DEFM14A
UNITED STATES
SECURITY AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934)
Filed by the Registrant þ
Filed by a Party other than the
Registrant o
Check the appropriate box:
o Preliminary Proxy
Statement
o Confidential, for
Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
þ Definitive
Proxy Statement
o Definitive
Additional Materials
o Soliciting Material
Pursuant to
§240.14a-12
INVESTOOLS INC.
(Name of Registrant as Specified In
Its Charter)
(Name of Person(s) Filing Proxy
Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
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Fee computed on table below per Exchange Act
Rules 14a-6(i)(4)
and 0-11.
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(1)
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Title of each class of securities to which transaction applies:
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(2)
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Aggregate number of securities to which transaction applies:
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(3)
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Per unit price or other underlying value of transaction computed
pursuant to Exchange Act
Rule 0-11
(set forth the amount on which the filing fee is calculated and
state how it was determined):
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(4)
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Proposed maximum aggregate value of transaction:
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Fee paid previously with preliminary materials:
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$41,207.80
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Check box if any part of the fee is offset as provided by
Exchange Act
Rule 0-11(a)(2)
and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its
filing.
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(1)
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Amount Previously Paid:
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(2)
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Form, Schedule or Registration Statement No.:
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INVESTOOLS
INC.
13947 South Minuteman Drive
DRAPER, UTAH 84020
December 13, 2006
Dear INVESTools Stockholder,
You are cordially invited to attend a special meeting of
stockholders (the Special Meeting) of INVESTools
Inc. (the Company) to be held on Wednesday,
January 17, 2007, at 10:00 a.m. (local time) at the
New York Marriott East Side Hotel, 1535 Broadway, New York, NY
10036. A notice of the meeting, a proxy card and a proxy
statement containing information about the matters to be acted
upon are enclosed.
As you may know, we have agreed to acquire thinkorswim Group,
Inc., which will create a unique business model with the ability
to offer differentiated product offerings for retail and
institutional investors.
All holders of record at the close of business on
November 30, 2006, of the outstanding shares of common
stock of the Company will be entitled to vote at the Special
Meeting, at which you will be asked to:
1. Approve the issuance of shares of our common stock in
connection with the proposed merger of thinkorswim Group, Inc.
and a wholly-owned subsidiary of the Company, and grants of
options to purchase our common stock to the employees of
thinkorswim Group, Inc. (the Issuance Proposal);
2. Approve the amendment to our Certificate of
Incorporation to increase the authorized common stock to
100 million shares (the Charter Amendment);
3. Approve amendments to the Companys 2001 Stock
Option Plan to increase the number of shares of common stock
available for issuance thereunder from 8 million to
12 million shares, and to expand potential award recipients
to include consultants of the Company (the Option Plan
Amendments);
4. Approve the adjournment of the meeting, if necessary or
appropriate, to solicit additional proxies if there are
insufficient votes at the meeting to approve the
proposals; and
5. Act upon other business as may properly come before the
meeting or any adjournment thereof.
The rules of The NASDAQ Global Market require stockholder
approval of the issuance of our common stock in the proposed
transaction.
Approval of the Issuance Proposal and the Option Plan Amendments
requires the affirmative vote of a majority of the shares of our
common stock present in person or by proxy at the Special
Meeting and entitled to vote thereon, provided that a quorum
consisting of a majority of the shares of common stock entitled
to vote is present. Approval of the Charter Amendment requires
the affirmative vote of a majority of the shares of our common
stock entitled to vote thereon.
The accompanying proxy statement provides important information
about the proposals please read it carefully.
It is important that your shares be represented at the meeting.
Accordingly, we request that you promptly sign, date and return
the enclosed proxy card in the accompanying postage-paid
envelope or authorize the individuals named on your proxy card
to vote your shares by calling the toll-free telephone number or
by using the Internet as described in the instructions included
with your proxy card.
If you have any questions or need assistance voting your shares,
please call D.F. King & Co., Inc., who is assisting us,
toll-free at 1-888-886-4425.
Regards,
Lee K. Barba
Chief Executive Officer
This proxy
statement is dated December 13, 2006,
and is first being mailed to stockholders on or about
December 18, 2006.
INVESTOOLS
INC.
13947 South Minuteman Drive
DRAPER, UTAH 84020
NOTICE OF SPECIAL MEETING OF
STOCKHOLDERS
January 17,
2007
To the Stockholders of INVESTools Inc.:
A special meeting of stockholders (the Special
Meeting) of INVESTools Inc. (the Company) will
be held on Wednesday, January 17, 2007 at 10:00 a.m.
(local time) at the New York Marriott East Side Hotel, 1535
Broadway, New York, NY 10036, for the following purposes:
1. To approve the issuance of shares of our common stock in
connection with the proposed merger of thinkorswim Group, Inc.
and a wholly-owned subsidiary of the Company, and grants of
options to purchase our common stock to the employees of
thinkorswim Group, Inc. (the Issuance Proposal);
2. To approve the amendment to our Certificate of
Incorporation to increase the authorized common stock to
100 million shares (the Charter Amendment);
3. To approve amendments to the Companys 2001 Stock
Option Plan to increase the number of shares of common stock
available for issuance thereunder from 8 million to
12 million shares and to expand potential award recipients
to include consultants of the Company (the Option Plan
Amendments);
4. To approve the adjournment of the meeting, if necessary
or appropriate, to solicit additional proxies if there are
insufficient votes at the meeting to approve the proposals
described above; and
5. To act upon other business as may properly come before
the meeting or any adjournment thereof.
Further information regarding the Special Meeting and the
proposals described above is set forth in the accompanying Proxy
Statement. The Board of Directors has fixed the close of
business on November 30, 2006, as the record date for the
meeting, and only holders of common stock of record at such time
will be entitled to vote at the Special Meeting or any
adjournments thereof. You are cordially invited to attend the
Special Meeting in person. Even if you plan to attend the
Special Meeting, we urge you to vote your shares at your
earliest convenience in order to ensure that your shares will be
represented at the meeting. You can vote by signing, dating and
returning the enclosed proxy card in the postage-paid envelope,
or by submitting your proxy voting instructions by telephone or
through the Internet. If you hold your shares through a broker
or other nominee you should contact your broker to determine
whether you may submit your proxy by telephone or Internet.
The Board of Directors has unanimously approved the proposals
described above. Accordingly, the Board of Directors
unanimously recommends that you vote FOR approval of
the Issuance Proposal, the Option Plan Amendments and the
Charter Amendment.
By Order of the Board of Directors
Lee K. Barba
Chairman of the Board
December 13, 2006
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A-1
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B-1
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INVESTOOLS
INC.
13947 South Minuteman Drive
DRAPER, UTAH 84020
PROXY STATEMENT
Special Meeting of Stockholders
This Proxy Statement and accompanying Proxy Card are being
furnished to stockholders in connection with the solicitation of
proxies by the Board of Directors (the Board of
Directors) of INVESTools Inc., a Delaware corporation
(INVESTools or the Company), for use at
the special meeting of stockholders of the Company to be held at
the New York Marriott East Side Hotel, 1535 Broadway, New York,
NY 10036, at 10:00 a.m. (local time) on January 17,
2007, and at any adjournments thereof (such meeting or
adjournment(s) thereof referred to as the Special
Meeting), for the purpose of considering and voting upon
the matters set forth in the accompanying Notice of Special
Meeting of Stockholders. This Proxy Statement and the
accompanying form of proxy card are first being mailed to
stockholders on or about December 18, 2006.
The close of business on November 30, 2006, 2006, has been
fixed as the record date for the determination of stockholders
entitled to notice of and to vote at the Special Meeting. As of
the record date, there were 45,133,616 shares of our common
stock, par value $0.01 per share (the Common
Stock), issued and outstanding. Each share is entitled to
one vote on all issues requiring a stockholder vote at the
Special Meeting. The presence, in person or by proxy, of at
least a majority of the outstanding shares of Common Stock on
the record date is necessary to constitute a quorum at the
Special Meeting. Abstentions and broker non-votes are counted
for purposes of determining the presence or absence of a quorum
for the transaction of business.
Approval of the first proposal, the issuance of shares of Common
Stock in connection with the proposed merger of thinkorswim
Group, Inc., a Delaware corporation (thinkorswim)
and a wholly-owned subsidiary of the Company, and the granting
of options to purchase Common Stock to the employees of
thinkorswim, will require the affirmative vote of a majority of
the shares of Common Stock present in person or by proxy at the
Special Meeting and entitled to vote thereon.
Approval of the second proposal, the amendment to
INVESTools Certificate of Incorporation, will require the
affirmative vote of a majority of the shares of our common stock
entitled to vote thereon.
Approval of the third proposal, the amendments to the
Companys 2001 Stock Option Plan to increase the number of
shares of Common Stock available for issuance thereunder from
8 million to 12 million shares, and to expand
potential award recipients to include consultants of the
Company, will require the affirmative vote of a majority of the
shares of Common Stock present in person or by proxy at the
Special Meeting and entitled to vote thereon.
Any person who signs and mails the enclosed proxy, even though
executed and returned, may revoke the proxy at any time prior to
the voting of the proxy (i) by the execution and submission
of a revised, later-dated proxy, (ii) by written notice to
the Corporate Secretary of the Company or (iii) by voting
in person at the Special Meeting. However, a proxy will not be
revoked simply by attending the Special Meeting and not voting.
To revoke a proxy previously submitted by telephone or the
Internet, a stockholder of record can simply vote again at a
later date, using the same procedures, in which case the later
submitted vote will be recorded and the earlier vote will
thereby be revoked.
QUESTIONS
AND ANSWERS
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Why is INVESTools asking you to approve the issuance of
shares of Common Stock? |
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On September 18, 2006, INVESTools and thinkorswim entered
into an Agreement and Plan of Merger (the Merger
Agreement), pursuant to which thinkorswim will merge with
a wholly-owned subsidiary of INVESTools. |
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Under the terms of the Merger Agreement, which was approved
unanimously by the Boards of Directors of INVESTools and
thinkorswim, thinkorswim will become a wholly-owed subsidiary of
INVESTools (the Merger) and thinkorswim stockholders
will receive 50% of the merger consideration in cash and 50% in
stock, representing approximately $170 million in cash and
19.1 million shares of Common Stock. Employees of
thinkorswim will also receive retention bonus opportunities
equaling, in the aggregate, $20 million, which would be
paid in equal annual installments over the three-year period
following the closing of the Merger. |
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The NASDAQ Global Market rules require the approval of the
Companys stockholders prior to the issuance of additional
shares of Common Stock in any transaction if the common stock to
be issued as merger consideration (i) has, or will have
upon issuance, voting power equal to or in excess of 20% of the
voting power outstanding before the issuance of such common
stock or (ii) is, or will be upon issuance, equal to or in
excess of 20% of the number of shares of common stock
outstanding before the issuance of the common stock. The number
of shares to be issued to thinkorswim stockholders is equal to
approximately 42.3% of the shares outstanding before the Merger
(29.7% after the Merger). Therefore, your approval is required. |
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Delaware law requires the approval of the Companys
stockholders prior to amending INVESTools Certificate of
Incorporation. Immediately prior to the Merger, subject to the
receipt of stockholder approval, INVESTools Certificate of
Incorporation will be amended to increase the number of
authorized shares of Common Stock to 100 million. |
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In connection with the Merger, the Company will grant to the
employees of thinkorswim options to purchase
2,255,563 shares of Common Stock under the Companys
2001 Stock Option Plan, half with an exercise price equal to the
fair market value of the underlying Common Stock at the time of
grant, and half with an exercise price equal to 150% of such
fair market value. The Company intends to amend its 2001 Stock
Option Plan to maintain the approximate number of shares of
Common Stock eligible for future awards under the plan, by
increasing the number of shares of Common Stock available for
issuance thereunder from 8 million to 12 million
shares. The Company must obtain stockholder approval to amend
its 2001 Stock Option Plan. |
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You are not being asked to approve the proposed transaction
itself, although if INVESTools stockholders do not approve the
issuance of shares or the amendment to the Certificate of
Incorporation, the proposed transaction cannot occur on its
current terms. |
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Who is thinkorswim? |
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thinkorswim is a leading retail online brokerage firm,
specializing in options and also offering customers a broad
range of products including equities, futures, mutual funds, and
bonds. thinkorswim supports retail and institutional traders
through its own trading platforms and is widely recognized as
the premier option software for order entry, professional
analytical tools and real-time position management. thinkorswim
has revolutionized the option industry by teaching and executing
complex, multi-leg option strategies with single-click
functionality. thinkorswim recently received Barrons top
rating in their 2006 Annual Survey of Best Online Brokers for
their software platform. thinkorswims platform surpassed
its peer group as Barrons choice for options traders and
was the only firm to finish #1 and #2, respectively,
in software and browser-based ratings. |
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Why is the Company merging with thinkorswim? |
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In reaching its decision to pursue a combination of INVESTools
and thinkorswim, the Board of Directors consulted with senior
management and the Companys financial and legal advisors
and considered a number of factors. The Company believes that a
combination of INVESTools and thinkorswim represents a
compelling opportunity to improve value for stockholders by
creating a market leader in the investor education and online
brokerage industries and establishing a foundation for long-term
growth. For a detailed discussion of |
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the Companys reasons for merging its wholly-owned
subsidiary with thinkorswim, see Issuance of Common Stock
in Connection with the Proposed Merger
INVESTools Reasons for the Merger. |
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Is the Board of Directors recommending that I vote for the
issuance of Common Stock, the charter amendment, and the
amendments to the 2001 Stock Option Plan? |
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Yes. The Board of Directors has unanimously approved the Merger,
the issuance of shares of Common Stock in connection with the
Merger, the amendment to INVESTools Certificate of
Incorporation and the amendments to the 2001 Stock Option Plan.
Accordingly, the Board of Directors unanimously recommends
that you vote FOR such proposals. |
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How much INVESTools stock will the current owners of
thinkorswim own upon consummation of the Merger? |
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In connection with the Merger, current thinkorswim stockholders
will represent approximately 29.7% of the ownership of
INVESTools, and thinkorswim will designate two seats on an
expanded eight-member INVESTools Board of Directors.
Employees of thinkorswim will also receive INVESTools stock
options to purchase 2,255,563 shares of Common Stock under
the Companys 2001 Stock Option Plan, half with an exercise
price equal to the fair market value of the underlying Common
Stock at the time of grant and half with an exercise price equal
to 150% of such fair market value. These options will vest over
a four-year term. |
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Am I entitled to dissenters rights? |
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No, you will not be entitled to dissenters rights under
Delaware law as a result of the Merger. |
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What do I need to do now? |
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After carefully reading and considering the information
contained in this Proxy Statement, you may either complete, sign
and date your proxy card and voting instructions and return them
in the enclosed postage- paid envelope or vote in person at the
Special Meeting. Alternatively, you can simplify your voting and
save the Company expense by either voting via the Internet (by
visiting the website established for that purpose at
www.cesvote.com and following the instructions listed there) or
calling the toll-free number listed on the proxy card. Please
vote your shares as soon as possible so that your shares will be
represented at the Special Meeting. |
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If my shares are held in street name by my
broker, will my broker vote my shares for me? |
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Your broker will vote your shares only if you provide
instructions on how to vote. Your broker will mail you materials
that describe the procedures necessary for him or her to record
your voting instructions and vote your shares. Please tell your
broker how you would like him or her to vote your shares. If you
do not tell your broker how to vote, your shares will not be
voted by your broker. |
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Can I change my vote after I have delivered my proxy? |
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Yes. You may revoke your proxy at any time before it is voted at
the meeting by (i) delivering a written notice of
revocation to D.F. King & Co., Inc., who is assisting us,
(ii) delivering a later-dated proxy, including by telephone
or Internet vote or (iii) attending the meeting and voting
in person. Attendance at the Special Meeting, in and of itself,
will not constitute a revocation of a proxy. If your shares are
held in an account at a brokerage firm or a bank, you should
contact your brokerage firm or bank for instructions on how to
change your vote. |
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Who may vote at the Special Meeting? |
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Holders of shares of Common Stock at the close of business on
November 30, 2006 may vote at the Special Meeting. |
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How many votes are required to approve the issuance of the
additional shares of Common Stock? |
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The affirmative vote of holders of a majority of the shares of
Common Stock present in person or represented by proxy at the
Special Meeting is required in order to approve the issuance of
the additional shares in connection with the Merger. As of
November 30, 2006, there were 45,133,616 shares of
Common Stock |
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outstanding and, therefore, assuming that all outstanding
shares of Common Stock are present in person or represented by
proxy at the Special Meeting, the approval of
22,566,809 shares of Common Stock is required to approve
the amendment to INVESTools Certificate of Incorporation
and the issuance of additional shares in connection with the
Merger. |
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What if I dont vote? |
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If your proxy card is signed and returned without specifying a
vote or an abstention on the proposal, it will be voted
according to the recommendation of the Board of Directors on
that proposal. That recommendation is shown FOR the
proposals on the proxy card. To the extent shares are not voted,
such non-votes will not be counted for purposes of
determining whether the proposals have been approved. |
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When do you expect the transaction to be completed? |
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The closing of the transaction is expected to occur in the first
quarter of 2007. |
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Where and when is the Special Meeting? |
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The Special Meeting will take place at the New York Marriott
East Side Hotel, 1535 Broadway, New York, NY 10036, on
January 17, 2007, at 10:00 a.m. local time. |
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Who can help answer my questions? |
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A. |
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If you have any questions about the matters addressed in this
Proxy Statement, need additional copies of this Proxy Statement,
or need assistance voting your shares, you should contact:
D.F. King & Co., Inc., 48 Wall Street, New York,
NY 10005,
1-888-886-4425
(toll-free),
1-212-269-5550
(call collect). |
4
FORWARD-LOOKING
STATEMENTS
All statements in this Proxy Statement that are not historical
are forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934. Such
forward-looking statements may be identified by words such as
believe, intend, expect,
may, could, would,
will, should, plan,
project, contemplate,
anticipate, or similar statements. Because these
statements reflect the Companys current views concerning
future events, these forward-looking statements are subject to
risks and uncertainties. The Company has made every reasonable
effort to ensure that the information and assumptions on which
these statements and projections are based are current,
reasonable, and complete. However, a variety of factors could
cause actual results to differ materially from the projections,
anticipated results or other expectations expressed in this
Proxy Statement, including, without limitation, the ability to
successfully integrate acquired companies; the success of brand
development efforts and strategic alliances; demand for the
Companys products and services; the ability to compete
effectively and adjust to changing market conditions; inability
to protect the Companys proprietary technology;
difficulties or delays in developing improved products when
expected or desired and with the additional features
contemplated or desired; the potential for intellectual property
infringement, warranty, product liability, and other claims; the
uncertainties associated with governmental regulation; and other
factors detailed from time to time in INVESTools SEC
filings. The forward-looking statements are made only as of the
date hereof and the Company assumes no obligation to publicly
update or revise the forward-looking statements whether as a
result of new information, future events, or otherwise.
5
SUMMARY
The
Special Meeting (Page 19)
The Special Meeting will be held on January 17, 2007, at
10:00 a.m. (local time) at the New York Marriott East Side
Hotel, 1535 Broadway, New York, NY 10036. At the
Special Meeting, stockholders will consider and vote upon:
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the issuance of 19,104,762 shares of Common Stock to be
issued in connection with the Companys proposed Merger
with thinkorswim, and grants of options to the employees of
thinkorswim to purchase 2,255,563 shares of Common Stock
under the Companys 2001 Stock Option Plan, half with an
exercise price equal to the fair market value of the underlying
Common Stock at the time of grant, and half with an exercise
price equal to 150% of such fair market value (the
Issuance Proposal);
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the amendment to INVESTools Certificate of Incorporation
to increase the authorized Common Stock to 100 million
shares (the Charter Amendment);
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the amendments to the Companys 2001 Stock Option Plan to
increase the number of shares of Common Stock available for
issuance thereunder from 8 million to 12 million
shares, and to expand potential award recipients to include
consultants of the Company (the Option Plan
Amendments); and
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the proposal to adjourn the meeting, if necessary or
appropriate, to solicit additional proxies if there are
insufficient votes at the meeting to approve the other proposals.
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Record
Date; Voting Power; and Vote Required (Page 19)
All holders of Common Stock are entitled to notice, but only
stockholders of record holding Common Stock as of the close of
business on November 30, 2006, the record date for the
Special Meeting, are entitled to vote at the Special Meeting. As
of the record date, there were 45,133,616 shares of Common
Stock outstanding. Approximately 9,000 stockholders of record
held such shares. Every holder of Common Stock is entitled to
one vote for each such share the stockholder held as of the
record date.
The Issuance Proposal and the Option Plan Amendments will
require the affirmative vote of a majority of the shares of
Common Stock present in person or by proxy at the Special
Meeting and entitled to vote thereon. The Charter Amendment will
require the affirmative vote of a majority of the shares of
Common Stock issued and outstanding.
Revocability
of Proxies (Page 20)
You have the right to revoke your proxy at any time before the
vote taken at the Special Meeting: if you hold your shares in
your name as a stockholder of record, by notifying
D.F. King & Co., Inc., at
1-888-886-4425;
by attending the Special Meeting and voting in person (your
attendance at the meeting will not, by itself, revoke your
proxy; you must vote in person at the meeting); by submitting a
later-dated proxy card, telephone vote, or Internet vote; or, if
you have instructed a broker, bank or other nominee to vote your
shares, by following the directions received from your broker,
bank or other nominee to change those instructions.
Solicitation
of Proxies (Page 20)
The Company will pay the cost of this proxy solicitation. In
addition to soliciting proxies by mail, directors, officers and
employees of INVESTools may solicit proxies personally and by
telephone, facsimile or other electronic means of communication.
These persons will not receive additional or special
compensation for such solicitation services. INVESTools will,
upon request, reimburse brokers, banks and other nominees for
their expenses in sending proxy materials to their customers who
are beneficial owners and obtaining their voting instructions.
The Company has retained D.F. King & Co., Inc., a
proxy solicitation firm, to assist it in the solicitation of
proxies for the Special Meeting and will pay a customary fee of
approximately $9,000 plus reimbursement of
out-of-pocket
expenses.
Proposed
Merger (Page 21)
On September 18, 2006, INVESTools entered into the Merger
Agreement with thinkorswim, pursuant to which thinkorswim will
become a wholly-owned subsidiary of INVESTools in the Merger.
Under the terms of the Merger Agreement, which was approved
unanimously by the Boards of Directors of INVESTools and
thinkorswim, thinkorswim stockholders will receive approximately
$170 million in cash and 19.1 million shares of Common
Stock. Employees of thinkorswim will also receive retention
bonus opportunities equaling, in the aggregate,
6
$20 million, which would be paid in equal annual
installments over the three-year period following the closing of
the Merger. For a detailed description of the conditions to the
Merger, please see Issuance of Common Stock in Connection
with the Proposed Merger Merger Agreement. For
a detailed description of our reasons for the Merger, please see
Issuance of Common Stock in Connection with the Proposed
Merger INVESTools Reasons for the
Transaction.
Upon the consummation of the transaction, the combined company
will be subject to certain risks. In deciding whether to approve
the Issuance Proposal and the Charter Amendment, you should
carefully read and consider the risk factors contained in
thinkorswim-thinkorswim Qualitative and Quantitative
Disclosure About Market Risk and in INVESTools
Annual Report on
Form 10-K
for the year ended December 31, 2005.
Board of
Directors Recommendation to Stockholders
(Page 33)
The Board of Directors has unanimously approved the proposals
described above. Accordingly, the Board of Directors
unanimously recommends that you vote FOR approval of
the Issuance Proposal, the Option Plan Amendments and the
Charter Amendment.
INVESTools
Board after the Merger (Page 29)
Subject to the satisfaction or waiver of all conditions
precedent to the Merger, the Company has agreed, effective
immediately following the Merger, that current thinkorswim
directors Tom Sosnoff and Scott Sheridan shall become members of
the Board of Directors and they, or their designees, will be
nominated at any annual meeting of our stockholders held within
the next three years. The size of the Board of Directors shall
concurrently be increased to eight members.
Management
Ownership (Page 47)
At the close of business on the record date, our directors and
executive officers were entitled to
vote 2,159,706 shares of Common Stock, or
approximately 5% of the shares outstanding on that date. These
individuals have indicated that they intend to vote in favor of
the Issuance Proposal and the Charter Amendment. For more
information about the security ownership of our directors and
executive officers, please see Security Ownership of
Certain Beneficial Owners.
Opinion
of INVESTools Financial Advisor (Page 23)
In connection with the Merger, one of the Companys
financial advisors, Updata Securities, Inc.
(Updata), delivered a written opinion to the Board
of Directors as to the fairness to INVESTools, from a financial
point of view, of the consideration to be paid to the
thinkorswim stockholders in connection with the Merger. The full
text of Updatas written opinion, dated September 15,
2006, is attached to this Proxy Statement as Annex A. The
Company encourages you to read this opinion carefully in its
entirety for a description of the procedures followed,
assumptions made, matters considered and limitations on the
review undertaken. The opinion is addressed to the Board of
Directors and does not constitute a recommendation to any
stockholder as to how such stockholder should vote or act on any
matter relating to the issuance of the additional shares of
Common Stock. INVESTools has agreed to pay Updata a fee for the
delivery of this opinion.
Indebtedness
and the Financing of the Merger (Page 31)
In connection with the Merger, the Company will issue
approximately 19.1 million shares of Common Stock and will
pay approximately $170 million in cash to
thinkorswims securityholders. An additional
$15.2 million in cash will be used to pay customary fees
and expenses in connection with the Merger, the financing
arrangements and the related transactions. The cash payments are
expected to be funded by a combination of the following:
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|
|
new senior secured credit facilities in the amount of
$150 million, consisting of a $125 million senior
secured term loan facility and a $25 million senior secured
revolving credit facility. The revolving credit facility is not
expected to be utilized at the closing; and
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cash and marketable securities on hand in an amount of
approximately $60.2 million.
|
7
Rights of
Appraisal
Under Delaware law and INVESTools Certificate of
Incorporation, holders of shares of Common Stock are not
entitled to any dissenters rights to seek appraisal of
their shares, or to any preemptive rights, in connection with
the proposed transaction.
Material
U.S. Federal Income Tax Consequences
(Page 31)
There are no material U.S. federal income tax consequences
to the Companys current stockholders that will result from
our issuance of additional shares of Common Stock in the Merger.
Accounting
Treatment (Page 31)
The Merger with thinkorswim will be accounted for under the
purchase method of accounting under accounting principles
generally accepted in the United States of America (US
GAAP). For a detailed discussion of accounting treatment,
please see Issuance of Common Stock in Connection with the
Proposed Merger Accounting Treatment.
Regulatory
Matters (Page 30)
Under the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the
Hart-Scott-Rodino
Act or HSR Act), and the rules promulgated
thereunder by the Federal Trade Commission (FTC),
the Merger may not be completed until notification and report
forms have been filed with the FTC and the Antitrust Division of
the Department of Justice (DOJ) and the applicable
waiting period has expired or been terminated. INVESTools and
thinkorswim filed notification and report forms under the HSR
Act with the FTC and the Antitrust Division of the DOJ on
October 13, 2006, and received early termination of the
waiting period on October 23, 2006.
Additionally, prior to the completion of the Merger,
thinkorswim, as a
U.S.-registered
broker-dealer, is required under the rules of the National
Association of Securities Dealers (the NASD) to make
certain filings in respect of the change in control of
thinkorswim.
Except as noted above with respect to the required filings under
the
Hart-Scott-Rodino
Act, the filings with the NASD, and the filing of a Certificate
of Merger in Delaware at or before the effective date of the
Merger, the Company is unaware of any material federal, state or
foreign regulatory requirements or approvals required for the
completion of the Merger.
The
Companies
INVESTools
Inc.
INVESTools is a global leader in investor education. INVESTools
offers a full range of investor education products and services
that provide lifelong learning in a variety of delivery formats,
including instructor-led workshops, at home study
programs, personal training sessions and through the Internet.
More than 260,000 investors around the world have graduated from
INVESTools investor education programs. Visit INVESTools
corporate website at http://www.investools.com for more
information regarding the INVESTools
Methodtm. INVESTools
principal executive offices are located at 13947 South Minuteman
Drive, Draper, Utah 84020.
thinkorswim
Group, Inc.
As a leading retail online brokerage firm, thinkorswim
specializes in options and also offers customers a broad range
of products including equities, futures, mutual funds and bonds.
The company supports retail and institutional traders through
its own trading platforms and is widely recognized as the
premier option software for order entry, professional analytical
tools and real-time position management. thinkorswim has
revolutionized the option industry by teaching and executing
complex, multi-leg option strategies with single-click
functionality. thinkorswims principal executive offices
are located at 600 West Chicago Avenue, Suite 100,
Chicago, Illinois 60610.
thinkorswim recently received Barrons top rating in their
2006 Annual Survey of Best Online Brokers. thinkorswims
platform surpassed its peer group as Barrons choice for
options traders and was the only firm to finish #1 and #2
in software and browser-based ratings.
8
COMPARATIVE
UNAUDITED PER SHARE DATA
The table below depicts the earnings (loss) per common share,
pro forma earnings (loss) per common share, book value per
common share and cash dividends declared per common share for
(i) each of INVESTools and thinkorswim on a historical
basis and (ii) the combination of INVESTools and
thinkorswim on a pro forma combined basis. The pro forma data of
the combined company assumes that 19.1 million shares of
Common Stock will be issued in the Merger. The pro forma data of
the combined company was derived by combining the historical
consolidated financial information of INVESTools and thinkorswim
using the purchase method of accounting for business
combinations as described elsewhere in this Proxy Statement. For
a discussion of the assumptions and adjustments made in the
preparation of the pro forma financial information presented in
this Proxy Statement, see Unaudited Pro Forma Condensed
Combined Financial Statements.
You should read the information presented in this table below
together with the selected historical consolidated financial
data, historical consolidated financial statements and the
related notes of INVESTools incorporated herein by reference,
the separate historical consolidated financial statements and
related notes of thinkorswim appearing elsewhere in this Proxy
Statement, and the Unaudited Pro Forma Condensed Combined
Financial Statements appearing elsewhere in this Proxy
Statement. The pro forma data is unaudited and for illustrative
purposes only. The companies may have performed differently had
they been combined for the periods presented. You should not
rely on this information as being indicative of the historical
results that would have been achieved had the companies been
combined for the periods illustrated or the future results that
the combined company will achieve after the consummation of the
Merger.
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|
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|
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As of, or for the
|
|
|
As of, or for the Nine
|
|
|
|
Year Ended December 31,
|
|
|
Months Ended September 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
INVESTools
|
|
|
|
|
|
|
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
Loss Per Share Basic
and Diluted
|
|
$
|
(0.35
|
)
|
|
$
|
(0.89
|
)
|
Book value per share
|
|
$
|
(0.53
|
)
|
|
$
|
(1.41
|
)
|
Dividends declared per share
|
|
|
|
|
|
|
|
|
thinkorswim
|
|
|
|
|
|
|
|
|
Per Share Data:
|
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|
|
|
|
|
|
|
Earnings Per Share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
3.61
|
|
|
$
|
12.01
|
|
Diluted
|
|
$
|
2.05
|
|
|
$
|
6.81
|
|
Book value per share
|
|
$
|
36.77
|
|
|
$
|
46.25
|
|
Dividends declared per share
|
|
|
|
|
|
|
|
|
Pro Forma Combined
|
|
|
|
|
|
|
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
Loss Per Share Basic
and Diluted
|
|
$
|
(0.67
|
)
|
|
$
|
(0.76
|
)
|
Book value per share
|
|
|
|
|
|
$
|
1.61
|
|
Dividends declared per share
|
|
|
|
|
|
|
|
|
9
SELECTED
HISTORICAL FINANCIAL DATA OF INVESTOOLS
The following table sets forth a summary of selected historical
financial data of INVESTools for each of the fiscal years in the
five-year period ended December 31, 2005 and for the
nine-month periods ended September 30, 2006 and 2005. The
information is derived from, and should be read in conjunction
with, the consolidated financial statements and the notes
related to those financial statements, of INVESTools. See
Where you can find Additional Information. In the
opinion of INVESTools management, all adjustments
(consisting only of normal recurring accruals) considered
necessary for a fair presentation have been included. The
information set forth below is not necessarily indicative of the
results of future operations.
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of, or for the Nine
|
|
|
|
As of, or for the Years Ended December 31,
|
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|
Months Ended September 30,
|
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|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
Revenue
|
|
$
|
138,621
|
|
|
$
|
97,169
|
|
|
$
|
69,802
|
|
|
$
|
53,923
|
|
|
$
|
51,560
|
|
|
$
|
112,729
|
|
|
$
|
101,804
|
|
Operating loss
|
|
|
(16,131
|
)
|
|
|
(11,910
|
)
|
|
|
(5,849
|
)
|
|
|
(5,340
|
)
|
|
|
(9,111
|
)
|
|
|
(42,544
|
)
|
|
|
(11,829
|
)
|
Net loss attributable to common
stockholders
|
|
|
(15,742
|
)
|
|
|
(11,727
|
)
|
|
|
(7,301
|
)
|
|
|
(33,669
|
)
|
|
|
(9,044
|
)
|
|
|
(40,054
|
)
|
|
|
(11,525
|
)
|
Loss per share Basic
and diluted
|
|
|
(0.35
|
)
|
|
|
(0.26
|
)
|
|
|
(0.17
|
)
|
|
|
(0.80
|
)
|
|
|
(0.27
|
)
|
|
|
(0.89
|
)
|
|
|
(0.26
|
)
|
Dividends per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
72,699
|
|
|
|
49,778
|
|
|
|
26,551
|
|
|
|
25,305
|
|
|
|
55,174
|
|
|
|
120,257
|
|
|
|
63,659
|
|
Long-term debt(1)
|
|
|
9,814
|
|
|
|
8,505
|
|
|
|
639
|
|
|
|
|
|
|
|
|
|
|
|
23,056
|
|
|
|
9,920
|
|
|
|
|
(1) |
|
Includes deferred revenue in the amounts of $9,301, $8,421,
$476, $22,249, and $9,365 as of December 31, 2005, 2004,
2003, and as of September 30, 2006 and 2005, respectively. |
10
SELECTED
HISTORICAL FINANCIAL DATA OF THINKORSWIM
The following table sets forth a summary of selected historical
financial data of thinkorswim for each of the fiscal years in
the
three-year
period ended December 31, 2005 and the nine-month periods
ended September 30, 2006 and 2005. This information is
derived from, and should be read in conjunction with, the
audited consolidated financial statements and the notes related
to those financial statements of thinkorswim, which are included
elsewhere in this Proxy Statement. See Index to
thinkorswim Financial Statements. In the opinion of
thinkorswims management, all material adjustments
(consisting only of normal recurring accruals) considered
necessary for a fair presentation have been included. The
information set forth below is not necessarily indicative of the
results of future operations.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of, or for the Years
|
|
|
As of, or for the Nine
|
|
|
|
Ended December 31,
|
|
|
Months Ended September 30,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
Revenue
|
|
$
|
26,359
|
|
|
$
|
17,064
|
|
|
$
|
13,097
|
|
|
$
|
44,045
|
|
|
$
|
16,562
|
|
Operating income
|
|
|
4,245
|
|
|
|
1,078
|
|
|
|
2,106
|
|
|
|
14,576
|
|
|
|
2,024
|
|
Net income
|
|
|
2,684
|
|
|
|
712
|
|
|
|
3,142
|
|
|
|
8,896
|
|
|
|
861
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
3.61
|
|
|
$
|
1.06
|
|
|
$
|
5.22
|
|
|
$
|
12.01
|
|
|
$
|
1.15
|
|
Diluted
|
|
$
|
2.05
|
|
|
$
|
0.60
|
|
|
$
|
3.20
|
|
|
$
|
6.81
|
|
|
$
|
0.66
|
|
Dividends per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
39,422
|
|
|
|
35,365
|
|
|
|
11,148
|
|
|
|
52,017
|
|
|
|
37,537
|
|
Long-term debt
|
|
|
375
|
|
|
|
|
|
|
|
|
|
|
|
375
|
|
|
|
|
|
11
SELECTED
PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The following table sets forth a summary of selected unaudited
pro forma condensed combined operating financial data and is
designed to show how the Merger of thinkorswim and a
wholly-owned subsidiary of INVESTools might have affected
historical financial statements if the Merger had been completed
at an earlier time. This information is derived from, and should
be read in conjunction with, the unaudited pro forma condensed
combined financial statements of INVESTools and thinkorswim
which are included elsewhere in this Proxy Statement. See
Unaudited Pro Forma Condensed Combined Financial
Statements.
The unaudited pro forma balance sheet assumes that the Merger
took place on September 30, 2006, and combines
INVESTools September 30, 2006 condensed consolidated
balance sheet with thinkorswims September 30, 2006
condensed consolidated balance sheet. The unaudited pro forma
statements of operations for the nine months ended
September 30, 2006 and for the year ended December 31,
2005 give effect to the Merger as if it occurred on
January 1, 2005.
The summary unaudited pro forma condensed combined financial
information is presented for illustrative purposes only and is
not necessarily indicative of the financial condition or results
of operations of future periods or the financial condition or
results of operations that actually would have been realized had
the entities been a single entity during these periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of or for the
|
|
|
|
Fiscal Year
|
|
|
Nine Months Ended
|
|
|
|
Ended December 31, 2005
|
|
|
September 30, 2006
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
Revenue
|
|
$
|
164,980
|
|
|
$
|
156,774
|
|
Operating loss
|
|
|
(33,786
|
)
|
|
|
(44,356
|
)
|
Net loss
|
|
|
(42,813
|
)
|
|
|
(48,939
|
)
|
Loss per share basic
and diluted(1)
|
|
|
(0.67
|
)
|
|
|
(0.76
|
)
|
Dividends per share
|
|
|
|
|
|
|
|
|
Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
|
|
450,188
|
|
Long-term debt
|
|
|
|
|
|
|
145,704
|
|
|
|
|
(1) |
|
As the effects of including the incremental shares associated
with stock options are antidilutive for both the year ended
December 31, 2005 and nine months ended September 30,
2006, they are not included in the weighted average common
shares outstanding, and both diluted and basic earnings per
share reflect the same calculation. |
12
UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The unaudited pro forma condensed combined financial statements
contained herein have been derived by combining INVESTools
historical consolidated balance sheet and statements of
operations with that of thinkorswims for the periods
presented. The unaudited pro forma condensed combined statements
of operations for the year ended December 31, 2005, and for
the nine months ended September 30, 2006, give pro forma
effect as if the transaction had occurred on January 1,
2005. The unaudited pro forma condensed combined balance sheet
gives pro forma effect as if the transaction had occurred on
September 30, 2006. The historical combined financial
information has been adjusted to give effect to pro forma events
that are (1) directly attributable to the Merger,
(2) factually supportable, and (3) with respect to the
statement of operations, expected to have a continuing impact on
the combined results. Pro forma adjustments are based on
preliminary estimates and assumptions.
The unaudited pro forma condensed combined financial statements
were prepared using the purchase method of accounting in
accordance with Statement of Financial Accounting Standards
No. 141, Business Combinations, with INVESTools as
the acquiring entity. Under the purchase method of accounting,
the total estimated purchase price is allocated to the net
tangible and identifiable intangible assets of thinkorswim,
based on their respective estimated fair values. The unaudited
pro forma condensed combined financial information has been
prepared based on a preliminary analysis of fair values
performed by certain valuation experts. Therefore, the actual
amounts recorded as of the completion of the Merger might differ
materially from the information presented in the unaudited pro
forma condensed combined financial statements.
INVESTools expects to incur certain costs over the next few
years associated with integrating the technologies of INVESTools
and thinkorswim. Managements development of these
integration plans is underway. The impact of these plans,
assuming they are in place at the consummation date of the
Merger, could increase or decrease the amount of goodwill and
intangible assets recognized in accordance with EITF
No. 95-3,
Recognition of Liabilities in Connection with a Purchase
Business Combination. The unaudited pro forma condensed
combined financial statements do not reflect the cost of any
integration activities or benefits that may result from
synergies that may be derived from any integration activities.
As part of the Merger Agreement, INVESTools agreed to issue up
to a maximum of 728,608 additional shares of common stock to
thinkorswim shareholders in the event the stocks average
trading price fell below $8.75 per share during the twenty-day
period prior to certain dates subsequent to the Merger (with an
$8.00 floor on such share price). The various dates are those on
which specific groups of thinkorswim shareholders are first
permitted to sell INVESTools shares, or portions thereof, that
they received as merger consideration. The potential dates
specified fall between six months and three years after the
Merger closes. At the time the Merger was announced, the fair
market value of INVESTools stock was $8.59. Because the
additional shares are contingently issuable if the price falls
below $8.75 per share, the value of the portion of the
purchase price attributable to the issuance of common stock has
been increased to $8.75 per share in accordance with EITF
No. 97-15,
Accounting for Contingency Arrangements Based on Security
Prices in a Purchase Business Combination.
13
INVESTOOLS
INC.
UNAUDITED
PRO FORMA CONDENSED COMBINED BALANCE SHEETS
September 30,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTools
|
|
|
thinkorswim
|
|
|
Pro forma
|
|
|
Pro forma
|
|
|
|
Inc.
|
|
|
Group, Inc.
|
|
|
adjustments
|
|
|
Combined
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
32,660
|
|
|
$
|
16,504
|
|
|
$
|
(20,474
|
) c
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,522
|
) h
|
|
$
|
22,168
|
|
Receivable from clearing broker
|
|
|
|
|
|
|
5,482
|
|
|
|
|
|
|
|
5,482
|
|
Marketable securities
|
|
|
36,473
|
|
|
|
17,211
|
|
|
|
(53,684
|
) h
|
|
|
|
|
Accounts receivable
|
|
|
5,184
|
|
|
|
1,588
|
|
|
|
|
|
|
|
6,772
|
|
Deferred tax asset
|
|
|
|
|
|
|
|
|
|
|
3,219
|
b
|
|
|
3,219
|
|
Other current assets
|
|
|
7,562
|
|
|
|
1,261
|
|
|
|
|
|
|
|
8,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
81,879
|
|
|
|
42,046
|
|
|
|
(77,461
|
)
|
|
|
46,464
|
|
Long-term restricted cash
|
|
|
373
|
|
|
|
|
|
|
|
|
|
|
|
373
|
|
Goodwill
|
|
|
18,085
|
|
|
|
105
|
|
|
|
225,452
|
a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(105
|
) g
|
|
|
243,537
|
|
Intangible assets
|
|
|
3,375
|
|
|
|
1,506
|
|
|
|
132,650
|
a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,506
|
) g
|
|
|
136,025
|
|
Capitalized software development
costs
|
|
|
9,428
|
|
|
|
2,915
|
|
|
|
|
|
|
|
12,343
|
|
Furniture and equipment
|
|
|
5,760
|
|
|
|
2,007
|
|
|
|
|
|
|
|
7,767
|
|
Other long-term assets
|
|
|
1,357
|
|
|
|
3,438
|
|
|
|
(1,116
|
) b
|
|
|
3,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
120,257
|
|
|
$
|
52,017
|
|
|
$
|
277,914
|
|
|
$
|
450,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY (DEFICIT)
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable
|
|
$
|
|
|
|
$
|
|
|
|
$
|
25,000
|
e
|
|
$
|
25,000
|
|
Current portion of deferred revenue
|
|
|
131,037
|
|
|
|
|
|
|
|
|
|
|
|
131,037
|
|
Accounts payable
|
|
|
6,621
|
|
|
|
2,930
|
|
|
|
|
|
|
|
9,551
|
|
Accrued payroll
|
|
|
5,141
|
|
|
|
1,188
|
|
|
|
10,530
|
d
|
|
|
16,859
|
|
Securities sold, not yet purchased
|
|
|
|
|
|
|
116
|
|
|
|
|
|
|
|
116
|
|
Accrued tax liabilities
|
|
|
7,700
|
|
|
|
417
|
|
|
|
(1,315
|
) b
|
|
|
6,802
|
|
Other current liabilities
|
|
|
10,038
|
|
|
|
1,250
|
|
|
|
|
|
|
|
11,288
|
|
Current portion of capital leases
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
160,713
|
|
|
|
5,901
|
|
|
|
34,215
|
|
|
|
200,829
|
|
Long-term portion of deferred
revenue
|
|
|
22,249
|
|
|
|
|
|
|
|
|
|
|
|
22,249
|
|
Long-term portion of capital lease
obligations
|
|
|
543
|
|
|
|
|
|
|
|
|
|
|
|
543
|
|
Long-term portion of note payable
|
|
|
|
|
|
|
|
|
|
|
100,000
|
e
|
|
|
100,000
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
|
51,700
|
b
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,427
|
) b
|
|
|
22,273
|
|
Other long-term accrued liabilities
|
|
|
264
|
|
|
|
375
|
|
|
|
|
|
|
|
639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
183,769
|
|
|
|
6,276
|
|
|
|
156,488
|
|
|
|
346,533
|
|
Stockholders equity
(deficit)
Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
451
|
|
|
|
1
|
|
|
|
(1
|
) f
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
191
|
f
|
|
|
642
|
|
Additional paid-in capital
|
|
|
127,600
|
|
|
|
33,001
|
|
|
|
(33,001
|
) f
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
166,976
|
f
|
|
|
294,576
|
|
Accumulated other comprehensive loss
|
|
|
(19
|
)
|
|
|
|
|
|
|
19
|
m
|
|
|
|
|
Retained earnings (accumulated
deficit)
|
|
|
(191,544
|
)
|
|
|
13,300
|
|
|
|
(10,530
|
) d
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,770
|
) f
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19
|
) m
|
|
|
(191,563
|
)
|
Treasury stock
|
|
|
|
|
|
|
(561
|
)
|
|
|
561
|
f
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
(deficit)
|
|
|
(63,512
|
)
|
|
|
45,741
|
|
|
|
121,426
|
|
|
|
103,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity (deficit)
|
|
$
|
120,257
|
|
|
$
|
52,017
|
|
|
$
|
277,914
|
|
|
$
|
450,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
INVESTOOLS
INC.
UNAUDITED
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
Nine
Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTools
|
|
|
thinkorswim
|
|
|
Pro forma
|
|
|
Pro forma
|
|
|
|
Inc.
|
|
|
Group, Inc.
|
|
|
adjustments
|
|
|
Combined
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenue
|
|
$
|
112,729
|
|
|
$
|
44,045
|
|
|
$
|
|
|
|
$
|
156,774
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
90,841
|
|
|
|
13,376
|
|
|
|
3,188
|
l
|
|
|
107,405
|
|
Selling expense
|
|
|
36,208
|
|
|
|
1,408
|
|
|
|
5,747
|
l
|
|
|
43,363
|
|
General and administrative expense
|
|
|
25,039
|
|
|
|
14,609
|
|
|
|
5,000
|
j
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,954
|
k
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
575
|
l
|
|
|
47,177
|
|
Special charges
|
|
|
3,185
|
|
|
|
|
|
|
|
|
|
|
|
3,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
155,273
|
|
|
|
29,393
|
|
|
|
16,464
|
|
|
|
201,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from operations
|
|
|
(42,544
|
)
|
|
|
14,652
|
|
|
|
(16,464
|
)
|
|
|
(44,356
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on the sale of assets
|
|
|
10
|
|
|
|
(76
|
)
|
|
|
|
|
|
|
(66
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(5,368
|
) i
|
|
|
(5,368
|
)
|
Interest income and other, net
|
|
|
1,581
|
|
|
|
|
|
|
|
(1,581
|
) m
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
1,591
|
|
|
|
(76
|
)
|
|
|
(6,949
|
)
|
|
|
(5,434
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before taxes
|
|
|
(40,953
|
)
|
|
|
14,576
|
|
|
|
(23,413
|
)
|
|
|
(49,790
|
)
|
Income tax expense (benefit)
|
|
|
(851
|
)
|
|
|
5,680
|
|
|
|
(5,680
|
) n
|
|
|
(851
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations
|
|
$
|
(40,102
|
)
|
|
$
|
8,896
|
|
|
$
|
(17,733
|
)
|
|
$
|
(48,939
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
per common share basic and diluted
|
|
$
|
(0.89
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(0.76
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average
shares outstanding
|
|
|
44,999
|
|
|
|
|
|
|
|
19,105
|
f
|
|
|
64,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
INVESTOOLS
INC.
UNAUDITED
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
Year
Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTools
|
|
|
thinkorswim
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
|
Inc.
|
|
|
Group, Inc.
|
|
|
Adjustments
|
|
|
Combined
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenue
|
|
$
|
138,621
|
|
|
$
|
26,359
|
|
|
$
|
|
|
|
$
|
164,980
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
92,161
|
|
|
|
6,556
|
|
|
|
4,250
|
l
|
|
|
102,967
|
|
Selling expense
|
|
|
37,332
|
|
|
|
1,181
|
|
|
|
7,611
|
l
|
|
|
46,124
|
|
General and administrative expense
|
|
|
24,182
|
|
|
|
14,377
|
|
|
|
6,667
|
j
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,605
|
k
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
767
|
l
|
|
|
48,598
|
|
Special charges
|
|
|
1,077
|
|
|
|
|
|
|
|
|
|
|
|
1,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
154,752
|
|
|
|
22,114
|
|
|
|
21,900
|
|
|
|
198,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from operations
|
|
|
(16,131
|
)
|
|
|
4,245
|
|
|
|
(21,900
|
)
|
|
|
(33,786
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on the sale of assets
|
|
|
(93
|
)
|
|
|
|
|
|
|
|
|
|
|
(93
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(8,788
|
) i
|
|
|
(8,788
|
)
|
Interest income and other expense,
net
|
|
|
596
|
|
|
|
|
|
|
|
(596
|
) m
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32
|
) m
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
503
|
|
|
|
|
|
|
|
(9,416
|
)
|
|
|
(8,913
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before taxes
|
|
|
(15,628
|
)
|
|
|
4,245
|
|
|
|
(31,316
|
)
|
|
|
(42,699
|
)
|
Income tax expense
|
|
|
114
|
|
|
|
1,561
|
|
|
|
(1,561
|
) n
|
|
|
114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(15,742
|
)
|
|
$
|
2,684
|
|
|
$
|
(29,755
|
)
|
|
$
|
(42,813
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common
share basic and diluted
|
|
$
|
(0.35
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(0.67
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average
shares outstanding
|
|
|
44,933
|
|
|
|
|
|
|
|
19,105
|
f
|
|
|
64,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
Pro Forma
Adjustments
Pro forma adjustments for the unaudited pro forma condensed
combined financial statements are as follows:
a. To reflect the excess of acquisition cost over the
estimated fair value of tangible and intangible net assets
acquired. These preliminary allocations are subject to change
based on finalization of the fair values of the tangible and
intangible assets acquired and liabilities assumed as described
above. The purchase price, purchase-price allocation, and
financing of the transaction are summarized as follows (in
thousands):
|
|
|
|
|
|
|
|
|
Purchase price paid as:
|
|
|
|
|
|
|
|
|
Cash:
|
|
|
|
|
|
|
|
|
Proceeds from term note
|
|
|
|
|
|
$
|
125,000
|
|
Cash-on-hand
paid to thinksorswim shareholders
|
|
|
|
|
|
|
45,000
|
|
Direct estimated transaction costs
paid to third parties
|
|
|
|
|
|
|
15,206
|
|
Additional
cash-on-hand
paid to thinkorswim shareholders as a distribution of
thinksorswim working capital (see c. below)
|
|
|
|
|
|
|
20,474
|
|
|
|
|
|
|
|
|
|
|
Total cash
|
|
|
|
|
|
|
205,680
|
|
Common stock
|
|
|
|
|
|
|
191
|
|
Additional paid-in capital
|
|
|
|
|
|
|
166,976
|
|
|
|
|
|
|
|
|
|
|
Total purchase consideration
|
|
|
|
|
|
|
372,847
|
|
Allocated to:
|
|
|
|
|
|
|
|
|
Historical book value of
thinkorswims net assets and liabilities
|
|
$
|
45,741
|
|
|
|
|
|
Adjustments to assets and
liabilities:
|
|
|
|
|
|
|
|
|
Elimination of existing intangible
assets and goodwill
|
|
|
(1,611
|
)
|
|
|
|
|
Assumed thinkorswim
change-in-control
compensation obligations payable to certain individuals
|
|
|
(10,530
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated fair value of tangible
net assets acquired
|
|
|
|
|
|
|
33,600
|
|
Identifiable intangible assets
(see l. below)
|
|
|
132,650
|
|
|
|
|
|
Deferred tax liability arising
from value allocated to intangibles
|
|
|
(51,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net identifiable intangible assets
|
|
|
|
|
|
|
80,950
|
|
Change in INVESTools
valuation allowance on its deferred tax assets, based on future
reversals of deferred tax liabilities attributable to the Merger
|
|
|
|
|
|
|
32,845
|
|
|
|
|
|
|
|
|
|
|
Excess purchase price over
allocation to identifiable assets and liabilities (goodwill)
|
|
|
|
|
|
$
|
225,452
|
|
|
|
|
|
|
|
|
|
|
b. To reflect the estimated deferred tax liabilities
arising from the purchase, and the change in INVESTools
valuation allowance on its deferred tax assets based on future
reversals of the deferred tax liabilities attributable to the
Merger. The change in the valuation allowance also results in a
reclassification of INVESTools various existing deferred
tax asset and liability accounts.
c. To reflect the working capital adjustment whereby
INVESTools will add to the merger consideration paid to
thinkorswim shareholders an amount by which working capital (as
calculated pursuant to the Merger Agreement) in the aggregate
exceeds $5 million. The working capital adjustment was
estimated based upon the net working capital as of
September 18, 2006, and a final determination of this
additional consideration will occur later in December 2006.
d. To reflect as of September 30, 2006 the thinkorswim
assumed
change-in-control
compensation obligations payable to certain individuals prior to
the date the acquisition is to close.
e. To reflect the issuance of a term note to partially
finance the cash portion of the purchase price.
17
f. To reflect the elimination of the shareholders
equity accounts of thinkorswim, and to reflect the issuance of
19.1 million shares of INVESTools common stock valued at
$167.2 million as partial consideration for the purchase.
The per share fair value of the stock on the date the Merger was
announced ($8.59), was adjusted to also give effect to the
contingent additional consideration mentioned above, which
reflects a minimum per share valuation of $8.75.
g. To reflect the elimination of thinkorswims
existing intangible assets and goodwill.
h. To reflect the additional cash paid to thinkorswim
shareholders and approximately $15.2 million in transaction
costs paid to third parties. However, these transaction costs
have been estimated and are subject to change at closing. A
portion of the cash is assumed at September 30, 2006 to be
derived from the liquidation of marketable securities held by
both companies.
i. To reflect the increase in interest expense resulting
from the issuance of debt to finance part of the cash portion of
the purchase price. The interest rate on new debt of
$125 million is assumed to be 7.5%. However, this is an
estimate, and is subject to change at closing. A change of 1% in
the interest rate would result in a change in both interest
expense and net loss for the nine months ended
September 30, 2006 and the year ended December 31,
2005 of $0.7 million and $1.2 million, respectively.
j. To reflect the accrual of $6.7 million annually in
retention bonuses INVESTools has agreed to pay annually to a
group of thinkorswim employees. The bonuses are to be paid over
a period of three years from the date of the Merger.
k. To reflect the additional share-based compensation
expense related to unvested stock options for the purchase of
2.3 million shares of INVESTools common stock to be granted
to employees or third-party consultants of thinkorswim. Options
granted to employees are accounted for under
SFAS 123(R), Share Based Payment, and options
granted to consultants are accounted for under SFAS 123(R) and
remeasured based on the guidance of EITF 96-18,
Accounting for Equity Instruments That are Issued to Other
Than Employees for Acquiring or in Conjunction with Selling,
Goods or Services. The options were valued using the
Black-Scholes option pricing model. Variables assumed were a
volatility factor of 56 percent, a risk-free interest
factor of 4.6 percent, and an expected life of
6.3 years. The fair market value per common share used
($8.59) was the same as that for INVESTools common stock
at the time the Merger was announced. The exercise price for
half the options equaled this fair market value, and the other
half was 150% of the fair market value, both as specified in the
Merger Agreement. The total value of the options is being
amortized on a straight-line basis over a four-year vesting
period. The actual value of the options will change upon their
final issuance (expected to occur immediately following closing).
l. To reflect the increase in amortization expense due to
the amortization of those identifiable assets which have
definite lives, i.e.,
covenants-not-to-compete,
core technology, and customer relationships. The
covenants-not-to-compete and core technology are presumed to be
amortized using the straight-line method over periods of 3 to
7 years. The customer relationships are presumed to be
amortized over a period of 14 years, using an accelerated method
based on the estimated undiscounted cash flows associated with
the customers.
m. To eliminate net interest income previously earned on
marketable securities, net of unrealized losses included in
accumulated other comprehensive loss recorded on
INVESTools balance sheets as of the beginning of the
respective pro forma periods. The securities are presumed to be
liquidated by the time the transaction is closed in order to pay
a portion of the cash consideration to thinkorswim shareholders.
n. To eliminate thinkorswims provision for income
taxes due to the effect of the pro forma adjustments on the
operating results of the combined companies.
Pro Forma
Net Loss Per Share
The net loss and shares used in computing the net loss per share
for the year ended December 31, 2005 and nine months ended
September 30, 2006 are based on INVESToolss
historical weighted average common shares outstanding during the
respective periods. The effect of the additional shares of
INVESTools common stock assumed issued as part of the Merger
transaction has been included for purposes of presenting pro
forma net loss per share. However, the effect of any common
stock issuable upon the exercise of INVESTools stock
options has been excluded from the historical and pro forma
computation of net loss per share as the effect would be
anti-dilutive. Accordingly, both basic and diluted pro forma
loss per common share reflect the same calculation.
18
THE
SPECIAL MEETING
Place,
Date and Time
The Special Meeting will be held on January 17, 2007, at
10:00 a.m. local time at the New York Marriott East Side
Hotel, 1535 Broadway, New York, NY 10036.
Purpose
of the Special Meeting
At the Special Meeting, stockholders will consider and vote upon:
|
|
|
|
|
the issuance of shares of Common Stock in connection with the
Companys proposed Merger with thinkorswim and grants to
the employees of thinkorswim of options to purchase Common Stock;
|
|
|
|
|
|
the amendment to INVESTools Certificate of Incorporation
to increase the number of authorized shares of Common Stock to
100 million;
|
|
|
|
|
|
the amendments to the Companys 2001 Stock Option Plan to
increase the number of shares of Common Stock available for
issuance thereunder from 8 million to 12 million
shares, and to expand potential award recipients to include
consultants of the Company (the Option Plan
Amendment); and
|
|
|
|
|
|
the proposal to adjourn the meeting, if necessary or
appropriate, to solicit additional proxies if there are
insufficient votes at the meeting to approve the other proposals.
|
Stockholders
Entitled to Vote
All holders of Common Stock are entitled to notice, but only
stockholders of record holding Common Stock as of the close of
business on November 30, 2006, the record date for the
Special Meeting, are entitled to vote at the Special Meeting. As
of the record date, there were 45,133,616 shares of Common
Stock outstanding. Approximately 9,000 stockholders held such
shares. Every holder of Common Stock is entitled to one vote for
each share held as of the record date.
Required
Vote
The Issuance Proposal and the Option Plan Amendments will
require the affirmative vote of a majority of the shares of
Common Stock present in person or by proxy at the Special
Meeting and entitled to vote thereon. The Charter Amendment will
require the affirmative vote of a majority of the shares of
Common Stock issued and outstanding.
Proxies
and Voting
If you are a stockholder of record and submit a proxy by
telephone or the Internet or by returning a signed proxy card by
mail, your shares will be voted at the Special Meeting as you
indicate on your proxy card or by such other method. If no
instructions are indicated on your properly-signed proxy card,
your shares of Common Stock will be voted FOR the
approval of the proposals described above and FOR
any postponement or adjournment of the Special Meeting, if
necessary or appropriate to solicit additional proxies.
If your shares are held in street name by your
broker, you should instruct your broker how to vote your shares
using the instructions provided by your broker. If you have not
received such voting instructions or require further information
regarding such voting instructions, contact your broker and he
or she can give you directions on how to vote your shares. Under
the rules of The NASDAQ Global Market (NASDAQ),
brokers who hold shares in street name for customers
may not exercise their voting discretion with respect to
non-routine matters such as the proposals described above and
thus, absent specific instructions from the beneficial owner of
such shares, brokers are not empowered to vote such shares with
respect to the proposals (i.e., broker non-votes).
Shares of Common Stock held by persons attending the Special
Meeting but not voting, or shares for which the Company has
received proxies with respect to which holders have abstained
from voting, will be considered abstentions. Abstentions and
properly executed broker non-votes, if any, will be treated as
shares that are present and entitled to vote at the Special
Meeting for purposes of determining whether a quorum exists and
will have the same effect as a vote AGAINST the
Charter Amendment, and will not affect the outcome of the Option
Plan Amendments and Issuance Proposal.
19
INVESTools does not expect that any matter other than the
proposals described above (and to approve the adjournment of the
meeting, if necessary or appropriate to solicit additional
proxies) will be brought before the Special Meeting. If,
however, any such other matter is properly presented at the
Special Meeting or any adjournment or postponement, the persons
appointed as proxies will have discretionary authority to vote
the shares represented by duly executed proxies in accordance
with their discretion and judgment.
Submitting
Proxies Via the Internet or by Telephone
Stockholders of record will have the option to submit their
proxies or voting instructions via the Internet or by telephone.
If your shares are held in street name, you should
check the voting instruction card provided by your broker to see
which options are available and the procedures to be followed.
Many brokers also offer telephone and Internet voting options.
In addition to submitting the enclosed proxy card by mail,
INVESTools stockholders of record may submit their proxies:
|
|
|
|
|
via the Internet by visiting a website established for that
purpose at www.cesvote.com and following the instructions on the
website; or
|
|
|
|
|
|
by telephone by calling 1-888-693-8683 and following the
recorded instructions.
|
Revocability
of Proxies
You have the right to revoke your proxy at any time before the
vote taken at the Special Meeting: if you hold your shares in
your name as a stockholder of record, by notifying
D.F. King & Co., Inc., at
1-888-886-4425;
by attending the Special Meeting and voting in person (your
attendance at the meeting will not, by itself, revoke your
proxy; you must vote in person at the meeting); by submitting a
later-dated proxy card, telephone vote, or Internet vote; or, if
you have instructed a broker, bank or other nominee to vote your
shares, by following the directions received from your broker,
bank or other nominee to change those instructions.
Adjournments
and Postponements
Although it is not currently expected, the Special Meeting may
be adjourned or postponed for the purpose of soliciting
additional proxies. Any adjournment may be made without notice
(if the adjournment is not for more than thirty days), other
than by an announcement made at the Special Meeting of the time,
date and place of the adjourned meeting. Whether or not a quorum
exists, holders of a majority of the shares of Common Stock
present in person or represented by proxy at the Special Meeting
and entitled to vote thereat may adjourn the Special Meeting.
Any signed proxies received by the Company in which no voting
instructions are provided on such matter will be voted in favor
of an adjournment in these circumstances. Any adjournment or
postponement of the Special Meeting for the purpose of
soliciting additional proxies will allow stockholders who have
already sent in their proxies to revoke them at any time prior
to their use at the Special Meeting as adjourned or postponed.
Costs of
Proxy Solicitation
The Company will pay the cost of this proxy solicitation. In
addition to soliciting proxies by mail, directors, officers and
employees of INVESTools may solicit proxies personally and by
telephone, facsimile or other electronic means of communication.
These persons will not receive additional or special
compensation for such solicitation services. INVESTools will,
upon request, reimburse brokers, banks and other nominees for
their expenses in sending proxy materials to their customers who
are beneficial owners and obtaining their voting instructions.
The Company has retained D.F. King & Co., Inc., a
proxy solicitation firm, to assist it in the solicitation of
proxies for the Special Meeting and will pay approximately
$9,000 plus reimbursement of
out-of-pocket
expenses.
Voting by
INVESTools Directors and Executive Officers
At the close of business on the record date, INVESTools
directors and executive officers were entitled to
vote 2,159,706 shares of Common Stock, or
approximately 5% of the shares outstanding on that date. These
individuals have indicated that they intend to vote in favor of
the Issuance Proposal, the Option Plan Amendments and the
Charter Amendment.
20
ISSUANCE
OF COMMON STOCK IN CONNECTION WITH THE PROPOSED MERGER
(ISSUANCE PROPOSAL)
General
On September 18, 2006, INVESTools entered into the Merger
Agreement with thinkorswim, pursuant to which thinkorswim will
become a wholly-owned subsidiary of INVESTools following the
Merger. For a detailed description of the conditions to the
Merger, please see Merger Agreement
below. For a detailed description of our reasons for the Merger,
please see INVESTools Reasons for the
Transaction below.
In connection with, and subject to, the Merger, the Company will
issue 19,104,762 shares of Common Stock to current
thinkorswim stockholders and grant options to the employees of
thinkorswim to purchase 2,255,563 shares of Common Stock
under the Companys 2001 Stock Option Plan, half with an
exercise price equal to the fair market value of the underlying
Common Stock at the time of grant and half with an exercise
price equal to 150% of such fair market value. Employees of
thinkorswim will also receive retention bonus opportunities
equaling, in the aggregate, $20 million, which would be
paid in equal annual installments over the three-year period
following the closing of the Merger.
NASDAQ rules require the approval of the Companys
stockholders prior to the issuance of additional shares of
Common Stock in any transaction if the common stock to be issued
as merger consideration (i) has, or will have upon
issuance, voting power equal to or in excess of 20% of the
voting power outstanding before the issuance of such common
stock or (ii) is, or will be upon issuance, equal to or in
excess of 20% of the number of shares of common stock
outstanding before the issuance of the common stock. The number
of shares to be issued to thinkorswim stockholders in the Merger
is equal to approximately 42.3% of the shares outstanding before
the Merger (29.7% after the Merger). Therefore, your approval is
required.
The adoption of this Proposal is conditioned on the approval of
the Charter Amendment by the Companys stockholders. The
adoption of this Proposal is not conditioned on the approval of
the Option Plan Amendments by the Companys stockholders.
Background
of the Merger
INVESTools strategic objective is to offer its students
the highest quality investor education possible as well as those
ancillary services which INVESTools believes its students are
seeking. As a result of market research undertaken during
2002-2004,
INVESTools realized its students were seeking some guidance from
INVESTools in their selection of a brokerage firm. As a result,
INVESTools contacted several brokerage firms during 2004 to
identify the firms with the most suitable product offering for
its students. In 2004 and 2005, INVESTools entered into
advertising agreements with optionXpress Holdings Inc. and
CyberTrader Inc., a wholly-owned subsidiary of the Charles
Schwab Corporation.
During 2005 and 2006, these agreements resulted in a significant
number of INVESTools students opening accounts with either
optionsXpress or CyberTrader. In February 2006, at a regularly
scheduled Board of Directors meeting, the Board discussed the
relative merits of continuing or enhancing INVESTools
advertising agreements, as well as building or acquiring a
brokerage platform. During the Spring of 2006, management
identified several executives that might be suitable to help
build a brokerage platform and met with several clearing firms.
In March 2006, several students of INVESTools met with Tom
Sosnoff, Chief Executive Officer of thinkorswim Group Inc., to
learn more about thinkorswim and the benefits of its online
trading platform. This discussion was facilitated via a Webex
presentation, during which Lee Barba, Chief Executive Officer of
INVESTools, was in attendance. After discussion with a number of
INVESTools employees about thinkorswims positioning in the
marketplace and the strength of its software and browser-based
platforms, Mr. Barba concluded that thinkorswim could be an
ideal platform to offer to INVESTools student population.
In late April 2006, Mr. Barba, Mr. Sosnoff and a
representative of Paragon Capital Partners
(Paragon), INVESTools financial advisor, met
at thinkorswims offices in Chicago, at which they
discussed the possibility of the two parties entering into an
advertising agreement, as well as the possibility of INVESTools
acquiring a minority stake in thinkorswim. In this connection,
they signed a mutual confidentiality agreement. Following this
21
initial meeting, Mr. Barba and Mr. Sosnoff had several
meetings and telephone conversations to discuss potential
various partnership alternatives in greater detail.
In early May 2006, Mr. Barba raised the possibility of a
merger between INVESTools and thinkorswim. At this point,
Mr. Sosnoff disclosed high-level financial results for
thinkorswim but did not share any detailed financial or
operating information. In late May 2006, the Board of Directors
met to discuss the benefits of a possible transaction with
thinkorswim. In mid-June 2006, at another Board of Directors
meeting, the Board discussed the preliminary financial terms
being negotiated.
After the June Board meeting, with the assistance of its legal
and financial advisors, INVESTools began extensive due diligence
of thinkorswim. Simultaneous with this due diligence process,
INVESTools began to meet with potential financing sources. From
early July 2006 until mid-September 2006, INVESTools and
thinkorswim negotiated the key aspects of the Merger Agreement.
The Board of Directors had regular updates of the due diligence
process, as well as the negotiation of the key terms of the
Merger Agreement and related documents.
On September 15, 2006, the Board of Directors held a
meeting with members of management, Paragon and Simpson
Thacher & Bartlett LLP, INVESTools legal
advisors, to discuss the status of negotiations of the proposed
transaction. Members of INVESTools senior management and
INVESTools financial and legal advisors reviewed the
history of the negotiations and the terms and conditions of the
Merger Agreement that had been negotiated. Updata reviewed with
the Board of Directors its financial analysis of the transaction
and informed the Board of Directors that, in its opinion, the
proposed merger consideration was fair, from a financial point
of view, to holders of INVESTools common stock. Complete drafts
of the Merger Agreement and related agreements, which had been
distributed to each director prior to the meeting, were
reviewed. Updatas written opinion was subsequently
delivered to the Board of Directors on September 18, 2006
when the Merger Agreement was executed. The Board of Directors
and legal and financial advisors engaged in extensive discussion
relating to, and consideration of, the proposed transaction, the
potential alternatives to the transaction and the benefits and
risks of entering into the Merger Agreement, including the
possible effect on INVESTools existing business, compared
to continuing as a stand alone entity.
After full deliberation, the Board of Directors resolved
(i) that it was advisable and fair to and in the best
interests of INVESTools and INVESTools stockholders, for
INVESTools to enter into the Merger Agreement with thinkorswim,
(ii) to approve and adopt the Merger Agreement and the
transactions contemplated by the Merger Agreement, (iii) to
approve and adopt the ancillary agreements, and (iv) to
recommend that INVESTools stockholders approve and adopt
the Issuance Proposal and the Charter Amendment.
On the evening of September 18, 2006, INVESTools and
thinkorswim signed the Merger Agreement and related agreements.
Thereafter, INVESTools issued a press release announcing the
transaction.
INVESTools
Reasons for the Merger
In reaching its decision to pursue a combination of INVESTools
and thinkorswim, the Board of Directors consulted with senior
management and the Companys financial and legal advisors
and considered a number of factors, including those set forth
below.
The Company believes that a combination of INVESTools and
thinkorswim represents a compelling opportunity to improve value
for stockholders by creating a market leader in the investor
education and online brokerage industries and establishing a
foundation for long-term growth. The Company believes that there
are a number of potential benefits of the proposed Merger with
thinkorswim, including, among others:
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|
|
The combination of INVESTools education capabilities with
thinkorswims
best-in-class
trading platform creates a unique business model with the
ability to offer differentiated product offerings for the retail
investor;
|
|
|
|
INVESTools continuing education offerings, which represent
more than 80% of its sales, are principally based on options,
complementing thinkorswims award-winning options-oriented
trading platform;
|
|
|
|
The combination of two leading technology-based companies will
create operating leverage in product innovation resulting in
increased lifetime value and recurring revenue from each student;
|
22
|
|
|
|
|
Significant incremental revenues and profitability are expected
from INVESTools students utilizing thinkorswims
trading platform rather than other third-party brokerage
platforms
|
The Board of Directors also considered potential adverse
consequences and negative factors, primarily consisting of the
following:
|
|
|
|
|
The significant amount of debt INVESTools will incur in
connection with completing the Merger;
|
|
|
|
The significant degree of difficulty and management distraction
that is inherent in the process of integrating INVESTools and
thinkorswim, and the risk that operational synergies sought in
the proposed Merger might not be fully achieved or that
achieving these benefits may take longer than expected;
|
|
|
|
The risk that the Merger might not be consummated despite
INVESTools efforts, even if the issuance of shares of
Common Stock in connection with the Merger is approved by
INVESTools stockholders; and
|
|
|
|
Other risks described in thinkorswim
thinkorswim Qualitative and Quantitative Disclosure About Market
Risk and in INVESTools Annual Report on
Form 10-K
for the year ended December 31, 2005.
|
The Board of Directors concluded, however, that these risks are
outweighed by the substantial benefits of the Merger with
thinkorswim.
thinkorswims
Reasons for the Merger
In reaching its decision to approve the Merger of thinkorswim
and a wholly-owned subsidiary of INVESTools, the Board of
Directors of thinkorswim, most of whom represent major
stockholders of thinkorswim, analyzed a number of factors,
including the merger consideration in the Merger, the synergies
between the businesses of thinkorswim and INVESTools, and the
growth prospects for both businesses. The Board of Directors of
thinkorswim determined the following:
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The businesses of the two companies are complementary and their
customer bases are similar;
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The business combination of a brokerage firm specializing in
options with a customer base consisting primarily of
self-directed active traders, and an investor education company
that focuses on active investors will strengthen both companies;
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The companies have the same goal of enabling the individual
investors to better understand and participate in the investment
world through education and the use of analytical tools created
through the creative application of technology;
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INVESTools, with its reputation as a premier investor education
company, and thinkorswim with its reputation as a top-rated
online options brokerage firm, should enable both companies to
achieve economies of scale in their efforts to attract
additional customers; and
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The strategic alliance of INVESTools and thinkorswim will permit
both companies to more fully develop investor education
programs, financial technology and trade facilitation processes.
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Opinion
of INVESTools Financial Advisor
Updata focuses on providing merger and acquisition and strategic
advisory services to information technology companies including
software, consulting, financial technology and other information
technology companies. In this capacity, Updata is continually
engaged in valuing technology businesses. INVESTools engaged
Updata to act as its financial advisor in connection with the
Merger. On September 15, 2006, Updata delivered to the
Board of Directors its oral and written opinions that, as of
that date, and subject to the assumptions, limitations and
qualifications set forth in such opinion, the consideration to
be paid to the thinkorswim stockholders in connection with the
Merger was fair, from a financial point of view, to INVESTools.
THE FULL TEXT OF THE OPINION DELIVERED BY UPDATA TO THE BOARD OF
DIRECTORS, DATED SEPTEMBER 15, 2006, WHICH SETS FORTH THE
ASSUMPTIONS MADE, GENERAL PROCEDURES FOLLOWED, MATTERS
CONSIDERED AND LIMITATIONS ON THE SCOPE OF REVIEW UNDERTAKEN BY
UPDATA IN RENDERING ITS OPINION, IS ATTACHED AS ANNEX A TO
THIS
23
PROXY STATEMENT AND IS INCORPORATED HEREIN BY REFERENCE. UPDATA
HAS CONSENTED IN WRITING TO THE INCLUSION OF THE OPINION IN THIS
PROXY STATEMENT. THE OPINION SPEAKS ONLY AS OF THE DAY UPDATA
DELIVERED ITS OPINION. UPDATA DELIVERED THE OPINION SOLELY FOR
THE INFORMATION OF THE BOARD OF DIRECTORS IN CONNECTION WITH ITS
CONSIDERATION OF THE TRANSACTION AND IT DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY INVESTOOLS STOCKHOLDER AS TO WHETHER OR
HOW TO VOTE ITS, HIS OR HER SHARES OF COMMON STOCK. THE
SUMMARY OF THE UPDATA OPINION SET FORTH BELOW IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION
ATTACHED TO THIS PROXY STATEMENT AS ANNEX A. INVESTOOLS
SHAREHOLDERS ARE ENCOURAGED TO READ THE OPINION CAREFULLY IN ITS
ENTIRETY.
In rendering its opinion, Updata, among other things:
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reviewed a draft of the Merger Agreement dated
September 13, 2006 and related documents, and based its
opinion on the understanding that the terms and conditions of
the Merger Agreement would not materially change;
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reviewed certain publicly-available financial statements and
other business and financial information of INVESTools and
thinkorswim;
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reviewed certain internal financial statements and other
financial and operating data concerning INVESTools and
thinkorswim prepared by the managements of INVESTools and
thinkorswim, respectively;
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reviewed certain financial projections prepared by the
managements of INVESTools and thinkorswim;
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discussed the past and current operations and financial
condition and the prospects of INVESTools and thinkorswim with
senior executives of INVESTools and thinkorswim, respectively;
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reviewed the pro forma impact of the Merger on various
INVESTools financial metrics;
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reviewed information relating to certain strategic, financial
and operational benefits (the Projected Benefits)
anticipated from the Merger prepared by the managements of
INVESTools and thinkorswim, with senior executives of INVESTools
and thinkorswim, respectively;
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discussed the strategic rationale for the Merger with senior
executives of INVESTools and thinkorswim;
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reviewed the reported prices and trading activity for the Common
Stock;
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compared the financial performance of INVESTools and the prices
and trading activity of the Common Stock with that of certain
other comparable publicly-traded companies and their securities;
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analyzed available information concerning certain other mergers
and acquisitions believed to be comparable in whole or in part
to the Merger; and
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conducted other financial studies, analyses and investigations
as deemed appropriate for purposes of this opinion.
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Updata relied on, without independent verification of, the
accuracy and completeness of all the financial and other
information (including, without limitation, the representations
and warranties contained in the Merger Agreement) that was
publicly available or furnished to Updata by INVESTools or
thinkorswim. Updata did not assume responsibility to verify, and
did not independently verify, the accuracy or completeness of
such information. Updata further relied upon the assurances of
management of INVESTools that they were unaware of any facts
that would make the information provided incomplete or
misleading in any respect. With respect to the financial
projections examined by Updata, it assumed that such financial
projections were reasonably prepared and reflect the best
available estimates and good faith judgments of INVESTools and
thinkorswim, and did not assume any responsibility for or
express any view as to the financial forecasts or the
assumptions on which they were based. Updata has assumed that
the amount and timing of the Projected Benefits are reasonable
and that the Projected Benefits will be realized substantially
in accordance with such estimates. The forecasts and
projections, including the Projected Benefits, were based on
numerous variables and assumptions that are inherently
uncertain, including, without limitations, facts related to
general economic and market conditions. Accordingly, actual
results could vary
24
significantly from those set forth in such forecasts and
projections. Updata has neither made nor obtained an independent
appraisal or valuation of any of the assets of INVESTools or
thinkorswim, nor has it conducted an inspection of the
respective properties and facilities of INVESTools or
thinkorswim.
Updata did not opine on, nor did its opinion consider:
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the tax consequences of the Merger, including tax consequences
to any holder of INVESTools common stock;
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the relative merits of the Merger as compared to any alternative
business strategies that might exist for INVESTools;
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the effect of any other transaction in which INVESTools might
engage;
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the form or terms of the Merger Agreement; or
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the prices at which INVESTools common stock may trade following
the date of its opinion or following the consummation of the
Merger.
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Updatas opinion is necessarily based upon market,
economic, financial and other conditions as they existed and
could be evaluated as of the date of the opinion, and any
subsequent change in such conditions would require a
reevaluation of such opinion. Although subsequent developments
may affect its opinion, Updata has assumed no obligation to
update, revise or reaffirm it.
The preparation of a fairness opinion is a complex process and
is not necessarily susceptible to summary description. The
summary of Updatas analyses set forth below summarizes the
material analyses presented to the Board of Directors, but is
not a complete description of the presentation by Updata to the
Board of Directors or the analysis performed by Updata in
connection with preparing its opinion. In arriving at its
opinion, Updata did not attribute any particular weight to any
analyses or factors considered by it, but rather made
subjective, qualitative judgments as to the significance and
relevance of each analysis and factor. Accordingly, Updata
believes that its analyses and the summary set forth below must
be considered as a whole and that selecting portions of its
analyses, without considering all analyses, or of the following
summary, without considering all factors and analyses, could
create an incomplete view of the processes underlying the
analyses set forth in the Updata presentation to the Board of
Directors and Updatas opinion.
The terms of the proposed Merger, including the type and amount
of merger consideration, were determined through negotiations
between INVESTools and thinkorswim and were approved by the
Board of Directors. The decision to enter into the Merger was
solely that of the Board of Directors. As described above, the
opinion of Updata as to the fairness of the merger consideration
from a financial point of view was only one of a number of
factors taken into consideration by the Board of Directors in
making its determination to approve the proposed Merger.
The following is a brief summary of the material financial
analyses performed by Updata in connection with providing its
opinion to the Board of Directors on September 15, 2006.
Analysis
of Implied Multiples of the Merger Consideration
Updata analyzed certain transaction multiples implied by the
merger consideration. Specifically, Updata calculated the
following implied transaction multiples using the equity value
and enterprise value of the transaction derived from the merger
consideration:
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Implied Transaction Multiple
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Enterprise Value / 2006
thinkorswim forecasted revenue
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5.0x
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Enterprise Value / 2006
thinkorswim forecasted EBITDA
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11.4x
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Equity Value / 2006 thinkorswim
forecasted Net Income
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20.8x
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Equity Value / 2007 thinkorswim
forecasted Net Income
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16.6x
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25
These implied transaction multiples were then compared to the
corresponding multiples observed in its analysis of
(i) publicly traded companies deemed to be comparable to
thinkorswim, and (ii) select precedent acquisitions deemed
to be comparable to thinkorswim.
Analysis
of Publicly Traded Companies Comparable to
thinkorswim
This analysis reviews a business operating performance and
outlook relative to a group of peer companies and then compares
the Implied Transaction Multiples to the trading multiples of
the peer group. Updata chose firms that it believed to be
comparable to thinkorswim in terms of online brokerage focus and
business models, including optionsXpress, Charles Schwab Corp.,
TD Ameritrade Holding Corp., E*Trade Financial Corp., and
TradeStation Group Inc. Using published Wall Street estimates
for the peer group, Updata analyzed revenue, EBITDA, and P/E
multiples when making its comparisons, because valuations based
on these multiples are generally accepted in the analysis of
online brokerage firms. Revenue and EBITDA multiples were based
on enterprise value, and P/E multiples were based on market
value of equity. Enterprise value represents a companys
current stock price multiplied by its fully diluted common
shares, plus debt and preferred stock, minus cash and cash
equivalents on the most recent publicly available balance sheet.
EBITDA means a companys earnings before interest, taxes,
depreciation and amortization, and it excludes all one-time
charges and expenses. Updata used closing per share prices of
the peer group companies as of September 13, 2006 in its
calculations.
The following table lists the low, median and high data for a
selected group of the comparable companies compared to the
Implied Transaction Multiples. Based on the comparison to the
peer group, Updata noted that the Implied Transaction Multiples
were within the range of trading multiples.
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Range of Multiples
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Implied thinkorswim
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Low
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Median
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High
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Transaction Multiples
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Online Broker Dealers
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Enterprise Value / 2006 Revenue
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4.0
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x
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4.7
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x
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6.1
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x
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5.0x
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Enterprise Value / 2006 EBITDA
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9.2
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x
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11.4
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x
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16.7
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x
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11.4x
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Market Cap / 2006 Net Income
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16.0
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x
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20.6
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x
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23.2
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x
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20.8x
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Market Cap / 2007 Net Income
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13.6
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x
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16.3
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x
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19.8
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x
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16.6x
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Analysis
of Selected Transactions
This analysis provides a valuation range based on financial
information of selected public and privately held companies
which have been acquired and are in similar industries as the
business being evaluated. Using publicly available historical
financial data of the acquisition targets and publicly available
transaction values for these acquisitions, Updata compared the
Merger with 17 selected mergers and acquisitions transactions
involving online brokerage firms. These transactions included
(target/acquirer):
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TD Waterhouse / Ameritrade Holding Corp
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Harrisdirect LLC / E*Trade Financial Corp.
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BrownCo / E*Trade Financial Corp
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JB Oxford & Co. / Ameritrade Holding Corp
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Wit Capital Group, Inc. / Charles Schwab Corp
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Tradescape.com / E*Trade Financial Corp
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Datek Online Holding Corp. / Ameritrade Holding Corp
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DLJ Direct / Toronto Dominion Bank,
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CSFB Direct / Bank of Montreal,
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CSFB Direct / Credit Suisse Group,
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TradeCast Ltd. / Ameritrade Holding Corp
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26
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CyBerCorp Inc. / Charles Schwab Corp.,
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VERSUS Technologies / E*Trade Financial Corp
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Electronic Share Info / E*Trade Financial Corp
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TIR Holdings Ltd. / E*Trade Financial Corp.,
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Onlinetradinginc.com Corp. / TradeStation Group, Inc.,
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TeleBanc Financial Corp. / E*Trade Financial Corp
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For each selected acquisition, Updata calculated multiples based
on the enterprise value to the target companys LTM revenue
and EBITDA wherever such information was publicly available. The
following chart lists the low, median and high data for the
selected transactions and the Implied Transaction Multiples.
Updata noted that the Implied Transaction Multiples were within
the range of the selected acquisitions.
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Range of Multiples
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Implied thinkorswim
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Low
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Median
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High
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Transaction Multiples
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Enterprise Value / LTM Revenue
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0.9x
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2.6x
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19.7x
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5.0x
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Enterprise Value / LTM EBITDA
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4.6x
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8.1x
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12.3x
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11.4x
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Updata also observed that no company or transaction used in the
above analyses is identical to thinkorswim or the Merger, and
the reasons for and circumstances surrounding each of the
analyzed transactions are inherently different. Accordingly, an
analysis of the results of the foregoing is not mathematical;
rather it involves complex, qualitative considerations and
judgments, reflected in Updatas opinion, concerning
differences in the financial and operating characteristics of
the compared companies, the characteristics of the selected
transactions and other factors that could affect the public
trading values (or other valuation) of the comparable companies,
INVESTools and thinkorswim.
Discounted
Cash Flow Analysis
Updata calculated a range of theoretical values for thinkorswim
based upon projected discounted cash flows from
2007-2011,
and a terminal value based upon a range of multiples of 2011
EBITDA. Results were based on financial estimates, approved by
thinkorswims management through 2011, Updatas
analysis of after-tax, unlevered free cash flows, and discount
rates between 13% and 17%. Changes in these estimated ranges, or
in managements estimates of business performance, would
change the implied theoretical values. The discounted cash flow
analysis produced a range of theoretical values, depending on
the assumptions utilized, from an enterprise value of
$444 million to $527 million. See the following table
for details. Updata noted that this range of derived enterprise
values was greater than the enterprise value implied by the
merger consideration.
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Enterprise Value
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Multiple of 2011 EBITDA
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Weighed Average Cost of Capital
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7.5x
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8.0x
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8.5x
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9.0x
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9.5x
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13.0%
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$
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476
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$
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500
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$
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525
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$
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549
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$
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573
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14.0%
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458
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481
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504
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527
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550
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15.0%
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440
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462
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484
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506
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528
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16.0%
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423
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444
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465
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486
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507
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17.0%
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407
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427
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447
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467
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487
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|
Pro
Forma Accretion/Dilution Analysis
Updata analyzed the financial impact of the Merger on INVESTools
financial results as compared to INVESTools standalone projected
financial results. Accretion/dilution was calculated for
INVESTools projected free cash flow per share and projected
Adjusted EBITDA (defined as earnings before interest, taxes,
depreciation and amortization and adjusted to add back 90% of
the change in deferred revenue and other non-cash charges for
the relevant period) per share for the projected fiscal years
ended December 31, 2007 and December 31, 2008. The
effect on free cash flow per share and Adjusted EBITDA per share
was calculated using various assumptions,
27
including but not limited to the following: (i) the
transaction closes on December 31, 2006,
(ii) consideration paid to thinkorswim shareholders
consisted of $170 million in cash (of which
$125 million was new borrowings and $45 million was
from available cash on INVESTools balance sheet) and
19.1 million shares of newly issues IEDU common stock, and
(iii) the financial projections and Projected Benefits used
in the analysis for thinkorswim and INVESTools were provided by
and/or
approved by the respective companies, subject to certain
assumptions made by Updata.
Based on Updatas analysis, the Merger, on a Free Cash Flow
per Share basis, is dilutive in 2007 and accretive in 2008. On
the basis of Adjusted EBITDA per Share, the Merger is accretive
in 2007 and 2008. The following table sets forth the results of
this analysis.
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2007E
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2008E
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Accretion/(Dilution)
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Accretion/(Dilution)
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Free Cash Flow per Share
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(4.3
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)%
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7.9%
|
|
Adjusted EBITDA per Share
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8.6
|
%
|
|
|
17.2%
|
|
Updata, as part of its investment banking services, is regularly
engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, strategic
transactions, corporate restructurings, and other investment
banking activity. Updata may in the future provide investment
banking or other financial advisory services to INVESTools or
thinkorswim or their affiliates and may receive fees for the
rendering of such services.
Pursuant to an engagement letter dated August 17, 2006,
INVESTools had agreed to pay Updata, upon delivery of the
opinion, a customary fee of $425,000. The letter also provides
that INVESTools will reimburse Updata for its
out-of-pocket
expenses (regardless of whether or not the opinion was
delivered) and will indemnify Updata and certain related persons
against certain liabilities arising out of its engagement. In
addition, Updatas engagement letter stipulates that Updata
will bring down the fairness opinion to the closing of the
Merger if requested by the Board of Directors.
The
Merger Agreement
On September 18, 2006, INVESTools entered into the Merger
Agreement with thinkorswim. The following description of the
Merger Agreement does not purport to be complete and is
qualified in its entirety by reference to the complete text of
the Merger Agreement, a copy of which has been filed as
Exhibit 2.1 to INVESTools Current Report on
Form 8-K
filed on September 20, 2006. See Where You Can Find
Additional Information.
Under the terms of the Merger Agreement, which was approved
unanimously by the Boards of Directors of INVESTools and
thinkorswim, thinkorswim will become a wholly-owed subsidiary of
INVESTools following the Merger and thinkorswim stockholders
will receive half of the merger consideration in cash and half
in stock, representing approximately $170 million in cash
and 19.1 million shares of Common Stock.
Following the Merger, current thinkorswim securityholders will
generally not be allowed to transfer the Common Stock to be
received in the Merger until six months following the Merger,
and Mr. Sosnoff and Mr. Sheridan are subject to a
longer restrictive period while employed by the Company. After
the expiration of such periods, the Company will provide a shelf
registration statement to effectuate sales of Common Stock held
by current thinkorswim securityholders or their permitted
transferees. In addition, up to 728,608 additional shares of
Common Stock may be issued to current thinkorswim
securityholders on the date such periods expire if, at such
time, the Common Stock is trading for less than $8.75 per
share (with an $8.00 floor on such price for purposes of the
calculation of this additional consideration).
The parties to the Merger Agreement have made customary
representations, warranties and covenants therein. INVESTools
has also agreed to call a meeting of INVESTools stockholders to
consider approval of the Issuance Proposal and the Charter
Amendment. The Merger Agreement also provides for customary
covenants providing for the parties to use their commercially
reasonable efforts to take actions necessary for the closing of
the Merger.
Consummation of the Merger is subject to various customary
conditions, including, among others:
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Approval by the INVESTools stockholders of the Issuance Proposal
and the Charter Amendment;
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|
Adoption of the Merger Agreement by the thinkorswim stockholders;
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28
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|
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The expiration or termination of the waiting period under the
Hart-Scott-Rodino
Act (the waiting period was terminated on October 23, 2006);
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The approval of the NASD;
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|
No temporary restraining order, preliminary or permanent
injunction or other order shall be in effect prohibiting the
Merger;
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|
There shall not be any pending or threatened proceeding asserted
by a governmental authority challenging or seeking to enjoin the
Merger;
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|
The receipt by INVESTools of the debt financing necessary to
consummate the Merger;
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There shall not have occurred a Material Adverse Effect (as
defined in the Merger Agreement) in respect of INVESTools or
thinkorswim; and
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The Company and DevExperts LLC and its affiliates shall have
entered into an arrangement for the provision of ongoing
consulting services. DevExperts LLC is a software development
company based in St. Petersburg, Russia, that developed and
maintains the thinkorswim platform.
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Under the Merger Agreement, thinkorswim has agreed not to,
directly or indirectly, solicit, facilitate, initiate, entertain
or encourage any inquiries or communications regarding, or the
making of any proposal or offer that constitutes or may
constitute, an Acquisition Proposal (as defined in the Merger
Agreement).
thinkorswim and its subsidiaries have agreed to conduct their
business in all material respects in the ordinary course of
business and in a manner consistent with past practice and in
compliance with all applicable laws and to use their
commercially reasonable efforts to (i) preserve intact
their business organization and their assets, rights and
properties, (ii) operate according to plans and budgets
provided to INVESTools, (iii) retain the services of their
present officers, key employees and software development
consultants, (iv) maintain in effect their material
contracts and (v) preserve their present relationships with
customers and other persons with whom they have business
relations.
The Merger Agreement contains certain termination rights for
both INVESTools and thinkorswim. In the event of a termination
by either INVESTools or thinkorswim, substantially all of the
provisions of the Merger Agreement will cease to have any effect.
The Merger Agreement is subject to and governed by the laws of
the State of Delaware.
The
Marketing Agreement
INVESTools and thinkorswim, Inc., a wholly-owned subsidiary of
thinkorswim, entered into a Marketing Agreement on
September 18, 2006 pursuant to which INVESTools has agreed
to display the thinkorswim logo prominently in its Investors
Toolbox and thinkorswim, Inc. has agreed to give
INVESTools students a preferred rate for
thinkorswims services. INVESTools and thinkorswim, Inc.
will work together to develop an interface to allow
INVESTools students to access thinkorswim, Inc.s
brokerage platform. thinkorswim, Inc. has agreed to pay
INVESTools a monthly fee of $175,000, with a semi-annual review
of the pricing. The Marketing Agreement expires on
December 31, 2007 unless renewed by mutual agreement.
INVESTools has agreed to only enter into similar marketing
arrangements with one other brokerage firm during the term of
the Marketing Agreement.
INVESTools
Board of Directors and Management after the Merger
Subject to the satisfaction or waiver of all conditions
precedent to the Merger, the Company has agreed, effective
immediately following the Merger, that current thinkorswim
directors Messrs. Sosnoff and Sheridan shall become members
of the Board of Directors and that they, or their designees,
will be nominated at each annual meeting of the Companys
stockholders held within the next three years following the
closing of the Merger. The size of the Board of Directors shall
concurrently be increased to eight members, to allow for the
addition of the two nominees set forth above.
29
The management of INVESTools will not change as a result of the
Merger. Mr. Sosnoff shall be the President of thinkorswim,
Mr. Sheridan shall be the Executive Vice President of
thinkorswim and Kristine Ross shall be the Chief Financial
Officer of thinkorswim.
Employment
Agreements for Messrs. Sosnoff and Sheridan
The Company will enter into substantially identical employment
agreements, each having three-year terms, with
Messrs. Sosnoff and Sheridan (the Executives)
effective upon the closing of the Merger. Pursuant to these
agreements, Messrs. Sosnoff and Sheridan will serve as
President and Executive Vice President of thinkorswim,
respectively, and will each be entitled to a base salary of
$120,000 per year and eligible to earn an annual bonus
award in an amount determined in the sole discretion of the
compensation committee of the Board of Directors, but in no
event less than $225,000 (which will be considered earned
ratably on a monthly basis throughout the applicable fiscal
year). The employment agreements will also provide for grants of
non-qualified stock options, one-half of which will have an
exercise price per share equal to the fair market value of the
Common Stock on the date of grant and one-half of which will
have an exercise price per share equal to 150% of the fair
market value of the Common Stock on the date of grant. These
options will become vested and exercisable as to 25% of the
shares subject thereto on each of the first, second, third, and
fourth anniversaries of their grant date, subject to the
Executives continued service with the Company.
Additionally, if a change in control of the Company occurs
during the employment term, the options will become 100% vested
and exercisable on an accelerated basis immediately prior to a
change in control of the Company. In the event of a termination
of the Executives employment due to the Executives
death or disability, the Executive will be entitled to payment
of earned and unpaid salary and bonus and continued payment of
base salary for three months following termination of
employment. In the event of a termination of an Executives
employment by the Company without cause or by the Executive due
to a resignation for constructive termination (which would
include diminution in status, titles or duties), the Executive
will be entitled to payment of earned and unpaid salary and
bonus and continued payment of base salary for the longer of
(i) twelve months or (ii) the scheduled expiration of
the term of his employment agreement. The employment agreements
also contain non-competition and non-solicitation covenants that
apply during the employment term and following termination of
employment for any reason until the later of the scheduled
expiration of the employment term or the one-year anniversary of
such termination of employment.
If the Executives employment is terminated by the Company
without cause or by the Executive due to resignation for
constructive termination, and at the time of such termination
the Company is actively engaged in substantive negotiations with
respect to a transaction that, if consummated, would result in a
change in control of the Company, then the Executive agrees to
continue to serve the Company and its subsidiaries and
affiliates as a consultant for a period of up to 12 months
following such termination of employment. Executives stock
options will continue to vest during such consulting period in
accordance with their normal vesting schedule (and will be
vested on an accelerated basis if the change in control occurs
during such consulting period), and Executive will be paid a per
diem amount for his consulting services.
Regulatory
Matters
Under the
Hart-Scott-Rodino
Act, and the rules promulgated thereunder by the FTC, the Merger
may not be completed until notification and report forms have
been filed with the FTC and the Antitrust Division of the DOJ,
and the applicable waiting period has expired or been
terminated. INVESTools and thinkorswim filed notification and
report forms under the HSR Act with the FTC and the Antitrust
Division on October 13, 2006, and received early
termination of the waiting period on October 23, 2006.
Additionally, prior to the completion of the Merger,
thinkorswim, as a
U.S.-registered
broker-dealer, is required under the rules of the NASD to make
certain filings in respect of the change in control of
thinkorswim.
Except as noted above with respect to the required filings under
the
Hart-Scott-Rodino
Act, the filings with the NASD and the filing of a Certificate
of Merger in Delaware at or before the effective date of the
Merger, the Company is unaware of any material federal, state or
foreign regulatory requirements or approvals required for the
completion of the Merger.
30
Interests
of Certain Persons in the Merger
To the knowledge of the Board of Directors, none of the
directors or executive officers of the Company will receive
benefits as a result of the Merger that will be in addition to
or different from the benefits received by the Companys
stockholders generally.
Accounting
Treatment
The Merger with thinkorswim will be accounted for under the
purchase method of accounting under U.S. GAAP, which means
that thinkorswims results of operations will effectively
be included with ours from the effective time of the Merger and
its consolidated identifiable assets (both tangible and
intangible) and liabilities will be recorded at their fair
values at the same time with the excess, if any, allocated to
goodwill.
Material
U.S. Federal Income Tax Consequences
There are no material U.S. federal income tax consequences
to the Companys current stockholders that will result from
the issuance of additional shares of Common Stock in the Merger.
Indebtedness
and the Financing of the Merger
In connection with the Merger, the Company will issue
approximately 19.1 million shares of Common Stock and pay
approximately $170 million in cash to thinkorswims
securityholders. An additional $15.2 in cash will be used to pay
customary fees and expenses in connection with the Merger, the
financing arrangements and the related transactions. The cash
payments are expected to be funded by a combination of the
following:
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new senior secured credit facilities in the amount of
$150 million, consisting of a $125 million senior
secured term loan facility and a $25 million senior secured
revolving credit facility. The revolving credit facility is not
expected to be utilized at the closing; and
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cash and marketable securities on hand in an amount of
approximately $60.2 million.
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Senior
Secured Credit Facilities
Commitment
Letter
The Company has received a fully executed debt commitment
letter, dated as of September 18, 2006, from JPMorgan Chase
Bank, N.A. (JPMCB) and J.P. Morgan Securities
Inc. (JPMorgan). Pursuant to the debt commitment
letter, subject to the conditions set forth therein, JPMCB has
committed to provide the Company up to $150 million of
senior secured credit facilities in the form of a
$125 million senior secured term loan facility and a
$25 million senior secured revolving credit facility. The
proceeds of the senior secured term loan facility will be used
to finance in part the Merger. The proceeds of the senior
secured revolving credit facility will be used for general
corporate purposes, including permitted acquisitions.
The debt commitments expire on January 31, 2007. The
documentation governing the senior secured credit facilities has
not been finalized and, accordingly, the actual terms of such
facilities may differ slightly from those described in this
Proxy Statement.
Conditions
Precedent
The availability of the senior secured credit facilities is
subject to, among other things, there not having occurred since
December 31, 2005 any change or condition that would
constitute a Company Material Adverse Effect or
Parent Material Adverse Effect, as each term defined
in the Merger Agreement, the accuracy in all material respects
at the closing date of specified representations of the Company
in the Merger Agreement, consummation of the Merger in
accordance with the Merger Agreement (and no provision thereof
being waived or amended in a manner materially adverse to the
lenders without the consent of JPMorgan) and the negotiation,
execution and delivery of definitive documentation.
31
General
Provisions
The senior secured credit facilities will consist of a
$125 million senior secured term loan facility and a
$25 million senior secured revolving credit facility, both
with terms of five years. The revolving credit facility will
include provisions for the issuance of letters of credit and
swingline loans. The senior secured credit facilities will
permit the borrower to increase the amount of the revolving
facility up to an aggregate of $50 million. No alternative
financing arrangements or alternative financing plans have been
made in the event that the senior secured credit facilities are
not available as anticipated.
Interest
Rate and Fees
Loans under the senior secured credit facilities are expected to
bear interest, at the borrowers option, initially, at
(1) a rate equal to the London interbank offered rate (with
adjustments for statutory reserve requirements), or LIBOR, plus
an applicable margin, or (2) a rate equal to the higher of
(a) the prime rate of JPMCB and (b) the federal funds
effective rate plus 0.50%, plus an applicable margin. After
delivery of the borrowers financial statements for the
second full fiscal quarter completed after the closing date, the
applicable margins for borrowings under the term loan facility
and the revolving credit facility may be reduced subject to a
leverage-based pricing grid.
In addition, the borrower will pay to the lenders customary
commitment fees under the revolving credit facility in respect
of the unutilized commitments thereunder and a ticking fee on
the aggregate amount of the revolving and term facilities from
November 1, 2006 to the closing date.
Prepayments
and Amortization
The borrower will be permitted to make voluntary prepayments at
any time, without premium or penalty (other than LIBOR breakage
costs, if applicable), and will be required to make mandatory
prepayments of term loans with (1) net cash proceeds of
non-ordinary course asset sales (subject to reinvestment rights
and other exceptions), (2) issuances of debt (other than
permitted debt) and (3) 50% of the surviving
corporations excess cash flow (to be defined) subject to a
leverage-ratio test. The term loan will amortize in equal
quarterly installments in aggregate annual amounts equal to 5%
of the original principal amount of the term loan, with the
balance payable at the final maturity date.
Guarantors
All obligations under the new senior secured credit facilities
will be unconditionally guaranteed by each existing and future
direct or indirect wholly-owned material domestic subsidiary,
other than any domestic subsidiary that is a broker-dealer.
Collateral
The obligations of the borrower under the senior secured credit
facilities will be secured on a first priority basis, subject to
permitted liens and other agreed-upon exceptions, by (i) a
first-priority pledge of all the capital stock of each
wholly-owned restricted subsidiary of the Company and
(ii) by security interests in, and mortgages on,
substantially all tangible and intangible assets of the Company
and each subsidiary.
Other
Terms
The senior secured credit facilities will contain customary
representations, warranties and covenants, including, among
other things, restrictions on indebtedness, liens, fundamental
changes, investments and acquisitions, sales of assets, sale
leasebacks, mergers and consolidations, dividends and other
distributions, redemptions, prepayments of certain subordinated
indebtedness and certain existing indebtedness, and a maximum
total leverage ratio. The senior secured credit facilities will
also include customary events of default, including a change of
control (to be defined).
32
Recommendation
of the Board of Directors
The Board of Directors has unanimously approved the Merger, the
issuance of shares of Common Stock in connection with the
Merger, the amendments to the Companys 2001 Stock Option
Plan, and the amendment to INVESTools Certificate of
Incorporation.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE
FOR THE APPROVAL OF THE ISSUANCE OF SHARES OF
COMMON STOCK IN CONNECTION WITH THE COMPANYS PROPOSED
MERGER OF ITS WHOLLY-OWNED SUBSIDIARY WITH THINKORSWIM, AND
GRANTS TO THE EMPLOYEES OF THINKORSWIM OF OPTIONS TO PURCHASE
COMMON STOCK.
33
AMENDMENT
OF INVESTOOLS CERTIFICATE OF INCORPORATION
(CHARTER AMENDMENT)
General
The Board of Directors has approved the amendment and
restatement of INVESTools Certificate of Incorporation to
authorize additional shares of Common Stock to permit the
issuance of Common Stock to the stockholders of thinkorswim in
connection with the Merger and the grants to employees of
thinkorswim of options to purchase shares of Common Stock. See
Issuance of Common Stock in Connection with the Proposed
Merger Background of the Merger,
INVESTools Reasons for the Merger
and thinkorswims Reasons for the
Merger for a discussion of the background and reasons for
the amendment of INVESTools Certificate of Incorporation.
The amendment to INVESTools Certificate of Incorporation
will increase the number of authorized shares of capital stock
of the Company from 61,000,000 to
101,000,000, and will increase the number of
authorized shares of Common Stock from 60,000,000 to
100,000,000.
Under Delaware law and the provisions of INVESTools
current Certificate of Incorporation, the adoption of the
proposed amendment to the Certificate of Incorporation requires
the affirmative vote of the holders of at least a majority of
the issued and outstanding shares of Common Stock.
If the Companys stockholders approve the amendment to
INVESTools Certificate of Incorporation and the issuances
of Common Stock to thinkorswim stockholders in connection with
the Merger and the grants to the employees of thinkorswim of
options to purchase Common Stock, the Company intends to file
the amended Certificate of Incorporation with the Delaware
Secretary of State immediately prior to the consummation of the
proposed Merger. The amended Certificate of Incorporation will
become effective on the date the filing is accepted by the
Delaware Secretary of State. Please note, however, that the
proposed amendment of INVESTools Certificate of
Incorporation may be abandoned by the Board of Directors,
without further action by the Companys stockholders, at
any time before or after the Special Meeting if for any reason
the Board of Directors deems it advisable.
The adoption of this Proposal is conditioned on the approval of
the Issuance Proposal by the Companys stockholders. The
adoption of this Proposal is not conditioned on the approval of
the Option Plan Amendments by the Companys stockholders.
Material
U.S. Federal Income Tax Consequences
There are no material U.S. federal income tax consequences
to the Companys current stockholders that will result from
the amendment to INVESTools Certificate of Incorporation.
Recommendation
of the Board of Directors
The Board of Directors has unanimously approved the Merger, the
issuance of shares of Common Stock in connection with the
Merger, the amendments to the Companys 2001 Stock Option
Plan, and the amendment to INVESTools Certificate of
Incorporation.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE
FOR THE APPROVAL OF THE AMENDMENT TO
INVESTOOLS CERTIFICATE OF INCORPORATION.
34
AMENDMENTS
OF THE 2001 STOCK OPTION PLAN
(OPTION PLAN AMENDMENTS)
General
On October 31 and December 6, 2006, the Compensation
Committee recommended to the Board of Directors that the
stockholders approve amendments to the Companys 2001 Stock
Option Plan (the Plan) to, respectively, increase
the number of shares of Common Stock available for issuance
thereunder from 8 million to 12 million shares, and to
expand potential award recipients to include consultants of the
Company. Attached to this Proxy Statement as Annex B is a
copy of the Plan, as amended and approved by the Board of
Directors, and as submitted to the stockholders for their
approval.
Approval of the Option Plan Amendments requires the affirmative
vote of a majority of the shares of Common Stock present or
represented by proxy and entitled to a vote at the Special
Meeting.
The Board of Directors believes that approval of the Option Plan
Amendments will allow the Company to continue to provide key
employees and directors with a proprietary interest in the
growth and performance of the Company while aligning the
interests of management with those of the Companys
stockholders. Approval of the Option Plan Amendments will also
allow the Company to continue to have flexibility in structuring
compensation arrangements to attract and retain key employees
and directors for the Company, and to provide the Company with
an alternative means of compensating consultants.
The Board of Directors believes that the growth of the Company
depends significantly upon the efforts of its key employees and
directors and that such individuals are best motivated to put
forth maximum effort on behalf of the Company if they own an
equity interest in the Company. In accordance with this
philosophy, in December 2001, the Board of Directors adopted,
and the stockholders approved, the Plan. The purpose of the Plan
is to further the interests of the Company, its subsidiaries and
its stockholders by providing incentives in the form of stock
options to key employees and directors who contribute to the
success and profitability of the Company and its subsidiaries.
The Plan, with the amendments as proposed, provides for the
grant to employees, directors, and consultants of the Company
(or its subsidiaries) of options to purchase shares of Common
Stock. The Plan is administered by the Compensation Committee of
the Board of Directors (the Compensation Committee),
which has complete discretion to select the optionees and to
establish the terms and condition of each option, subject to the
provision of the Plan. Options granted under the Plan may be
incentive stock options as defined in
Section 422 of the Internal Revenue Code of 1986, as
amended (the Code), or nonstatutory stock options.
The adoption of this Proposal is conditioned on the approval of
the Issuance Proposal and the Charter Amendment by the
Companys stockholders.
Shares Subject
to the Plan
As of December 6, 2006 the Company has reserved a total of
12 million shares of Common Stock (including the
4 million additional shares subject to stockholder approval
at the Special Meeting) for issuance under the Plan. If any
option granted under the Plan expires or terminates for any
reason without having been exercised in full, then the
unpurchased shares subject to that option will once again be
available for additional option grants. As of December 6,
2006, options to acquire 5,572,118 shares of Common Stock
had been granted under the Plan at exercises prices ranging from
$0.18 to $12.67 per share, or a weighted average per share
exercise price of $1.80 per share.
Proportionate adjustments may be made to the number, class
and/or kind
of shares for which options are authorized to be granted under
the Plan, the number, class or kind of shares then subject to
options previously granted under the Plan, the price per share
payable upon exercise of each option outstanding under the Plan
and/or any
other affected term of an option, in the discretion of the Board
of Directors, in the event of any reclassification,
recapitalization, stock dividend, stock split, combination or
exchange of shares, rights offering, or other similar
transaction or event. To the extent deemed equitable and
appropriate by the Board of Directors, and subject to any
required stockholder action, any option granted under the Plan
will pertain to the securities and other property to
35
which a holder of the number of shares of stock covered by the
option would have been entitled to receive in connection with
such event.
Stock
Option Terms
Options granted under the Plan may not be exercised more than
10 years after the date of grant and the Compensation
Committee may set a shorter option period. Options may be
granted under the Plan only until December 3, 2011.
If an optionee ceases continuous service for the Company for
cause, all options held by the optionee shall lapse immediately
following the last day that the optionee is employed by the
Company or the effective date of the termination of his services
to the Company. If an optionee ceases continuous service for the
Company for any reason other than cause, death, disability, or
retirement on or after the age of 65 of the optionee, all
options held by the optionee will lapse at the earlier of the
end of the option period or ten days following the last day that
the optionee is employed by the Company or the effective date of
the termination of his services to the Company; provided,
however, the options may be exercised only as to those shares
that have vested as of the termination date. In the case of
death of the optionee, the beneficiaries designated by the
optionee shall have one year from the optionees demise or
to the end of the option period, whichever is earlier, to
exercise the option; provided, however, the option may be
exercised only as to those shares that have vested at the time
the optionee died. If the optionee retires on or after attaining
age 65, the option shall lapse at the earlier of the end of
the option period or three months after the date of retirement;
provided, however, the option may be exercised only as to those
shares that have vested on the retirement date. In the event of
termination of continuous service due to total and permanent
disability (within the meaning of Section 422 of the Code),
the option shall lapse at the earlier of the end of the option
period or twelve months after the date of such termination;
provided, however, the option may be exercised only as to those
shares that have vested at the time the optionee became
disabled. Notwithstanding the foregoing, with respect to option
grants to thinkorswim employees in connection with the Merger,
in the event that the optionees employment is terminated
by the Company without cause during the
12 month period following the occurrence of a change
of control (as defined in the Plan), then such
optionees then outstanding unvested options will become
fully vested upon such termination of employment.
The exercise price of incentive stock options may not be less
than 100% of the fair market value of the Common Stock as of the
date of grant (110% of the fair market value if the grant is to
an employee who owns more than 10% of the total combined voting
power of all classes of capital stock of the Company). The Code
currently limits to $100,000 the aggregate value of Common Stock
for which incentive stock options may first become exercisable
in any calendar year under the Plan or any other option plan
adopted by the Company. Nonstatutory stock options may be
granted under the Plan at an exercise price of not less than the
par value of the Common Stock on the date of grant. The maximum
number of shares with respect to which options (incentive or
nonstatutory) may be granted each calendar year to an optionee
is 2 million. On December 12, 2006, the closing price
for the Common Stock on NASDAQ was $13.24 per share.
Unless otherwise provided by the Compensation Committee, an
option granted under the Plan vests as to
1/4
of the total number of shares covered by the option during each
12-month
period commencing 12 months after the date of grant of the
option. The Board of Directors may, in its discretion and
subject to applicable law, provide for the exercise of options
either as to an increased percentage of shares per year or as to
all remaining shares.
Transferability
An option granted under the Plan is not transferable otherwise
than by will or the laws of descent and distribution or pursuant
to a qualified domestic relations order as defined by the Code
or Title I of the Employee Retirement Income Security Act
of 1974, as amended, or the rules thereunder, and may be
exercised during the lifetime of an optionee only by him. The
Compensation Committee may grant options that are transferable,
without payment of consideration, to immediate family members of
an optionee or to trusts or partnerships for such family
members. The Compensation Committee may also amend outstanding
options to provide for such transferability.
36
Amendment
of the Plan
The Compensation Committee may amend the Plan or condition or
modify options awarded under the Plan in response to changes in
securities or other laws or rules, regulations or regulatory
interpretations applicable to the Plan or to comply with stock
exchange rules or requirements without approval of the
stockholders. The Compensation Committee may, from time to time,
terminate or modify the Plan in any respect; provided,
however, that, any amendment, whether with or without the
approval of the stockholders, that alters the terms or
provisions of an option granted before the amendment (unless the
alteration is expressly permitted under the Plan) will be
effective only with the consent of the optionee to whom the
option was granted.
Awards to
be Granted
As of December 6, 2006, approximately 540 employees were
eligible to be considered for the grant of options under the
Plan. Following the consummating of the Merger, the Company
expects that approximately 630 employees will be eligible to be
considered for the grant of options under the Plan. The grant of
options to key employees, directors, and consultants under the
Plan is entirely in the discretion of the Compensation
Committee. The Compensation Committee has no outstanding grants
of options to purchase Common Stock and no grants are under
consideration at the present time.
Federal
Income Tax Consequences
Under existing federal income tax provisions, a participant who
receives stock options that are subject to restrictions that
create a substantial risk of forfeiture (within the
meaning of Section 83 of the Code) will not normally
realize any income, nor will the Company normally receive any
deduction for federal income tax purposes, in the year such
option is granted.
When a nonstatutory stock option granted pursuant to the Plan is
exercised, the optionee will realize ordinary income measured by
the difference between the aggregate fair market value of the
shares of Common Stock on the exercise date and the aggregate
purchase price of the shares of Common Stock as to which the
option is exercised, and, subject to Section 162(m) of the
Code, the Company will be entitled to a deduction in the year
the option is exercised equal to the amount the optionee is
required to treat as ordinary income.
An optionee generally will not recognize any income upon the
exercise of any incentive stock option, but the excess of the
fair market value of the shares at the time of exercise over the
option price will be an item of adjustment, which may, depending
on particular factors relating to the optionee, subject the
optionee to the alternative minimum tax imposed by
Section 55 of the Code. An optionee will recognize capital
gain or loss in the amount of the difference between the
exercise price and the sale price on the sale or exchange of
stock acquired pursuant to the exercise of an incentive stock
option, provided the optionee does not dispose of such stock
within either two years from the date of grant or one year from
the date of exercise of the incentive stock option (the
required holding periods). An optionee disposing of
such shares before the expiration of the required holding period
will recognize ordinary income generally equal to the difference
between the option price and the fair market value of the stock
on the date of exercise. The remaining gain, if any, will be
capital gain. The Company will not be entitled to a federal
income tax deduction in connection with the exercise of an
incentive stock option, except where the optionee disposes of
the Common Stock received upon exercise before the expiration of
the required holding periods.
The foregoing does not purport to be a complete summary of the
federal income tax considerations that may be relevant to
holders of options or to the Company. It also does not reflect
provisions of the income tax laws of any municipality, state or
foreign country in which an optionee may reside, nor does it
reflect the tax consequences of an optionees death.
Recommendation
of the Board of Directors
The Board of Directors has unanimously approved the Merger, the
issuance of shares of Common Stock in connection with the
Merger, the amendments to the Companys 2001 Stock Option
Plan and the amendment to INVESTools Certificate of
Incorporation.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE
FOR THE APPROVAL OF THE AMENDMENTS TO THE
COMPANYS 2001 STOCK OPTION PLAN.
37
THINKORSWIM
Business
Description
Overview
Founded in 1999, thinkorswim is a leading online brokerage and
technology company focused on providing services to
self-directed options traders with more than 19,000
self-directed retail customers and several hundred institutional
users. thinkorswim offers customers a broad range of products
including equities, exchange traded options, futures, mutual
funds, and bonds. thinkorswim provides a unique front end
trading platform that allows its customers to trade
electronically at national securities exchanges and provides
sophisticated trading tools and analytics, including tools for
implementing complex, multi-leg options strategies. The
thinkorswim platform pioneered single click trading
functionality for complex option spreads.
thinkorswim Group, Inc. (collectively with its subsidiaries,
thinkorswim) was founded in 2002 as a holding
company for thinkorswim, Inc., an NASD member broker-dealer, and
thinkorswim Advisors, Inc. (Advisors), an
SEC-registered investment adviser. thinkorswims additional
operating subsidiaries are thinkorswim Technologies, Inc.
(Technologies), which owns the institutional equity
order management technology thinklink,and tos
Services, Inc. (tos Services), which owns the
thinkpipes technology used by thinkorswims
institutional customers.
Brokerage
Platforms
thinkorswim has developed highly-interactive, feature rich,
user-friendly platforms that benefit all traders, from the
novice to the expert. The vast array of analytical tools
available for order management, trade monitoring, and position
analysis, in addition to the efficient and powerful order
execution system provided, distinguish the thinkorswim brokerage
platform from its competitors. The platform utilizes extensive
real-time data streaming that allows a customer to use the tools
with the most
up-to-date
information available. The thinkorswim platforms
capabilities include:
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Spread
hackertm,
an advanced and innovative way to find defined-risk option
trades quickly and efficiently. Displaying six different
strategies grouped by symbol, price, implied volatility, and
probability of success, Spread
Hackertm
allows the customers to find trades that meet their criteria
with a simple click.
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Conditional and contingent order management, which permits
customers to enter orders with their specified parameters.
Customers do not, therefore, have to constantly monitor the
market to execute these orders.
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Papermoney, a paper trading, or virtual trading, function,
allows customers to access two virtual accounts each funded with
$100,000 of notional money. The customer may
use the same features as the live platform, except
that the trades are not real and the customer can start over
anytime he or she likes. PaperMoney lets customers trade stocks,
options and futures 24/7 with all of the best tools thinkorswim
offers.
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An automated trading service, offered to subscribers of
participating advisory firms, by which customers may authorize
thinkorswim to execute trades in his or her account, based on
the strategy and allocation chosen from the selected advisory
newsletter. Advisors, under the name Red Option, publishes a
number of newsletters, each with a different strategy, all of
which are available for thinkorswims autotrade service.
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thinkorswims platform ranked best for options
traders in 2006 in Barronss 11th Annual Survey of
Best Online Brokerage Firms. It was the only brokerage firm to
finish #1 and #2 in software and web-based ratings,
respectively.
Overall, the thinkorswim platform is a
state-of-the-art
system for monitoring, analyzing and trading equities and option
derivatives that is efficient, feature-packed and powerful. As
part of thinkorswims strategic vision, the firm continues
to evolve by developing additional cutting edge retail and
institutional software products for hedging, speculating and
enhancing returns, in order to benefit customers at all trading
levels.
38
In November 2004, thinkorswim launched thinkpipes, a powerful
and flexible trading and risk management software platform
designed to create greater market efficiencies for the
professional trader. thinkorswim has also created mobile
technology software, thinkanywhere and thinkmobile, which permit
customers to trade from pocket PCs and mini-browsers.
In addition to thinkorswims in-house software developers,
thinkorswim uses a third party technology development firm to
assist it in the development, testing and support of its various
software and browser-based platforms. thinkorswim is in
preliminary discussions with this firm to enter into a
longer-term arrangement than the current software development
agreement, although no assurance can be made that such an
arrangement will be entered into before or after the Merger. The
inability to maintain a long-term arrangement or the loss of
these services could have a material adverse effect on
thinkorswims operations and its business.
Customer
Service
thinkorswim does not generally utilize the traditional
commissioned representative model where a customer has a
dedicated relationship with a broker at the firm. All
thinkorswim customers have access to the entire thinkorswim
service desk, which is staffed with experienced traders and
other trading experts who are able to field all levels of
questions via telephone or email. The service desk gives
customers the ability to interact with, and have their questions
answered by the experienced thinkorswim salaried staff, rather
than limiting contact to a single commissioned
broker or salesperson. Customers also have access to
user-friendly libraries, FAQs, and online chats.
In addition to service desk and online support, thinkorswim
provides extensive support for its customers through its options
trading classes and seminars. To strengthen thinkorswims
focus on education, the firm created Option Planet, a separate
division of Advisors that offers approximately 200 free seminars
and moderately-priced option education all over the world.
Operations
and Regulation
thinkorswims customers are generally self-directed. They
enter their own orders and utilize the array of analytical tools
available as part of thinkorswims software, and can at any
time seek personal support from the service desk. thinkorswim
customer accounts are cleared on a fully-disclosed basis by a
clearing broker-dealer. thinkorswim is responsible for all
customer contact, including opening customer accounts,
responding to customer inquiries and placing customer orders
with the executing and clearing brokers. The clearing agents
provide back office functions such as the possession, control
and safeguarding of funds and securities in client accounts,
extending credit in a margin account to the customer, settling
and administering securities transactions, settling commissions
and clearing fees, and preparing client trade confirmations and
statements.
thinkorswims eligible customers can obtain margin credit
and leverage with its clearing firm. Because thinkorswim is the
introducing broker, and does not hold customer funds and
securities, it is not subject to the segregation requirements of
the customer protection rule. Margin credit and leverage
requirements are regulated by the SEC and self-regulating
organizations (SROs), such as the NASD.
thinkorswim monitors customer accounts and their margin
positions to identify customer accounts that may need additional
collateral.
The securities industry is subject to extensive regulation under
federal and state law. In general, broker-dealers are required
to register with the SEC and to be members of NASD or the New
York Stock Exchange. As a member of the NASD, thinkorswim is
subject to the requirements of the Securities Exchange Act of
1934 and the rules and regulations promulgated thereunder
relating to broker-dealers and to the Conduct Rules of the NASD.
These regulations establish, among other things, minimum net
capital requirements. These laws, rules and regulations affect
all facets of thinkorswims securities business, including
trading practices, safekeeping of funds, marketing activities
and record-keeping practices. thinkorswim is also subject to
regulation under various state laws, including registration
requirements.
39
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
Business
Overview
thinkorswim currently has over 19,000 customer funded brokerage
accounts. The majority of thinkorswims revenue consists of
commissions from customer transactions in options, stock,
futures, mutual funds and fixed-income products, net interest
income, and payment for order flow. For the nine-month periods
ended September 30, 2006 and 2005, option trading
commission revenue represented over 80 percent of total
commissions revenue.
Critical
Accounting Policies
This Managements Discussion and Analysis of Financial
Condition and Results of Operations is based upon
thinkorswims Consolidated Financial Statements, which have
been prepared in accordance with generally accepted accounting
principles in the United States. The preparation of these
financial statements requires thinkorswim to make judgments,
assumptions and estimates that may have a significant impact
upon its financial results. thinkorswim believes the following
critical accounting policies reflect its more significant
estimates and assumptions used in the preparation of its
Consolidated Financial Statements.
Software and Website Development. Costs
associated with software and website development provided or
acquired from third parties are capitalized and are stated at
cost, net of accumulated amortization. These assets are
amortized on a straight-line basis over a three-year useful life.
Goodwill and Other Intangible
Assets. Intangible assets relate to a
customer list acquired in 2004, and customer relationships
acquired during 2005. The customer list and customer
relationships are being amortized on a straight-line basis over
their expected useful lives of three and eight years,
respectively. Goodwill results from allocating the excess
acquisition cost over the estimated fair values of tangible and
intangible net assets acquired, and is tested at least annually
to determine if any impairment should be recognized. In
thinkorswim managements opinion, no impairment exists as
of September 30, 2006 or December 31, 2005.
Income Taxes. thinkorswim files a
consolidated U.S. federal income tax return. thinkorswim
uses the asset and liability method required by Statement of
Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes to provide income taxes on
all transactions recorded in the consolidated financial
statements. This requires that income taxes reflect the expected
future tax consequences of temporary differences between the
carrying amounts of assets or liabilities for book and tax
purposes. Accordingly, a deferred tax liability or asset for
each temporary difference is determined based on the tax rates
thinkorswim expects to be in effect when the underlying items of
income and expense are realized. thinkorswims expense for
income taxes includes the current and deferred portions of that
expense.
Stock Options. Effective
January 1, 2006, thinkorswim accounts for stock-based
compensation in accordance with the fair value method prescribed
by SFAS No. 123(R), Share-Based Payment
(SFAS 123R), a revision to
SFAS No. 123, Accounting for Stock Based
Compensation (SFAS 123). Under this method,
compensation expense is recognized over the relevant service
period based on the fair value of stock options. thinkorswim
uses the Black-Scholes valuation model to estimate the fair
value of stock options at the time of each grant. Stock options
are recorded as expense with an offsetting credit to
stockholders equity in accordance with
SFAS No. 123R over the corresponding service period.
Results
of Operations
thinkorswims results of operations are significantly
impacted by activity in the U.S. equity markets,
particularly market volatility. Generally, increased market
volatility results in a greater level of customer activity, and
decreased market volatility results in a reduced level of
customer activity. If customer trading activity were to
increase, thinkorswim expects that would result in a positive
impact on its results of operations. If customer trading
activity were to decline, thinkorswim expects that it would have
a negative impact on its results of operations. Changes in
interest rates, customer margin balances, and customer cash
balances also impact thinkorswims results of operations.
thinkorswims interest and dividend income includes its
portion of the income generated by charges to customers on
margin balances and customer cash held and invested by its
clearing firms, offset by interest paid to customers on their
credit balances. Accordingly, results of operations are
sensitive to interest rate fluctuations. As
40
an introducing broker, all of thinkorswims customer
balances are held by its clearing firms on a fully disclosed
basis. thinkorswim started accepting payment for order flow at
the end of 2005 from some of the execution firms to which
customers orders are routed. Most of these are oral
arrangements and can be changed or eliminated at any time.
thinkorswim includes payment for order flow in Other Brokerage
Related Revenue.
Nine
Months Ended September 30, 2006 Compared to Nine Months
Ended September 30, 2005
Revenue. Revenue increased by
$27.5 million or 166 percent during the nine months
ended September 30, 2006, as compared to the same period in
2005 principally as a result of the following four changes:
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thinkorswims volume of trades increased significantly,
attributable to an ongoing focus on active trading customers.
This increase accounted for revenue included in Commissions and
Other Brokerage Related Revenue of $11.8 million during the
first three quarters of 2006, as compared to $2.1 million
during the same period in the prior year.
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Customer assets held at thinkorswims clearing
broker-dealer increased, as did net interest income earned by
thinkorswim, in part due to the rising interest rate environment
. As a result, interest income generated by charges to customers
on margin balances and customer cash held and invested by
thinkorswims clearing firms, offset by interest paid to
customers on their credit balances, increased by
$4.7 million, or 254 percent for the nine months ended
September 30, 2006, as compared to the nine months ended
September 30, 2005.
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At the end of 2005, thinkorswim started accepting payment for
order flow, which accounted for an additional $2.6 million
of revenue during the nine months ended September 30, 2006,
and which is included in Other Brokerage Related Revenue.
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In addition, at the end of 2005, thinkorswim purchased the
assets of Arrowhead Solutions, Inc. (Arrowhead),
which resulted in additional revenue of $2.1 million for
the nine months ended September 30, 2006.
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Clearing and Brokerage Fees. Clearing
and brokerage fees increased $8.8 million, or
268 percent during the nine months ended September 30,
2006, as compared to the same period of the previous year. The
difference was due to the increase in brokerage volume.
Employee Compensation and
Benefits. Compensation and benefits increased
$3 million, or 67 percent, during the nine months
ended September 30, 2006 as compared to the same period of
2005, primarily due to a 66 percent increase in the number
of employees. Included in the new employees were those hired as
a result of the Arrowhead acquisition which occurred at the end
of 2005.
Technology, Communication, Market
Data. Technology, Communication, Market Data
expenses increased $2.1 million, or 182 percent,
during the nine months ended September 30, 2006 as compared
to the nine months ended September 30, 2005. The increase
primarily resulted from the increase in users of
thinkorswims trading systems, as well as from additional
enhancements to its capacity and communication lines. The
increase was also due to additional trading systems and tools
for active traders that thinkorswim brought online after
September 30, 2005, as well as connectivity associated with
the asset acquisition of Arrowhead at the end of 2005.
Occupancy. Occupancy increased by
$0.4 million, or 224 percent, during the first three
quarters of 2006 as compared to the same period in 2005
primarily due to leasing new office space.
Other. Other expenses include general
and administrative costs which increased by $1.3 million,
or 109 percent, during the nine months ended
September 30, 2006 compared to the same period in 2005,
primarily due to the increase in operations attributable to the
asset acquisition of Arrowhead at the end of 2005.
Year
Ended December 31, 2005 Compared to Year Ended
December 31, 2004
Revenue. Revenue increased
$9.3 million, or 55 percent, during 2005 as compared
to 2004 as a result of two changes. Trade volume increased
significantly, attributable to additional active trading
customers. This increased activity accounted for an additional
$4.8 million. There were also increases in customer asset
balances, interest rates, and interest revenue as a result of
renegotiating thinkorswims clearing agreement with its
clearing broker-
41
dealer. As a result of these changes, interest revenue increased
to approximately 12 percent of total revenue for 2005,
while interest revenue was less than 4 percent of total
revenue for the year ended December 31, 2004.
Clearing and Brokerage Fees. The
largest variable expense item is Brokerage, Clearing and other
related expenses, which primarily include executing and clearing
customer trade costs. These expenses increased
$2.4 million, or 74 percent during 2005 as compared to
2004, primarily due to the increase in brokerage volume.
Employee Compensation and
Benefits. Compensation and benefits increased
15 percent during the year ended December 31, 2005 as
compared to the previous year, primarily due to a
62 percent increase in the number of employees. Additional
employee benefit programs were also added during fiscal year
2005.
Professional Fees and Provision for Legal
Settlements. Professional Legal Fees and
Provision for Legal Settlements increased by $2.9 million,
or 257 percent, during 2005 as compared to 2004. A portion
of the increase was attributable to a settlement reached during
2005 in connection with litigation involving a third party
vendor. In addition, thinkorswim incurred $2.1 million in
expense related to an unfunded customer debit balance arising
from trading activity, for which thinkorswim is vigorously
pursuing reimbursement.
Technology, Communication, Market
Data. Technology, Communication, and Market
Data expenses increased 126 percent during the year ended
December 31, 2005 compared to the prior year due to the
increase in trading system users, along with increased capacity
and communication lines needed for data and functionality. The
increase was also due to new trading systems and tools for
active traders brought online during 2005.
Year
Ended December 31, 2004 Compared to Year Ended
December 31, 2003
Revenue. Revenue increased
30 percent during the year ended December 31, 2004, as
compared to the year ended December 31, 2003. The increase
resulted from two factors. thinkorswim acquired additional
customer accounts through marketing efforts with a third party
vendor. This resulted in a 19 percent increase in
commission revenue during 2004 compared with 2003, along with a
114 percent increase in interest income earned on customer
accounts. thinkorswim also earned Software and Maintenance Fees
of $0.8 million during 2004 as a result of
thinkorswims institutional trading platform which was
launched in November 2004.
Employee Compensation and
Benefits. Compensation and benefits increased
56 percent during 2004 compared to 2003 as a result of a
44 percent increase in the number of employees, from 27 to
39.
Professional Fees and Provision for Legal
Settlements. Professional Legal Fees and
Provision for Legal Settlements increased by $1 million, or
752 percent, during 2004 as compared to 2003 as a result of
legal expenses and a $0.4 million settlement provision
incurred in connection with ongoing litigation with a third
party vendor. The matter was settled during 2005.
Liquidity
and Capital Resources
thinkorswim has historically financed its capital needs
primarily through the use of funds generated from operations,
and plans to rely on operating earnings for capital needs in the
future. Operations during the nine months ended
September 30, 2006 were financed primarily through
profitable operations, and during the year ended
December 31, 2005 by cash on hand. In 2004, thinkorswim
received an investment of $22.5 million from a venture
capital firm.
thinkorswim is subject to the Securities and Exchange Commission
(SEC) Uniform Net Capital Rule
(Rule 15c3-1)
under the Securities Exchange Act of 1934, administered by the
SEC and the NASD, which requires the maintenance of minimum net
capital. thinkorswim is required to maintain net capital of the
greater of
62/3%
of aggregate indebtedness, or $250,000. At September 30,
2006 and December 31, 2005, thinkorswims net capital
requirement was $383,330 and $250,000, respectively. At
September 30, 2006, thinkorswim had net capital of
approximately $14 million, and at December 31, 2005
had net capital of approximately $8.9 million. The ratio of
aggregate indebtedness to net capital at September 30, 2006
and at December 31, 2005 was .41 to 1 and .32 to 1,
respectively. thinkorswim is also subject to the Commodity
Futures Trading Commission (CFTC)
Regulation 1.17 (Reg 1.17) under the Commodity Exchange
Act, administered by the CFTC and the National Futures
Association,
42
which also requires the maintenance of minimum net capital to be
the greater of its net capital requirement under
Rule 15c3-1
or $30,000.
Cash
Flows
thinkorswims net increase in cash and cash equivalents
during the nine months ended September 30, 2006 was
$2.9 million, from $13.6 million to
$16.5 million. thinkorswims primary source of cash
was net income, which served to substantially offset the
investment of $4 million in fixed income debt instruments
and $2.9 million in new software and website development,
computer equipment and leasehold improvements associated with
new office space. The investment in fixed income debt securities
was made to allow thinkorswim to earn a better yield when
compared to cash and cash equivalents. The increases in software
and website development and computer equipment were needed to
accommodate ongoing growth in trade volume. thinkorswims
cash and cash equivalents for the nine months ended
September 30, 2005 decreased by $11.5 million, from
$25.2 million to $13.6 million. thinkorswims
primary source of cash was net income, which served to partially
offset the investment of $12 million in fixed income debt
instruments and $1.1 million in new software and website
development and computer equipment.
thinkorswims net decrease in cash and cash equivalents for
the year ended December 31, 2005 was $11.5 million,
from $25.2 million to $13.7 million.
thinkorswims primary source of cash was net income, which
served to partially offset the investment of $10 million in
fixed income debt instruments and $2.9 million for software
development and equipment, $1.5 million for acquisition of
intangibles including the Arrowhead asset acquisition and
$0.5 million for the repurchase of common stock.
thinkorswims net increase in cash and cash equivalents for
the year ended December 31, 2004 was $19 million, from
$6.2 million to $25.2 million. thinkorswims
primary source of cash was net $21.8 million received in
equity capital from a venture capital firm, which was partially
offset by the $0.7 million paid primarily for software
development and equipment and $2 million invested in a
certificate of deposit, which is included in securities owned.
thinkorswims net increase in cash and cash equivalents for
the year ended December 31, 2003 was $3.9 million,
from $2.3 million to $6.2 million. thinkorswims
primary source of cash was net income, offset by
$1.1 million in equipment and furniture acquisitions, and
software and website development activities, all attributable to
increasing needs required to service customers higher
trading volume.
Capital
Expenditures
The majority of capital expenditures is attributable to the
acquisition of computer hardware, along with the development of
software for internal use. Capital expenditures were
$2.9 million for the nine months ended September 30,
2006, which also included leasehold improvements and furniture
for the new office space. Capital expenditures were
$1.1 million for the nine months ended September 30,
2005, primarily attributable to software development. During the
year ended December 31, 2005, capital expenditures were
$4.4 million, which included a $2 million acquisition
of customers and software. During 2004, capital expenditures
were $0.7 million, which consisted of software development
and computer equipment, and in 2003, thinkorswims capital
expenditures were $1.1 million, which consisted of website
development and computer equipment.
Acquisition
of Arrowhead Solutions
In December 2005, thinkorswim acquired the assets of Arrowhead
with a fixed purchase price of $2 million, of which
$1.3 million was paid at closing and $750,000 is payable in
two equal installments due on each of the first and second
anniversaries of the transaction. In addition, the agreement
provides for additional consideration of $1.3 million
subject to certain performance goals being met. thinkorswim
acquired Arrowhead to add sell-side equity order management and
direct market access technology and institutional expertise to
thinkorswims option technology and retail expertise.
Off-Balance-Sheet
Arrangements
In the ordinary course of business, there are certain
customer-related loss contingencies that may not be reflected in
the consolidated financial statements. For example, customer
activities may expose thinkorswim to off-
43
balance-sheet risk if a customer is unable to fulfill
contractual obligations. The clearing broker makes margin loans
to thinkorswim customers to purchase securities. The clearing
broker is exposed to the risk that a market decline could reduce
the value of a customers collateral below the amount of
the customers indebtedness, resulting in possible losses
to the clearing broker. thinkorswims agreement with the
clearing broker requires thinkorswim to reimburse the clearing
broker for any losses the broker incurs related to customers
introduced by thinkorswim. thinkorswim seeks to control the risk
associated with customer activities by making credit inquiries
when establishing customer relationships, carefully monitoring
customer trading activity on a real time basis, and by
monitoring customer margin calls.
Contractual
Obligations
The following table sets forth contractual obligations at
September 30, 2006:
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Less Than
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1-3
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3-5
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More Than
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Total
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1 Year
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Years
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Years
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5 Years
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(In thousands)
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Operating lease obligations
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$
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1,841
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$
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342
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$
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609
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$
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642
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$
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248
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Purchase obligations for
development and consulting services
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3,171
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2,646
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525
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Other long-term liabilities
reflected on the balance sheet
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875
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500
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375
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Total
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$
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5,887
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$
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3,488
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$
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1,509
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$
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642
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$
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248
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Operating lease obligations primarily consist of three leases
for office facilities. Purchase obligations include ongoing
arrangements with thinkorswims third party developers for
both development and consulting services along with a marketing
contract with INVESTools through the end of 2007. Other
long-term liabilities reflected on the balance sheet include
$0.4 million related to thinkorswims asset
acquisition of Arrowhead in 2005, which is due December 1,
2007, and $0.5 million related to a division of thinkorswim
where the repayment is dependent on cash flows from that
division. In the normal course of business, thinkorswim enters
into contracts that contain indemnification provisions where
thinkorswim may indemnify counterparties to the contracts for
certain aspects of thinkorswims past conduct if other
parties fail to perform, or if certain events occur. These
indemnification provisions vary based upon the contract.
thinkorswim may, in turn, obtain indemnifications from other
parties in certain contracts.
Contingent
Contractual Obligations
On January 30, 2006, thinkorswim established a change in
control bonus plan. Should a change in control (such as the
Merger) occur on or before December 31, 2008, thinkorswim
would recognize up to $3 million in compensation expense to
employees under the plan, and would owe $8.3 million
pursuant to a 2006 agreement with an independent contractor.
On March 27, 2006, thinkorswim also entered into a
marketing agreement with another company whereby institutional
services will be marketed to new customers. In connection with
that agreement, the other company loaned $0.5 million to
thinkorswim to be used solely for the new operation. The loan is
included in Other liabilities on the Balance Sheet, and
repayment is limited to available cash flow from the operation.
Qualitative
and Quantitative Disclosure About Market Risk
Market risk generally represents the risk of loss that may
result from the potential change in the value of a financial
instrument as a result of fluctuations in interest rates and
market prices. thinkorswim has established policies, procedures
and internal processes governing its management of market risks
in the ordinary course of business operations. thinkorswim does
not generally trade securities for its own account or maintain
inventories of securities for sale, except when it is necessary
to manage small to moderate positions in the ordinary course of
business. As a result, thinkorswim may be subject to market risk
from time to time. thinkorswim does hold corporate funds in
government, municipal or other fixed income products, as well as
commercial paper, overnight repurchase agreements, and money
market funds. The interest rates applicable to those instruments
may fluctuate.
44
thinkorswim seeks to control the risks associated with its
customer activities by monitoring required margin levels daily
and, pursuant to established guidelines, may require customers
to deposit additional collateral or reduce positions when
necessary.
In the ordinary course of thinkorswims brokerage business,
customer assets are held at thinkorswims clearing firm.
thinkorswim earns interest revenue that is equal to a portion of
the income resulting from amounts charged to its customers by
its clearing broker-dealers on their margin balances, less
amounts paid to its customers by its clearing broker-dealers on
their credit balances and interest earned on customer cash
invested and held by thinkorswims clearing broker-dealers.
Because thinkorswim establishes the rate paid on customer credit
balances and the rate charged on customer margin balances, a
portion of its interest rate risk is under its direct management.
thinkorswim has no borrowings outstanding under a credit
arrangement with a financial institution. thinkorswim has
received a $0.5 million loan from a service provider who is
engaged in marketing thinkorswims services to
institutional customers. The corresponding cash is restricted
for use by a specific operating unit, and repayment terms of the
loan are limited to available cash flow from the that operating
unit.
Information
Concerning Members of thinkorswim Management Who Will Serve as
Directors of INVESTools
Tom Sosnoff, age 49, co-founded thinkorswim in 1999 with
Scott Sheridan, and since such time Mr. Sosnoff has served
as its Chief Executive Officer and a director. Mr. Sosnoff
was a market maker for the Chicago Board of Options Exchange
from 1980 through 2001, where he was one of the original market
makers in the S&P 100 Index pit. Mr. Sosnoff earned his
B.A. in Political Science from the State University of New York
at Albany.
Scott Sheridan, age 43, co-founded thinkorswim in 1999 with
Tom Sosnoff, and since such time Mr. Sheridan has served as
its President, Secretary and a director. Mr. Sheridan began
his career on the Chicago Board of Options Exchange in 1987,
where he acted as a market maker until 2003. While there, he
worked as a market maker in the S&P 100 Index pit for over
15 years. Mr. Sheridan received his B.A. in Finance
and Economics from Miami University, Oxford, Ohio.
45
OTHER
MATTERS
Management does not know of any business to be transacted at the
Special Meeting other than as indicated herein. Should any such
matter properly come before the Special Meeting for a vote, the
persons designated as proxies will vote thereon in accordance
with their best judgment.
You are urged to promptly sign, date and return the enclosed
proxy card in the accompanying postage-paid envelope or
authorize the individuals named on your proxy card to vote your
interests by calling the toll-free telephone number or by using
the Internet as described in the instructions included with your
proxy card.
MARKET
PRICE OF THE COMPANYS STOCK
The Common Stock has been listed on NASDAQ under the symbol
IEDU since it began trading on May 23, 2006.
The following table sets forth the high and low sales prices,
and dividends, per share of Common Stock on NASDAQ since
May 23, 2006, and
over-the-counter
for the prior periods indicated.
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High
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Low
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Price
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Price
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Dividends
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Fiscal Year Ended
December 31, 2004
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1st Quarter
(ended March 31, 2004)
|
|
$
|
2.90
|
|
|
$
|
1.51
|
|
|
$
|
0.00
|
|
2nd Quarter
(ended June 30, 2004)
|
|
$
|
2.50
|
|
|
$
|
1.71
|
|
|
$
|
0.00
|
|
3rd Quarter
(ended September 30, 2004)
|
|
$
|
2.27
|
|
|
$
|
1.58
|
|
|
$
|
0.00
|
|
4th Quarter
(ended December 31, 2004)
|
|
$
|
3.50
|
|
|
$
|
2.10
|
|
|
$
|
0.00
|
|
Fiscal Year Ended
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
(ended March 31, 2005)
|
|
$
|
5.36
|
|
|
$
|
3.35
|
|
|
$
|
0.00
|
|
2nd Quarter
(ended June 30, 2005)
|
|
$
|
5.74
|
|
|
$
|
3.30
|
|
|
$
|
0.00
|
|
3rd Quarter
(ended September 30, 2005)
|
|
$
|
4.65
|
|
|
$
|
3.25
|
|
|
$
|
0.00
|
|
4th Quarter
(ended December 31, 2005)
|
|
$
|
5.50
|
|
|
$
|
4.05
|
|
|
$
|
0.00
|
|
Fiscal Year Ended
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter
(ended March 31, 2006)
|
|
$
|
8.80
|
|
|
$
|
5.30
|
|
|
$
|
0.00
|
|
2nd Quarter
(ended June 30, 2006)
|
|
$
|
9.88
|
|
|
$
|
7.47
|
|
|
$
|
0.00
|
|
3rd Quarter
(ended September 30, 2006)
|
|
$
|
10.71
|
|
|
$
|
6.99
|
|
|
$
|
0.00
|
|
4th Quarter
(through December 12, 2006)
|
|
$
|
13.62
|
|
|
$
|
10.56
|
|
|
$
|
0.00
|
|
The closing price of Common Stock on NASDAQ on
September 18, 2006, which was the last trading day before
the Company announced the Merger, was $9.46 per share. On
December 12, 2006, the the last trading day before the date
of this Proxy Statement, the closing price for Common Stock on
NASDAQ was $13.24 per share. You are encouraged to obtain
current market quotations for Common Stock in connection with
voting your shares.
As of December 12, 2006, the last trading day before the
date of this Proxy Statement, there were approximately 9,000
stockholders of Common Stock.
The Company intends to make applications as necessary to list
the shares of Common Stock issued as merger consideration in the
Merger on NASDAQ.
46
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth information, as of
December 13, 2006, with respect to the number of shares of
Common Stock beneficially owned by (1) each director
and/or the
Companys Chief Executive Officer and the Companys
four other most highly compensated executive officers
individually, (2) all executives and directors of the
Company as a group and (3) each stockholder known by the
Company to be the beneficial owner of more than 5% of the Common
Stock. Except as noted below, each stockholder has sole voting
and investment power with respect to the shares shown.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Percent of Class
|
|
|
|
Beneficially
|
|
|
Before
|
|
|
After
|
|
Owners
|
|
Owned(1)
|
|
|
Merger
|
|
|
Merger(2)
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Lee K. Barba
|
|
|
3,111,156
|
(3)
|
|
|
6.6
|
%
|
|
|
4.7
|
%
|
Ida K. Kane
|
|
|
63,000
|
|
|
|
*
|
|
|
|
*
|
|
Paul A. Helbling
|
|
|
473,361
|
|
|
|
1.0
|
%
|
|
|
0.7
|
%
|
Ainslie J. Simmonds
|
|
|
25,000
|
|
|
|
*
|
|
|
|
*
|
|
Dale C. Ainge
|
|
|
22,500
|
|
|
|
*
|
|
|
|
*
|
|
Douglas T. Tansill
|
|
|
152,375
|
|
|
|
*
|
|
|
|
*
|
|
Stephen C. Wood
|
|
|
58,254
|
(4)
|
|
|
*
|
|
|
|
*
|
|
Hans von Meiss
|
|
|
168,059
|
(5)
|
|
|
*
|
|
|
|
*
|
|
Michael H. Goldsmith
|
|
|
66,042
|
|
|
|
*
|
|
|
|
*
|
|
F. Warren McFarlan
|
|
|
24,375
|
|
|
|
*
|
|
|
|
*
|
|
Tom Sosnoff(6)
|
|
|
|
|
|
|
*
|
|
|
|
6.8
|
%
|
Scott D. Sheridan(6)
|
|
|
|
|
|
|
*
|
|
|
|
6.8
|
%
|
All executive officers and
directors as a group (12 persons)
|
|
|
4,193,497
|
|
|
|
8.9
|
%
|
|
|
19.6
|
%
|
Springhouse Capital, LP (7)
520 Madison Avenue,
35th Floor
New York, New York, 10022
|
|
|
4,115,102
|
|
|
|
9.1
|
%
|
|
|
6.4
|
%
|
Gilder, Gagnon, Howe &
Co. LLC (8) 1775 Broadway,
26th Floor,
New York, New York 10019
|
|
|
2,471,056
|
|
|
|
5.5
|
%
|
|
|
3.8
|
%
|
Wellington Management Co.,
LLP (9) 75 State Street,
Boston, MA 02109
|
|
|
2,367,935
|
|
|
|
5.2
|
%
|
|
|
3.7
|
%
|
TCV V, L.P. and TCV Member
Fund, L.P. (6) 100 Field
Drive, Suite 160, Lake Forest, IL 60045
|
|
|
|
|
|
|
*
|
|
|
|
6.8
|
%
|
Momentum Media, Inc.(10)
69-12 Gutierrez Street Sunset Valley Mansion Angeles City
2009 Pampanga, Philippines
|
|
|
2,299,980
|
|
|
|
5.1
|
%
|
|
|
3.6
|
%
|
|
|
|
(1) |
|
Each of the share amounts for the directors and officers
includes options to purchase additional shares, which are
exercisable within the next 60 days, as follows: Lee K.
Barba, 1,615,627; Paul A. Helbling, 229,627; Ida K. Kane,
55,000; Dale C. Ainge, 22,500; Michael H. Goldsmith, 29,375;
Hans von Meiss, 29,375; Stephen C. Wood, 16,037; F. Warren
McFarlan, 9,375, Douglas T. Tansill, 1,875, and Ainslie J.
Simmonds, 25,000. |
|
|
|
(2) |
|
After the Merger, Mr. Sosnoff and Mr. Sheridan will
each own 4,404,538 shares of Common Stock (6.8%), and
TCV V, L.P. and TCV Member Fund, L.P., collectively, will
own 4,349,954 shares of Common Stock (6.8%). |
|
|
|
(3) |
|
Includes 469,999 shares, as to which beneficial ownership
is disclaimed, held for the benefit of family members and
700,000 shares held in a Grantor Retained Annuity Trust. |
|
(4) |
|
Includes 111 shares, as to which beneficial ownership is
disclaimed, held for the benefit of family members. |
|
|
|
(5) |
|
Includes 136,333 shares, as to which beneficial ownership
is disclaimed, held for the benefit of family members. |
47
|
|
|
(6) |
|
Currently a stockholder of thinkorswim. |
|
|
|
(7) |
|
Based solely on a Schedule 13F filed by Springhouse Capital, LP
with the SEC, reporting share ownership as of September 30,
2006. |
|
|
|
(8) |
|
Based solely on a Schedule 13F filed by Gilder, Gagnon,
Howe & Co. LLC with the SEC, reporting share ownership
as of September 30, 2006. |
|
|
|
(9) |
|
Based solely on a Schedule 13F filed by Wellington Management
Co., LLP with the SEC, reporting share ownership as of
September 30, 2006. |
|
|
|
(10) |
|
Based on stockholder list dated November 30, 2006, provided by
U.S. Stock Transfer Corporation, the Companys
Transfer Agent. |
MULTIPLE
STOCKHOLDERS SHARING ONE ADDRESS
In accordance with
Rule 14a-3(e)(1)
under the Securities Exchange Act of 1934, as amended, one proxy
statement will be delivered to two or more stockholders who
share an address, unless INVESTools has received contrary
instructions from one or more of the stockholders. INVESTools
will deliver promptly upon written or oral request a separate
copy of the proxy statement to a stockholder at a shared address
to which a single copy of the proxy statement was delivered.
Requests for additional copies of the proxy statement, and
requests that in the future separate proxy statements be sent to
stockholders who share an address, should be directed to D.F.
King & Co., Inc., 48 Wall Street, New York, NY 10005,
or by calling 1-888-886-4425 (toll-free). In addition,
stockholders who share a single address but receive multiple
copies of the proxy statement may request that in the future
they receive a single copy by contacting D.F. King & Co.,
Inc. at the address and phone number set forth in the prior
sentence.
WHERE YOU
CAN FIND ADDITIONAL INFORMATION
The Company files annual, quarterly and current reports, proxy
statements and other information with the SEC. You may read and
copy any reports, proxy statements or other information that the
Company files with the SEC at the following location of the SEC:
Public Reference Room
100 F Street, N.E.
Washington, D.C. 20549
Please call the SEC at
1-800-SEC-0330
for further information on the public reference rooms. You may
also obtain copies of this information by mail from the Public
Reference Section of the SEC, 100 F Street, N.E.,
Washington, D.C. 20549, at prescribed rates. The
Companys public filings are also available to the public
from document retrieval services and the Internet website
maintained by the SEC at www.sec.gov.
Any person, including any beneficial owner, to whom this Proxy
Statement is delivered may request copies of reports, proxy
statements or other information concerning us, without charge,
by written or telephonic request directed to us at INVESTools
Inc., 13947 South Minuteman Drive, Draper, Utah 84020,
attention: Ida K. Kane, telephone:
(801) 816-6918.
If you would like to request documents, please do so by
December 31, 2006, in order to receive them before the
Special Meeting.
48
The SEC allows us to incorporate by reference into
this Proxy Statement documents the Company files with the SEC.
This means that the Company can disclose important information
to you by referring you to those documents. The information
incorporated by reference is considered to be a part of this
Proxy Statement. The Company incorporates by reference the
documents listed below:
|
|
|
Company Filings
|
|
Periods
|
|
Annual Report on
Form 10-K
|
|
Year ended December 31, 2005
|
Quarterly Reports on
Form 10-Q
|
|
Quarters ended March 31,
2006, June 30, 2006, and September 30, 2006.
|
Current Reports on
Form 8-K
|
|
Filed March 1, 2006,
May 10, 2006, May 11, 2006, July 28, 2006,
September 20, 2006 and November 9, 2006.
|
No persons have been authorized to give any information or to
make any representations other than those contained in this
Proxy Statement and, if given or made, such information or
representations must not be relied upon as having been
authorized by us or any other person. This Proxy Statement is
dated December 6, 2006. You should not assume that the
information contained in this Proxy Statement is accurate as of
any date other than that date, and the mailing of this Proxy
Statement to stockholders shall not create any implication to
the contrary.
49
INDEX TO
THINKORSWIM FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
Year Ended December 31,
2005:
|
|
|
|
|
|
|
|
1
|
|
|
|
|
2
|
|
|
|
|
3
|
|
|
|
|
4
|
|
|
|
|
5
|
|
|
|
|
6
|
|
Year Ended December 31,
2004:
|
|
|
|
|
|
|
|
1
|
|
|
|
|
2
|
|
|
|
|
3
|
|
|
|
|
4
|
|
|
|
|
5
|
|
|
|
|
6
|
|
Year Ended December 31,
2003:
|
|
|
|
|
|
|
|
1
|
|
|
|
|
2
|
|
|
|
|
3
|
|
|
|
|
4
|
|
|
|
|
5
|
|
|
|
|
6
|
|
Nine Months Ended
September 30, 2006 and 2005:
|
|
|
|
|
|
|
|
2
|
|
|
|
|
3
|
|
|
|
|
5
|
|
|
|
|
6
|
|
50
thinkorswim
Group, Inc.
Consolidated
Financial Statements
December 31,
2005
thinkorswim
Group, Inc.
Index
December 31,
2005
|
|
|
|
|
|
|
Page(s)
|
|
|
|
|
1
|
|
Consolidated Financial
Statements
|
|
|
|
|
|
|
|
2
|
|
|
|
|
3
|
|
|
|
|
4
|
|
|
|
|
5
|
|
|
|
|
6-12
|
|
Report of
Independent Auditors
To the Board of Directors and Stockholders of thinkorswim Group,
Inc.:
In our opinion, the accompanying consolidated statement of
financial condition and the related consolidated statements of
income, of changes in stockholders equity and of cash
flows present fairly, in all material respects, the financial
position of thinkorswim Group, Inc. and its subsidiaries
(collectively, the Company) at December 31,
2005, and the results of their operations and their cash flows
for the year then ended in conformity with accounting principles
generally accepted in the United States of America. These
financial statements are the responsibility of the
Companys 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
auditing standards generally accepted in the United States of
America 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 our opinion.
/s/ PricewaterhouseCoopers
LLP
Chicago, Illinois
July 11, 2006
1
thinkorswim
Group, Inc.
Consolidated
Statement of Financial Condition
December 31,
2005
|
|
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
13,650,094
|
|
Receivable from clearing broker
|
|
|
3,623,496
|
|
Securities owned, at market value
|
|
|
12,226,118
|
|
Software and website development,
at cost net of accumulated amortization of $2,134,737
|
|
|
2,458,692
|
|
Furniture, equipment and leasehold
improvements, at cost net of accumulated depreciation and
amortization of $985,778
|
|
|
1,008,260
|
|
Goodwill and other intangibles, at
cost net of accumulated amortization of $16,000
|
|
|
1,514,046
|
|
Income taxes receivable
|
|
|
53,483
|
|
Deferred tax asset
|
|
|
3,176,534
|
|
Accounts receivable
|
|
|
311,747
|
|
Prepaid expenses and other assets
|
|
|
1,399,234
|
|
|
|
|
|
|
Total assets
|
|
$
|
39,421,704
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Accrued compensation and related
benefits
|
|
$
|
104,903
|
|
Securities sold, not yet
purchased, at market value
|
|
|
207,168
|
|
Accounts payable and accrued
expenses
|
|
|
1,691,261
|
|
Other liabilities
|
|
|
1,150,000
|
|
|
|
|
|
|
Total liabilities
|
|
|
3,153,332
|
|
|
|
|
|
|
Convertible preferred stock,
$0.001 par value, authorized 243,830 shares 238,068
issued and outstanding
|
|
|
238
|
|
Common stock, $0.001 par
value, authorized 1,397,821 shares, 749,914 issued and
outstanding
|
|
|
749
|
|
Additional paid-in capital
|
|
|
32,363,128
|
|
Retained earnings
|
|
|
4,404,266
|
|
Treasury stock, at cost
(11,585 shares at December 31, 2005)
|
|
|
(500,009
|
)
|
|
|
|
|
|
Total stockholders equity
|
|
|
36,268,372
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
39,421,704
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
2
thinkorswim
Group, Inc.
Consolidated
Statement of Income
Year
Ended December 31, 2005
|
|
|
|
|
Revenues
|
|
|
|
|
Commissions
|
|
$
|
19,528,732
|
|
Software and maintenance fees
|
|
|
1,314,302
|
|
Management and subscription fees
|
|
|
859,863
|
|
Interest and dividends
|
|
|
3,704,275
|
|
Other
|
|
|
951,920
|
|
|
|
|
|
|
Total revenues
|
|
|
26,359,092
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
Employee compensation and benefits
|
|
|
6,286,239
|
|
Clearing and brokerage fees
|
|
|
5,736,089
|
|
Professional fees and provision
for legal settlements
|
|
|
4,064,838
|
|
Technology, communications and
market data
|
|
|
2,444,925
|
|
Advertising and promotion
|
|
|
1,181,558
|
|
Depreciation and amortization
|
|
|
986,792
|
|
Occupancy
|
|
|
297,523
|
|
Other
|
|
|
1,115,825
|
|
|
|
|
|
|
Total expenses
|
|
|
22,113,789
|
|
|
|
|
|
|
Income before provision for income
taxes
|
|
|
4,245,303
|
|
Provision for income taxes
|
|
|
(1,560,808
|
)
|
|
|
|
|
|
Net income
|
|
$
|
2,684,495
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
3
thinkorswim
Group, Inc.
Consolidated
Statement of Changes in Stockholders Equity
Year
Ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Stock
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Treasury
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Equity
|
|
|
Balance, December 31,
2004
|
|
|
238,068
|
|
|
$
|
238
|
|
|
|
749,914
|
|
|
$
|
749
|
|
|
|
|
|
|
$
|
|
|
|
$
|
32,395,343
|
|
|
$
|
1,719,771
|
|
|
$
|
34,116,101
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,684,495
|
|
|
|
2,684,495
|
|
Treasury stock purchase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,585
|
|
|
|
(500,009
|
)
|
|
|
|
|
|
|
|
|
|
|
(500,009
|
)
|
Stock transactions (see Note 6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,215
|
)
|
|
|
|
|
|
|
(32,215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2005
|
|
|
238,068
|
|
|
$
|
238
|
|
|
|
749,914
|
|
|
$
|
749
|
|
|
|
11,585
|
|
|
$
|
(500,009
|
)
|
|
$
|
32,363,128
|
|
|
$
|
4,404,266
|
|
|
$
|
36,268,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
4
thinkorswim
Group, Inc.
Consolidated
Statement of Cash Flows
Year
Ended December 31, 2005
|
|
|
|
|
Cash flows from operating
activities
|
|
|
|
|
Net income
|
|
$
|
2,684,495
|
|
Adjustments to reconcile net
income to net cash used in operating activities:
|
|
|
|
|
Depreciation and amortization
|
|
|
986,792
|
|
Stock option expense
|
|
|
(32,215
|
)
|
Deferred income taxes
|
|
|
(823,770
|
)
|
(Increase)/decrease in operating
assets
|
|
|
|
|
Receivable from clearing broker
|
|
|
(1,602,846
|
)
|
Securities owned
|
|
|
(10,132,764
|
)
|
Income taxes receivable
|
|
|
441,301
|
|
Accounts receivable, prepaid
expenses and other assets
|
|
|
(15,304
|
)
|
Increase/(decrease) in operating
liabilities
|
|
|
|
|
Accrued compensation and related
benefits
|
|
|
(14,690
|
)
|
Securities sold, not yet purchased
|
|
|
141,472
|
|
Accounts payable and accrued
expenses
|
|
|
1,070,936
|
|
Other liabilities
|
|
|
707,200
|
|
|
|
|
|
|
Net cash used in operating
activities
|
|
|
(6,589,393
|
)
|
|
|
|
|
|
Cash flows from investing
activities
|
|
|
|
|
Acquisition of intangibles
|
|
|
(1,530,046
|
)
|
Purchase of furniture, equipment
and leasehold improvements
|
|
|
(735,532
|
)
|
Website development costs
|
|
|
(1,469,327
|
)
|
Purchase of software
|
|
|
(679,393
|
)
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(4,414,298
|
)
|
|
|
|
|
|
Cash flows from financing
activities
|
|
|
|
|
Purchase of treasury stock
|
|
|
(500,009
|
)
|
|
|
|
|
|
Net cash used in financing
activities
|
|
|
(500,009
|
)
|
|
|
|
|
|
Net decrease in cash and cash
equivalents
|
|
|
(11,503,700
|
)
|
Cash and cash
equivalents
|
|
|
|
|
Beginning of year
|
|
|
25,153,794
|
|
|
|
|
|
|
End of year
|
|
$
|
13,650,094
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information
|
|
|
|
|
Cash paid for interest
|
|
$
|
|
|
Cash paid for income taxes
|
|
$
|
1,495,000
|
|
The accompanying notes are an integral part of these financial
statements.
5
thinkorswim
Group, Inc.
December 31,
2005
Organization
and Basis of Presentation
These consolidated financial statements include thinkorswim
Group, Inc. and its wholly owned subsidiaries, thinkorswim, Inc.
(Inc.), thinkorswim Technologies, Inc.
(Tech), thinkorswim Advisors, Inc.
(Advisors), TOS Services, Inc. and TOS Red, Inc.
(collectively, the Company). Inc. is the primary
operating subsidiary and is a registered broker-dealer subject
to regulation by the Securities and Exchange Commission
(SEC), National Association of Securities Dealers,
Inc. and the National Futures Association. Inc. is in the
business of providing brokerage services for index and equity
options and the related equity securities to retail and
institutional customers, primarily through online systems. In
addition, Inc. provides its clients with news, quotes, charts
and other tools. Pursuant to a clearing agreement between Inc.
and its primary clearing broker, Penson Financial Services, all
securities transactions are cleared on a fully disclosed basis.
Advisors is registered with the SEC as an investment adviser and
offers a wide variety of investment advisory services to
individual and institutional clients. In addition, Tech
developed and TOS Services maintains an electronic institutional
trading platform which is utilized by Inc. and two other
unaffiliated broker-dealers.
On December 1, 2005, the Company acquired certain fixed
assets, software and customer relationships from Arrowhead
Solutions Inc on behalf of Tech. The fixed purchase price was
$2,000,000, of which $1,250,000 was paid and $750,000 is
included in other liabilities and is payable in two equal
installments due on each of the first and second anniversaries
of the transaction. In addition, the agreement provides for
additional consideration of up to $1,250,000, subject to certain
conditions being met. The Company has recorded $75,000, $500,000
and $1,425,000 related to fixed assets, software and customer
relationships, respectively.
|
|
2.
|
Significant
Accounting Policies
|
The following is a summary of significant accounting policies
followed in the preparation of the Companys financial
statements.
Basis
of Presentation
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All material
intercompany balances and transactions have been eliminated in
consolidation.
Cash
and Cash Equivalents
Cash and cash equivalents includes cash, money market funds and
highly liquid securities with original maturities at the date of
purchase of three months or less. The carrying amount of such
cash equivalents approximates their fair value due to the
short-term nature of these investments. Included in cash and
cash equivalents at December 31, 2005 are investments in an
overnight repurchase agreement and commercial paper with
balances of $1,050,000 and $1,458,481, respectively.
Receivable
from Clearing Broker
Receivable from clearing broker consists of cash deposits and
receivables from revenues earned, net of expenses incurred, from
customer transactions conducted through the clearing broker.
Securities
Owned and Securities Sold, Not Yet Purchased
Securities owned and securities sold, not yet purchased, are
carried at market value and recorded on a trade date basis. The
Company does not actively trade securities for its own benefit.
Equities and options included in
6
thinkorswim
Group, Inc.
Notes to
Consolidated Financial
Statements (Continued)
securities and securities sold, not yet purchased result from
trade corrections, while certificates of deposit, municipal
bonds and U.S. treasury securities are investments of the
Company.
Estimated
Fair Value of Financial Instruments
Market value of securities owned and securities sold, not yet
purchased, is determined using market quotations. Management
estimates the aggregate fair value of other financial
instruments recognized on the consolidated statement of
financial condition (including receivables, payables and accrued
expenses) approximates their fair value, as such financial
instruments are short-term in nature, bear interest at current
market rates or are subject to frequent repricing.
Software
and Website Development
Costs associated with software and website development provided
by third parties, or acquired, are capitalized and are stated at
cost, net of accumulated amortization. These assets are being
amortized on a straight-line basis over a three-year useful life.
Furniture,
Equipment and Leasehold Improvements
Furniture, equipment and leasehold improvements are carried at
cost and are depreciated on an accelerated basis over the
estimated useful lives of the related assets ranging from five
to seven years. Leasehold improvements are amortized on a
straight-line basis over the lesser of the useful life of the
improvement or the term of the lease.
Goodwill
and Other Intangible Assets
Intangible assets relate to cash paid for a customer list
acquired during 2004 for $289,345 and customer relationships
acquired during 2005 for $1,425,000. The customer list and
customer relationships are being amortized on a straight-line
basis over their expected useful lives of three and
8.33 years, respectively. Total amortization expense
related to intangible assets for the year ended
December 31, 2005 was $81,486. Goodwill consists of
$105,046 resultant from the acquisition of certain assets from
Arrowhead, and is carried at cost adjusted for any other than
temporary impairment. In managements opinion, no
impairment exists as of December 31, 2005.
Income
Taxes
The Company and its eligible subsidiaries file a consolidated
U.S. federal income tax return. The Company uses the asset
and liability method required by Statement of Accounting
Standards (SFAS) No. 109, Accounting for
Income Taxes to provide income taxes on all transactions
recorded in the consolidated financial statements. This requires
that income taxes reflect the expected future tax consequences
of temporary differences between the carrying amounts of assets
or liabilities for book and tax purposes. Accordingly, a
deferred tax liability or asset for each temporary difference is
determined based on the tax rates the Company expects to be in
effect when the underlying items of income and expense are to be
realized. The Companys expense for income taxes includes
the current and deferred portions of that expense.
Recognition
of Revenues and Expenses
Commissions revenues and clearing and brokerage fees are
recorded on a trade date basis. Management fees are typically
asset based and are recorded when earned. Subscription fees and
software fees are recognized ratably over the associated
subscription period. Interest income is recorded when earned.
Development
and Maintenance Fees
Development and maintenance fees consist of amounts earned by
the Company related to software developed and maintained by the
Company and licensed to third parties. Development revenue
represents payments or
7
thinkorswim
Group, Inc.
Notes to
Consolidated Financial
Statements (Continued)
payment commitments received by the Company to fund its software
development costs. Maintenance revenue is recognized over the
life of the maintenance period.
Stock
Options
The Company accounts for stock-based compensation in accordance
with the fair value method prescribed by SFAS 123,
Accounting for Stock Based Compensation, as amended
by SFAS No. 148, Accounting for Stock Based
Compensation Transition and Disclosure. Under
this method, compensation expense is recognized over the
relevant service period based on the fair value of stock
options. The Company uses the Black-Scholes valuation model to
estimate the fair value of stock options at the time of each
grant. Stock options are recorded as expense with an offsetting
credit to stockholders equity in accordance with
SFAS No. 123 over the corresponding service period.
Use of
Estimates
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the amounts of assets and
liabilities and disclosures of contingent assets and liabilities
at the date of the consolidated financial statements and the
reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Recent
Accounting Pronouncements
In December 2004 the Financial Accounting Standards Board issued
SFAS No. 123 (revised 2004)
(SFAS 123R), Share Based Payment, which
is a revision to SFAS 123. The Company expects to adopt
SFAS 123R in 2006. The Company continues to evaluate the
impact of SFAS 123R, however, the Company does not
anticipate that the adoption of SFAS 123R will have a
material impact on results of operations.
|
|
3.
|
Securities
Owned and Securities Sold, Not Yet Purchased
|
Securities owned and securities sold, not yet purchased, are
composed of the following at December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
|
Securities
|
|
|
Sold, Not Yet
|
|
|
|
Owned
|
|
|
Purchased
|
|
|
Options
|
|
$
|
172,960
|
|
|
$
|
130,740
|
|
Debt
|
|
|
12,040,330
|
|
|
|
|
|
Equities and other
|
|
|
12,828
|
|
|
|
76,428
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,226,118
|
|
|
$
|
207,168
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
Furniture,
Equipment and Leasehold Improvements
|
Furniture, equipment and leasehold improvements consisted of the
following at December 31, 2005:
|
|
|
|
|
Computer hardware
|
|
$
|
1,283,390
|
|
Leasehold improvements
|
|
|
270,063
|
|
Furniture and fixtures
|
|
|
440,585
|
|
Less: accumulated depreciation and
amortization
|
|
|
(985,778
|
)
|
|
|
|
|
|
|
|
$
|
1,008,260
|
|
|
|
|
|
|
8
thinkorswim
Group, Inc.
Notes to
Consolidated Financial
Statements (Continued)
|
|
5.
|
Software
and Website Development
|
The Company has capitalized the following software and website
development costs at December 31, 2005:
|
|
|
|
|
Computer software
|
|
$
|
1,225,227
|
|
Website and software development
|
|
|
3,368,202
|
|
Less: accumulated amortization
|
|
|
(2,134,737
|
)
|
|
|
|
|
|
|
|
$
|
2,458,692
|
|
|
|
|
|
|
|
|
6.
|
Stock
Based Compensation
|
The Company accounts for stock options under SFAS 123.
SFAS 123 requires all stock based compensation awards,
including stock options, to be accounted for at fair value. The
difference between fair value and the stock option exercise
price at date of grant is recognized as compensation expense
over the required service period. During the year ended
December 31, 2005, all prior year options were fully vested
and the current year options were granted with an exercise price
that made the fair value of the award $0, so there was no
compensation expense; however, the Company recognized a decrease
in compensation expense of $32,215 related to employee option
award cancellations.
The following table presents a summary of the Companys
option activity:
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Weighted-average
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Outstanding, January 1, 2005
|
|
|
142,224
|
|
|
$
|
0.52
|
|
Granted
|
|
|
7,226
|
|
|
|
38.92
|
|
Exercised
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(3,876
|
)
|
|
|
8.53
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2005
|
|
|
145,574
|
|
|
$
|
2.21
|
|
Exercisable, December 31, 2005
|
|
|
143,922
|
|
|
$
|
1.52
|
|
The options outstanding as of December 31, 2005 have a
weighted-average remaining contractual life of 7.12 years.
The following table represents the Companys
weighted-average grant date fair values for the stock options
granted, and the assumptions used to value the stock options
under a Black-Scholes valuation model:
|
|
|
|
|
Weighted-average grant date
fair value per option
|
|
$
|
19.40
|
|
Weighted-average annualized
stock option valuation assumptions
|
|
|
|
|
Risk-free interest rate
|
|
|
4.61
|
%
|
Expected dividend yield
|
|
|
|
|
Expected common stock price
volatility
|
|
|
68.70
|
%
|
Assumed weighted-average
expected life of stock options per employee option (in
years)
|
|
|
7.12
|
|
As of December 31, 2005, the Company had 176,110 issued and
fully vested options outstanding to a former service provider.
These options have a remaining contractual life of approximately
16 years and an exercise price of $0.01 per share. In
April 2005, the Company entered into an agreement with an
independent contractor, under which the independent contractor
would introduce new active customer accounts to Inc. and manage
those accounts in a registered representative capacity. The
agreement granted the independent contractor the option to buy
up to one percent of the Companys stock per year for three
years, not to exceed three percent in aggregate. Partial vesting
of this grant occurs on each of the first three anniversaries of
this agreement and is subject to various performance and
9
thinkorswim
Group, Inc.
Notes to
Consolidated Financial
Statements (Continued)
service conditions. As of December 31, 2005,
13,197 options had been earned and will vest in April 2006.
These independent contractor options have a weighted average
remaining life of 2.33 years and a weighted average exercise
price of $69.01.
|
|
7.
|
Convertible
Preferred Stock
|
Series A Convertible Preferred shares have voting rights
equal to common shares, while Series B Convertible
Preferred shares are non-voting. Series A Convertible
Preferred shares and Series B Convertible Preferred shares
are convertible at the option of the holder at any time into
shares of common stock. At December 31, 2005, holders of
Series A Convertible Preferred shares and Series B
Convertible Preferred shares would receive 1.168 and
1.0 shares of common stock, respectively, if converted.
Series A Convertible Preferred shares and Series B
Convertible Preferred shares also have preference upon
liquidation of $26.0416 per share and $125.6928 per
share, respectively. Series B Convertible Preferred
shares liquidation preference supersedes that of
Series A Convertible Preferred shares. As of
December 31, 2005, 59,060 shares of Series A
Convertible Preferred stock and 184,770 shares of
Series B Convertible Preferred stock were authorized.
Series A Convertible Preferred stock and Series B
Convertible Preferred stock had 59,060 and 179,008 shares
issued and outstanding, respectively, as of December 31,
2005.
Income tax expense for the year ended December 31, 2005
consists of:
|
|
|
|
|
Current
|
|
|
|
|
U.S. Federal
|
|
$
|
1,889,518
|
|
State
|
|
|
494,890
|
|
|
|
|
|
|
Total current
|
|
|
2,384,408
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
U.S. Federal
|
|
|
(628,500
|
)
|
State
|
|
|
(195,100
|
)
|
|
|
|
|
|
Total deferred
|
|
|
(823,600
|
)
|
|
|
|
|
|
Total income tax expense
|
|
$
|
1,560,808
|
|
|
|
|
|
|
Income tax expense differs from the statutory U.S. federal
income tax rate as a result of the following:
|
|
|
|
|
Federal income tax expense
computed at statutory rate
|
|
$
|
1,485,856
|
|
State tax expense net of Federal
benefit
|
|
|
205,000
|
|
Permanent book/tax differences
|
|
|
48,974
|
|
Prior year tax adjustment
|
|
|
(99,022
|
)
|
Research and development credit
|
|
|
(80,000
|
)
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
1,560,808
|
|
|
|
|
|
|
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities
at December 31, 2005 are presented below:
Management has determined that no valuation allowance is needed
given the expectation of future taxable income which will exceed
the amounts necessary to realize the deferred tax asset.
10
thinkorswim
Group, Inc.
Notes to
Consolidated Financial
Statements (Continued)
|
|
|
|
|
Deferred tax assets arising from:
|
|
|
|
|
Options
|
|
$
|
2,408,772
|
|
Legal fees/settlement
|
|
|
1,021,513
|
|
Leasehold improvements
|
|
|
78,822
|
|
Software acquisition
|
|
|
4,589
|
|
Start-up
costs
|
|
|
4,199
|
|
Customer base
|
|
|
3,097
|
|
Customer lists
|
|
|
26,160
|
|
State tax benefit
|
|
|
(173,264
|
)
|
|
|
|
|
|
Total deferred tax assets
|
|
|
3,373,888
|
|
|
|
|
|
|
Deferred tax liabilities arising
from:
|
|
|
|
|
Depreciation costs
|
|
|
197,354
|
|
|
|
|
|
|
Net deferred taxes
|
|
$
|
3,176,534
|
|
|
|
|
|
|
|
|
9.
|
Commitments
and Contingencies
|
The Company leases office space in three locations under
operating lease agreements which expire during 2006 and 2007.
Minimum required rental payments in 2006 under these lease
obligations, including real estate taxes and operating expenses,
is $44,988, $44,768 and $45,837, respectively. Minimum required
rental payments in 2007 under one of the lease agreements is
$30,431.
The Company has signed a lease for new office space under an
operating lease agreement expiring in 2012. Minimum required
rental payments in 2006 under this lease obligation, including
taxes and operating expenses, are $216,252. Minimum required
future rental payments under lease obligations, including taxes
and operating expenses are as follows:
|
|
|
|
|
Years Ending December 31,
|
|
|
|
|
2006
|
|
$
|
351,845
|
|
2007
|
|
|
324,689
|
|
2008
|
|
|
302,271
|
|
2009
|
|
|
310,431
|
|
2010
|
|
|
318,843
|
|
Thereafter
|
|
|
492,963
|
|
|
|
|
|
|
Total
|
|
$
|
2,101,042
|
|
|
|
|
|
|
Rent expense for the year ended December 31, 2005 was
$266,313, which includes $76,804 of rent reimbursement to an
independent contractor who is a registered representative of the
Company. As the Company is not a part to this lease, it has been
excluded from the lease obligations noted above.
The Company, under consultation with counsel, has accrued for
the estimable outcome of pending litigation. The Company does
not expect the ultimate resolution of these matters to have a
material adverse effect on the Companys financial position
or results of operations.
During the year, the Company was involved in two significant
matters. The Company paid approximately $1.5 million
related to a settlement with a former third party vendor of the
Company. In addition, the Company has recognized expense of
approximately $2.1 million related to an unfunded debit
balance arising from trading activity
11
thinkorswim
Group, Inc.
Notes to
Consolidated Financial
Statements (Continued)
of a customer. The Company is vigorously pursuing reimbursement
of the unfunded debit from the customer; however, the Company is
unable to reasonably predict the ultimate outcome of recovery.
In the normal course of business, the Company enters into
contracts which contain indemnification provisions, such as
purchase contracts, service agreements and leasing agreements.
Under the provisions of these contracts, the Company may
indemnify counterparties to the contracts for certain aspects of
the Companys past conduct if other parties fail to
perform, or if certain events occur. These indemnification
provisions will vary based upon the contract. The Company may,
in turn, obtain indemnifications from other parties in certain
contracts. These indemnification provisions are not expected to
have a material impact on the Companys financial position
of results of operations.
|
|
10.
|
Off-Balance
Sheet Risk and Concentration of Credit Risk
|
Credit risk is the amount of accounting loss the Company would
incur if the counterparty failed to perform its obligations
under contractual terms. Substantially all of the clearing and
depository operations of the Company are performed by its
clearing broker on a fully disclosed basis pursuant to a
clearance agreement. The Companys exposure to credit risk
associated with the nonperformance of counterparties in
fulfilling their contractual obligations pursuant to securities
transactions can be directly impacted by volatile securities
markets, credit markets and regulatory changes.
In the normal course of business, the Companys clearing
broker makes margin loans to the Companys customers, which
are collateralized by customer securities. In permitting the
customers to purchase securities on margin, the clearing broker
is exposed to the risk of a market decline that could reduce the
value of the collateral held below the customers
indebtedness before the collateral can be sold, which could
result in losses to the clearing broker. The Companys
agreement with the clearing broker requires the Company to
reimburse the clearing broker for any losses incurred related to
customers introduced by the Company. The Company seeks to
control the risk associated with customer activities by making
credit inquiries when establishing customer relationships and by
monitoring customer trading activity.
The Company enters into repurchase agreements under which the
Company purchases a security at a specified price with the
intention to sell the same security to the same counterparty at
a fixed or determinable price at a future date. The Company has
not experienced any losses in such agreements. Management
believes that the Company is not exposed to any significant
credit risk on repurchase agreements.
The Company maintains its cash in bank deposit accounts which,
at times, may exceed federally insured limits. The Company has
not experienced any losses in such accounts. Management believes
that the Company is not exposed to any significant credit risk
on bank deposits.
12
thinkorswim
Group, Inc.
Consolidated Financial Statements
December 31, 2004
thinkorswim
Group, Inc.
Index
December 31, 2004
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|
|
Page(s)
|
|
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|
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1
|
|
Consolidated Financial
Statements
|
|
|
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|
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2
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|
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3
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4
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5
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6-12
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Report of
Independent Auditors
To the Board of Directors and Stockholders of
thinkorswim Group, Inc.:
In our opinion, the accompanying consolidated statement of
financial condition and the related consolidated statements of
income, of changes in stockholders equity and of cash
flows present fairly, in all material respects, the financial
position of thinkorswim Group, Inc. and its subsidiaries
(collectively, the Company) at December 31,
2004, and the results of their operations and their cash flows
for the year then ended in conformity with accounting principles
generally accepted in the United States of America. These
financial statements are the responsibility of the
Companys 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
auditing standards generally accepted in the United States of
America 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 our opinion.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
May 31, 2005
1
thinkorswim
Group, Inc.
December 31, 2004
|
|
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
25,153,794
|
|
Receivable from clearing broker
|
|
|
2,020,650
|
|
Securities owned, at market value
|
|
|
2,093,354
|
|
Software and website development,
at cost net of accumulated amortization of $1,517,720
|
|
|
926,989
|
|
Furniture, equipment and leasehold
improvements, at cost net of accumulated depreciation and
amortization of $697,489
|
|
|
561,017
|
|
Income taxes receivable
|
|
|
494,784
|
|
Deferred tax asset
|
|
|
2,352,764
|
|
Accounts receivable
|
|
|
1,208,258
|
|
Prepaid expenses and other assets
|
|
|
552,905
|
|
|
|
|
|
|
Total assets
|
|
$
|
35,364,515
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Accrued compensation and related
benefits
|
|
$
|
119,593
|
|
Securities sold, not yet
purchased, at market value
|
|
|
65,696
|
|
Accounts payable and accrued
expenses
|
|
|
620,325
|
|
Other liabilities
|
|
|
442,800
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,248,414
|
|
|
|
|
|
|
Convertible preferred stock,
$0.001 par value, authorized 243,830 shares, 238,068
issued and outstanding
|
|
|
238
|
|
Common stock, $0.001 par
value, authorized 1,397,821 shares, 749,914 issued and
outstanding
|
|
|
749
|
|
Additional paid in capital
|
|
|
32,395,343
|
|
Retained earnings
|
|
|
1,719,771
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
34,116,101
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
35,364,515
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
2
thinkorswim
Group, Inc.
Year Ended December 31, 2004
|
|
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Revenues
|
|
|
|
|
Commissions
|
|
$
|
14,602,936
|
|
Development and maintenance fees
|
|
|
844,652
|
|
Management and subscription fees
|
|
|
593,884
|
|
Interest and dividends
|
|
|
950,066
|
|
Other
|
|
|
72,249
|
|
|
|
|
|
|
Total revenues
|
|
|
17,063,787
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
Employee compensation and benefits
|
|
|
5,487,478
|
|
Clearing and brokerage fees
|
|
|
3,300,974
|
|
Professional fees and legal
settlement
|
|
|
1,137,177
|
|
Technology, communications and
market data
|
|
|
1,080,085
|
|
Advertising and promotion
|
|
|
2,892,642
|
|
Depreciation and amortization
|
|
|
848,467
|
|
Occupancy
|
|
|
192,849
|
|
Other
|
|
|
1,045,703
|
|
|
|
|
|
|
Total expenses
|
|
|
15,985,375
|
|
|
|
|
|
|
Income before provision for income
taxes
|
|
|
1,078,412
|
|
Provision for income taxes
|
|
|
(366,480
|
)
|
|
|
|
|
|
Net income
|
|
$
|
711,932
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
3
thinkorswim
Group, Inc.
Year Ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Stock
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Convertible Preferred
|
|
|
Common
|
|
|
Additional
|
|
|
Retained
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid-in Capital
|
|
|
Earnings
|
|
|
Equity
|
|
|
Balance, December 31,
2003
|
|
|
59,060
|
|
|
$
|
59
|
|
|
|
602,462
|
|
|
$
|
602
|
|
|
$
|
7,627,783
|
|
|
$
|
1,007,839
|
|
|
$
|
8,636,283
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
711,932
|
|
|
|
711,932
|
|
Stock transactions
|
|
|
179,008
|
|
|
|
179
|
|
|
|
147,452
|
|
|
|
147
|
|
|
|
22,271,247
|
|
|
|
|
|
|
|
22,271,573
|
|
Stock option awards (see
Note 6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,496,313
|
|
|
|
|
|
|
|
2,496,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2004
|
|
|
238,068
|
|
|
$
|
238
|
|
|
|
749,914
|
|
|
$
|
749
|
|
|
$
|
32,395,343
|
|
|
$
|
1,719,771
|
|
|
$
|
34,116,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
4
thinkorswim
Group, Inc.
Year Ended December 31, 2004
|
|
|
|
|
Cash flows from operating
activities
|
|
|
|
|
Net income
|
|
$
|
711,932
|
|
Adjustments to reconcile net
income to net cash provided by operating activities:
|
|
|
|
|
Depreciation and amortization
|
|
|
848,467
|
|
Stock option expense
|
|
|
2,982,584
|
|
Deferred income taxes
|
|
|
(529,735
|
)
|
(Increase)/decrease in operating
assets
|
|
|
|
|
Receivable from clearing broker
|
|
|
(719,768
|
)
|
Securities owned
|
|
|
(2,089,299
|
)
|
Income taxes receivable
|
|
|
(494,784
|
)
|
Accounts receivable, prepaid
expenses and other assets
|
|
|
(1,589,711
|
)
|
Increase/(decrease) in operating
liabilities
|
|
|
|
|
Accrued compensation and related
benefits
|
|
|
(260,637
|
)
|
Securities sold, not yet purchased
|
|
|
55,279
|
|
Income taxes payable
|
|
|
(749,000
|
)
|
Accounts payable and accrued
expenses
|
|
|
(751,508
|
)
|
Other liabilities
|
|
|
442,800
|
|
|
|
|
|
|
Net cash used in operating
activities
|
|
|
(2,143,380
|
)
|
|
|
|
|
|
Cash flows from investing
activities
|
|
|
|
|
Software purchases and website
development costs
|
|
|
(258,096
|
)
|
Purchase of furniture, equipment
and leasehold improvements
|
|
|
(424,984
|
)
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(683,080
|
)
|
|
|
|
|
|
Cash flows from financing
activities
|
|
|
|
|
Shares issued
|
|
|
21,785,012
|
|
Stock options exercised
|
|
|
290
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
21,785,302
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents
|
|
|
18,958,842
|
|
Cash and cash
equivalents
|
|
|
|
|
Beginning of year
|
|
|
6,194,952
|
|
|
|
|
|
|
End of year
|
|
$
|
25,153,794
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information
|
|
|
|
|
Cash paid for interest
|
|
$
|
2,321
|
|
Cash paid for income taxes
|
|
$
|
2,140,000
|
|
The accompanying notes are an integral part of these financial
statements.
5
thinkorswim
Group, Inc.
December 31,
2004
Organization
and Basis of Presentation
These consolidated financial statements include thinkorswim
Group, Inc. and its wholly owned subsidiaries, thinkorswim, Inc.
(Inc.), thinkorswim Technologies, Inc.
(Tech), thinkorswim Advisors, Inc.
(Advisors), TOS Services, Inc. and TOS Red, Inc.
(collectively, the Company). Inc. is the primary
operating subsidiary and is a registered broker-dealer subject
to regulation by the Securities and Exchange Commission
(SEC), National Association of Securities Dealers,
Inc. and the National Futures Association. Inc. is in the
business of providing brokerage services for index and equity
options and the related equity securities to retail customers,
primarily through online systems. Pursuant to a clearing
agreement between Inc. and its clearing broker, Penson Financial
Services, all securities transactions are cleared on a fully
disclosed basis. The Company also offers a wide variety of
investment advisory services to individual and institutional
clients, subscriptions, investment news, quotes, charts and
other tools. In addition, the Company developed and maintains an
electronic institutional trading platform on behalf of Inc. and
two other unaffiliated broker-dealers.
|
|
2.
|
Significant
Accounting Policies
|
The following is a summary of significant accounting policies
followed in the preparation of the Companys financial
statements.
Basis
of Presentation
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All material
intercompany balances and transactions have been eliminated in
consolidation.
Cash
and Cash Equivalents
Cash and cash equivalents includes cash, money market funds and
highly liquid securities with original maturities at the date of
purchase of three months or less. The carrying amount of such
cash equivalents approximates their fair value due to the
short-term nature of these investments. Included in cash and
cash equivalents at December 31, 2004 are investments in an
overnight repurchase agreement, a money market fund and
commercial paper with balances of $17,500,000, $3,743,623 and
$432,686, respectively.
Receivable
from Clearing Broker
Receivable from clearing broker consists of cash deposits and
receivables from revenues earned, net of expenses incurred from
customer transactions conducted through the clearing broker.
Securities
Owned and Securities Sold, Not Yet Purchased
Securities owned and securities sold, not yet purchased, are
carried at market value and recorded on a trade date basis. The
Company does not actively trade securities for its own benefit.
Equities and options included in securities and securities sold,
not yet purchased result from trade corrections, while
certificates of deposit are investments of the Company.
Estimated
Fair Value of Financial Instruments
Fair value of securities owned and securities sold, not yet
purchased, is determined using market quotations. Management
estimates the aggregate fair value of other financial
instruments recognized on the consolidated statement of
financial condition (including receivables, payables and accrued
expenses) approximates their fair
6
thinkorswim
Group, Inc.
Notes to
Consolidated Financial
Statements (Continued)
value, as such financial instruments are short-term in nature,
bear interest at current market rates or are subject to frequent
repricing.
Software
and Website Development
Software and website development costs provided by third parties
are capitalized and are stated at cost, net of accumulated
amortization. These assets are being amortized on a
straight-line basis over a three-year useful life.
Furniture,
Equipment and Leasehold Improvements
Furniture, equipment and leasehold improvements are carried at
cost and are depreciated on an accelerated basis over the
estimated useful lives of the related assets ranging from five
to seven years. Leasehold improvements are amortized on a
straight-line basis over the lesser of the useful life of the
improvement or the term of the lease.
Intangible
Asset
Intangible assets relate to customer lists acquired during 2004
totaling $289,345. These intangible assets are being amortized
on a straight-line basis over their expected useful life of
three years. Total amortization expense for the year ended
December 31, 2004 was $29,171. The unamortized intangible
assets are included in Prepaid Expenses and Other Assets on the
consolidated statement of financial condition.
Income
Taxes
The Company and its eligible subsidiaries file a consolidated
U.S. federal income tax return. The Company uses the asset
and liability method required by Statement of Accounting
Standards (SFAS) No. 109, Accounting for Income Taxes
to provide income taxes on all transactions recorded in the
consolidated financial statements. This requires that income
taxes reflect the expected future tax consequences of temporary
differences between the carrying amounts of assets or
liabilities for book and tax purposes. Accordingly, a deferred
tax liability or asset for each temporary difference is
determined based on the tax rates the Company expects to be in
effect when the underlying items of income and expense are to be
realized. The Companys expense for income taxes includes
the current and deferred portions of that expense.
Recognition
of Revenues and Expenses
Commissions revenues and clearing and brokerage fees are
recorded on a trade date basis. Management fees are typically
asset based and are recorded when earned. Subscription fees are
recognized ratably over the associated subscription period.
Interest income is recorded when earned.
Development
and Maintenance Fees
Development and maintenance fees consist of amounts earned by
the Company related to software developed and maintained by the
Company and licensed to third parties. Development revenue
represents payments or payment commitments received by the
Company to fund its software development costs. Maintenance
revenue is recognized over the life of the maintenance period.
Stock
Options
The Company accounts for stock-based compensation in accordance
with the fair value method prescribed by SFAS 123,
Accounting for Stock Based Compensation, as amended
by SFAS No. 148, Accounting for Stock Based
Compensation Transition and Disclosure. Under
this method, compensation expense is recognized over the
relevant service period based on the fair value of stock
options. The Company uses the Black-Scholes valuation model to
estimate the fair value of stock options at the time of each
grant. Stock options are recorded as expense
7
thinkorswim
Group, Inc.
Notes to
Consolidated Financial
Statements (Continued)
with an offsetting credit to stockholders equity in
accordance with SFAS No. 123 over the corresponding
service period.
Use of
Estimates
The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the amounts of assets and
liabilities and disclosures of contingent assets and liabilities
at the date of the consolidated financial statements and the
reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
|
|
3.
|
Securities
Owned and Securities Sold, Not Yet Purchased
|
Securities owned and securities sold, not yet purchased, are
composed of the following at December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
|
Securities
|
|
|
Sold, Not Yet
|
|
|
|
Owned
|
|
|
Purchased
|
|
|
Certificates of deposit
|
|
$
|
2,016,668
|
|
|
$
|
|
|
Options
|
|
|
66,675
|
|
|
|
55,685
|
|
Equities
|
|
|
10,011
|
|
|
|
10,011
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,093,354
|
|
|
$
|
65,696
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
Furniture,
Equipment and Leasehold Improvements
|
Furniture, equipment and leasehold improvements consisted of the
following at December 31, 2004:
|
|
|
|
|
Computer hardware
|
|
$
|
882,586
|
|
Leasehold improvements
|
|
|
256,162
|
|
Furniture and fixtures
|
|
|
119,758
|
|
|
|
|
|
|
Total
|
|
|
1,258,506
|
|
Less: accumulated depreciation and
amortization
|
|
|
(697,489
|
)
|
|
|
|
|
|
|
|
$
|
561,017
|
|
|
|
|
|
|
|
|
5.
|
Software
and Website Development
|
The Company has capitalized the following software and website
development costs at December 31, 2004:
|
|
|
|
|
Computer software
|
|
$
|
631,197
|
|
Website development
|
|
|
1,813,512
|
|
|
|
|
|
|
Total
|
|
|
2,444,709
|
|
Less: accumulated amortization
|
|
|
(1,517,720
|
)
|
|
|
|
|
|
|
|
$
|
926,989
|
|
|
|
|
|
|
During the year, the Company capitalized software development
costs in the amount of $1,342,848 relating to the development of
its institutional trading platform. The Company received
$2,000,000 from two financial institutions in exchange for
rights to use the institutional software. This revenue was
credited against the capitalized software value, until such
value was reduced to zero, and the remaining $657,152 has been
included within development and maintenance fees in the
consolidated statement of income.
8
thinkorswim
Group, Inc.
Notes to
Consolidated Financial
Statements (Continued)
|
|
6.
|
Stock
Based Compensation
|
Certain key employees and a director of the Company have been
granted compensatory stock options. During the year ended
December 31, 2004, the Company recognized compensation
expense of $1,192,377 related to employee and director option
awards.
The following table presents a summary of the Companys
option activity:
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Weighted-average
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Outstanding, January 1, 2004
|
|
|
98,436
|
|
|
$
|
0.01
|
|
Granted
|
|
|
43,788
|
|
|
|
1.67
|
|
Exercised
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2004
|
|
|
142,224
|
|
|
$
|
0.52
|
|
Exercisable, December 31, 2004
|
|
|
138,919
|
|
|
$
|
0.30
|
|
The options outstanding as of December 31, 2004 have a
weighted-average remaining contractual life of 8.09 years.
The following table represents the Companys
weighted-average grant date fair values for the employee stock
options granted, and the assumptions used to value the stock
options under a Black-Scholes valuation model:
|
|
|
|
|
Weighted-average grant date
fair value per employee option
|
|
$
|
18.65
|
|
Weighted-average annualized
stock option valuation assumptions
|
|
|
|
|
Risk-free interest rate
|
|
|
2.02
|
%
|
Expected dividend yield
|
|
|
|
|
Expected common stock price
volatility
|
|
|
65.39
|
%
|
Assumed weighted-average
expected life of stock options per employee option (in
years)
|
|
|
6.38
|
|
In March 2002, Inc entered into a strategic marketing agreement
(the Agreement) with a service provider, under which
the service provider would introduce up to 6,000 new, funded
customer accounts to Inc. The Agreement granted 205,072 options
of Company stock to the service provider. Vesting of this grant
was based on the number of new, funded customer accounts
introduced to Inc. by the service provider. On each of the first
three anniversaries of the date of the Agreement, the service
provider vested in options based on the number of new, funded
customer accounts introduced during the preceding twelve month
period. Vesting was contingent upon introduction of a specified
minimum number of accounts in each twelve month period.
Prior to 2004, Inc. recognized expense in each year equal to the
estimated fair value of the options earned in that year.
During 2004, Inc. and the service provider mutually agreed to
terminate the Agreement. As a result of the termination, 40,365
options vested immediately, making the service provider fully
vested in all 205,072 options. During 2004, Inc. recognized
$632,932 of expense related to options vested due to account
introductions and $1,157,275 of expense related to termination
of the Agreement. These amounts were recorded as advertising and
promotion expense.
During 2004, the service provider exercised 28,962 options at an
aggregate exercise price of $290, leaving this service provider
with 176,110 vested options. These remaining options have a
strike price of $0.01 per share and a remaining contractual life
of approximately 17 years.
9
thinkorswim
Group, Inc.
Notes to
Consolidated Financial
Statements (Continued)
|
|
7.
|
Convertible
Preferred Stock
|
Holders of the convertible preferred stock have voting rights
equal to the common shares. The shares are convertible at the
option of the holder at any time into shares of common stock of
the Company in accordance with the conversion ratio of one share
of common stock for each $22.297 of Preferred Classes A and
$75.6308 of Preferred Class B at December 31, 2004.
Preferred Classes A and B shareholders also have a per
share preference upon liquidation of $26.0416 and $125.6928,
respectively. Preferred Class B shares liquidation
preference supersedes that of Preferred Class A shares. As
of December 31, 2004 59,060 and 184,770 shares of
Preferred Classes A and B, respectively, were authorized.
Preferred Class A and B had 59,060 and 179,008 shares
issued and outstanding, respectively, as of December 31,
2004.
Income tax expense for the year ended December 31, 2004
consists of:
|
|
|
|
|
Current
|
|
|
|
|
U.S. Federal
|
|
$
|
804,984
|
|
State
|
|
|
91,251
|
|
|
|
|
|
|
Total current
|
|
|
896,235
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
U.S. Federal
|
|
|
(455,200
|
)
|
State
|
|
|
(74,555
|
)
|
|
|
|
|
|
Total deferred
|
|
|
(529,755
|
)
|
|
|
|
|
|
Total income tax expense
|
|
$
|
366,480
|
|
|
|
|
|
|
Income tax expense differs from the statutory U.S. federal
income tax rate as a result of the following:
|
|
|
|
|
Federal income tax expense
computed at statutory rate
|
|
|
34.00
|
%
|
State tax expense
|
|
|
4.80
|
|
Miscellaneous credits and
permanent items
|
|
|
(4.82
|
)
|
|
|
|
|
|
Provision for income taxes
|
|
|
33.98
|
%
|
|
|
|
|
|
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities
at December 31, 2004 are presented below:
|
|
|
|
|
Deferred tax assets arising from:
|
|
|
|
|
Stock options
|
|
$
|
2,418,811
|
|
Leasehold improvements
|
|
|
63,208
|
|
Start-up
costs
|
|
|
5,271
|
|
Customer lists
|
|
|
9,638
|
|
State tax benefit
|
|
|
107,678
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
2,604,606
|
|
Deferred tax liabilities arising
from:
|
|
|
|
|
Depreciation
|
|
$
|
251,842
|
|
|
|
|
|
|
Net deferred taxes
|
|
|
2,352,764
|
|
|
|
|
|
|
10
thinkorswim
Group, Inc.
Notes to
Consolidated Financial
Statements (Continued)
Management has determined that no valuation allowance is needed
given the expectation of future taxable income which will exceed
the amounts necessary to realize the deferred tax asset.
|
|
9.
|
Commitments
and Contingencies
|
The Company leases office space under an operating lease
agreement which expires during 2005. Minimum required rental
payments in 2005 under this lease obligation, including real
estate taxes and operating expenses, is $163,069.
Rent expense for the year ended December 31, 2004 was
$164,522.
The Company has accrued for the estimated outcome of litigation
surrounding a non-customer related claim. The settlement, legal
and arbitration fees are estimated at $442,800 and are included
in Other Liabilities. The Company does not expect resolution of
this matter to have a material adverse effect on the
Companys financial position or results of operations.
Management of the Company is not aware of any legal proceedings
or other matters arising out of its activities as a
broker-dealer in securities that would result in a material
adverse effect on the Companys financial position or
results of operations.
In the normal course of business, the Company enters into
contracts which contain indemnification provisions, such as
purchase contracts, service agreements and leasing agreements.
Under the provisions of these contracts, the Company may
indemnify counterparties to the contracts for certain aspects of
the Companys past conduct if other parties fail to
perform, or if certain events occur. These indemnification
provisions will vary based upon the contract. The Company may,
in turn, obtain indemnifications from other parties in certain
contracts. These indemnification provisions are not expected to
have a material impact on the Companys financial position
of results of operations.
|
|
10.
|
Off-Balance
Sheet Risk and Concentration of Credit Risk
|
Credit risk is the amount of accounting loss the Company would
incur if the counterparty failed to perform its obligations
under contractual terms. Substantially all of the clearing and
depository operations of the Company are performed by its
clearing broker on a fully disclosed basis pursuant to a
clearance agreement. The Companys exposure to credit risk
associated with the nonperformance of counterparties in
fulfilling their contractual obligations pursuant to securities
transactions can be directly impacted by volatile securities
markets, credit markets and regulatory changes.
In the normal course of business, the Companys clearing
broker makes margin loans to the Companys customers, which
are collateralized by customer securities. In permitting the
customers to purchase securities on margin, the clearing broker
is exposed to the risk of a market decline that could reduce the
value of the collateral held below the customers
indebtedness before the collateral can be sold, which could
result in losses to the clearing broker. The Companys
agreement with the clearing broker requires the Company to
reimburse the clearing broker for any losses incurred related to
customers introduced by the Company. The Company seeks to
control the risk associated with customer activities by making
credit inquiries when establishing customer relationships and by
monitoring customer trading activity.
The Company enters into repurchase agreements under which the
Company purchases a security at a specified price with the
intention to sell the same security to the same counterparty at
a fixed or determinable price at a future date. The Company has
not experienced any losses in such agreements. Management
believes that the Company is not exposed to any significant
credit risk on repurchase agreements.
The Company maintains its cash in bank deposit accounts which,
at times, may exceed federally insured limits. The Company has
not experienced any losses in such accounts. Management believes
that the Company is not exposed to any significant credit risk
on bank deposits.
11
thinkorswim
Group, Inc.
Notes to
Consolidated Financial
Statements (Continued)
During May 2005, the Company entered into new lease agreements
for office facilities requiring minimum annual rental payments,
excluding escalations and increases in operating expenses and
taxes, as follows:
|
|
|
|
|
Year Ending
December 31,
|
|
|
|
|
2005
|
|
$
|
134,364
|
|
2006
|
|
|
227,500
|
|
2007
|
|
|
294,262
|
|
2008
|
|
|
302,271
|
|
2009
|
|
|
310,427
|
|
After 2009
|
|
|
811,799
|
|
|
|
|
|
|
Total
|
|
$
|
2,080,623
|
|
|
|
|
|
|
12
thinkorswim
Group, Inc.
Consolidated
Financial Statements
December 31,
2003
thinkorswim
Group, Inc.
Index
December 31,
2003
|
|
|
|
|
|
|
Page(s)
|
|
|
|
|
1
|
|
Consolidated Financial
Statements
|
|
|
|
|
|
|
|
2
|
|
|
|
|
3
|
|
|
|
|
4
|
|
|
|
|
5
|
|
|
|
|
6-11
|
|
Report of
Independent Auditors
To the Board of Directors and Stockholders of
thinkorswim Group, Inc.:
In our opinion, the accompanying consolidated statement of
financial condition and the related consolidated statements of
income, of changes in stockholders equity and of cash
flows present fairly, in all material respects, the financial
position of thinkorswim Group, Inc. and its subsidiaries
(collectively, the Company) at December 31,
2003, and the results of their operations and their cash flows
for the year then ended in conformity with accounting principles
generally accepted in the United States of America. These
financial statements are the responsibility of the
Companys 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
auditing standards generally accepted in the United States of
America 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 our opinion.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
October 11, 2006
1
thinkorswim
Group, Inc.
Consolidated
Statement of Financial Condition
December 31,
2003
|
|
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
6,194,952
|
|
Receivable from clearing broker
|
|
|
1,300,882
|
|
Securities owned, at market value
|
|
|
4,055
|
|
Software and website development,
at cost net of accumulated amortization of $911,677
|
|
|
1,274,935
|
|
Furniture, equipment and leasehold
improvements, at cost net of accumulated depreciation and
amortization of $513,113
|
|
|
347,981
|
|
Deferred tax asset
|
|
|
1,823,029
|
|
Prepaid expenses and other assets
|
|
|
201,928
|
|
|
|
|
|
|
Total assets
|
|
$
|
11,147,762
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Accrued compensation and related
benefits
|
|
$
|
380,230
|
|
Accounts payable and accrued
expenses
|
|
|
371,831
|
|
Securities sold, not yet
purchased, at market value
|
|
|
10,418
|
|
Prepaid software license
|
|
|
1,000,000
|
|
Income taxes payable
|
|
|
749,000
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,511,479
|
|
|
|
|
|
|
Convertible preferred stock,
$0.001 par value, authorized 400,000 shares, 59,060
issued and outstanding
|
|
|
59
|
|
Common stock, $0.001 par
value, authorized 5,000,000 shares, 602,462 issued and
outstanding
|
|
|
602
|
|
Additional paid-in capital
|
|
|
7,627,783
|
|
Retained earnings
|
|
|
1,007,839
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
8,636,283
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
11,147,762
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
2
thinkorswim
Group, Inc.
Consolidated
Statement of Income
Year
Ended December 31, 2003
|
|
|
|
|
Revenues
|
|
|
|
|
Commissions
|
|
$
|
12,249,028
|
|
Management and subscription fees
|
|
|
341,039
|
|
Interest and dividends
|
|
|
443,641
|
|
Other
|
|
|
63,004
|
|
|
|
|
|
|
Total revenues
|
|
|
13,096,712
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
Employee compensation and benefits
|
|
|
3,528,627
|
|
Clearing and brokerage fees
|
|
|
3,444,791
|
|
Professional legal fees
|
|
|
133,485
|
|
Technology, communications and
market data
|
|
|
716,720
|
|
Marketing, advertising and
promotion
|
|
|
1,842,657
|
|
Depreciation and amortization
|
|
|
612,151
|
|
Occupancy
|
|
|
190,514
|
|
Other
|
|
|
521,889
|
|
|
|
|
|
|
Total expenses
|
|
|
10,990,834
|
|
|
|
|
|
|
Income before income tax benefit
|
|
|
2,105,878
|
|
Income tax benefit (see
note 7)
|
|
|
1,036,329
|
|
|
|
|
|
|
Net income
|
|
$
|
3,142,207
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
3
thinkorswim
Group, Inc.
Consolidated
Statement of Changes in Stockholders Equity
Year
Ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Additional
|
|
|
Retained
|
|
|
|
|
|
|
Capital Stock
|
|
|
Paid-in
|
|
|
Paid-in
|
|
|
Earnings/
|
|
|
Total
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Capital
|
|
|
Capital
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
(Preferred)
|
|
|
(Common)
|
|
|
Deficit
|
|
|
Equity
|
|
|
Balance, December 31,
2002
|
|
|
59,060
|
|
|
$
|
59
|
|
|
|
602,462
|
|
|
$
|
602
|
|
|
$
|
|
|
|
$
|
6,274,457
|
|
|
$
|
(2,134,368
|
)
|
|
$
|
4,140,750
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,142,207
|
|
|
|
3,142,207
|
|
Stock options (see note 5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,353,326
|
|
|
|
|
|
|
|
1,353,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2003
|
|
|
59,060
|
|
|
$
|
59
|
|
|
|
602,462
|
|
|
$
|
602
|
|
|
$
|
|
|
|
$
|
7,627,783
|
|
|
$
|
1,007,839
|
|
|
$
|
8,636,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
4
thinkorswim
Group, Inc.
Consolidated
Statement of Cash Flows
Year
Ended December 31, 2003
|
|
|
|
|
Cash flows from operating
activities
|
|
|
|
|
Net income
|
|
$
|
3,142,207
|
|
Adjustments to reconcile net
income to net cash provided by operating activities:
|
|
|
|
|
Depreciation and amortization
|
|
|
612,151
|
|
Stock option expense
|
|
|
1,353,326
|
|
Deferred income taxes
|
|
|
(1,755,329
|
)
|
(Increase)/decrease in operating
assets
|
|
|
|
|
Receivable from clearing broker
|
|
|
(397,725
|
)
|
Securities owned
|
|
|
(1,715
|
)
|
Prepaid expenses and other assets
|
|
|
(120,529
|
)
|
Increase/(decrease) in operating
liabilities
|
|
|
|
|
Accrued compensation and related
benefits
|
|
|
259,948
|
|
Accounts payable and accrued
expenses
|
|
|
130,548
|
|
Securities sold, not yet purchased
|
|
|
8,558
|
|
Prepaid software license
|
|
|
1,000,000
|
|
Income taxes payable
|
|
|
749,000
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
4,980,440
|
|
|
|
|
|
|
Cash flows from investing
activities
|
|
|
|
|
Purchase of furniture, equipment
and leasehold improvements
|
|
|
(157,724
|
)
|
Software and website development
costs
|
|
|
(948,032
|
)
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(1,105,756
|
)
|
|
|
|
|
|
Net increase in cash and cash
equivalents
|
|
|
3,874,684
|
|
Cash and cash
equivalents
|
|
|
|
|
Beginning of year
|
|
|
2,320,268
|
|
|
|
|
|
|
End of year
|
|
$
|
6,194,952
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information
|
|
|
|
|
Cash paid for interest
|
|
$
|
|
|
Cash paid for income taxes
|
|
$
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
5
thinkorswim
Group, Inc.
December 31, 2003
Organization
and Basis of Presentation