<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 12, 1999
REGISTRATION NO. 333-81559
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------------
AMERITRADE HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 47-0642657
(State of incorporation) (I.R.S. Employer Identification No.)
ROBERT T. SLEZAK
4211 SOUTH 102ND STREET AMERITRADE HOLDING CORPORATION
OMAHA, NEBRASKA 68127 4211 SOUTH 102ND STREET
(402) 331-7856 OMAHA, NEBRASKA 68127
(Address, including zip code, and telephone (402) 331-7856
number, including area code, of (Name, address, including zip code, and telephone
registrant's principal executive offices) number, including area code, of agent for service)
</TABLE>
Copies to:
<TABLE>
<S> <C>
CAROL S. RIVERS, ESQ. JOHN EVANGELAKOS, ESQ.
MAYER, BROWN & PLATT SULLIVAN & CROMWELL
190 SOUTH LASALLE STREET 125 BROAD STREET
CHICAGO, ILLINOIS 60603 NEW YORK, NEW YORK 10004
(312) 782-0600 (212) 558-4000
</TABLE>
----------------------
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TITLE OF SHARES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(1)(2) REGISTRATION FEE(3)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A common stock, par value
$.01 per share............... 16,100,000 $38.13 $613,893,000 $170,662
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) A portion of the shares to be registered represents shares that are to be
offered outside of the United States but that may be resold from time to
time in the United States. Such shares are not being registered for the
purposes of sales outside the United States. Includes up to 2,100,000 shares
subject to the Underwriters' over-allotment options.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(3) Of which $155,680 was previously paid.
----------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
EXPLANATORY NOTE
This Registration Statement relates to an offering of up to 10,000,000
shares of Class A common stock (or 11,500,000 shares if the underwriters'
over-allotment options are exercised in full) for sale directly to the public,
of which 8,500,000 shares will be offered by us and 1,500,000 will be offered by
the selling stockholders identified in this prospectus, and up to 4,000,000
shares of Class A common stock (or 4,600,000 shares if the underwriters' over-
allotment option is exercised in full) that may be delivered by the Ameritrade
Automatic Common Exchange Security Trust, a non-diversified closed-end
management investment company, to holders of its Automatic Common Exchange
Securities upon exchange of those securities. The Automatic Common Exchange
Securities are being offered pursuant to a separate prospectus of the Ameritrade
Automatic Common Exchange Security Trust (the "Trust Prospectus") included in a
registration statement on Form N-2 (Registration Nos. 333-77547 and 811-9319).
This Registration Statement contains two forms of prospectus: one to be
used in connection with the offerings by us and the selling stockholders of
Class A common stock and one to be attached to the Trust Prospectus. The
prospectus to be attached to the Trust Prospectus will be identical to the one
used for the offerings of Class A common stock, except for the front and back
cover pages and except that the prospectus to be attached to the Trust
Prospectus contains additional sections entitled "Plan of Distribution" and
"Trust Prospectus" and does not contain a section entitled "Underwriting".
<PAGE> 3
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
[AMERITRADE HOLDING CORPORATION LOGO]
Subject to Completion. Dated July 12, 1999.
10,000,000 Shares
AMERITRADE HOLDING CORPORATION
Class A Common Stock
----------------------
This is an offering of shares of Class A common stock of Ameritrade Holding
Corporation. This prospectus relates to an offering of 8,000,000 shares in the
United States. In addition, 2,000,000 shares are being offered outside the
United States in an international offering.
Holding is offering 8,500,000 of the shares to be sold in the offerings.
The selling stockholders identified in this prospectus are offering an
additional 1,500,000 shares. Holding will not receive any of the proceeds from
the sale of the shares by the selling stockholders.
In addition to the offerings described in this prospectus, the Ameritrade
Automatic Common Exchange Security Trust (the "TRACES Trust") stockholders named
in this prospectus are offering up to 4,000,000 shares of Class A common stock
(or up to 4,600,000 shares if the underwriters' over-allotment option is
exercised in full) that may be delivered by the TRACES Trust to holders of
Automatic Common Exchange Securities of the TRACES Trust upon exchange of such
securities on the Exchange Date as defined in the TRACES Trust prospectus (the
"Trust Prospectus"). The Automatic Common Exchange Securities are being sold by
the TRACES Trust in an offering described in the Trust Prospectus. The
respective closings of the offerings of the Class A common stock and the
Automatic Common Exchange Securities are not dependent upon one another.
The Class A common stock is quoted on The Nasdaq National Market under the
symbol "AMTD". The last reported sale price of the Class A common stock on July
9, 1999 was $38.13 per share.
The Class B common stock, which is not being offered, is entitled to elect
a majority of Holding's board of directors. The Class A common stock is entitled
to elect the remaining directors. See "Description of Capital Stock".
See "Risk Factors" beginning on page 8 to read about factors you should
consider before buying shares of the Class A common stock.
----------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
----------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- --------
<S> <C> <C>
Initial price to public..................................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Holding....................... $ $
Proceeds, before expenses, to the selling stockholders...... $ $
</TABLE>
To the extent the underwriters sell more than 10,000,000 shares of the
Class A common stock, the underwriters have the option to purchase up to an
additional 1,500,000 shares from one of the selling stockholders at the initial
price to public less the underwriting discount.
----------------------
The underwriters expect to deliver the shares against payment in New York,
New York, on , 1999.
GOLDMAN, SACHS & CO.
CREDIT SUISSE FIRST BOSTON
DEUTSCHE BANC ALEX. BROWN
LEHMAN BROTHERS
RAYMOND JAMES & ASSOCIATES, INC.
U.S. BANCORP PIPER JAFFRAY
----------------------
Prospectus dated , 1999.
<PAGE> 4
[LOGO]
AMERITRADE -- THE WAY TO TRADE. PERIOD.
[PICTURES]
TECHNOLOGY
LEADERSHIP
INNOVATION
FREEDOM
POWER
INDEPENDENCE
CONVENIENCE
VALUE
CONTROL
<PAGE> 5
SUMMARY
The following summary highlights selected information from this prospectus.
It does not contain all of the information that is important to you. You should
carefully read this entire prospectus before making an investment in the Class A
common stock. The terms "we" and "us" as used in this prospectus refer to
Ameritrade Holding Corporation ("Holding") and its operating subsidiaries
Ameritrade (Inc.) ("Ameritrade"), Accutrade, Inc. ("Accutrade"), Advanced
Clearing, Inc. ("Advanced Clearing"), AmeriVest, Inc. ("AmeriVest") and OnMoney
Financial Services Corporation ("OnMoney"), collectively. Our fiscal year ends
on the last Friday of each September. Unless otherwise indicated, (1) dollar
amounts have been rounded to the nearest one hundred thousand and (2) the
information presented herein assumes no exercise by the underwriters of their
over-allotment options.
OUR COMPANY
We are a leading provider of online discount brokerage services. We provide
technology-based brokerage services to retail investors through a variety of
mediums, primarily through the Internet. Our services appeal to a broad market
of self-directed retail investors who are value conscious. We use our low-cost
platform to offer brokerage services to investors at prices that are
significantly lower than prices offered by our major competitors. Our goal is to
provide the best execution using the best information at the best value.
We are an innovator in electronic brokerage services. We were the first
brokerage firm to offer touch-tone trading in 1988 and the first to offer
trading over the Internet in 1994. In 1997, we embarked upon an aggressive
marketing campaign to build awareness of the Ameritrade brand and to attract
investors to online trading. At the same time, we introduced our "8 bucks a
trade" program and set a price standard among major online discount brokerage
firms that remains in place today.
We believe that we have the lowest operating cost per transaction of any
online discount brokerage firm. We have built and continue to invest in a
proprietary trade processing platform that is both cost efficient and highly
scalable. We also have made significant strategic investments in building the
Ameritrade brand. As a result, our acquisition cost per new account is among the
lowest of our competitors.
We believe that our history of innovation, cost control and brand building
has enabled us to capitalize on the dramatic growth in online investing.
- Core discount brokerage accounts increased to approximately 428,000 at
March 26, 1999 from approximately 306,000 at September 25, 1998 and
approximately 98,000 at September 26, 1997.
- Average daily trading volume during the quarter ended March 26, 1999
increased to approximately 52,000 executed transactions from
approximately 24,000 during the quarter ended September 25, 1998 and
approximately 8,500 during the quarter ended September 26, 1997.
- Total assets in customer accounts increased to $19.5 billion at March 26,
1999 from $11.4 billion at September 25, 1998 and $7.3 billion at
September 26, 1997.
- Pre-advertising operating expenses per trade decreased to $12.51 for the
quarter ended March 26, 1999 from $17.37 for the quarter ended September
25, 1998 and $23.24 for the quarter ended September 26, 1997.
We expect online brokerage activity to continue to expand, creating
opportunities for further growth. According to International Data Corporation
("IDC"), the total number of online customer accounts in the United States has
grown from approximately 1.5 million at the end of
1
<PAGE> 6
1996 to approximately 6.4 million at the end of 1998. IDC also estimates that
our market share of online customer accounts was approximately 6% at March 26,
1999. Based on reports of industry analysts, we believe that our market share of
average daily trades executed online was over 8% for the quarter ended March 26,
1999, marking our eighth consecutive quarter of average daily online trade
volume market share gains, a record unmatched by any other firm in the online
brokerage industry. We believe that our significant and growing market share,
low customer acquisition costs and low pre-advertising operating expenses per
trade give us a competitive advantage in the online discount brokerage industry.
We have experienced significant growth since we began offering discount
brokerage services in 1975. Our net revenues have grown at a compound average
annual rate of 45% over the past five fiscal years. Our pre-advertising net
income before taxes has grown at a compound average annual rate of 34% during
the same period. From fiscal 1993 to fiscal 1997, our net income grew at a
compound average annual rate of 35%. In early fiscal 1998, we significantly
increased advertising and infrastructure expenditures to aggressively expand our
customer base. As a result, our net income in fiscal 1998 decreased to $0.2
million, although our pre-advertising operating margin in fiscal 1998 remained
strong at 33%. Our average annual return on equity since 1975 has been 38%.
BUSINESS OPERATIONS
Following is a summary of our operating subsidiaries:
- AMERITRADE, our principal operating subsidiary, provides retail brokerage
services targeted at value conscious investors who trade primarily
through the Internet. Ameritrade offers a full range of trading services
and focuses on providing a compelling price point and value to retail
customers. In addition to the Internet, Ameritrade provides access to its
services through automated touch-tone telephone systems, personal digital
assistants and registered representatives. Ameritrade customers can
invest in common and preferred stocks, mutual funds, options, corporate
and municipal bonds, treasury obligations and other securities.
Ameritrade also offers a wide range of informational services and
educational tools to its customers.
- ACCUTRADE also offers retail brokerage services, targeting investors who
desire a higher degree of personalized customer service.
- ADVANCED CLEARING provides clearing and execution services to Ameritrade
and Accutrade, as well as to independent broker-dealers and other
correspondents.
- AMERIVEST provides wholesale discount brokerage services to depository
institutions, including banks, savings and loans and credit unions.
In addition, we are developing an Internet-based personal financial
management system for individual investors through our OnMoney subsidiary.
BUSINESS STRATEGY
Our business strategy is to capitalize on the growth of the online
brokerage industry. The key elements of our business strategy are as follows:
- Establish Ameritrade as the dominant brand in online trading;
- Focus on online discount brokerage services;
- Expand our capacity and infrastructure to meet expected increases in
trading volume;
- Continue to offer innovative technologies and service enhancements to our
customers;
- Be the lowest cost provider of quality brokerage services; and
- Expand our access to international customers.
2
<PAGE> 7
Our principal executive offices are located at 4211 South 102nd Street,
Omaha, Nebraska 68127, and our telephone number is (402) 331-7856.
RECENT DEVELOPMENTS
We continued to experience significant growth during the quarter ended June
25, 1999. Net revenues for the quarter were $78.1 million, a 97% increase over
the corresponding period in fiscal 1998. Net income for the quarter was $8.9
million, or $0.05 per share, compared to $5.9 million, or $0.03 per share, for
the corresponding period in fiscal 1998. Advertising expenses for the quarter
were $12.1 million, compared to $5.2 million for the corresponding period in
fiscal 1998. Pre-advertising operating expenses per trade for the quarter
decreased to $13.86 from $18.61 for the corresponding period in fiscal 1998.
Pre-advertising net income before taxes for the period was $26.0 million, a 79%
increase over the corresponding period in fiscal 1998.
We opened a record 84,000 new core discount brokerage accounts in the
quarter ended June 25, 1999. Core discount brokerage accounts increased to
approximately 505,000. Average daily trading volume during the quarter increased
to approximately 60,000 executed transactions, and total assets in customer
accounts increased to $22.6 billion.
3
<PAGE> 8
THE OFFERINGS
Class A common stock:
Offered by Holding.................... 8,500,000 shares
Offered by the selling stockholders... 1,500,000 shares
Total......................... 10,000,000 shares
U.S. offering......................... 8,000,000 shares
International offering................ 2,000,000 shares
Total......................... 10,000,000 shares
Common stock to be outstanding after the
offerings:
Class A common stock.................. 166,563,640 shares
Class B common stock.................. 16,372,800 shares
Total......................... 182,936,440 shares
In addition to the offerings described in this prospectus, the TRACES Trust
stockholders named in this prospectus are offering up to 4,000,000 shares of
Class A common stock (or up to 4,600,000 shares if the underwriters'
over-allotment option is exercised in full) that may in certain circumstances be
delivered by the TRACES Trust to holders of its Automatic Common Exchange
Securities upon exchange of those securities on the Exchange Date.
Voting Rights........................... Except as otherwise required by law
and with respect to the election of
directors, the holders of Class A
common stock and the holders of
Class B common stock have one vote
per share and vote as a single
class with respect to all matters
submitted to a vote of the holders
of common stock. The Class B common
stock is not being offered in the
offerings. The Class B common stock
is entitled to elect a majority of
our directors. The Class A common
stock is entitled to elect the
remainder of our directors. We
currently have nine directors.
Except with respect to the ability
to elect directors and the
conversion rights discussed below,
the Class A common stock and the
Class B common stock are identical
in all respects. If all shares of
Class B common stock are converted
into Class A common stock or if no
shares of Class B common stock are
otherwise outstanding, the holders
of Class A common stock will be
entitled to elect all of our
directors, subject to any rights of
the holders of preferred stock. See
"Description of Capital
Stock -- Common Stock -- Voting
Rights".
4
<PAGE> 9
Conversion of Class B Common Stock...... Each share of Class B common stock
is convertible into one share of
Class A common stock at any time at
the election of the holder of the
share of Class B common stock. Each
share of Class B common stock
automatically converts on a
share-for-share basis into one
share of Class A common stock in
the event of a transfer of the
share of Class B common stock to
any person other than J. Joe
Ricketts, Marlene M. Ricketts, the
lineal descendants of J. Joe
Ricketts and Marlene M. Ricketts
and their spouses or any trust or
other person or entity that holds
common stock for the benefit of any
of those members of the Ricketts
family (the "Control Group"). In
addition, each share of Class B
common stock automatically converts
on a share-for-share basis into one
share of Class A common stock if
the number of shares of outstanding
common stock held by the Control
Group falls below 20% of the number
of shares of outstanding common
stock. See "Description of Capital
Stock -- Conversion Rights".
Use of Proceeds......................... We will use the proceeds from the
offerings for general corporate
purposes, including promoting the
Ameritrade brand name through
advertising, building
infrastructure, developing and
acquiring new forms of technology,
retiring existing indebtedness and
potentially acquiring businesses or
assets. See "Use of Proceeds".
Dividends............................... We have never declared or paid any
cash dividends on our capital stock
and do not anticipate paying any
cash dividends to our stockholders
in the foreseeable future. See
"Dividend Policy".
Listing................................. The Class A common stock is quoted
on The Nasdaq National Market.
Nasdaq National Market Symbol........... AMTD
5
<PAGE> 10
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The information in the following table is based on historical financial
information contained in our prior filings with the Securities and Exchange
Commission ("SEC"), including our annual report on Form 10-K for the fiscal year
ended September 25, 1998 and our report on Form 10-Q for the period ended March
26, 1999. This historical financial information is also included elsewhere in
this prospectus for your convenience. The following summary financial
information should be read in conjunction with this historical financial
information, including the notes that accompany such financial information. Per
share amounts have been adjusted to reflect a three-for-one stock split
effective on July 2, 1999.
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED ENDED
---------------------------------------------------------- -----------------------
SEPT. 30, SEPT. 29, SEPT. 27, SEPT. 26, SEPT. 25, MAR. 27, MAR. 26,
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
INCOME DATA:
Revenues:
Commissions and clearing
fees....................... $ 20,386 $ 23,977 $ 36,470 $ 51,937 $ 85,644 $ 35,209 $ 83,566
Interest revenue............. 9,856 16,297 22,518 36,623 66,716 27,909 47,715
Investment income and other.. 1,119 2,608 6,391 7,107 11,834 5,008 4,615
-------- -------- -------- -------- ---------- ---------- ----------
Total revenues......... 31,361 42,882 65,379 95,667 164,194 68,126 135,896
Interest expense............. 3,912 7,862 11,040 18,429 29,279 12,373 20,117
-------- -------- -------- -------- ---------- ---------- ----------
Net revenues........... 27,449 35,020 54,339 77,238 134,915 55,753 115,779
Pre-advertising operating
expense...................... 14,012 19,348 28,385 41,842 90,770 39,052 74,461
Advertising expense............ 5,987 4,842 7,537 13,971 43,614 34,513 22,797
-------- -------- -------- -------- ---------- ---------- ----------
Total expenses
excluding interest... 19,999 24,190 35,922 55,813 134,384 73,565 97,258
Income (loss) before provision
for income taxes............. 7,450 10,830 18,417 21,425 531 (17,812) 18,521
Provision (benefit) for income
taxes........................ 2,619 3,799 7,259 7,603 321 (6,292) 6,701
-------- -------- -------- -------- ---------- ---------- ----------
Net income (loss)...... $ 4,831 $ 7,031 11,158 13,822 $ 210 $ (11,520) $ 11,820
======== ======== ======== ======== ========== ========== ==========
Basic earnings (loss) per
share........................ $ 0.03 $ 0.05 $ 0.07 $ 0.08 $ 0.00 $ (0.07) $ 0.07
Diluted earnings (loss) per
share........................ $ 0.03 $ 0.05 $ 0.07 $ 0.08 $ 0.00 $ (0.07) $ 0.07
Weighted average shares
outstanding -- basic......... 154,271 153,766 153,766 165,227 174,188 174,210 174,247
Weighted average shares
outstanding -- diluted....... 154,271 153,766 153,766 165,233 174,465 174,320 175,528
OPERATING DATA:
Average customer trades per
day.......................... 1,519 2,055 3,670 6,571 18,407 13,909 42,179
Total assets in customer
accounts (in billions)....... $ 1.7 $ 2.4 $ 4.0 $ 7.3 $ 11.4 $ 10.1 $ 19.5
Number of core accounts(1)..... 18,000 38,000 52,000 98,000 306,000 217,000 428,000
Net revenue per trade.......... $ 70.31 $ 67.09 $ 58.76 $ 46.65 $ 29.20 $ 32.07 $ 21.96
Pre-advertising operating
expense per trade............ $ 35.89 $ 37.07 $ 30.69 $ 25.27 $ 19.65 $ 22.46 $ 14.12
Operating margin(2)............ 27% 31% 34% 28% 0% (32)% 16%
Pre-advertising operating
margin(3).................... 49% 45% 48% 46% 33% 30% 36%
Return on average equity(4).... 49% 47% 44% 28% 0% (21)% 7%
</TABLE>
6
<PAGE> 11
<TABLE>
<CAPTION>
SEPT. 30, SEPT. 29, SEPT. 27, SEPT. 26, SEPT. 25, MAR. 27, MAR. 26,
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA:
Cash and segregated
investments.................. $101,352 $125,456 $191,436 $373,286 $ 527,982 $ 543,236 $ 606,286
Receivable from customers and
correspondents, net.......... 99,627 130,187 166,075 325,407 647,122 532,812 1,220,291
Total assets................... 216,991 287,105 401,679 757,357 1,290,402 1,125,729 2,104,989
Payable to customers and
correspondents............... 198,539 251,862 356,943 666,279 1,136,082 1,038,698 1,686,378
Total long-term debt........... -- 7,097 4,853 -- 11,000 10,000 38,000
Stockholders' equity........... 12,473 19,504 30,662 66,989 84,572 55,447 204,305
</TABLE>
- ---------------
(1) Core accounts consist of open accounts in our discount brokerage
subsidiaries.
(2) Operating margin is computed by dividing income before provision for income
taxes by net revenues.
(3) Pre-advertising operating margin is computed by dividing income before
provision for income taxes plus advertising expenses by net revenues.
(4) Return on average equity is computed by dividing net income by average
stockholders' equity on a quarterly basis. Six month results are not
annualized.
7
<PAGE> 12
RISK FACTORS
You should carefully consider the risks described below before making an
investment in the Class A common stock.
OUR BUSINESS COULD BE HARMED BY MARKET FLUCTUATIONS AND OTHER SECURITIES
INDUSTRY RISKS
Substantially all of our revenues are derived from discount securities
brokerage and clearing and execution services. Like other brokerage businesses,
we are directly affected by economic and political conditions, broad trends in
business and finance and changes in volume and price levels of securities
transactions. We are particularly affected by volatility in technology and
Internet-related stocks because a significant portion of our customers invest in
these types of stocks. In recent months, the U.S. securities markets have
fluctuated considerably. Severe market fluctuations in the future could have a
material adverse effect on our business, financial condition and operating
results. Reduced trading volumes and prices have historically resulted in
reduced transaction revenues. In addition, when trading volume is low, our
profitability may be adversely affected because our overhead is substantially
fixed.
THE MARKET PRICE OF THE CLASS A COMMON STOCK WILL FLUCTUATE AND COULD FLUCTUATE
SIGNIFICANTLY
The Class A common stock has experienced significant price fluctuations in
recent months. The stock market in general also has experienced substantial
price and volume fluctuations. The market prices of securities of
Internet-related companies, in particular, have been especially volatile. The
price of the Class A common stock could decrease substantially following the
offerings. In addition, because the market price of our Class A common stock
tends to fluctuate significantly, we may become the object of securities class
action litigation. Securities class action litigation may result in substantial
costs and a diversion of management's attention and resources.
SYSTEMS FAILURES AND DELAYS COULD HARM OUR BUSINESS
We receive and process trade orders through a variety of electronic
mediums, including the Internet, personal digital assistants and automated
touch-tone telephone systems. These methods of trading are heavily dependent on
the integrity of the electronic systems supporting them. Our systems and
operations are vulnerable to damage or interruption from human error, natural
disasters, power loss, computer viruses, intentional acts of vandalism and
similar events. Extraordinary trading volumes could cause our computer systems
to operate at an unacceptably low speed or even fail. We have experienced
periods of extremely high trading volume that has caused individual system
components or processes to fail, resulting in the temporary unavailability of
our Web site for online trading and delays in our telephone systems. On some
other occasions, high trading volume has caused significant delays in executing
trading orders, resulting in some customers' orders being executed at prices
they did not anticipate. In September 1998, we became subject to a putative
class action lawsuit resulting from systems failures and delays. See
"Business -- Legal Proceedings". In addition, from time to time, we reimburse
our customers for losses incurred in connection with systems failures and
delays. During the quarter ended December 31, 1998, we paid $3.1 million to
customers for execution price adjustments as a result of systems failures and
delays. Systems failures and delays may occur again in the future and could
cause:
- unanticipated disruptions in service;
- slower response times;
- decreased customer service and customer satisfaction; and
- harm to our reputation;
8
<PAGE> 13
which could result in:
- loss of customers;
- increased operating expenses;
- financial losses;
- additional litigation or other customer claims; and
- regulatory sanctions.
CAPACITY CONSTRAINTS OF OUR SYSTEMS COULD HARM OUR BUSINESS
As our business grows, we will need to expand and upgrade our transaction
processing systems, network infrastructure and other aspects of our technology.
Many of our systems are designed to accommodate additional growth without
redesign or replacement; however, we will need to make significant investments
in additional hardware and software to accommodate growth. We may not be able to
project accurately the rate or timing of growth in our business, or the cost to
expand and upgrade our systems and infrastructure to accommodate any growth in a
timely manner. Failure to make necessary expansions and upgrades to our systems
and infrastructure could lead to failures and delays, which could have a
material adverse effect on our business, financial condition and results of
operations.
SUBSTANTIAL COMPETITION COULD REDUCE OUR MARKET SHARE AND HARM OUR FINANCIAL
PERFORMANCE
The market for discount brokerage services, particularly electronic
brokerage services, is new, rapidly evolving and competitive. We expect the
competitive environment to continue in the future. We may not be able to compete
effectively with current or future competitors, which could have a material
adverse effect on our business, financial condition and results of operations.
We face direct competition from numerous discount brokerage firms, many of which
provide online services. We also encounter competition from the broker-dealer
affiliates of established full-commission brokerage firms as well as from
financial institutions, mutual fund sponsors and other organizations, some of
which provide or have announced that they intend to provide online discount
brokerage services. Some of our competitors have greater financial, technical,
marketing and other resources than we do. Some of our competitors offer a wider
range of services and financial products than we do and have greater name
recognition and a more extensive customer base than we do. We believe that the
general financial success of companies within the online securities industry
will continue to attract new competitors to the industry, such as banks,
software development companies, insurance companies, providers of online
financial information and others. These companies may provide a more
comprehensive suite of services than we do. In addition, our clearing operations
compete with numerous firms that provide clearing and execution services to the
securities industry.
WE MAY BE UNABLE TO MANAGE OUR RAPID GROWTH EFFECTIVELY
We have rapidly and significantly expanded our operations and anticipate
that continued expansion will be required to realize our growth strategy. Our
rapid growth has placed significant demands on our management and other
resources and these demands are likely to continue. If we are unable to
effectively manage our future growth, we may not be able to achieve the rate of
growth that we have experienced in the past. To manage our future growth, we
will need to attract, hire and retain highly skilled and motivated officers and
employees. In particular, we currently need to hire a significant number of
technical personnel and customer service representatives. Most of our
competitors face similar staffing shortages, which makes the competition for
qualified employees particularly intense. We also will need to improve existing
systems and/or implement new systems for operational and financial management
and training, integrating and managing our growing employee base.
9
<PAGE> 14
OUR FUTURE OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY
We may experience significant variation in our future quarterly results of
operations. These fluctuations may result from:
- the timing and size of advertising campaigns;
- introductions of or enhancements to online investing services by us or
our competitors;
- changes in trading volume in securities markets;
- changes in pricing policies by us or our competitors;
- disruptions or problems in our services to customers;
- changes in our business strategy;
- changes in the level of operating expenses needed to support projected
growth;
- actions taken by us that negatively affect short-term results but may
benefit long-term results; and
- general economic conditions.
Due to these factors, quarterly revenues and operating results are difficult to
forecast. We believe that period-to-period comparisons of our operating results
will not necessarily be meaningful, and you should not rely on them as an
indication of our future performance. In addition, our future quarterly
operating results may not consistently meet the expectations of securities
analysts or investors, which could have a material adverse effect on the market
price of the Class A common stock.
REGULATORY AND LEGAL UNCERTAINTIES COULD HARM OUR BUSINESS
The securities industry in the United States is subject to extensive
regulation under both federal and state laws. Broker-dealers are subject to
regulations covering all aspects of the securities business. Our operations and
profitability may be directly affected by:
- additional legislation;
- changes in rules promulgated by the SEC, the National Association of
Securities Dealers, Inc. ("NASD"), the Board of Governors of the Federal
Reserve System (the "Federal Reserve"), the various stock exchanges and
other self-regulatory organizations; or
- changes in the interpretation or enforcement of existing laws and rules.
The SEC, the NASD or other self-regulatory organizations and state
securities commissions can censure, fine, issue cease-and-desist orders to,
suspend or expel a broker-dealer or any of its officers or employees. Our
ability to comply with applicable laws and rules is largely dependent on our
internal system to ensure compliance, as well as our ability to attract and
retain qualified compliance personnel. We could be subject to disciplinary or
other actions in the future due to claimed noncompliance, which could have a
material adverse effect on our business, financial condition and results of
operations.
Recently, various regulatory and enforcement agencies have been reviewing
systems capacity, customer access, best execution practices, other service
issues and advertising claims as they relate to the discount and online
brokerage industry. These reviews could result in enforcement actions or new
regulations, either of which could have a material adverse effect on our
business, financial condition and results of operations.
Securities industry regulators are currently reviewing the extent to which
clearing firms, such as Advanced Clearing, will be held accountable for the
improper activities of introducing brokers
10
<PAGE> 15
for which they provide clearing services. Our procedures may not be sufficient
to protect us from liability for the acts of introducing brokers under current
or future laws and regulations.
In addition, we use the Internet as a major distribution channel to provide
services to our customers. Due to the increasing popularity of the Internet, it
is possible that new laws and regulations may be adopted dealing with issues
such as user privacy and the pricing, content and quality of products and
services. These laws and regulations might increase our cost of using, or limit
our ability to use, the Internet as a distribution channel. As a result, the
adoption of these laws and regulations could have a material adverse effect on
our business, financial condition and results of operations.
We intend to expand our business in U.S. securities to other countries. We
will need to comply with the relevant regulations of each country in which we
conduct business. Our international expansion may be limited by the compliance
requirements of these jurisdictions.
THE SUCCESS OF OUR BUSINESS WILL DEPEND ON CONTINUED GROWTH OF INTERNET COMMERCE
The market for online discount brokerage services is at an early stage of
development and is rapidly evolving. Consequently, demand and market acceptance
for recently introduced services and products are subject to a high level of
uncertainty. A significant portion of our growth is related to acceptance of the
Internet as a method of commerce. The failure of commerce on the Internet to
grow at projected rates could have a material adverse effect on our business,
financial condition and results of operations.
THE SUCCESS OF OUR BUSINESS WILL DEPEND ON CONTINUED DEVELOPMENT AND MAINTENANCE
OF THE INTERNET INFRASTRUCTURE
The Internet has experienced, and is expected to continue to experience,
significant growth in the number of users and amount of traffic. Our success
will depend upon the development and maintenance of the Internet's
infrastructure to cope with this increased traffic. The failure to develop and
maintain the Internet's infrastructure could have a material adverse effect on
our business, financial condition and results of operations. The Internet has
experienced a variety of outages and other delays as a result of damage to
portions of its infrastructure and could face similar outages and delays in the
future. Outages and delays are likely to affect the level of Internet usage and
the processing of transactions on our Web site. In addition, the Internet could
lose its viability due to delays in the development or adoption of new standards
to handle increased levels of activity.
WE ARE HIGHLY DEPENDENT ON OUR KEY PERSONNEL
We are highly dependent on a small number of key executive officers. We
have entered into employment agreements with our key executive officers but do
not maintain "key person" life insurance policies on any of our officers. Our
success has been, and will be, dependent to a large degree on our ability to
retain the services of our existing key executive officers and to attract and
retain additional qualified personnel in the future. Competition for these
personnel is intense. The loss of the services of any of our key executive
officers or the inability to identify, hire and retain other highly qualified
technical and managerial personnel in the future could have a material adverse
effect on our business, financial condition and results of operations.
THE RICKETTS FAMILY CONTROLS ALL FUNDAMENTAL MATTERS AFFECTING US
Following the offerings, J. Joe Ricketts, our Chairman and Co-Chief
Executive Officer, his family members and trusts held for their benefit
(collectively, the "Ricketts Family") will own approximately 54.5% of the Class
A common stock and all of the Class B common stock, which
11
<PAGE> 16
will constitute approximately 58.6% of the common stock. As a result, the
Ricketts Family will retain the ability to control all fundamental matters
affecting us, including:
- the election of the majority of our directors;
- the sale of substantially all of our assets;
- the merger of Holding with another entity;
- an amendment to our certificate of incorporation;
- the future issuance of common stock or other securities; and
- the declaration of any dividend payable on the common stock.
In addition, the Ricketts Family could convert a portion of its Class B common
stock into Class A common stock and subsequently dispose of such shares, thereby
substantially reducing its economic interest in Holding while retaining the
ability to elect the majority of our directors.
WE WILL NEED TO INTRODUCE NEW PRODUCTS AND SERVICES TO REMAIN COMPETITIVE
Our future success depends in part on our ability to develop and enhance
our products and services. There are significant technical and financial risks
in the development of new or enhanced products and services, including the risk
that we will be unable to:
- effectively use new technologies;
- adapt our services to emerging industry standards; or
- develop, introduce and market new or enhanced products and services.
If we are unable to develop and introduce enhanced or new products and services
quickly enough to respond to market or customer requirements, or if our products
and services fail to achieve market acceptance, our business, financial
condition and results of operations could be materially adversely affected.
WE MAY NOT BE ABLE TO KEEP UP WITH RAPID TECHNOLOGICAL AND OTHER CHANGES
The markets in which we compete are characterized by rapidly changing
technology, evolving industry standards, frequent new product and service
announcements, introductions and enhancements and changing consumer demands. We
may not be able to keep up with these rapid changes. In addition, the widespread
adoption of new Internet, networking or telecommunications technologies or other
technological changes could require us to incur substantial expenditures to
modify or adapt our services or infrastructure.
CHANGES IN PAYMENTS FOR ROUTING OUR CUSTOMERS' ORDERS COULD ADVERSELY AFFECT OUR
BUSINESS
We have arrangements with several execution agents to receive cash payments
in exchange for routing trade orders to these firms for execution. We expect
these payments to continue to decrease on a per trade basis, which could have a
material adverse effect on our business, financial condition and results of
operations. Receiving payments for routing customers' orders may not continue to
be permitted by the SEC, the NASD or other governmental and regulatory agencies
and courts. Furthermore, competition between execution agents and the
implementation by the SEC of order handling rules in January 1997 has made it
less profitable for execution agents to offer order flow payments to
broker-dealers. Payments made to us by execution agents for routing trade orders
were $9.1 million in fiscal 1997 and $10.9 million in fiscal 1998, and were $4.5
million for the six months ended March 27, 1998 and $10.3 million for the six
months ended March 26, 1999. Per trade payments decreased to $2.35 in fiscal
1998 from $5.51
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<PAGE> 17
in fiscal 1997, and decreased to $1.96 for the six months ended March 26, 1999
from $2.60 for the six months ended March 27, 1998.
OUR NETWORKS MAY BE VULNERABLE TO SECURITY RISKS
The secure transmission of confidential information over public networks is
a critical element of our operations. We have not in the past experienced
network security problems. However, our networks may be vulnerable to
unauthorized access, computer viruses and other security problems. Persons who
circumvent security measures could wrongfully use our confidential information
or our customers' confidential information or cause interruptions or
malfunctions in our operations. We may be required to expend significant
additional resources to protect against the threat of security breaches or to
alleviate problems caused by any breaches. We may not be able to implement
security measures that will protect against all security risks.
YEAR 2000 RISKS MAY HARM OUR BUSINESS
Many computer systems were not designed to handle dates beyond the year
1999. These systems, if not modified or replaced, could fail or create erroneous
results by or at the Year 2000. We have implemented a plan to address Year 2000
problems with our own systems. However, if we are unable to make our systems
Year 2000 compliant on a timely basis or if the costs associated with addressing
Year 2000 issues are greater than planned, our business, financial condition and
results of operations could be materially adversely affected. In addition, our
operations rely heavily on the integrity of computer systems of third parties,
such as broker-dealers, clearinghouses, stock exchanges and online and Internet
service providers. A systems failure affecting any of these parties due to Year
2000 issues would interfere with the trading process and, as a result, could
have a material adverse effect on our business, financial condition and results
of operations. For a description of our Year 2000 program, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000".
WE MUST COMPLY WITH NET CAPITAL REQUIREMENTS
The SEC, the NASD and various other regulatory agencies have stringent
rules with respect to the maintenance of specific levels of net capital by
securities broker-dealers. Net capital is an SEC-defined measure of a
broker-dealer's readily available liquid assets, reduced by its total
liabilities other than approved subordinated debt. All of our broker-dealer
subsidiaries are required to comply with the net capital requirements. If we
fail to maintain the required net capital, the SEC could suspend or revoke our
registration, or the NASD could expel us from membership, which could ultimately
lead to our liquidation. If the net capital rules are changed or expanded, or if
there is an unusually large charge against net capital, operations that require
the intensive use of capital would be limited. A large operating loss or charge
against net capital could adversely affect our ability to expand or even
maintain our present levels of business, which could have a material adverse
effect on our business, financial condition and results of operations.
OUR CLEARING OPERATIONS EXPOSE US TO LIABILITY FOR ERRORS IN CLEARING FUNCTIONS
Advanced Clearing provides clearing and execution services to each of our
discount brokerage businesses, as well as to independent broker-dealers,
depository institutions, registered investment advisors and financial planners.
Clearing services include the confirmation, receipt, settlement and delivery
functions involved in securities transactions. As a clearing broker, Advanced
Clearing also assumes direct responsibility for the possession and control of
customer securities and other assets and the clearance of customer securities
transactions. Self-clearing securities firms are subject to substantially more
regulatory control and examination than brokers that rely on others to perform
those functions, such as many of our competitors. Errors in
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<PAGE> 18
performing clearing functions, including clerical and other errors related to
the handling of funds and securities held by us on behalf of customers and
introducing brokers, could lead to civil penalties imposed by applicable
authorities as well as losses and liability in related lawsuits brought by
customers and others.
WE ARE EXPOSED TO CREDIT RISK
We make margin loans to customers collateralized by customer securities and
periodically borrow securities to cover trades. By permitting customers to
purchase securities on margin, we are subject to risks inherent in extending
credit, especially during periods of rapidly declining markets in which the
value of the collateral held by us could fall below the amount of a customer's
indebtedness. The inability of customers to repay their margin loans could
result in material losses to us. A significant portion of our net revenues is
derived from interest on margin loans. To the extent that these margin loans
exceed customer cash balances maintained with us, we generally must obtain
financing from third parties. We may not be able to obtain such financing on
favorable terms or in sufficient amounts.
WE MUST PROTECT OUR INTELLECTUAL PROPERTY
Our success and ability to compete are dependent to a significant degree on
fully protecting our intellectual property, which includes our proprietary
technology, trade identity and customer base. We rely on all modes of
intellectual property protection to protect our intellectual property, including
copyright, trade secret, trademark, domain name, patent and contract law.
Notwithstanding the precautions taken by us to protect our intellectual
property, it is possible that third parties may misappropriate, obtain, copy or
use without authorization, or otherwise infringe upon, our intellectual
property. It is also possible that third parties may independently develop
intellectual property similar to ours. Policing unauthorized use of our
intellectual property may be difficult because of difficulties in controlling
the ultimate destination or security of information or computer software
transmitted over the Internet. In addition, the laws of foreign countries may
afford different, and possibly inadequate, protection of our intellectual
property.
ACQUISITIONS AND STRATEGIC RELATIONSHIPS INVOLVE RISKS
We intend to pursue strategic acquisitions of businesses and technologies.
Acquisitions may entail numerous risks, including:
- difficulties in assessing values for acquired businesses and
technologies;
- difficulties in the assimilation of acquired operations and products;
- diversion of management's attention from other business concerns;
- assumption of unknown material liabilities of acquired companies;
- amortization of acquired intangible assets, which could reduce future
reported earnings; and
- potential loss of customers or key employees of acquired companies.
We may not be able to integrate successfully any operations, personnel, services
or products that we acquire in the future. In addition, we have established a
number of strategic relationships with online service providers and information
service providers. These relationships and others we may enter into in the
future are and will be important to our business and growth prospects. We may
not be able to maintain these relationships or develop new strategic alliances.
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<PAGE> 19
WE MAY NOT SUCCEED IN INTERNATIONAL MARKETS
We have limited experience in providing brokerage services internationally.
We may not succeed in marketing our services in international markets. In
addition, there are risks inherent in doing business in some international
markets that may include:
- less developed technological infrastructures;
- lower customer acceptance of, or access to, electronic channels;
- regulatory requirements, tariffs and other trade barriers;
- reduced protection for intellectual property rights;
- difficulties in staffing and managing foreign operations;
- less developed automation in exchanges, depositories and clearing
systems;
- fluctuations in currency exchange rates; and
- potentially adverse tax consequences.
Any of the factors described above could have a material adverse effect on our
future international operations.
CERTAIN PROVISIONS OF OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD MAKE A
TAKEOVER MORE DIFFICULT
Our certificate of incorporation, bylaws and Delaware corporate law contain
provisions that might make it more difficult for someone to acquire control of
us in a transaction not approved by our board of directors. These provisions
could also discourage proxy contests and make it more difficult for you and
other stockholders to elect directors other than the candidates nominated by our
board of directors and other stockholders. The existence of these provisions
could adversely affect the market price of the Class A common stock. In
addition, these provisions could have the effect of depriving stockholders of an
opportunity to sell their shares at a premium over prevailing market prices. For
a description of these provisions, see "Description of Capital Stock".
FUTURE SALES OF SHARES OF COMMON STOCK COULD ADVERSELY AFFECT THE MARKET PRICE
OF THE CLASS A COMMON STOCK
Sales of substantial amounts of common stock in the public market following
the offerings, or the perception that such sales could occur, could adversely
affect the market price of the Class A common stock and may make it more
difficult for us or for our stockholders to sell our equity securities in the
future at a time and at a price that we or they deem appropriate. Following the
offerings, there will be 182,936,440 shares of our common stock outstanding. The
10,000,000 shares of Class A common stock sold in the offerings and
approximately 71,036,440 additional shares of common stock will be freely
transferable without restriction or further registration under the Securities
Act of 1933. Approximately 101,900,000 shares of common stock will be
"restricted securities" as defined in Rule 144 under the Securities Act and may
not be resold in the absence of registration under the Securities Act or an
exemption from registration. All of these restricted securities currently can be
resold in the market without registration, subject in some cases to volume
limitations, manner of sale and other requirements of Rule 144.
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<PAGE> 20
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and the information incorporated by reference in it include
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend
that the forward-looking statements be covered by the safe harbor provisions for
forward-looking statements in these sections. In some cases, you can identify
these statements by our use of forward-looking words such as "may", "will",
"should", "anticipate", "estimate", "expect", "plan", "believe", "predict",
"potential" or "intend". All statements regarding our dividend policy, expected
financial condition and results of operations, expectations relating to Year
2000 issues, business strategy, forecasted demographic and economic trends
relating to our industry, plans for OnMoney, advertising and marketing plans and
anticipated expenses, planned investments in technology infrastructure and other
anticipated capital expenditures, expansion into international markets, hiring
plans and similar matters are forward-looking statements. You should be aware
that these statements and any other forward-looking statements in this
prospectus or incorporated herein by reference only reflect our expectations.
Actual events or results may differ substantially from our expectations.
Important factors that could cause our actual results to be materially different
from our expectations include those discussed in this prospectus under the
caption "Risk Factors". We undertake no obligation to update or revise publicly
any forward-looking statements, whether as a result of new information, future
events or otherwise.
USE OF PROCEEDS
We estimate that the net proceeds from the sale by us of 8,500,000 shares
of Class A common stock will be approximately $309,605,537. We will use these
proceeds for general corporate purposes, including promoting the Ameritrade
brand name through advertising, building infrastructure, developing and
acquiring new forms of technology, retiring existing indebtedness and
potentially acquiring businesses or assets. We will not receive any of the
proceeds from the sale of shares by the selling stockholders. Our revolving
credit facility requires us to repay all outstanding indebtedness under the
facility with the proceeds from some public offerings of common stock. For a
description of our revolving credit facility, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- Bank Loan Agreements".
DIVIDEND POLICY
We have not declared or paid cash dividends on any of our common stock. We
currently intend to retain all of our earnings, if any, for use in our business
and do not anticipate paying any cash dividends in the foreseeable future. Our
revolving credit agreement prohibits the payment of cash dividends. The payment
of any future dividends will be at the discretion of our board of directors in
accordance with the provisions of the revolving credit agreement and will depend
upon a number of factors, including future results of operations, financial
condition, capital requirements, general business conditions and other factors
that our board of directors may deem relevant.
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<PAGE> 21
MARKET PRICE OF CLASS A COMMON STOCK
We completed the initial public offering of our Class A common stock on
March 7, 1997, at a price per share of $1.25. Since March 4, 1997, our Class A
common stock has been quoted on The Nasdaq National Market under the symbol
"AMTD". The following table shows for the periods indicated the high and low
sales prices per share of our Class A common stock as reported by The Nasdaq
National Market. These prices reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions. These prices reflect the two-for-one stock splits effective August
18, 1998 and February 22, 1999 and the three-for-one stock split effective on
July 2, 1999.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL 1997
Second Quarter (beginning March 4, 1997).................... $ 1.88 $ 1.35
Third Quarter............................................... $ 1.53 $ 0.98
Fourth Quarter.............................................. $ 2.24 $ 1.22
FISCAL 1998
First Quarter............................................... $ 3.25 $ 1.50
Second Quarter.............................................. $ 2.59 $ 1.86
Third Quarter............................................... $ 2.74 $ 1.91
Fourth Quarter.............................................. $ 4.47 $ 2.16
FISCAL 1999
First Quarter............................................... $ 6.50 $ 1.88
Second Quarter.............................................. $22.50 $ 5.00
Third Quarter............................................... $62.79 $19.54
Fourth Quarter (through July 9, 1999)....................... $43.50 $26.83
</TABLE>
On July 9, 1999, the last reported sale price of our Class A common stock
on The Nasdaq National Market was $38.13 per share and there were 333 holders of
record, including The Depository Trust Company, which holds shares of Class A
common stock on behalf of an indeterminate number of beneficial owners.
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<PAGE> 22
CAPITALIZATION
The following table sets forth, as of March 26, 1999, (1) our actual
capitalization as adjusted to give effect to the three-for-one stock split
effective on July 2, 1999 and (2) our capitalization as further adjusted to give
effect to the offerings. You should read this table in conjunction with our
historical financial information, including the notes that accompany such
financial information.
<TABLE>
<CAPTION>
MARCH 26, 1999
---------------------------
ACTUAL AS ADJUSTED
------------ ------------
<S> <C> <C>
Total long-term debt........................................ $ 38,000,000 $ --
Stockholders' equity:
Preferred stock, $1 par value; authorized 3,000,000
shares, none issued.................................... -- --
Class A common stock, $.01 par value, 270,000,000 shares
authorized, 158,103,480 shares issued.................. 1,581,035 1,666,035
Class B common stock, convertible, $.01 par value,
18,000,000 shares authorized, 16,372,800 issued and
outstanding............................................ 163,728 163,728
Additional paid-in capital................................ 24,065,141 333,585,678
Retained earnings......................................... 55,576,576 55,576,576
Treasury stock (40,200 shares of Class A common stock).... (94,144) (94,144)
Accumulated other comprehensive income.................... 123,012,199 123,012,199
------------ ------------
Total stockholders' equity........................ 204,304,535 513,910,072
------------ ------------
Total capitalization............................ $242,304,535 $513,910,072
============ ============
</TABLE>
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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The selected financial data as of and for the fiscal year periods presented
below are derived from our consolidated financial statements, which have been
audited and reported upon by our independent auditors. The data presented for
the six month periods ended March 27, 1998 and March 26, 1999 are derived from
our unaudited financial statements and include, in the opinion of management,
all adjustments (consisting only of normal recurring accruals) necessary to
present fairly the data for such periods. The results for the six month period
ended March 26, 1999 are not necessarily indicative of the results to be
expected for the full fiscal year. The selected financial data presented below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the historical financial
information, including the notes that accompany such financial information,
included elsewhere in this prospectus and incorporated herein by reference. Per
share amounts have been adjusted to reflect the three-for-one stock split
effective on July 2, 1999.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
--------------------------------------------------------- -------------------
SEPT. 30, SEPT. 29, SEPT. 27, SEPT. 26, SEPT. 25, MAR. 27, MAR. 26,
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
Revenues:
Commissions and clearing fees............. $ 20,386 $ 23,977 $ 36,470 $ 51,937 $ 85,644 $ 35,209 $ 83,566
Interest revenue.......................... 9,856 16,297 22,518 36,623 66,716 27,909 47,715
Investment income and other............... 1,119 2,608 6,391 7,107 11,834 5,008 4,615
-------- -------- -------- -------- -------- -------- --------
Total revenues...................... 31,361 42,882 65,379 95,667 164,194 68,126 135,896
Interest expense.......................... 3,912 7,862 11,040 18,429 29,279 12,373 20,117
-------- -------- -------- -------- -------- -------- --------
Net revenues........................ 27,449 35,020 54,339 77,238 134,915 55,753 115,779
Pre-advertising operating expense.......... 14,012 19,348 28,385 41,842 90,770 39,052 74,461
Advertising expense........................ 5,987 4,842 7,537 13,971 43,614 34,513 22,797
-------- -------- -------- -------- -------- -------- --------
Total expenses excluding interest... 19,999 24,190 35,922 55,813 134,384 73,565 97,258
Income (loss) before provision for income
taxes..................................... 7,450 10,830 18,417 21,425 531 (17,812) 18,521
Provision (benefit) for income taxes....... 2,619 3,799 7,259 7,603 321 (6,292) 6,701
-------- -------- -------- -------- -------- -------- --------
Net income (loss)................... $ 4,831 $ 7,031 $ 11,158 $ 13,822 $ 210 $(11,520) $ 11,820
======== ======== ======== ======== ======== ======== ========
Basic earnings (loss) per share............ $ 0.03 $ 0.05 $ 0.07 $ 0.08 $ 0.00 $ (0.07) $ 0.07
Diluted earnings (loss) per share.......... $ 0.03 $ 0.05 $ 0.07 $ 0.08 $ 0.00 $ (0.07) $ 0.07
Weighted average shares outstanding --
basic..................................... 154,271 153,766 153,766 165,227 174,188 174,210 174,247
Weighted average shares outstanding --
diluted................................... 154,271 153,766 153,766 165,233 174,465 174,320 175,528
OPERATING DATA:
Average customer trades per day............ 1,519 2,055 3,670 6,571 18,407 13,909 42,179
Total assets in customer accounts (in
billions)................................. $ 1.7 $ 2.4 $ 4.0 $ 7.3 $ 11.4 $ 10.1 $ 19.5
Number of core accounts(1)................. 18,000 38,000 52,000 98,000 306,000 217,000 428,000
Net revenue per trade...................... $ 70.31 $ 67.09 $ 58.76 $ 46.65 $ 29.20 $ 32.07 $ 21.96
Pre-advertising operating expense per
trade..................................... $ 35.89 $ 37.07 $ 30.69 $ 25.27 $ 19.65 $ 22.46 $ 14.12
Operating margin(2)........................ 27% 31% 34% 28% 0% (32)% 16%
Pre-advertising operating margin(3)........ 49% 45% 48% 46% 33% 30% 36%
Return on average equity(4)................ 49% 47% 44% 28% 0% (21)% 7%
</TABLE>
19
<PAGE> 24
<TABLE>
<CAPTION>
SEPT. 30, SEPT. 29, SEPT. 27, SEPT. 26, SEPT. 25, MAR. 27, MAR. 26,
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and segregated investments....... $101,352 $125,456 $191,436 $373,286 $ 527,982 $ 543,236 $ 606,286
Receivable from customers and
correspondents, net.................. 99,627 130,187 166,075 325,407 647,122 532,812 1,220,291
Total assets.......................... 216,991 287,105 401,679 757,357 1,290,402 1,125,729 2,104,989
Payable to customers and
correspondents....................... 198,539 251,862 356,943 666,279 1,136,082 1,038,698 1,686,378
Total long-term debt.................. -- 7,097 4,853 -- 11,000 10,000 38,000
Stockholders' equity.................. 12,473 19,504 30,662 66,989 84,572 55,447 204,305
</TABLE>
- ---------------
(1) Core accounts consist of open accounts in our discount brokerage
subsidiaries.
(2) Operating margin is computed by dividing income before provision for income
taxes by net revenues.
(3) Pre-advertising operating margin is computed by dividing income before
provision for income taxes plus advertising expenses by net revenues.
(4) Return on average equity is computed by dividing net income by average
stockholders' equity on a quarterly basis. Six month returns are not
annualized.
20
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
We provide discount securities brokerage and clearing execution services to
our customers. Our principal operating subsidiaries consist of our discount
brokerage operating units, Ameritrade and Accutrade, and our wholly owned
securities clearing firm, Advanced Clearing. During fiscal 1998, almost all of
our net revenues were derived from our retail discount brokerage activities and
clearing and execution services. In addition, we provide wholesale discount
brokerage services to depository institutions through our subsidiary AmeriVest
and are developing an Internet-based financial management system through our
subsidiary OnMoney.
Our primary focus is serving retail customers by providing services at
prices that are significantly lower than our major competitors. Retail brokerage
customers are able to trade securities through a variety of mediums, including
the Internet. We provide our customers with investment news and information as
well as educational services. We also provide clearing and execution services to
both of our brokerage operations as well as to unaffiliated broker-dealers.
Our largest sources of revenues are commissions earned from our discount
brokerage activities and associated brokerage commissions, securities
transaction clearing fees and payment for order flow. Our other principal source
of revenue is net interest revenue. Net interest revenue is the difference
between interest revenues and interest expenses. Interest revenues are generated
by charges to customers on margin balances maintained in brokerage accounts and
the investment of cash from operations and cash segregated in compliance with
federal regulations in short-term marketable securities. Interest expense
consists of amounts paid or payable to customers based on credit balances
maintained in brokerage accounts, as well as costs related to notes payable,
letters of credit and lines of credit with financial institutions. Until the end
of fiscal 1998, we also recorded equity income from investments, which primarily
consisted of our share of income from our partnership interests in Roundtable
Partners L.L.C. ("Roundtable," the predecessor to Knight/Trimark Group, Inc.
("Knight/Trimark")) and Consolidated Software Systems, Inc. ("CSS").
Our largest operating expense generally is employee compensation and
benefits. Employee compensation and benefits expense includes salaries, bonuses,
group insurance, contributions to benefit programs, recruitment and other
related employee costs. Commissions and clearance costs include fees paid to
stock and option exchanges for trade executions, as well as settlement and
depository costs associated with our securities clearing activities.
Communications expense includes telephone, postage, news and quote costs.
Occupancy and equipment costs include depreciation charges for fixed assets, the
costs of leasing and maintaining our office spaces and the lease expenses on
computer equipment and other fixed assets. Advertising costs are expensed as
incurred and include production and placement of advertisements on various
mediums, including online, television, print and direct mail. Advertising
expenses may increase or decrease significantly from period to period. We
currently have budgeted approximately $25 million for advertising expenses in
the quarter ended September 24, 1999 and approximately $200 million for
advertising expenses in fiscal 2000. Other operating expenses include
professional service fees, provision for losses, customer execution price
adjustments, amortization of goodwill, travel expenses and other miscellaneous
expenses. In addition, our costs related to the processing of customer
confirmations, statements and other communications are included in this
category.
We believe that the discount brokerage market is currently impacted by four
significant trends that may affect our financial condition and results of
operations. First, commissions charged to customers of discount brokerage
services have steadily decreased over the past several years but have stabilized
over the past year. Although decreased commissions per trade
21
<PAGE> 26
have had a negative effect on our commission and clearing fee revenue per trade,
our experience to date indicates that decreased commissions per trade result in
increased account activity and increased commission and clearing fees revenue in
the aggregate. Second, technology has increased in importance as delivery
channels such as the Internet have become more prevalent. During the quarter
ended March 26, 1999, 84% of our trades were placed through electronic mediums,
with 78% of our trades being placed over the Internet, compared to 73% and 60%,
respectively, for the quarter ending March 27, 1998. We believe that the
increased use of electronic mediums will continue to decrease operating expenses
per trade. Third, the effects of price competition and required investment in
technology have resulted in some consolidation in the market. Finally, the
intense advertising and promotional efforts by us and our major competitors are
making it increasingly difficult for new entrants to make a competitive impact
without substantial financial resources to invest in building a brand.
Our fiscal year ends on the last Friday in each September. References to
fiscal year in this prospectus or in the information incorporated herein by
reference are to the approximate twelve-month period ended on any such Friday.
For example, "fiscal 1998" refers to the fiscal year ended September 25, 1998.
RESULTS OF OPERATIONS
The following tables set forth the amounts per trade and the percentage of
net revenues represented by certain items included in our consolidated
statements of income for the periods indicated:
<TABLE>
<CAPTION>
AMOUNTS PER TRADE
---------------------------------------------------------------------
FISCAL YEAR ENDED SIX MONTHS ENDED
--------------------------------------------- ---------------------
SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 25, MARCH 27, MARCH 26,
1996 1997 1998 1998 1999
------------- ------------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Commissions and clearing
fees...................... $39.44 $31.37 $18.54 $ 20.25 $15.85
Interest revenue............. 24.35 22.12 14.44 16.05 9.05
Equity income from
investments............... 3.63 2.08 1.10 1.45 --
Gain from sale of
investment................ -- -- 0.17 -- --
Other........................ 3.28 2.21 1.29 1.43 0.88
------ ------ ------ ------- ------
Total revenues....... $70.70 $57.78 $35.54 $ 39.18 $25.78
Interest expense............. 11.94 11.13 6.34 7.12 3.82
------ ------ ------ ------- ------
Net revenues......... $58.76 $46.65 $29.20 $ 32.06 $21.96
Expenses excluding interest:
Employee compensation and
benefits.................. $15.19 $11.65 $ 7.81 $ 8.45 $ 5.38
Commissions and clearance.... 2.74 2.01 1.25 1.31 0.76
Communications............... 3.99 3.40 2.80 3.71 1.51
Occupancy and equipment
costs..................... 3.12 3.28 2.30 2.42 1.66
Advertising.................. 8.15 8.44 9.44 19.85 4.32
Other........................ 5.65 4.93 5.49 6.57 4.81
------ ------ ------ ------- ------
Total expenses
excluding
interest........... $38.84 $33.71 $29.09 $ 42.31 $18.44
------ ------ ------ ------- ------
Income (loss) before provision
for income taxes............. $19.92 $12.94 $ 0.11 $(10.25) $ 3.52
Provision (benefit) for income
taxes........................ 7.85 4.59 0.07 (3.62) 1.27
------ ------ ------ ------- ------
Net income (loss).............. $12.07 $ 8.35 $ 0.04 $ (6.63) $ 2.25
====== ====== ====== ======= ======
</TABLE>
22
<PAGE> 27
<TABLE>
<CAPTION>
PERCENTAGE OF NET REVENUES
---------------------------------------------------------------------
FISCAL YEAR ENDED SIX MONTHS ENDED
--------------------------------------------- ---------------------
SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 25, MARCH 27, MARCH 26,
1996 1997 1998 1998 1999
------------- ------------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Commissions and clearing
fees.................... 67.1% 67.2% 63.5% 63.2% 72.2%
Interest revenue........... 41.4 47.4 49.5 50.1 41.2
Equity income from
investments............. 6.2 4.5 3.8 4.5 0.0
Gain from sale of
investment.............. 0.0 0.0 0.6 0.0 0.0
Other...................... 5.6 4.8 4.3 4.4 4.0
----- ----- ----- ----- -----
Total revenues..... 120.3% 123.9% 121.7% 122.2% 117.4%
Interest expense........... 20.3 23.9 21.7 22.2 17.4
----- ----- ----- ----- -----
Net revenues....... 100.0% 100.0% 100.0% 100.0% 100.0%
Expenses excluding interest:
Employee compensation and
benefits................ 25.9% 25.0% 26.7% 26.4% 24.5%
Commissions and clearance.. 4.7 4.3 4.3 4.1 3.5
Communications............. 6.8 7.3 9.6 11.6 6.9
Occupancy and equipment
costs................... 5.3 7.0 7.9 7.6 7.5
Advertising................ 13.9 18.1 32.3 61.9 19.7
Other...................... 9.7 10.6 18.8 20.5 21.9
----- ----- ----- ----- -----
Total expenses
excluding
interest......... 66.3% 72.3% 99.6% (32.1)% 84.0%
----- ----- ----- ----- -----
Income (loss) before
provision for income
taxes...................... 33.7% 27.7% 0.4% (32.1)% 16.0%
Provision (benefit) for
income taxes............... 13.4 9.8 0.2 (11.3) 5.8
----- ----- ----- ----- -----
Net income
(loss)........... 20.3% 17.9% 0.2% (20.8)% 10.2%
===== ===== ===== ===== =====
</TABLE>
SIX MONTH PERIODS ENDED MARCH 26, 1999 AND MARCH 27, 1998
NET REVENUES. Commissions and clearing fees increased 138% to $83.6 million
in the first six months of fiscal 1999 from $35.2 million in the first six
months of fiscal 1998. This increase was primarily attributable to an increase
in the number of securities transactions processed, as average trades per day
increased 203% to 42,179 in the first six months of fiscal 1999 from 13,909 in
the first six months of fiscal 1998. The increase in transaction processing
volume was primarily a result of a significant increase in customer accounts
resulting from the substantial advertising expenditures made by us during fiscal
1998 and during the first half of fiscal 1999. Core accounts increased to
approximately 428,000 at March 26, 1999 from approximately 306,000 at September
25, 1998. Offsetting the growth in trades per day was a decrease in commissions
and clearing fees per trade of 20% to $16 in the first six months of fiscal 1999
from $20 in the first six months of fiscal 1998. We expect our average
commission and clearing fees per trade to continue to decrease due to the
greater anticipated number of lower revenue Internet equity trades. However, we
believe that the rate of decline in average commission will be lower than the
rate of decline experienced over the past two years.
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<PAGE> 28
We have arrangements with several execution agents to receive cash payments
in exchange for routing trade orders to these firms for execution. Revenues
generated by us under these arrangements totaled $10.3 million, or 9% of net
revenues, for the first half of fiscal 1999, and $4.5 million, or 8% of net
revenues, for the first half of fiscal 1998. Payment for order flow is a
component of the commission and clearing fees revenue line. The majority of
these revenues were received from execution agents owned by Knight/Trimark. As
of March 26, 1999, we owned approximately 7.1% of the outstanding common stock
of Knight/Trimark. We expect payments for order flow to continue to decrease on
a per trade basis as a result of competition and regulatory changes.
Net interest revenue increased 78% to $27.6 million in the first six months
of fiscal 1999 from $15.5 million in the first six months of fiscal 1998. This
increase was due primarily to an increase of 18% in cash and investments
segregated in compliance with federal regulations, an increase of 136% in
customer and correspondent broker-dealer receivables partially offset by an
increase of 57% in amounts payable to customers and correspondent broker-dealers
at the end of the first six months of fiscal 1999 from the end of the first six
months of fiscal 1998. We generally expect net interest revenue to grow as our
account base grows.
We had no equity income from investments in the first six months of fiscal
1999, compared to $2.5 million in the first six months of fiscal 1998. The
equity income in fiscal 1998 was primarily generated by our ownership in
Roundtable, which was reorganized into Knight/Trimark in July 1998. We no longer
recognize equity income from this investment.
Other revenues increased 84% to $4.6 million in the first six months of
fiscal 1999 from $2.5 million in the first six months of fiscal 1998 due
primarily to an increase in marketing and service fees paid to us by mutual
funds as a result of holding more customer mutual funds assets.
EXPENSES EXCLUDING INTEREST. Employee compensation and benefits expense
increased 93% to $28.4 million in the first half of fiscal 1999 from $14.7
million in the first six months of fiscal 1998, due primarily to an increase in
full-time employees. Full-time equivalent employees rose 67% from 811 at the end
of March 1998 to 1,353 at the end of March 1999. The increase in employees was
necessary to accommodate the dramatic growth in trading volume following our
advertising campaign in fiscal 1998 and the first half of fiscal 1999. We expect
employment expenses to continue to increase in support of the expected increase
in customer accounts, assets and trades.
Commissions and clearance costs increased 74% to $4.0 million in the first
half of fiscal 1999 from $2.3 million in the first half of fiscal 1998, due
primarily to the 203% increase in transaction volume. This increase was offset
by efforts that we have undertaken to reduce execution, clearance, settlement
and depository costs with outside entities and the economies of scale associated
with these activities.
Communications expense increased 23% to $8.0 million in the first six
months of fiscal 1999 from $6.5 million in the first six months of fiscal 1998,
primarily as a result of telephone, quote and market information costs related
to the increase in transaction processing volume. Communication expenses are
expected to continue to increase at a slower rate than transactions processed,
as the low cost of Internet transactions continues to be the predominant
communication channel with our customers.
Occupancy and equipment costs increased 107% to $8.7 million in the first
six months of fiscal 1999 from $4.2 million in the first six months of fiscal
1998. This increase was due primarily to the lease of a 132,000 square foot
operations center in Bellevue, Nebraska, which started during the third quarter
of fiscal 1998, as well as the lease of equipment to accommodate our continued
growth.
24
<PAGE> 29
Advertising expenses decreased 34% to $22.8 million in the first half of
fiscal 1999 from $34.5 million in the first half of fiscal 1998 as we directed
more resources to capital investments. We plan to continue to expand our
customer base through advertising efforts.
Other operating expenses increased 123% to $25.4 million in the first half
of fiscal 1999 from $11.4 million in the first six months of fiscal 1998,
primarily as a result of increased confirmation and statement processing costs
associated with the increase in transaction processing volume and increased
consulting fees related to technology development. In addition, we incurred $3.1
million in customer execution price adjustments largely caused by system delays
and outages in the first quarter of fiscal 1999.
Income tax expense was $6.7 million in the first six months of fiscal 1999,
compared with a tax benefit of $6.3 million in the first six months of fiscal
1998 consistent with the increase in our pretax income. The effective tax rate
in the first six months of fiscal 1999 was 36% and benefited from our
participation in an economic development tax incentive program offered by the
State of Nebraska. We expect to continue to benefit from the State of Nebraska
tax incentive program during the remainder of fiscal 1999.
FISCAL YEARS ENDED SEPTEMBER 25, 1998, SEPTEMBER 26, 1997 AND SEPTEMBER 27,
1996
NET REVENUES. For the years ended September 25, 1998, September 26, 1997
and September 27, 1996, 63%, 67% and 67%, respectively, of our net revenues were
derived from commissions and clearing fees. Commissions and clearing fees
totaled $85.6 million in fiscal 1998, compared to $51.9 million in fiscal 1997
and $36.5 million in fiscal 1996. This represents a 135% increase between fiscal
1996 and fiscal 1998. The increase was primarily attributable to an increase in
the number of transactions processed as average trades per day increased over
400% between fiscal 1996 and fiscal 1998 in line with the growth in our customer
base. Core accounts increased to approximately 306,000 at September 25, 1998
from approximately 98,000 at September 26, 1997 and approximately 52,000 at
September 27, 1996. Offsetting the growth in trades per day was a decrease in
commissions and clearing fees per trade of 53% between fiscal 1996 and fiscal
1998 from an average of $39 per trade to an average of $19 per trade in 1998.
We have arrangements with several execution agents to receive cash payments
in exchange for routing trade orders to these firms for execution. The revenues
generated by us under these arrangements totaled $10.9 million, or 8% of net
revenues, for the fiscal year ended September 25, 1998; $9.1 million, or 12% of
net revenues, for the fiscal year ended September 26, 1997; and $8.1 million, or
15% of net revenues, for the fiscal year ended September 27, 1996. Payment for
order flow is a component of the commission and clearing fees revenue line. The
majority of these revenues were received from execution agents owned by
Knight/Trimark.
Net interest revenue increased to $37.4 million in fiscal 1998 from $18.2
million in fiscal 1997 and from $11.5 million in fiscal 1996. This increase was
due primarily to an increase of 187% in cash and investments segregated in
compliance with federal regulations, an increase of 271% in customer and
correspondent broker-dealer receivables partially offset by an increase of 221%
in amounts payable to customers and correspondent broker-dealers in fiscal 1998
over fiscal 1996.
Equity income from investments increased from $3.4 million in fiscal 1996
and fiscal 1997 to $5.1 million in fiscal 1998 primarily due to the greater
income generated by Roundtable. In July 1998, Roundtable was reorganized into
Knight/Trimark and conducted a public stock offering. We sold a portion of our
interest in CSS during fiscal 1998. We own less than 10% of the voting equity of
both Roundtable and CSS. As a result of these transactions, we began accounting
for our investment in Knight/Trimark as a marketable equity security held
available-for-sale and for our investment in CSS on the cost method rather than
the equity method. We no longer have any investments accounted for under the
equity method and, accordingly, no equity income from investments is currently
anticipated for periods after fiscal 1998.
25
<PAGE> 30
Other revenues increased to $6.0 million in fiscal 1998 from $3.7 million
in fiscal 1997 and $3.0 million in fiscal 1996. The increase was due primarily
to an increase in marketing fees and service fees paid to us by mutual funds as
a result of holding more customer mutual fund assets.
EXPENSES EXCLUDING INTEREST. Employee compensation and benefits expense
increased to $36.1 million in fiscal 1998 from $19.3 million in fiscal 1997 and
$14.0 million in fiscal 1996, due primarily to an increase in full-time
equivalent employees. As of September 25, 1998, we employed 985 full-time
equivalent employees compared to 412 on September 26, 1997 and 334 on September
27, 1996. The increase in employees was necessary to accommodate the dramatic
growth in trading volume following our advertising campaign in early fiscal
1998.
Commissions and clearance costs increased to $5.8 million in fiscal 1998
from $3.3 million in fiscal 1997 and $2.5 million in fiscal 1996. The 132%
increase between fiscal 1996 and fiscal 1998 was due primarily to the 400%
increase in transaction processing volume over the same period, offset by
efforts that we have undertaken to reduce execution, clearance, settlement and
depository costs with outside entities and the economies of scale associated
with these activities.
Communications expense was $12.9 million in fiscal 1998, compared to $5.6
million in fiscal 1997 and $3.7 million in fiscal 1996. The 251% increase
between fiscal 1996 and fiscal 1998 was primarily a result of the 400% increase
in transaction processing volume between fiscal 1996 and fiscal 1998.
Occupancy and equipment expense was $10.6 million in fiscal 1998, $5.4
million in fiscal 1997 and $2.9 million in fiscal 1996. This increase was due
primarily to the lease of equipment and additional office space. In fiscal 1998,
we added 132,000 square feet of additional space; in fiscal 1997, we added
approximately 50,000 square feet of additional space.
Advertising expenses constituted an increasing portion of our operating
costs, increasing from $7.5 million (14% of net revenues) in fiscal 1996, to
$14.0 million (18% of net revenues) in fiscal 1997 and to $43.6 million (32% of
net revenues) in fiscal 1998. The increase in advertising expenses in fiscal
1998 was principally related to our efforts to build brand awareness for our
Ameritrade brand and was primarily responsible for the significant increase in
the number of customer accounts and account assets realized by us during fiscal
1998. Our acquisition cost per new account decreased to $194 in fiscal 1998,
from $269 in fiscal 1997 and $502 in fiscal 1996.
Other expenses increased to $25.4 million in fiscal 1998 from $8.2 million
in fiscal 1997 and $5.2 million in fiscal 1996. The increase was primarily a
result of increased confirmation and statement processing costs associated with
the increase in transaction processing volume and increased consulting services
to assist us in operational effectiveness and market research. To a lesser
extent, increases in trade errors related to the growth in transactions
processed and to customer execution price adjustments largely caused by system
outages, particularly in the fourth quarter of fiscal 1998, and increases in the
provision for losses related to market volatility experienced in the fourth
quarter of fiscal 1998 also contributed to the growth in other expenses.
Income tax expense was $0.3 million in fiscal 1998, $7.6 million in fiscal
1997 and $7.3 million in fiscal 1996. The effective tax rate dropped from 39% in
fiscal 1996 to 35% in fiscal 1997 as a result of our participation in an
economic development tax incentive program offered by the State of Nebraska. The
effective rate increased to 60% in fiscal 1998 due to the impact of
non-deductible goodwill on a relatively small base of pre-tax income.
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed our growth primarily through the use of funds
generated from operations. We plan to finance our capital and liquidity needs
during fiscal 1999 from our operating cash flows, borrowings under our $75.0
million revolving credit facility and a portion of the proceeds from the
offerings.
26
<PAGE> 31
OPERATING CASH FLOW. Cash used in operating activities was $37.6 million in
the first six months of fiscal 1999, compared to $29.2 million in the first six
months of fiscal 1998. The increased use of cash during the first six months of
fiscal 1999 was attributable to the substantial increase in customer receivables
at the end of the first six months of fiscal 1999. Cash used in operating
activities was $35.9 million in fiscal 1998, compared to cash generated from
operations of $23.8 million in fiscal 1997 and $20.9 million in fiscal 1996. The
increase in cash used during fiscal 1998 was attributable to the substantial
increase in advertising expenditures during the fiscal year.
Cash used in investing activities was $10.1 million in the first six months
of fiscal 1999, compared to $0.7 million in the first six months of fiscal 1998.
Use of cash in both periods was related to purchases of property and equipment.
Those amounts were offset in fiscal 1998 by the proceeds from cash distributions
received from our investment in Knight/Trimark and the sale of an investment.
Cash used in investing activities was $4.0 million in fiscal 1998, compared to
$3.7 million in fiscal 1997 and $4.7 million in fiscal 1996. Use of cash in
fiscal 1998 and fiscal 1997 was primarily related to purchases of property and
equipment, offset by cash distributions received from Knight/Trimark and CSS.
Use of cash in fiscal 1996 related primarily to purchases of property and
equipment and additional investments in Knight/Trimark and CSS, offset by cash
distributions received from Knight/Trimark.
Cash provided by financing activities was $27.6 million in the first six
months of fiscal 1999, compared to $10.0 million in the first six months of
fiscal 1998. The cash provided by financing activities in both periods consisted
of net proceeds from our revolving credit agreement. Cash provided by financing
activities was $10.8 million in fiscal 1998, compared to $17.6 million in fiscal
1997 and to cash used in financing activities of $2.2 million in fiscal 1996.
The cash provided by financing activities in fiscal 1998 consisted of proceeds
from our revolving credit agreement, offset by payments on the principal of the
revolving credit loan. The increase in fiscal 1997 over fiscal 1996 was
attributable to the net proceeds of $22.5 million from the initial public
offering in March 1997, offset by principal payments on notes payable.
BANK LOAN AGREEMENTS. We have entered into a revolving credit agreement
with a bank group dated January 16, 1998, as amended on May 24, 1999. The
revolving credit agreement permits borrowings up to $75.0 million through June
30, 2000, with permissible borrowings declining $3.125 million quarterly to
$68.75 million at maturity on December 31, 2000. The revolving credit agreement
is collateralized by the common stock of our subsidiaries, as well as all of our
tangible and intangible assets. Borrowings under the revolving credit agreement
bear interest at the prime rate less 0.75% (7.00% and 7.75% at March 26, 1999
and September 25, 1998, respectively). We pay a maintenance fee of 0.25% of the
unused borrowings through the maturity date. We had outstanding indebtedness
under the revolving credit agreement of $38.0 million and $11.0 million at March
26, 1999 and September 25, 1998, respectively. The increase in indebtedness
during the first six months of fiscal 1999 was due to additional net capital
requirements, purchases of property and equipment and advertising expenses. The
revolving credit agreement contains certain restrictions, including restrictions
on the payment of cash dividends and additional borrowings, the maintenance of a
minimum number of core accounts and a minimum net worth and a requirement to
repay all outstanding indebtedness under the facility with the proceeds from
some public offerings of common stock.
Advanced Clearing has various secured credit facilities with financial
institutions. These credit facilities are utilized in Advanced Clearing's
securities clearing operations. These facilities provide for the issuance of
letters of credit by the financial institutions on behalf of, and cash advances
to, Advanced Clearing. Advanced Clearing has pledged customer securities as
collateral for the related credit, and its obligations under these facilities
and the related collateral requirements fluctuate from time to time. As of March
26, 1999, the financial institutions had issued letters of credit in the
aggregate amount of $81.0 million and had made cash advances to Advanced
Clearing in the aggregate amount of $45.0 million. Advanced Clearing pays a
maintenance fee of
27
<PAGE> 32
0.5% of the committed amount for the letters of credit, and the cash advances
bear interest at rates tied to the prevailing broker call rate, which rates
ranged from 5.5% to 6.75% as of March 26, 1999.
CAPITAL EXPENDITURES. We expect to spend between $25.0 million and $35.0
million during fiscal 1999 on hardware and software upgrades to our computer
systems to meet anticipated increases in trading volumes. In addition, we
anticipate expenditures between $10.0 million and $15.0 million during fiscal
1999 primarily for the purchase of office, computer and operating equipment.
Lease commitments for operating equipment and facilities during fiscal 1999 are
expected to equal approximately $9.0 million with an aggregate commitment of
approximately $50.0 million through fiscal 2018. In addition, we plan to spend
approximately $10.0 million on continuing research and development activities
during fiscal 1999. We have entered into a two-year agreement with America
Online, Inc. ("AOL") that will feature Ameritrade as one of four brokerages on
AOL's Personal Finance Channel. The agreement calls for us to pay AOL $12.5
million annually over a two-year term and expires in September 2000. In May
1999, we also entered into an agreement with Yahoo!, Inc. ("Yahoo") that will
feature Ameritrade as one of four brokerages on Yahoo's finance Web page. The
agreement calls for us to pay Yahoo $8.3 million through its expiration in
December 1999.
YEAR 2000
We rely heavily on computerized information technology ("IT") systems for
our business operations. In particular, securities trading information moves to
and from our IT system to those operated by stock exchanges, broker-dealers,
clearinghouses and other trading partners on a real-time basis with little human
intervention. Our business operations are also dependent on a variety of non-IT
systems that contain embedded circuitry such as telephone equipment, security
and alarm systems, copiers, fax machines, mail room equipment, heating and air
conditioning systems and other infrastructure systems. In addition, we have
business relationships with a variety of third parties whose ability to
interface with our IT systems or otherwise perform their obligations to us
depends on these systems and equipment. Some or all of these systems and
equipment may be affected by the so-called "Year 2000 problem," which is the
potential inability of certain computer programs and embedded circuitry to
correctly recognize dates occurring after December 31, 1999. We have adopted a
plan to handle this "Year 2000 problem" with respect to our IT, non-IT systems
and third party business relationships.
STATE OF READINESS. We have hired a Year 2000 project manager who has
assembled a working group that is responsible for our Year 2000 remediation
effort. In general, this effort consists of (1) preparing an inventory of IT and
non-IT systems and assessing the need for remediation of such systems, (2)
determining the status of Year 2000 remediation of third parties with which we
have material business relationships, (3) remediation of our IT and non-IT
systems and (4) testing. We also have engaged the services of an independent
outside consultant group to gauge the status of the Year 2000 project and two
additional consultants to provide contract support for this effort. We have
completed the inventory and assessment phase of our Year 2000 program. We have
been in the process of a planned upgrade of many components of our IT system and
as this process is completed, our IT systems are expected to become Year 2000
compliant. We expect the IT systems upgrade and remediation to be completed by
July 31, 1999. We have reviewed our non-IT systems, such as telephone systems,
which have been identified as necessary to our ability to conduct the operation
of our business activities. We believe that all non-IT systems have been
modified or replaced to be Year 2000 compliant.
We plan to conduct testing of IT and non-IT systems as remediation work is
completed. In particular, the IT systems passed a series of Securities Industry
Association-sponsored industry-wide simulation tests of the trading cycle
through the millennium. These tests exercised not only our internal IT system,
but also key interfaces with third parties in the securities industry.
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Notwithstanding our efforts to anticipate and remediate Year 2000 problems,
there can be no assurance that the inventory and assessment will discover all
potential Year 2000 problems or that testing will reveal unanticipated material
problems with our IT systems and non-IT systems that will need to be resolved.
We have no control over the remediation efforts of third parties with which
we have material business relationships and the failure of certain of these
third parties to successfully remediate their Year 2000 issues could have a
material adverse effect on us. Accordingly, we have undertaken the process of
contacting each material third party. Such parties include, but are not limited
to, various brokers-dealers, clearinghouses, stock exchanges and online and
Internet services providers. We continue to receive documentation from our third
party vendors and partners declaring that their ability to perform their
obligations to us is not expected to be materially adversely affected by the
Year 2000 problem. We intend to conduct in-house testing of third party systems
where applicable. We also expect to continue to request updated information from
these material third parties in order to access their Year 2000 readiness.
COSTS TO ADDRESS YEAR 2000 COMPLIANCE. Costs associated with Year 2000
compliance consist primarily of salaries of the Year 2000 project manager and
other staff assigned to the Year 2000 working group, software used to assess our
systems, and consulting and contractor fees. Additional costs are incurred in
connection with replacing non-IT systems as necessary, polling of third-party
readiness and testing. All remediation to our IT system was made as part of
scheduled upgrades and, therefore, has not been included in the costs of Year
2000 compliance. Costs associated with our Year 2000 program have been
approximately $1.0 million to date and are expected to range between $2.0
million and $3.0 million by the end of the project.
YEAR 2000 RISKS. Based on currently available information, we do not
believe that there will be any protracted systemic failures of the IT or non-IT
systems utilized by us in connection with the operation of our business. We
believe that the most reasonably likely worst-case scenario will be a temporary
interruption or reduction in trading volume capability due to a combination of
interface breakdowns, utilities disruptions or communications degradations. If
such an interruption or reduction occurs, it will result in a loss of revenues
and, depending on the extent of such disruption, may cause us to lose accounts.
We cannot estimate the magnitude of any such loss of revenue at this time, but
it could be material.
CONTINGENCY PLANS. We have compiled a series of contingency plans with
respect to Year 2000 issues as part of an overall business continuity/disaster
recovery initiative. In general, these plans provide for the use of manual
processes and back-up market sources in order to execute securities trades.
Other principal components of our contingency plan include the use of multiple
transmission channels with several long distance telephone vendors and on-site
diesel generators if telephone service or electricity is interrupted. We expect
to make refinements to our contingency plans as additional information regarding
Year 2000 strategies become available and as a result of the industry-wide
simulation testing described above. There can be no assurance, however, that any
contingency plan utilized by us will prevent us from incurring service
interruptions and other negative consequences in the event of Year 2000 problems
either with our own IT and non-IT systems or with those of third parties having
material business relationships with us. See "Risk Factors -- Year 2000 risks
may harm our business".
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BUSINESS
OVERVIEW
We are a leading provider of online discount brokerage services. We provide
technology-based brokerage services to retail investors through a variety of
mediums, primarily through the Internet. Our services appeal to a broad market
of self-directed retail investors who are value conscious. We use our low-cost
platform to offer brokerage services to investors at prices that are
significantly lower than prices offered by our major competitors. Our goal is to
provide the best execution using the best information at the best value.
We were one of the earliest participants in the growing online brokerage
industry, pioneering online trading with the first Internet trade in 1994. Since
initiating online trading, we have dramatically increased our number of core
discount brokerage accounts, average daily trading volume and total assets in
customer accounts, while significantly lowering our pre-advertising operating
costs per trade. IDC estimates that our market share of online customer accounts
was approximately 6% at March 26, 1999. Based on reports of industry analysts,
we believe that our market share of average daily trades executed online was
over 8% for the quarter ended March 26, 1999, marking our eighth consecutive
quarter of average daily online trade volume market share gains, a record
unmatched by any other firm in the online brokerage industry. We expect online
brokerage activity to continue to expand, creating opportunities for us to
leverage our market position and cost structure for further growth and
profitability.
We operate through four subsidiaries, including Ameritrade, Accutrade,
Advanced Clearing and AmeriVest. We serve most of our retail discount brokerage
customers through Ameritrade. In 1997, we began to emphasize our Ameritrade
brand and focus on positioning ourselves as a major player in the low commission
segment of online brokerage. We serve customers who desire a higher degree of
personalized service through Accutrade. Ameritrade and Accutrade enable us to
target and service retail customers differentiated primarily by price
sensitivity and level of personalized service sought. Advanced Clearing provides
clearing services to Ameritrade and Accutrade, as well as to independent
broker-dealers and other correspondents. AmeriVest provides wholesale discount
brokerage services to depository institutions. Additionally, we are developing
an Internet-based personal financial management system through our OnMoney
subsidiary.
BUSINESS STRATEGY
Our business strategy is to capitalize on the growth of the online
brokerage industry. The key elements of our business strategy are as follows:
- ESTABLISH AMERITRADE AS THE DOMINANT BRAND IN ONLINE TRADING. We intend
to establish Ameritrade as the dominant global brand in the online
discount brokerage market. We plan to achieve this goal by providing a
compelling value proposition in order to attract and retain online
discount brokerage customers as well as through aggressive promotion of
the Ameritrade brand name. Since October 1997, we have invested over
$66.4 million in advertising programs and plan to substantially increase
the amount we spend on advertising in the future. We also plan to pursue
opportunities to strengthen our brand positioning and increase our
customer base through strategic acquisitions.
- FOCUS ON ONLINE DISCOUNT BROKERAGE SERVICES. We plan to maintain our
focus on attracting self-directed investors to our online discount
brokerage services. Approximately 95% of our net revenues are derived
from our retail discount brokerage service. We believe that this focus
promotes efficiencies and capitalizes on projected growth in the
industry. IDC reports that the number of online brokerage accounts at the
end of 1998 was approximately 6.4 million with the number projected to
reach approximately 25 million by the end of 2002.
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- EXPAND OUR CAPACITY AND INFRASTRUCTURE TO MEET EXPECTED INCREASES IN
TRADING VOLUME. We continually enhance our systems to provide timely and
reliable service to our customers. We plan to make substantial
investments in technology and infrastructure over the next 18 months to
meet expected increases in trading volume. We also are expanding our
management team, adding support personnel and opening additional customer
service and technology centers to support our growth.
- CONTINUE TO OFFER INNOVATIVE TECHNOLOGIES AND SERVICE ENHANCEMENTS TO OUR
CUSTOMERS. We seek to provide our customers with the most advanced
technology and service available. During fiscal 1998, we released
"Darwin(TM) : Survival of the Fittest" ("Darwin"), the first interactive
CD-ROM-based options trading simulator. We recently reached an agreement
with MicroStrategy Incorporated to develop a comprehensive suite of
financial service offerings, including personalized investor information
available by cellular telephone, pager or e-mail. In addition, we intend
to further develop our data gathering and tracking system to enable us to
determine the needs of our various customer segments and tailor our
services to their individual needs.
- BE THE LOWEST COST PROVIDER OF QUALITY SERVICES. As the volume of online
trading further expands and our online trading volume increases, we
intend to continue to lower our operating costs per trade by creating
economies of scale, using proprietary systems and automation and locating
our operations in low-cost geographical areas. We have significantly
reduced our pre-advertising operating expenses per trade and will
continue to maintain our cost discipline.
- EXPAND OUR ACCESS TO INTERNATIONAL CUSTOMERS. We plan to increase our
customer base and build brand awareness by selectively forming strategic
alliances with international financial services leaders. We recently
formed alliances with Deutsche Bank in Germany and Cortal, a subsidiary
of Banque Paribas, in France, which will provide their substantial
customer bases the ability to trade on the United States markets through
Ameritrade. In addition, we have recently signed non-disclosure
agreements with well-established large financial institutions in Europe
and Japan to explore the possibility of extending the Ameritrade brand
name and operations to those markets.
ONLINE DISCOUNT BROKERAGE INDUSTRY OVERVIEW
The online discount brokerage industry in which we compete has grown
rapidly in the past few years. A number of factors have contributed to this
growth, including:
- the enduring strength and recent growth of the United States equity
markets, with equity market capitalization in the United States doubling
in the past five years to over $15 trillion;
- increased accessibility to and affordability of brokerage services made
possible by rapid advances in communications and processing technology
and by increased competition among brokerage companies;
- increased consumer acceptance of and confidence in the Internet as a
reliable, secure and cost-effective medium for financial transactions;
- the availability of financial information online, including research,
real-time quotes, charts, news and company information;
- the appeal of online trading to investors based on lower prices, greater
range of investment alternatives and greater control over investment
decisions; and
- growth in financial assets held by individual investors.
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Internet penetration continues to rapidly increase. IDC estimates that
there were 62.8 million Internet users in the United States at the end of 1998,
growing from 38.9 million at the end of 1997. The Internet enables investors to
identify, analyze and transact investments at far lower costs than previously
possible.
These factors have contributed to the tremendous growth of online brokers.
IDC estimates that online brokerage average daily trading volume more than
tripled during the two year period of 1997 and 1998 to more than 300,000 trades
per day. Over that same time period, the number of online brokerage accounts
grew from approximately 1.5 million to approximately 6.4 million. Overall, IDC
predicts exceptionally strong growth in all key industry metrics for the
foreseeable future.
International markets also present significant opportunities for online
brokers. While current Web usage in Europe and Asia trails United States rates,
IDC predicts that Web penetration will grow faster in Europe and Asia in the
next several years than in the United States. Correspondingly, Internet commerce
in Europe and Asia is expected to substantially increase over the next several
years.
AMERITRADE
Ameritrade is a leading full-service provider of low-cost, high-value
online discount brokerage services to the rapidly expanding population of
self-directed investors in the United States and abroad. Ameritrade was formed
in 1997 through the consolidation of the accounts of Ceres Securities, Inc., K.
Aufhauser & Co. and the eBroker division of All American Brokers, Inc. In
October 1997, we launched an aggressive advertising campaign to introduce our
revolutionary "8 bucks a trade" campaign and began emphasizing our Ameritrade
brand as the major player in the low commission segment of online brokerage. The
campaign succeeded in building brand awareness, helping us to open 225,000 new
accounts and add a net $4.1 billion to assets in customer accounts during fiscal
1998. Since the campaign's introduction, the number of trades per day has grown
at a 312% compound annual growth rate. We intend to continue an advertising and
marketing program in the future to establish Ameritrade as the dominant brand in
online trading.
OUR PRODUCTS AND SERVICES
Ameritrade is focused on being the best provider of online discount
brokerage services. Our goal is to "bring Wall Street to Main Street". The
products and services we offer reflect this goal. Our products include:
- - COMMON AND PREFERRED STOCK. Customers can purchase common and preferred stocks
and American depository receipts traded on any United States exchange or
quotation system. Fees for equity trades begin at $8.00 per trade regardless
of the number of shares bought or sold. Additional value-added services such
as limit-orders are offered at higher rates.
- - MUTUAL FUNDS. Customers can compare and select from a portfolio of over 7,800
mutual funds from over 400 fund families. Customers can also easily exchange
funds within the same family. Fees for mutual fund trades begin at $18.00 per
trade.
- - OPTION TRADES. We offer a full range of option trades, including spreads,
straddles and buy/writes. To help navigate the complex landscape of option
trading, we provide the proprietary educational tool, Darwin, which is
designed to help our customers become comfortable with the options market.
Fees for option trades begin at $29.00 per trade.
- - TREASURY, CORPORATE AND MUNICIPAL BONDS. We offer our customers access to the
secondary bond market via our skilled telephone brokers. Bond trades begin at
$40.00 per trade.
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Our services accessible through our Web site, and other mediums, include:
- - a broad range of third party research reports and investment news tailored to
meet customer's specifications provided by CBS MarketWatch, Morningstar, The
Motley Fool and Zacks Investment Research, among others;
- - real-time stock quotes;
- - trade entry screens on our Web site that allow our customers to select the
level of complexity that they desire in placing their trade orders.
Additionally, online help wizards guide investors through the process of
executing limit orders for both equities and options;
- - convenient access for our customers via strategically placed links at leading
Web portals such as America Online and Yahoo!;
- - educational programs to assist our customers such as Darwin and Stockpile.
Darwin is an options trading simulator that includes a comprehensive option
tutorial designed to allow investors to learn basic and advanced option
trading strategies, to trade fictional equities and options, to formulate
investment strategies, to track performance and to compete against other
players. Stockpile is a tutorial that instructs the customer how to invest
online. Stockpile is intended to raise the level of comfort and sophistication
of our customers prior to their first online trade; and
- - an expanding base of customer service representatives, trained to answer
questions knowledgeably and courteously.
In addition, we recently entered into a two-year alliance with
MicroStrategy Incorporated, which will allow subscribing customers to receive
highly personalized news and market-related data via cellular telephone, pager
and e-mail.
We intend to continue to expand our products and services to meet customer
demand and to provide the best value in the industry.
OUR CUSTOMERS
Our customers primarily are self-directed investors, many of whom use the
Internet to manage their personal finances. Customer accounts include cash
accounts, margin accounts and retirement accounts and may be opened with a
minimum $2,000 investment. Our customers range in experience from first-time
traders to sophisticated investors. Our initial customer base was comprised of
individuals who tended to be experienced, active investors seeking more control
over their portfolios while reducing their transaction costs. Our continual
technology infrastructure enhancements and broadening brokerage product and
service offerings have proven to be attractive to this growing base of Internet
investors. Since we introduced our $8 commission price point and our extensive
branding campaign, we also have attracted many new customers who initially are
less experienced but who are interested in becoming market participants and who
are attracted to our low commissions and our easy access to the market. In
addition, a substantial number of our customers have migrated from full-service
brokers. As Internet penetration rates continue to climb and self-directed
investment proliferates, we expect to attract significantly more of these
customers.
OUR DISTRIBUTION METHODS
We provide our customers with an array of mediums with which to access our
products and services. These mediums include:
- - INTERNET. Customers are attracted to the ease, convenience and value of stock
trading via the Internet. For the quarter ended March 26, 1999, 78% of our
customer transactions were
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executed through the Internet, located at www.ameritrade.com. Commissions on
Internet equity market orders are $8 per transaction.
- - TOUCH-TONE TELEPHONE. Users may transact their trades through an automated,
toll-free touch-tone telephone system. Many customers rely on this medium for
trading while away from their computers. Commissions on touch-tone equity
market orders are $12 per transaction.
- - REGISTERED REPRESENTATIVES. Customers may gain assistance and make trades
through registered representatives at a toll-free telephone number.
Commissions on broker-assisted equity market orders are $18 per transaction.
There is a $5 additional fee for executed limit orders through all channels.
ACCUTRADE
Accutrade provides value-added discount brokerage services to investors who
desire a higher degree of personalized customer service. Accutrade permits
customers to access its services through the Internet, automated touch-tone
telephone and facsimile, and through registered representatives. Accutrade
customers can trade in common and preferred stocks, mutual funds, options,
corporate and municipal bonds, treasury obligations, foreign securities and
certificates of deposit. Accutrade also offers a wide range of third-party
research services to assist its customers in meeting their investment
objectives. Accutrade pioneered trading by touch-tone telephone in 1988.
Accutrade introduced a software package known as Accutrade for Windows in
March 1996 to provide investors with an online investing system and the ability
to manage their financial assets. Customers using Accutrade for Windows may
place orders for stocks, mutual funds, options and corporate bonds. Customers
also can review their balances, positions, transaction history, order status and
obtain quotes. One of the advanced features of Accutrade for Windows is the
ability to make program investments. This feature permits customers to create
conditions under which orders will be placed and then to have their personal
computer monitor the market to automatically place the order. Customers can also
design baskets of stocks to track and trade. In October 1997, Accutrade for
Windows was named a finalist by PC Computing magazine in its annual Most
Valuable Product competition.
In addition to its trading department, which is staffed by registered
representatives, Accutrade provides personalized customer service for both
technical and brokerage needs. Customer service representatives respond to
inquiries about the services offered by Accutrade, including securities
transactions and other account activity. We believe that our customer service
representatives provide superior service and assist in maintaining long-term
customer relationships.
Accutrade charges a commission of $29.95 for equity orders of up to 1,000
shares placed over the Internet and requires a minimum of $5,000 to open an
account.
ADVANCED CLEARING
We provide clearing and execution services to correspondents, including our
discount brokerage businesses and independent broker-dealers, depository
institutions, registered investment advisors and financial planners, through our
subsidiary, Advanced Clearing. Clearing services include the confirmation,
receipt, settlement, delivery and record-keeping functions involved in the
processing of securities transactions. The clearing function involves a sharing
of responsibilities between the clearing broker and the introducing broker.
Advanced Clearing's correspondents, as introducing brokers, are responsible for
all customer contact, including opening customer accounts, responding to
customer inquiries and placing customer orders with
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the clearing broker. As a clearing broker, Advanced Clearing provides the
following back office functions:
- - maintaining customer accounts;
- - extending credit in a margin account to the customer;
- - settling security transactions with clearing houses such as the Depository
Trust Company and the National Securities Clearing Corporation;
- - settling commissions and clearing fees;
- - preparing customer trade confirmations and statements;
- - performing designated cashiering functions, including the delivery and receipt
of funds and securities to or from the customer;
- - possession, control and safeguarding funds and securities in customer
accounts;
- - transmitting tax accounting information to the customer and to the applicable
tax authorities; and
- - forwarding prospectuses, proxies and other shareholder information to
customers.
We make loans to customers collateralized by customer securities. Margin
lending by us is subject to the margin rules of the Federal Reserve, NASD margin
requirements and our internal policies, which are more stringent than the
Federal Reserve and NASD requirements. By permitting customers to purchase on
margin, we take the risk of a market decline that could reduce the value of the
collateral held by us to below the customers' indebtedness before the collateral
can be sold. Under applicable securities laws and regulations, in the event of a
decline in the market value of the securities in a margin account, we are
obligated to require the customer to deposit additional securities or cash in
the account so that at all times the customer's equity in the account is at
least 25 percent of the value of the securities in the account. Our current
internal requirement, however, is that the customer's equity not fall below 30
percent of the value of the securities in the account. If it does, the customer
will be required to increase the account's equity to 35 percent of the value of
the securities in the account. These requirements can be, and often are, raised
as we deem necessary for certain accounts, groups of accounts, securities, or
groups of securities.
AMERIVEST
AmeriVest is a wholesale provider of discount brokerage services to
depository institutions, including banks, savings and loans and credit unions.
AmeriVest provides these institutions a means of providing online discount
brokerage services to their retail customers without the need for the
institutions themselves to register as broker-dealers to provide these services.
ONMONEY
OnMoney is developing an Internet-based financial management system for
individual investors. OnMoney will provide its customers with a consolidated
financial statement showing all of their accounts with various financial
institutions, including banks, securities brokers, mutual funds, insurance and
mortgage brokers. OnMoney customers also will receive free information,
including news, market research and stock quotes. OnMoney expects to offer its
services to the public in the fall of 1999.
ADVERTISING AND MARKETING ALLIANCES
We intend to increase our market share through an aggressive advertising
program primarily consisting of online advertising, television, print, direct
mail and our own Web sites. In October
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1997, we launched a national marketing campaign to promote the Ameritrade brand
name and our new $8 price point. Since that date, we have invested over $66.4
million in advertising programs designed to bring greater brand recognition to
our services. During this period, our core discount brokerage accounts have
increased over 330% from approximately 98,000 accounts at September 26, 1997 to
approximately 428,000 accounts at March 26, 1999. As a result of this success,
we intend to significantly increase our investment in advertising in the future.
We currently have budgeted approximately $25 million for advertising expenses in
the quarter ended September 24, 1999 and approximately $200 million for
advertising expenses in fiscal 2000. From time to time, we may choose to
increase our advertising to target specific groups of investors or to decrease
advertising in response to market conditions.
Our marketing program focuses on advertising our online discount brokerage
services as a less expensive and more efficient way of executing transactions,
building awareness of our brand and selling the full range of our services. Our
target market includes individual investors who want to manage some or all of
their funds directly in a cost-effective manner. We believe that this represents
a very broad and growing segment of the U.S. population.
Online advertising is conducted through many Web sites, including our
relationships with America Online, as well as popular Web sites such as Yahoo!.
Our two-year contract with AOL makes us one of only four online brokerage firms
with exclusive access to AOL's customer base. Similarly, we are one of the four
online brokerage firms featured on Yahoo!'s finance Web page. We advertise
regularly on CNBC and other major television networks. We also place print
advertisements in a broad range of business publications, including The Wall
Street Journal, Barron's and Investor's Business Daily, and use direct mail
advertising.
To monitor the success of our various marketing efforts, we have installed
a sophisticated data gathering and tracking system. This system allows us to
determine the type of advertising that best appeals to our target market so that
we can invest future dollars in these programs and obtain a greater yield from
our marketing dollars. Additionally, through the use of our database tools, we
are working to more efficiently determine the needs of our various customer
segments and tailor our services to their individual needs. We intend to utilize
this system to strengthen relationships with our customers and support marketing
campaigns to attract new customers.
At our Web sites, prospective customers are able to obtain detailed
information on our services, use an interactive demonstration system, request
additional information and obtain an account application online. We may
capitalize on the traffic to our Web sites by selling advertising to third
parties who are interested in targeting our broad customer base.
We pursue public relations opportunities to build brand awareness. This
campaign includes appearances by our executives on CNN, CNBC and various
television networks, in addition to profiles in Business Week, The Wall Street
Journal, and Kiplinger's. We also participate on a regular basis at industry
conferences and events.
All of our communications with the public are regulated by the NASD.
TECHNOLOGY AND INFORMATION SYSTEMS
Technology is at the core of our business and is critical to our goal of
providing the best execution at the best value to our customers. Online trading
requires reliable, scalable systems that can handle complex financial
transactions for our customers with speed and accuracy. We maintain
sophisticated and proprietary technology that automates traditionally
labor-intensive securities transactions. Our ability to effectively leverage and
adopt new technology to improve our services is a key component to our success.
We combine our sophisticated systems with premier technology personnel. In
March 1999, we hired key executives with extensive technology backgrounds to
strengthen our technology capabilities. Our internal staff of programmers,
developers and operators provide critical support
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to our technology platform. In addition, our quality control analysts, Web site
developers, technical writers and design specialists help ensure that our
systems are easy to use, dependable and reflect the most current enhancements
and features. We currently employ approximately 150 employees in our technology
department and expect to double our technology staff over the next year. We
supplement our internal staff with consultants and contract programmers to
strengthen our capabilities in specialized technology disciplines.
We continue to make significant investments in technology and information
systems. Since March 1999, we have spent over $20 million to increase capacity
and improve reliability. In that time, we have more than doubled our daily trade
and Web capacity and increased our back office systems capacity by 70%. By
October of this year, we intend to increase our system-wide capacity by an
additional 300-400% to accommodate growth in our business. We also are upgrading
our systems and adding personnel to ensure the highest level of reliability for
our customers. Later this year, we will begin operating a second data center
that will be a duplicate of our primary data center. We expect to be able to run
our business from this second site, should our primary site fail, without any
service interruptions. To provide for system continuity during potential power
outages, we also have equipped our computer facilities with uninterruptible
power supply units, as well as back-up generators.
In general, technology impacts our business on three levels:
- - front-end applications are focused on customer contact with us and ability to
place trades through our system;
- - middleware technology handles the routing and processing of customer orders;
and
- - back office systems facilitate our interaction with third parties such as
clearinghouses, stock exchanges, execution agents and quote providers.
FRONT-END APPLICATIONS
Each customer interacts with our technology through various delivery
channels, with the primary channel being the Internet. We are currently
improving the speed and capacity of our Web site to ensure reliability as we
continue to grow. We believe that the Internet component of our technology and
information system has been a key contributor to our growth to date, and will
remain an important aspect of our growth in the future.
We recognize that privacy in transmitting confidential information over
public networks such as the Internet is critical to our operations. As a result,
we have invested in both proprietary and industry standard security measures to
protect the integrity of our customers' personal information and account data.
Customers are assigned unique account numbers and personal identification
numbers that must be used each time they log on to our system. We use encryption
technology to provide the security and authentication necessary to ensure the
confidential exchange of information between our customers and our system.
MIDDLEWARE
Our middleware is the technology that transfers and processes information
between the customer and the trading system. The middleware unifies the
front-end applications and multiple interfaces, supports different computer
languages, hardware platforms and protocols, and establishes the interface
between our back office system and the customers who execute transactions. We
are investing extensively in the development of our middleware to increase the
speed and reliability with which we can communicate with our customers. We have
successfully implemented Tuxedo, which is a high-end middleware package. Tuxedo,
coupled with our proprietary trading applications, allows us to handle hundreds
of thousands of transactions and execute them quickly and accurately.
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BACK OFFICE SYSTEM
Our back office systems include customer service work stations, order entry
systems, transaction summaries, data feeds for compliance and risk management,
execution reports, margin calculations, reconciliation of accounts and trade
confirmations. Our back office systems also contain our customer profile data
base functions and provide other support to Advanced Clearing. Our back office
system currently runs in a batch environment. We are exploring converting our
back office systems to a real-time environment.
CUSTOMER SERVICE
We strive to optimize the level of customer service provided to our clients
by:
- - expanding our use of technology to provide automated responses to the most
typical inquiries generated in the course of customers' securities trading and
related activities;
- - ensuring prompt response to customer service calls through adequate staffing
with properly trained and motivated personnel in our customer service
departments; and
- - tailoring customer service to the particular expectations of the clients of
each of our brokerage businesses.
ACCESS TO CUSTOMER SERVICE
We provide customer service support through a variety of access points,
including Web sites, e-mail, electronic bulletin boards and customer service
representatives.
- - WEB SITES. Web sites provide basic information on how to use our services. We
are in the process of redesigning our Web site to make it even more
user-friendly.
- - E-MAIL. Customers are encouraged to use e-mail for matters that are not time
sensitive. Our operating standards require a response within 24 hours of
receipt of the e-mail for such matters; however, we strive to respond within
60 minutes of the original message.
- - ELECTRONIC BULLETIN BOARDS. We maintain electronic bulletin boards where
existing and prospective customers can ask questions and exchange information
about our services.
- - CUSTOMER SERVICE REPRESENTATIVES. For customers who choose to call or whose
inquiries necessitate calling one of our customer service representatives, we
provide a toll-free number that connects to advanced call handling systems.
These systems provide automated answering, directing of calls to the proper
department, information about current wait times and the capability to exit
the voice queue to leave a voice message for later response or to transfer to
an automated system. Our systems also allow linkage between caller
identification and the customer database to give the customer service
representative immediate access to the customer's account data at the time the
call is received. We are currently implementing technology that will increase
call handling efficiency and enhance the customers' experience when calling
for service, particularly during periods of heavy market activity.
SERVICE AND TRAINING STANDARDS
Many of our customers' inquiries require handling by customer service
representatives. We provide our customers access to customer service
representatives via toll-free numbers 24 hours per day during the business week.
We strive to provide the best customer service in the industry as measured by
(1) speed of response time on telephone calls, (2) turnaround time on resolving
customer inquiries and (3) customer satisfaction with the account relationship.
We develop hiring plans that reflect growth projections to ensure that adequate
personnel are hired and trained in advance of customer needs. As of May 31,
1999, we employed over 750 full-time equivalent employees assigned to handle
customer service calls in our discount brokerage
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<PAGE> 43
businesses. We also are building a customer service operations center in Fort
Worth, Texas, to supplement our experienced customer service staff in Omaha,
Nebraska.
Customer service representatives receive training in brokerage operations,
our policies and procedures and basic telephone and clerical skills to ensure
quality and accuracy. Each new representative is monitored closely by a lead
representative, who is supervised by experienced operations managers. All
telephone calls are recorded for purposes of training and supervision and to
assist in the resolution of customer disputes.
We monitor the speed of answering telephone calls from our customers. We
also seek to monitor the level of overall customer satisfaction through use of
customer response cards sent with trade confirmations and through periodic
surveys. Written comments, e-mails and electronic postings by customers are
regularly reviewed by our senior officers. It is our policy to respond to all
customer questions, comments or complaints, regardless of the manner received.
INTERNATIONAL EXPANSION
We are exploring opportunities to expand our market share and brand
awareness abroad through various arrangements, including joint ventures with
local financial service providers and other strategic alliances. We currently
have alliances with Deutsche Bank in Germany and Cortal, a subsidiary of Banque
Paribas, in France. These alliances will provide their substantial customer
bases the ability to trade on the United States markets through Ameritrade.
Trades are settled in United States dollars. We are compensated through fee
arrangements with both partners based on trades made by their customers. We also
plan to offer our customers the ability to trade on the European markets through
our partners' systems. We intend to evaluate additional opportunities in Europe,
Japan and other Pacific Rim countries, either directly or through joint
ventures, to offer brokerage services to local customers. We have recently
signed non-disclosure agreements with well-established large financial
institutions in Europe and Japan to explore the possibility of extending the
Ameritrade brand name and operations to those markets.
COMPETITION
We believe that the principal determinants of success in the discount
brokerage market are brand recognition, size of customer base, technology
infrastructure and access to financial and managerial resources. We also believe
that the principal factors considered by customers in choosing a discount broker
are price, customer service, quality of trade execution, delivery platform
capabilities, convenience and ease of use, breadth of services and innovation.
Based on our experience, focus group research and the success we have enjoyed to
date, we believe that we presently compete successfully in each of these
categories.
The market for discount brokerage services, particularly electronic
brokerage services, is new, rapidly evolving and intensely competitive. We have
seen a dramatic increase in competition during 1998 and 1999 and expect this
competitive environment to continue in the future. We encounter direct
competition from numerous other discount brokerage firms, many of which provide
online brokerage services. These competitors include such discount brokerage
firms as Charles Schwab & Co., Inc., Fidelity Brokerage Services, Inc., TD
Waterhouse Securities, Inc., E*TRADE Securities, Inc., DLJdirect, a division of
Donaldson, Lufkin & Jenrette, Inc., Discover Brokerage Direct, Inc., an
affiliate of Morgan Stanley Dean Witter & Co., and Datek Online Brokerage
Services Corp. We also encounter competition from established full-commission
brokerage firms as well as financial institutions, mutual fund sponsors and
other organizations, some of which provide or have announced that they intend to
provide online brokerage services. For example, Merrill Lynch & Co. recently
announced that it intends to offer online brokerage services beginning in
December 1999.
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<PAGE> 44
INVESTMENTS
Our investments consist primarily of our ownership of unregistered shares
representing an approximately 7.1% interest in Knight/Trimark, a publicly held
company that is a leading market maker in Nasdaq securities as well as the
over-the-counter market in other securities. Knight/ Trimark is the successor
company to Roundtable, in which we had a minority interest. Knight/ Trimark
became a public company in 1998 and trades on The Nasdaq National Market under
the symbol "NITE". J. Joe Ricketts, our Chairman and Co-Chief Executive Officer,
and Gene L. Finn, one of our directors, are on the board of directors of
Knight/Trimark. We derive significant revenues from Knight/Trimark in exchange
for routing trade orders to them for execution. See "Risk Factors -- Changes in
payments for routing our customers' orders could adversely affect our business".
We also have investments in CSS, a software development firm for the
brokerage industry, and Adirondack Trading Partners, L.L.C., a development-stage
company formed to trade listed equity and index options.
REGULATION
The securities industry is subject to extensive regulation under federal
and state law as well as under the rules and regulations of self-regulatory
organizations such as the NASD and national stock exchanges. In general,
broker-dealers are required to register with the SEC and to be members of the
NASD. As such, we are subject to the requirements of the Securities Exchange Act
of 1934 and the rules promulgated thereunder relating to broker-dealers and to
the Rules of Fair Practice of the NASD. Such regulations establish, among other
things, minimum net capital requirements for us and our operating subsidiaries.
We are also subject to regulation under various state laws in all 50 states and
the District of Columbia, including registration requirements.
In its capacity as a securities clearing firm, Advanced Clearing is a
member of the National Securities Clearing Corporation, the Depository Trust
Company and The Options Clearing Corporation, each of which is registered as a
clearing agency with the SEC. As a member of these clearing agencies, Advanced
Clearing is required to comply with the rules of such clearing agencies,
including rules relating to possession and control of customer funds and
securities, margin lending and execution and settlement of transactions.
Margin lending activities are subject to limitations imposed by the Federal
Reserve and the NASD. In general, these regulations provide that in the event of
a decline in the value of securities collateralizing a margin account, we are
required to obtain additional collateral from the borrower. For a description of
these requirements, see "-- Advanced Clearing".
INTELLECTUAL PROPERTY RIGHTS
Our success and ability to compete are dependent to a significant degree on
our intellectual property, which includes our proprietary technology, trade
identity and customer base. We rely on all modes of intellectual property
protection to protect our intellectual property, including copyright, trade
secret, trademark, domain name, and patent and contract law. We have several
registered and unregistered tradenames, various registered and unregistered
copyrights, domain name registrations, a filed patent application, and licenses
and other technology agreements with third parties. The source and object code
for our proprietary software is protected under all applicable modes of
intellectual property protection. In addition, it is our policy to enter into
confidentiality, intellectual property ownership and/or noncompetition
agreements with our associates, independent contractors and business partners,
and to generally control access to and distribution of our intellectual
property.
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<PAGE> 45
EMPLOYEES
As of May 31, 1999, we employed approximately 1,600 full-time equivalent
employees, of which approximately 350 were registered representatives. The
number of employees has grown from the 412 full-time equivalent employees as of
the end of fiscal 1997 in response to the growth in the number of accounts and
transaction volume we have experienced. None of our employees are covered under
a collective bargaining agreement. We believe that our relations with our
employees are good.
Our employment assessment process is a critical factor in identifying
candidates whose abilities and potential create the opportunity to be a
successful associate with us. The assessment process includes an in-person
interview, a work-related behavioral trait profile, a cognitive reasoning
assessment test and a data entry "keyboarding" or computer skills test when
appropriate. We believe based on our experience to date that our employment
assessment process has a positive impact on our success.
PROPERTIES
Our headquarters are located in Omaha, Nebraska, and occupy approximately
74,000 square feet of leased space. The existing lease expires in April 2019.
During the third quarter of fiscal 1998, we began to lease an additional
facility in Bellevue, Nebraska, with approximately 132,000 square feet. This
facility is used as an operations center for Ameritrade. The Bellevue lease
expires in January 2008. We also lease four other locations in Omaha totaling
over 50,000 square feet. The leases on these properties expire from November
2001 through July 2006. In addition, we have leased space in White Plains, New
York, and New York City totaling approximately 25,000 square feet. The leases on
these properties expire from November 1999 through August 2001. We recently
began leasing space in Ft. Worth, Texas for a second operations center for
Ameritrade. We currently lease over 65,000 square feet and will soon occupy
additional space, bringing the total Ft. Worth square footage to over 185,000.
The leases in Ft. Worth expire between March 2000 and December 2014. We also
have recently subleased 8,000 square feet of office space in Baltimore, Maryland
to be used as a technology development center. The Baltimore facility lease
expires on December 31, 1999.
LEGAL PROCEEDINGS
On September 16, 1998, a putative class action complaint was filed in the
District Court, Douglas County, Nebraska, regarding our alleged inability to
handle the volume of subscribers to our Internet brokerage services. The
complaint seeks injunctive relief enjoining alleged deceptive, fraudulent and
misleading practices, equitable relief compelling us to increase capacity, and
unspecified compensatory damages. We believe that we have viable defenses to the
allegations raised in the complaint and intend to assert them vigorously.
However, because this proceeding is at a preliminary phase and the amount of
damages sought has not been quantified, we cannot predict the ultimate outcome
of this matter or its effect on our business.
On October 13, 1997, Advanced Clearing received from the Director of
Arbitration of the NASD an arbitration claim filed by Slavic Investment
Corporation, a former correspondent broker, and Slavic Mutual Funds Management
Corporation, a related company, regarding breach of contract. The damages sought
include approximately $9.3 million in compensatory damages, and five times that
amount in punitive damages. We have completed a portion of the arbitration
hearings with additional hearings scheduled for this fall. We believe that we
have viable defenses to the issues raised in the arbitration and intend to
assert them vigorously. We also believe that the damages sought are
substantially in excess of any losses that may have been incurred. However, if
the damages sought in the arbitration were ultimately assessed against us, it
could have a material adverse effect on our business, financial condition and
results of operations.
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<PAGE> 46
We also are parties to a number of other legal matters arising in the
ordinary course of our business. In our opinion, we have adequate legal defenses
to each of these actions and do not believe that any such matters, either
individually or in the aggregate, will materially affect our business, financial
condition or results of operations.
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<PAGE> 47
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers are as follows:
<TABLE>
<CAPTION>
AGE POSITION
--- --------
<S> <C> <C>
J. Joe Ricketts................... 57 Chairman, Co-Chief Executive Officer and Director
Thomas K. Lewis, Jr. ............. 46 Co-Chief Executive Officer
Robert T. Slezak.................. 41 Vice President, Chief Financial Officer, Treasurer and
Director
Jack R. McDonnell................. 45 Chief Executive Officer of Ameritrade
Kurt D. Halvorson................. 37 President of Advanced Clearing
J. Peter Ricketts................. 34 President of Accutrade, Secretary of Holding
James M. Ditmore.................. 38 Chief Information Officer
David D. Jones.................... 37 Vice President, Human Resources
Michael J. Anderson............... 42 President of Ameritrade
Susan M. Hohman................... 56 Vice President, Infrastructure and Facilities
Joseph A. Konen................... 51 Chief Executive Officer, OnMoney and Director
Gene L. Finn...................... 66 Director
David W. Garrison................. 43 Director
Thomas Y. Hartley................. 65 Director
Charles L. Marinaccio............. 65 Director
Mark L. Mitchell.................. 38 Director
John W. Ward...................... 56 Director
</TABLE>
J. JOE RICKETTS, has served as a director and as Chairman and Chief
Executive Officer of Holding since 1981. He has served as Co-Chief Executive
Officer of Holding since February 1999. In 1975, Mr. Ricketts became associated
with Holding and served as a director, officer and stockholder. By 1981, Mr.
Ricketts acquired majority control of Holding. Prior to 1975, Mr. Ricketts was a
registered representative with a national brokerage firm, an investment advisor
with Ricketts & Co. and a branch manager with The Dun & Bradstreet Corporation,
a financial information firm. Mr. Ricketts is a director of Knight/Trimark, CSS
Management, Inc. and Net.B@nk, Inc. Mr. Ricketts served as a member of the
District Committee for District 4 of the NASD from 1996 to 1999. Mr. Ricketts is
a member of the Board of Trustees for Father Flanagan's Boys' Homes (Boys Town)
and serves on the Board of Directors of Creighton University. Mr. Ricketts
received his B.A. in economics from Creighton University.
THOMAS K. LEWIS, JR., has served as Co-Chief Executive Officer of Holding
since February 1999. From May 1998 to October 1998, Mr. Lewis served as
President of TenFold Insurance Group, a systems integration and consulting
division of TenFold Corporation, where he was responsible for all business
operations, including marketing, sales, consulting, applications development,
business development and administration. From November 1993 to May 1998, Mr.
Lewis served as Chief Information Officer of USF&G, Inc., an insurance company.
From 1989 to 1993, Mr. Lewis was a co-founder of Seer Technologies, Inc., a
global technology consulting practice, and managed the company's rapid expansion
in Europe, the Middle East and Africa. From 1987 to 1989, he served as Senior
Vice President, Strategic Information Systems for American Express Corporation,
a financial service provider, and, from 1984 to 1987, spearheaded an effort to
rebuild all of the securities trading and settlement systems while serving as
Vice President, Systems Development and Support for Credit Suisse First Boston,
an investment banking firm. From 1982 to 1984, Mr. Lewis was head of technology
for the Executive Office of the President of the United States, and was
recognized with the highest award given for such service, The Distinguished
Service Award of the Office of Administration. Mr. Lewis is a
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<PAGE> 48
technology advisor for the National Federation of the Blind. He has a B.S. in
business administration and a M.S. in computer science from the University of
New Haven in Connecticut.
ROBERT T. SLEZAK, has served as Vice President, Chief Financial Office and
Treasurer of Holding since January 1989 and has served as a director since
October 1996. Mr. Slezak joined Holding in March 1987 and served as Operations
Manager at Advanced Clearing until January 1989. Prior to that time, Mr. Slezak
was a Senior Financial Analyst for Peter Kiewit Sons, Inc., an international
construction and mining company, from August 1985 to March 1987. From January
1980 to August 1985, Mr. Slezak was on the audit staff of Deloitte & Touche LLP,
an accounting firm. Mr. Slezak served as a member of the District Committee for
District 4 of the NASD from 1990 to 1992 and as a member of its Nominating
Committee from 1993 to 1994. Mr. Slezak serves on the Dean's Advisory Council
for the Creighton University College of Business Administration. Mr. Slezak is a
Certified Public Accountant. He holds a B.S. in business from the University of
Nebraska at Omaha and an M.B.A. from Creighton University.
JACK R. MCDONNELL, has served as Chief Executive Officer of Ameritrade
since March 1999. From March 1995 to December 1998, he served in a variety of
positions with First Data Corporation, the largest credit card processing
company in the United States. Most recently, he was Managing Director of Client
Development, Card Services Group, where he was responsible for all domestic
bankcard and private label client relationships. From 1989 to 1995, Mr.
McDonnell served as Executive Vice President and Chief Operating Officer of
FirsTier Financial, Inc. of Omaha, a regional banking firm. Mr. McDonnell
currently serves as chairman of Children's Memorial Hospital and is a member of
the board and past chairman of the Junior Achievement of the Midlands. Mr.
McDonnell is a Certified Public Accountant and has a B.A. in accounting from St.
Ambrose University.
KURT D. HALVORSON, has served as President of Advanced Clearing since April
1997. Mr. Halvorson served as Vice President and General Manager of Advanced
Clearing from April 1996 to March 1997. Mr. Halvorson served as Vice President
and Controller of Advanced Clearing from October 1992 to March 1996 and as
Controller of Advanced Clearing from September 1987 to October 1992. Mr.
Halvorson was on the audit staff of Deloitte & Touche LLP, an accounting firm,
from 1984 to September 1987. Mr. Halvorson is a Certified Public Accountant. Mr.
Halvorson received a B.S. in business from the University of Nebraska.
J. PETER RICKETTS, has served as Secretary of Holding since November 1996
and as President/General Manager of Accutrade since October 1997. From August
1996 to October 1997, Mr. Ricketts served as Director of Corporate Development
of Holding. From April 1995 to August 1996, Mr. Ricketts served as Project
Director for Accutrade. From January 1994 to March 1995, Mr. Ricketts served in
various management capacities, including as President, of Ameritrade. Mr.
Ricketts was a customer service representative for Accutrade from December 1993
to May 1994. Mr. Ricketts worked as Manager, Business Development, for Woodward
Clyde Consultants, an environmental consulting firm, from October 1992 to
September 1993. Mr. Ricketts served as Account Representative for Union Pacific
Railroad from July 1991 to September 1992. Mr. Ricketts holds a B.A. in biology
and an M.B.A. from the University of Chicago. J. Peter Ricketts is the son of J.
Joe Ricketts.
JAMES M. DITMORE, has served as Chief Information Officer for Holding since
March 1999. From December 1998 to March 1999, Mr. Ditmore served as Vice
President of Systems Development for Bell Atlantic Corporation, a regional Bell
operating company, where he was in charge of wholesale systems. From May 1998 to
December 1998, he served as Chief Technology Officer of TenFold Insurance
Systems Group, a systems integration and consulting division of TenFold
Corporation. From August 1995 to May 1998, Mr. Ditmore served as Vice President
of Enterprise Technology and Architecture for USF&G, Inc., an insurance company.
From August 1991 to August 1995, he served as Director of Enterprise
Architecture and Development Services
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<PAGE> 49
for MCI WorldCom, Inc., a telecommunications company. Mr. Ditmore has a B.S. in
math and computer science from the College of William & Mary.
DAVID D. JONES, has served as Vice President of Human Resources of Holding
since September 1998. Prior to joining Holding, Mr. Jones was the Executive
Director of Human Resources for the University of Nebraska Medical Center from
September 1994 to August 1998. From 1992 to 1994, he served as Vice President of
Human Development at the Beaver Valley Medical Center in Beaver, Pennsylvania.
From 1986 to 1992, Mr. Jones served as Vice President of Human Resources at West
Virginia University United Hospital Center. Mr. Jones was also an Adjunct
Faculty at Fairmont State College in Fairmont, West Virginia where he taught
Personnel and Human Resources Management. Mr. Jones received his B.A. in
psychology and M.A. in industrial and labor relations from West Virginia
University. He is certified as a Senior Professional in Human Resources (SPHR)
and as a Consultant in Managing Organizational Change.
MICHAEL J. ANDERSON, has served as President of Ameritrade since October
1997. From May 1996 to October 1997, Mr. Anderson was the President of
Accutrade. Mr. Anderson served as General Manager of Accutrade from August 1994
to May 1996 and served as Director of Marketing and Sales of Advanced Clearing
from October 1992 until August 1994. Mr. Anderson was an account executive for
Vital Learning Corporation, a training industry firm, from January 1990 to
October 1992. Mr. Anderson is President of the National Discount Brokerage
Association and is currently a trustee for the Security Industry Association's
Security Industry Institute. Mr. Anderson also has served as the Vice President
of Marketing with Sales and Marketing Executives of the Midlands. In addition,
he served as President of the Omaha chapter of the American Society of Training
and Development. Mr. Anderson received a B.S. in marketing from Iowa State
University.
SUSAN M. HOHMAN, was appointed Vice President, Infrastructure and
Facilities of Holding effective September 1998. Mrs. Hohman served as Vice
President, Human Resources, of Holding from August 1986 to 1998. Mrs. Hohman was
a member of the Human Resources Committee of the Securities Industry Association
in 1993. Mrs. Hohman received a B.S. in management from Bellevue University.
JOSEPH A. KONEN, has served as Chief Executive Officer of OnMoney since
November 1998 and has served as a director of Holding since October 1996. Mr.
Konen served as President and Chief Operating Officer of Holding from October
1994 to November 1998. From October 1992 to April 1995, Mr. Konen served as
President, and from February 1992 to October 1992, as Operations Manager, of
Advanced Clearing. Mr. Konen was a principal in Joseph A. Konen & Associates, a
management consulting firm, from June 1990 to February 1992. Mr. Konen was
President and Chief Executive Officer of Vital Learning Corporation, a training
industry firm, from January 1989 to June 1990 and was President and Chief
Executive Officer of its parent, Vital Resources, Inc., from October 1987 to
June 1990. Mr. Konen was a member of the Clearing Firms Committee of the
Securities Industry Association from 1995 to 1996 and was a member of its
Membership Committee from 1993 to 1994. Mr. Konen holds a B.A. in economics and
an M.B.A. in finance from Indiana University.
GENE L. FINN, has served as a director of Holding since December 1996. Mr.
Finn was Vice President and Chief Economist of the NASD from 1983 to 1995. Mr.
Finn was Chief Economist and Senior Adviser for the SEC from 1969 to 1982. In
such capacities, Mr. Finn provided policy advice on stock market and investment
company regulation and oversight. Mr. Finn is a director of Knight/Trimark. Mr.
Finn holds a Ph.D. in economics from the University of Wisconsin.
DAVID W. GARRISON, has served as a director of Ameritrade since December
1997. Mr. Garrison has also served on the Board of Directors of Traveling
Software, Inc., a software provider, since May 1996. Mr. Garrison served as
Chief Executive Officer, President and Chairman of the Board of Directors of
NETCOM On-Line Communications Services, Inc., an
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Internet service provider, from 1995 to 1998. Prior to joining NETCOM, Mr.
Garrison served as President of SkyTel, a division of Mobil Telecommunications,
Inc., from 1990 to 1994.
THOMAS Y. HARTLEY, has served as a director of Holding since December 1996.
Mr. Hartley has been President and Chief Operating Officer of Colbert Golf
Design and Development since 1991. From 1988 to 1991, Mr. Hartley was President
and Chief Operating Officer of Jim Colbert Golf Inc. Mr. Hartley was a partner
in Deloitte & Touche LLP, an accounting firm, from 1973 to 1988, and served in
other positions with Deloitte & Touche from 1959 to 1973. Mr. Hartley was an
officer in the United States Air Force from 1955 to 1961. Mr. Hartley is a
director of Southwest Gas Corporation and Sierra Health Services. Mr. Hartley
served as Chairman of the University of Nevada at Las Vegas Foundation from 1994
to 1996. Mr. Hartley is a Certified Public Accountant. Mr. Hartley has a B.S. in
commerce from Ohio University and earned certification in the Advanced
Management Program at Harvard University.
CHARLES L. MARINACCIO, has served as a director of Holding since January
1997. Mr. Marinaccio has served on the Board of Directors for the Securities
Investor Protection Corporation since 1995. From 1985 through 1994, he was a
partner with the law firm of Kelley, Drye & Warren. He served as Commissioner of
the SEC from 1984 to 1985. Mr. Marinaccio was General Counsel to the U.S. Senate
Committee on Banking, Housing and Urban Affairs from 1975 to 1984, and
previously served as an adviser and senior attorney with the regulatory and
legal divisions of the Federal Reserve. He holds a J.D. from the George
Washington University and received his B.A. from the University of Connecticut.
MARK L. MITCHELL, has served as a director of Holding since December 1996
and served as a member of Holding's Board of Advisors in 1993. Mr. Mitchell has
been an Associate Professor of Business Administration at Harvard University
since July 1999. Mr. Mitchell was an Associate Professor of Finance at the
University of Chicago from 1994 to 1999 and was an Assistant Professor of
Finance from 1990 to 1993. Mr. Mitchell was a Senior Financial Economist for the
SEC from 1987 to 1990. Mr. Mitchell was a member of the Economic Advisory Board
of the NASD from 1995 to 1998. Mr. Mitchell received his Ph.D. in applied
economics from Clemson University.
JOHN W. WARD, has served as a director of Holding since January 1997. Mr.
Ward has been an independent consultant since 1991 and Chairman of Transition
International, Inc., management consultants in financial services and
international corporate strategy, since its formation in 1994. Mr. Ward was
Chief Executive Officer of Midland Montagu US Group, New York, a British bank,
from 1987 to 1990. Mr. Ward was a Managing Director, President and Chairman of
the International Banking Group of Merrill Lynch & Co. Incorporated, an
investment banking firm, from 1981 to 1987. Prior to that time, he was a Vice
President of the Merchant Banking Group of Citibank, N.A., a national banking
firm. Mr. Ward holds a master's degree in chemistry from Oxford University and a
business degree from the Manchester Business School in the United Kingdom.
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<PAGE> 51
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth, as of the close of business on June 1,
1999, the beneficial ownership of our common stock as adjusted for a
three-for-one stock split effective on July 2, 1999 by:
- - each director, each co-chief executive officer and each of the other four
highest compensated executive officers of our company for fiscal 1998;
- - each person believed by us to beneficially own more than 5% of our common
stock;
- - all of our current executive officers and directors as a group; and
- - each selling stockholder.
Under the Securities Exchange Act of 1934, a person will be deemed to be a
"beneficial owner" of shares of our Class A common stock if he or she has or
shares the power to vote or direct the voting of such shares or the power to
dispose or direct the disposition of such shares. Unless otherwise indicated in
the footnotes to the table, each of the stockholders listed has sole voting and
dispositive power with respect to the shares of our Class A common stock shown
as beneficially owned.
<TABLE>
<CAPTION>
PRIOR TO THE OFFERINGS
----------------------------------- AFTER THE OFFERINGS
NUMBER OF -----------------------
NUMBER OF PERCENT OF SHARES NUMBER OF PERCENT OF
NAME SHARES(1) SHARES OFFERED SHARES SHARES
- ---- ---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
J. Joe Ricketts(2), Director,
Chairman and Co-Chief Executive
Officer.......................... 52,552,661 30.1% 875,000 51,677,661 28.2%
Thomas K. Lewis, Jr.(3), Co-Chief
Executive Officer................ 0 0 -- 0 0
Robert T. Slezak(4), Director, Vice
President, Chief Financial
Officer and Treasurer............ 579,732 * -- 579,732 *
Peter D. Horst(5), Vice President,
Marketing........................ 11,550 * -- 11,550 *
Joseph A. Konen(6), Chief Executive
Officer, OnMoney Financial
Services Corporation............. 95,343 * -- 95,343 *
Kurt D. Halvorson(7), President,
Advanced Clearing................ 265,632 * -- 265,632 *
Gene L. Finn, Director............. 33,600 * -- 33,600 *
David W. Garrison(8), Director..... 19,278 * -- 19,278 *
Thomas Y. Hartley, Director........ 0 0 -- 0 0
Charles L. Marinaccio(9),
Director......................... 39,204 * -- 39,204 *
Mark L. Mitchell(9), Director...... 104,244 * -- 104,244 *
John W. Ward(10), Director......... 31,692 * -- 31,692 *
All Directors and Executive
Officers as a group (18 in
group)(11)....................... 63,073,776 36.1% 875,000 62,198,776 33.9%
OTHER STOCKHOLDERS
Marlene M. Ricketts(12)............ 28,337,292 16.2% 625,000 27,712,292 15.1%
Ricketts Grandchildren Trust(13)... 19,008,000 10.9% -- 19,008,000 10.4%
</TABLE>
- ---------------
* Less than 1 percent of the issued and outstanding shares.
(1) Amounts of shares of common stock beneficially owned assumes that all of
the Class B common stock has been converted into Class A common stock.
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<PAGE> 52
(2) Shares of Class A common stock beneficially owned by Mr. Ricketts consist
of 34,611,312 shares held by Mr. Ricketts individually, 4,500,000 shares
held jointly with Marlene M. Ricketts, his spouse, 332,352 shares held in
the J. Ricketts IRA, 4,626,033 shares in Mr. Ricketts' 401(k) account, and
296,802 shares issuable upon the exercise of options exercisable within 60
days from June 1, 1999. Shares of Class B common stock beneficially owned
by Mr. Ricketts consist of 8,186,112 shares held by the Marlene M. Ricketts
1994 Dynasty Trust, over which Mr. Ricketts has sole voting and dispositive
power. Mr. Ricketts' address is c/o Ameritrade Holding Corporation, 4211
South 102nd Street, Omaha, Nebraska 68127.
(3) Mr. Lewis began his employment with Holding in February 1999. Mr. Lewis has
options to purchase 173,400 shares of Class A common stock exercisable over
a three year period, none of which are exercisable within 60 days from June
1, 1999.
(4) Consists of 54,660 shares of Class A common stock held by Robert T. Slezak
and Jane G. Slezak, as trustees of the Robert T. Slezak and Jane G. Slezak
Revocable Trust, and 525,072 shares of Class A common stock in Mr. Slezak's
401(k) account.
(5) Consists of 6,000 shares of Class A common stock held jointly with Deborah
R. Horst, his spouse, and 5,550 shares of Class A common stock in Mr.
Horst's 401(k) account. Mr. Horst terminated his employment with Holding in
June 1999.
(6) Represents shares of Class A common stock in Mr. Konen's 401(k) account.
(7) Consists of 9,600 shares of Class A common stock held jointly with Melinda
K. Halvorson, his spouse, and 256,032 shares of Class A common stock in Mr.
Halvorson's 401(k) account.
(8) Includes 6,402 shares of Class A common stock issuable upon the exercise of
options exercisable within 60 days from June 1, 1999.
(9) For each of Mr. Marinaccio and Mr. Mitchell, includes 33,600 shares of
Class A common stock issuable upon the exercise of options exercisable
within 60 days from June 1, 1999.
(10) Includes 14,400 shares of Class A common stock issuable upon the exercise
of options exercisable within 60 days from June 1, 1999.
(11) Includes 4,200,000 shares held by J. Peter Ricketts in his capacity as
co-trustee of the Marlene M. Ricketts 1999-1 Qualified Annuity Trust and
1,800,000 shares held by J. Peter Ricketts in his capacity as co-trustee of
the Marlene M. Ricketts 1999-2 Qualified Annuity Trust, over which he has
shared voting and dispositive power, and 1,500,000 shares held by J. Peter
Ricketts in his capacity as trustee of a trust created pursuant to the
Marlene M. Ricketts 1999 Irrevocable Trust, over which he has sole voting
and dispositive power. Also includes 394,008 shares issuable upon the
exercise of options exercisable within 60 days from June 1, 1999.
(12) Shares of Class A common stock beneficially owned by Mrs. Ricketts consist
of 14,787,912 shares held by Mrs. Ricketts individually, 4,500,000 shares
held jointly with J. Joe Ricketts, her spouse, 332,352 shares held in the
M. Ricketts IRA and 530,340 shares in Mrs. Ricketts' 401(k) account. Shares
of Class B common stock beneficially owned by Mrs. Ricketts consist of
8,186,688 shares held by the J. Joe Ricketts 1996 Dynasty Trust, over which
Mrs. Ricketts has sole voting and dispositive power. Mrs. Ricketts' address
is c/o Ameritrade Holding Corporation, 4211 South 102nd Street, Omaha,
Nebraska 68127.
(13) The trustee of the Joe and Marlene Ricketts Grandchildren's Trust is First
National Bank of Omaha, First National Center, 16th and Dodge Streets,
Omaha, Nebraska 68102.
48
<PAGE> 53
TRACES STOCKHOLDERS
Pursuant to forward purchase contracts between the TRACES Trust and the
stockholders listed below (the "TRACES Stockholders"), a specified number of
shares of Class A common stock may be required to be delivered to the TRACES
Trust by the TRACES Stockholders upon the exchange of Automatic Common Exchange
Securities. The following table sets forth certain information for the TRACES
Stockholders with respect to:
- the TRACES Stockholders' beneficial ownership of common stock after the
offerings and the percentage of common stock represented thereby;
- the maximum number of shares of Class A common stock owned by the TRACES
Stockholders that may be delivered to the TRACES Trust pursuant to the
forward purchase contracts; and
- the TRACES Stockholders' beneficial ownership of common stock after
delivery of the maximum number of shares of Class A common stock
deliverable to the TRACES Trust and the percentage of common stock
represented thereby.
The TRACES Stockholders' beneficial ownership of common stock will not
change as a result of the offering of the Automatic Common Exchange Securities
unless, until and to the extent that the TRACES Stockholders deliver shares of
Class A common stock to the TRACES Trust pursuant to the forward purchase
contracts.
<TABLE>
<CAPTION>
AFTER DELIVERY OF
MAXIMUM NUMBER MAXIMUM NUMBER
OF SHARES OF SHARES
DELIVERABLE TO DELIVERABLE TO
AFTER THE OFFERINGS TRACES TRUST(1)(2) TRACES TRUST
------------------------ ------------------ ------------------------
NUMBER OF PERCENT OF NUMBER OF PERCENT OF
TRACES STOCKHOLDERS SHARES SHARES SHARES SHARES
------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
J. Joe Ricketts......... 51,677,661 28.2% 4,000,000 47,677,661 26.0%
</TABLE>
- ---------------
(1) The 4,000,000 shares of Class A common stock deliverable to the TRACES Trust
will be delivered by J. Joe Ricketts individually or one or more entities
established for his benefit. J. Joe Ricketts individually may be required to
deliver up to an additional 600,000 shares of Class A common stock if the
underwriters' over-allotment option is exercised in respect of the Automatic
Common Exchange Securities.
(2) Pursuant to the forward purchase contracts, the shares deliverable
thereunder will be delivered to the TRACES Trust on the Exchange Date under
the forward purchase contracts. The Exchange Date will occur no earlier than
, 2002. Under the forward purchase contracts, some of the shares
of Class A common stock covered by the forward purchase contracts are not
mandatorily deliverable to the TRACES Trust.
49
<PAGE> 54
DESCRIPTION OF CAPITAL STOCK
The following summary description of our capital stock is based on the
provisions of our certificate of incorporation and bylaws and the applicable
provisions of the Delaware General Corporation Law. For information on how to
obtain copies of our certificate of incorporation and bylaws, see "Where You Can
Find More Information".
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
We currently have authority to issue 291,000,000 shares of capital stock,
consisting of 270,000,000 shares of Class A common stock, $.01 par value,
18,000,000 shares of Class B common stock, $.01 par value, and 3,000,000 shares
of preferred stock, $1.00 par value. As of June 1, 1999, 158,063,640 shares of
our Class A common stock, 16,372,800 shares of our Class B common stock and no
shares of our preferred stock were issued and outstanding.
After the offerings, there will be 166,563,640 shares of Class A common
stock issued and outstanding, 16,372,800 shares of Class B common stock issued
and outstanding and no shares of preferred stock issued and outstanding. The
additional shares of common stock and preferred stock may be utilized for a
variety of corporate purposes, including future public offerings and corporate
acquisitions, and could be utilized, under certain circumstances, to delay,
prevent or make more difficult a takeover or change in control of our company.
The rights of the holders of our Class A common stock and our Class B
common stock discussed below are subject to such rights as our board of
directors may from time to time confer on holders of our preferred stock that
may be issued in the future. Such rights may adversely affect the rights of
holders of our Class A common stock or our Class B common stock, or both.
COMMON STOCK
VOTING RIGHTS. Except for the election of directors and as otherwise
required by the law, the holders of our Class A common stock and our Class B
common stock have one vote per share and vote as a single class on any matter
submitted to a stockholder vote. Under the Delaware General Corporation Law, the
holders of Class A common stock must vote separately as a class to approve any
proposal to amend the certificate of incorporation to change the rights,
preferences and limitations of Class A common stock. Our board of directors
determines by resolution the number of directors we will have but, in any case,
by our bylaws, we may not have less than three. We currently have nine
directors.
The holders of our Class B common stock are entitled to elect a majority
(five) of our board of directors. The holders of Class A common stock are
entitled to elect the remaining (four) directors. Only the holders of the class
of common stock that have elected a director or that have filled the vacancy of
a director previously may remove or fill the vacancy of that director. If all of
the shares of Class B common stock are converted into Class A common stock or
are no longer outstanding, the holders of Class A common stock will be entitled
to elect all of the directors, subject to any rights of the holders of preferred
stock. The shares of Class A common stock and Class B common stock do not have
cumulative voting rights.
In general, the holders of our Class B common stock will be able to defeat
any attempt to acquire control of us even if more than a majority of the holders
of the outstanding shares of common stock favor a change of control. This could
preclude holders of shares of our common stock from receiving any premium above
market price for their shares that may be offered in an attempt to acquire
control of us. By their ability to control the board of directors, the holders
of our Class B common stock also will generally have the power to prevent
certain fundamental corporate changes, like a sale of substantially all of our
assets, a merger of our company or an amendment to our certificate of
incorporation.
50
<PAGE> 55
DIVIDEND RIGHTS. Dividends may be paid on our Class A common stock and our
Class B common stock when and as declared by our board of directors. Any
dividend declared and payable in cash, capital stock (other than our Class A
common stock or our Class B common stock) or other property must be paid equally
on a share-for-share basis on Class A common stock and Class B common stock.
Dividends and distributions payable in shares of Class A common stock may be
paid only on shares of Class A common stock, and dividends and distributions
payable in shares of Class B common stock may be paid only on shares of Class B
common stock. If a dividend or distribution payable in Class A common stock is
made on Class A common stock, the same dividend or distribution in Class B
common stock has to be made on Class B common stock. Similarly, if a dividend or
distribution payable in Class B common stock is made on Class B common stock,
the same dividend or distribution in Class A common stock must be made on Class
A common stock.
LIQUIDATION RIGHTS. If there is a liquidation, distribution or winding up
of Holding, the holders of our Class A common stock and the holders of our Class
B common stock will be entitled to participate equally on a share-for-share
basis in all distributions to the holders of common stock.
CONVERSION RIGHTS. Our Class A common stock is not convertible. Each share
of our Class B common stock is convertible into one share of our Class A common
stock at any time at the option of and without any cost to the holder of the
shares. Each share of Class B common stock automatically converts on a
share-for-share basis into one share of Class A common stock if that share of
Class B common stock is sold or transferred to any person other than a member of
the Control Group. In addition, Class B common stock automatically converts on a
share-for-share basis into Class A common stock if the number of shares of
outstanding common stock held by the Control Group falls below 20 percent of the
total number of shares of outstanding common stock.
PREEMPTIVE RIGHTS. Neither the holders of Class A common stock nor the
holders of Class B common stock have preemptive rights to purchase shares of
Class A or Class B common stock or shares of stock of any other class that we
may issue.
PREFERRED STOCK
Our board of directors are authorized to issue, by resolution and without
any action by stockholders, up to 3,000,000 shares of our preferred stock and
may establish the designations, dividend rights, dividend rate, conversion
rights, voting rights, terms of redemption, liquidation preference, sinking fund
terms and all other preferences and rights of any series of preferred stock,
including rights that could adversely affect the voting power of the holders of
Class A common stock. We have no present intention to issue any shares of
preferred stock.
DIRECTOR NOMINATIONS AND STOCKHOLDER PROPOSALS.
Our bylaws establish procedures for the nomination of candidates for
election as directors and stockholder proposals. In order to nominate directors
or bring other business before an annual meeting of stockholders, a stockholder
must give notice to the secretary not less than 120 days and not more than 150
days prior to the date of our proxy statement on the preceding year's annual
meeting. To make nominations or bring other business before a special meeting of
stockholders, a stockholder must give notice to the secretary not less than 60
days and not more than 90 days prior to the date of the special meeting. Only
the chief executive officer, the president, the majority of the board of
directors or the holders of not less than 25% of our outstanding voting stock
may call a special meeting of the stockholders. A stockholder may nominate a
person to be a director only if that stockholder would be entitled to vote for
that person in the election for that director. Also, the stockholder's notice
for nominating a director must provide all information relating to the person
being nominated that required by Regulation 14A of the Securities Exchange Act
of 1934.
51
<PAGE> 56
CERTAIN STATUTORY PROVISIONS.
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. In general, this statute prohibits a publicly held Delaware
corporation like us from engaging in a business combination with an interested
stockholder for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless
- - prior to that date, the corporation's board of directors approved either the
business combination or the transaction that resulted in the stockholder
becoming an interested stockholder,
- - upon consummation of the transaction that resulted in such person becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding, for purposes of determining the number of shares
outstanding, shares owned by directors who are also officers and by certain
employee stock plans, or
- - on or after the date the stockholder became an interested stockholder, the
business combination is approved by the corporation's board of directors and
authorized by the affirmative vote, and not by written consent, of at least
two-thirds of the outstanding voting stock of the corporation excluding the
stock owned by the interested stockholder.
A "business combination" includes a merger or consolidation, asset sale or
other transaction resulting, directly or indirectly, in a financial benefit to
the interested stockholder. An "interested stockholder" is a person, other than
the corporation and any direct or indirect majority owned subsidiary of the
corporation, who (1) is the owner of 15% or more of the corporation's
outstanding voting stock or (2) is an affiliate or associate of the corporation
and was the owner of 15% or more of the corporation's outstanding voting stock
at any time within the three-year period immediately prior to the date on which
it is sought to be determined whether a person is an interested stockholder,
including the affiliates or associates of that person.
Section 203 expressly exempts from the requirements described above any
business combination by a corporation with an interested stockholder who became
an interested stockholder at a time when the section did not apply to the
corporation.
LIMITATION OF LIABILITY AND INDEMNIFICATION
LIMITATIONS OF DIRECTOR LIABILITY. Section 102(b)(7) of the Delaware
General Corporation Law authorizes corporations to limit or eliminate the
personal liability of directors to corporations and their stockholders for
monetary damages for breach of directors' fiduciary duty of care. Our
certificate of incorporation limits the liability of our directors to us or our
stockholders to the full extent permitted by the law. Specifically, our
directors are not personally liable for monetary damages to us or our
stockholders for breach of the director's fiduciary duty as a director, except
for liability for:
- - any breach of the director's duty of loyalty to us or our stockholders;
- - acts or omissions not in good faith or that involve intentional misconduct or
a knowing violation of law;
- - unlawful payments of dividends or unlawful stock repurchases or redemptions as
provided in Section 174 of the Delaware General Corporation Law; and
- - any transaction from which the director derived an improper personal benefit.
These provisions in our certificate incorporation do not eliminate a
director's duty of care and do not affect the availability of equitable remedies
such as an action to enjoin or rescind a
52
<PAGE> 57
transaction involving a breach of fiduciary duty. Moreover, these provisions
would probably not bar claims against a director for violation of the federal
securities laws.
INDEMNIFICATION. Our bylaws require us to indemnify our directors and
officers to the maximum extent permitted by law against any expense, liability
or loss to which they may become subject, or which they may incur as a result of
being or having been a director or officer of our company. In addition, we must
advance or reimburse directors and officers for expenses incurred by them
relating to indemnifiable claims. We also maintain directors' and officers'
liability insurance, which covers liabilities under the federal securities laws.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our Class A common stock is The Bank
of New York.
VALIDITY OF CLASS A COMMON STOCK
The validity of the Class A common stock offered by us and the selling
stockholders is being passed upon for us by Mayer, Brown & Platt, Chicago,
Illinois, and for the underwriters by Sullivan & Cromwell, New York, New York.
EXPERTS
The consolidated financial statements as of September 25, 1998 and
September 26, 1997 and for each of the years in the three year period ended
September 25, 1998, included in this prospectus and the related financial
statement schedule incorporated by reference from our Annual Report on Form
10-K/A for the year ended September 25, 1998 in this prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports, which are included and incorporated by reference herein, and have been
so included and incorporated in reliance upon the reports of such firm given
upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement of which this
prospectus forms a part. The registration statement, including the attached
exhibits and schedules, contain additional relevant information about us and our
Class A common stock. The rules and regulations of the SEC allow us to omit some
of the information included in the registration statement from this prospectus.
In addition, we have filed reports, proxy statements and other information with
the SEC under the Securities Exchange Act of 1934. You may read and copy any of
this information at the following locations of the SEC:
<TABLE>
<S> <C> <C>
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois 60661-2511
</TABLE>
You may obtain information on the operation of the SEC's Public Reference
Room by calling the SEC at 1-800-SEC-0330.
The SEC also maintains an Internet Web site that contains reports, proxy
statements and other information regarding issuers, like us, that file
electronically with the SEC. The address of that site is http://www.sec.gov. The
SEC file number for our documents filed under the Securities Exchange Act of
1934 is 0-22163.
53
<PAGE> 58
The SEC allows us to "incorporate by reference" information into this
prospectus. This means we can disclose important information to you by referring
you to another document filed separately with the SEC. The information
incorporated by reference is considered to be a part of this prospectus, except
for any such information that is superseded by information included directly in
this document.
This prospectus incorporates by reference the documents listed below that
we have previously filed or will file with the SEC. They contain important
information about us and our financial condition.
- - Our Annual Report on Form 10-K for our fiscal year ended September 25, 1998,
filed on December 21, 1998, as amended by Form 10-K/A filed on January 20,
1999 (except for Item 8, "Financial Statements and Supplementary Data," which
has been updated and included elsewhere in this prospectus);
- - Our Quarterly Report on Form 10-Q for the quarterly period ended December 31,
1998, filed on February 12, 1999;
- - Our Quarterly Report on Form 10-Q for the quarterly period ended March 26,
1999, filed on May 10, 1999 (except for Item 1, "Consolidated Financial
Statements", which has been updated and included elsewhere in this
prospectus); and
- - All documents filed with the SEC by us under Sections 13(a), 13(c) 14, and
15(d) of the Securities Exchange Act of 1934 after the date of this prospectus
and before the offering is terminated, are considered to be part of this
prospectus, effective as of the date these documents are filed.
In the event of conflicting information in these documents, the information
in the latest filed document should be considered correct.
You can obtain any of the documents listed above from the SEC, through the
SEC's Web site at the address described above, or directly from us, by
requesting them in writing or by telephone at the following address:
Ameritrade Holding Corporation
4211 South 102nd St.
Omaha, Nebraska 68127
Attn: J. Peter Ricketts, Secretary
(402) 331-7856
We will provide a copy of any of these documents without charge, excluding
any exhibits unless the exhibit is specifically listed as an exhibit to the
registration statement of which this prospectus is a part. If you request any
documents from us, we will mail them to you by first class mail, or another
equally prompt means, within two business days after we receive your request.
54
<PAGE> 59
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Audited Financial Statements:
Independent Auditors' Report.............................. F-2
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Income......................... F-4
Consolidated Statements of Stockholders' Equity........... F-5
Consolidated Statements of Cash Flows..................... F-6
Notes to Consolidated Financial Statements................ F-7
Unaudited Financial Statements:
Consolidated Balance Sheets............................... F-18
Consolidated Statements of Operations..................... F-19
Consolidated Statements of Cash Flows..................... F-20
Statements of Consolidated Comprehensive Income........... F-21
Notes to Consolidated Financial Statements................ F-22
</TABLE>
F-1
<PAGE> 60
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Ameritrade Holding Corporation and Subsidiaries
Omaha, Nebraska
We have audited the accompanying consolidated balance sheets of Ameritrade
Holding Corporation and its subsidiaries (collectively, the "Company") as of
September 25, 1998 and September 26, 1997, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended September 25, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Ameritrade Holding Corporation
and its subsidiaries as of September 25, 1998 and September 26, 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended September 25, 1998, in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Omaha, Nebraska
October 27, 1998 (July 9, 1999 as to Note 11)
F-2
<PAGE> 61
AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 26, 1997 AND SEPTEMBER 25, 1998
ASSETS
<TABLE>
<CAPTION>
1997 1998
------------ --------------
<S> <C> <C>
Cash and cash equivalents................................... $ 53,522,447 $ 24,526,935
Cash and investments segregated in compliance with federal
regulations............................................... 319,763,921 503,455,354
Receivable from brokers, dealers, and clearing
organizations............................................. 17,823,640 25,732,164
Receivable from customers and correspondents -- net of
allowance for doubtful accounts: 1997 -- $249,949; 1998 --
$1,039,788................................................ 325,407,147 647,121,854
Furniture, equipment and leasehold improvements -- net of
accumulated depreciation and amortization: 1997 --
$3,732,790; 1998 -- $6,728,212............................ 8,709,923 26,116,333
Goodwill -- net of accumulated amortization................. 6,346,763 5,983,761
Investments................................................. 12,597,972 30,760,729
Deferred income taxes....................................... 39,314 --
Other assets................................................ 13,145,616 26,704,546
------------ --------------
Total assets...................................... $757,356,743 $1,290,401,676
============ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Payable to brokers, dealers and clearing organizations.... $ 1,404,999 $ 11,765,785
Payable to customers and correspondents................... 666,279,440 1,136,082,337
Accounts payable and accrued liabilities.................. 19,252,931 30,716,987
Notes payable............................................. -- 11,000,000
Income taxes payable...................................... 3,430,279 1,331,170
Deferred income taxes..................................... -- 14,933,313
------------ --------------
Total liabilities................................. 690,367,649 1,205,829,592
------------ --------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par value; authorized 3,000,000
shares, none issued.................................... -- --
Common stock, $0.01 par value:
Class A -- 270,000,000 shares authorized; 157,841,076
shares issued........................................ 1,578,411 1,578,411
Class B -- 18,000,000 shares authorized; 16,372,800
shares issued and outstanding........................ 163,728 163,728
------------ --------------
Total common stock................................ 1,742,139 1,742,139
Additional paid in capital.................................. 21,700,545 21,683,870
Retained earnings........................................... 43,546,410 43,756,848
Treasury stock -- Class A shares at cost (56,652 shares at
September 25, 1998)....................................... -- (133,388)
Net unrealized investment gain.............................. -- 17,522,615
------------ --------------
Total stockholders' equity........................ 66,989,094 84,572,084
------------ --------------
Total liabilities and stockholders' equity........ $757,356,743 $1,290,401,676
============ ==============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 62
AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 27, 1996, SEPTEMBER 26, 1997 AND SEPTEMBER 25,
1998
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Commissions and clearing fees.............. $ 36,469,561 $ 51,936,902 $ 85,644,433
Interest revenue........................... 22,517,655 36,622,800 66,716,234
Equity income from investments............. 3,358,871 3,443,807 5,083,172
Gain from sale of investment............... -- -- 794,634
Other...................................... 3,032,443 3,663,685 5,955,534
------------ ------------ ------------
Total revenues..................... 65,378,530 95,667,194 164,194,007
Interest expense........................... 11,039,777 18,428,854 29,278,536
------------ ------------ ------------
Net revenues....................... 54,338,753 77,238,340 134,915,471
Expenses excluding interest:
Employee compensation and benefits......... 14,049,642 19,290,808 36,082,707
Commissions and clearance.................. 2,530,642 3,320,262 5,762,336
Communications............................. 3,685,535 5,623,468 12,926,154
Occupancy and equipment costs.............. 2,889,654 5,422,839 10,621,551
Advertising................................ 7,537,265 13,970,834 43,613,779
Other...................................... 5,228,422 8,185,016 25,377,918
------------ ------------ ------------
Total expenses excluding
interest......................... 35,921,160 55,813,227 134,384,445
------------ ------------ ------------
Income before provision for income taxes..... 18,417,593 21,425,113 531,026
Provision for income taxes................... 7,259,248 7,602,964 320,588
------------ ------------ ------------
Net income................................... $ 11,158,345 $ 13,822,149 $ 210,438
============ ============ ============
Basic earnings per share..................... $ 0.07 $ 0.08 $ 0.00
Diluted earnings per share................... $ 0.07 $ 0.08 $ 0.00
Weighted average shares outstanding --
basic...................................... 153,765,876 165,226,668 174,187,962
Weighted average shares outstanding --
diluted.................................... 153,765,876 165,233,442 174,464,730
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 63
AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 27, 1996, SEPTEMBER 26, 1997 AND SEPTEMBER 25,
1998
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------------------ PAID-IN RETAINED TREASURY
TOTAL CLASS A CLASS B TOTAL CAPITAL EARNINGS STOCK
----------- ---------- --------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September 29, 1995.... $19,503,719 $1,595,811 $ 299,376 $ 1,895,187 $ (793,519) $19,839,450 $(1,437,399)
Net Income................... 11,158,345 -- -- -- -- 11,158,345 --
Retirement of treasury
stock...................... -- (221,880) (135,648) (357,528) 193,663 (1,273,534) 1,437,399
----------- ---------- --------- ----------- ----------- ----------- -----------
Balance, September 27, 1996.... 30,662,064 1,373,931 163,728 1,537,659 (599,856) 29,724,261 --
Net Income................... 13,822,149 -- -- -- -- 13,822,149 --
Issuance of 48,000 shares
from compensation plans.... 33,750 480 -- 480 33,270 -- --
Issuance of 20,400,000 shares
from initial public
offering................... 22,471,131 204,000 -- 204,000 22,267,131 -- --
----------- ---------- --------- ----------- ----------- ----------- -----------
Balance, September 26, 1997.... 66,989,094 1,578,411 163,728 1,742,139 21,700,545 43,546,410 --
Net Income................... 210,438 -- -- -- -- 210,438 --
Purchase of treasury stock... (286,375) -- -- -- -- -- (286,375)
Reissuance of treasury
stock...................... 136,312 -- -- -- (16,675) -- 152,987
Net unrealized investment
gain....................... 17,522,615 -- -- -- -- -- --
----------- ---------- --------- ----------- ----------- ----------- -----------
Balance, September 25, 1998.... $84,572,084 $1,578,411 $ 163,728 $ 1,742,139 $21,683,870 $43,756,848 $ (133,388)
=========== ========== ========= =========== =========== =========== ===========
<CAPTION>
NET
UNREALIZED
INVESTMENT
GAIN
-----------
<S> <C>
Balance, September 29, 1995.... $ --
Net Income................... --
Retirement of treasury
stock...................... --
-----------
Balance, September 27, 1996.... --
Net Income................... --
Issuance of 48,000 shares
from compensation plans.... --
Issuance of 20,400,000 shares
from initial public
offering................... --
-----------
Balance, September 26, 1997.... --
Net Income................... --
Purchase of treasury stock... --
Reissuance of treasury
stock...................... --
Net unrealized investment
gain....................... 17,522,615
-----------
Balance, September 25, 1998.... $17,522,615
===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 64
AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 27, 1996, SEPTEMBER 26, 1997 AND SEPTEMBER 25,
1998
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 11,158,345 $ 13,822,149 $ 210,438
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization........................... 1,048,692 1,693,487 2,999,017
Provision for losses.................................... 148,014 59,000 815,000
Deferred income taxes................................... (358,139) 405,064 3,769,643
Equity income from investments.......................... (3,358,871) (3,443,807) (5,083,172)
Gain from sale of investment............................ -- -- (794,634)
Amortization of goodwill................................ 363,002 363,002 363,002
Changes in operating assets and liabilities:
Cash and investments segregated in compliance with
Federal regulations................................. (51,977,699) (144,095,424) (183,691,433)
Receivable from brokers, dealers and clearing
organizations....................................... (5,080,870) (2,726,778) (7,908,524)
Receivable from customers and correspondents.......... (36,035,750) (159,391,092) (322,529,707)
Other assets.......................................... (658,027) (7,132,072) (13,558,930)
Payable to brokers, dealers and clearing
organizations....................................... (1,664,200) 211,520 10,360,786
Payable to customers and correspondents............... 105,080,587 309,336,470 469,802,897
Accounts payable and accrued liabilities.............. 1,999,534 12,031,923 11,464,056
Income taxes payable.................................. 244,342 2,623,568 (2,099,109)
------------ ------------- -------------
Net cash provided by (used in) operating
activities....................................... 20,908,960 23,757,010 (35,880,670)
------------ ------------- -------------
Cash flows from investing activities:
Acquisition of subsidiary............................... (188,953) -- --
Purchase of furniture, equipment and leasehold
improvements.......................................... (1,104,124) (6,657,232) (20,405,427)
Purchase of investments................................. (6,272,361) (659,613) (1,652,740)
Distributions received from investments................. 2,902,005 3,663,231 12,264,993
Proceeds from sale of investments....................... -- -- 5,828,395
------------ ------------- -------------
Net cash used in investing activities............... (4,663,433) (3,653,614) (3,964,779)
------------ ------------- -------------
Cash flows from financing activities:
Issuance of Class A common stock........................ -- 33,750 --
Proceeds from initial public offering, net of offering
costs................................................. -- 22,471,131 --
Proceeds from notes payable............................. -- -- 22,500,000
Principal payments on notes payable..................... (2,244,000) (4,853,000) (11,500,000)
Purchase of treasury stock.............................. -- -- (286,375)
Reissuance of treasury stock............................ -- -- 136,312
------------ ------------- -------------
Net cash provided by (used in) financing
activities....................................... (2,244,000) 17,651,881 10,849,937
------------ ------------- -------------
Net increase (decrease) in cash and cash equivalents...... 14,001,527 37,755,277 (28,995,512)
Cash and cash equivalents at beginning of year............ 1,765,643 15,767,170 53,522,447
------------ ------------- -------------
Cash and cash equivalents at end of year.................. $ 15,767,170 $ 53,522,447 $ 24,526,935
============ ============= =============
Supplemental cash flow information:
Interest paid........................................... $ 11,025,779 $ 17,623,539 $ 28,258,819
Income taxes paid (refunds received).................... $ 7,342,359 $ 4,525,078 $ (1,418,800)
Supplemental investing activities:
Unrealized investment gain net of deferred taxes of
$11,202,984........................................... $ -- $ -- $ 17,522,615
Noncash financing activities:
Retirement of treasury stock............................ $ 1,437,399 $ -- $ --
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 65
AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 27, 1996, SEPTEMBER 26, 1997
AND SEPTEMBER 25, 1998
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- The consolidated financial statements include the
accounts of Ameritrade Holding Corporation and its wholly-owned subsidiaries
(collectively, the "Company"), Advanced Clearing, Inc. ("Advanced Clearing"),
formerly known as AmeriTrade Clearing, Inc., Accutrade, Inc. ("Accutrade"),
Ameritrade (Inc.), formerly known as Ceres Securities, Inc., AmeriVest, Inc.
("AmeriVest"), formerly known as All American Brokers, Inc., K. Aufhauser &
Company ("Aufhauser"), and OnMoney Financial Services Corporation ("OnMoney").
All significant intercompany balances and transactions have been eliminated.
On September 27, 1996, the Company's Board of Directors approved a
resolution to reincorporate in the State of Delaware and change its name from
TransTerra Co. to Ameritrade Holding Corporation. The reincorporation was
accomplished by exchanging each share of Class A and Class B common stock of
TransTerra Co. for thirty shares of Class A and Class B common stock of the
Company. On January 23, 1997, the Company effected an eight-for-five stock split
in the form of a stock dividend. During 1998, the Company's Board of Directors
declared a two-for-one common stock split, distributed August 1998, and effected
in the form of a stock dividend. All share data and per share amounts have been
restated to reflect these exchanges.
The Company reports on a fifty-two/fifty-three week year. The fiscal years
ended 1998, 1997, and 1996 were each fifty-two week years.
Nature of Operations -- The Company provides discount securities brokerage
services through its Ameritrade (Inc.), Accutrade, Aufhauser, and AmeriVest
subsidiaries. The Company also provides trading execution and clearing services
for its own broker-dealer operations and for unaffiliated broker-dealers through
Advanced Clearing. OnMoney is a development-stage entity involved in on-line
financial services. The Company's broker-dealer subsidiaries are subject to
regulation by the Securities and Exchange Commission, the National Association
of Securities Dealers, and the Chicago Stock Exchange, Inc.
Capital Stock -- The authorized capital stock of the Company consists of
Class A common stock, Class B common stock and preferred stock. Each share of
Class A and Class B common stock is entitled to one vote on all matters, except
that the Class B common stock is entitled to elect a majority of the directors
of the Company and the Class A common stock is entitled to elect the remainder
of the directors. Each class of common stock is equally entitled to dividends
if, as and when declared by the Board of Directors. Shares of Class A common
stock are not convertible, while each share of Class B common stock is
convertible into one share of Class A common stock at the option of the Class B
holder or upon the occurrence of certain events. Class A and Class B common
stock have equal participation rights in the event of a liquidation of the
Company.
Voting, dividend, conversion and liquidation rights of the preferred stock
would be established by the Board of Directors upon issuance of such preferred
stock.
Use of Estimates -- The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure 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.
F-7
<PAGE> 66
AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 27, 1996, SEPTEMBER 26, 1997
AND SEPTEMBER 25, 1998
Securities Transactions -- Securities transactions are recorded on a
settlement date basis with such transactions generally settling three business
days after trade date. Revenues and expenses related to securities transactions,
including revenues from execution agents, are also recorded on settlement date,
which is not materially different than trade date.
Depreciation and Amortization -- Depreciation is provided on a
straight-line basis using estimated useful service lives of three to seven
years. Leasehold improvements are amortized over the lesser of the economic
useful life of the improvement or the term of the lease.
Goodwill is amortized on a straight-line basis generally over a twenty year
period. Accumulated amortization at September 25, 1998 and September 26, 1997
was $1,243,026 and $880,024, respectively. The Company reviews its intangible
assets for impairment at least annually or whenever events or change in
circumstances indicate that the carrying amount of such asset may not be
recoverable.
Income Taxes -- The Company files a consolidated income tax return with its
subsidiaries on a calendar year basis. Deferred income taxes are provided for
temporary differences between financial statement and taxable income. The
principal temporary differences arise from depreciation, bad debts, prepaid
expenses, and certain accrued liabilities. Deferred tax liabilities and assets
are determined based on the differences between the financial statement carrying
amounts and tax bases of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse.
Cash and Cash Equivalents -- The Company considers temporary, highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
Segregated Cash and Investments -- Cash and investments consisting
primarily of U.S. Treasury Bills and repurchase agreements at Advanced Clearing
of $503,455,354 and $319,763,921 as of September 25, 1998 and September 26,
1997, respectively, have been segregated in a special reserve bank account for
the benefit of customers under Rule 15c3-3 of the Securities and Exchange
Commission.
Estimated Fair Value of Financial Instruments -- The Company considers the
amounts presented for financial instruments on the consolidated balance sheets
to be reasonable estimates of fair value. The estimated fair value amounts have
been determined by the Company using available market information and
appropriate valuation methodologies.
Investments -- The Company's investments in companies and partnerships are
accounted for under the equity method when the Company has the ability to
exercise significant influence over the investee's operating and financial
policies. The cost method is used for investments that do not meet equity method
requirements. The Company's investments in marketable equity securities are
carried at fair market value and designated as available for sale. Unrealized
gains and losses, net of deferred income taxes, are reflected as a separate
component of stockholders' equity. Realized gains and losses are determined on
the specific identification method and reflected in operations.
Advertising -- The Company generally expenses advertising costs as they are
incurred.
Earnings Per Share -- The Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share ("SFAS 128")
and accordingly, restated all prior period earnings per share ("EPS") to conform
with SFAS 128. This statement requires dual presentation of basic and diluted
earnings per share on the face of the Statement
F-8
<PAGE> 67
AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 27, 1996, SEPTEMBER 26, 1997
AND SEPTEMBER 25, 1998
of Income. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of all classes
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or securities converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity. The
adoption of SFAS 128 did not have a material effect on previously reported EPS.
Stock Based Compensation -- As permitted by SFAS No. 123, Accounting for
Stock Based Compensation, the Company accounts for its stock-based compensation
on the intrinsic-value method in accordance with Accounting Principles Board
("APB") Opinion No. 25.
Reclassifications -- Certain items in prior years' consolidated financial
statements have been reclassified to conform to the current year presentation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
SFAS No. 130 -- In June 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income ("SFAS No. 130"). This statement establishes standards for
reporting and display of comprehensive income and its components in a full set
of financial statements. This statement is effective for fiscal years beginning
after December 15, 1997. Companies are also required to report comparative
totals for comprehensive income in interim reports. The Company will report
comprehensive income commencing in fiscal 1999.
SFAS No. 131 -- In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131, Disclosures About Segments of an Enterprise and
Related Information ("SFAS No. 131"). This statement requires disclosures for
each segment that are similar to those required under current standards with the
addition of quarterly disclosure requirements and more specific and detailed
geographic disclosures especially by countries as opposed to broad geographic
regions. The provisions of SFAS No. 131 are effective for fiscal years beginning
after December 15, 1997. This statement will have no impact on the Company as
the Company currently does not have reportable operating segments.
SFAS No. 133 -- In June 1998, the FASB issued Statement of Financial
Accounting Standards No. 133, Accounting for Derivatives and Similar Financial
Instruments and for Hedging Activities. This statement revises the accounting
for the recognition and measurement of derivatives and hedging transactions and
is effective for fiscal years beginning after June 15, 1999. The Company has not
determined the impact this statement will have on the consolidated financial
statements.
F-9
<PAGE> 68
AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 27, 1996, SEPTEMBER 26, 1997
AND SEPTEMBER 25, 1998
2. RECEIVABLE FROM AND PAYABLE TO BROKERS, DEALERS AND CLEARING ORGANIZATIONS
Amounts receivable from and payable to brokers, dealers and clearing
organizations are comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 26, SEPTEMBER 25,
1997 1998
------------- -------------
<S> <C> <C>
Receivable:
Securities borrowed............................. $15,072,400 $21,638,669
Securities failed to deliver.................... 2,751,240 4,069,740
Clearing organizations.......................... -- 23,755
----------- -----------
Total........................................ $17,823,640 $25,732,164
=========== ===========
Payable:
Securities loaned............................... $ -- $ 5,519,000
Securities failed to receive.................... 1,005,984 2,227,342
Clearing organizations.......................... 399,015 4,019,443
----------- -----------
Total........................................ $ 1,404,999 $11,765,785
=========== ===========
</TABLE>
3. INVESTMENTS
Knight/Trimark Group, Inc. -- Prior to July 8, 1998, the Company owned a
9.2 percent interest in Roundtable Partners L.L.C. ("Roundtable"), a company
formed to hold equity interests in securities trading and market making
companies. The Company had accounted for its investment in Roundtable under the
equity method since its inception. On July 8, 1998, Roundtable was reorganized
into a corporation known as Knight/Trimark Group, Inc. ("Knight/ Trimark")
coincident with an initial public offering of Knight/Trimark common stock. As a
result of this reorganization, all of the Company's ownership interest in
Roundtable was converted to common stock of Knight/Trimark, which represents 7.7
percent of the issued and outstanding shares of common stock of Knight/Trimark.
As of September 25, 1998, the Company also received a cash distribution of
$7,817,329 in connection with the reorganization. The cash distribution was a
return of capital, therefore there was no gain or loss associated with the
distribution. As a result of the reorganization of Knight/Trimark and subsequent
initial public offering in 1998, the Company accounts for its investment in
Knight/Trimark as a marketable equity security held available-for-sale. The
Company's investment in Knight/Trimark is subject to a 180-day sale restriction
agreement from the initial public offering date with the underwriters of the
initial public offering and potential registration costs. On September 25, 1998,
the Company valued its investment in Knight/Trimark at $29,454,879. The
Company's cost basis on September 25, 1998 was $729,280, therefore the gross
unrealized gain is $28,725,599. The Company executes a portion of its securities
transactions through subsidiaries of Knight/Trimark. Revenues related to such
transactions totaled $9,435,696, $6,843,502, and $7,758,836 in 1998, 1997, and
1996, respectively. These amounts are included in Commissions and Clearing Fees.
Comprehensive Software Systems, Ltd.("CSS") -- As of September 25, 1998,
the Company owned 7.2 percent of CSS, a partnership formed for the purpose of
developing software for securities broker-dealers, banks and other financial
institutions. On June 3, 1998, the Company earned $794,634 on the sale of a
portion of its limited partnership interest in CSS. As a result of this
transaction, the Company's ownership interest in CSS decreased from 14.3 percent
to 7.2 percent. Accordingly, the Company began accounting for its investment in
CSS under the
F-10
<PAGE> 69
AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 27, 1996, SEPTEMBER 26, 1997
AND SEPTEMBER 25, 1998
cost method as of that date, and will, therefore, no longer recognize income or
loss based on the operations of CSS.
Adirondack Trading Partners, L.L.C. ("Adirondack") -- As of September 25,
1998, the Company owned a minority interest in Adirondack, a development-stage
company formed to trade listed equity and index options. The Company accounts
for its ownership in Adirondack under the cost method.
Telescan, Inc. ("Telescan") -- As of September 26, 1997, the Company owned
769,794 shares of common stock of Telescan, a publicly traded software/online
services company. During fiscal 1998, in a series of transactions, the Company
sold its interest in Telescan.
4. NOTES PAYABLE
The Company entered into a revolving credit agreement with a bank group on
January 16, 1998. The revolving credit agreement permits borrowings up to $50
million through June 30, 1999, with permissible borrowings decreasing $2.5
million quarterly to $35 million maturity at December 31, 2000. The revolving
credit agreement is collateralized by the common stock of the Company's
subsidiaries, as well as all assets of the Company. Borrowings under the
revolving credit agreement bear interest at prime rate less 0.75 percent (7.75
percent at September 25, 1998). The Company had outstanding indebtedness under
the revolving credit agreement of $11 million at September 25, 1998. The Company
pays a maintenance fee of 0.25 percent per annum of the unused credit available
under the revolving credit agreement. The revolving credit agreement contains
certain restrictions, including restrictions on the payment of cash dividends
and additional borrowings.
5. INCOME TAXES
Provision for income tax is comprised of the following for fiscal years
ended:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Current expense (benefit):
Federal............................................ $7,132,387 $7,150,775 $(3,051,000)
State.............................................. 485,000 47,125 (398,055)
---------- ---------- -----------
7,617,387 7,197,900 (3,449,055)
Deferred expense (benefit):
Federal............................................ (306,777) 344,066 3,383,013
State.............................................. (51,362) 60,998 386,630
---------- ---------- -----------
(358,139) 405,064 3,769,643
---------- ---------- -----------
Provision for income taxes........................... $7,259,248 $7,602,964 $ 320,588
========== ========== ===========
</TABLE>
F-11
<PAGE> 70
AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 27, 1996, SEPTEMBER 26, 1997
AND SEPTEMBER 25, 1998
A reconciliation of the federal statutory tax rate to the effective tax
rate applicable to income before provision for income taxes follows:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate...................................... 35.00% 35.00% 35.00%
State taxes, net of federal tax effect...................... 4.29 3.57 2.78
Amortization of goodwill.................................... 0.75 0.59 23.93
State credits............................................... (2.87) (3.72) 0.00
Other....................................................... 2.24 0.05 (1.34)
----- ----- -----
Effective tax rate.......................................... 39.41% 35.49% 60.37%
===== ===== =====
</TABLE>
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Unrealized investment gain.................................. $ -- $(11,202,984)
Depreciation and amortization, net.......................... (181,323) (575,425)
Prepaid expenses............................................ (1,107,460) (4,279,343)
----------- ------------
(1,288,783) (16,057,752)
Accrued liabilities......................................... 1,328,097 1,124,439
----------- ------------
Net deferred tax assets (liabilities)....................... $ 39,314 $(14,933,313)
=========== ============
</TABLE>
6. NET CAPITAL
The Company's subsidiaries are subject to the Securities and Exchange
Commission Uniform Net Capital Rule (SEC rule 15c3-1), which requires the
maintenance of minimum net capital, as defined. Net capital and the related net
capital requirement may fluctuate on a daily basis.
The Company's broker-dealer subsidiaries had net capital, in the aggregate,
of $40,062,733 and $26,121,959 as of September 25, 1998 and September 26, 1997,
respectively, which exceeded aggregate minimum net capital requirements by
$25,247,775 and $18,058,972, respectively. Subsidiary net capital in the amount
of $14,814,958 and $8,062,987 as of September 25, 1998 and September 26, 1997,
respectively, is not available for transfer to the Company due to net capital
regulations.
7. STOCK OPTION AND INCENTIVE PLANS
The Company has two stock option plans, the Ameritrade Holding Corporation
Long-Term Incentive Plan (the "Long-Term Incentive Plan") and the Ameritrade
Holding Corporation Directors Incentive Plan (the "Directors Plan"), both
initiated in fiscal 1997.
The Long-Term Incentive Plan authorizes the award of options to purchase
Class A Common Stock, Class A Common Stock appreciation rights, shares of Class
A Common Stock and performance units. The Long-Term Incentive Plan reserves
9,600,000 shares of the Company's Class A Common Stock for issuance to eligible
employees. The Directors Plan authorizes the award of options to purchase Class
A Common Stock. The Directors Plan reserves 960,000 shares of the Company's
Class A Common Stock for issuance to non-employee directors. Options are
generally granted at not less than the fair market value at grant date, vest
over a one to three year period, and expire ten years after the grant date.
F-12
<PAGE> 71
AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 27, 1996, SEPTEMBER 26, 1997
AND SEPTEMBER 25, 1998
A summary of the status of the Company's outstanding stock options as of
September 26, 1997 and September 25, 1998 is presented below:
<TABLE>
<CAPTION>
1997 1998
----------------------------- -----------------------------
NUMBER WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
OF OPTIONS EXERCISE PRICE OF OPTIONS EXERCISE PRICE
---------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year... -- -- 96,000 $1.25
Granted.......................... 96,000 $1.25 1,681,200 $2.14
Exercised........................ -- -- -- --
Canceled......................... -- -- -- --
---------- ----- --------- -----
Outstanding at end of year......... 96,000 $1.25 1,777,200 $2.09
Exercisable at end of year......... -- -- 96,000 $1.25
Available for future grant at end
of year.......................... 10,464,000 8,782,800
Weighted-average fair value of
options granted during the
year............................. $1.12 $1.23
</TABLE>
The following table summarizes information about the stock options
outstanding at September 25, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ -----------------------------
WEIGHTED-AVERAGE
REMAINING
NUMBER CONTRACTUAL WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES OF OPTIONS LIFE(IN YEARS) EXERCISE PRICE OF OPTIONS EXERCISE PRICE
- ------------------------ ---------- ---------------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
$0.83-$1.66........... 96,000 6.44 $1.25 96,000 $1.25
$1.67-$2.50........... 1,653,600 7.14 $2.13 -- --
$2.51-$3.33........... 27,600 7.81 $2.86 -- --
--------- ---- ----- ------ -----
$0.83-$3.33........... 1,777,200 7.11 $2.09 96,000 $1.25
</TABLE>
There are no Stock Appreciation Rights or performance units outstanding as
of September 25, 1998.
As discussed in Note 1, the Company has elected to follow APB 25 and
related Interpretations in accounting for stock-based awards to employees. Under
APB 25, the Company generally recognizes no compensation expense with respect to
such awards.
Pro forma information regarding the net income and earnings per share is
required by SFAS 123. This information is required as if the Company had
accounted for its stock-based awards to employees under the fair value method.
The fair value of options was estimated at the date of the grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for fiscal 1998 and 1997, respectively: risk-free interest rate of
5.95 percent and 6.37 percent; dividend yield of zero for both years; expected
volatility of 49.8 percent for both years; and an expected option life of eight
years for both years. The weighted average fair value
F-13
<PAGE> 72
AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 27, 1996, SEPTEMBER 26, 1997
AND SEPTEMBER 25, 1998
of options granted in fiscal 1997 and 1998 was $1.12 and $1.23, respectively.
Pro forma net income and earnings per share are as follows:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C> <C>
Net Income:.......................... As reported $13,822,149 $ 210,438
Pro forma 13,787,640 (301,983)
Basic earnings per share:............ As reported $ 0.08 $ 0.00
Pro forma 0.08 (0.00)
Diluted earnings per share:.......... As reported 0.08 0.00
Pro forma 0.08 (0.00)
</TABLE>
8. EMPLOYEE BENEFIT PLANS
The Company has a profit-sharing plan under which the annual contribution
is determined at the discretion of the Board of Directors. Profit sharing
expense was $779,657, $595,222 and $388,800 for the fiscal years ended 1998,
1997 and 1996, respectively.
The Company has a 401(k) plan covering all eligible employees. The plan
provides for matching contributions at the discretion of the Board of Directors.
Contribution expense under this plan was $-0-, $-0- and $9,093 for the fiscal
years ended 1998, 1997 and 1996, respectively.
The Company has an executive bonus plan that was designed to allow
designated executive participants the opportunity to earn bonus awards with
current and deferred components. The value of each component is based on the
annual increase (if any) in the book value per share of the common stock.
Executive bonus plan expense was $960,000, $2,170,000 and $1,710,000 for the
fiscal years ended 1998, 1997 and 1996, respectively.
9. EARNINGS PER SHARE
Reconciliation between the weighted average shares outstanding used in the
basic and diluted earnings per share ("EPS") computation is presented below.
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Net Income...................................... $ 11,158,345 $ 13,822,149 $ 210,438
------------ ------------ ------------
Weighted average shares outstanding -- basic.... 153,765,876 165,226,668 174,187,962
Effect of dilutive securities:
Assumed exercise of stock options............. -- 6,774 276,768
Weighted average shares outstanding --
diluted....................................... 153,765,876 165,233,442 174,464,730
Earnings per share -- basic..................... $ 0.07 $ 0.08 $ 0.00
Earnings per share -- diluted................... $ 0.07 $ 0.08 $ 0.00
</TABLE>
F-14
<PAGE> 73
AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 27, 1996, SEPTEMBER 26, 1997
AND SEPTEMBER 25, 1998
10. COMMITMENTS AND CONTINGENCIES
Lease Commitments -- The Company and its subsidiaries have various
non-cancelable operating leases on facilities and certain computer and office
equipment requiring annual payments as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING AMOUNT
- ------------------ ------
<S> <C>
1999........................................................ $ 6,970,754
2000........................................................ 6,028,228
2001........................................................ 3,075,012
2002........................................................ 1,776,036
2003........................................................ 1,790,677
Thereafter (to December 31, 2017)........................... 20,904,751
-----------
Total....................................................... $40,545,458
===========
</TABLE>
The Company and certain of its subsidiaries lease one of their office
facilities from the Chief Executive Officer of the Company. The lease expires on
December 31, 2017, and provides for annual rentals of $1,288,000. Additionally,
the Company and its subsidiaries lease certain computer equipment, office
equipment, and office facilities under various operating leases. Rental expense
was $6,225,232, $3,155,550 and $1,581,171 for fiscal years ended 1998, 1997 and
1996, respectively.
Advertising Commitment -- The Company has entered into a two-year agreement
with America Online, Inc. ("AOL") that will feature Ameritrade (Inc.) as one of
four brokerages on AOL's Personal Finance Channel. The pact calls for the
Company to pay AOL $12.5 million annually over a two-year term.
Letter of Credit -- A letter of credit in the amount of $44 million as of
September 25, 1998, has been issued by a financial institution on behalf of
Advanced Clearing, a wholly-owned subsidiary of the Company which acts as a
securities clearing firm. The letter of credit has been issued to support margin
requirements. Advanced Clearing pays a maintenance fee of 0.5 percent of the
committed amount for the letter of credit. As of September 25, 1998 and
September 26, 1997, no amounts were outstanding under the credit facility. In
addition, the same financial institution may make loans to Advanced Clearing if
requested under a note. Advanced Clearing has pledged customer securities, the
amount of which fluctuates from time to time, to secure its obligations under
the letter of credit and the note.
Legal -- On September 16, 1998, a putative class action complaint was filed
in the District Court, Douglas County, Nebraska, seeking injunctive and
equitable relief due to the Company's alleged breach of contract, violation of
the Consumer Protection Act, fraudulent inducement, negligent misrepresentation,
negligence, and unjust enrichment regarding the Company's alleged inability to
handle the volume of subscribers to its Internet brokerage services. The
complaint seeks injunctive relief enjoining alleged deceptive, fraudulent, and
misleading practices and unspecified compensatory damages. The Company believes
that it has viable defenses to the allegations raised in the complaint. However,
because this proceeding is at a preliminary phase and the amount of damages
sought has not been quantified, the Company is not presently able to predict the
ultimate outcome of this matter.
F-15
<PAGE> 74
AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 27, 1996, SEPTEMBER 26, 1997
AND SEPTEMBER 25, 1998
The Company and its subsidiaries are parties to a number of other legal
matters arising in the ordinary course of business. In management's opinion, the
Company has adequate legal defenses respecting each of these actions and does
not believe that they will materially affect the Company's results of operations
or its financial position.
General Contingencies -- In the general course of business, there are
various contingencies which are not reflected in the consolidated financial
statements. These include Advanced Clearing's customer activities involving the
execution, settlement and financing of various customer securities transactions.
These activities may expose the Company to off-balance-sheet credit risk in the
event the customers are unable to fulfill their contracted obligations.
Advanced Clearing's customer securities activities are transacted on either
a cash or margin basis. In margin transactions, Advanced Clearing extends credit
to the customer, subject to various regulatory and internal margin requirements,
collateralized by cash and securities in the customer's account. In connection
with these activities, Advanced Clearing executes and clears customer
transactions involving the sale of securities not yet purchased (short sales),
substantially all of which are transacted on a margin basis subject to
individual exchange regulations. Such transactions may expose the Company to
off-balance-sheet risk in the event margin requirements are not sufficient to
fully cover losses which customers may incur. In the event the customer fails to
satisfy its obligations, Advanced Clearing may be required to purchase or sell
financial instruments at prevailing market prices in order to fulfill the
customer's obligations.
Advanced Clearing seeks to control the risks associated with its customer
activities by requiring customers to maintain margin collateral in compliance
with various regulatory and internal guidelines. Advanced Clearing monitors
required margin levels daily and, pursuant to such guidelines, requires
customers to deposit additional collateral, or to reduce positions, when
necessary.
Advanced Clearing borrows securities both to cover short sales and to
complete customer transactions in the event that a customer fails to deliver
securities by the required date. Such borrowings are collateralized by
depositing cash or pledging securities with lending institutions and are "marked
to market" on a daily basis. Failure to maintain levels of cash deposits or
pledged securities at all times at least equal to the value of the related
securities can subject Advanced Clearing to risk of loss. Advanced Clearing
seeks to control the risk of loss by monitoring the market value of securities
pledged and requiring adjustments of collateral levels where necessary.
NOTE 11 -- SUBSEQUENT EVENTS
Subsequent to September 25, 1998, the Company announced a two-for-one and a
three-for-one stock split. Stockholders of record as of the close of business on
February 5, 1999 received, in the form of a stock dividend, one additional share
for each share held by them. This two-for-one split was distributed on or about
February 22, 1999 and the stock began trading at post-split value on February
23, 1999. Stockholders of record as of the close of business on June 11, 1999
received, in the form of a stock dividend, two additional shares for each share
held by them. This three-for-one split was distributed on July 2, 1999 and the
stock began trading at post-split value on July 6, 1999. On July 1, 1999, the
stockholders approved a restated certificate of incorporation increasing the
number of shares of Class A common stock to 270,000,000 and Class B common stock
to 18,000,000. All share data and per share amounts have been restated to
reflect the two-for-one and three-for-one stock splits.
F-16
<PAGE> 75
QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AND STOCK PRICE DATA)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED SEPTEMBER 25, 1998
---------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues....................................... $ 31,365 $ 36,762 $ 47,926 $ 48,141
Interest expense............................... 5,689 6,684 8,320 8,586
-------- -------- -------- --------
Net revenues......................... 25,676 30,078 39,606 39,555
Total expenses excluding interest.............. 43,171 30,394 30,346 30,473
-------- -------- -------- --------
Income (loss) before provision for income
taxes........................................ (17,495) (316) 9,260 9,082
Net income (loss).............................. $(11,249) $ (271) $ 5,940 $ 5,790
-------- -------- -------- --------
Basic earnings (loss) per share................ $ (0.06) $ (0.00) $ 0.03 $ 0.03
Diluted earnings (loss) per share.............. $ (0.06) $ (0.00) $ 0.03 $ 0.03
Stock price data ($)
High......................................... 3.25 2.59 2.74 4.47
Low.......................................... 1.50 1.86 1.91 2.16
</TABLE>
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED SEPTEMBER 26, 1997
---------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues....................................... $ 19,042 $ 22,641 $ 24,904 $ 29,080
Interest expense............................... 3,690 4,197 4,959 5,583
-------- -------- -------- --------
Net revenues......................... 15,352 18,444 19,945 23,497
Total expenses excluding interest.............. 15,416 13,036 12,805 14,556
-------- -------- -------- --------
Income (loss) before provision for income
taxes........................................ (64) 5,408 7,140 8,941
Net income (loss).............................. $ (75) $ 3,469 $ 4,587 $ 5,841
-------- -------- -------- --------
Basic earnings (loss) per share................ $ 0.00 $ 0.02 $ 0.03 $ 0.03
Diluted earnings (loss) per share.............. $ 0.00 $ 0.02 $ 0.03 $ 0.03
Stock price data ($)
High......................................... N/A 1.88* 1.53 2.24
Low.......................................... N/A 1.35* 0.98 1.22
</TABLE>
- ---------------
* Commencing March 4, 1997
All information is adjusted for the two-for-one stock splits effective on
August 18, 1998 and February 22, 1999 and the three-for-one stock split
effective on July 2, 1999. The stock prices listed above do not include retail
markups, markdowns, or commissions, and may not represent actual transactions.
F-17
<PAGE> 76
AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 25, 1998 AND MARCH 26, 1999
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 25, MARCH 26,
1998 1999
-------------- --------------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents.................................. $ 24,526,935 $ 4,474,679
Cash and investments segregated in compliance with federal
regulations.............................................. 503,455,354 601,811,083
Receivable from brokers, dealers, and clearing
organizations............................................ 25,732,164 34,152,264
Receivable from customers and correspondents -- net of
allowance for doubtful accounts: September -- $1,039,788;
March -- $2,615,349...................................... 647,121,854 1,186,138,384
Furniture, equipment and leasehold improvements -- net of
accumulated depreciation and amortization: September --
$6,728,212; March -- $9,480,716.......................... 26,116,333 33,418,857
Goodwill -- net of accumulated amortization................ 5,983,761 5,802,259
Investments................................................ 30,760,729 203,694,473
Other assets............................................... 26,704,546 35,496,623
-------------- --------------
Total assets..................................... $1,290,401,676 $2,104,988,622
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Payable to brokers, dealers and clearing organizations... $ 11,765,785 $ 64,070,484
Payable to customers and correspondents.................. 1,136,082,337 1,622,307,296
Accounts payable and accrued liabilities................. 30,716,987 47,775,036
Short-term borrowings.................................... -- 45,000,000
Notes payable............................................ 11,000,000 38,000,000
Income taxes payable..................................... 1,331,170 850,213
Deferred income taxes.................................... 14,933,313 82,681,058
-------------- --------------
Total liabilities................................ 1,205,829,592 1,900,684,087
-------------- --------------
Stockholders' equity:
Preferred stock, $1 par value; authorized 3,000,000
shares, none issued...................................
Common stock, $0.01 par value:........................... -- --
Class A -- 270,000,000 shares authorized: 158,103,480
shares issued at March 26, 1999; 157,841,076 shares
issued at September 25, 1998........................ 1,578,411 1,581,035
Class B -- 18,000,000 shares authorized: 16,372,800
shares issued and outstanding....................... 163,728 163,728
-------------- --------------
Total common stock............................... 1,742,139 1,744,763
Additional paid-in capital................................. 21,683,870 24,065,141
Retained earnings.......................................... 43,756,848 55,576,576
Treasury stock -- Class A shares at cost (40,200 shares at
March 26, 1999; 56,652 shares at September 25, 1998)..... (133,388) (94,144)
Accumulated other comprehensive income..................... 17,522,615 123,012,199
-------------- --------------
Total stockholders' equity....................... 84,572,084 204,304,535
-------------- --------------
Total liabilities and stockholders' equity....... $1,290,401,676 $2,104,988,622
============== ==============
</TABLE>
See notes to unaudited consolidated financial statements.
F-18
<PAGE> 77
AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTH PERIODS ENDED MARCH 27, 1998 AND MARCH 26, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED
-------------------------------
MARCH 27, 1998 MARCH 26, 1999
-------------- --------------
<S> <C> <C>
Revenues:
Commissions and clearing fees............................. $ 35,209,381 $ 83,566,382
Interest revenue.......................................... 27,908,539 47,715,180
Equity income from investments............................ 2,527,693 --
Other..................................................... 2,480,749 4,614,844
------------ ------------
Total revenues.................................... 68,126,362 135,896,406
Interest expense.......................................... 12,373,053 20,117,417
------------ ------------
Net revenues...................................... 55,753,309 115,778,989
Expenses excluding interest:
Employee compensation and benefits........................ 14,691,907 28,364,340
Commissions and clearance................................. 2,272,429 4,032,907
Communications............................................ 6,456,836 7,971,435
Occupancy and equipment costs............................. 4,213,046 8,736,185
Advertising............................................... 34,513,770 22,797,109
Other..................................................... 11,417,773 25,355,684
------------ ------------
Total expenses excluding interest................. 73,565,761 97,257,660
Income (loss) before provision for income taxes... (17,812,452) 18,521,329
Provision for income taxes........................ (6,292,236) 6,701,601
------------ ------------
Net income (loss)........................................... $(11,520,216) $ 11,819,728
============ ============
Basic earnings (loss) per share............................. $ (0.07) $ 0.07
Diluted earnings (loss) per share........................... (0.07) 0.07
Weighted average shares outstanding -- basic................ 174,209,745 174,247,323
Weighted average shares outstanding -- diluted.............. 174,320,274 175,528,386
</TABLE>
See notes to unaudited consolidated financial statements.
F-19
<PAGE> 78
AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED MARCH 27, 1998 AND MARCH 26, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED
-------------------------------
MARCH 27, 1998 MARCH 26, 1999
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................... $ (11,520,216) $ 11,819,728
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Depreciation and amortization........................ 1,068,800 2,752,504
Provision for losses................................. 88,000 1,695,000
Deferred income taxes................................ 785,355 303,585
Equity loss from investments......................... (2,527,693) --
Amortization of goodwill............................. 181,502 181,502
Changes in operating assets and liabilities:
Cash and investments segregated in compliance with
federal regulations............................. (189,881,751) (98,355,729)
Brokerage receivables.............................. (189,669,131) (549,131,630)
Income taxes receivable............................ (1,494,676) --
Other assets....................................... (5,420,726) (8,792,077)
Brokerage payables................................. 371,013,841 538,529,658
Accounts payable and accrued liabilities........... 1,584,506 17,058,049
Short-term borrowings.............................. -- 45,000,000
Income taxes payable............................... (3,430,279) 1,383,912
------------- -------------
Net cash used in operating activities........... (29,222,468) (37,555,498)
Cash flows from investing activities:
Purchase of furniture, equipment and leasehold
improvements......................................... (5,658,428) (10,055,028)
Purchase of equity investments.......................... (435,581) --
Distributions received from equity investments.......... 1,498,836 --
Proceeds from sale of investment........................ 3,906,610 --
------------- -------------
Net cash used in investing activities........... (688,563) (10,055,028)
Cash flows from financing activities:
Proceeds from notes payable............................. 10,000,000 60,000,000
Principal payments on notes payable..................... -- (33,000,000)
Proceeds from exercise of stock options................. 507,209
Purchase of Class A treasury stock...................... (145,000) --
Issuance of Class A treasury stock...................... 123,481 51,061
------------- -------------
Net cash provided by financing activities....... 9,978,481 27,558,270
------------- -------------
Net decrease in cash and cash equivalents....... (19,932,550) (20,052,256)
Cash and cash equivalents at beginning of period.......... 53,522,447 24,526,935
------------- -------------
Cash and cash equivalents at end of period................ $ 33,589,897 $ 4,474,679
============= =============
Supplemental cash flow information:
Interest paid........................................... $ 11,747,864 $ 19,468,778
Income taxes paid (refunds received).................... $ (2,224,720) $ 5,010,874
</TABLE>
See notes to unaudited consolidated financial statements.
F-20
<PAGE> 79
AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
FOR THE SIX MONTH PERIODS ENDED MARCH 27, 1998 AND MARCH 26, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED
----------------------------
MARCH 27, MARCH 26,
1998 1999
------------ ------------
<S> <C> <C>
Net income (loss)........................................... $(11,520,216) $ 11,819,728
Other comprehensive income
Net unrealized holding gains on investment securities
available-for-sale arising during the period........... -- 172,933,744
Adjustment for deferred income taxes...................... -- (67,444,160)
------------ ------------
Total other comprehensive income, net of tax................ -- 105,489,584
------------ ------------
Comprehensive income (loss)................................. $(11,520,216) $117,309,312
============ ============
</TABLE>
See notes to unaudited consolidated financial statements.
F-21
<PAGE> 80
AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTH PERIODS ENDED MARCH 27, 1998 AND MARCH 26, 1999
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Ameritrade Holding Corporation and its wholly-owned subsidiaries
(collectively, the "Company"): Advanced Clearing, Inc. ("Advanced Clearing"),
formerly known as AmeriTrade Clearing, Inc.; Accutrade, Inc. ("Accutrade");
Ameritrade (Inc.), formerly known as Ceres Securities; AmeriVest, Inc.
("AmeriVest"), formerly known as All American Brokers, Inc.; K Aufhauser &
Company ("Aufhauser"); and OnMoney Financial Services Corporation ("OnMoney").
All significant intercompany balances and transactions have been eliminated. The
Company is a provider of discount securities brokerage and related financial
services, including clearing and execution services.
All share data and per share amounts have been restated to reflect the
two-for-one common stock splits effective August 1998 and February 1999.
These financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC) and, in the opinion
of management, reflect all adjustments, which are all of a normal recurring
nature, necessary to present fairly the financial position, results of
operations and cash flows for the periods presented in conformity with generally
accepted accounting principles. These financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's annual report filed on Form 10-K and amendments
thereto for the fiscal year ended September 25, 1998.
2. NET CAPITAL
The Company's broker-dealer subsidiaries are subject to the Net Capital
Rule under the Securities Exchange Act of 1934 and are required to maintain a
minimum net capital reserve. Net capital and the related net capital requirement
may fluctuate on a daily basis.
The Company's broker-dealer subsidiaries had net capital, in the aggregate,
of $69,580,988 and $40,062,733 as of March 26, 1999 and September 25, 1998,
respectively, which exceeded aggregate minimum net capital requirements by
$43,644,516 and $25,247,775, respectively. Subsidiary net capital in the amount
of $25,936,472 and $14,814,958 as of March 26, 1999 and September 25, 1998,
respectively, is not available for transfer to the Company due to net capital
regulations.
3. NOTES PAYABLE
The Company entered into a revolving credit agreement with a bank group on
January 16, 1998. The revolving credit agreement permits borrowings up to $50.0
million through June 30, 1999 with permissible borrowings declining $2.5 million
quarterly to $35.0 million at maturity on December 31, 2000. The common stock of
the Company's subsidiaries, as well as all assets of the Company, collateralize
the revolving credit agreement. Borrowings under the revolving credit agreement
bear interest at prime rate less 0.75 percent (7.00 percent and 7.75 percent
borrowing rate at March 26, 1999 and September 25, 1998, respectively). The
Company pays a maintenance fee of 0.25 percent of the unused borrowings through
the maturity date. The Company had outstanding indebtedness under the revolving
credit agreement of $38.0 million and $11.0 million at March 26, 1999 and
September 25, 1998, respectively. The revolving credit
F-22
<PAGE> 81
AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE SIX MONTH PERIODS ENDED MARCH 27, 1998 AND MARCH 26, 1999
agreement contains certain restrictions, including restrictions on the payment
of cash dividends and additional borrowings.
A letter of credit in the amount of $81 million as of March 26, 1999 has
been issued by a financial institution on behalf of Advanced Clearing, a
wholly-owned subsidiary of the Company, which acts as a securities clearing
firm. The letter of credit has been issued to support margin requirements.
Advanced Clearing pays a maintenance fee of 0.5 percent of the committed amount
for the letter of credit. In addition, the same financial institution may make
loans to Advanced Clearing if requested under a note. As of March 26, 1999, $45
million was outstanding under the note. Advanced Clearing has pledged customer
securities, the amount of which fluctuates from time to time, to secure its
obligations under the letter of credit and the note.
4. INVESTMENTS
The Company owns unregistered shares of common stock of Knight/Trimark
Group, Inc. ("Knight/Trimark"), a company formed to hold equity interests in
securities trading and market making companies. The Company's holdings represent
7.1 percent of the issued and outstanding shares of common stock of
Knight/Trimark as of March 26, 1999. The Company accounts for its investment in
Knight/Trimark as a marketable equity security available for sale. On March 26,
1999 the Company valued its investment in Knight/Trimark at $202,388,623. The
Company's cost basis on March 26, 1999 was $729,280, therefore the gross
unrealized gain is $201,659,343. On September 25, 1998 the Company valued its
investment in Knight/Trimark at $29,454,879. The Company's cost basis on
September 25, 1998 was $729,280, therefore the gross unrealized gain is
$28,725,599.
5. LEGAL
On September 16, 1998, a putative class action complaint was filed in the
District Court, Douglas County, Nebraska, seeking injunctive and equitable
relief due to the Company's alleged breach of contract, violation of the
Consumer Protection Act, fraudulent inducement, negligent misrepresentation,
negligence, and unjust enrichment regarding the Company's alleged inability to
handle the volume of subscribers to its Internet brokerage services. The
complaint seeks injunctive relief enjoining alleged deceptive, fraudulent, and
misleading practices and unspecified compensatory damages. The Company believes
that it has viable defenses to the allegations raised in the complaint. However,
because this proceeding is at a preliminary phase and the amount of damages
sought has not been quantified, the Company is not presently able to predict the
ultimate outcome of this matter.
The Company and its subsidiaries are parties to a number of other legal
matters arising in the ordinary course of business. In management's opinion, the
Company has adequate legal defenses respecting each of these actions and does
not believe that they will materially affect the Company's results of operations
or its financial position.
6. SUBSEQUENT EVENT
The Company announced a three-for-one stock split on June 2, 1999.
Stockholders of record as of the close of business on June 11, 1999 received, in
the form of a stock dividend, two additional shares for each share held by them.
This three-for-one split was distributed on July 2, 1999 and the stock began
trading at post-split value on July 6, 1999. On July 1, 1999, the stockholders
approved a restated certificate of incorporation increasing the number of shares
of Class A common stock to 270,000,000 and Class B common stock to 18,000,000.
All share data and per share amounts have been restated to reflect the
three-for-one stock split.
F-23
<PAGE> 82
UNDERWRITING
Holding, the selling stockholders and the underwriters for the U.S.
offering (the "U.S. Underwriters") named below have entered into an underwriting
agreement with respect to the shares being offered in the United States. Subject
to certain conditions, each U.S. Underwriter has severally agreed to purchase
the number of shares indicated in the following table. Goldman, Sachs & Co.,
Credit Suisse First Boston Corporation, Deutsche Bank Securities Inc., Raymond
James & Associates, Inc., U.S. Bancorp Piper Jaffray Inc. and Lehman Brothers
Inc. are the representatives of the U.S. Underwriters.
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
Goldman, Sachs & Co. .......................................
Credit Suisse First Boston Corporation......................
Deutsche Bank Securities Inc. ..............................
Raymond James & Associates, Inc. ...........................
U.S. Bancorp Piper Jaffray Inc. ............................
Lehman Brothers Inc. .......................................
---------
Total............................................. 8,000,000
=========
</TABLE>
------------------------
If the U.S. Underwriters sell more shares than the total number set forth
in the table above, the U.S. Underwriters have an option to buy up to an
additional 1,200,000 shares from J. Joe Ricketts, one of the selling
stockholders, to cover such sales. They may exercise that option for 30 days. If
any shares are purchased pursuant to this option, the U.S. Underwriters will
severally purchase shares in approximately the same proportion as set forth in
the table above.
The following tables show the per share and total underwriting discounts
and commissions to be paid to the U.S. Underwriters by Holding and the selling
stockholders. Such amounts are shown assuming both no exercise and full exercise
of the U.S. Underwriters' option to purchase 1,200,000 additional shares.
<TABLE>
<CAPTION>
Paid by Holding
------------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share......................................... $ $
Total............................................. $ $
</TABLE>
<TABLE>
<CAPTION>
Paid by the Selling
Stockholders
------------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share......................................... $ $
Total............................................. $ $
</TABLE>
Shares sold by the Underwriters to the public will initially be offered at
the initial price to public set forth on the cover of this prospectus. Any
shares sold by the Underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial price to public. Any such securities
dealers may resell any shares purchased from the Underwriters to
U-1
<PAGE> 83
certain other brokers or dealers at a discount of up to $ per share from the
initial price to public. If all the shares are not sold at the initial price to
public, the representatives may change the offering price and the other selling
terms.
Holding and the selling stockholders have entered into an underwriting
agreement with the underwriters of the international offering (the
"International Underwriters") for the sale of 2,000,000 shares outside of the
United States. The terms and conditions of both offerings are the same and the
sale of shares in both offerings are conditioned on each other. Goldman Sachs
International, Credit Suisse First Boston (Europe) Limited, Raymond James &
Associates, Inc., Deutsche Bank AG London, U.S. Bancorp Piper Jaffray Inc. and
Lehman Brothers International (Europe) are representatives of the International
Underwriters. J. Joe Ricketts, one of the selling stockholders, has granted the
International Underwriters a similar option to purchase up to an aggregate of
300,000 additional shares.
The Underwriters for both of the offerings have entered into an agreement
in which they agree to restrictions on where and to whom they and any dealer
purchasing from them may offer shares as a part of the distribution of the
shares. The Underwriters also have agreed that they may sell shares among each
of the underwriting groups.
Holding and the selling stockholders have agreed with the Underwriters
generally not to dispose of or hedge any of the Class A common stock or
securities convertible into or exchangeable for shares of Class A common stock
during the period from the date of this prospectus continuing through the date
90 days after the date of this prospectus, except with the prior written consent
of the representatives. This agreement does not apply to any existing employee
benefit plans. See "Risk Factors -- Future sales of shares of common stock could
adversely affect the market price of the Class A common stock".
In connection with the offerings, the Underwriters may purchase and sell
shares of the Class A common stock in the open market. These transactions may
include short sales, stabilizing transactions and purchases to cover positions
created by short sales. Short sales involve the sale by the Underwriters of a
greater number of shares than they are required to purchase in the offerings.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the Class A
common stock while the offerings are in progress.
The Underwriters also may impose a penalty bid. This occurs when a
particular Underwriter repays to the Underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the Underwriters may stabilize, maintain or otherwise
affect the market price of the Class A common stock. As a result, the price of
the Class A common stock may be higher than the price that otherwise might exist
in the open market. If these activities are commenced, they may be discontinued
by the Underwriters at any time. These transactions may be effected on The
Nasdaq National Market, in the over-the-counter market or otherwise.
Holding's securities clearing firm, Advanced Clearing, is a member of the
NASD, a wholly-owned subsidiary of Holding and a member of the selling group for
the U.S. offering. The U.S. offering, therefore, is being conducted in
accordance with the applicable provisions of Rule 2720 of the Conduct Rules of
the NASD.
Holding estimates that the total expenses of the offerings (excluding
underwriting discounts and commissions) will be approximately $725,000.
Holding and the selling stockholders have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
U-2
<PAGE> 84
Some of the Underwriters and their affiliates have provided, are currently
providing, and expect to provide in the future, commercial and investment
banking services to us for which they have received and will receive fees and
commissions.
This prospectus may be used by the Underwriters and other dealers in
connection with offers and sales of the shares, including sales of shares
initially sold by the Underwriters in the offering being made outside of the
United States, to persons located in the United States.
Up to 4,000,000 additional shares of Class A common stock (or up to
4,600,000 shares if the applicable over-allotment option is exercised in full)
may be delivered by the TRACES Trust to holders of its Automatic Common Exchange
Securities upon exchange of the Automatic Common Exchange Securities on the
Exchange Date (as defined in the Trust Prospectus). In lieu of delivery of some
of such shares, J. Joe Ricketts may elect to pay cash or deliver other
securities on the Exchange Date for each share of Class A common stock then
deliverable in the amounts and under the procedures described in the Trust
Prospectus. The Automatic Common Exchange Securities are being offered through
underwriters in the manner described in the Trust Prospectus. The respective
closings of the offerings of the Class A common stock and the Automatic Common
Exchange Securities are not dependent upon one another.
U-3
<PAGE> 85
================================================================================
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the shares offered hereby, but only under circumstances
and in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.
----------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary................................ 1
Risk Factors........................... 8
Cautionary Note Regarding Forward-
Looking Statements................... 16
Use of Proceeds........................ 16
Dividend Policy........................ 16
Market Price of Class A Common
Stock................................ 17
Capitalization......................... 18
Selected Consolidated Financial and
Operating Data....................... 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations........................ 21
Business............................... 30
Management............................. 43
Principal and Selling Stockholders..... 47
TRACES Stockholders.................... 49
Description of Capital Stock........... 50
Validity of Class A Common Stock....... 53
Experts................................ 53
Where You Can Find More Information.... 53
Index to Consolidated Financial
Information.......................... F-1
Underwriting........................... U-1
</TABLE>
================================================================================
================================================================================
10,000,000 Shares
AMERITRADE HOLDING
CORPORATION
Class A Common Stock
---------------------------------
[AMERITRADE HOLDING CORPORATION LOGO]
---------------------------------
GOLDMAN, SACHS & CO.
CREDIT SUISSE FIRST BOSTON
DEUTSCHE BANC ALEX. BROWN
LEHMAN BROTHERS
RAYMOND JAMES & ASSOCIATES, INC.
U.S. BANCORP PIPER JAFFRAY
Representatives of the Underwriters
================================================================================
<PAGE> 86
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
[ALTERNATE PAGE FOR PROSPECTUS ATTACHED TO TRUST PROSPECTUS]
SUBJECT TO COMPLETION. DATED JULY 12, 1999.
4,000,000 Shares
AMERITRADE HOLDING CORPORATION
AMERITRADE HOLDING CORPORATION LOGO
Class A Common Stock
----------------------
This prospectus relates to up to 4,000,000 shares of Class A common stock
(or up to 4,600,000 shares if the underwriters' over-allotment option is
exercised in full) beneficially owned by the Ameritrade Automatic Common
Exchange Security Trust (the "TRACES Trust") stockholders named in this
prospectus that may be delivered by the TRACES Trust to holders of Automatic
Common Exchange Securities of the TRACES Trust upon exchange of such securities
on the Exchange Date as defined in the prospectus of the TRACES Trust (the
"Trust Prospectus") to which this prospectus is attached. The Automatic Common
Exchange Securities are being sold by the TRACES Trust in an offering described
in the Trust Prospectus. See "Trust Prospectus".
In addition, Ameritrade Holding Corporation and several of its stockholders
are offering for sale up to an aggregate 10,000,000 shares of Class A common
stock (or up to 11,500,000 shares if the underwriters' over-allotment options
are exercised in full) directly to the public pursuant to a separate prospectus.
Of the 10,000,000 shares being offered in those offerings, 8,500,000 shares are
being offered by Holding and 1,500,000 shares are being offered by the selling
stockholders. The respective closings of the offerings of the Automatic Common
Exchange Securities and the shares of Class A common stock are not dependent
upon one another.
Holding will not receive any proceeds from the sale of the Automatic Common
Exchange Securities by the TRACES Trust or the sale of the Class A common stock
by the selling stockholders.
The Class A common stock is quoted on The Nasdaq National Market under the
symbol "AMTD". The last reported sale price of the Class A common stock on July
9, 1999 was $38.13 per share.
The Class B common stock, which is not being offered, is entitled to elect
a majority of Holding's board of directors. The Class A common stock is entitled
to elect the remaining directors. See "Description of Capital Stock".
See "Risk Factors" beginning on page 8 to read about factors you should
consider in connection with an investment in the Class A common stock.
----------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
----------------------
GOLDMAN, SACHS & CO. CREDIT SUISSE FIRST BOSTON
----------------------
Prospectus dated , 1999.
<PAGE> 87
[ALTERNATE PAGE FOR PROSPECTUS ATTACHED TO TRUST PROSPECTUS]
PLAN OF DISTRIBUTION
The Automatic Common Exchange Securities will be distributed as described
in the Trust Prospectus under the caption "Underwriting". Some of the
underwriters and their affiliates have provided, are currently providing, and
expect to provide in the future, commercial and investment banking services to
us for which they have received and will receive fees and commissions.
TRUST PROSPECTUS
The Automatic Common Exchange Securities are being offered pursuant to the
Trust Prospectus. This prospectus relates only to the shares of Class A common
stock that may be delivered upon exchange of the Automatic Common Exchange
Securities. We take no responsibility for any information included in or omitted
from the Trust Prospectus. The Trust Prospectus does not constitute a part of
this prospectus nor is it incorporated by reference herein.
<PAGE> 88
[ALTERNATE PAGE FOR PROSPECTUS ATTACHED TO TRUST PROSPECTUS]
- ------------------------------------------------------
- ------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the shares offered hereby, but only under circumstances
and in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.
----------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.............................. 1
Risk Factors......................... 8
Cautionary Note Regarding Forward-
Looking Statements................. 16
Use of Proceeds...................... 16
Dividend Policy...................... 16
Market Price of Class A Common
Stock.............................. 17
Capitalization....................... 18
Selected Consolidated Financial and
Operating Data..................... 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 21
Business............................. 30
Management........................... 43
Principal and Selling Stockholders... 47
TRACES Stockholders.................. 49
Description of Capital Stock......... 50
Validity of Class A Common Stock..... 53
Experts.............................. 53
Where You Can Find More Information.. 53
Plan of Distribution................. 55
Trust Prospectus..................... 55
Index to Consolidated Financial
Information........................ F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
4,000,000 Shares
AMERITRADE HOLDING
CORPORATION
Class A Common Stock
---------------------------------
Ameritrade Holding Corporation Logo
---------------------------------
GOLDMAN, SACHS & CO.
CREDIT SUISSE FIRST BOSTON
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 89
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a statement of the expenses payable by us in connection
with the issuance and distribution of the securities being registered hereby.
All amounts shown are estimates, except the SEC registration fee, the NASD
filing fee and The Nasdaq National Market listing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $170,662
NASD filing fee............................................. 30,500
Nasdaq National Market listing fee.......................... 17,500
Printing and engraving...................................... 250,000
Legal fees and expenses..................................... 150,000
Accounting fees and expenses................................ 75,000
Blue sky fees and expenses.................................. 10,000
Miscellaneous............................................... 21,338
--------
Total............................................. $725,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pursuant to the provisions of the Delaware General Corporation Law, we have
adopted provisions in our certificate of incorporation and bylaws, which (1)
require us to indemnify our directors and officers to the fullest extent
permitted by law and (2) eliminate the personal liability of our directors to us
and our stockholders for monetary damages for breach of their duty of due care,
except (a) for any breach of the duty of loyalty; (b) for acts or omissions not
in good faith or which involve intentional misconduct or knowing violations of
law; (c) for liability under Section 174 of the Delaware General Corporation Law
(relating to certain unlawful dividends, stock repurchases or stock
redemptions); or (d) for any transaction from which the director derived any
improper personal benefit.
We also maintain insurance on our directors and officers, which covers
liabilities under the federal securities laws.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
The following documents are filed with this registration statement.
<TABLE>
<CAPTION>
EXHIBIT
-------
<C> <S>
*1.1 Form of Underwriting Agreements
*3.1 Form of Restated Certificate of Incorporation
*4.1 Form of Stock Certificate (incorporated herein by reference
to our Registration Statement on Form S-1, File No.
333-17495)
5.1 Opinion of Mayer, Brown & Platt as to validity of common
stock
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Mayer, Brown & Platt (included in Exhibit 5.1)
*24.1 Powers of Attorney (included on the signature page)
</TABLE>
- ---------------
* Previously filed.
II-1
<PAGE> 90
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual report
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934
(and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Securities Exchange Act of 1934)
that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof; and
(2) That, (a) for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective; and (b) for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in such Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-2
<PAGE> 91
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this amendment to
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Omaha, State of Nebraska on the 12th day of
July, 1999.
AMERITRADE HOLDING CORPORATION
By: /s/ ROBERT T. SLEZAK
----------------------------------
Robert T. Slezak
Vice President, Chief
Financial Officer and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to registration statement has been signed by the following persons in the
capacities indicated and on the 12th day of July, 1999.
<TABLE>
<CAPTION>
SIGNATURE POSITION
--------- --------
<C> <S>
/s/ J. JOE RICKETTS* Director, Chairman and Co-Chief Executive
- -------------------------------------------- Officer (Principal Executive Officer)
J. Joe Ricketts
/s/ THOMAS K. LEWIS, JR.* Co-Chief Executive Officer (Principal
- -------------------------------------------- Executive Officer)
Thomas K. Lewis, Jr.
/s/ ROBERT T. SLEZAK Director, Vice President, Chief Financial
- -------------------------------------------- Officer and Treasurer (Principal Financial
Robert T. Slezak and Accounting Officer)
/s/ JOSEPH A. KONEN* Director
- --------------------------------------------
Joseph A. Konen
/s/ GENE L. FINN* Director
- --------------------------------------------
Gene L. Finn
/s/ DAVID W. GARRISON* Director
- --------------------------------------------
David W. Garrison
/s/ THOMAS Y. HARTLEY* Director
- --------------------------------------------
Thomas Y. Hartley
/s/ CHARLES L. MARINACCIO* Director
- --------------------------------------------
Charles L. Marinaccio
/s/ MARK L. MITCHELL* Director
- --------------------------------------------
Mark L. Mitchell
</TABLE>
II-3
<PAGE> 92
<TABLE>
<CAPTION>
SIGNATURE POSITION
--------- --------
<C> <S>
/s/ JOHN W. WARD* Director
- --------------------------------------------
John W. Ward
*By: /s/ ROBERT T. SLEZAK
- --------------------------------------------
Robert T. Slezak
Attorney-in-Fact
</TABLE>
II-4
<PAGE> 93
INDEX TO EXHIBITS
<TABLE>
<C> <S>
*1.1 Form of Underwriting Agreements
*3.1 Form of Restated Certificate of Incorporation
*4.1 Form of Stock Certificate (incorporated by reference to our
Registration Statement on Form S-1, File No. 333-17495)
5.1 Opinion of Mayer, Brown & Platt as to validity of common
stock
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Mayer, Brown & Platt (included in Exhibit 5.1)
*24.1 Powers of Attorney (included on the signature page)
</TABLE>
- ---------------
* Previously filed.
<PAGE> 1
EXHIBIT 5.1
July 12, 1999
AMERITRADE HOLDING CORPORATION
4211 South 102nd Street
Omaha, Nebraska 68127
Ladies and Gentlemen:
We have acted as your counsel in connection with the registration of
certain shares of Class A Common Stock, $.01 par value per share (the "Shares"),
of Ameritrade Holding Corporation, a Delaware corporation (the "Company"), to be
sold by the Company and certain of its stockholders (the "Selling
Stockholders").
In rendering the opinions expressed herein, we have examined and relied
upon such documents, corporate records, certificates of public officials and
certificates as to factual matters executed by officers of the Company as we
have deemed necessary or appropriate. We have assumed the authenticity, accuracy
and completeness of all documents, records and certificates submitted to us as
originals, the conformity to the originals of all documents, records and
certificates submitted to us as copies and the authenticity, accuracy and
completeness of the originals of all documents, records and certificates
submitted to us as copies. We have also assumed the legal capacity and
genuineness of the signatures of persons signing all documents in connection
with which the opinions expressed herein are rendered.
Based upon and subject to the foregoing, we are of the opinion that:
(i) The Shares to be sold by the Company, when issued against
payment of the agreed consideration therefor, will be legally issued,
fully paid and non-assessable; and
(ii) The Shares to be sold by the Selling Stockholders,
assuming receipt of the agreed consideration therefor, have been
legally issued and are fully paid and non-assessable.
We are admitted to practice law in the State of Illinois and we express
no opinions as to matters under or involving any laws other than the laws of the
State of Illinois, the federal laws of the United States of America and the
General Corporation Law of the State of Delaware.
<PAGE> 2
Ameritrade Holding Corporation
July 12, 1999
Page 2
We hereby consent to the filing of this opinion letter as an exhibit to
the registration statement covering the Shares and to the reference to this firm
under the caption "Validity of Class A Stock" contained therein.
Very truly yours,
/s/ MAYER, BROWN & PLATT
MAYER, BROWN & PLATT
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Amendment No. 1 to
Registration Statement No. 333-81559 of Ameritrade Holding Corporation on Form
S-3 of our report dated October 27, 1998 on the financial statement schedule,
included in the Annual Report on Form 10-K/A of Ameritrade Holding Corporation
for the year ended September 25, 1998, and to the use of our report dated
October 27, 1998 (July 9, 1999 as to Note 11) on the financial statements,
appearing in the Prospectus, which is part of this Registration Statement. We
also consent to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
July 9, 1999
