporting requirements.
61
<PAGE> 66
MANAGEMENT
THE BOARD OF DIRECTORS
Our charter and by-laws provide that the number of directors on the board
of directors shall be not less than nor more than (as fixed
from time to time by resolution of a majority of the board of directors) and
require the division of the board of directors into three separate classes with
staggered terms of three years each. The board has initially fixed the number of
directors at five.
As of the date of this prospectus, the following individuals are our
directors:
<TABLE>
<CAPTION>
NAME, PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE AGE
- -------------------------------------------------- ---
<S> <C>
CLASS I DIRECTORS WITH TERMS EXPIRING IN 2002:
A. Charles Baillie.......................................... 59
Mr. Baillie is the Chairman of the Board of Directors
of TD Waterhouse. Since 1998 Mr. Baillie has served as
Chairman and Chief Executive Officer of TD Bank. Mr.
Baillie joined TD Bank in 1972 and since then has
occupied various positions including President & Chief
Executive Officer.
CLASS II DIRECTORS WITH TERMS EXPIRING IN 2001:
Stephen D. McDonald......................................... 42
Mr. McDonald is the Deputy Chairman of the Board of
Directors and Chief Executive Officer of TD Waterhouse
and is Vice Chair of TD Bank. Mr. McDonald joined TD
Bank in 1983 and since then has occupied various
positions, including Vice Chair, Group Administration;
Executive Vice President, Corporate Banking; and Senior
Vice President, USA Division, Corporate and Investment
Banking Group.
Lawrence M. Waterhouse, Jr.................................. 62
Mr. Waterhouse serves as a director of TD Waterhouse.
Mr. Waterhouse founded Waterhouse Securities, Inc. and
has served as its Chairman since its inception in 1978.
In addition, Mr. Waterhouse has served as Chairman of
Waterhouse Investor Services, Inc. since its inception
in 1987 and served as its Chief Executive Officer from
1987 to 1998. Also, Mr. Waterhouse has served as
Chairman of Waterhouse National Bank since its
inception in 1994.
CLASS III DIRECTORS WITH TERMS EXPIRING IN 2000:
Frank J. Petrilli........................................... 48
Mr. Petrilli is the President and Chief Operating
Officer and a director of TD Waterhouse. Since 1997,
Mr. Petrilli has served as President and Chief
Executive Officer, Waterhouse Investor Services, Inc.
and since 1998 as a Senior Vice President, TD Bank
Financial Group. Mr. Petrilli joined Waterhouse
Investor Services, Inc. in 1995 as President and Chief
Operating Officer. Prior to joining Waterhouse, Mr.
Petrilli served in senior management positions at
American Express, including President and Chief
Operating Officer of Centurion Bank (a wholly owned
subsidiary of American Express), from 1988 to 1995.
John G. See................................................. 42
Mr. See is the Vice Chairman of the Board of Directors
of TD Waterhouse, whose responsibilities include
managing our Canadian operations. Since 1995, Mr. See
has served as Senior Vice President, Green Line
Investor Services and Senior Vice President, TD Bank
Financial Group. Mr. See joined TD Bank in 1981 and
since then has held various positions of increasing
responsibility the Corporate and Investment Banking
Group in Houston, New York and London.
</TABLE>
Prior to completion of the offerings, we expect to elect four additional
directors, including two directors who will not be affiliated with us or TD Bank
and who will qualify as independent directors.
62
<PAGE> 67
BOARD COMMITTEES
Our board of directors will initially have two committees: an audit
committee and a management resources and compensation advisory committee.
The audit committee will consist of two independent directors. The audit
committee will be responsible for making recommendations concerning the
engagement of independent auditors, reviewing with the independent auditors the
plans and results of the audit engagement, approving professional services
provided by the independent auditors, reviewing the independence of the
independent auditors, considering the range of audit and non-audit fees and
reviewing the adequacy of our internal accounting controls.
The management resources and compensation advisory committee will also
include at least two independent directors. The compensation committee will be
responsible for the determination of compensation of our executive officers and
the administration of our employee incentive plans. Prior to the offerings, the
executive officers named in the Summary Compensation Table below were
participants in the executive compensation programs of TD Bank. The management
resources and compensation advisory committee of TD Bank was responsible for the
review of those programs, and for grants awarded under those programs.
The board of directors may, from time to time, establish certain other
committees to facilitate the management of our business.
COMPENSATION OF DIRECTORS
Our independent directors will be paid an annual fee of $ . In
addition, each independent director will be paid a fee of $ for
attendance at each meeting of the Board and $ annually for service as a
member of a committee of the Board. Directors who are employees of TD Waterhouse
or TD Bank will not receive any fees for their service on the board or a
committee thereof. We will reimburse directors for their out-of-pocket expenses
in connection with their service on the board.
EXECUTIVE OFFICERS
We have set forth below certain information for each person who is expected
to serve as an executive officer of TD Waterhouse upon consummation of the
reorganization. For information concerning the business experience of Stephen D.
McDonald, Frank J. Petrilli and John G. See, see "-- The Board of Directors."
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Stephen D. McDonald.................. 42 Chief Executive Officer and Deputy Chairman
Frank J. Petrilli.................... 48 President and Chief Operating Officer
John G. See.......................... 42 Vice Chairman
Joseph N. Barra...................... 39 Executive Vice President
John H. Chapel....................... 46 Executive Vice President
A. Wayne Kyle........................ 50 Executive Vice President, Human Resources
Bharat B. Masrani.................... 42 Executive Vice President
Richard H. Neiman.................... 48 Executive Vice President and General Counsel
Gerard J. O'Mahoney.................. 44 Executive Vice President
B. Kevin Sterns...................... 52 Executive Vice President and Chief Financial Officer
Richard W. Arnold.................... 51 Senior Vice President
Andrew S. Nevin...................... 36 Senior Vice President
</TABLE>
JOSEPH N. BARRA will serve as Executive Vice President, TD Waterhouse, with
responsibility for clearing operations in the U.S. Since January 1997, Mr. Barra
has served as President of our subsidiary, National Investor Services Corp. and
Chief Executive Officer since March 1998. Mr. Barra joined Waterhouse Investor
Services, Inc. in 1996 as President of the clearing division of Waterhouse
Securities. Prior to joining Waterhouse Investor Services, Inc., Mr. Barra was
Executive Cashier and Vice President of National Financial Services Corporation,
a wholly owned subsidiary of Fidelity Investments.
63
<PAGE> 68
JOHN H. CHAPEL will serve as Executive Vice President, TD Waterhouse, with
responsibilities for all areas of brokerage operations in the U.S. Since 1995,
Mr. Chapel has served as President of our subsidiary, Waterhouse Securities,
Inc. with responsibility for all areas of brokerage operations. Mr. Chapel
joined Waterhouse Securities, Inc. in 1981 and has held various positions
including Executive Vice President, Branch Administration.
A. WAYNE KYLE will serve as Executive Vice President, Human Resources, TD
Waterhouse. Since 1996, Mr. Kyle has served as Executive Vice President, Human
Resources, Waterhouse Investor Services, Inc. Mr. Kyle joined TD Bank in 1971
and since then has held various positions including Vice President, Human
Resources, Investor Services Division, TD Bank Financial Group.
BHARAT B. MASRANI will serve as Executive Vice President, TD Waterhouse,
with responsibility for all areas of brokerage operations in the UK and Europe.
Since 1997 until the date of the reorganization, Mr. Masrani served as Senior
Vice President, Corporate Banking (London, England). Mr. Masrani joined TD Bank
in 1987 and since then has held various positions including Vice President,
Corporate Banking (London, England) and Vice President, Corporate Banking
(Bombay, India).
RICHARD H. NEIMAN will serve as Executive Vice President and General
Counsel, TD Waterhouse. Since July 1994, Mr. Neiman has served as Executive Vice
President and General Counsel, Waterhouse Investor Services, Inc. Prior to
joining Waterhouse Investor Services, Inc., Mr. Neiman was a Director of
Regulatory Advisory Services at Price Waterhouse LLP in Washington, D.C. from
1990 to 1994 and served in various legal positions at Citicorp in New York,
including General Counsel of its Global Equities Group, from 1979 to 1989.
GERARD J. O'MAHONEY will serve as Executive Vice President, TD Waterhouse,
with responsibility for Canadian and overseas clearing and securities services
operations. Since 1996, until the date of the reorganization, Mr. O'Mahoney
served as Senior Vice President, TD Securities Services, Wealth Management
Services. Mr. O'Mahoney joined TD Bank in 1982 and has since held various
positions including Assistant General Manager, Operations, Corporate Banking
(London, England) and Director, Administration TD Australia Ltd. (Melbourne,
Australia), Investor Services Division and Vice President, Mutual Funds
Operations, Investor and Trust Services Division.
B. KEVIN STERNS will serve as Executive Vice President and Chief Financial
Officer, TD Waterhouse. Since 1996, Mr. Sterns has served as Executive Vice
President and Chief Financial Officer, Waterhouse Investor Services, Inc. Mr.
Sterns joined TD Bank in 1970 and since then has held various positions
including Vice President Finance and Operations, U.S.A. Division, Corporate and
Investment Banking Group (New York).
RICHARD W. ARNOLD will serve as Senior Vice President, TD Waterhouse with
responsibility for all areas of brokerage in Australia. Since April 1999 until
the date of the reorganization, Mr. Arnold served as Managing Director, Green
Line Australia. Prior to joining TD Bank, Mr. Arnold served in senior positions
with various companies including, Executive Vice President, Strategic Planning
and Corporate Development, Charles Schwab Company, Inc.
ANDREW S. NEVIN will serve as Senior Vice President, TD Waterhouse, with
responsibility for all areas of brokerage in the Asia Pacific Region. Since
February 1999 until the date of the reorganization, Mr. Nevin served as
Executive Vice President and Managing Director of Asia Pacific Region, Green
Line Investor Services, Wealth Management Services. Mr. Nevin joined TD Bank in
1995 as Manager of Corporate Finance, Investment Banking. Since then, Mr. Nevin
has served in various positions including Vice President and Managing Director
of Asia Pacific Region, Green Line Investor Services, Wealth Management
Services. Prior to joining TD Bank, Mr. Nevin served as a Senior Engagement
Manager for McKinsey & Company.
64
<PAGE> 69
EXECUTIVE COMPENSATION
The following table sets forth the compensation that was paid by TD Bank or
its subsidiaries during the fiscal year ending on October 31, 1998 with respect
to the chief executive officer of TD Waterhouse and the four individuals who
will become executive officers of TD Waterhouse upon consummation of the
reorganization and who would have been, based on such compensation, the most
highly compensated executive officers during fiscal year 1998 (the "Named
Executive Officers"). The principal positions listed in the table are those that
will be held by such persons upon consummation of the reorganization.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------------
OTHER ANNUAL
SALARY BONUS COMPENSATION(1)
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)
--------------------------- ---- -------- ---------- ---------------
<S> <C> <C> <C> <C>
Stephen D. McDonald............................. 1998 $257,583 $ 296,196*(4) $ 88
Chief Executive Officer and Deputy Chairman
Frank J. Petrilli............................... 1998 $300,000 $1,000,000* n/a
President and Chief Operating Officer
John G. See..................................... 1998 $135,814 $ 186,821* $569
Vice Chairman
Richard H. Neiman............................... 1998 $230,000 $ 115,000* n/a
Executive Vice President and General Counsel
B. Kevin Sterns................................. 1998 $174,918 $ 135,000* n/a
Executive Vice President and Chief Financial
Officer
<CAPTION>
LONG-TERM COMPENSATION
-------------------------------------
SECURITIES
RESTRICTED UNDERLYING
STOCK OPTIONS LTIP
AWARDS(2) GRANTED PAYOUTS ALL OTHER
NAME AND PRINCIPAL POSITION ($) (#) ($) COMPENSATION(3)
--------------------------- ------------- ---------- -------- ---------------
<S> <C> <C> <C> <C>
Stephen D. McDonald............................. 54,000 $ 1,578
Chief Executive Officer and Deputy Chairman
Frank J. Petrilli............................... 4,000 13,400 $20,342
President and Chief Operating Officer
John G. See..................................... 13,400 $ 1,188
Vice Chairman
Richard H. Neiman............................... 5,100 $20,342
Executive Vice President and General Counsel
B. Kevin Sterns................................. 5,100 $20,342
Executive Vice President and Chief Financial
Officer
</TABLE>
- ---------------
(1) The value of perquisites and benefits for each Named Executive Officer is
less than the lesser of $50,000 and 10% of total annual salary and bonus.
The amounts quoted in this column represent the taxable benefits on reduced
rate loans for Mr. McDonald and Mr. See.
(2) The aggregate holdings and value of restricted share units on October 31,
1998, are as follows:
<TABLE>
<CAPTION>
# UNITS VALUE ON OCTOBER 31, 1998
------- -------------------------
<S> <C> <C>
F. Petrilli.......................... 4,000 $205,220
</TABLE>
Dividend equivalents are not paid on these units. Units are redeemed on the
3rd anniversary. This represents an award granted in 1998.
(3) All figures in this column reflect 401(k) and profit sharing plan
contributions, and life insurance premiums for U.S. residents and Employee
Savings Plan contributions and life insurance premiums for Canadian
residents.
(4) Mr. McDonald elected to defer a portion of his bonus equal to $31,590 into
phantom share units of TD Bank as part of its Senior Executive Deferred
Share Unit Plan.
* Awarded on December 10, 1998.
TD BANK STOCK OPTION PLAN
TD Bank adopted the Toronto-Dominion 1993 Stock Option Plan in 1993.
The stock option plan permits the grant of stock options to management
employees of TD Bank and its subsidiaries. A maximum of 21 million common shares
of TD Bank may be subject to the stock option plan. The aggregate number of
common shares for which options may be granted to any single participant shall
not exceed 5% of the total number of issued and outstanding shares. The number
of common shares issued or reserved pursuant to the stock option plan (or
outstanding options) is subject to adjustment on account of stock splits, stock
dividends and other dilutive changes in the common shares. Common shares that
are subject to options that expire, terminate or lapse will again be available
for option or grant under the stock option plan.
Administration. The stock option plan is administered by the TD Bank
Management Resources and Compensation Advisory Committee of the board of
directors of TD Bank. The committee may appoint the
65
<PAGE> 70
Chairman, President or the senior officer of the TD Bank responsible for human
resources to act on its behalf and in accordance with its determinations to
administer the stock option plan. The committee has the sole discretion to
determine the employees to whom options may be granted under the stock option
plan and the terms, conditions and limitations of each grant.
Exercise. The exercise price for each option shall be the closing price of
the common shares on the TSE on the last date on which common shares were traded
before the date the option was granted. An option holder may exercise an option
by written notice and payment of the exercise price; provided, that no option
may be exercised later than 10 years after the date upon which it was granted.
Transferability. Options granted under the stock option plan are not
transferable other than by will or by the laws of descent and distribution.
Change in Control. In the event of a change in control (as defined in the
stock option plan), all options not exercisable shall immediately become
exercisable in full.
Amendment and Termination. The board of directors of TD Bank may amend or
terminate the stock option plan in any respect at any time, but no amendment (1)
shall be implemented without the approval of the shareholders of TD Bank, if
such approval is required by any regulatory authorities or stock exchanges or
(2) can impair any previously granted without his or her consent.
The following table sets forth certain information concerning options with
respect to TD Bank common shares granted to the Named Executive Officers during
the fiscal year ended October 31, 1998:
OPTION/SAR GRANTS FROM TD BANK IN LAST FISCAL YEAR(1)
<TABLE>
<CAPTION>
PERCENT OF
TOTAL
NUMBER OF OPTIONS/SAR'S
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES IN
OPTIONS/SAR'S FISCAL YEAR EXERCISE OR GRANT DATE
GRANTED 1998 BASE PRICE EXPIRATION PRESENT VALUE(2)
NAME (#) (%) ($/SHARE) DATE ($)
- ---- ------------- ------------- ----------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Stephen D. McDonald.................. 54,000 2.6% $43.086 April 2, 2008 $502,211
Frank J. Petrilli.................... 13,400 0.6% $43.086 April 2, 2008 $124,623
John G. See.......................... 13,400 0.6% $43.086 April 2, 2008 $124,623
Richard H. Neiman.................... 5,100 0.2% $43.086 April 2, 2008 $ 47,431
B. Kevin Sterns...................... 5,100 0.2% $43.086 April 2, 2008 $ 47,431
</TABLE>
- ---------------
(1) Option awards for fiscal 1998 were granted for TD Bank common shares. The
first 25% of the award becomes exercisable after one year, the second 25%
after two years, the third 25% after three years, and the final 25% after
four years.
(2) Grant date value is based on the number of options granted multiplied by the
Black-Scholes value at time of issue, which was $9.3002.
66
<PAGE> 71
AGGREGATED TD BANK OPTION/SAR EXERCISES IN FISCAL YEAR ENDED OCTOBER 31, 1998
OPTION VALUES AS OF OCTOBER 31, 1998
The following table sets forth certain information concerning TD Bank stock
option exercises during the last fiscal year by the Named Executive Officers and
unexercised options held by such officers at the end of the last fiscal year.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS/SARS OPTIONS/SARS
AT FISCAL YEAR END(1) AT FISCAL YEAR END(2)
SECURITIES ACQUIRED # $
ON EXERCISE VALUE REALIZED --------------------------- ---------------------------
NAME # $ EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stephen D. McDonald.......... 61,000 $1,781,045 54,500 61,500 $1,054,762 $ 124,684
Frank J. Petrilli............ 0 $ 0 3,875 25,025 $ 27,627 $ 82,880
John G. See.................. 33,000 $ 931,946 30,500 34,900 $ 469,999 $ 232,014
Richard H. Neiman............ 0 $ 0 1,500 9,600 $ 10,694 $ 32,082
B. Kevin Sterns.............. 0 $ 0 16,775 13,175 $ 410,221 $ 126,722
</TABLE>
- ---------------
(1) Options issued in 1993 through 1998 and Phantom Stock Options issued in 1990
through 1992.
(2) The closing price of TD Bank common shares on the TSE on October 30, 1998
was $29.75.
TD WATERHOUSE STOCK INCENTIVE PLAN
In connection with the reorganization, we intend to adopt the 1999 TD
Waterhouse stock incentive plan to be effective immediately prior to the
reorganization.
The stock incentive plan permits the grant of non-qualified stock options,
incentive stock options, stock appreciation rights, restricted stock and other
stock-based awards to employees, directors or consultants of ours or of our
affiliates. A maximum of 9% of the outstanding shares of common stock may be
subject to awards under the stock incentive plan. The maximum number of shares
of common stock for which options and stock appreciation rights may be granted
during a calendar year to any participant will be one million. The number of
shares issued or reserved pursuant to the stock incentive plan (or pursuant to
outstanding awards) is subject to adjustment on account of stock splits, stock
dividends and other dilutive changes in the common stock.
Administration. The stock incentive plan is administered by the management
resources and compensation committee of our board of directors, which may
delegate its duties and powers to any subcommittee thereof consisting solely of
two or more individuals who are intended to qualify as "non-employee directors"
within the meaning of Rule 16b-3 under the Securities Act (or any successor rule
thereto) and "outside directors" within the meaning of Section 162(m) of the
Internal Revenue Code of 1986, as amended (or any successor section thereto).
The committee has the sole discretion to determine the employees, directors and
consultants to whom awards may be granted under the stock incentive plan and the
manner in which such awards will vest. In addition, we may also grant
performance-based awards, deductible by us under Section 162(m), based on the
attainment of written, objective performance goals approved by the committee for
a performance period, established by the committee while the outcome for such
period is substantially uncertain and no more than 90 days after the
commencement of the period to which the performance goal relates (or, if less,
the number of days which is equal to 25% of the relevant performance period).
The committee shall determine whether performance goals are met, the amount of
the performance-based award and the time of payment.
Options. The committee determines the exercise price for each option;
provided, however, that options must have an exercise price that is at least
equal to the fair market value of the common stock on the date the option is
granted (at least equal to 110% of fair market value in the case of an incentive
stock option granted to an employee who owns common stock having more than 10%
of the voting power). An option holder may exercise an option by written notice
and payment of the exercise price in (1) cash, (2) by the surrender of a number
of shares of common stock already owned by the option holder for at least six
months with a fair
67
<PAGE> 72
market value equal to the exercise price, (3) a combination of cash and common
stock (as qualified by clause (2)); or (4) through the delivery of irrevocable
instruments to a broker to deliver promptly to us an amount equal to the
exercise price for the shares being purchased.
Stock Appreciation Rights. The committee may grant stock appreciation
rights independent of or in connection with an option. The exercise price per
share of a stock appreciation right shall be an amount determined by the
committee but in no event shall such amount be less than the greater of (1) the
fair market value of the common stock on the date the stock appreciation right
is granted or, in the case of a stock appreciation right granted in conjunction
with an option, the exercise price of the related option and (2) an amount
permitted by applicable laws, rules, by-laws or policies of regulatory
authorities or stock exchanges. Generally, each stock appreciation right shall
entitle a participant upon exercise to an amount equal to (1) the excess of (A)
the fair market value on the exercise date of one share of common stock over (B)
the exercise price, times (2) the number of shares of common stock covered by
the stock appreciation right. Payment shall be made in common stock or in cash,
or partly in common stock and partly in cash (any common stock valued at fair
market value), all as shall be determined by the committee.
Transferability. Unless otherwise determined by the committee, awards
granted under the stock incentive plan are not transferable other than by will
or by the laws of descent and distribution.
Change in Control. In the event of a change of control (as defined in the
stock incentive plan), (1) any outstanding awards then held by participants
which are unexercisable or otherwise unvested shall automatically be deemed
exercisable or otherwise vested, as the case may be, as of immediately prior to
the change of control and (2) the committee may make provision for a cash
payment to the holder of an award in consideration for the cancellation of the
award.
Amendment and Termination. Our board of directors may amend, alter or
discontinue the stock incentive plan in any respect at any time, but no
amendment (1) without the approval of our shareholders, can increase the total
number of shares of common stock reserved for the purposes of the stock
incentive plan or change the maximum number of shares of common stock for which
awards may be granted to any participant or (2) can impair any awards previously
granted or deprive an option holder, without his or her consent, of any common
stock previously acquired.
Tax Consequences. Generally, we are entitled to a deduction equal to the
compensation recognized by the holder for our taxable year that ends with or
within the taxable year in which the holder recognized the compensation,
assuming the compensation amounts satisfy the ordinary and necessary and
reasonable compensation requirements for deductibility.
PENSION PLANS
Certain of our executive officers including certain of the Named Executive
Officers, participate in certain pension plans maintained by TD Bank. The
pension under the plans is based on 2% per year of service (to a maximum of 35
years) of the average of the final three year's salary minus an adjustment for
Canadian, or where applicable, U.S. social security benefits. These amounts
payable include the annual lifetime benefits payable from TD Bank's Pension Fund
Society or, where applicable, attributable to the profit sharing plan for U.S.
employees and include payments from the Canadian or U.S. social security
systems. The maximum annual benefit payable to executive officers participating
in the plans will be the greater of (A) 50% (60% in the case of Mr. McDonald) of
the average of the highest five consecutive years of salary and incentive
compensation payments in the last ten years of service, or (B) 70% of the
average of the final three years of salary.
Messrs. McDonald, See and Sterns are expected to have attained the maximum
years of service credit at age 63. Messrs. Neiman and Petrilli do not currently
participate in these benefit plans.
Benefits earned in respect of service in Canada are determined and paid in
Canadian dollars. Similarly, benefits earned in respect of service in the U.S.
are determined and paid in U.S. dollars. These retirement benefits are payable
for life. Upon death, reduced payments continue to the surviving spouse.
68
<PAGE> 73
Tables I and II show the standard annual pension benefits payable to
certain of our officers, including certain of the Named Executive Officers, at
age 63 for the various salary/service combinations shown in the table. The
amounts in Table I reflect the exclusion of payments of U.S. Social Security
benefits. The amounts in Table II pension plans reflect the exclusion of
payments from Canada or Quebec Pension Plans. These benefits are reduced for
those who retire earlier than age 62.
TABLE I
OFFSET FOR U.S. SOCIAL SECURITY BENEFITS
<TABLE>
<CAPTION>
YEARS OF SERVICE
FINAL AVERAGE ----------------------------------------------------
BASE SALARY 15 20 25 30 35
- ------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$100,000............................... $ 22,939 $ 30,585 $ 38,231 $ 45,878 $ 53,524
$200,000............................... $ 52,939 $ 70,585 $ 88,231 $105,878 $123,524
$300,000............................... $ 82,939 $110,585 $138,231 $165,878 $193,524
$400,000............................... $112,939 $150,585 $188,231 $225,878 $263,524
$500,000............................... $142,939 $190,585 $238,231 $285,878 $333,524
$600,000............................... $172,939 $230,585 $288,231 $345,878 $403,524
$700,000............................... $202,939 $270,585 $338,231 $405,878 $473,524
$800,000............................... $232,939 $310,585 $388,231 $465,878 $543,524
$900,000............................... $262,939 $350,585 $438,231 $525,878 $613,524
$1,000,000............................. $292,939 $390,585 $488,231 $585,878 $683,524
</TABLE>
TABLE II
OFFSET FOR CANADA PENSION PLAN/QUEBEC PENSION PLAN BENEFITS
<TABLE>
<CAPTION>
YEARS OF SERVICE
FINAL AVERAGE ----------------------------------------------------
BASE SALARY 15 20 25 30 35
- ------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$100,000............................... $ 27,442 $ 36,589 $ 45,736 $ 54,883 $ 64,030
$200,000............................... $ 57,442 $ 76,589 $ 95,736 $114,883 $134,030
$300,000............................... $ 87,442 $116,589 $145,736 $174,883 $204,030
$400,000............................... $117,442 $156,589 $195,736 $234,883 $274,030
$500,000............................... $147,442 $196,589 $245,736 $294,883 $344,030
$600,000............................... $177,442 $236,589 $295,736 $354,883 $414,030
$700,000............................... $207,442 $276,589 $345,736 $414,883 $484,030
$800,000............................... $237,442 $316,589 $395,736 $474,883 $554,030
$900,000............................... $267,442 $356,589 $445,736 $534,883 $624,030
$1,000,000............................. $297,442 $396,589 $495,736 $594,883 $694,030
</TABLE>
ANTICIPATED STOCK OPTION GRANTS
In connection with the offerings, we expect to make grants of stock options
to executive officers, non-employee directors and certain other employees. The
exercise price of such options is expected to be the public offering price of
our common stock set forth on the cover page of this prospectus. The following
table sets forth the number of shares of our common stock underlying options
that are expected to be granted to the cach of our executive officers, our
executive officers as a group, our non-employee directors as a group, and all
other employees as a group.
<TABLE>
<CAPTION>
ANTICIPATED
NUMBER OF SHARES
NAME AND POSITION UNDERLYING OPTIONS
- ----------------- ------------------
<S> <C>
Executive Officer Group.....................................
Non-employee Director Group.................................
All Other Employees.........................................
</TABLE>
69
<PAGE> 74
EMPLOYMENT AGREEMENTS
We are currently negotiating and expect to enter into employment agreements
with certain of our key executive officers immediately following the
reorganization.
70
<PAGE> 75
PRINCIPAL STOCKHOLDER
All of the outstanding shares of our common stock are currently owned by TD
Bank. Upon completion of the offerings, TD Bank will beneficially own
approximately % of our outstanding common stock, including shares issuable
upon exchange of the exchangeable preference shares issued to TD Bank in the
reorganization ( % if the underwriters and managers exercise their
over-allotment option in full).
Other than as set forth above, we are not aware of any person or group that
will beneficially own more than 5% of our outstanding common stock after the
offerings.
TD Bank is a chartered bank which was formed on February 1, 1955. At March
31, 1999, TD Bank ranked as the second largest Canadian bank in terms of market
capitalization and the fifth largest based on total assets. TD Bank serves its
customers through its network of more than 900 retail banking and investment
outlets, as well as through its electronic banking services.
TD Bank has advised us that it is its present intention to maintain
majority ownership of TD Waterhouse for the foreseeable future.
CERTAIN TRANSACTIONS BETWEEN US AND TD BANK
After the reorganization, TD Bank will continue to provide services to our
Canadian operations, such as office space, equipment purchase and maintenance,
human resources and employee pension and benefits, audit, tax planning and
reporting, legal, compliance, banking, risk management, telecommunications,
technology research and development. TD Bank, as our affiliate, will continue to
provide banking products and services to our Canadian customers. In addition,
the services of those employees who are to be transferred to us, but remain with
TD Bank on a transitional basis, will also be made available to us. Both we and
TD Bank will continue to make available to each other those personnel who
provided executive and support services to each other prior to the
reorganization.
We believe the fees and other amounts to be paid by and to us under the
above arrangements approximate the amounts that would be paid if such
arrangements were provided by unaffiliated third parties.
MASTER SERVICES AGREEMENT
In connection with the reorganization, we and TD Bank entered into an
inter-company master services agreement with respect to services to be provided
by TD Bank to us (primarily to TD Waterhouse Canada) and vice-versa. The master
services agreement provides that such services will be provided in exchange for
fees which, generally, (1) in the case of services purchased by TD Bank from
third parties for us will be based upon the incremental cost charged by such
third parties to TD Bank and (2) in the case of services directly provided by TD
Bank, will be based on estimated or actual cost, including a reasonable
allocation of direct and indirect overhead cost, plus a profit margin, where
appropriate, incurred by TD Bank, for the services it provides directly to us.
Such fees will be paid monthly in arrears. The master services agreement may be
terminated by either party on one year's notice. The services will be made
available on an "as needed" basis. This arrangement provides us with the
flexibility to bring "in-house" services we currently receive from TD Bank if it
is suitable to do so. In the performance of these services, TD Bank may enter
into contracts with third parties as our agent.
The purpose of the master services agreement is to ensure that TD Bank and
we provide services to each other in the scope and manner which are generally
consistent with current practices, having regard to the various assets and
employees to be transferred to us pursuant to the reorganization. The primary
services initially to be provided by TD Bank to us are described below in more
detail.
OFFICE SPACE
TD Bank will lease to our Canadian operations space within certain
buildings leased or owned by TD Bank. We are required to indemnify TD Bank
against certain liabilities in respect of the use of the premises. In addition,
TD Bank will enter into leases with third parties as agent for us and on our
behalf for
71
<PAGE> 76
premises which are solely used for our Canadian operations. We will indemnify TD
Bank in connection with all obligations under these leases.
EQUIPMENT PURCHASE AND MAINTENANCE
TD Bank may purchase on behalf of TD Waterhouse such equipment, furniture
and office supplies as requested by our Canadian operations and, in addition,
will provide equipment and furniture maintenance services.
HUMAN RESOURCES AND EMPLOYEE PENSION AND BENEFITS
As presently contemplated, human resources and employee pension and benefit
services will be limited to policy, executive compensation and corporate
development.
AUDIT, TAX PLANNING AND REPORTING, LEGAL AND COMPLIANCE
TD Bank will provide high level tax and internal audit services for TD
Waterhouse Canada, and will assist in the development of corporate budgets. TD
Bank will provide legal services to our non-U.S. operations and, with the office
of the General Counsel of TD Waterhouse, will direct legal matters and
proceedings of TD Waterhouse. The employees primarily responsible for TD
Waterhouse Canada's compliance functions will be transferred to and become
employees of TD Waterhouse Canada. TD Bank will provide management oversight and
executive support of compliance functions.
BANKING
TD Bank will provide customary banking services to TD Waterhouse Canada.
RISK MANAGEMENT
TD Bank will provide high level risk management oversight of our credit,
concentration and risk management policies.
TELECOMMUNICATIONS, TECHNOLOGY RESEARCH AND DEVELOPMENT
TD Bank will continue to make available to us its in-house technology
infrastructure, facilities and expertise, including its applications research
and development capabilities.
CREDIT ARRANGEMENTS
Under a separate agreement, TD Bank will make available to TD Waterhouse
Canada credit at market rates in the form of a standby subordinated loan
facility required for regulatory compliance.
CERTAIN TRANSACTIONS BETWEEN US AND WATERHOUSE NATIONAL BANK
Waterhouse National Bank was established in 1994 primarily to offer deposit
and loan products and other banking services to the customer base of Waterhouse
Securities, Inc. Though Waterhouse National Bank will not be owned directly by
us after the reorganization, Waterhouse National Bank will, as an affiliated
company, continue to provide such banking products and services to our customer
base. In addition to providing deposit and loan related products, Waterhouse
National Bank will also provide us with certain support services such as check
and debit card processing. We in turn will continue to provide Waterhouse
National Bank with various marketing and administrative support services. These
services include the marketing of Waterhouse National Bank's FDIC insured
deposit accounts and various credit products. We will also provide Waterhouse
National Bank with various executive and administrative support services,
including providing office space, and audit, tax, human resource, employee
benefits and legal services.
In connection with the reorganization, we and Waterhouse National Bank will
enter into an agreement relating to the provision of these intercompany
services, that will provide for payment of fees for such services
72
<PAGE> 77
based on the lower of the actual cost incurred by the party providing such
service or the price that an unaffiliated third party would charge for such
service.
TAX-SHARING AGREEMENT
After the offerings, we will be included in the Waterhouse Investor
Services, Inc. ("WISI") federal consolidated income tax group, and our federal
income tax liability will be included in the consolidated federal income tax
liability of WISI and its subsidiaries. In addition, in some cases our
subsidiaries will also be included with certain WISI subsidiaries in combined,
consolidated or unitary income tax groups for state and local tax purposes. In
connection with the reorganization, we and WISI will enter into a tax-sharing
agreement. Pursuant to the tax-sharing agreement, we and WISI will make payments
between us such that, with respect to any period, the amount of taxes to be paid
by us, subject to certain adjustments, will be determined as though we were
filing separate federal, state and local income tax returns (including, except
as provided below, any amounts determined to be due as a result of a
redetermination of the tax liability of WISI arising from an audit or otherwise)
as the common parent of an affiliated group of corporations filing combined,
consolidated or unitary (as applicable) federal, state and local returns rather
than a consolidated subsidiary of WISI with respect to federal, state and local
income taxes. With respect to foreign tax credits, our right to reimbursement
will be determined based on the usage of such foreign tax credits by the
consolidated group.
In determining the amount of tax-sharing payments under the tax-sharing
agreement, WISI will prepare or cause to be prepared pro forma returns with
respect to federal and applicable state and local income taxes that reflect the
same positions and elections used by WISI in preparing the returns for WISI's
consolidated group and other applicable groups. WISI will continue to have all
the rights of a parent of a consolidated group (and similar rights provided for
by applicable state and local law with respect to a parent of a combined,
consolidated or unitary group), will be the sole and exclusive agent for us in
any and all matters relating to our income, franchise and similar liabilities,
will have sole and exclusive responsibility for the preparation and filing of
consolidated federal and consolidated or combined state and local income tax
returns (or amended returns), and will have the power, in its sole discretion,
to contest or comprise any asserted tax adjustment or deficiency and to file,
litigate or compromise any claim for refund on our behalf related to such
return.
In general, we will be included in WISI's consolidated group for federal
income tax purposes for so long as WISI beneficially owns at least 80% of the
total voting power and value of our outstanding common stock. Each member of a
consolidated group is jointly and severally liable for the federal income tax
liability of each other member of the consolidated group. Accordingly, although
the tax-sharing agreement allocates tax liabilities between us and WISI, during
the period in which we are included in WISI's consolidated group, we could be
liable in the event that any federal tax liability is incurred, but not
discharged, by any other member of WISI's consolidated group.
73
<PAGE> 78
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
The total number of shares of all classes of stock that we have authority
to issue under our charter is shares, of which shares
represent shares of our common stock, shares represent shares of
preferred stock and shares represent shares of series common stock .
As of the date of this prospectus, shares of our common stock and no
shares of either the preferred stock or the series common stock were issued and
outstanding.
COMMON STOCK
Subject to any preferential rights of any preferred stock or series common
stock created by our board of directors, each outstanding share of common stock
will be entitled to such dividends, if any, as may be declared from time to time
by our board of directors. See "Dividend Policy." Each outstanding share is
entitled to one vote on all matters submitted to a vote of stockholders. In the
event of our liquidation, dissolution or winding up, holders of our common stock
are entitled to receive on a pro rata basis any assets remaining after provision
for payment of creditors and after payment of any liquidation preferences to
holders of preferred stock and series common stock.
The transfer agent and registrar for our common stock is .
PREFERRED STOCK AND SERIES COMMON STOCK
Each of the authorized preferred stock and the authorized series common
stock is available for issuance from time to time in one or more series at the
discretion of our board of directors without stockholder approval. Our board of
directors has the authority to prescribe for each series of preferred stock or
series common stock it establishes the number of shares in that series, the
voting rights (if any) to which such shares in that series are entitled, the
consideration for such shares in that series and the designation, powers,
preferences and relative, participating, optional or other special rights and
qualifications, limitations or restrictions of the shares in that series.
Depending upon the rights of such preferred stock or series common stock, as
applicable, the issuance of preferred stock or series common stock, as
applicable, could have an adverse effect on holders of common stock by delaying
or preventing a change in control of our company, making removal of our present
management more difficult or resulting in restrictions upon the payment of
dividends and other distributions to the holders of common stock.
For a description of the terms of the special voting preferred shares that
we will issue in the reorganization, see "-- Special Voting Preferred Share,"
below.
AUTHORIZED BUT UNISSUED CAPITAL STOCK
Delaware law generally does not require stockholder approval for any
issuance of authorized shares. However, the listing requirements of the NYSE
require stockholder approval of certain issuances of stock equal to or exceeding
20% of the then outstanding voting power or then outstanding number of shares of
our common stock. In addition, the rules of the TSE may also require shareholder
approval in certain circumstances. These additional shares may be used for a
variety of corporate purposes, including future public offerings to raise
additional capital or to facilitate corporate acquisitions. We currently do not
have any plans to issue additional shares of common stock, preferred stock or
series common stock other than in connection with employee compensation plans.
EXCHANGEABLE PREFERENCE SHARES OF TD WATERHOUSE CANADA
As part of the reorganization, TD Bank will contribute all of the assets
and liabilities of its Canadian discount brokerage business and certain related
businesses to TD Waterhouse Canada, in return for exchangeable
preference shares of our subsidiary, TD Waterhouse Canada. As part of that
transaction, TD Bank will also acquire one special voting preferred share of TD
Waterhouse.
74
<PAGE> 79
The exchangeable preference shares, together with the special voting
preferred share, are designed to have characteristics equivalent to shares of
our common stock. The material attributes of the exchangeable preference shares
in that regard include the following:
Ranking. The exchangeable preference shares will rank senior to the TD
Waterhouse Canada common shares and any other shares ranking junior to the
exchangeable preference shares with respect to the payment of dividends and the
distribution of assets in the event of the liquidation, dissolution or winding
up of TD Waterhouse Canada.
Dividends. Holders of exchangeable preference shares will be entitled to
receive dividends equivalent to dividends, if any, paid from time to time by us
on shares of our common stock. The declaration date, record date and payment
date for dividends on the exchangeable preference shares will be the same as
that for the corresponding dividends on the shares of our common stock.
Voting Rights. Except as required by applicable law, the holders of the
exchangeable preference shares are not entitled to receive notice of or attend
any meeting of the shareholders of TD Waterhouse Canada or to vote at any such
meeting.
Liquidation of TD Waterhouse Canada. In the event of the liquidation,
dissolution or winding up of TD Waterhouse Canada or any other proposed
distribution of the assets of TD Waterhouse Canada among its shareholders for
the purpose of winding up its affairs, a holder of exchangeable preference
shares will be entitled to receive for each exchangeable preference share on the
effective date of such liquidation, dissolution, winding up or other
distribution (the "liquidation date") an amount to be satisfied by the issuance
of one share of our common stock, plus an additional cash amount (the "dividend
amount") equivalent to the full amount of all declared and unpaid dividends, if
any, on the exchangeable preference share and all dividends and distributions
declared on a share of our common stock not declared on the exchangeable
preference shares with a record date prior to the exchange of such exchangeable
preference shares (such amounts, satisfied as aforesaid, being the "liquidation
amount").
Upon the liquidation, dissolution or winding up of TD Waterhouse Canada, we
will have the right to purchase all but not less than all of the exchangeable
preference shares then outstanding (other than exchangeable preference shares
held by us) at a purchase price per exchangeable preference share equal to this
liquidation amount (satisfied in the same manner as the liquidation amount) and,
upon the exercise of this purchase right, the holders thereof will be obligated
to sell such exchangeable preference shares to us on the liquidation date.
Upon the occurrence of an event of insolvency in respect of TD Waterhouse
Canada the holders of exchangeable preference shares will have the exchange
rights described below under "-- Support and Exchange Agreement."
Liquidation of TD Waterhouse. In the event of a voluntary liquidation,
dissolution or winding up of TD Waterhouse or a threatened or instituted
proceeding for an involuntary liquidation, dissolution or winding up of TD
Waterhouse, we will be required to purchase each outstanding exchangeable
preference share (other than exchangeable preference shares held by us) and
holders of exchangeable preference shares will be required to sell the
exchangeable preference shares held by them at that time, by exchanging one
share of our common stock for each such exchangeable preference share, plus the
dividend amount.
Retraction. Subject to the purchase rights described below, a holder of
exchangeable preference shares will be entitled at any time to require TD
Waterhouse Canada to redeem any or all of the exchangeable preference shares
held by such holder for a retraction price per exchangeable preference share to
be satisfied by issuance of one share of our common stock, plus the dividend
amount.
When a holder of exchangeable preference shares requests TD Waterhouse
Canada to redeem the exchangeable preference shares, we will have an overriding
right to purchase on the retraction date all but not less than all of the
exchangeable preference shares that the holder has requested TD Waterhouse
Canada to redeem at a purchase price per exchangeable preference share equal to
one share of our common stock, plus the dividend amount.
75
<PAGE> 80
If, as a result of solvency provisions of applicable law, TD Waterhouse
Canada is not permitted to redeem all exchangeable preference shares tendered by
a retracting holder, TD Waterhouse Canada will redeem only those exchangeable
preference shares tendered by the holder as would not be contrary to such
provisions of applicable law. The holder of any exchangeable preference shares
not redeemed by TD Waterhouse Canada will be deemed to have required us to
purchase, pursuant to the optional exchange right applicable to a TD Waterhouse
Canada insolvency event, on the retraction date such unretracted exchangeable
preference shares in exchange for, in respect of each exchangeable preference
share, one share of our common stock, plus the dividend amount.
Certain Restrictions. In the event that dividends on the outstanding
exchangeable preference shares corresponding to any dividends declared on our
common stock have not been declared and paid in full, subject to certain
exceptions, TD Waterhouse Canada may not, without the approval of the holders of
the exchangeable preference shares, pay dividends on, or redeem, purchase or
make capital distributions in respect of, certain of its securities. In
addition, TD Waterhouse Canada will not, without the prior approval of the
holders of exchangeable preference shares, issue any shares other than
exchangeable preference shares, TD Waterhouse Canada common shares and other
shares not ranking superior to the exchangeable preference shares.
Transfer Restrictions. No exchangeable preference share may be transferred
without the approval of the board of directors of TD Waterhouse Canada.
Amendment and Approval. The rights, privileges, restrictions and
conditions attaching to the exchangeable preference shares may be changed only
with the approval of a majority of the holders thereof.
Support and Exchange Agreement. In connection with the issuance of the
exchangeable preference shares, we entered into a support and exchange agreement
with TD Waterhouse Canada. The following is a summary description of the
material provisions of the support and exchange agreement:
Upon the occurrence and during the continuance of an insolvency event in
respect of TD Waterhouse Canada, a holder of exchangeable preference shares will
be entitled to exercise the optional exchange right with respect to any or all
of the exchangeable preference shares held by such holder, thereby requiring us
to purchase such exchangeable preference shares from the holder. The purchase
price payable by us for each exchangeable preference share to be purchased under
the optional exchange right will be satisfied by the issuance of one share of
our common stock, plus the dividend amount.
The support and exchange agreement also provides the requirement on our
part to purchase, pursuant to the deemed exercise of the optional exchange
right, exchangeable preference shares held by a holder if, as a result of
solvency provisions of applicable law, TD Waterhouse Canada is unable to redeem
all of the exchangeable preference shares which such holder is entitled to have
redeemed in accordance with the exchangeable preference share provisions.
Under the support and exchange agreement, we will agree that:
- we will not declare or pay dividends on our common stock unless TD
Waterhouse Canada has sufficient money or assets or authorized but
unissued securities available to enable the due declaration and punctual
payment in accordance with applicable law of an equivalent dividend on
the exchangeable preference shares and TD Waterhouse Canada
simultaneously declares or pays, as the case may be, an equivalent
dividend on the exchangeable preference shares;
- we will advise TD Waterhouse Canada in advance of the declaration of any
dividend on our common stock;
- we will ensure that the record date for any dividend declared on our
common stock is not less than ten business days after the declaration
date for such dividend or such shorter period within which applicable
law may be complied with;
76
<PAGE> 81
- we will take all actions and do all things necessary to ensure that TD
Waterhouse Canada is able to pay to the holders of the exchangeable
preference shares the equivalent number of shares of our common stock
plus the dividend amount in the event of a liquidation, dissolution or
winding up of TD Waterhouse Canada or the giving of a retraction request
by a holder of exchangeable preference shares; and
- we will not vote or otherwise take any action or omit to take any action
causing the liquidation, dissolution or winding up of TD Waterhouse
Canada.
The support and exchange agreement also provides that without the prior
approval of TD Waterhouse Canada and the holders of the exchangeable preference
shares (as set forth under "-- Amendment and Approval" above), we will not (1)
distribute additional shares of our common stock or rights, options or warrants
to subscribe therefor (except for an issue of shares of our common stock to
shareholders who exercise an option to receive dividends in the form of shares
of our common stock) or other securities, property or assets to all or
substantially all holders of shares of our common stock, (2) change any of the
rights, privileges or other terms of our common stock or (3) effect a merger,
consolidation, reorganization or other transaction affecting the common stock,
unless the same or an equivalent distribution on or change to the exchangeable
preference shares (or in the rights of the holders thereof) is made
simultaneously. In the event of any proposed tender offer, exchange offer or
similar transaction affecting our common stock, we will use reasonable efforts
to take all actions necessary or desirable to enable holders of exchangeable
preference shares to participate in such transaction to the same extent and on
an economically equivalent basis as the holders of our common stock.
We will make such filings and seek such regulatory consents and approvals
as are necessary so that the shares of our common stock issuable upon the
exchange of exchangeable preference shares will be issued in compliance with
applicable securities laws.
SPECIAL VOTING PREFERRED SHARE
The special voting preferred share will have the following terms:
Dividends and Distributions. The holder of the special voting preferred
share shall not be entitled to receive any portion of any dividend or
distribution at any time.
Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution
or winding up of TD Waterhouse, the holder of the special voting preferred share
shall not be entitled to any portion of any distribution.
Voting Rights. The special voting preferred share shall entitle the holder
to an aggregate number of votes equal to the number of exchangeable preference
shares of TD Waterhouse Canada then outstanding. Except as otherwise provided
herein or by law, the holder of the special voting preferred share and the
holders of shares of our common stock shall vote together as one class on all
matters submitted to a vote of our shareholders.
Additional Provisions. At such time as (1) the special voting preferred
share entitles the holder to a number of votes equal to zero because there are
no exchangeable preference shares of TD Waterhouse Canada then outstanding, and
(2) there is no share of stock, debt, option or other agreement, obligation of
or commitment of TD Waterhouse Canada that could by its terms require TD
Waterhouse Canada to issue any exchangeable preference shares to any person,
then the special voting preferred share shall be retired and canceled promptly
thereafter.
Purchase for Cancellation. If the special voting preferred share should be
purchased or otherwise acquired by us in any manner whatsoever, then the special
voting preferred share shall be retired and canceled promptly after it is
acquired.
No Redemption or Conversion. The special voting preferred share will not
be redeemable or convertible.
77
<PAGE> 82
Transfer Restrictions. The special voting preferred share may not be
transferred without the approval of our board of directors.
78
<PAGE> 83
CERTAIN ANTI-TAKEOVER AND OTHER PROVISIONS
Our charter and by-laws and applicable sections of the General Corporation
Law of the State of Delaware (the "DGCL") contain several provisions that may
make the acquisition of control of our company more difficult without the prior
approval of our board of directors.
DELAWARE GENERAL CORPORATION LAW
The terms of Section 203 of the DGCL apply to us since we are a Delaware
corporation. Pursuant to Section 203, with certain exceptions, a Delaware
corporation may not engage in any of a broad range of business combinations,
such as mergers, consolidations and sales of assets, with an "interested
stockholder" for a period of three years from the time that such person became
an interested stockholder unless (1) the transaction that results in the
person's becoming an interested stockholder or the business combination is
approved by the board of directors of the corporation before the person becomes
an interested stockholder, (2) upon consummation of the transaction which
results in the stockholder becoming an interested stockholder, the interested
stockholder owns 85% or more of the voting stock of the corporation outstanding
at the time the transaction commenced, excluding shares owned by persons who are
directors and also officers, and shares owned by certain employee stock plans or
(3) on or after the time the person becomes an interested stockholder, the
business combination is approved by the corporation's board of directors and by
holders of at least two-thirds of the corporation's outstanding voting stock,
excluding shares owned by the interested stockholder, at a meeting of
stockholders. Under Section 203, an "interested stockholder" is defined as any
person, other than the corporation and any direct or indirect majority-owned
subsidiary, that is (1) the owner of 15% or more of the outstanding voting stock
of the corporation or (2) an affiliate or associate of the corporation and was
the owner of 15% or more of the outstanding voting stock of the corporation at
any time within the three-year period immediately prior to the date on which it
is sought to be determined whether such person is an interested stockholder.
Section 203 does not apply to a corporation that so provides in an amendment to
its charter or by-laws passed by holders of a majority of its outstanding
shares, but such stockholder action does not become effective for 12 months
following its adoption and would not apply to persons who were already
interested stockholders at the time of the amendment. Our charter does not
exclude us from the restrictions imposed under Section 203.
Under certain circumstances, Section 203 makes it more difficult for a
person who would be an "interested stockholder" to effect various business
combinations with a corporation for a three-year period. The provisions of
Section 203 may encourage companies interested in acquiring our company to
negotiate in advance with our board of directors, because the stockholder
approval requirement is avoided if our board of directors approves either the
business combination or the transaction that results in the stockholder becoming
an interested stockholder. Such provisions also may have the effect of
preventing changes in the board of directors. It is further possible that such
provisions could make it more difficult to accomplish transactions that
stockholders may otherwise deem to be in their best interests.
PREFERRED STOCK AND SERIES COMMON STOCK
Our charter authorizes our board to issue additional shares of common stock
without the need for further stockholder approval. Our charter also authorizes
our board of directors to issue up to shares of preferred stock and
shares of series common stock, in one or more series, and to establish
the rights and preferences (including the convertibility of such shares into
shares of common stock) of any series of preferred stock or series common stock
so issued. One of the effects of the existence of unissued and unreserved common
stock, preferred stock and series common stock may be to enable our board of
directors to issue shares to persons friendly to current management, which
issuance could render more difficult or discourage an attempt to obtain control
of our company by means of a merger, tender offer, proxy contest or otherwise,
and thereby delay or prevent a change in control of our company even if some of
our stockholders believed that such change of control was in their best
interests.
79
<PAGE> 84
PROVISIONS OF OUR CHARTER AND BY-LAWS AFFECTING A CHANGE IN CONTROL
Certain provisions of our charter and by-laws may delay or make more
difficult unsolicited acquisitions or changes of control of our company. We
believe that such provisions will enable us to develop our business in a manner
that will foster our long-term growth without disruption caused by the threat of
a takeover not deemed by our board of directors to be in the best interests of
our company and our stockholders. Such provisions could have the effect of
discouraging third parties from making proposals involving an unsolicited
acquisition or change of control of our company, although such proposals, if
made, might be considered desirable by a majority of our stockholders. Such
provisions may also have the effect of making it more difficult for third
parties to cause the replacement of the current board of directors. These
provisions include, in addition to those noted above:
- prohibitions against stockholders' calling a special meeting of
stockholders or, in certain circumstances, acting by written consent in
lieu of a meeting;
- requirements for advance notice for raising business or making
nominations at stockholders' meetings;
- the ability of the board of directors to increase the size of the board
of directors and to appoint directors to newly created directorships;
- a classified board of directors; and
- higher than majority requirements to make certain amendments to the
by-laws and charter.
Stockholder Action by Written Consent; Special Meetings
Our charter and by-laws provide that prior to the date on which TD Bank
beneficially owns less than 50% of the voting power of our outstanding capital
stock, any action required or permitted to be taken by stockholders may be
effected by written consent in lieu of a meeting, but that after such date
stockholder action can be taken only at an annual or special meeting and cannot
be taken by written consent in lieu of a meeting. Our charter and by-laws also
provide that special meetings of our stockholders can be called only by our
Chief Executive Officer or by a vote of the majority of our board of directors.
Furthermore, our by-laws provide that only such business as is specified in the
notice of any such special meeting of stockholders may come before such meeting.
Advance Notice for Raising Business or Making Nominations at Meetings
Our by-laws establish an advance notice procedure for stockholder proposals
to be brought before an annual meeting of stockholders and for nominations by
stockholders of candidates for election as directors at an annual or special
meeting at which directors are to be elected. Only such business may be
conducted at an annual meeting of stockholders as has been brought before the
meeting by, or at the direction of, the chairman of the board of directors, or
by a stockholder of ours who is entitled to vote at the meeting who has given to
the Secretary of TD Waterhouse timely written notice, in proper form, of the
stockholder's intention to bring that business before the meeting. The chairman
of such meeting has the authority to make determinations as to the business to
be conducted. Only persons who are nominated by, or at the direction of, the
chairman of the board of directors, or who are nominated by a stockholder who
has given timely written notice, in proper form, to the Secretary prior to a
meeting at which directors are to be elected will be eligible for election as
our directors.
To be timely, a stockholder's notice of business to be brought before an
annual meeting and nominations of candidates for election as directors at any
annual meeting shall be delivered to the Secretary of TD Waterhouse at our
principal executive offices not less than 90 days nor more than 120 days prior
to the first anniversary of the preceding year's annual meeting. However, in the
event that the date of the annual meeting is advanced by more than 20 days, or
delayed by more than 70 days, from such anniversary date, notice by the
stockholder to be timely must be so delivered not earlier than the 120th day
prior to such annual meeting and not later than the close of business on the
later of the 90th day prior to such annual meeting or the tenth day following
the day on which public announcement of the date of such meeting is first made.
80
<PAGE> 85
To be timely, a stockholder's notice of nominations of persons for election
to the board of directors may be made at a special meeting of stockholders if
the stockholder's notice is delivered to the Secretary of TD Waterhouse at our
principal executive offices not earlier than the 120th day prior to such special
meeting and not later than the close of business on the later of the 90th day
prior to such special meeting or the tenth day following the day on which public
announcement is first made of the date of the special meeting and of the
nominees proposed by the board of directors to be elected at such meeting.
The notice of any nomination for election as a director must set forth the
name and address of, and the class and number of shares of our capital stock
held by, the stockholder who intends to make the nomination and the beneficial
owner, if any, on whose behalf the nomination is being made; the name and
address of the person or persons to be nominated; a representation that the
stockholder is a holder of record of our capital stock entitled to vote at such
meeting and intends to appear in person or by proxy at the meeting to nominate
the person or persons specified in the notice; a description of all arrangements
or understandings between the stockholder and each nominee and any other person
or persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder, such other information regarding
each nominee proposed by such stockholder as would have been required to be
included in a proxy statement tiled pursuant to the proxy rules of the SEC had
each nominee been nominated, or intended to be nominated by the board of
directors; and the consent of each nominee to serve as a director if so elected.
Our by-laws and charter provide that as long as TD Bank beneficially owns
ten percent or more of the voting power of our outstanding capital stock, the
foregoing advance notice procedure for director nominations and stockholder
proposals will not apply to it.
Number of Directors; Filling of Vacancies; Removal
Our charter and by-laws provide that newly created directorships resulting
from an increase in the authorized number of directors (or any vacancy) may only
be filled by a vote of a majority of directors then in office. Accordingly, the
board of directors may be able to prevent any stockholder from obtaining
majority representation on the board of directors by increasing the size of the
board and filling the newly created directorships with its own nominees. If any
applicable provision of the DGCL expressly confers power on stockholders to fill
such a directorship at a special meeting of stockholders, such a directorship
may be filled at such meeting only by the affirmative vote of at least 80% in
voting power of all shares of our capital stock entitled to vote generally in
the election of directors, voting as a single class. Until such time as TD Bank
beneficially owns less than 50% of the voting power of our outstanding capital
stock, directors may be removed at any time, with or without cause, by the
affirmative vote of a majority in voting power of all shares of our capital
stock entitled to vote generally in the election of directors, voting as a
single class. Thereafter, directors may be removed only for cause, and only by
the affirmative vote of at least 80% in voting power of all shares of our
capital stock entitled to vote generally in the election of directors, voting as
a single class.
Classified Board of Directors
Our charter provides for the board of directors to be divided into three
classes of directors serving staggered three-year terms. As a result,
approximately one-third of the board of directors will be elected each year.
We believe that a classified board will help to assure the continuity and
stability of our board of directors and our business strategies and policies as
determined by our board of directors, because a majority of the directors at any
given time will have prior experience as our directors. This provision should
also help to ensure that the board of directors, if confronted with an
unsolicited proposal from a third party that has acquired a block of our voting
stock, will have sufficient time to review the proposal and appropriate
alternatives and to seek the best available result for all stockholders.
This provision could prevent a party who acquires control of a majority of
the outstanding voting stock from obtaining control of the board of directors
until the second annual stockholders meeting following the date the acquirer
obtains the controlling stock interest, could have the effect of discouraging a
potential
81
<PAGE> 86
acquirer from making a tender offer or otherwise attempting to obtain control of
our company and could thus increase the likelihood that incumbent directors will
retain their positions.
Amendments to Our By-laws
Our charter provides that the affirmative vote of the holders of at least
80% in voting power of all the shares of our capital stock entitled to vote
generally in the election of directors, voting together as a single class, shall
be required in order for the stockholders to alter, amend or repeal any
provision of the by-laws which is to the same effect as provisions contained in
our charter relating to (1) the amendment of our by-laws, (2) the classified
board of directors and the filling of director vacancies and (3) calling and
taking actions at meetings of stockholders and prohibiting stockholders from
taking action by written consent.
Amendments to Our Charter
Our charter requires the affirmative vote of the holders of at least 80% in
voting power of all the shares of our capital stock entitled to vote generally
in the election of directors, voting together as a single class, to alter, amend
or repeal provisions of our charter relating to (1) the amendment of our charter
and/or by-laws, (2) the classified board of directors and the filling of
director vacancies and (3) calling and taking actions at meetings of
stockholders and prohibiting stockholders from taking action by written consent.
CORPORATE OPPORTUNITIES
Our charter will provide that TD Bank shall have no duty to refrain from
engaging in the same or similar activities or lines of business as us and
neither TD Bank nor any officer or director thereof (except as provided below)
shall be liable to us or our stockholders for breach of any fiduciary duty by
reason of any such activities of TD Bank. In the event that TD Bank acquires
knowledge of a potential transaction or matter which may be a corporate
opportunity for both TD Bank and us, TD Bank shall have no duty to communicate
or offer such corporate opportunity to us and shall not be liable to us or our
stockholders for breach of any fiduciary duty as a stockholder of ours by reason
of the fact that TD Bank pursues or acquires such corporate opportunity for
itself, directs such corporate opportunity to another person, or does not
communicate information regarding such corporate opportunity to us.
In the event that one of the directors or officers of our company who is
also a director or officer of TD Bank acquires knowledge of a potential
transaction or matter which may be a corporate opportunity for both us and TD
Bank, such director or officer of ours shall have fully satisfied and fulfilled
the fiduciary duty of such director or officer and our stockholders with respect
to such corporate opportunity if such director or officer acts in a manner
consistent with the following policy:
- a corporate opportunity offered to any person who is an officer of
ours, and who is also a director but not an officer of TD Bank, shall
belong to us;
- a corporate opportunity offered to any person who is a director but
not an officer of ours, and who is also a director or officer of TD
Bank, shall belong to us if such opportunity is expressly offered to
such person in writing solely in his or her capacity as a director of
ours, and otherwise shall belong to TD Bank; and
- a corporate opportunity offered to any person who is an officer of
both ours and TD Bank shall belong to us if such opportunity is
expressly offered to such person in writing solely in his or her
capacity as an officer of ours, and otherwise shall belong to TD Bank.
For purposes of the foregoing:
- a director of ours who is chairman of our board of directors or of a
committee of our board of directors shall not be deemed to be an officer
of ours by reason of holding such position (without regard to whether
such position is deemed an officer of ours under our by-laws), unless
such person is a full-time employee of ours;
82
<PAGE> 87
- "us" or "ours" means TD Waterhouse and all corporations,
partnerships, joint ventures, associations and other entities in which
we beneficially own (directly or indirectly) 50% or more of the
outstanding voting stock, voting power, partnership interests or similar
voting interests; and
- the term "TD Bank" shall mean TD Bank and all corporations,
partnerships, joint ventures, associations and other entities (other
than TD Waterhouse, as defined in accordance with the preceding clause
(A) in which TD Bank beneficially owns (directly or indirectly) 50% or
more of the outstanding voting stock, voting power, partnership
interests or similar voting interests.
The foregoing provisions of our charter shall expire on the date that TD
Bank ceases to beneficially own common stock representing at least ten percent
of the total voting power of all classes of outstanding voting stock and no
person who is a director or officer of ours is also a director or officer of TD
Bank or any of its subsidiaries (other than us).
In addition to any vote of the stockholders required by our charter, until
the time that TD Bank ceases to beneficially own common stock representing at
least ten percent of the total voting power of all classes of our outstanding
common stock, the affirmative vote of the holders of more than 80% of the total
voting power of all classes of our outstanding voting stock shall be required to
alter, amend or repeal in a manner adverse to the interests of TD Bank and its
subsidiaries (other than us), or adopt any provision adverse to the interests of
TD Bank and its subsidiaries (other than us), and inconsistent with, the
corporate opportunity provisions described above. Accordingly, so long as TD
Bank beneficially owns common stock representing at least ten percent of the
total voting power of all classes of our outstanding common stock, it can
prevent any such alteration, amendment, repeal or adoption.
Any person purchasing or otherwise acquiring our common stock will be
deemed to have notice of, and to have consented to, the foregoing provisions of
our charter.
INDEMNIFICATION AND LIMITATION OF LIABILITY FOR DIRECTORS AND OFFICERS
Our charter provides that we will indemnify our directors and officers to
the fullest extent permitted by the laws of the State of Delaware. Our charter
also provides that a director of our company shall not be liable to us or our
stockholders for monetary damages for breach of fiduciary duty as a director,
except to the extent such exemption from liability or limitation thereof is not
permitted under the DGCL as the same exists or may hereafter be amended.
The indemnification rights conferred by our charter are not exclusive of
any other right to which a person seeking indemnification may otherwise be
entitled. We will also provide liability insurance for our directors and
officers for certain losses arising from claims or charges made against them,
while acting in their capacities as directors or officers.
83
<PAGE> 88
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the offerings, we will have shares of common
stock issued and outstanding. Of these shares, the shares of common stock sold
in the offerings will be freely tradeable without restrictions or further
registration under the Securities Act, except for any shares purchased by an
"affiliate" of ours as defined in Rule 144 under the Securities Act ("Rule
144"), which will be subject to the resale limitations under Rule 144. We have
agreed with the underwriters not to effect transactions in or relating to our
common stock for a period of time following this offering. See "Underwriting."
Immediately after the offerings, TD Bank will beneficially own
shares of common stock (including shares issuable upon exchange of the
exchangeable preference shares acquired by TD Bank in the reorganization), which
will represent approximately % of our outstanding common stock in the
aggregate ( % if the underwriters and managers exercise their over-allotment
option in full). None of the shares of common stock beneficially owned by TD
Bank will be registered under the Securities Act upon consummation of the
offerings and may not be sold by TD Bank in the absence of an effective
registration statement under the Securities Act, except in accordance with an
exemption from registration thereunder, including under Rule 144. As an
"affiliate" of ours, TD Bank will be able to freely sell shares of our common
stock currently owned by it after the offerings, subject only to the volume and
manner of sale restrictions under Rule 144 described below. TD Bank has agreed
with the underwriters not to effect any transactions in or relating to our
common stock for a period of time following the offerings. See "Underwriting."
In general, under Rule 144, a person or persons whose shares are required
to be aggregated who has beneficially owned shares of common stock for a period
of one year, including a person who may be deemed an "affiliate," is entitled to
sell, within any three-month period, a number of shares not exceeding the
greater of (1) 1% of the total number of outstanding shares of such class and
(2) the average weekly reported trading volume of such class during the four
calendar weeks immediately preceding such sale. A person who is not an
"affiliate" of ours and who has beneficially owned shares for at least two years
is entitled to sell such shares under Rule 144 without regard to the volume
limitations described above. Under Rule 144, an "affiliate" of an issuer is a
person that directly or indirectly through the use of one or more intermediaries
controls, is controlled by, or is under common control with, such issuer.
84
<PAGE> 89
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following summary describes the material U.S. federal income and estate
tax consequences of the ownership of our common stock by a Non-U.S. Holder (as
defined below) as of the date hereof. This discussion does not address all
aspects of U.S. federal income and estate taxes that may be relevant to such
Non-U.S. Holders in light of their personal circumstances and does not discuss
any potential foreign, state and local tax consequences of owning or disposing
of our common stock. Furthermore, the discussion below is based upon the
provisions of the Code, and regulations, rulings and judicial decisions
thereunder as of the date hereof, and such authorities may be repealed, revoked
or modified so as to result in U.S. federal income tax consequences different
from those discussed below. PERSONS CONSIDERING THE PURCHASE, OWNERSHIP OR
DISPOSITION OF OUR COMMON STOCK SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING
THE U.S. FEDERAL INCOME TAX CONSEQUENCES IN LIGHT OF THEIR PARTICULAR SITUATIONS
AS WELL AS ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING
JURISDICTION.
As used herein, a "U.S. Holder" of our common stock means a holder that is
(1) a citizen or resident of the U.S., (2) a corporation, or other entity that
is taxable as a corporation, created or organized in or under the laws of the
U.S. or any political subdivision thereof, (3) an estate the income of which is
subject to U.S. federal income taxation regardless of its source and (4) a trust
(X) that is subject to the supervision of a court within the U.S. and the
control of one or more U.S. persons as described in section 7701(a)(30) of the
Code or (Y) that has a valid election in effect under applicable U.S. Treasury
regulations to be treated as a U.S. person. In the case of a partnership that
holds our common stock, any partner described in any of (1) through (2), above,
is also a U.S. Holder. A "Non-U.S. Holder" is a holder, including any partner in
a partnership that holds our common stock, that is not a U.S. Holder.
DIVIDENDS
Dividends paid to a Non-U.S. Holder of common stock generally will be
subject to withholding of U.S. federal income tax at a 30% rate or such lower
rate as may be specified by an applicable income tax treaty. However, dividends
that are effectively connected with the conduct of a trade or business by the
Non-U.S. Holder within the U.S. and, where a tax treaty applies, are
attributable to a U.S. permanent establishment of the Non-U.S. Holder, are not
subject to the withholding tax, but instead are subject to U.S. federal income
tax on a net income basis at applicable graduated individual or corporate rates.
Certain certification and disclosure requirements must be complied with in order
to be exempt from withholding under such effectively connected income exemption.
Any such effectively connected dividends received by a foreign corporation may,
under certain circumstances, be subject to an additional "branch profits tax" at
a 30% rate or such lower rate as may be specified by an applicable income tax
treaty.
Until January 1, 2000, dividends paid to an address outside the U.S. are
presumed to be paid to a resident of such country (unless the payer has
knowledge to the contrary) for purposes of the withholding tax discussed above
and, under the current interpretation of U.S. Treasury regulations, for purposes
of determining the applicability of a tax treaty rate. However, under U.S.
Treasury regulations (the "Final Regulations"), a Non-U.S. Holder of common
stock who wishes to claim the benefit of an applicable treaty rate (and avoid
back-up withholding as discussed below) for dividends paid after December 31,
1999, will be required to satisfy applicable certification and other
requirements.
A Non-U.S. Holder of common stock eligible for a reduced rate of U.S.
withholding tax pursuant to an income tax treaty may obtain a refund of any
excess amounts withheld by filing an appropriate claim for refund with the
Internal Revenue Service (the "IRS").
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to U.S. federal income tax
with respect to gain recognized on a sale or other disposition of common stock
unless (1) the gain is effectively connected with a trade or business of the
Non-U.S. Holder in the U.S., and, where a tax treaty applies, is attributable to
a U.S. permanent establishment of the Non-U.S. Holder, (2) in the case of a
Non-U.S. Holder who is an individual and holds our common stock as a capital
asset, such holder is present in the U.S. for 183 or more
85
<PAGE> 90
days in the taxable year of the sale or other disposition and certain other
conditions are met or (3) we are or have been a "U.S. real property holding
corporation" (a "USRPHC") at any time during the shorter of the five-year period
ending on the date of the disposition by the Non-U.S. Holder or the period
during which the Non-U.S. Holder held our common stock, and certain other
conditions are met.
An individual Non-U.S. Holder described in clause (1) above will be subject
to tax on the net gain derived from the sale under regular graduated U.S.
federal income tax rates. An individual Non-U.S. Holder described in clause (2)
above will be subject to a flat 30% tax on the gain derived from the sale, which
may be offset by U.S. source capital losses (even though the individual is not
considered a resident of the U.S.). If a Non-U.S. Holder that is a foreign
corporation falls under clause (1) above, it will be subject to tax on its gain
under regular graduated U.S. federal income tax rates and, in addition, may be
subject to the branch profits tax equal to 30% of its effectively connected
earnings and profits within the meaning of the Code for the taxable year, as
adjusted for certain items, unless it qualifies for a lower rate under an
applicable income tax treaty.
If we are or have been a USRPHC during the shorter of the periods described
in clause (3), above, then, any gain or loss on the disposition of our common
stock by a Non-U.S. Holder would be treated as effectively connected with a
trade or business of the Non-U.S. Holder in the U.S., and the Non-U.S. Holder
would be taxed as described with respect to clause (1), above. However, even if
we were a USRPHC, any gain recognized by a Non-U.S. Holder still would not be
subject to U.S. tax if our shares were considered to be "regularly traded on an
established securities market" and the Non-U.S. Holder disposing of such shares
did not own, actually or constructively, at any time during the shorter of the
periods described in clause (3), above, more than five percent of a class of our
common stock. We believe that we never have been and are not currently a USRPHC,
and we consider it unlikely, based on our current business plans and operations,
that we will become a USRPHC in the foreseeable future.
Special rules may apply to certain Non-U.S. Holders, such as "controlled
foreign corporations," "passive foreign investment companies" and "foreign
personal holding companies," that are subject to special treatment under the
Code. Such entities should consult their own tax advisors to determine the U.S.
federal, state, local and other tax consequences that may be relevant to them.
FEDERAL ESTATE TAX
Common stock held by an individual Non-U.S. Holder at the time of death
will be included in such holder's gross estate for U.S. federal estate tax
purposes, unless an applicable estate tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
We must report annually to the IRS and to each Non-U.S. Holder the amount
of dividends paid to such holder and the tax withheld with respect to such
dividends, regardless of whether withholding was required. Copies of the
information returns reporting such dividends and withholding may also be made
available to the tax authorities in the country in which the Non-U.S. Holder
resides under the provisions of an applicable income tax treaty.
Under current law, backup withholding at the rate of 31% generally will not
apply to dividends paid to a Non-U.S. Holder at an address outside the U.S.
(unless the payer has knowledge that the payee is a U.S. person). Under the
Final Regulations, however, a Non-US Holder will be subject to back-up
withholding with respect to dividends paid after December 31, 1999 unless
applicable certification requirements are met.
Payment of the proceeds of a sale of our common stock within the U.S. or
conducted through certain U.S. related financial intermediaries is subject to
information reporting and, in the case of a payment made within the U.S. or made
through a U.S. office of a broker, backup withholding unless the applicable
documentary or certification requirements are met or the holder otherwise
establishes an exemption.
Any amounts withheld under the backup withholding rules may be allowed as a
refund or a credit against such holder's U.S. federal income tax liability
provided the required information is furnished to the IRS.
86
<PAGE> 91
UNDERWRITING
Credit Suisse First Boston Corporation ("CSFBC") and TD Securities (USA)
Inc. are acting as the U.S. representatives for the U.S. underwriters named
below. Credit Suisse First Boston (Europe) Limited, and The Toronto-Dominion
Bank are acting as the international representatives for the international
managers named below. Each of the U.S. and Canadian underwriters and
international managers has agreed to purchase the number of shares set forth
below opposite its name. Their obligations are subject to certain conditions to
be contained in a U.S. underwriting agreement dated , 1999, a Canadian
underwriting agreement dated , 1999, and an international underwriting
agreement dated , 1999. We have filed forms of the underwriting
agreements as exhibits to the registration statement.
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITERS SHARES
----------------- ---------
<S> <C>
Credit Suisse First Boston Corporation......................
TD Securities (USA) Inc.....................................
Goldman, Sachs & Co.........................................
Salomon Smith Barney Inc....................................
Morgan Stanley & Co. Incorporated...........................
--------
Subtotal...............................................
--------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
CANADIAN UNDERWRITERS SHARES
--------------------- ---------
<S> <C>
TD Securities Inc...........................................
Credit Suisse First Boston Securities Canada, Inc...........
Nesbitt Burns Inc...........................................
ScotiaMcLeod Inc............................................
CIBC Wood Gundy Securities Inc..............................
RBC Dominion Securities Inc.................................
Merrill Lynch Canada Inc....................................
Levesque Beaubien Geoffrion Inc.............................
Griffiths McBurney & Partners...............................
First Marathon Securities Limited...........................
HSBC James Capel Canada Inc.................................
Newcrest Capital Inc........................................
Trilon Securities Corporation...............................
--------
Subtotal...............................................
--------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL MANAGERS SHARES
---------------------- ---------
<S> <C>
Credit Suisse First Boston (Europe) Limited.................
The Toronto-Dominion Bank...................................
Goldman Sachs International.................................
Salomon Brothers International Limited......................
Morgan Stanley & Co. International Limited..................
--------
Subtotal...............................................
--------
Total................................................
========
</TABLE>
The U.S. offering, the Canadian offering and the international offering are
each conditioned upon the closing of the others.
The underwriting agreements provide that the U.S. underwriters, the
Canadian underwriters and the international managers will be obligated to
purchase all the shares of common stock in the offerings if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting
87
<PAGE> 92
agreements also provide that, in the event of a default, purchase commitments
may be increased or the underwriting agreements may be terminated.
We have granted to the underwriters and managers a 30-day option
exercisable by CSFBC and TD Securities (USA) Inc., the joint global
coordinators. The underwriters and managers may purchase on a pro rata basis up
to additional shares of common stock at the public offering price,
less the underwriting discounts and commissions. The option may be exercised
only to cover any over-allotments.
The underwriters and managers are entering into an inter-syndicate
agreement providing for, among other things, the coordination of certain of
their activities by the joint global coordinators. Pursuant to the inter-
syndicate agreement, sales may be made between the U.S. underwriters, the
Canadian underwriters and the international managers of such number of shares as
may be agreed upon by the joint global coordinators. The per share price of any
shares so sold will be the public offering price of such shares less an amount
not greater than the per share amount of the selling concession or commissions
to dealers applicable to such shares. Pursuant to the inter-syndicate agreement,
each U.S. underwriter agrees that it has not and will not offer or sell,
directly or indirectly, any shares or distribute any prospectus relating to the
offering other than within the United States or to a United States Person; each
Canadian underwriter agrees that it has not and will not offer or sell, directly
or indirectly, any shares or distribute any prospectus relating to the offering
to any person outside of Canada or to any United States Person; and each
international manager agrees that it has not and will not offer or sell,
directly or indirectly, any shares or distribute any prospectus relating to the
offering within the United States and Canada or to any United States Person. The
foregoing limitations do not apply to stabilization transactions or to certain
other transactions specified in the inter-syndicate agreement. In this context,
"United States Person" means any individual who is resident in the United
States, or any corporation, pension, profit sharing or other trust entity or
other entity organized or incorporated under or governed by the laws of the
United States or any political subdivision thereof (other than a foreign branch
or agency of any United States person), and includes any United States branch or
agency of a non-United States Person. "United States" means the United States of
America, its territories and possessions and all areas subject to its
jurisdiction. "Canada" means Canada, its provinces and territories and
possessions and all areas subject to its jurisdiction.
The underwriters and managers will offer the common stock initially at the
public offering price set forth on the cover page of this prospectus and to the
selling group members at such price less a concession of $ per share.
The underwriters and the managers and the selling group members may also reallow
a discount of $ per share on sales to certain other broker/dealers.
After the initial offering, the offering price, concession and discount may be
changed only by mutual agreement of the joint global coordinators.
The following table summarizes the compensation and the estimated expenses
payable by the selling stockholders and us.
<TABLE>
<CAPTION>
TOTAL
--------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
--------- -------------- --------------
<S> <C> <C> <C>
Underwriting discounts and commissions.............. $ $ $
Expenses payable by us.............................. $ $ $
</TABLE>
The underwriters and managers have informed us that they will not make
discretionary sales of the common stock being offered.
Each of the underwriters and managers represents and agrees that:
(1) it has not offered or sold and prior to the date six months after the
date of issue will not offer or sell any of our common stock to persons
in the United Kingdom except to persons whose ordinary activities
involved them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of their businesses
or otherwise in circumstances which have not resulted or do not result
in an offer to the public in the United Kingdom within the meaning of
the Public Offers of the Securities Regulations 1995;
88
<PAGE> 93
(2) it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in
relation to our common stock in, from or otherwise involving the United
Kingdom; and
(3) it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the issue
of our common stock to a person who is of a kind described in Article
II(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1996 or is a person to whom such document may
otherwise lawfully be issued or passed on.
We and TD Bank have each agreed that we will not sell or otherwise dispose
of any additional shares of common stock or securities convertible into or
exchangeable or exercisable for any shares of common stock, or disclose the
intention to make any sale or disposition. These restrictions are effective for
a period of days after the date of this prospectus. These restrictions are
subject to the following exceptions:
(1) in the case of TD Waterhouse, grants of stock options with respect to
our common stock to our officers, directors and employees and issuances
of common stock in connection with the exercise of such stock options,
and in connection with the exchange of exchangeable preference shares of
TD Waterhouse Canada; and
(2) the prior written consent of the joint global co-ordinators.
We have agreed to indemnify the underwriters and managers against certain
liabilities described in the underwriting agreements. In addition, we have
agreed to contribute to payments which the underwriters and managers may be
required to make relating to such liabilities.
We intend to apply to list our common stock on the NYSE and the TSE. The
underwriters and managers have agreed to sell round lots of 100 shares or more
to a minimum of 2,000 beneficial owners.
Prior to the offerings, there has been no public market for our common
stock. The initial public offering price for the common stock will be determined
by negotiation between us and the underwriters and managers, and may not reflect
the market price for the common stock following the offerings. Among the
principal factors considered in determining the initial public offering price
will be:
- the information set forth in this prospectus and otherwise available to
the underwriters and managers;
- market conditions for initial public offerings;
- the history of and prospects for the industry in which we are competing;
- our past and present operations;
- our past and present earnings and current financial position;
- the ability of our management;
- our prospects for future earnings;
- the present state of our development and our current financial
condition;
- the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies;
- the general condition of the securities markets at the time of these
offerings; and
- other relevant factors.
We cannot assure you that the initial public offering price will correspond
to the price at which the common stock will trade in the public market
subsequent to the offerings or that an active trading market for the common
stock will develop and continue after the offerings.
The joint global co-ordinators may engage in over-allotment, stabilizing
transactions, syndicate covering transactions and penalty bids in accordance
with Regulation M under the Securities Exchange Act of 1934, as
89
<PAGE> 94
amended. Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position. Stabilizing transactions permit bids
to purchase the underlying security so long as the stabilizing bids do not
exceed a specified maximum. Syndicate covering transactions involve purchases of
common stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the U.S.
representatives to reclaim a selling concession from a syndicate member when
common stock originally sold by such syndicate member is purchased in a
syndicate covering transaction to cover syndicate short positions. Such
stabilizing transactions, syndicate covering transactions and penalty bids may
cause the price of our common stock to be higher than it would otherwise be in
the absence of such transactions. These transactions may be effected on the NYSE
and the TSE or otherwise and, if commenced, may be discontinued at any time.
TD Bank, which currently owns 100% of our common stock, is also the parent
of and thereby an affiliate of TD Securities (USA) Inc., a member of the
National Association of Securities Dealers, Inc. (the "NASD") and an underwriter
in this offering. As a result of the foregoing, this offering is subject to the
provision of Rule 2720 of the Conduct Rules of the NASD (formerly Schedule E to
the Bylaws of the NASD). Accordingly, the underwriting terms for offering
conform with the requirements set forth in Rule 2720. In particular, the price
at which our common stock is to be distributed to the public must be at a price
no higher than that recommended by a "qualified independent underwriter" who has
also participated in the preparation of this prospectus and the registration
statement of which this prospectus is a part and who meets certain standards. In
accordance with this requirement, CSFBC will serve in such role and will
recommend the public offering price in compliance with the requirements of Rule
2720. CSFBC in its role as qualified independent underwriter, has performed the
due diligence investigations and reviewed and participated in the preparation of
this prospectus and the registration statement of which this prospectus is a
part.
The underwriters and the managers and their affiliates have provided and
will in the future continue to provide investment banking and other financial
services, including the provision of credit facilities, for us and TD Bank and
certain of our respective affiliates in the ordinary course of business for
which they have received and will receive customary compensation. TD Securities
Inc. will receive a portion of the proceeds of these offerings when we repay
certain indebtedness owed by us to TD Securities Inc. See "The Reorganization."
90
<PAGE> 95
LEGAL MATTERS
The validity of the shares of our common stock being offered by us will be
passed upon for us by Simpson Thacher & Bartlett, New York, New York, and for
the underwriters by Cravath, Swaine & Moore, New York, New York.
EXPERTS
The combined financial statements of TD Waterhouse Securities, Inc. (a
combination of certain businesses of The Toronto-Dominion Bank) as of October
31, 1998 and 1997 and for each of the three years in the period ended October
31, 1998 included in this prospectus, and the combined financial statements of
Waterhouse Securities Group (a combination of certain businesses of Waterhouse
Investor Services, Inc.) for the twelve months ended October 31, 1996 also
included in this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
Upon completion of the offerings, we will be required to file annual,
quarterly and current reports, proxy statements and other information with the
SEC. You may read and copy any documents filed by us at the SEC's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call
the SEC at 1-800-SEC-0330 for further information on the public reference room.
Our filings with the SEC are also available to the public through the SEC's
Internet site at http://www.sec.gov and through the New York Stock Exchange,
Inc., 20 Broad Street, New York, New York 10005. After the offerings, we expect
to provide annual reports to our shareholders that include financial information
reported on by our independent public accountants.
We have filed a Registration Statement on Form S-1 with the SEC. This
prospectus is a part of the Registration Statement and does not contain all of
the information in the Registration Statement. Whenever a reference is made in
this prospectus to a contract or other document of ours, please be aware that
such reference is not necessarily complete and that you should refer to the
exhibits that are a part of the Registration Statement for a copy of the
contract or other document. You may review a copy of the Registration Statement
at the SEC's public reference room in Washington, D.C. as well as through the
SEC's Internet site.
91
<PAGE> 96
TD WATERHOUSE SECURITIES, INC.
(A COMBINATION OF CERTAIN BUSINESSES OF THE TORONTO-DOMINION BANK)
INDEX TO COMBINED FINANCIAL STATEMENTS
AND SUPPLEMENTAL INFORMATION
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
Report of Independent Accountants........................... F-2
Combined Statements of Financial Condition as of October 31,
1997 and 1998, and January 31, 1999 (unaudited)........... F-3
Combined Statements of Income for the years ended October
31, 1996, 1997 and 1998, and for the three months ended
January 31, 1998 (unaudited) and 1999 (unaudited)......... F-4
Combined Statements of Changes in Equity for the years ended
October 31, 1996, 1997 and 1998, and for the three months
ended January 31, 1999 (unaudited)........................ F-5
Combined Statements of Cash Flows for the years ended
October 31, 1996, 1997 and 1998, and for the three months
ended January 31, 1998 (unaudited) and 1999 (unaudited)... F-6
Notes to the Combined Financial Statements.................. F-7
SUPPLEMENTAL INFORMATION:
Combined Statements of Income, Changes in Equity and Cash
Flows of Waterhouse Securities Group (a combination of
certain businesses of Waterhouse Investor Services, Inc.)
for the twelve month period ended October 31, 1996........ F-26
Notes to the Combined Financial Statements.................. F-29
Report of Independent Accountants........................... F-35
</TABLE>
F-1
<PAGE> 97
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholder of
TD Waterhouse Securities, Inc.
In our opinion, the accompanying combined statements of financial condition
and the related combined statements of income, of changes in equity and of cash
flows present fairly, in all material respects, the financial position of TD
Waterhouse Securities, Inc. (a combination of certain businesses of The Toronto-
Dominion Bank) at October 31, 1997 and 1998, and the results of its operations
and cash flows for each of the three years in the period ended October 31, 1998,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
New York, New York
April 29, 1999
F-2
<PAGE> 98
TD WATERHOUSE SECURITIES, INC.
(A COMBINATION OF CERTAIN BUSINESSES OF THE TORONTO-DOMINION BANK)
COMBINED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31, JANUARY 31,
1997 1998 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents............................ $ 291,511 $ 522,029 $ 484,137
Securities owned, at market value.................... 66,549 76,279 62,077
Receivable from brokers and dealers.................. 113,795 71,717 157,456
Receivable from customers............................ 1,757,019 2,556,182 3,470,265
Deposits paid for securities borrowed................ 170,837 232,685 455,618
Receivable from affiliates........................... 71,760 82,038 90,652
Deposits with clearing organizations................. 4,975 15,914 19,656
Fixed assets, net of accumulated depreciation........ 19,798 27,604 29,964
Goodwill, net of accumulated amortization............ 413,314 672,516 666,446
Other assets......................................... 37,036 41,772 46,428
---------- ---------- ----------
Total assets....................................... $2,946,594 $4,298,736 $5,482,699
========== ========== ==========
LIABILITIES AND EQUITY
LIABILITIES
Bank loans and overdrafts............................ $ 18,575 $ 31,183 $ 58,450
Deposits received for securities loaned.............. 916,700 1,033,964 2,048,999
Securities sold, not yet purchased................... 7,095 4,987 5,199
Payable to brokers and dealers....................... 94,371 152,865 207,986
Payable to customers................................. 1,190,480 1,947,430 1,903,272
Payable to affiliates................................ 5,672 36,181 50,287
Accrued compensation, taxes payable and other
liabilities........................................ 94,182 96,991 172,858
---------- ---------- ----------
Total liabilities.................................. 2,327,075 3,303,601 4,447,051
---------- ---------- ----------
Commitments and contingent liabilities (Notes 6, 8
and 12)
EQUITY
Equity............................................... 620,643 997,240 1,035,463
Accumulated other comprehensive income............... (1,124) (2,105) 185
---------- ---------- ----------
Total equity....................................... 619,519 995,135 1,035,648
---------- ---------- ----------
Total liabilities and equity....................... $2,946,594 $4,298,736 $5,482,699
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-3
<PAGE> 99
TD WATERHOUSE SECURITIES, INC.
(A COMBINATION OF CERTAIN BUSINESSES OF THE TORONTO-DOMINION BANK)
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
FOR THE YEAR ENDED OCTOBER 31, JANUARY 31,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Commissions and fees................... $104,688 $313,572 $409,432 $ 83,871 $152,044
Mutual fund and related revenue........ 8,288 35,762 59,022 10,583 20,783
Net interest revenue................... 31,826 68,874 117,733 23,768 34,004
Other.................................. 22,607 28,424 28,274 6,277 8,204
-------- -------- -------- -------- --------
Total revenues....................... 167,409 446,632 614,461 124,499 215,035
-------- -------- -------- -------- --------
EXPENSES
Employee compensation and benefits..... 40,432 138,261 183,377 40,181 59,859
Execution and clearing costs........... 21,954 63,316 95,523 19,259 34,679
Occupancy and equipment................ 14,306 43,485 56,596 12,403 17,754
Advertising and marketing.............. 5,118 18,511 33,184 7,695 11,569
Communications......................... 9,983 22,981 30,809 6,639 10,717
Amortization of goodwill............... 1,633 21,630 33,000 7,678 9,279
Professional fees...................... 5,388 14,871 15,350 3,118 4,082
Other.................................. 14,420 44,956 63,144 11,804 28,999
-------- -------- -------- -------- --------
Total expenses....................... 113,234 368,011 510,983 108,777 176,938
-------- -------- -------- -------- --------
Income before income taxes............. 54,175 78,621 103,478 15,722 38,097
Income tax provision................... 24,556 42,416 54,765 9,222 18,031
-------- -------- -------- -------- --------
NET INCOME........................... $ 29,619 $ 36,205 $ 48,713 $ 6,500 $ 20,066
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-4
<PAGE> 100
TD WATERHOUSE SECURITIES, INC.
(A COMBINATION OF CERTAIN BUSINESSES OF THE TORONTO-DOMINION BANK)
COMBINED STATEMENTS OF CHANGES IN EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMPREHENSIVE
EQUITY INCOME
---------- -------------
<S> <C> <C>
Balance at October 31, 1995................................. $ 51,836
Net income................................................ 29,619 $ 29,619
Dividend to Parent........................................ (4,833) --
Capital contributions..................................... 389,760 --
Cumulative foreign currency translation adjustment, net of
tax.................................................... 1,029 1,029
----------
Balance at October 31, 1996................................. 467,411
----------
Total comprehensive income as of October 31, 1996........... 30,648
==========
Net income................................................ 36,205 36,205
Capital contributions..................................... 117,027 --
Cumulative foreign currency translation adjustment, net of
tax.................................................... (1,124) (1,124)
----------
Balance at October 31, 1997................................. 619,519
----------
Total comprehensive income as of October 31, 1997........... 35,081
==========
Net income................................................ 48,713 48,713
Capital contributions..................................... 329,008 --
Cumulative foreign currency translation adjustment, net of
tax.................................................... (2,105) (2,105)
----------
Balance at October 31, 1998................................. 995,135
----------
Total comprehensive income as of October 31, 1998........... 46,608
==========
Net income (unaudited).................................... 20,066 20,066
Capital contributions (unaudited)......................... 20,262 --
Cumulative foreign currency translation adjustment, net of
tax (unaudited)........................................ 185 185
----------
Balance at January 31, 1999 (unaudited)..................... $1,035,648
========== ----------
Total comprehensive income as of January 31, 1999
(unaudited)............................................... $ 20,251
==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-5
<PAGE> 101
TD WATERHOUSE SECURITIES, INC.
(A COMBINATION OF CERTAIN BUSINESSES OF THE TORONTO-DOMINION BANK)
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
FOR THE YEAR ENDED OCTOBER 31, JANUARY 31,
---------------------------------- ----------------------
1996 1997 1998 1998 1999
-------- ----------- --------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................. $ 29,619 $ 36,205 $ 48,713 6,500 $ 20,066
Depreciation and amortization.......... 1,633 28,649 42,855 9,887 12,273
(Increases) decreases in operating
assets
Securities owned..................... (35,310) (4,327) (9,730) 5,851 14,202
Receivable from brokers and
dealers........................... (32,157) (52,625) 42,078 9,691 (85,739)
Receivable from customers............ (88,578) (1,329,202) (799,163) (551,370) (914,083)
Deposits paid for securities
borrowed.......................... 56,798 (48,937) (61,848) (512,502) (222,933)
Receivable from affiliates........... 7,557 (71,760) (10,278) (2,308) (8,614)
Deposits with clearing
organizations..................... -- (4,975) (10,939) (3,588) (3,742)
Other assets......................... (728) (27,799) (4,736) (4,255) (4,656)
Increases (decreases) in operating
liabilities
Bank loans and overdrafts............ -- 18,575 12,608 (16,023) 27,267
Deposits received for securities
loaned............................ 67,812 776,249 117,264 584,658 1,015,035
Securities sold, not yet purchased... (15,958) 7,095 (2,108) (2,450) 212
Payable to brokers and dealers....... 75,750 1,220 58,494 76,178 55,121
Payable to customers................. 123,269 570,824 756,950 418,361 (44,158)
Payable to affiliates................ -- 5,672 8,371 326 15,063
Accrued compensation, taxes payable
and other liabilities............. 16,206 36,171 2,809 (32,659) 75,867
-------- ----------- --------- --------- ----------
Cash (used in)/provided by
operating activities............ 205,913 (58,965) 191,340 (13,703) (48,819)
-------- ----------- --------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture, equipment and
leasehold improvements, net.......... -- (26,817) (17,661) (4,820) (5,354)
Acquisitions of businesses, net of
assets acquired and liabilities
assumed.............................. (393,085) (16,726) (292,202) (171,700) (3,209)
-------- ----------- --------- --------- ----------
Cash used in investing
activities...................... (393,085) (43,543) (309,863) (176,520) (8,563)
-------- ----------- --------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Subordinated debt with affiliate....... -- -- 22,138 (894) (957)
Dividend to Parent..................... (4,833) -- -- -- --
Capital contribution from Parent....... 389,760 117,027 329,008 218,731 20,262
-------- ----------- --------- --------- ----------
Cash provided by financing
activities...................... 384,927 117,027 351,146 217,837 19,305
-------- ----------- --------- --------- ----------
Effect of exchange rate differences in
cash and cash equivalents............ 1,029 (1,124) (2,105) (215) 185
(Decrease)/increase in cash and cash
equivalents.......................... 198,784 13,395 230,518 27,399 (37,892)
Cash and cash equivalents, beginning of
period............................... 79,332 278,116 291,511 291,511 522,029
-------- ----------- --------- --------- ----------
Cash and cash equivalents, end of
period............................... $278,116 $ 291,511 $ 522,029 $ 318,910 $ 484,137
======== =========== ========= ========= ==========
Supplemental disclosures of cash flow
information
Cash paid for interest............... $ 24,492 $ 36,854 $ 107,197 $ 21,248 $ 28,399
-------- ----------- --------- --------- ----------
Cash paid for income taxes........... $ 28,613 $ 38,615 $ 55,677 $ 12,403 $ 7,132
-------- ----------- --------- --------- ----------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-6
<PAGE> 102
TD WATERHOUSE SECURITIES, INC.
(A COMBINATION OF CERTAIN BUSINESSES OF THE TORONTO-DOMINION BANK)
NOTES TO COMBINED FINANCIAL STATEMENTS
(INFORMATION AT JANUARY 31, 1999 AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS)
1. ORGANIZATION AND DESCRIPTION OF THE BUSINESS
On March 31, 1999, the Board of Directors of The Toronto-Dominion Bank ("TD
Bank") approved the initial public offering of TD Bank's global discount
brokerage business, which consists of the following subsidiaries and divisions
of subsidiaries under TD Bank's control:
Waterhouse Securities Group ("Waterhouse")
- Waterhouse Securities, Inc. ("WSI"), a U.S. registered broker-dealer
which provides discount brokerage services to retail customers in the
U.S.
- National Investor Services, Corp. ("NISC"), a U.S. registered
broker-dealer which provides execution and clearance services for
affiliates, including WSI, and third-party broker-dealers.
- Waterhouse Asset Management, Inc. ("WAM"), a U.S. registered investment
advisor which provides investment advice to a series of affiliated
mutual funds.
- Waterhouse, Nicoll & Associates, Inc. ("WNA"), a U.S. based advertising
firm which places advertising for affiliates.
Green Line Group ("Green Line")
- Green Line Investor Services (Canada) -- ("GLIS-Canada"), a division of
TD Securities Inc. which provides discount brokerage services to retail
clients in Canada and the U.S.
- TD Securities Services ("TDSS"), a division of TD Bank which provides
execution and clearance services to GLIS-Canada, TD Securities Inc., TD
Bank and third party broker-dealers.
- Green Line Investor Services (Europe) Limited ("GLIS-UK"), a registered
broker-dealer which provides discount brokerage services to customers in
the United Kingdom.
- Green Line Investor Services (Hong Kong) Inc. ("GLIS-HK"), a registered
broker-dealer which provides discount brokerage services to customers
located in Asia.
- Green Line Investor Services Limited ("GLIS-Australia"), a registered
broker-dealer which provides discount brokerage services to customers
located in Australia.
As more fully discussed in Note 17, through a series of transactions, TD
Bank will reorganize the aforementioned entities and businesses under the
ownership of its indirect wholly owned subsidiary TD Waterhouse Securities, Inc.
(the "Company") a Delaware corporation, which, immediately after such
reorganization, will commence with an initial public offering of its common
stock. Hereafter, references to the "Company" will refer to TD Waterhouse
Securities, Inc. and the entities and businesses comprising TD Bank's global
discount business on a combined basis.
The Company is one of the largest discount brokers in the world and
provides securities and mutual fund investment services to retail customers
located in the United States, Canada, Australia, the United Kingdom and Hong
Kong. The Company also provides clearing and execution services for other
broker-dealers in the United States and Canada and through WAM, acts as
investment advisor to a series of proprietary mutual funds.
F-7
<PAGE> 103
TD WATERHOUSE SECURITIES, INC.
(A COMBINATION OF CERTAIN BUSINESSES OF THE TORONTO-DOMINION BANK)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT JANUARY 31, 1999 AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements include the accounts of the Company
and the entities and divisions comprising TD Bank's global discount brokerage
business, described in Note 1, on a combined basis for all periods during which
they were under TD Bank's control (Note 3). All significant transactions and
balances between and among the combined entities and divisions have been
eliminated in the combination. The accompanying financial statements of the
Company for the year ended October 31, 1996 include only the results of
operations and cash flows of Green Line. The separate financial statements of
Waterhouse, which was acquired effective October 31, 1996, have been included as
supplemental information.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
COMMISSIONS AND FEES
Customers' securities transactions are recorded on a settlement date basis
with commission revenue and related expenses recorded on a trade date basis.
Fees consist primarily of payments from market makers and exchanges for
directing order executions, and clearing fees.
MUTUAL FUND AND RELATED REVENUE
Mutual fund and related revenue consists of fees earned for providing
investment advisory services to a series of related mutual funds, and trailer
fees for services provided to third party mutual funds, affiliated mutual funds
and an affiliated bank. Such revenue is recorded when earned.
NET INTEREST REVENUE
The Company reports interest revenue, which primarily arises from margin
loans to customers, net of the related financing cost (interest expense). For
the years ended October 31, 1996, 1997 and 1998 and for the three months ended
January 31, 1998 (unaudited) and 1999 (unaudited), interest expense was $40,921,
$39,422, $110,175, $22,006 (unaudited) and $31,393 (unaudited), respectively.
ADVERTISING AND MARKETING
Advertising and marketing costs are expensed as incurred.
DEPRECIATION AND AMORTIZATION OF FIXED ASSETS
Depreciation of capitalized furniture and equipment is provided on a
straight-line basis using estimated useful lives of three to five years.
Leasehold improvements are amortized on a straight-line basis over the lesser of
the lease term or the estimated useful life. Fixed assets are stated at cost net
of accumulated depreciation and amortization of $10,332, $14,156 and $16,390
(unaudited) at October 31, 1997 and 1998 and
F-8
<PAGE> 104
TD WATERHOUSE SECURITIES, INC.
(A COMBINATION OF CERTAIN BUSINESSES OF THE TORONTO-DOMINION BANK)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT JANUARY 31, 1999 AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS)
January 31, 1999 (unaudited), respectively. Depreciation and amortization
expense is included in occupancy and equipment expense in the combined
statements of income. The Company recorded depreciation and amortization of
$ $7,019, $9,855, $2,209 (unaudited), and $2,994 (unaudited) for the
years ended October 31, 1997 and 1998 and the three months ended January 31,
1998 (unaudited) and 1999 (unaudited), respectively.
GLIS-Canada is charged rental expense for its use of equipment and other
fixed assets, which are owned by TD Bank. (See also Note 14.) The rental expense
approximates the depreciation on such equipment. The Company was charged $7,627,
$10,098, $8,775, $2,288 (unaudited), and $2,301 (unaudited) for the years ended
October 31, 1996, 1997 and 1998 and the three months ended January 31, 1998
(unaudited) and 1999 (unaudited) respectively, which has been included in
occupancy and equipment expense in the combined statements of income.
ACQUISITIONS AND GOODWILL
All business combinations have been accounted for under the purchase method
and accordingly, the excess of the purchase price over the fair value of the net
assets acquired has been recorded as goodwill on the combined statements of
financial condition. Pursuant to the purchase method, the results of operations,
changes in equity and cash flows of acquired companies and businesses are
included in combined operations only for those periods following the date of
their acquisition. (Note 3)
Goodwill arising from acquisitions of businesses is amortized on a
straight-line basis over a period of no more than twenty years. Goodwill is
stated at cost, net of accumulated amortization of $27,072, $57,341 and $66,208
(unaudited) at October 31, 1997 and 1998 and January 31, 1999 (unaudited),
respectively.
INCOME TAXES
The Company's U.S. operations are included in the consolidated federal
income tax returns filed by an affiliate in the U.S. and the Company's Canadian
operations are included in the federal income tax return filed by TD Bank or TD
Securities Inc. in Canada. The Company files separate income tax returns in
other countries. The Company determines its provision for federal income taxes
as if it were to file separate income tax returns. In the U.S., the Company also
files combined state and local income tax returns with an affiliate. In Canada,
the Canadian operations are also included in the provincial tax returns filed by
TD Bank or TD Securities Inc.
The Company records deferred tax assets and liabilities for the difference
between the tax basis of assets and liabilities and the amounts recorded for
financial reporting purposes, using current tax rates. Deferred tax expenses and
benefits are recognized in the combined statements of income for changes in
deferred tax assets and liabilities.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers all highly
liquid investments with original maturities of three months or less (except for
amounts designated as securities owned) to be cash equivalents.
F-9
<PAGE> 105
TD WATERHOUSE SECURITIES, INC.
(A COMBINATION OF CERTAIN BUSINESSES OF THE TORONTO-DOMINION BANK)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT JANUARY 31, 1999 AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS)
SECURITIES OWNED
Securities owned and securities sold, not yet purchased are recorded on a
trade date basis and primarily represent U.S. and Canadian government
securities, other debt instruments, equity securities and mutual fund positions
and are carried at fair value with unrealized gains and losses reported in
income.
FINANCING TRANSACTIONS
Deposits paid for securities borrowed and deposits received for securities
loaned are recorded at the amount of cash collateral advanced or received.
Deposits paid for securities borrowed transactions require the Company to
deposit cash with the lender. With respect to deposits received for securities
loaned, the Company receives collateral in the form of cash in an amount
generally in excess of the market value of the securities loaned. The Company
monitors the market value of the securities borrowed and loaned on a daily
basis, with additional collateral obtained or refunded, as necessary.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign entities and divisions are translated
based on the end of period exchange rates from local currency to U.S. dollars.
Results of operations are translated at the average exchange rates in effect
during the period. The resulting gains or losses are reported as a component of
equity on the combined statements of financial condition.
SEGMENT INFORMATION
Statement of Financial Accounting Standards ("SFAS") No. 131 Disclosures
about Segments of an Enterprise and Related Information, establishes standards
for reporting information about operating and geographic segments of the
Company's business. Currently, the nature and extent of the Company's operations
are such that it operates in only one reportable segment as a provider of
discount brokerage services. Information regarding the Company's geographic
segments is set forth in Note 15.
UNAUDITED INTERIM FINANCIAL INFORMATION
The combined financial information at January 31, 1999 and for the three
months ended January 31, 1998 and 1999 is unaudited. In the opinion of
management, such information contains all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation of the results of such
periods.
3. ACQUISITIONS
The Company has been active in acquiring discount brokerage businesses. A
description of the Company's more significant acquisitions, including the date
acquired, purchase price (including acquisition costs) and goodwill recognized,
is as follows:
Marathon Brokerage, a division of First Marathon Securities Limited, a
Canadian discount brokerage firm, was acquired in October 1993 for $46 million
and its operations were merged into GLIS-Canada. The $42 million excess of the
purchase price over the fair value of the net assets acquired was recorded as
goodwill.
Waterhouse Investor Services, Inc. ("WISI"), a U.S. bank holding company
and nationwide discount brokerage firm, was acquired by TD Bank in October 1996
for cash and TD Bank common stock. For purposes of preparing the combined
financial statements of the Company, the discount brokerage business of WISI,
F-10
<PAGE> 106
TD WATERHOUSE SECURITIES, INC.
(A COMBINATION OF CERTAIN BUSINESSES OF THE TORONTO-DOMINION BANK)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT JANUARY 31, 1999 AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS)
which included WSI, NISC, WAM and WNA, was assumed to be contributed by TD Bank
to the Company as of the close of business on October 31, 1996. The $390 million
excess of the purchase price assigned to the discount brokerage business of $525
million, over the fair value of the net assets acquired from WISI and
contributed to the Company was recorded by the Company as goodwill. The combined
financial statements of WISI's discount brokerage business for the twelve-months
ended October 31, 1996 have been included as supplemental information.
Kennedy Cabot & Co. ("KCC"), a discount brokerage firm located in Beverly
Hills, California was acquired in November 1997 for approximately $163 million
and its operations were merged into WSI. The acquisition was funded by capital
contributions from TD Bank and goodwill of $159 million was recorded.
Pont Securities and Rivkin, Croll, Smith, Australian based discount
brokerage firms, were acquired during fiscal year 1997 and 1998, respectively,
for an aggregate price of $42 million and their operations were reorganized to
create GLIS-Australia. The $40 million excess of the purchase price over the
fair value of the net assets acquired was recorded as goodwill.
Jack White & Co., a discount brokerage firm, based in San Diego, California
was acquired in May 1998 for $106 million and its operations were merged into
WSI. The acquisitions were funded by capital contributions from TD Bank and the
$102 million excess of the purchase price over the fair value of the net assets
acquired was recorded as goodwill.
Gall & Eke, a UK based discount brokerage firm, was acquired in September
1998 for $13 million and merged with GLIS-UK. The $12 million excess of the
purchase price over the fair value of the net assets acquired was recorded as
goodwill.
4. RECEIVABLE FROM AND PAYABLE TO BROKERS AND DEALERS
Receivables from and payables to brokers and dealers are comprised of the
following:
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31, JANUARY 31,
1997 1998 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Receivable
Securities failed to deliver......................... $ 93,004 $ 40,743 $122,467
Clearing and other fees.............................. 11,815 14,463 28,060
Other................................................ 8,976 16,511 6,929
-------- -------- --------
$113,795 $ 71,717 $157,456
======== ======== ========
Payable
Securities failed to receive $ 93,119 $126,060 $189,394
Other 1,252 26,805 18,592
-------- -------- --------
$ 94,371 $152,865 $207,986
======== ======== ========
</TABLE>
5. RECEIVABLE FROM AND PAYABLE TO CUSTOMERS
Receivables from customers are generally collateralized by marketable
securities. Receivables from customers are reported net of unsecured or
partially secured amounts over 30 days as an allowance for
F-11
<PAGE> 107
TD WATERHOUSE SECURITIES, INC.
(A COMBINATION OF CERTAIN BUSINESSES OF THE TORONTO-DOMINION BANK)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT JANUARY 31, 1999 AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS)
doubtful accounts of $2,655, $5,148, and $7,396 (unaudited) as of October 31,
1997 and 1998, and January 31, 1999 (unaudited), respectively.
Payables to customers primarily represent free credit balances in
customers' accounts. The Company pays customers interest on certain free credit
balances at a rate based on prevailing short-term money market rates. Interest
expense for the years ended October 31, 1996, 1997 and 1998 and for the three
months ended January 31, 1998 (unaudited) and 1999 (unaudited) was $25,196,
$17,898, $58,226, $11,304 (unaudited) and $16,882 (unaudited).
6. FINANCING ACTIVITIES
Bank loans and overdrafts primarily represent short-term borrowings in the
U.S. which bear interest at rates based primarily on the Federal funds rate. The
loans are generally collateralized by customers' margin securities valued at
approximately $99,258, $115,448, and $170,356 (unaudited) as of October 31, 1997
and 1998, and January 31, 1999 (unaudited), respectively. The following is a
summary of comparative bank loan data:
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31, JANUARY 31,
1997 1998 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Average amount outstanding during the period........... $ 17,843 $ 24,068 $ 35,016
Maximum amount outstanding during the period........... 79,400 230,900 130,300
Weighted average interest rate at period-end........... 6.04% 5.85% 5.17%
Weighted average interest rate during the period....... 5.83% 5.88% 5.15%
</TABLE>
Waterhouse maintains available bank credit lines totaling $255,000,
$255,000, and $405,000 (unaudited) at October 31, 1997 and 1998 and January 31,
1999 (unaudited), respectively. Included within the January 31, 1999 (unaudited)
balance is a bank credit line of $150,000 with TD Bank. All the lines require
collateralization and bear interest at a rate based on the Federal funds rate.
At October 31, 1997 and 1998 and January 31, 1999 (unaudited) Waterhouse had
drawn down $16,900, $400 and $46,700 (unaudited), respectively, on these credit
lines. GLIS-Canada has received unsecured letter of credit agreements with TD
Bank on behalf of two clearing organizations totalling $36,955, $47,369, and
$96,327 (unaudited) at October 31, 1997, 1998 and January 31, 1999 (unaudited),
respectively. GLIS-Canada pays an annual fee of 25 basis points on the notional
value of the letters of credit which amounted to $130, $191, $244, $62
(unaudited), and $45 (unaudited) for the years ended October 31, 1996, 1997 and
1998, and the three months ended January 31, 1998 (unaudited) and 1999
(unaudited), respectively. There were no borrowings outstanding under these
lines at October 31, 1997, 1998 and January 31, 1999 (unaudited).
Deposits received for securities loaned primarily represent short term
collateralized financing transactions which bear interest based on prevailing
market rates (rate of 5.28%, 5.02%, and 4.38% (unaudited) at October 31, 1997
and 1998, and January 31, 1999 (unaudited), respectively. In addition, Green
Line acts as an intermediary between lender and borrowers of securities and
earns a net interest spread on stock loan and stock borrow transactions.
F-12
<PAGE> 108
TD WATERHOUSE SECURITIES, INC.
(A COMBINATION OF CERTAIN BUSINESSES OF THE TORONTO-DOMINION BANK)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT JANUARY 31, 1999 AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS)
7. STOCK OPTIONS
Certain employees of the Company participate in TD Bank's stock option
plan. Under TD Bank's stock option plan, options on TD Bank common shares are
issued to certain employees of the Company for terms of 10 years, vesting over a
four-year period and exercisable at the market price of the shares on the date
the options were issued. During 1997, the plan was modified to allow employees
to elect to receive cash for the options equal to their intrinsic value, being
the difference between the option exercise price and the current market value of
the shares. Pursuant to SFAS No. 123, Accounting for Stock-Based Compensation,
the Company records compensation expense based on the annual change in the
intrinsic value of the stock options. The Company recorded compensation expense
(income) in the amount of, $5,478, $(117), $(14) (unaudited) and $2,480
(unaudited) for the years ended October 31, 1997, 1998 and the three month
periods ended January 31, 1998 (unaudited) and 1999 (unaudited), respectively,
for employee stock options. No compensation expense was recognized for fiscal
years prior to 1997. Outstanding options have exercise prices ranging from
$12.01 to $41.58. Their weighted average remaining contractual life is 7.9
years, and they expire on dates ranging from April 2000 to December 2008.
A summary of the Company's portion of stock option activity and related
information of TD Bank is as follows:
<TABLE>
<CAPTION>
WEIGHTED
WEIGHTED WEIGHTED WEIGHTED AVERAGE
OCTOBER AVERAGE OCTOBER AVERAGE OCTOBER AVERAGE JANUARY EXERCISE
31, EXERCISE 31, EXERCISE 31, EXERCISE 31, 1998 PRICE
1996 PRICE 1997 PRICE 1998 PRICE (UNAUDITED) (UNAUDITED)
------- -------- ------- -------- ------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Number outstanding, beginning
of period.................... 208,282 $13.84 291,056 $15.14 410,896 $17.59 410,896 $17.59
Granted....................... 100,400 17.33 194,300 25.33 250,900 41.58 -- --
Exercised..................... (14,875) 13.54 (69,475) 13.63 (48,650) 14.47 -- --
Forfeited..................... (2,751) 15.27 (4,985) 18.07 (1,049) 20.03 (353) 36.63
------- ------ ------- ------ ------- ------ ------- ------
Number outstanding, end of
period....................... 291,056 $15.14 410,896 $17.59 612,097 $21.47 410,543 $26.35
------- ------ ------- ------ ------- ------ ------- ------
Exercisable, end of period.... 89,848 $13.92 178,402 $14.40 227,617 $15.09 201,271 $13.55
<CAPTION>
WEIGHTED
AVERAGE
JANUARY EXERCISE
31, 1999 PRICE
(UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
Number outstanding, beginning
of period.................... 612,097 $21.47
Granted....................... 336,700 33.33
Exercised..................... (4,650) 35.69
Forfeited..................... (560) 35.69
------- ------
Number outstanding, end of
period....................... 943,587 $33.45
------- ------
Exercisable, end of period.... 222,361 $14.75
</TABLE>
F-13
<PAGE> 109
TD WATERHOUSE SECURITIES, INC.
(A COMBINATION OF CERTAIN BUSINESSES OF THE TORONTO-DOMINION BANK)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT JANUARY 31, 1999 AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS)
8. COMMITMENTS AND CONTINGENT LIABILITIES
The Company leases office space and equipment under noncancellable
operating leases with third parties and affiliates (Note 14) extending for
periods in excess of one year. Future minimum rental commitments under such
leases as of October 31, 1998 and January 31, 1999 are as follows:
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
1998 1999
----------- -----------
(UNAUDITED)
<S> <C> <C>
Year ending October 31, 1999................................ $ 20,486 $ 15,331
Year ending October 31, 2000................................ 19,134 19,134
Year ending October 31, 2001................................ 13,718 13,718
Year ending October 31, 2002................................ 11,281 11,281
Year ending October 31, 2003................................ 7,496 7,496
Thereafter.................................................. 13,929 13,929
----------- -----------
$ 86,044 $ 80,889
=========== ===========
</TABLE>
Rental expense amounted to approximately, $11,181, $15,081 and $21,428 for
the years ended October 31, 1996, 1997 and 1998, and $4,609 (unaudited) and
$6,545 (unaudited) for the three months ended January 31, 1998 (unaudited) and
1999 (unaudited), respectively.
Securities sold, not yet purchased represent obligations of the Company to
purchase securities at a future date. The Company may incur a loss if the market
value of the securities subsequently increases.
The Company and several other discount brokers providing on line trading
services have received a letter from the New York State Office of the Attorney
General dated February 2, 1999 requesting that WSI provide certain documents and
make certain employees available to discuss complaints that the Attorney
General's office has received regarding system outages or failures of online
brokerage services. The Company has met with representatives of the Attorney
General's office, has provided certain information to them and is continuing to
produce information as requested. In addition, the Company also understands that
the Securities and Exchange Commission ("SEC") and other federal and state
regulatory authorities are conducting inquiries into or reviewing similar
matters.
The Company recently received correspondence from the SEC's Office of
Compliance, Inspections and Examinations, which conducts examinations of
registered broker-dealers, requesting information with respect to our execution
policies and practices regarding the handling of customer orders. The Company
understands that other discount brokerage firms have received similar
correspondence from the SEC. The Company has provided and will continue to
provide information and documentation to the SEC regarding the policies and
practices in this area. In response to concerns raised by the SEC staff
regarding the practices followed by a number of brokerage firms, including the
Company, to obtain best execution of trades for customers, the Company has
engaged in an ongoing review of the Company's practices and policies in the area
in order to assure that it is in compliance with applicable rules.
Communications between the Company and the SEC staff on this subject are
ongoing.
In the normal course of conducting its securities business, the Company has
been named as a defendant in certain lawsuits, claims and legal actions. In the
opinion of management, after consultation with outside
F-14
<PAGE> 110
TD WATERHOUSE SECURITIES, INC.
(A COMBINATION OF CERTAIN BUSINESSES OF THE TORONTO-DOMINION BANK)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT JANUARY 31, 1999 AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS)
legal counsel, the ultimate outcome of pending litigation matters and the
inquiries described above will not have a material adverse effect on the
financial condition or results of operations of the Company.
9. NET CAPITAL REQUIREMENTS
As registered broker-dealers and members of the New York Stock Exchange,
WSI and NISC are subject to the SEC's Uniform Net Capital Rule (the "Rule")
which requires the maintenance of minimum net capital. At October 31, 1997 and
1998, and January 31, 1999 (unaudited), WSI and NISC were both in compliance
with their respective capital requirements and had net capital of $7,455,
$15,339 and $12,252 (unaudited), and $84,792, $160,314 and $196,005 (unaudited),
respectively, which was $6,352, $13,299 and $9,285 (unaudited), and $61,086,
$118,269 and $139,598 (unaudited), respectively, in excess of their required net
capital.
Subsequent to the reorganization described in Note 17, GLIS-Canada will be
a member of the Investment Dealers Association of Canada ("IDA"), and will be
required to meet the risk adjusted capital rules which require the maintenance
of minimum risk adjusted capital of Cdn. $250 (US$165 at January 31, 1999).
Previously, as a division of TD Securities Inc., GLIS-Canada was not subject to
the IDA risk adjusted capital rules and therefore did not maintain stand alone
minimum risk adjusted capital.
GLIS-UK, GLIS-Australia and GLIS-Hong Kong were all subject to
broker-dealer capital requirements in their respective countries and as of
October 31, 1997 and 1998 and January 31, 1999 (unaudited) were in compliance
with such requirements, as and when applicable.
10. EMPLOYEE BENEFIT PLANS
Substantially all of the Company's full-time U.S. employees are eligible to
participate in the defined contribution profit sharing and 401(K) plans
sponsored by an affiliate. The Company makes discretionary contributions to the
profit sharing plan and makes mandatory matching contributions to the 401(K)
plan based on a percentage of each employee's contribution up to 6% per pay
period of the employee's compensation. The total expense recognized by the
Company for contributions to the U.S. profit sharing and 401(K) plans for the
years ended October 31, 1997 and 1998 and for the three months ended January 31,
1998 (unaudited) and 1999 (unaudited) were $5,035, $6,400, $1,569 (unaudited)
and $2,121 (unaudited), respectively. There were no contributions made to the
plans in 1996.
Substantially all of the Company's Canadian employees are eligible to
participate in TD Bank's pension plan. In TD Bank's pension plan, membership is
voluntary and funding is provided by contributions from TD Bank and members of
the plan. Each year, actuarial valuations are made of the pension plans
maintained by TD Bank to determine the present value of the accrued pension
benefits. Pension plan assets are valued at market values. Pension costs are
determined based upon separate accrued valuations using the projected benefit
method pro-rated on service and TD Bank management's estimates rather than on
valuations for funding purposes. There is no separate actuarial valuation for
the Company but the Company is charged its portion of pension expense from TD
Bank. Pension expense (income) includes the cost of pension benefits for the
current year's service, interest expense on pension liabilities, income on plan
assets and the amortization of pension adjustments on a straight-line basis over
the expected average remaining service life of TD Bank's employee group. The
Company's pro-rata share of TD Bank's pension cost (income) was ($60), ($341),
($182), and ($49) (unaudited) for the year ended October 31, 1996, 1997, 1998
and the three months ended
F-15
<PAGE> 111
TD WATERHOUSE SECURITIES, INC.
(A COMBINATION OF CERTAIN BUSINESSES OF THE TORONTO-DOMINION BANK)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT JANUARY 31, 1999 AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS)
January 31, 1998 (unaudited) and $312 (unaudited) for the three months ended
January 31, 1999 (unaudited).
TD Bank also provides the Company's Canadian employees with certain health
care and life insurance benefits for its employees upon retirement. Eligible
employees are those who retire from TD Bank and the Company at normal retirement
age.
11. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED OCTOBER 31, JANUARY 31,
----------------------------- -------------------
1996 1997 1998 1998 1999
------- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal............................... $ -- $12,099 $27,392 $ (178) $ 9,480
State................................. -- 2,074 4,696 (31) 1,625
Foreign............................... 24,230 20,544 21,180 3,458 5,166
------- ------- ------- ------ -------
Total Current......................... 24,230 34,717 53,268 3,249 16,271
======= ======= ======= ====== =======
Deferred:
Federal............................... -- 6,363 1,149 4,920 1,306
State................................. -- 1,091 197 843 224
Foreign............................... 326 245 151 210 230
------- ------- ------- ------ -------
Total Deferred........................ 326 7,699 1,497 5,973 1,760
Total Income Tax Expense................ $24,556 $42,416 $54,765 $9,222 $18,031
======= ======= ======= ====== =======
</TABLE>
The temporary differences which have created deferred tax assets and
liabilities, included in other assets on the combined statements of financial
condition, are detailed below:
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31,
-------------------- -----------
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Depreciation and amortization.......................... $ 1,206 $ 645 $ 693
Accruals and allowances................................ 1,893 2,269 2,474
Net operating loss carryforwards....................... -- -- --
-------- -------- --------
Total deferred tax assets.............................. 3,099 2,914 3,167
-------- -------- --------
Deferred tax liabilities:
Goodwill............................................... -- (1,312) (1,771)
-------- -------- --------
Total deferred tax liabilities......................... -- (1,312) (1,771)
-------- -------- --------
Net deferred tax asset................................... $ 3,099 $ 1,602 $ 1,396
======== ======== ========
</TABLE>
F-16
<PAGE> 112
TD WATERHOUSE SECURITIES, INC.
(A COMBINATION OF CERTAIN BUSINESSES OF THE TORONTO-DOMINION BANK)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT JANUARY 31, 1999 AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS)
The Company determined that no valuation allowance against deferred tax
assets at October 31, 1997 and 1998, and January 31, 1999 (unaudited) was
necessary.
The following is a reconciliation of the provision for income taxes and the
amount computed by applying the U.S. Federal statutory rate to income before
income taxes.
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
FOR THE YEAR ENDED OCTOBER 31, JANUARY 31,
-------------------------------- --------------
1996 1997 1998 1998 1999
-------- -------- -------- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
U.S. Federal statutory income tax rate......... 35.0% 35.0% 35.0% 35.0% 35.0%
State and local income taxes, net of
Federal income tax benefit................... -- 3.5 4.8 7.0 5.6
Foreign Provincial income taxes................ 10.0 6.7 6.7 5.8 2.5
Amortization of goodwill....................... 0.3 8.7 6.4 10.9 4.3
----- ----- ----- ----- -----
45.3% 53.9% 52.9% 58.7% 47.4%
===== ===== ===== ===== =====
</TABLE>
12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATION OF
CREDIT RISK
In the normal course of business, the Company is exposed to
off-balance-sheet risk. The Company executes, as agent, securities transactions
on behalf of its customers. If either the customer or a counterparty fails to
perform, the Company may be required to discharge the obligations of the
nonperforming party. In such circumstances, the Company may sustain a loss if
the market value of the security is different from the contract value of the
transaction.
In the normal course of business, the Company may deliver securities as
collateral in support of various secured financing sources such as bank loans
and deposits received for securities loaned. Additionally, the Company delivers
customer securities as collateral to satisfy margin deposits of various clearing
organizations. In the event the counterparty is unable to meet its contracted
obligation to return customer securities delivered as collateral, the Company
may be obligated to purchase the securities in order to return them to the
owner. In such circumstances, the Company may incur a loss up to the amount by
which the market value of the securities exceeds the value of the loan or other
collateral received or in the possession or control of the Company.
For transactions in which the Company extends credit to customers, the
Company seeks to control the risks associated with these activities by requiring
customers to maintain margin collateral in compliance with various regulatory
and internal guidelines. The Company monitors required margin levels daily and,
pursuant to such guidelines, requests customers to deposit additional collateral
or reduce securities positions, when necessary.
The Company has a global retail customer base. The Company conducts
business with brokers and dealers, clearing organizations and depositories that
are primarily located in the U.S., Canada, Australia, U.K. and Hong Kong. The
majority of the Company's transactions and, consequently, the concentration of
its credit exposures are with customers, broker-dealers and other financial
institutions in the United States and Canada. These result in credit exposure in
the event that the counterparty fails to fulfill its contractual obligations.
The Company's exposure to credit risk can be directly impacted by volatile
securities markets which may impair
F-17
<PAGE> 113
TD WATERHOUSE SECURITIES, INC.
(A COMBINATION OF CERTAIN BUSINESSES OF THE TORONTO-DOMINION BANK)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT JANUARY 31, 1999 AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS)
the ability of counterparties to satisfy their contractual obligations. The
Company seeks to control its credit risk through a variety of reporting and
control procedures, including establishing credit limits based upon a review of
the counterparties' financial condition and credit ratings. The Company monitors
collateral levels on a daily basis for compliance with regulatory and internal
guidelines and requests changes in collateral levels, as appropriate.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosure about Fair
Value of Financial Instruments, requires the disclosure of the fair value of
financial instruments, including assets and liabilities recognized on the
combined statement of financial condition. Management estimates that the
aggregate net fair value of all other financial instruments recognized on the
combined statements of financial condition (including deposits received for
securities loaned, receivables, payables and accruals, and bank loans and
overdrafts) approximates their carrying value, as such financial instruments are
short term in nature, bear interest at current market rates or are subject to
restrictions or other specific provisions which offset their fair value.
14. RELATED PARTY TRANSACTIONS
The Company transacts business and has extensive relationships with TD
Bank, WISI and other affiliates. Due to these relationships, it is possible that
the terms of these transactions are not the same as those that would result from
transactions among unrelated parties. A description of these transactions and
relationships is set forth below:
GENERAL
Directors, officers and employees of the Company maintain cash and margin
accounts with the Company's broker-dealer subsidiaries and execute securities
transactions through these firms in the ordinary course of business. As of
October 31, 1997 and 1998, and January 31, 1999 (unaudited), receivable from
customers includes $6,162, $15,264, and $23,641 (unaudited), respectively,
representing accounts of executive officers and directors. As of October 31,
1997 and 1998, and January 31, 1999 (unaudited), payable to customers includes
$380, $1,621 and $2,535 (unaudited), respectively, representing accounts of
executive officers and directors.
The Company, where possible, utilizes the commercial banking and related
services of TD Bank and its affiliates, which are provided to the Company at
standard commercial rates for the services provided.
As more fully discussed in Note 11, the Company's U.S. operations are
included in the consolidated federal income tax returns and combined state and
local income tax returns of an affiliate filed in the U.S. and its Canadian
operations are included in income tax returns filed by TD Bank or TD Securities
Inc. in Canada. The provisions recorded by the Company for income taxes in the
U.S. and Canada do not differ materially from the provisions that would have
resulted had the Company filed separate income tax returns.
WATERHOUSE
WAM acts as investment advisor and provides various administrative and
shareholder services to a series of proprietary mutual funds. WAM receives fees
from the funds based primarily on the average daily net asset value of the
funds, but may, at its discretion, choose to waive all or a portion of the fees
at any time.
F-18
<PAGE> 114
TD WATERHOUSE SECURITIES, INC.
(A COMBINATION OF CERTAIN BUSINESSES OF THE TORONTO-DOMINION BANK)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT JANUARY 31, 1999 AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS)
WAM also provides investment advisory services to Waterhouse National Bank
("WNB"), an affiliated commercial bank, with respect to WNB's investments in
fixed income securities and receives fees based on the market value of the
assets under management.
Customers of WSI and NISC may elect to sweep their excess cash balances
held in their brokerage accounts into an FDIC insured money market account
offered by WNB. In connection with this arrangement, WSI and NISC provide WNB
with record keeping and shareholder services and as compensation receive a fee
based on the average daily cash balance that their customers maintain at WNB.
Fee income related to the aforementioned transactions and relationships of
Waterhouse have been included in Mutual fund and related revenue in the
accompanying combined statements of income and the corresponding amounts are as
follows:
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR ENDED THREE MONTHS ENDED
OCTOBER 31, JANUARY 31,
-------------------------------- --------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Fees.............................. $ -- $ 17,253 $ 24,115 $ 5,049 $ 9,189
Fees waived....................... -- (1,331) (3,894) (828) (1,978)
-------- -------- -------- -------- --------
Fee income........................ $ -- $ 15,922 $ 20,221 $ 4,221 $ 7,211
======== ======== ======== ======== ========
</TABLE>
Commencing in fiscal 1998, NISC provided clearing services to a U.S.
affiliate of TD Bank and received clearing fees, at rates approximating those
charged to third party introducing brokers. The income from this relationship
was $959 for the year ended October 31, 1998 and $169 (unaudited) and $193
(unaudited) respectively, for the three months ended January 31, 1998
(unaudited) and 1999 (unaudited) which have been included in commissions and
fees.
In addition, the Company, primarily through WSI, provides WNB with various
marketing and administrative support services. These services include the
marketing of WNB's FDIC insured deposit accounts and various credit products. In
addition to these marketing services, WSI provides WNB with various executive
and administrative support services. These services include providing office
space, audit, tax, human resources, employee benefits and legal. The Company is
reimbursed for such services based on a cost recovery basis, which approximates
$50 per month or $600 per annum which has been included in Other revenue in the
combined statements of income.
GREEN LINE
GLIS-Canada sells mutual funds to customers, some of which are managed by
TD Asset Management ("TDAM"). TDAM pays trailer fees to the Company based on the
net asset value of the mutual funds held by GLIS-Canada's customers.
GLIS-Canada also pays TD Bank a referral fee for customers introduced by TD
Bank's retail bank branches.
TDSS provides clearing services to TD Bank. Since TDSS was a division of TD
Bank during the periods presented in the accompanying financial statements, fees
received by TDSS from TD Bank have been
F-19
<PAGE> 115
TD WATERHOUSE SECURITIES, INC.
(A COMBINATION OF CERTAIN BUSINESSES OF THE TORONTO-DOMINION BANK)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT JANUARY 31, 1999 AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS)
determined on a cost recovery basis. Subsequent to the reorganization and
initial public offering, fees for such services will be renegotiated at
commercial rates.
All employees involved in the Green Line businesses are employees of TD
Bank. TD Bank has allocated compensation expense to the Company based on an
estimate of the actual compensation earned by each TD Bank employee that
performs services for Green Line, plus an estimate of the related employment
benefits applicable to these employees which was based on a percentage of total
compensation.
TD Bank provides significant administrative and other services to Green
Line. Charges for these services are calculated on a cost recovery basis. A
detailed description of the services is as follows:
Leases for Green Line's head office and branch locations are negotiated by
TD Bank and rental expense is allocated to the Company by TD Bank. The rental
charge includes the lease costs, insurance and management and maintenance
expenses. Rental amounts are also paid by the Company on TD Bank owned property
which Green Line occupies. TD Bank also charges GLIS-Canada for use of their
equipment and provides hardware, software, and telephone infrastructure services
which are charged to GLIS-Canada based on services used.
Professional services such as internal audit and legal are provided by TD
Bank and charged to the Company at an hourly rate for specific work performed on
Green Line's business. TD Bank's systems research and development group works
with the Green Line in-house systems group to provide software solutions.
Overhead costs associated with the following general services are allocated
to the Company based on the proportion of Green Line's revenues to the total
consolidated TD Bank revenues: payroll services and corporate human resource
policy and procedures, financial statement consolidation, business planning,
forecasting and tax planning, official external communications which include
press releases and annual and quarterly reporting and investor, government and
community relations, charitable donations and the costs related to employee
communications, and overall TD Bank marketing expenses which include advertising
and market research. In addition, economic research is provided for Green Line
and used for marketing and client education purposes and the costs to prepare
the research and charged based on usage. Policies and procedures for credit and
market risk management are formulated centrally by TD Bank. Expense allocations
are determined based on the time spent on each business.
TD Bank advances funding in the form of subordinated loans to
GLIS-Australia and GLIS-UK. GLIS-Australia and GLIS-UK maintained available
subordinated debt lines with an affiliate totaling $24,944 and $25,216
(unaudited) and $8,373 and $8,228 (unaudited), respectively, as of October 31,
1998 and January 31, 1999 (unaudited), respectively. At October 31, 1998 and
January 31, 1999 (unaudited), GLIS-Australia had drawn down $22,138 and $21,181
(unaudited), respectively, on these lines. GLIS-UK had not drawn down on its
loan as of October 31, 1998 and January 31, 1999 (unaudited).
F-20
<PAGE> 116
TD WATERHOUSE SECURITIES, INC.
(A COMBINATION OF CERTAIN BUSINESSES OF THE TORONTO-DOMINION BANK)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT JANUARY 31, 1999 AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS)
Revenues and expenses resulting from the aforementioned transactions and
relationships of Green Line are as follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
----------------------------------------- --------------------------
OCTOBER OCTOBER 31, OCTOBER 31, JANUARY 31, JANUARY 31,
31, 1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Commissions and fees.............. $ 8,937 $14,706 $16,524 $ 3,848 $ 4,225
Mutual Fund and related revenue... 3,336 4,710 5,959 1,377 1,338
Net interest revenue.............. -- -- (1,038) -- (298)
------- ------- ------- ------- -------
Total revenues.................... $12,273 $19,416 $21,445 $ 5,225 $ 5,265
======= ======= ======= ======= =======
EXPENSES
Compensation and benefits......... $40,432 $51,647 $52,717 $13,457 $13,984
Occupancy and equipment........... 13,371 16,783 17,065 4,176 4,396
Professional fees................. 3,139 4,141 3,600 972 783
Other expenses.................... 4,947 7,054 7,190 1,611 1,749
======= ======= ======= ======= =======
Total expenses.................... $61,889 $79,625 $80,572 $20,216 $20,912
======= ======= ======= ======= =======
</TABLE>
15. INTERNATIONAL OPERATIONS
The total revenues, income before income taxes, and identifiable assets of
the Company's businesses by geographic region are summarized below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE THREE MONTHS
OCTOBER 31, ENDED JANUARY 31,
-------------------------------- --------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Total revenues:
United States................... $ -- $250,095 $423,789 $ 79,531 $160,939
Canada.......................... 167,409 194,028 180,051 42,158 49,850
Other........................... -- 2,509 10,621 2,810 4,246
-------- -------- -------- -------- --------
Total........................... $167,409 $446,632 $614,461 $124,499 $215,035
======== ======== ======== ======== ========
Income before income taxes:
United States................... $ -- $ 35,775 $ 64,243 $ 8,433 $ 27,737
Canada.......................... 54,175 44,290 45,739 7,829 12,008
Other........................... -- (1,444) (6,504) (540) (1,648)
-------- -------- -------- -------- --------
Total........................... $ 54,175 $ 78,621 $103,478 $ 15,722 $ 38,097
======== ======== ======== ======== ========
</TABLE>
F-21
<PAGE> 117
TD WATERHOUSE SECURITIES, INC.
(A COMBINATION OF CERTAIN BUSINESSES OF THE TORONTO-DOMINION BANK)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT JANUARY 31, 1999 AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31, JANUARY 31,
1997 1998 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Identifiable assets:
United States.................. $ 1,636 $ 1,383 $ 3,620
Canada......................... 1,259 2,799 1,712
Other.......................... 52 115 149
-------- -------- --------
Total.......................... $ 2,947 $ 4,297 $ 5,481
======== ======== ========
</TABLE>
16. RECONCILIATION OF U.S. AND CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The combined financial statements of the Company are prepared in accordance
with accounting principles generally accepted in the United States of America
("US GAAP"). Material differences at October 31, 1997 and 1998 and January 31,
1999 (unaudited) and for the fiscal years ended October 31, 1996, 1997 and 1998
and for the three months ended January 31, 1998 (unaudited) and 1999 (unaudited)
between US GAAP and accounting principles generally accepted in Canada
("Canadian GAAP") are described below.
NET INCOME
<TABLE>
<CAPTION>
FOR THE THREE
FOR THE YEAR ENDED MONTHS ENDED
----------------------------------------- --------------------------
OCTOBER 31, OCTOBER 31, OCTOBER 31, JANUARY 31, JANUARY 31,
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income based on US GAAP.... $29,619 $36,205 $48,713 $6,500 $20,066
Stock-based compensation....... -- 3,177 (68) (8) 1,438
------- ------- ------- ------ -------
Net income based on Canadian
GAAP......................... $29,619 $39,382 $48,645 $6,492 $21,504
======= ======= ======= ====== =======
</TABLE>
F-22
<PAGE> 118
TD WATERHOUSE SECURITIES, INC.
(A COMBINATION OF CERTAIN BUSINESSES OF THE TORONTO-DOMINION BANK)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT JANUARY 31, 1999 AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS)
STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31, JANUARY 31,
1997 1998 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Total assets based on US
GAAP....................... $2,946,594 $4,298,736 $5,482,699
Customer transactions as of a
trade date................. 307,425 795,429 970,012
---------- ---------- ----------
Total assets based on
Canadian GAAP.............. $3,254,019 $5,094,165 $6,452,711
========== ========== ==========
Total liabilities based on US
GAAP....................... $2,327,075 $3,303,601 $4,447,051
Customer transactions as of
trade date................. 307,425 795,429 970,012
---------- ---------- ----------
Total liabilities based on
Canadian GAAP.............. $2,634,500 $4,099,030 $5,417,063
========== ========== ==========
</TABLE>
STOCK-BASED COMPENSATION
During 1997, the TD Bank employee stock option plan was modified to allow
option holders to elect to receive cash for the option's intrinsic value, being
the difference between the option's exercise price and the current market value
of the shares. In accounting for stock options with this feature, SFAS No. 123
requires expensing the annual change in the intrinsic value of the stock
options. For options that have not fully vested, the change in intrinsic value
is amortized over the remaining vesting period. For purposes of preparing its
Canadian GAAP financial statements, TD Bank does not record compensation expense
for stock-based compensation, but rather cash payments to option holders are
charged to retained earnings.
CUSTOMERS' SECURITIES TRANSACTIONS
Under U.S. GAAP, customers' securities transactions are recorded on a
settlement date basis. Under Canadian GAAP, customers securities transactions
are recorded on a trade date basis.
17. PROPOSED REORGANIZATION AND INITIAL PUBLIC OFFERING (UNAUDITED)
The Company was organized as an indirect wholly owned subsidiary of TD
Bank. In connection with an initial public offering of the Company's common
stock, TD Bank will reorganize the subsidiaries and divisions of subsidiaries
which comprise TD Bank's global discount brokerage business under the ownership
of the Company. Management anticipates that the reorganization will include the
following steps:
- TD Bank will transfer all of the stock of WSI, NISC, WAM and WNA to the
Company at their respective net book values.
- TD Bank will transfer GLIS-Canada to a newly formed Canadian subsidiary
of the Company in exchange for a series of exchangeable preference
shares of this subsidiary. The exchangeable preference shares will have
voting and dividend rights equal to an equivalent number of shares of
the
F-23
<PAGE> 119
TD WATERHOUSE SECURITIES, INC.
(A COMBINATION OF CERTAIN BUSINESSES OF THE TORONTO-DOMINION BANK)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION AT JANUARY 31, 1999 AND FOR THE
THREE MONTHS ENDED JANUARY 31, 1998 AND 1999 IS UNAUDITED)
(IN THOUSANDS)
Company's common stock, and will be exchangeable at any time, at TD
Bank's option, for an equivalent number of shares of the Company's common
stock.
- TD Bank will transfer all the stock of GLIS-UK, GLIS-HK and
GLIS-Australia to the Company at their respective net book values.
- The Company will enter into an inter-company service agreement with TD
Bank and affiliates for services provided and received.
F-24
<PAGE> 120
SUPPLEMENTAL INFORMATION
F-25
<PAGE> 121
SUPPLEMENTAL INFORMATION
WATERHOUSE SECURITIES GROUP
(A COMBINATION OF CERTAIN BUSINESSES
OF WATERHOUSE INVESTOR SERVICES, INC.)
COMBINED STATEMENT OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE TWELVE
MONTHS ENDED
OCTOBER 31, 1996
----------------
<S> <C>
REVENUES
Commissions and fees........................................ $165,817
Mutual fund and related revenue............................. 15,227
Net interest revenue........................................ 21,259
Other....................................................... 1,074
--------
TOTAL REVENUES............................................ 203,377
--------
EXPENSES
Employee compensation and benefits.......................... 66,705
Execution and clearing costs................................ 25,556
Occupancy and equipment..................................... 30,107
Advertising and marketing................................... 9,321
Communications.............................................. 9,171
Professional fees........................................... 9,646
Other....................................................... 19,891
--------
TOTAL EXPENSES............................................ 170,397
--------
Income before income taxes.................................. 32,980
Income tax provision........................................ 16,807
--------
NET INCOME................................................ $ 16,173
========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-26
<PAGE> 122
WATERHOUSE SECURITIES GROUP
(A COMBINATION OF CERTAIN BUSINESSES
OF WATERHOUSE INVESTORS SERVICES, INC.)
COMBINED STATEMENT OF CHANGES IN EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
EQUITY
--------
<S> <C>
Balance at October 31, 1995................................. $ 54,824
Net income.................................................. 16,173
Purchase accounting adjustments............................. 389,760
--------
Balance at October 31, 1996................................. $460,757
========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-27
<PAGE> 123
WATERHOUSE SECURITIES GROUP
(A COMBINATION OF CERTAIN BUSINESSES
OF WATERHOUSE INVESTOR SERVICES, INC.)
COMBINED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE TWELVE
MONTHS ENDED
OCTOBER 31, 1996
----------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 16,173
Depreciation and amortization............................. 9,272
(Increases) decreases in operating assets
Securities owned....................................... (4,185)
Receivable from brokers and dealers.................... 1,624
Receivable from customers.............................. (118,849)
Deposits with clearing organizations................... (763)
Other assets........................................... (1,600)
Increases (decreases) in operating liabilities
Bank loans and overdrafts.............................. (22,500)
Deposits received for securities loaned................ 263,314
Payable to brokers and dealers......................... (136,508)
Payable to customers................................... 23,169
Accrued compensation, taxes payable and other
liabilities........................................... 14,802
---------
CASH PROVIDED BY OPERATING ACTIVITIES................ 43,949
---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets and leasehold improvements......... (14,458)
---------
CASH USED IN INVESTING ACTIVITIES.................... (14,458)
---------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in advances from affiliates........................ (25,506)
---------
CASH USED IN FINANCING ACTIVITIES.................... (25,506)
---------
INCREASE IN CASH AND CASH EQUIVALENTS................ 3,985
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD....... 14,553
---------
CASH AND CASH EQUIVALENTS, END OF PERIOD............. $ 18,538
=========
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 13,637
=========
Cash paid for income taxes................................ $ 23,543
=========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-28
<PAGE> 124
WATERHOUSE SECURITIES GROUP
(A COMBINATION OF CERTAIN BUSINESSES OF WATERHOUSE INVESTOR SERVICES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
OCTOBER 31, 1996
(IN THOUSANDS)
1. ORGANIZATION AND DESCRIPTION OF THE BUSINESS
On March 31, 1999, the Board of Directors of The Toronto-Dominion Bank ("TD
Bank") approved the public offering of TD Bank's global discount brokerage
business, which includes the following subsidiaries of Waterhouse Investor
Services, Inc. ("WISI"):
- Waterhouse Securities, Inc. ("WSI"), a U.S. registered broker-dealer
which provides discount brokerage services to retail customers in the
U.S.
- National Investor Services, Corp. ("NISC"), a U.S. registered
broker-dealer with limited operations as of October 31, 1996.
- Waterhouse Asset Management ("WAM"), a U.S. registered investment
advisor which provides investment advice to a series of affiliated
mutual funds.
- Waterhouse, Nicoll & Associates, Inc. ("WNA"), a U.S. based advertising
firm which places advertising for affiliates.
The aforementioned entities constitute WISI's discount brokerage business
and are collectively hereinafter referred to as "Waterhouse."
Waterhouse provides securities and mutual fund investment services to
retail customers throughout the United States. Waterhouse also acts as an
investment advisor to a series of proprietary mutual funds and provides
execution and clearing services to third party broker-dealers.
WISI was acquired by TD Bank in October 1996 for cash and TD Bank Common
Stock. The transaction was accounted for under the purchase method and the $390
million excess of the purchase price assigned to Waterhouse's business over the
fair value of the net assets acquired was recorded by Waterhouse as goodwill, to
be amortized over a period of twenty years. For financial reporting purposes the
transaction was accounted for as of October 31, 1996, TD Bank's year end date,
which, in the opinion of management, did not have a material effect on the
accompanying financial statements for the twelve months ended October 31, 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements include the accounts of the
individual entities comprising Waterhouse on a combined basis. All transactions
and balances between and among the entities within the combined group have been
eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-29
<PAGE> 125
WATERHOUSE SECURITIES GROUP
(A COMBINATION OF CERTAIN BUSINESSES OF WATERHOUSE INVESTOR SERVICES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 1996
(IN THOUSANDS)
COMMISSIONS AND FEES
Customers' securities transactions are recorded on a settlement date basis
with related commission revenue and related expenses recorded on a trade date
basis. Fees consist primarily of payments from market makers and exchanges for
directing order executions and clearing fees.
MUTUAL FUND AND RELATED REVENUE
Mutual fund and related revenue consist of fees earned for providing
investment advisory services to a series of related mutual funds and fees for
record keeping and shareholder services provided to third party mutual funds and
an affiliated bank. Such revenue is recorded when earned.
NET INTEREST REVENUE
Waterhouse reports interest revenue, which primarily arises from margin
loans to customers net of the related financing cost (interest expense).
Interest expense for the twelve months ended October 31, 1996 was $16,197.
ADVERTISING AND MARKETING
Advertising and marketing costs are expensed as incurred.
DEPRECIATION AND AMORTIZATION OF FIXED ASSETS
Depreciation of capitalized furniture and equipment is provided on a
straight-line basis using estimated useful lives of three to five years.
Leasehold improvements are amortized on a straight-line basis over the lesser of
the lease term or the estimated useful life.
INCOME TAXES
Waterhouse's results of operations were included in the consolidated income
tax returns filed by WISI. WISI allocated income tax expense to Waterhouse based
on Waterhouse's ratable share of WISI's taxable income as if Waterhouse were to
file separate income tax returns. Deferred tax expenses and benefits were
recognized in the combined statement of income for changes in deferred tax
assets and liabilities.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, Waterhouse considers all highly
liquid investments with original maturities of three months or less (except for
amounts designated as securities owned) to be cash equivalents.
SEGMENT INFORMATION
The nature and extent of Waterhouse's operations are such that it operates
in only one reportable segment as a provider of discount brokerage services and
in one geographic location, the United States.
F-30
<PAGE> 126
WATERHOUSE SECURITIES GROUP
(A COMBINATION OF CERTAIN BUSINESSES OF WATERHOUSE INVESTOR SERVICES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 1996
(IN THOUSANDS)
3. STOCK OPTIONS
Certain employees of Waterhouse participated in WISI's stock option plan,
which provided for the issuance of WISI's stock options at prices equal to the
market value of WISI's stock on the date of grant. WISI accounted for these
options in accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees. WISI had not recognized any
compensation expenses relative to Waterhouse's employees; accordingly, no
compensation expense was reflected in Waterhouse's financial statements. As a
result of WISI's acquisition by TD Bank, all outstanding options were exercised
and the plan was terminated. Waterhouse recorded approximately $4.1 million in
compensation expense relating to the termination of certain employee stock
options prior to its acquisition by TD Bank.
4. COMMITMENTS AND CONTINGENT LIABILITIES
Waterhouse leased office space under noncancellable operating leases
extending for periods in excess of one year. Future minimum rental commitments
under such leases were as follows:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDING OCTOBER 31,
- --------------------------------
<S> <C>
1997........................................................ $ 6,685
1998........................................................ 6,818
1999........................................................ 6,383
2000........................................................ 5,863
2001........................................................ 5,038
Thereafter.................................................. 10,202
-------
$40,989
=======
</TABLE>
Rent expense for the twelve months ended October 31, 1996 was approximately
$5,485.
5. NET CAPITAL REQUIREMENTS
As registered broker-dealers and members of the New York Stock Exchange,
WSI and NISC are subject to the SEC's Uniform Net Capital Rule (the "Rule")
which requires the maintenance of minimum net capital. At October 31, 1996 WSI
and NISC had net capital of $40,995 and $768, respectively, which was $29,728
and $518, respectively, in excess of required net capital.
6. EMPLOYEE BENEFIT PLANS
WISI had an employee stock ownership plan in which employees of Waterhouse
participated. In connection with this plan, Waterhouse recorded compensation
expense of $1,950 during the twelve months ended October 31, 1996 which equaled
WISI's contributions to the plan on behalf of Waterhouse's employees. As a
result of TD Bank's acquisition of all of WISI's outstanding Common Stock, the
plan was terminated and the assets were distributed to participants or, at their
election, transferred to a newly created defined contribution plan.
WISI also had a 401k plan in which employees of Waterhouse participated.
Neither Waterhouse nor WISI made contributions to this plan during the twelve
months ended October 1996.
F-31
<PAGE> 127
WATERHOUSE SECURITIES GROUP
(A COMBINATION OF CERTAIN BUSINESSES OF WATERHOUSE INVESTOR SERVICES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 1996
(IN THOUSANDS)
7. INCOME TAXES
The reported amount of income tax expense differs from the amount of income
tax expense that would result from applying Federal statutory rates to pretax
income due primarily to state and local income taxes, accrued expenses and other
items such as nondeductible business development expenses and officers'
nondeductible life insurance premiums. A reconciliation of Waterhouse's
effective tax rate for the twelve months ended October 31, 1996 was as follows:
<TABLE>
<CAPTION>
<S> <C>
Federal statutory income tax rate........................... 35.0%
State and local income taxes, net of Federal income tax
benefit................................................... 7.6
Accrued expenses............................................ 5.9
Other, net.................................................. 2.4
-----
50.9%
=====
</TABLE>
Income tax expense was as follows:
<TABLE>
<S> <C>
Current
Federal................................................... 9,626
State..................................................... 1,650
Foreign................................................... --
------
Total Current............................................. 11,276
Deferred
Federal................................................... 4,722
State..................................................... 809
Foreign................................................... --
------
Total Deferred............................................ 5,531
Total Income Tax Expense.................................... 16,807
======
</TABLE>
8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
In the normal course of business, Waterhouse executes, as agent, securities
transactions on behalf of its customers and the customers introduced by other
broker-dealers. If either the customer or a counterparty fails to perform,
Waterhouse may be required to discharge the obligations of the nonperforming
party. In such circumstances, Waterhouse may sustain a loss if the market value
of the security is different from the contract value of the transaction.
In the normal course of business, Waterhouse may deliver securities as
collateral in support of various secured financing sources such as securities
loaned. Additionally, Waterhouse delivers customer securities as collateral to
satisfy margin deposits of various clearing organizations. In the event the
counterparty is unable to meet its contracted obligation to return customer
securities delivered as collateral, Waterhouse may be obligated to purchase the
securities in order to return them to the owner. In such circumstances,
Waterhouse may incur a loss up to the amount by which the market value of the
securities exceeds the value of the loan or other collateral received or in the
possession or control of Waterhouse.
For transactions in which Waterhouse extends credit to customers,
Waterhouse seeks to control the risks associated with these activities by
requiring customers to maintain margin collateral in compliance with
F-32
<PAGE> 128
WATERHOUSE SECURITIES GROUP
(A COMBINATION OF CERTAIN BUSINESSES OF WATERHOUSE INVESTOR SERVICES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 1996
(IN THOUSANDS)
various regulatory and internal guidelines. Waterhouse monitors required margin
levels daily and, pursuant to such guidelines, requests customers to deposit
additional collateral or reduce securities positions, when necessary.
Waterhouse has a nationwide retail customer base. Waterhouse conducts
business with brokers and dealers, clearing organizations and depositories that
are primarily located in the New York area. The majority of Waterhouse's
transactions and, consequently, the concentration of its credit exposures, are
with customers, broker-dealers and other financial institutions in the United
States. These result in credit exposure in the event that the counterparty fails
to fulfill its contractual obligations. Waterhouse's exposure to credit risk can
be directly impacted by volatile securities markets which may impair the ability
of counterparties to satisfy their contractual obligations. Waterhouse seeks to
control its credit risk through a variety of reporting and control procedures,
including establishing credit limits based upon a review of the counterparties'
financial condition and credit ratings. Waterhouse monitors collateral levels on
a daily basis for compliance with regulatory and internal guidelines and
requests changes in collateral levels, as appropriate.
9. RELATED PARTY TRANSACTIONS
Waterhouse transacts business and has extensive relationships with WISI and
its affiliates. Due to these relationships, it is possible that the terms of
these transactions were not the same as those that would have resulted from
transactions among unrelated parties. A description of these transactions and
relationships is set forth below:
Directors, officers and employees of Waterhouse maintained cash and margin
accounts with Waterhouse's broker-dealer subsidiaries and executed securities
transactions through these firms in the ordinary course of business.
As more fully discussed in Note 2, Waterhouse was included in the
consolidated federal and combined State and City income tax returns of WISI.
WAM acted as investment advisor and provided various administrative and
shareholder services to a series of proprietary mutual funds. WAM received fees
from the funds based primarily on the average daily net asset value of the
funds, but may, at its discretion, choose to waive all or a portion of the fees
at any time.
WAM also provided investment advisory services to Waterhouse National Bank
("WNB"), an affiliated commercial bank, with respect to WNB's investments in
fixed income securities and received fees based on the market value of the
assets under management.
Customers of WSI and NISC may have elected to sweep their excess cash
balances held in their brokerage accounts into an FDIC insured money market
account offered by WNB. In connection with this arrangement, WSI and NISC
provided WNB with record keeping and shareholder services and as compensation
received a fee based on the average daily cash balance that their customers
maintained at WNB.
F-33
<PAGE> 129
WATERHOUSE SECURITIES GROUP
(A COMBINATION OF CERTAIN BUSINESSES OF WATERHOUSE INVESTOR SERVICES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 31, 1996
(IN THOUSANDS)
Fee income related to the aforementioned transactions and relationships
have been included in Mutual fund and related revenue in the accompanying
combined statement of income and the corresponding amounts were as follows:
<TABLE>
<S> <C>
Fees................................. $ 9,458
Fees waived.......................... (1,926)
-------
Fee income........................... $ 7,532
=======
</TABLE>
In addition, the Company, primarily through WSI, provided WNB with referral
and administrative support services. These services included the marketing of
WNB's FDIC insured deposit accounts and various credit products. In addition to
these marketing services, WSI provided WNB with various executive and
administrative support services. These services included providing office space,
audit, tax, human resources, employee benefits and legal. The Company was
reimbursed for those services based on an estimate of the costs of providing the
services, which approximated $50 per month or $600 per annum and is included in
other revenue in the combined statement of income.
In the normal course of business, Waterhouse obtained advances from WISI to
finance its operations. The advances were payable on demand and bore interest at
an annual rate of 10%. For the twelve months ended October 31, 1996, WISI
charged Waterhouse interest of approximately $3.2 million.
During the twelve months ended October 31, 1996, WISI charged Waterhouse a
management fee of $600 for management services. In addition, another subsidiary
of WISI charged Waterhouse a fee of $600 for advertising services.
F-34
<PAGE> 130
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Waterhouse Investor Services, Inc.
In our opinion, the accompanying statements of income, of cash flows and of
changes in equity of Waterhouse Securities Group (a combination of certain
businesses of Waterhouse Investor Services, Inc.) present fairly, in all
material respects, the results of its operations and its cash flows for the year
ended October 31, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of Waterhouse's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
New York, New York
April 29, 1999
F-35
<PAGE> 131
TD WATERHOUSE SECURITIES, INC.
<PAGE> 132
This is a preliminary prospectus relating to these securities, a copy of
which has been filed with the securities commission or similar regulatory
authority in each of the provinces and territories of Canada, but which has
not yet become final for the purpose of a distribution or a distribution to
the public. Information contained herein is subject to completion or
amendment. These securities may not be sold to, nor may offers to buy be
accepted from, residents of such jurisdictions prior to the time a receipt
for the final prospectus is obtained from the appropriate securities
commission or other regulatory authority.
ADDITIONAL PAGES FOR THE CANADIAN PROSPECTUS
PRELIMINARY PROSPECTUS DATED APRIL 30, 1999
This prospectus constitutes a public offering of these securities only in those
jurisdictions where they may be lawfully offered for sale and therein only by
persons permitted to sell such securities. No securities commission or similar
authority in Canada or the United States has in any way passed upon the merits
of the securities offered hereunder and any representation to the contrary is an
offence.
Initial Public Offering
TD WATERHOUSE SECURITIES, INC.
CDN.$ --
-- SHARES OF COMMON STOCK
Of the -- shares of common stock (the "Shares") of TD Waterhouse
Securities, Inc. (the "Company") being offered in Canada, the United States and
elsewhere (the "Combined Offering"), -- Shares are being offered
initially in Canada (the "Canadian Offering"). The Company has appointed Credit
Suisse First Boston Corporation ("CSFBC") and TD Securities (USA) Inc. as the
joint global co-ordinators for the Combined Offering (the "Joint Global
Coordinators"). THERE IS CURRENTLY NO MARKET THROUGH WHICH THE SHARES CAN BE
SOLD. The Company intends to make application to list the Shares on The Toronto
Stock Exchange and The New York Stock Exchange. The offering price of the Shares
has been determined by negotiation between the Company and the representatives
of the U.S. underwriters. PRIOR TO SUBSCRIBING FOR SHARES, PROSPECTIVE
PURCHASERS SHOULD CAREFULLY CONSIDER CERTAIN RISK FACTORS. SEE "RISK FACTORS".
----------------------------------------------
PRICE: CDN.$ -- PER SHARE
----------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING NET PROCEEDS TO
THE PUBLIC COMMISSION THE COMPANY(1)
---------- ------------ ---------------
<S> <C> <C> <C> <C>
OFFERED INITIALLY IN CANADA(2)(3)(4)
Per Share...................................... Cdn. $ -- $ -- $ --
Total.......................................... Cdn. $ -- $ -- $ --
OFFERED INITIALLY IN THE UNITED STATES(3)(4)
Per Share...................................... U.S. $ -- $ -- $ --
Total.......................................... U.S. $ -- $ -- $ --
OFFERED INITIALLY OUTSIDE NORTH AMERICA(3)(4)
Per Share...................................... U.S. $ -- $ -- $ --
Total.......................................... U.S. $ -- $ -- $ --
-------- -------- --------
TOTAL(2)(3)...................................... Cdn. $ -- $ -- $ --
</TABLE>
- ---------------
(1) Before deducting expenses of the Combined Offering, estimated to be
$ -- , which will be paid by the Company.
(2) The Shares are being offered in Canada in Canadian dollars at the
approximate equivalent of the U.S. dollar offering price converted at an
Exchange Rate (as defined below) of Cdn.$ -- = U.S.$1.00 as of
-- , 1999. See "Exchange Rates".
(3) The Company has granted an over-allotment option to the Canadian
Underwriters (as defined below), the U.S. underwriters and the international
managers (collectively, the "Underwriters") exercisable until -- days
after the date of the closing of the Combined Offering to purchase up to an
additional -- Shares on the same terms as those set forth above to
cover over-allotments, if any (the "Over-Allotment Option"). These
additional Shares are qualified for sale hereunder. If the Underwriters
exercise the Over-Allotment Option in full, the total Price to the Public,
the total Underwriting Commission and the total Net Proceeds to the Company
will be Cdn.$ -- , Cdn.$ -- and Cdn.$ -- , respectively.
(4) Subject to the conditions contained in an agreement dated -- , 1999
among the Underwriters, the respective Canadian Underwriters, the U.S.
underwriters and the international managers are permitted to sell Shares to
each other for purposes of resale.
AFTER GIVING EFFECT TO THE COMBINED OFFERING AND ASSUMING THAT THERE HAS
BEEN NO EXERCISE BY THE UNDERWRITERS OF THE OVER-ALLOTMENT OPTION, THE OFFERING
PRICE OF EACH SHARE WILL EXCEED THE CONSOLIDATED NET TANGIBLE BOOK VALUE
THEREOF, ON A PRO FORMA BASIS AS OF -- , 1999, BY $ -- ON A FULLY
DILUTED BASIS, REPRESENTING DILUTION OF -- % OF THE CANADIAN DOLLAR OFFERING
PRICE. SEE "DILUTION" AND "RISK FACTORS".
IN THE OPINION OF COUNSEL, THE SHARES, WHEN ISSUED, WILL QUALIFY FOR
INVESTMENT UNDER CERTAIN STATUTES AS SET OUT UNDER "ELIGIBILITY FOR INVESTMENT".
BOTH OF TD SECURITIES INC. ("TDSI"), ONE OF THE CANADIAN UNDERWRITERS, AND
THE COMPANY ARE SUBSIDIARIES OF THE TORONTO-DOMINION BANK (THE "BANK").
ACCORDINGLY, THE COMPANY IS A RELATED ISSUER OF TDSI WITHIN THE MEANING OF
APPLICABLE CANADIAN SECURITIES LEGISLATION. SEE "PLAN OF DISTRIBUTION FOR THE
CANADIAN OFFERING" AND "USE OF PROCEEDS".
The Canadian Underwriters, as principals, conditionally offer the Shares
initially offered in Canada and any Shares acquired by transfer from the U.S.
underwriters and the international managers, subject to prior sale, if, as and
when the Shares are issued and delivered by the Company and accepted by the
Canadian Underwriters in accordance with the conditions of the Canadian
Underwriting Agreement (as defined below) and subject to the approval of certain
legal matters on behalf of the Company by McCarthy Tetrault and on behalf of the
Canadian Underwriters by Tory Tory DesLauriers & Binnington. Subscriptions for
the Shares will be received subject to rejection or allotment in whole or in
part and the right is reserved to close the subscription books at any time
without notice. It is expected that the closing of the Canadian Offering will
take place on or about -- , 1999 or such later date as may be agreed upon
but, in any event, no later than -- (the "Closing"). Certificates
evidencing the Shares will be available for delivery at the Closing.
<PAGE> 133
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EXCHANGE RATES..................... Can - 2
CONTINUOUS DISCLOSURE.............. Can - 2
ENFORCEMENT OF LEGAL RIGHTS........ Can - 3
ELIGIBILITY FOR INVESTMENT......... Can - 3
PLAN OF DISTRIBUTION FOR THE
CANADIAN OFFERING................ Can - 3
CANADIAN FEDERAL INCOME TAX
CONSIDERATIONS................... Can - 5
MATERIAL CONTRACTS................. Can - 6
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
LEGAL MATTERS...................... Can - 7
AUDITOR, TRANSFER AGENT AND
REGISTRAR........................ Can - 7
STATUTORY RIGHTS OF WITHDRAWAL AND
RESCISSION....................... Can - 8
UNITED STATES PROSPECTUS........... Can - 9
CERTIFICATE OF THE COMPANY......... Can - 10
CERTIFICATE OF THE CANADIAN
UNDERWRITERS..................... Can - 11
</TABLE>
EXCHANGE RATES
IN THIS PROSPECTUS, UNLESS OTHERWISE SPECIFIED OR THE CONTEXT OTHERWISE
REQUIRES, ALL DOLLAR AMOUNTS ARE EXPRESSED IN U.S. DOLLARS. The following table
sets forth: (i) the rates of exchange for U.S. dollars, expressed in Canadian
dollars, in effect at the end of the periods indicated; (ii) the average
exchange rates in effect on the last day of each month during such periods;
(iii) the high rate of exchange in effect during such periods; and (iv) the low
rate of exchange in effect during such periods, such rates (each an "Exchange
Rate"), in each case, based on the noon rates of exchange for conversion of one
U.S. dollar to Canadian dollars as reported by the Bank of Canada.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Rate at end of period................................. Cdn.$1.53 Cdn.$1.43 Cdn.$1.37
Average rate for period............................... $ 1.49 $ 1.39 $ 1.36
High for period....................................... $ 1.58 $ 1.44 $ 1.39
Low for period........................................ $ 1.41 $ 1.34 $ 1.33
</TABLE>
During the period from January 1, 1999 to April 28, 1999, the average, high
and low Exchange Rates were Cdn.$1.50, Cdn.$1.53 and Cdn.$1.48, respectively.
On April 28, 1999, the noon rate of exchange as reported by the Bank of
Canada for conversion of U.S. dollars into Canadian dollars was U.S.$1.00 =
Cdn.$1.48 (U.S.$0.68 = Cdn.$1.00).
CONTINUOUS DISCLOSURE
Upon the filing of the final prospectus with the securities regulatory
authorities in the various provinces and territories of Canada, the Company will
become a reporting issuer under the securities laws of those of such
jurisdictions that provide for a reporting issuer regime. Pursuant to the rules
of the securities regulatory authorities of such jurisdictions, the Company (or,
in the case of insider reporting, its insiders) are generally exempt from the
requirements of the laws of such jurisdictions relating to continuous
disclosure, proxy solicitation and insider reporting. These rules generally
permit the Company to comply with certain informational requirements applicable
in the U.S. instead of the continuous disclosure requirements normally
applicable in such Canadian jurisdictions, provided that the relevant documents
are filed with the securities regulatory authorities in the relevant Canadian
jurisdictions and are provided to security holders in Canada to the extent and
in the manner and within the time required by applicable U.S. requirements.
Can - 2
<PAGE> 134
ENFORCEMENT OF LEGAL RIGHTS
The Company is organized under the laws of the State of Delaware and,
accordingly, the rights and remedies generally available to shareholders under
Canadian corporation law will not be available to investors. Certain of the
officers and directors of the Company, as well as certain of the experts named
herein, may reside outside of Canada. Furthermore, all or substantially all of
the assets of the Company and such persons may be located outside of Canada. The
Company has appointed The Toronto-Dominion Bank, 12th Floor, Toronto Dominion
Bank Tower, Toronto-Dominion Centre, Toronto, Ontario M5K 1A2 as agent for
service of process in Canada for any actions or proceedings related to the
Canadian Offering, but it may not be possible for investors to effect service of
process within Canada upon the experts or the directors and officers referred to
above. In addition, it may not be possible to enforce against the Company, its
directors and officers and certain of the experts named in this prospectus,
judgements obtained in Canadian courts predicated upon the civil liability
provisions of applicable securities laws in Canada.
ELIGIBILITY FOR INVESTMENT
In the opinion of McCarthy Tetrault and Tory Tory DesLauriers & Binnington,
subject to compliance with the prudent investor standards and the general
provisions and restrictions of the statutes referred to below (and, where
applicable, the regulations thereunder) and, in certain cases subject to
satisfaction of additional requirements relating to investments or lending
policies or goals and, in certain cases, the filing of such policies or goals,
the Shares would not, if the date hereof was the Closing, be precluded as
investments under the following statutes:
Insurance Companies Act (Canada);
Pension Benefits Standards Act, 1985 (Canada);
Trust and Loan Companies Act (Canada);
Financial Institutions Act (British Columbia);
Loan and Trust Corporations Act (Alberta);
The Pension Benefits Act, 1992 (Saskatchewan);
The Insurance Act (Manitoba);
The Pension Benefits Act (Manitoba);
The Trustee Act (Manitoba);
Pension Benefits Act (Ontario);
Loan and Trust Corporation Act (Ontario);
an Act respecting trust companies and savings companies (Quebec) (for a trust
company, as defined therein, which invests its own funds and funds received as
deposits or a savings company, as defined therein, which invests its own funds);
an Act respecting insurance (Quebec) (in respect of insurers other than
guarantee fund corporations);
Supplemental Pension Plan Act (Quebec);
Pension Benefits Act (Nova Scotia); and
Trust and Loan Companies Act (Nova Scotia).
Under the Income Tax Act (Canada), the Shares will be qualified investments
for trusts governed by registered retirement savings plans, registered
retirement income funds and deferred profit sharing plans and for certain other
tax-exempt persons, provided the Shares are listed on a prescribed stock
exchange (which currently includes The Toronto Stock Exchange and The New York
Stock Exchange), and the Shares will be foreign property for such persons.
PLAN OF DISTRIBUTION FOR THE CANADIAN OFFERING
Upon the terms and subject to the conditions contained in an underwriting
agreement dated -- , 1999 (the "Canadian Underwriting Agreement") among
the Company and TD Securities Inc., Credit Suisse First Boston Securities Canada
Inc., Nesbitt Burns Inc., ScotiaMcLeod Inc., CIBC Wood Gundy Securities Inc.,
RBC Dominion Securities Inc., Merrill Lynch Canada Inc., Levesque Beaubien
Geoffrion Inc., Griffiths
Can - 3
<PAGE> 135
McBurney & Partners, First Marathon Securities Limited, HSBC James Capel Canada
Inc., Newcrest Capital Inc. and Trilon Securities Corporation (collectively, the
"Canadian Underwriters"), the Company has agreed to issue and sell an aggregate
of -- Shares (the "Canadian Shares") and the Canadian Underwriters have
severally agreed to purchase on -- , 1999 or on such other date, not
later than -- , 1999, as may be agreed upon, the Canadian Shares offered
hereby at the price of Cdn.$ -- per Share, payable against delivery of
certificates representing such Shares.
Pursuant to the terms of the Canadian Underwriting Agreement, the Company
has agreed to pay the Canadian Underwriters a commission of $ -- per Share
in consideration for their services in connection with the Canadian Offering in
respect of Shares sold by the Canadian Underwriters. The obligations of the
Canadian Underwriters to purchase the Canadian Shares are several and not joint
and several and may be terminated at their discretion upon the occurrence of
certain stated events. In the event that a Canadian Underwriter fails to
purchase the Shares which it has severally agreed to purchase under the Canadian
Underwriting Agreement, the Canadian Underwriters shall be severally obligated
to purchase those Shares in accordance with their respective percentages,
provided that if the percentage of the total number of Shares in respect of
which such failure occurs exceeds a certain level, the other Canadian
Underwriters shall have the right, but not the obligation, to purchase severally
those shares. The Canadian Underwriters have agreed, subject to the terms and
conditions of the Canadian Underwriting Agreement, to purchase all of the Shares
being sold thereunder, if any of the Shares being sold thereunder are purchased.
The underwriting commission will be paid out of the general funds of the
Company. The Company has agreed to indemnify the Canadian Underwriters against
certain liabilities, including liability under provincial securities
legislation. The Canadian Underwriting Agreement provides that the obligations
of the several Canadian Underwriters to pay for and accept delivery of the
Shares offered hereby are subject to the approval of certain legal matters by
their counsel and to certain other conditions. The obligations of the Canadian
Underwriters under the Canadian Underwriting Agreement may be terminated at
their discretion, in certain circumstances, on the basis of their assessment of
the state of the financial markets.
For details of the underwriting agreements between the Company and the U.S.
underwriters and the Company and the international managers, see "Underwriting"
in the U.S. Prospectus (as defined below), which forms a part of this
prospectus.
The Canadian Underwriters, the U.S. underwriters and the international
managers have entered into an agreement dated -- , 1999 (the
"Inter-Syndicate Agreement") providing for, among other things, the
co-ordination of certain of their activities by the Joint Global Coordinators.
Pursuant to the Inter-Syndicate Agreement, sales may be made between the U.S.
underwriters, the international managers and the Canadian Underwriters of such
number of Shares as may be agreed upon by the Joint Global Coordinators. The per
share price of any Shares so sold will be the public offering price of such
Shares less an amount not greater than the per share amount of the selling
concession or commissions to dealers applicable to such Shares. Pursuant to the
Inter-Syndicate Agreement, each U.S. underwriter has agreed that it has not
offered or sold, and will not offer or sell, directly or indirectly, any Shares
or distribute any prospectus relating to the Combined Offering other than within
the United States or to a United States Person; and each Canadian Underwriter
has agreed that it has not offered or sold, and will not offer or sell, directly
or indirectly, any Shares or distribute any prospectus relating to the Combined
Offering to any person outside of Canada or to any United States Person.
Pursuant to the Inter-Syndicate Agreement, each international manager has agreed
that it has not offered or sold, and will not offer or sell, directly or
indirectly, any Shares or distribute any prospectus relating to the Combined
Offering to any person within Canada or the United States or to any United
States Person. The foregoing limitations do not apply to stabilization
transactions or to certain other transactions specified in the Inter-Syndicate
Agreement. As used herein, "United States Person" means any individual who is
resident in the United States, or any corporation, pension, profit sharing or
other trust entity or other entity organized or incorporated under or governed
by the laws of the United States or any political subdivision thereof (other
than a foreign branch or agency of any United States person), and includes any
United States branch or agency of a non-United States Person. "United States"
means the United States of America, its territories and possessions and all
areas subject to its jurisdiction. "Canada" means Canada, its provinces and
territories and possessions and all areas subject to its jurisdiction.
Can - 4
<PAGE> 136
Pursuant to policy statements of the Ontario Securities Commission and the
Commission des valeurs mobilieres du Quebec, the Canadian Underwriters may not,
throughout the period of distribution under this prospectus, bid for or purchase
Shares. The foregoing restriction is subject to certain exceptions, as long as
the bid or purchase is not engaged in for the purpose of creating actual or
apparent trading activity in, or raising the price of such securities. These
exceptions include a bid or purchase permitted under the by-laws and rules of
The Toronto Stock Exchange relating to market stabilization and passive market
making activities and a bid or purchase made for and on behalf of a customer
where the order was not solicited during the period of distribution. Pursuant to
the first mentioned exception, in connection with this offering, the Canadian
Underwriters may over-allot or effect transactions which stabilize or maintain
the market price of the Shares at levels other than those which otherwise might
prevail on the open market. Through the period of distribution such
transactions, if commenced, may be discontinued at any time.
The Company has agreed in the Canadian Underwriting Agreement that, subject
to certain exceptions, it will not offer, sell, contract to sell or otherwise
dispose of any Shares (other than the Shares being offered by the Underwriters)
for a period of -- days after the date of this prospectus without the
prior written consent of the Joint Global Coordinators.
We have granted to the Canadian Underwriters, the U.S. underwriters and the
international managers a 30-day option exercisable by the Joint Global
Coordinators. The Underwriters may purchase on a pro rata basis up to --
additional Shares at the public offering price, less the underwriting discounts
and commissions. The Over-Allotment Option may be exercised only to cover any
over-allotments. This prospectus qualifies the distribution of the Shares
received by the Underwriters on exercises of the Over-Allotment Option.
TDSI, one of the Canadian Underwriters, is a wholly-owned subsidiary of the
Bank. The Company is also a wholly-owned subsidiary of the Bank. The terms of
the Combined Offering were negotiated at arm's length between the Company and
representatives of the U.S. underwriters. TDSI will not receive any benefit in
connection with the Combined Offering, other than as described herein. CSFBC,
one of the Joint Global Coordinators and a co-lead manager of the syndicate of
U.S. underwriters, participated in the due diligence for the Combined Offering,
the preparation of the U.S. Prospectus which forms a part of this prospectus and
in pricing the Combined Offering. See "Underwriting" in the U.S. Prospectus,
which forms a part of this prospectus.
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of McCarthy Tetrault, counsel to the Company, and Tory Tory
DesLauriers & Binnington, counsel to the Canadian Underwriters, the following
summary fairly presents, as of the date hereof, the principal Canadian federal
income tax considerations generally applicable to a person who purchases Shares
pursuant to this offering (a "Canadian Holder") and who, for purposes of the
Income Tax Act (Canada) (the "Canadian Tax Act"), is resident in Canada, holds
Shares as capital property, deals at arm's length with the Company and at all
times does not hold, including any holdings by a person related to the Canadian
Holder, ten percent (10%) or more of the outstanding Shares of the Company.
Generally, the Shares will be considered capital property to a Canadian Holder
provided that such holder does not hold the Shares in the course of carrying on
a business and does not acquire the Shares in a transaction considered to be an
adventure in the nature of trade. The mark-to-market rules contained in the
Canadian Tax Act relating to taxpayers that are financial institutions for the
purposes of those rules will deem such holders not to hold the Shares as capital
property for the purposes of the Canadian Tax Act. Canadian Holders that are
financial institutions should consult their own advisers to determine the tax
consequences to them of the application of the mark-to-market rules.
This summary is based on the current provisions of the Canadian Tax Act,
the regulations thereunder, specific proposals to amend the Canadian Tax Act and
the regulations which have been publicly announced by the Minister of Finance
prior to the date hereof, and on the current published administrative practices
of Revenue Canada, Taxation. This summary does not take into account or
anticipate any other changes in the
Can - 5
<PAGE> 137
law, whether by legislative, governmental or judicial action, nor does it take
into account any provincial, territorial or foreign tax considerations.
THIS SUMMARY DOES NOT CONSTITUTE, AND SHOULD NOT BE CONSTRUED TO
CONSTITUTE, LEGAL OR TAX ADVICE TO ANY CANADIAN HOLDER. PROSPECTIVE PURCHASERS
OF SHARES ARE, THEREFORE, ADVISED TO CONSULT WITH THEIR OWN TAX ADVISORS WITH
RESPECT TO THEIR PARTICULAR CIRCUMSTANCES.
A Canadian Holder who is an individual will be required to include in
income the Canadian dollar equivalent of any dividends (including the Canadian
dollar equivalent of any United States taxes withheld therefrom) paid to the
holder of the Shares. Such dividends will not be eligible for the gross-up and
dividend tax credit treatment generally accorded dividends received from taxable
Canadian corporations. A Canadian Holder which is a corporation will be required
to include in income the Canadian dollar equivalent of any dividends (including
the Canadian dollar equivalent of any United States taxes withheld therefrom)
paid to it on the Shares and will generally not be entitled to any deduction in
respect thereof in computing taxable income. A Canadian Holder that is a
Canadian-controlled private corporation for purposes of the Canadian Tax Act may
be liable to pay an additional refundable tax of 6 2/3% on such dividends. In
general, the Canadian dollar equivalent of any United States taxes withheld will
be treated as foreign tax eligible for foreign tax credit or deduction treatment
where applicable under the Canadian Tax Act.
A Canadian Holder who disposes of Shares or is deemed under the Canadian
Tax Act to have disposed of Shares will realize a capital gain (or a capital
loss) to the extent that the proceeds of disposition of the Shares, net of any
costs of disposition, exceed (or are exceeded by) the adjusted cost base thereof
to the Canadian Holder immediately before the disposition. The adjusted cost
base will generally be determined by reference to the average cost of all Shares
held by the Canadian Holder as capital property at the time of the disposition.
The portion of capital gains to be included in computing a holder's income
("taxable capital gains"), and the portion of capital losses deductible from
taxable capital gains in accordance with the Canadian Tax Act, is 75%.
A holder of Shares who is a "specified Canadian entity" under the Canadian
Tax Act and whose aggregate cost amount at any time in a year or fiscal period
of all of the holder's "specified foreign property" (which includes the Shares)
exceeds Cdn.$100,000 is required to file an information return in respect of
such property (including the Shares) disclosing in respect of the Shares the
holder's cost amount, any dividends received in the year and any gains or losses
realized in the year in respect of the Shares. A specified Canadian entity means
a taxpayer resident in Canada in the year, other than a corporation or a trust
exempt from tax under Part I of the Canadian Tax Act, a non-resident owned
investment corporation, a mutual fund corporation, a mutual fund trust and
certain other trusts or partnerships.
MATERIAL CONTRACTS
The only material contracts entered into within the two years prior to the
date hereof, or to be entered into prior to the completion of the Offering, by
the Company or any of its subsidiaries, other than in the ordinary course of
business are as follows:
1. the Canadian Underwriting Agreement described under "Plan of
Distribution for the Canadian Offering";
2. the underwriting agreements between the Company and the U.S.
underwriters and the Company and the international managers described
under the heading "Underwriting" in the U.S. Prospectus forming part of
this prospectus;
3. the Transfer and Assumption Agreement to be entered into by TD
Waterhouse Securities (Canada), Inc. ("TD Waterhouse Canada"), a
wholly-owned subsidiary of the Company, with TDSI and the Bank pursuant
to which TD Waterhouse Canada will acquire certain assets and assume
certain liabilities from TDSI and the Bank as described under the
heading "The Reorganization" in the US Prospectus forming part of this
prospectus;
Can - 6
<PAGE> 138
4. the Support and Exchange Agreement to be entered into by the Company,
TD Waterhouse Canada, TDSI and the Bank in connection with the
exchangeable preference shares to be issued by TD Waterhouse Canada, as
described under the heading "Description of Capital Stock -- Description
of Exchangeable Preference Shares of TD Waterhouse Canada" in the U.S.
Prospectus forming part of this prospectus;
5. a Master Services Agreement to be entered into between TD Waterhouse
and/or its affiliates and the Bank providing for certain services to be
provided as between the Bank and its affiliates and TD Waterhouse and
its affiliates, as described under the heading "Principal Stockholder --
Master Services Agreement" in the U.S. Prospectus forming part of this
prospectus;
6. the Tax Sharing Agreement between the Company and Waterhouse Investor
Services, Inc. ("WISI"), providing for certain tax sharing arrangements
as described under the heading "Principal Stockholder -- Tax Sharing
Agreement" in the U.S. Prospectus forming part of this prospectus;
7. a subordinated loan facility to be provided by the Bank to TD
Waterhouse Canada pursuant to which the Bank will make subordinated
loans available to TD Waterhouse Canada at market rates as described
under the heading "Principal Stockholder -- Credit Arrangements" in the
U.S. Prospectus forming part of this prospectus;
8. the Transfer Agreement to be entered into between WISI and the
Company pursuant to which the Company will acquire certain shares from
WISI, as described under the heading "The Reorganization" in the U.S.
Prospectus forming part of this prospectus;
9. one or more Share Transfer Agreements to be entered into between the
Company and the Bank pursuant to which the Company will acquire certain
shares held by the Bank, as described under the heading "The
Reorganization" in the U.S. Prospectus forming part of this prospectus;
and
10. Share Transfer Agreements between WISI and two of its broker-dealer
subsidiaries providing for the exchange by WISI of shares of common
stock of such subsidiaries held by WISI for new shares of common stock
and preferred shares of such subsidiaries, as described under the
heading "The Reorganization" in the U.S. Prospectus forming part of this
prospectus.
Copies of the foregoing agreements, or drafts thereof, may be inspected at
the registered office of the Company at 100 Wall Street, New York, New York
10005 U.S.A. during regular business hours during the course of distribution to
the public of the Common Shares and for a period of 30 days thereafter.
LEGAL MATTERS
Certain legal matters in connection with the Canadian Offering will be
passed upon on behalf of the Company by McCarthy Tetrault and on behalf of the
Canadian Underwriters by Tory Tory DesLauriers & Binnington. The partners,
counsel and associates of each of McCarthy Tetrault and Tory Tory DesLauriers &
Binnington, respectively as a group, beneficially own, directly and indirectly,
less than one percent of the outstanding securities of any class of the Company.
A partner and a counsel to McCarthy Tetrault are officers and/or directors of
various affiliates of the Bank through which the Bank administers certain of its
real estate investments.
AUDITOR, TRANSFER AGENT AND REGISTRAR
The auditor of the Company is PricewaterhouseCoopers LLP, 1117 Avenue of
the Americas, New York, New York 10036.
The transfer agent and registrar for the Shares is -- at its
principal offices in each of the cities of -- .
Can - 7
<PAGE> 139
STATUTORY RIGHTS OF WITHDRAWAL AND RESCISSION
Securities legislation in several of the provinces and territories of
Canada provides purchasers with the right to withdraw from an agreement to
purchase securities within two business days after receipt or deemed receipt of
a prospectus and any amendment. In several of the provinces and territories
securities legislation further provides a purchaser with remedies for rescission
or, in some jurisdictions, damages where the prospectus and any amendment
contains a misrepresentation or is not delivered to the purchaser, provided that
such remedies for rescission or damages are exercised by the purchaser within
the time limit prescribed by the securities legislation of the purchaser's
province or territory. The purchaser should refer to any applicable provisions
of the securities legislation of the purchaser's province or territory for the
particulars of these rights or consult with a legal adviser.
Can - 8
<PAGE> 140
UNITED STATES PROSPECTUS
Attached is the prospectus forming part of the Form S-1 registration
statement filed with the Securities and Exchange Commission in the United States
in connection with the Combined Offering (the "U.S. Prospectus"). The U.S.
Prospectus is deemed to form a part of this prospectus.
Can - 9
<PAGE> 141
CERTIFICATE OF THE COMPANY
Dated: April 30, 1999
The foregoing constitutes full, true and plain disclosure of all material
facts relating to the securities being offered by this prospectus as required by
Part 7 of the Securities Act (British Columbia), Part 8 of the Securities Act
(Alberta), Part XI of the Securities Act, 1988 (Saskatchewan), Part VII of the
Securities Act (Manitoba), Part XV of the Securities Act (Ontario), Section 13
of the Security Frauds Prevention Act (New Brunswick), section 64 of the
Securities Act (Nova Scotia), Part II of the Securities Act (Prince Edward
Island), Part XIV of the Securities Act (Newfoundland), Part 3 of the Securities
Act (Yukon) and section 28 of the Securities Act (N.W.T.) and the respective
regulations thereunder. This prospectus does not contain any misrepresentation
likely to affect the value or the market price of the securities to be
distributed, as required by the Securities Act (Quebec) or the Regulations
thereunder.
<TABLE>
<S> <C>
(signed) Stephen D. McDonald (signed) B. Kevin Sterns
Deputy Chair and Chief Executive Officer Chief Financial Officer
On behalf of the Board of Directors:
(signed) Frank J. Petrilli (signed) John G. See
Director Director
</TABLE>
Can - 10
<PAGE> 142
CERTIFICATE OF THE CANADIAN UNDERWRITERS
Dated: April 30, 1999
To the best of our knowledge, information and belief, the foregoing,
constitutes full, true and plain disclosure of all material facts relating to
the securities offered by this prospectus as required by Part 7 of the
Securities Act (British Columbia), Part 8 of the Securities Act (Alberta), Part
XI of the Securities Act, 1988 (Saskatchewan), Part VII of the Securities Act
(Manitoba), Part XV of the Securities Act (Ontario), Section 13 of the Security
Frauds Prevention Act (New Brunswick), section 64 of the Securities Act (Nova
Scotia), Part II of the Securities Act (Prince Edward Island), Part XIV of the
Securities Act (Newfoundland), Part 3 of the Securities Act (Yukon) and section
28 of the Securities Act (N.W.T.) and the respective regulations thereunder. To
our knowledge, this prospectus does not contain any misrepresentation likely to
affect the value or the market price of the securities to be distributed, as
required by the Securities Act (Quebec) or the Regulations thereunder.
<TABLE>
<S> <C>
TD SECURITIES INC. CREDIT SUISSE FIRST BOSTON SECURITIES
CANADA INC.
By: (signed) J. David Beattie By: (signed) Darin E. Deschamps
NESBITT BURNS INC. SCOTIAMCLEOD INC.
By: (signed) Tom Flynn By: (signed) John L. Sherrington
CIBC WOOD GUNDY SECURITIES INC. RBC DOMINION SECURITIES INC.
By: (signed) Peter M. Irwin By: (signed) John M. Garrow
</TABLE>
<TABLE>
<S> <C> <C>
MERRILL LYNCH CANADA INC. LEVESQUE BEAUBIEN GRIFFITHS MCBURNEY &
GEOFFRION INC. PARTNERS
By: (signed) Donald A. Fox By: (signed) Ian McPherson By: (signed) Eugene C. McBurney
</TABLE>
<TABLE>
<S> <C> <C> <C>
FIRST MARATHON HSBC JAMES CAPEL NEWCREST CAPITAL TRILON SECURITIES
SECURITIES LIMITED CANADA INC. INC. CORPORATION
By: (signed) Vincenza Sera By: (signed) Mark A. By: (signed) David G. Ward By: (signed) Trevor D. Kerr
Weisdorf
</TABLE>
Can - 11
<PAGE> 143
The following includes the name of each person having an interest, either
directly or indirectly, to the extent of not less than five percent in the
capital of:
TD SECURITIES INC.: a wholly-owned subsidiary of a Canadian chartered bank;
CREDIT SUISSE FIRST BOSTON SECURITIES CANADA INC.: an indirect subsidiary of
Credit Suisse First Boston, a Swiss bank;
NESBITT BURNS INC.: The Nesbitt Burns Corporation Limited, a majority-owned
subsidiary of a Canadian chartered bank;
SCOTIAMCLEOD INC.: an indirect wholly-owned subsidiary of a Canadian chartered
bank;
CIBC WOOD GUNDY SECURITIES INC.: a wholly-owned subsidiary of a Canadian
chartered bank;
RBC DOMINION SECURITIES INC.: RBC Dominion Securities Limited, a majority-owned
subsidiary of a Canadian chartered bank;
MERRILL LYNCH CANADA INC.: a wholly-owned subsidiary of Merrill Lynch & Co.,
Inc.;
LEVESQUE BEAUBIEN GEOFFRION INC.: wholly-owned by Levesque Beaubien and Company
Inc., a majority-owned subsidiary of a Canadian chartered bank;
GRIFFITHS MCBURNEY & PARTNERS: Bradley D. Griffiths, Eugene C. McBurney, Kevin
Sullivan, Michael Wekerle, Thomas Budd and J. Robert Fraser;
FIRST MARATHON SECURITIES LIMITED: a wholly-owned subsidiary of First Marathon
Inc.;
HSBC JAMES CAPEL CANADA INC.: a wholly-owned subsidiary of a Canadian chartered
bank;
NEWCREST CAPITAL INC.: a wholly-owned subsidiary of Newcrest Holdings Inc. which
is owned by the employees of Newcrest Capital Inc.; and
TRILON SECURITIES CORPORATION: a wholly-owned subsidiary of Trilon Financial
Corporation.
Can - 12
<PAGE> 144
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
ALTERNATE COVER PAGE FOR INTERNATIONAL PROSPECTUS
SUBJECT TO COMPLETION, DATED APRIL 30, 1999
Shares
TD WATERHOUSE SECURITIES, INC.
Common Stock
------------------
We are selling shares of our common stock. Of these shares,
shares are being offered in the United States by a syndicate of U.S.
underwriters, shares are being offered in Canada by a syndicate of Canadian
underwriters, and shares are being offered outside of the United States
and Canada by a syndicate of international managers. The underwriters and
managers have an option to purchase on a pro rata basis up to
additional shares to cover over-allotments.
Prior to these offerings, there has not been a public market for our common
stock. The initial public offering price is expected to be between $ and
$ per share. We intend to apply to list our common stock on The New York
Stock Exchange and The Toronto Stock Exchange.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" STARTING ON
PAGE .
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS TD WATERHOUSE
-------- ------------- -------------
<S> <C> <C> <C>
Per Share............................................ $ $ $
Total................................................ $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about ,
1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Joint Global Coordinators
CREDIT SUISSE FIRST BOSTON THE TORONTO-DOMINION BANK
------------------
<TABLE>
<S> <C> <C>
GOLDMAN SACHS SALOMON SMITH BARNEY MORGAN STANLEY
INTERNATIONAL INTERNATIONAL DEAN WITTER
</TABLE>
The date of this prospectus is , 1999.
<PAGE> 145
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below is an estimate (except for the SEC, TSE and NYSE fees) of
the fees and expenses payable by us in connection with the offerings of the
common stock:
<TABLE>
<CAPTION>
FEES AND EXPENSES
-----------------
<S> <C>
Registration Fees........................................... $*
Printing and Engraving Costs................................ *
Legal Fees and Expenses..................................... *
Accounting Fees and Expenses................................ *
NYSE Listing Fee............................................ *
TSE Listing Fee............................................. *
Registrar and Transfer Agent's Fees......................... *
Blue Sky Qualification Fees and Expenses.................... *
Miscellaneous Fees and Expenses............................. *
-------
Total.................................................. $*
=======
</TABLE>
- ---------------
* To be filled in by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102(b)(7) of the Delaware General Corporation Law (the "DGCL")
permits a provision in the certificate of incorporation of each corporation
organized thereunder, eliminating or limiting, with certain exceptions, the
personal liability of a director to the corporation or its stockholders for
monetary damages for certain breaches of fiduciary duty as a director.
Waterhouse's Certificate of Incorporation eliminates the personal liability of
directors to the fullest extent permitted by the DGCL.
Section 145 of the DGCL authorizes a Delaware corporation, within certain
limitations, to indemnify its officers, directors, employees and agents against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement, actually and reasonably incurred by them in connection with any suit
or proceeding other than by or on behalf of the corporation, if they acted in
good faith and in a manner reasonably believed to be in or not opposed to the
best interest of the corporation, and, with respect to a criminal action or
proceeding, had no reasonable cause to believe their conduct was unlawful.
With respect to actions by or on behalf of the corporation, Section 145
permits a corporation to indemnify its officers, directors, employees and agents
against expenses (including attorneys' fees) actually and reasonably incurred in
connection with the defense or settlement of such action or suit, provided such
person meets the standard of conduct described in the preceding paragraph,
except that no indemnification is permitted in respect of any claim where such
person has been found liable to the corporation, unless the Court of Chancery or
the court in which such action or suit was brought approves such indemnification
and determines that such person is fairly and reasonably entitled to be
indemnified.
Our charter provides for the indemnification of our officers and directors
(the "Indemnitees") to the fullest extent permitted by applicable law. Delaware
law currently permits a Delaware corporation (i) to indemnify any officer or
director in any third-party or governmental actions against them for expenses,
judgments, fines and amounts paid in settlement and, in derivative actions, for
expenses, if the Indemnitee acted in good faith and in the manner he believed to
be in or not opposed to the best interest of such corporation and (ii) to
advance expenses in any action, provided that such officer or directors agrees
to reimburse the corporation if it is ultimately determined that he was not
entitled to indemnification.
Pursuant to the underwriting agreement between us and the underwriters
filed as an exhibit to this registration statement, the underwriters have agreed
to indemnify each of our officers and directors and each
II-1
<PAGE> 146
person, if any, who controls us within the meaning of the Securities Act of
1933, as amended, against certain liabilities, including liabilities under said
Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since our formation, we have issued the following securities that were not
registered under the Securities Act:
On April 21, 1999, we issued 100 shares of our common stock to Waterhouse
Investor Securities, Inc., a wholly-owned subsidiary of TD Bank. Such issuance
was made in reliance upon an exemption from the registration provisions of the
Securities Act set forth in section 4(2) thereof relating to sales by an issuer
not involving a public offering. The foregoing securities are deemed restricted
securities for purposes of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1* Underwriting Agreement
2* Transfer and Assumption Agreement among The Toronto-Dominion
Bank, TD Waterhouse Securities, Inc. and certain of their
respective subsidiaries
3.1* Amended and Restated Certificate of Incorporation of TD
Waterhouse
3.2* By-laws of TD Waterhouse
4.1* Specimen Common Stock certificate
4.2* Support and Exchange Agreement between TD Waterhouse and TD
Waterhouse Canada (including therein forms of exchangeable
preference shares of TD Waterhouse Canada and special voting
preferred share of TD Waterhouse)
5* Opinion of Simpson Thacher & Bartlett as to validity of
common stock
8* Opinion of Simpson Thacher & Bartlett regarding certain tax
matters
10.1* Form of 1999 TD Waterhouse Stock Incentive Plan
10.2* The Toronto-Dominion 1993 Stock Option Plan
10.3* Form of Master Services Agreement between TD Waterhouse and
TD Bank
10.4* Form of Tax Sharing Agreement between TD Waterhouse and
Waterhouse Investor Services, Inc.
11.1* Statement re computation of per share earnings
21.1* List of subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP
23.2* Consent of Simpson Thacher & Bartlett (included in Exhibits
5 and 8)
27.1 Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment.
(b) All other schedules are omitted as the required information is included
in the Registrants's consolidated financial statements or the related notes or
such schedules are not applicable.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 14 above, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by a
registrant of expenses incurred or paid by a director, officer or controlling
person of such registrant in the
II-2
<PAGE> 147
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of
this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(3) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreement,
certificates in such denominations registered in such names as required
by the underwriter to permit prompt delivery to each purchaser.
II-3
<PAGE> 148
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on the 30th day of April, 1999.
TD WATERHOUSE SECURITIES, INC.
By: /s/ STEPHEN D. MCDONALD
------------------------------------
Name: Stephen D. McDonald
Title: Chief Executive Officer
The registrant and each person whose signature appears below constitutes
and appoints Stephen D. McDonald, and any agent for service named in this
registration statement and each of them, his, her or its true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him, her or it and in his, her, or its name, place and
stead, in any and all capacities, to sign and file (i) any and all amendments
(including post-effective amendments) to this registration statement, with all
exhibits thereto, and other documents in connection therewith, and (ii) a
registration statement, and any and all amendments thereto, relating to the
offering covered hereby filed pursuant to Rule 462(b) under the Securities Act
of 1933, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he, she, or it
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ STEPHEN D. MCDONALD Chief Executive Officer and Deputy Chair of the
- --------------------------------------------------- Board of Directors
Stephen D. McDonald (Principal Executive Officer)
/s/ B. KEVIN STERNS Executive Vice-President and Chief Financial
- --------------------------------------------------- Officer
B. Kevin Sterns (Principal Financial and Accounting Officer)
/s/ A. CHARLES BAILLIE Chairman of the Board of Directors
- ---------------------------------------------------
A. Charles Baillie
/s/ FRANK J. PETRILLI Director
- ---------------------------------------------------
Frank J. Petrilli
/s/ JOHN G. SEE Director
- ---------------------------------------------------
John G. See
/s/ LAWRENCE M. WATERHOUSE, JR. Director
- ---------------------------------------------------
Lawrence M. Waterhouse, Jr.
</TABLE>
II-4
<PAGE> 149
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ------- ----------- ----------
<C> <S> <C>
1* Underwriting Agreement
2* Transfer and Assumption Agreement among The Toronto-Dominion
Bank, TD Waterhouse Securities, Inc. and certain of their
respective subsidiaries
3.1* Amended and Restated Certificate of Incorporation of TD
Waterhouse
3.2* By-laws of TD Waterhouse
4.1* Specimen Common Stock certificate
4.2* Support and Exchange Agreement between TD Waterhouse and TD
Waterhouse Canada (including therein form of exchangeable
preference shares of TD Waterhouse Canada and special voting
preferred share of TD Waterhouse)
5* Opinion of Simpson Thacher & Bartlett as to validity of
common stock
8* Opinion of Simpson Thacher & Bartlett regarding certain tax
matters
10.1* Form of 1999 TD Waterhouse Stock Incentive Plan
10.2* The Toronto-Dominion 1993 Stock Option Plan
10.3* Form of Master Services Agreement between TD Waterhouse and
TD Bank
10.4* Form of Tax Sharing Agreement between TD Waterhouse and
Waterhouse Investor Services, Inc.
11.1* Statement re computation of per share earnings
21.1* List of subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP
23.2* Consent of Simpson Thacher & Bartlett (included in Exhibits
5 and 8)
27.1 Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment.
II-5
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated April 29, 1999 relating
to the combined financial statements of TD Waterhouse Securities, Inc. (a
combination of certain businesses of The Toronto-Dominion Bank), which appears
in such Prospectus. We also consent to the use in such Prospectus of our report
dated April 29, 1999 relating to the combined financial statements of Waterhouse
Securities Group (a combination of certain businesses of Waterhouse Investor
Services, Inc.) for the twelve-months ended October 31, 1996, which appears as
supplemental information in such prospectus. We also consent to the reference to
us under the heading "Experts" in such prospectus.
PricewaterhouseCoopers LLP
New York, New York
April 30, 1999
II-6
<TABLE> <S> <C>
<ARTICLE> BD
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> OCT-31-1998 OCT-31-1999
<PERIOD-START> NOV-01-1997 NOV-01-1999
<PERIOD-END> OCT-31-1998 JAN-31-1999
<CASH> 522,029 484,137
<RECEIVABLES> 2,627,899 3,627,721
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 232,685 455,618
<INSTRUMENTS-OWNED> 76,279 62,077
<PP&E> 27,604 29,964
<TOTAL-ASSETS> 4,298,736 5,482,699
<SHORT-TERM> 31,183 58,450
<PAYABLES> 2,100,295 2,111,258
<REPOS-SOLD> 0 0
<SECURITIES-LOANED> 1,033,964 2,048,999
<INSTRUMENTS-SOLD> 4,987 5,199
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 997,240 1,035,463
<OTHER-SE> (2,105) 185
<TOTAL-LIABILITY-AND-EQUITY> 4,298,736 5,842,699
<TRADING-REVENUE> 0 0
<INTEREST-DIVIDENDS> 117,733 34,004
<COMMISSIONS> 409,432 152,044
<INVESTMENT-BANKING-REVENUES> 0 0
<FEE-REVENUE> 87,296 28,987
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 183,377 59,859
<INCOME-PRETAX> 103,478 38,097
<INCOME-PRE-EXTRAORDINARY> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 48,713 20,066
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
