<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- --------------------------------------------------------------------------------
FORM 10-K/A No. 1
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the Fiscal year ended September 24, 1999
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from _________ to _________
Commission file number: 0-22163
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AMERITRADE HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 47-0642657
-------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4211 SOUTH 102ND STREET, OMAHA, NEBRASKA 68127
(Address of principal executive offices)
(Zip Code)
(402) 331-7856
(Registrant's telephone number, including area code)
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<TABLE>
<S> <C>
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None None
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
Title of class
--------------
Class A Common Stock - $0.01 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
As of December 15, 1999, the aggregate market value of the Class A Common Stock
held by non-affiliates of the registrant was approximately $4.2 billion computed
by reference to the final sale price of the stock on December 15, 1999 on the
Nasdaq stock market. All of the Class B Common Stock is held by affiliates of
the registrant.
The number of shares of Class A Common Stock outstanding as of December 15,
1999 was 159,339,473 shares. The number of shares of Class B Common Stock
outstanding as of December 15, 1998 was 16,372,800 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1999 Annual Report to Stockholders (incorporated into Part II
hereof) Definitive Proxy Statement relating to the Company's 2000 Annual Meeting
to be filed hereafter (incorporated into Part III hereof)
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SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the city of Omaha,
State of Nebraska, on the 27th day of December, 1999.
AMERITRADE HOLDING CORPORATION
By: /s/ J. Peter Ricketts
--------------------------
J. Peter Ricketts
Senior Vice President,
Marketing and Sales and Director
2
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report
3. Exhibits
3.1 Restated Certificate of Incorporation of Ameritrade Holding
Corporation dated July 1, 1999 (incorporated by reference to
Exhibit 3.6 of the Company's quarterly report on Form 10-Q
filed on August 9, 1999)
3.2 Bylaws (incorporated by reference to Exhibit 3.2 of the
Company's Registration Statement on Form S-1 (Registration
No. 333-17495) filed on February 7, 1997)
4.1 Form of Certificate for Class A Common Stock (incorporated by
reference to Exhibit 4.1 of the Company's Registration
Statement on Form S-1 (Registration No. 333-17495) filed on
February 7, 1997)
4.2 Form of Note for the Company's 5.75% Convertible
Subordinated Note due August 1, 2004 (included as part of
Exhibit 4.4)
4.3 Indenture dated August 4, 1999, between Ameritrade Holding
Corporation and The Bank of New York, as trustee (incorporated
by reference to Exhibit 4.3 of the Company's Registration
Statement on Form S-3, File No. 333-87999, filed on September
28, 1999)
4.4 First Supplemental Indenture dated August 4, 1999, between
Ameritrade Holding Corporation and The Bank of New York, as
trustee (incorporated by reference to Exhibit 4.4 of the
Company's Registration Statement on Form S-3, File No.
333-87999, filed on September 28, 1999)
4.5 Registration Rights Agreement dated August 4, 1999, between
Ameritrade Holding Corporation and Goldman, Sachs & Co. and
relating to the Company's 5.75% Convertible Subordinated Notes
due August 1, 2004 (incorporated by reference to Exhibit 4.5 of
the Company's Registration Statement on Form S-3, File No.
333-87999, filed on September 28, 1999)
10.1 Agreement of Limited Partnership, dated as of February 4, 1993,
of Comprehensive Software Systems, Ltd. (incorporated by
reference to Exhibit 10.1 of the Company's Registration
Statement on Form S-1 (Registration No. 333-17495) filed on
February 7, 1997)
10.2 Amendment to Agreement of Limited Partnership, dated as of
September 1993, of Comprehensive Software Systems, Ltd.
(incorporated by reference to Exhibit 10.33 of the Company's
Registration Statement on Form S-1 (Registration No.
333-17495) filed on February 7, 1997)
10.3 Second Amendment to Agreement of Limited Partnership, dated as
of December 1994, of Comprehensive Software Systems, Ltd.
(incorporated by reference to Exhibit 10.34 of the Company's
Registration Statement on Form S-1 (Registration No. 333-17495)
filed on February 7, 1997)
10.4 Third Amendment to Agreement of Limited Partnership, dated as
of December 31, 1995, of Comprehensive Software Systems, Ltd.
(incorporated by reference to Exhibit 10.35 of the Company's
Registration Statement on Form S-1 (Registration No. 333-17495)
filed on February 7, 1997)
10.5 Sale of Minority Interest Agreement between Comprehensive
Software Systems, Ltd. and ADP Financial Information Services,
Inc., dated as of June 3, 1998 (incorporated by reference to
3
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Exhibit 10.5 of the Company's Annual Report on Form 10-K and
amendments thereto filed on December 21, 1998)
10.6 Broker Loan Pledge and Security Agreement, dated as of October
24, 1989, made by AmeriTrade, Inc. (now known as Advanced
Clearing, Inc.) in favor of the First National Bank of Chicago
(incorporated by reference to Exhibit 10.18 of the Company's
Registration Statement on Form S-1 (Registration No. 333-17495)
filed on February 7, 1997)
10.7 Master Broker Loan Note, dated as of October 24, 1989, made by
AmeriTrade, Inc. (now known as Advanced Clearing, Inc.) in
favor of the First National Bank of Chicago (incorporated by
reference to Exhibit 10.19 of the Company's Registration
Statement on Form S-1 (Registration No. 333-17495) filed on
February 7, 1997)
10.8 Lease, dated as of February 3, 1998, between Southroads Mall
and Ameritrade Holding Corporation (incorporated by reference
to Exhibit 10.24 of the Company's quarterly report on Form 10-Q
filed on May 12, 1998)
10.9 Lease, dated as of March 19, 1999, between Alliance Gateway No.
16, Ltd. and Ameritrade Holding Corporation (incorporated by
reference to Exhibit 10.9 of the Company's quarterly report on
Form 10-Q filed on August 9, 1999)
10.10 Lease, dated as of March 19, 1999, between Alliance Gateway
No. 17, Ltd. and Ameritrade Holding Corporation (incorporated
by reference to Exhibit 10.10 of the Company's quarterly report
on Form 10-Q filed on August 9, 1999)
10.11 Lease, dated as of April 9, 1999, between IRET Properties and
Ameritrade Holding Corporation (incorporated by reference to
Exhibit 10.11 of the Company's quarterly report on Form 10-Q
filed on August 9, 1999)
10.12 Lease, dated as of April 22, 1999, between Heritage Commons I,
Ltd. and Ameritrade Holding Corporation (incorporated by
reference to Exhibit 10.12 of the Company's quarterly report on
Form 10-Q filed on August 9, 1999)
10.13 Agreement of Lease, dated July 28, 1999, between NBP 132, LLC
and Ameritrade Holding Corporation (incorporated by reference
to Exhibit 10.13 of the Company's annual report on Form 10-K
and amendments thereto filed on December 23, 1999)
10.14 First Amendment to Lease, dated September 27, 1999 between NBP
132, LLC and Ameritrade Holding Corporation (incorporated by
reference to Exhibit 10.14 of the Company's annual report on
Form 10-K and amendments thereto filed on December 23, 1999)
10.15 Addendum to Lease, dated July 28, 1999 between NBP 132, LLC and
Ameritrade Holding Corporation (incorporated by reference to
Exhibit 10.15 of the Company's annual report on Form 10-K and
amendments thereto filed on December 23, 1999)
10.16 Employment Contract, dated as of December 3, 1996, between J.
Joe Ricketts and AmeriTrade Holding Corporation (incorporated
by reference to Exhibit 10.26 of the Company's Registration
Statement on Form S-1 (Registration No. 333-17495) filed on
February 7, 1997)
10.17 Employment Contract, dated as of February 15, 1999, between
Thomas Lewis and Ameritrade Holding Corporation (incorporated
by reference to Exhibit 10.20 of the Company's quarterly report
on Form 10-Q filed May 10, 1999)
10.18 Employment Contract, dated as of March 24, 1999, between Jack
R. McDonnell and Ameritrade Holding Corporation (incorporated
by reference to Exhibit 10.21 of the Company's quarterly report
on Form 10-Q filed May 10, 1999)
4
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10.19 Consulting agreement, dated as of November 15, 1999, between
Robert T. Slezak and Ameritrade Holding Corporation
(incorporated by reference to Exhibit 10.19 of the Company's
annual report on Form 10-K and amendments thereto filed on
December 23, 1999)
10.20 Form of Executive Bonus Plan (incorporated by reference to
Exhibit 10.29 of the Company's Registration Statement on Form
S-1 (Registration No. 333-17495) filed on February 7, 1997)
10.21 Amended and Restated 1996 Long-Term Incentive Plan dated
October 23, 1999 (incorporated by reference to Exhibit 10.21 of
the Company's annual report on Form 10-K and amendments thereto
filed on December 23, 1999)
10.22 1996 Directors Incentive Plan, as amended February 10, 1998.
This plan supercedes plan filed February 7, 1997 (incorporated
by reference to Exhibit 10.20 of the Company's Annual Report on
Form 10-K and amendments thereto filed on December 21, 1998)
10.23 Loan Agreement, dated as of January 16, 1998, made by
Ameritrade Holding Corporation in favor of a bank group
(incorporated by reference to Exhibit 10.22 of the Company's
quarterly report on Form 10-Q filed on February 13, 1998)
10.24 Amendment to Loan Agreement dated as of May 24, 1999
(incorporated by reference to Exhibit 10.20 of the Company's
quarterly report on Form 10-Q filed on August 9, 1999)
10.25 Operating Agreement of Adirondack Trading Partners LLC
(incorporated by reference to Exhibit 10.20 of the Company's
Annual Report on Form 10-K and amendments thereto filed on
December 21, 1998)
*13.1 Ameritrade Holding Corporation 1999 Annual Report to
Stockholders
21.1 Subsidiaries of the Registrant (incorporated by reference to
Exhibit 21.1 of the Company's annual report on Form 10-K and
amendments thereto filed on December 23, 1999)
23 Independent Auditors Consent (incorporated by reference to
Exhibit 23 of the Company's annual report on Form 10-K and
amendments thereto filed on December 23, 1999)
24.1 Power of Attorney authorizing J. Peter Ricketts to sign the
annual report on Form 10-K on behalf of Gene L. Finn
(incorporated by reference to Exhibit 24.1 of the Company's
annual report on Form 10-K and amendments thereto filed on
December 23, 1999)
24.2 Power of Attorney authorizing J. Peter Ricketts to sign the
annual report on Form 10-K on behalf of Thomas Y. Hartley
(incorporated by reference to Exhibit 24.2 of the Company's
annual report on Form 10-K and amendments thereto filed on
December 23, 1999)
24.3 Power of Attorney authorizing J. Peter Ricketts to sign the
annual report on Form 10-K on behalf of Charles L. Marinaccio
(incorporated by reference to Exhibit 24.3 of the Company's
annual report on Form 10-K and amendments thereto filed on
December 23, 1999)
24.4 Power of Attorney authorizing J. Peter Ricketts to sign the
annual report on Form 10-K on behalf of Mark L. Mitchell
(incorporated by reference to Exhibit 24.4 of the Company's
annual report on Form 10-K and amendments thereto filed on
December 23, 1999)
24.5 Power of Attorney authorizing J. Peter Ricketts to sign the
annual report on Form 10-K on behalf of John W. Ward
(incorporated by reference to Exhibit 24.5 of the Company's
annual report on Form 10-K and amendments thereto filed on
December 23, 1999)
24.6 Power of Attorney authorizing J. Peter Ricketts to sign the
annual report on Form 10-K on behalf of David W. Garrison
(incorporated by reference to Exhibit 24.6 of the Company's
annual report on Form 10-K and amendments thereto filed on
December 23, 1999)
24.7 Power of Attorney authorizing J. Peter Ricketts to sign the
annual report on Form 10-K on behalf of Robert T. Slezak
(incorporated by reference to Exhibit 24.7 of the Company's
annual report on Form 10-K and amendments thereto filed on
December 23, 1999)
27.1 Financial Data Schedule (incorporated by reference to Exhibit
27.1 of the Company's annual report on Form 10-K and amendments
thereto filed on December 23, 1999)
* Inadvertently omitted from original filing
5
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EXHIBIT 13.1
Financial Contents
Selected financial data 36
Management's discussion and analysis of
financial condition and results of operations 38
Independent auditors' report 46
Consolidated balance sheets 47
Consolidated statements of income 48
Consolidated statements of stockholders' equity 49
Consolidated statements of cash flows 50
Notes to consolidated financial statements 52
Quarterly financial data 61
<PAGE> 2
Selected financial data
in thousands, except per share and operating data
<TABLE>
<CAPTION>
Sept. 24 Sept. 25 Sept. 26 Sept. 27 Sept. 29 Sept. 30 Sept. 24
Fiscal year ended 1999 1998 1997 1996 1995 1994 1993
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<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF INCOME DATA
Revenues:
Commissions and clearing
fees $188,874 $85,644 $51,937 $36,470 $23,977 $20,386 $16,910
Interest revenue 116,162 66,716 36,623 22,518 16,297 9,856 5,838
Equity income (loss) from
investments -- 5,083 3,444 3,359 543 (575) (240)
Gain from sale of
investments -- 795 -- -- 584 -- --
Other 10,213 5,956 3,663 3,032 1,481 1,694 1,031
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Total revenues 315,249 164,194 95,667 65,379 42,882 31,361 23,539
Interest expense 46,898 29,279 18,429 11,040 7,862 3,912 2,258
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Net revenues 268,351 134,915 77,238 54,339 35,020 27,449 21,281
Expenses excluding
interest:
Employee compensation
and benefits 74,353 36,083 19,291 14,050 8,482 6,538 5,368
Commissions and clearance 8,023 5,762 3,320 2,531 2,517 1,717 1,447
Communications 18,591 12,926 5,623 3,686 2,353 1,892 1,289
Occupancy and equipment
costs 21,382 10,622 5,423 2,890 1,627 1,412 970
Advertising 59,717 43,614 13,971 7,537 4,842 5,987 3,928
Professional services 40,644 11,530 2,134 1,043 700 420 403
Other 27,533 13,847 6,051 4,185 3,669 2,033 1,612
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Total expenses excluding
interest 250,243 134,384 55,813 35,922 24,190 19,999 15,017
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Income before provision for
income taxes 18,108 531 21,425 18,417 10,830 7,450 6,264
Provision for income taxes 6,569 321 7,603 7,259 3,799 2,619 2,119
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Net income $ 11,539 $ 210 $13,822 $11,158 $ 7,031 $ 4,831 $ 4,145
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Basic earnings per share $ 0.07 $ 0.00 $ 0.08 $ 0.07 $ 0.05 $ 0.03 $ 0.03
Diluted earnings per share $ 0.07 $ 0.00 $ 0.08 $ 0.07 $ 0.05 $ 0.03 $ 0.03
Weighted average shares
outstanding - basic 174,342 174,188 165,227 153,768 153,768 154,272 164,592
Weighted average shares
outstanding - diluted 175,745 174,444 165,233 153,768 153,768 154,272 164,592
</TABLE>
36
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Selected financial data (continued)
<TABLE>
<CAPTION>
Sept. 24 Sept. 25 Sept. 26 Sept. 27 Sept. 29 Sept. 30 Sept. 24
Fiscal year ended 1999 1998 1997 1996 1995 1994 1993
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<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA
Average customer trades
per day 49,305 18,407 6,571 3,670 2,055 1,519 1,220
Assets in customer accounts
(in billions) $ 22.9 $ 11.4 $ 7.3 $ 4.0 $ 2.4 $ 1.7 $ 1.2
Number of core accounts (1) 560,000 306,000 98,000 52,000 38,000 18,000 11,000
Net revenue per trade $ 21.68 $ 29.20 $ 46.65 $ 58.76 $ 67.09 $ 70.31 $ 69.22
Pre-advertising operating
expense per trade $ 15.40 $ 19.65 $ 25.27 $ 30.69 $ 37.07 $ 35.89 $ 36.07
Operating margin (2) 7% 0% 28% 34% 31% 27% 29%
Pre-advertising
operating margin (3) 29% 33% 46% 48% 45% 49% 48%
Return on average equity (4) 8% 0% 28% 44% 47% 49% 69%
<CAPTION>
Sept. 24 Sept. 25 Sept. 26 Sept. 27 Sept. 29 Sept. 30 Sept. 24
As of 1999 1998 1997 1996 1995 1994 1993
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<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA
Cash and segregated
investments $1,019,370 $527,982 $373,286 $191,436 $125,456 $101,352 $53,787
Receivable from customers
and correspondents, net 1,526,801 647,122 325,407 166,075 130,187 99,627 86,281
Total assets 3,037,083 1,290,402 757,357 401,679 287,105 216,991 151,228
Payable to customers and
correspondents 2,057,346 1,136,082 666,279 356,943 251,862 198,539 138,958
Notes payable 200,000 11,000 -- 4,853 7,097 -- --
Stockholders' equity 220,463 84,572 66,989 30,662 19,504 12,473 7,831
</TABLE>
(1)Core accounts consist of open accounts in the Company's 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 stockholders'
equity averaged on a quarterly basis.
Fiscal 1994 was a 53-week year. All other periods presented are 52-week
years.
37
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Management's discussion and analysis
of financial condition and results of operations
The following discussion of the financial condition and results of operations
of the Company should be read in conjunction with the Selected Financial Data
and the Consolidated Financial Statements and Notes thereto in this annual
report. This discussion contains forward-looking statements that involve risks
and uncertainties that could cause actual results to differ materially from
those anticipated in such forward-looking statements. Factors that may cause
such differences include, but are not limited to: the effect of customer
trading patterns on Company revenues and earnings; computer system failures;
risks associated with the Year 2000 computer systems conversions; the effects
of competitors' pricing, product and service decisions and intensified
competition; evolving regulation and changing industry customs and practices
adversely affecting the Company; adverse results of litigation; changes in
revenues and profit margin due to cyclical securities markets and interest
rates; and a significant downturn in the securities markets over a short period
of time or a sustained decline in securities prices and trading volumes.
The terms "we" and "us" as used in this document 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.
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 1999, 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 AmeriVest subsidiary
and are developing an Internet-based financial management system through our
OnMoney subsidiary.
Our primary focus is serving retail customers by providing services at
prices that are lower than our major competitors. Retail brokerage customers
are able to trade securities through a variety of media, 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 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 partnership
interests in Roundtable Partners L.L.C. ("Roundtable"), the predecessor to
Knight/ Trimark Group, Inc. ("Knight/Trimark"), and Comprehensive Software
Systems Ltd. ("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
38
<PAGE> 5
Management's discussion and analysis
of financial condition and results of operations
costs are expensed as incurred and include production and placement of
advertisements on various media, including online, television, print and direct
mail. Advertising expenses may increase or decrease significantly from period
to period. We currently have budgeted approximately $200 million for
advertising expenses in fiscal 2000. Professional services expense includes
costs paid to outside agencies for assistance with legal, accounting,
technology, marketing and general management issues. Other operating expenses
include 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 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 fee 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 September 24, 1999, 87 percent of our trades were placed through
electronic media, with 82 percent of our trades being placed over the Internet,
compared to 80 percent and 72 percent respectively for the quarter ended
September 25, 1998. We believe that the increased use of electronic media 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 September. References to fiscal
year in this document are to the approximate twelve-month period ended on any
such Friday. For example, "fiscal 1999" refers to the fiscal year ended
September 24, 1999.
RESULTS OF OPERATIONS
NET REVENUES
For the fiscal years ended September 24, 1999, September 25, 1998 and September
26, 1997, 70 percent, 63 percent and 67 percent, respectively, of our net
revenues were derived from commissions and clearing fees. Commissions and
clearing fees totaled $188.9 million in fiscal 1999, compared to $85.6 million
in fiscal 1998 and $51.9 million in fiscal 1997. This represents a 264 percent
increase between fiscal 1997 and fiscal 1999. The increase was primarily
attributable to an increase in the number of transactions processed, as average
trades per day increased 650 percent between fiscal 1997 and fiscal 1999 in
line with the growth in our customer base. Core accounts increased to
approximately 560,000 at September 24, 1999, from approximately 306,000 at
September 25, 1998 and approximately 98,000 at September 26, 1997. Offsetting
the growth in trades per day was a decrease in commissions and clearing fees
per trade by 53 percent between fiscal 1997 and fiscal 1999 from an average of
$47 per trade in fiscal 1997 to an average of $22 per trade in fiscal 1999. 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 commissions
will be lower than the rate of decline experienced over the past two years.
We have arrangements with several execution agents to receive cash payments
in exchange for routing trade orders to these firms for execution ("payment for
order flow"). Revenues generated by us under these arrangements totaled $22.1
million, or 8 percent of net revenues for the fiscal year ended September 24,
1999; $10.9 million, or 8 percent of net revenues for the fiscal year ended
September 25, 1998; and $9.1 million
39
<PAGE> 6
Management's discussion and analysis
of financial condition and results of operations
or 12 percent of net revenues for the fiscal year ended September 26, 1997.
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 September 24, 1999, we owned
approximately 7.1 percent of the outstanding common stock of Knight/Trimark. We
expect payment for order flow to continue to decrease on a per trade basis as a
result of competition and regulatory changes.
Net interest revenue increased to $69.3 million in fiscal 1999, from $37.4
million in fiscal 1998 and from $18.2 million in fiscal 1997. This increase was
due primarily to an increase of 195 percent in cash and investments segregated
in compliance with federal regulations and an increase of 405 percent in
customer and correspondent broker-dealer receivables, but was partially offset
by an increase of 209 percent in amounts payable to customers and correspondent
broker-dealers in fiscal 1999 over fiscal 1997. We generally expect net
interest revenue to grow as our account base grows.
We had no equity income from investments in fiscal 1999, compared to $5.1
million in fiscal 1998 and $3.4 million in fiscal 1997. The equity income in
fiscal 1997 and fiscal 1998 was primarily generated by our ownership in
Roundtable. In July 1998, Roundtable was reorganized into Knight/Trimark and
conducted a public stock offering. We also sold a portion of our interest in
CSS during fiscal 1998. We own less than 10 percent of the voting equity of
both Knight/Trimark and CSS. As a result of these transactions, we began
accounting for our investment in Knight/Trimark as a marketable equity security
available-for-sale and for our investment in CSS on the cost method rather than
the equity method. As of September 24, 1999, we had no investments accounted
for under the equity method.
Other revenues increased to $10.2 million in fiscal 1999, from $6.0 million
in fiscal 1998 and $3.7 million in fiscal 1997 due primarily to an increase in
marketing 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 $74.4 million in fiscal
1999, from $36.1 million in fiscal 1998 and $19.3 million in fiscal 1997, due
primarily to an increase in full-time employees. As of September 24, 1999, we
employed 2,379 full-time equivalent employees versus 985 on September 25, 1998
and 412 on September 26, 1997. The increase in employees was necessary to
accommodate the dramatic growth in trading volume following our advertising
campaigns in fiscal 1998 and fiscal 1999 and to provide the capability to
handle anticipated future growth in trading volume. We expect employment
expenses to continue to increase to support expected increases in customer
accounts, assets and trades.
Commissions and clearance costs increased to $8.0 million in fiscal 1999,
from $5.8 million in fiscal 1998 and $3.3 million in fiscal 1997. The 142
percent increase between fiscal 1997 and 1999 was due primarily to the 650
percent increase in transaction processing 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 was $18.6 million in fiscal 1999, compared to $12.9
million in fiscal 1998 and $5.6 million in fiscal 1997. The 232 percent
increase between fiscal 1997 and fiscal 1999 is primarily a result of the 650
percent increase in transaction processing volume between fiscal 1997 and
fiscal 1999. Communication expenses are expected to continue to increase at a
slower rate than transactions processed as the Internet continues to be the
predominant communication channel for our customers.
Occupancy and equipment expense was $21.4 million in fiscal 1999, $10.6
million in fiscal 1998 and $5.4 million in fiscal 1997. This increase was due
primarily to the lease of equipment and additional office space. In fiscal
1999, we added approximately 250,000 square feet of additional space in Omaha,
Nebraska, Baltimore, Maryland, Ft. Worth, Texas, and Kansas City, Missouri. In
fiscal 1998, we added a 132,000 square
40
<PAGE> 7
Management's discussion and analysis
of financial condition and results of operations
foot operations center in Bellevue, Nebraska. We have also leased additional
equipment over the past two fiscal years to accommodate our continued growth.
Advertising expenses increased to $59.7 million in fiscal 1999, from $43.6
million in fiscal 1998 and $14.0 million in fiscal 1997. The increase in
advertising expenditures in fiscal 1998 and fiscal 1999 was principally related
to our efforts to build awareness of the Ameritrade brand and was primarily
responsible for the significant increase in the number of customer accounts and
account assets realized by us during those two years. We plan to continue to
expand our customer base through significant advertising efforts and have
budgeted approximately $200 million for advertising in fiscal 2000.
Professional services increased to $40.6 million in fiscal 1999 from $11.5
million in fiscal 1998 and $2.1 million in fiscal 1997. The increase is
primarily due to marketing and technology consulting services to assist us in
operational effectiveness, market research and Year 2000 readiness (see "Year
2000").
Other operating expenses increased to $27.5 million in fiscal 1999 from
$13.8 million in fiscal 1998 and $6.1 million in fiscal 1997. The increase is
primarily a result of increased confirmation and statement processing costs
associated with the increase in transaction processing volume.
Income tax expense was $6.6 million in fiscal 1999, $0.3 million in fiscal
1998, and $7.6 million in fiscal 1997. The effective tax rate was 36 percent in
fiscal 1999 and 35 percent in fiscal 1997 as a result of our participation in
economic development tax incentive programs offered by the State of Nebraska.
The effective rate increased to 60 percent in fiscal 1998 due to the impact of
nondeductible 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 2000 from our operating cash flows, borrowings under our
revolving credit facility and the proceeds from $200 million of convertible
subordinated notes (the "Convertible Subordinated Notes", see "Convertible
Subordinated Notes") issued by us in August 1999.
In March 1997, we completed an initial public offering of our common stock,
resulting in net proceeds of $22.5 million. Upon completion of the offering, we
repaid our then existing term and revolving debt in their entirety, resulting
in the use of proceeds of $5.4 million. We entered into a revolving credit
agreement on January 16, 1998 and as of September 24, 1999, we had no amount
outstanding under the agreement (see "Bank Loan Agreements").
Dividends from subsidiaries are another source of liquidity. Some of our
subsidiaries are subject to requirements of the Securities and Exchange
Commission and the National Association of Securities Dealers relating to
liquidity, capital standards, and the use of customer funds and securities,
which limit funds available for the payment of dividends to Holding.
OPERATING CASH FLOW
Cash used in operating activities was $81.6 million in fiscal 1999, which
compares to cash used in operating activities of $35.9 million in fiscal 1998
and cash generated from operations of $23.8 million in fiscal 1997. The
increase in cash used during fiscal 1999 and fiscal 1998 was attributable to
the substantial increase in advertising expenditures during these years.
Cash used in investing activities was $55.5 million in fiscal 1999, compared
to $4.0 million in fiscal 1998 and $3.7 million in fiscal 1997. Uses of cash in
fiscal 1999 related primarily to purchases of property and equipment and the
acquisition of The R.J. Forbes Group, Inc., a broker-dealer. Uses of cash in
fiscal 1998 and fiscal 1997 were primarily related to purchases of property and
equipment, offset by cash distributions received from Knight/Trimark and CSS.
41
<PAGE> 8
Management's discussion and analysis
of financial condition and results of operations
Cash provided by financing activities was $189.6 million in fiscal 1999,
compared to $10.8 million in fiscal 1998 and $17.7 million in fiscal 1997. The
cash provided by financing activities in fiscal 1999 consisted of proceeds from
our revolving credit agreement with a bank (see "Bank Loan Agreements"), offset
by payments of principal and interest on the revolving credit agreement and the
net proceeds from the issuance of the $200 million Convertible Subordinated
Notes (see "Convertible Subordinated Notes"). Cash provided by financing
activities in fiscal 1998 consisted of proceeds from the revolving credit
agreement, partially offset by payments of principal and interest on the
revolving credit agreement. Cash provided by financing activities in fiscal
1997 was attributable to the net proceeds of $22.5 million from the initial
public offering in March 1997, partially offset by payments of principal and
interest 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 of up to $75.0 million through June 30, 2000, with
permissible borrowings declining $3.125 million quarterly to $68.76 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 percent (7.25 percent and 7.75 percent at
September 24, 1999 and September 25, 1998, respectively). We pay a maintenance
fee of 0.25 percent of the unused borrowings through the maturity date. At
September 24, 1999 we had no outstanding amount under the revolving credit
agreement. We had outstanding indebtedness under the revolving credit agreement
of $11.0 million at September 25, 1998. The revolving credit agreement contains
certain restrictions, including restrictions on the incurrence of 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. In accordance with the restrictions, we repaid the then outstanding
indebtedness under the facility with a portion of the proceeds of the sale of
the Convertible Subordinated Notes (see "Convertible Subordinated Notes").
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
September 24, 1999 and September 25, 1998, the financial institutions had
issued letters of credit in the aggregate amount of $100 million and $44
million, respectively. As of September 24, 1999 and September 25, 1998, no
amounts were outstanding under the letters of credit. Advanced Clearing pays a
maintenance fee of 0.5 percent of the committed amount for the letters of
credit.
CONVERTIBLE SUBORDINATED NOTES
In August 1999, we issued $200 million of 5.75 percent Convertible Subordinated
Notes due August 1, 2004. The notes are convertible into 6,142,740 shares of
Class A common stock. The holders of the notes may convert the notes into
shares of Class A common stock at any time prior to the close of business on
the maturity date of the notes, unless previously redeemed or repurchased, at a
conversion rate of 30.7137 shares per $1,000 principal amount of notes
(equivalent to an approximate conversion price of $32.56 per share), subject to
adjustment in certain circumstances. Interest on the notes is payable on
February 1 and August 1 of each year, commencing on February 1, 2000. The notes
are not subject to redemption prior to August 6, 2002, and we may, at our
option, redeem the notes on or after such date, in whole or in part, upon
notice to each holder not less than 30 days nor more than 60 days prior to the
redemption date.
42
<PAGE> 9
Management's discussion and analysis
of financial condition and results of operations
CAPITAL EXPENDITURES
We currently anticipate that our available cash resources and credit facilities
will be sufficient to meet our anticipated working capital and capital
expenditure requirements for at least the next 12 months. However, we may need
to raise additional funds in order to support more rapid expansion, develop new
or enhanced services and products, respond to competitive pressures, acquire
complementary businesses or technologies or take advantage of unanticipated
opportunities.
Our forecast of the period of time through which our financial resources
will be adequate to support our operations is a forward-looking statement that
involves risks and uncertainties, and actual results could vary. The factors
described above will impact our future capital requirements and the adequacy of
our available funds. If additional funds are raised through the issuance of
equity securities, the percentage ownership of our shareholders will be
reduced, our shareholders may experience additional dilution in net book value
per share or such equity securities may have rights, preferences or privileges
senior to those of the holders of our common stock. There can be no assurance
that additional financing will be available when needed on terms favorable to
us, if at all.
If adequate funds are not available on acceptable terms, we may be unable to
develop or enhance our services and products, take advantage of future
opportunities or respond to competitive pressures, any of which could have a
material adverse effect on our business, financial condition and operating
results.
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 deal with this Year 2000 problem with respect to our IT systems, non-IT
systems and third party business relationships. We generally define "Year 2000
compliant" as that the information technology in use will continue to
accurately process date/time data during 1999, 2000 and throughout the 21st
century in addition to accurately handling the leap year in 2000 (including,
but not limited to, calculating, comparing and sequencing).
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 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 believe
that all material IT systems that were identified as having a potential Year
2000 problem have been replaced or modified to be Year 2000 compliant. We have
reviewed our material 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 material non-IT systems that were
identified as having a potential Year 2000 problem have been replaced or
modified to be Year 2000 compliant.
43
<PAGE> 10
Management's discussion and analysis
of financial condition and results of operations
Testing of IT and non-IT systems has been conducted as remediation work has
been 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.
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 ongoing testing will be sufficient to
reveal any unanticipated material problems with our IT systems or non-IT
systems.
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 service 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 have conducted in-house testing of third party systems
where applicable. We have received responses from almost all material third
parties, which we have analyzed accordingly. We also expect to continue to
request updated information from those few material third parties who have not
yet responded in order to assess their Year 2000 readiness. We have relied upon
representations by vendors and third parties as to their Year 2000 readiness
and have generally not performed independent verification of the statements
unless requested by the third party or we believed it to be necessary. The Year
2000 readiness of other third parties which have not been identified as
material have not been verified.
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 systems were made
as part of scheduled upgrades and, therefore, have not been included in the
costs of Year 2000 compliance. Costs associated with our Year 2000 program have
been approximately $4.2 million to date and are expected to total less than $5
million.
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. However, we
are dependent on systems that are not under our control, which, even if
assurances have been received, may not be accurate, and may, if they fail, have
a material adverse effect on us. 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 developed a Year 2000 Continuity Plan ("the Plan")
to prepare for and aid us in avoiding or minimizing risks associated with Year
2000 problems that may arise due to internal or external causes. A designated
team developed the Plan by analyzing core business operations and identifying
risks, technical and nontechnical, to these operations. Contingency plans have
been developed for each case where a critical business function that may suffer
a Year 2000 problem could affect a core business operation. 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
44
<PAGE> 11
Management's discussion and analysis
of financial condition and results of operations
if telephone service or electricity is interrupted. We have also organized a
Crisis Action Center to centrally coordinate and direct necessary actions and
act as the focal point for Year 2000 communications. The Year 2000 Continuity
Plan is a dynamic plan and we expect to continue to modify it through the
millennium change as we process and analyze new information we receive on a
daily basis. We cannot give 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
relations with us.
All forecasts, estimates or other statements in this report relating to our
Year 2000 readiness are based on information and assumptions about future
events. Such forward-looking statements are subject to various known and
unknown risks and uncertainties that may cause actual events to differ from
such statements. Important factors upon which our Year 2000 forward-looking
statements are based include, but are not limited to, (a) our belief that the
upgraded software used in IT systems is already able to correctly read and
interpret dates after December 31, 1999, and will require little or no
remediation; (b) the ability to identify, repair or replace mission critical
non-IT equipment in a timely manner; (c) third parties' remediation of their
internal systems to be Year 2000 ready and their willingness to test their
systems interfaces with ours; (d) no third party system failures causing
material disruption of telecommunications, data transmission, payment networks,
government services, utilities or other infrastructure; (e) no unexpected
failures by third parties with which we have a material business relationship;
and (f) no material undiscovered flaws in our Year 2000 inventory and
assessment process.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk generally represents the risk of loss that may result from the
potential change in the value of a financial instrument as a result of
fluctuations in interest rates and market prices. We have established policies,
procedures and internal processes governing our management of market risks in
the normal course of our business operations.
As a fundamental part of our brokerage business, we hold short-term
interest-earning assets, mainly funds required to be segregated in compliance
with federal regulations for customers. Such funds totaled $942,426,784 at
September 24, 1999 and $503,455,354 at September 25, 1998. We invest such funds
primarily in short-term fixed-rate U.S. Treasury Bills and repurchase
agreements. Our interest-earning assets are financed by short-term
interest-bearing liabilities totaling $2,057,345,904 at September 24, 1999 and
$1,136,082,337 at September 25, 1998 in the form of customer cash balances.
Additionally, at September 24, 1999 we had $200,000,000 outstanding in
Convertible Subordinated Notes (see "Convertible Subordinated Notes") compared
to $11,000,000 outstanding at September 25, 1998 under a bank note with a
floating interest rate arrangement. We earn a net interest spread on the
difference between amounts earned on customer margin loans and amounts paid on
customer credit balances. Since we establish the rate paid on customer cash
balances, a substantial portion of our interest rate risk is under our direct
management. We generally move rates earned on loans in lockstep with rates paid
on credit balances to maintain a consistent net interest spread, and,
therefore, do not anticipate that changes in interest rates will have a
material effect on our earnings and cash flows.
We hold a marketable equity security at September 24, 1999, which is
recorded at fair value of $229,313,150 ($139,436,161 net of tax) and has
exposure to market price risk. The same security was recorded at fair value of
$29,454,879 ($17,522,615 net of tax) at September 25, 1998. This risk is
estimated as the potential loss in fair value resulting from a hypothetical 10
percent adverse change in prices quoted by the stock exchanges and amounts to
approximately $23 million at September 24, 1999. Actual results may differ.
Our revenues and financial instruments are denominated in U.S. dollars and
we generally do not invest in derivative financial instruments or derivative
commodity instruments.
45
<PAGE> 12
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 24, 1999 and September 25, 1998, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended September 24, 1999. 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 24, 1999 and September 25, 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended September 24, 1999, in conformity with generally accepted
accounting principles.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Omaha, Nebraska
October 27, 1999
46
<PAGE> 13
Consolidated balance sheets
as of Sept. 24, 1999 and Sept. 25, 1998
<TABLE>
<CAPTION>
1999 1998
-------------------------------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 76,943,144 $ 24,526,935
Cash and investments segregated in compliance
with federal regulations 942,426,784 503,455,354
Receivable from brokers, dealers and clearing organizations 89,957,472 25,732,164
Receivable from customers and correspondents - net of allowance
for doubtful accounts: 1999 - $2,916,120; 1998 - $1,039,788 1,526,801,390 647,121,854
Refundable income taxes 15,947,412 --
Furniture, equipment and leasehold improvements net of
accumulated depreciation and amortization:
1999 - $12,901,240; 1998 - $6,728,212 68,587,792 26,116,333
Goodwill - net of accumulated amortization 12,820,759 5,983,761
Investments 230,619,000 30,760,729
Other assets 72,979,039 26,704,546
-------------------------------------
Total assets $ 3,037,082,792 $ 1,290,401,676
=====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Payable to brokers, dealers and clearing organizations $ 384,960,381 $ 11,765,785
Payable to customers and correspondents 2,057,345,904 1,136,082,337
Accounts payable and accrued liabilities 73,602,700 30,716,987
Notes payable 200,000,000 11,000,000
Income taxes payable -- 1,331,170
Deferred income taxes 100,710,729 14,933,313
-------------------------------------
Total liabilities 2,816,619,714 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; 1999 - 158,103,480
shares issued; 1998 - 157,841,076 shares issued 1,581,035 1,578,411
Class B - 18,000,000 shares authorized;
16,372,800 shares issued and outstanding 163,728 163,728
-------------------------------------
Total common stock 1,744,763 1,742,139
Additional paid-in capital 24,078,753 21,683,870
Retained earnings 55,296,171 43,756,848
Treasury stock - Class A shares at cost (39,624 shares
at Sept. 24, 1999; 56,652 shares at Sept. 25, 1998) (92,770) (133,388)
Accumulated other comprehensive income 139,436,161 17,522,615
-------------------------------------
Total stockholders' equity 220,463,078 84,572,084
Total liabilities and stockholders' equity $ 3,037,082,792 $ 1,290,401,676
=====================================
</TABLE>
See notes to consolidated financial statements.
47
<PAGE> 14
Consolidated statements of income
for the years ended Sept. 24, 1999, Sept. 25, 1998 and Sept. 26, 1997
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------------------
<S> <C> <C> <C>
Revenues:
Commissions and clearing fees $188,874,029 $85,644,433 $51,936,902
Interest revenue 116,161,765 66,716,234 36,622,800
Equity income from investments -- 5,083,172 3,443,807
Gain from sale of investment -- 794,634 --
Other 10,212,784 5,955,534 3,663,685
------------------------------------------------
Total revenues 315,248,578 164,194,007 95,667,194
Interest expense 46,897,401 29,278,536 18,428,854
------------------------------------------------
Net revenues 268,351,177 134,915,471 77,238,340
Expenses excluding interest:
Employee compensation and benefits 74,353,330 36,082,707 19,290,808
Commissions and clearance 8,022,544 5,762,336 3,320,262
Communications 18,591,359 12,926,154 5,623,468
Occupancy and equipment costs 21,382,300 10,621,551 5,422,839
Advertising 59,716,704 43,613,779 13,970,834
Professional services 40,644,379 11,529,642 2,134,266
Other 27,532,915 13,848,276 6,050,750
------------------------------------------------
Total expenses excluding interest 250,243,531 134,384,445 55,813,227
------------------------------------------------
Income before provision for income taxes 18,107,646 531,026 21,425,113
Provision for income taxes 6,568,323 320,588 7,602,964
------------------------------------------------
Net income $ 11,539,323 $ 210,438 $13,822,149
================================================
Basic earnings per share $ 0.07 $ 0.00 $ 0.08
Diluted earnings per share $ 0.07 $ 0.00 $ 0.08
Weighted average shares outstanding - basic 174,341,920 174,187,965 165,226,668
Weighted average shares outstanding - diluted 175,744,647 174,443,597 165,233,442
</TABLE>
See notes to consolidated financial statements.
48
<PAGE> 15
Consolidated statements of stockholders' equity
for the years ended Sept. 24, 1999, Sept. 25, 1998 and Sept. 26, 1997
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
------------------------------- Paid-In Retained Treasury Comprehensive
Total Class A Class B Total Capital Earnings Stock Income
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, Sept. 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, Sept. 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 -- --
Net unrealized
investment gain 17,522,615 -- -- -- -- -- -- 17,522,615
---------------
Total comprehensive
income 17,733,053
---------------
Purchase of
treasury stock (286,375) -- -- -- -- -- (286,375) --
Issuance of
treasury stock 136,312 -- -- -- (16,675) -- 152,987 --
-----------------------------------------------------------------------------------------------------
Balance, Sept. 25, 1998 84,572,084 1,578,411 163,728 1,742,139 21,683,870 43,756,848 (133,388) 17,522,615
Net income 11,539,323 -- -- -- -- 11,539,323 -- --
Net unrealized
investment gain 121,913,546 -- -- -- -- -- -- 121,913,546
---------------
Total comprehensive
income 133,452,869
---------------
Issuance of
treasury stock 66,048 -- -- -- 25,430 -- 40,618 --
Options exercised 507,208 2,624 -- 2,624 504,584 -- -- --
Tax benefit of options
exercised 1,864,869 -- -- -- 1,864,869 -- -- --
-----------------------------------------------------------------------------------------------------
Balance, Sept. 24, 1999 $220,463,078 $1,581,035 $163,728 $1,744,763 $24,078,753 $55,296,171 $(92,770) $139,436,161
-----------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
49
<PAGE> 16
Consolidated statements of cash flows
for the years ended Sept. 24, 1999, Sept. 25, 1998 and Sept. 26, 1997
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 11,539,323 $ 210,438 $ 13,822,149
Adjustments to reconcile net income to
net cash flows from operating activities:
Depreciation and amortization 6,390,322 2,999,017 1,693,487
Provision for losses 2,155,000 815,000 59,000
Deferred income taxes 7,832,691 3,769,643 405,064
Equity income from investments -- (5,083,172) (3,443,807)
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 (438,971,430) (183,691,433) (144,095,424)
Receivable from brokers, dealers and
clearing organizations (64,225,308) (7,908,524) (2,726,778)
Receivable from customers and correspondents (881,593,835) (322,529,707) (159,391,092)
Other assets (60,357,030) (13,558,930) (7,132,072)
Payable to brokers, dealers and
clearing organizations 373,194,596 10,360,786 211,520
Payable to customers and correspondents 921,263,567 469,802,897 309,336,470
Accounts payable and accrued liabilities 42,132,706 11,464,056 12,031,923
Income taxes payable (1,331,170) (2,099,109) 2,623,568
-----------------------------------------------------
Net cash provided by (used in)
operating activities (81,607,566) (35,880,670) 23,757,010
-----------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of The R.J. Forbes Group, Inc.,
net of cash and cash equivalents acquired (6,917,076) -- --
Purchase of furniture, equipment and
leasehold improvements (48,632,405) (20,405,427) (6,657,232)
Purchase of investments -- (1,652,740) (659,613)
Distributions received from investments -- 12,264,993 3,663,231
Proceeds from sale of investments -- 5,828,395 --
-----------------------------------------------------
Net cash used in investing activities (55,549,481) (3,964,779) (3,653,614)
-----------------------------------------------------
</TABLE>
50
<PAGE> 17
Consolidated statements of cash flows (continued)
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------------------------------
<S> <C> <C> <C>
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 294,000,000 22,500,000 --
Principal payments on notes payable (105,000,000) (11,500,000) (4,853,000)
Proceeds from exercise of stock options 507,208 -- --
Purchase of treasury stock -- (286,375) --
Issuance of treasury stock 66,048 136,312 --
-----------------------------------------------------
Net cash provided by financing activities 189,573,256 10,849,937 17,651,881
-----------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 52,416,209 (28,995,512) 37,755,277
Cash and cash equivalents at beginning of year 24,526,935 53,522,447 15,767,170
-----------------------------------------------------
Cash and cash equivalents at end of year $ 76,943,144 $24,526,935 $53,522,447
=====================================================
Supplemental cash flow information:
Interest paid $ 43,743,875 $28,258,819 $17,623,539
Income taxes paid (refunds received) $ 14,149,346 $ (1,418,800) $ 4,525,078
Noncash financing activities:
Tax benefit on exercise of stock options $ 1,864,869 $ -- $ --
</TABLE>
See notes to consolidated financial statements.
51
<PAGE> 18
Notes to consolidated financial statements
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"),
Accutrade, Inc. ("Accutrade"), Ameritrade (Inc.) ("Ameritrade"), AmeriVest,
Inc. ("AmeriVest"), K. Aufhauser and Company, Inc. ("Aufhauser"), The R.J.
Forbes Group, Inc. ("R.J. Forbes") and OnMoney Financial Services Corporation
("OnMoney"). The Company operates as a single reportable business segment. All
significant intercompany balances and transactions have been eliminated.
On January 23, 1997, the Company effected an eight-for-five stock split in
the form of a stock dividend. During fiscal 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. During fiscal 1999, the Company's
Board of Directors declared a two-for-one common stock split, distributed
February 1999 and effected in the form of a stock dividend and a three-for-one
common stock split, distributed July 1999 and effected in the form of a stock
dividend. All share data and per share amounts have been restated to reflect
these transactions.
The Company reports on a fifty-two/fifty-three week year. The fiscal years
ended 1999, 1998, and 1997 were each fifty-two week years.
Nature of Operations - The Company provides discount securities brokerage
services through its Ameritrade, Accutrade, 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 online 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. During fiscal 1999, the Company
purchased R.J. Forbes and subsequently consolidated the R.J. Forbes brokerage
operation with Accutrade.
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 revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
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.
52
<PAGE> 19
Notes to consolidated financial statements
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 24, 1999 and September 25, 1998
was $1,606,028 and $1,243,026, respectively. The Company reviews its intangible
assets and other long-lived assets for impairment at least annually or whenever
events or changes 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 securities available-for-sale,
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
$942,426,784 and $503,455,354 as of September 24, 1999 and September 25, 1998,
respectively, have been segregated in a special reserve bank account for the
benefit of customers under Rule 15c3-3 of the Securities Exchange Act of 1934.
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 other
valuation methodologies.
Investments - 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 criteria. The Company's
investments in marketable equity securities are carried at fair value and are
designated as available-for-sale. Unrealized gains and losses, net of deferred
income taxes, are reflected as accumulated other comprehensive income. Realized
gains and losses are determined on the specific identification method and are
reflected in the statements of income.
Advertising - The Company generally expenses advertising costs as they are
incurred.
Earnings Per Share - Basic earnings per share ("EPS") is computed by dividing
net income by the weighted average 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 converted into common
stock.
Stock Based Compensation - As permitted by Statement of Financial Accounting
Standards No. 123, Accounting for Stock Based Compensation ("SFAS 123"), the
Company accounts for its stock based compensation on the intrinsic-value method
in accordance with Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees ("APB 25"). The Company provides pro forma
disclosures of net income and earnings per share as required under SFAS 123.
Comprehensive Income - Comprehensive income for all periods presented consists
of net income and unrealized gains on securities available-for-sale. These
results are incorporated into the consolidated statements of stockholders'
equity.
53
<PAGE> 20
Notes to consolidated financial statements
Reclassifications - Certain items in prior years' consolidated financial
statements have been reclassified to conform to the current year presentation.
Recently Issued Accounting Pronouncements:
SFAS 133 - In June 1998, the Financial Accounting Standards Board 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,
2000. Management has not determined the impact, if any, that adoption of the
provisions of this statement would have on the Company's financial statements.
SOP 98-5 - The American Institute of Certified Public Accountants issued
Statement of Position 98-5, Reporting on the Costs of Start-Up Activities, in
April 1998. The Statement of Position requires costs of start-up activities and
organization costs to be expensed as incurred and is effective for fiscal years
beginning after December 15, 1998. Management is currently evaluating the
impact of this Statement of Position, and does not expect the impact of
adoption to be material to the Company's financial position or results of
operations.
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>
Sept. 24, 1999 Sept. 25, 1998
---------------------------------
<S> <C> <C>
Receivable:
Securities borrowed $ 81,763,429 $21,638,669
Securities failed to deliver 8,082,421 4,069,740
Clearing organizations 111,622 23,755
---------------------------------
Total $ 89,957,472 $25,732,164
=================================
Payable:
Securities loaned 371,214,321 $ 5,519,000
Securities failed to receive 3,865,301 2,227,342
Clearing organizations 9,880,759 4,019,443
---------------------------------
Total $384,960,381 $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. In fiscal 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 available-for-sale. As of September 24, 1999, the Company owned
approximately 7.1 percent of the outstanding shares of common stock of
Knight/Trimark. On September 24, 1999, the Company valued its investment in
Knight/Trimark at $229,313,150.
54
<PAGE> 21
Notes to consolidated financial statements
The Company executes a portion of its securities transactions through
subsidiaries of Knight/Trimark. Revenues related to such transactions totaled
$8,198,753, $9,435,696, and $6,843,502 in fiscal 1999, fiscal 1998 and fiscal
1997, respectively. These amounts are included as commissions and clearing fees
in the statements of income.
Comprehensive Software Systems, Ltd. ("CSS") - As of September 24, 1999, the
Company owned approximately 7.2 percent of CSS, a joint venture 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
the CSS sale, 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 cost method as of that date, and will, therefore,
no longer recognize income or loss based on the operations of CSS.
Adirondack Trading Partners, LLC ("Adirondack") - As of September 24, 1999, 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.
4. NOTES PAYABLE
The Company has 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 $68.760 million at
maturity on December 31, 2000. The revolving credit agreement is collateralized
by the common stock of the Company's subsidiaries, as well as all of the
Company's tangible and intangible assets. Borrowings under the revolving credit
agreement bear interest at the prime rate less 0.75 percent (7.25 percent and
7.75 percent at September 24, 1999 and September 25, 1998, respectively). The
Company pays a maintenance fee of 0.25 percent of the unused borrowings through
the maturity date. At September 24, 1999, there was no outstanding amount under
the revolving credit agreement. The Company had outstanding indebtedness under
the revolving credit agreement of $11.0 million at September 25, 1998. The
revolving credit agreement contains certain restrictions, including
restrictions on the incurrence of 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. In accordance with the
restrictions, the Company repaid the then outstanding indebtedness under the
facility with a portion of the proceeds of the sale of $200 million convertible
subordinated notes.
In August 1999, the Company issued $200 million of 5.75 percent convertible
subordinated notes due August 1, 2004. The notes are convertible into 6,142,740
shares of Class A common stock. The holders of the notes may convert the notes
into shares of Class A common stock at any time prior to the close of business
on the maturity date of the notes, unless previously redeemed or repurchased,
at a conversion rate of 30.7137 shares per $1,000 principal amount of notes
(equivalent to an approximate conversion price of $32.56 per share), subject to
adjustment in certain circumstances. Interest on the notes is payable on
February 1 and August 1 of each year, commencing on February 1, 2000. The notes
are not subject to redemption prior to August 6, 2002, and the Company may, at
its option, redeem the notes on or after such date, in whole or in part, upon
not less than 30 days nor more than 60 days prior notice to each holder.
55
<PAGE> 22
Notes to consolidated financial statements
5. INCOME TAXES
Provision for income tax is comprised of the following for fiscal years ended:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------------
<S> <C> <C> <C>
Current expense:
Federal $(1,264,368) $(3,051,000) $7,150,775
State -- (398,055) 47,125
------------------------------------------------
(1,264,368) (3,449,055) 7,197,900
------------------------------------------------
Deferred expense (benefit):
Federal 8,062,629 3,383,013 344,066
State (229,944) 386,630 60,998
------------------------------------------------
7,832,691 3,769,643 405,064
------------------------------------------------
Provision for income taxes $ 6,568,323 $ 320,588 $7,602,964
================================================
</TABLE>
A reconciliation of the federal statutory tax rate to the effective tax rate
applicable to income before provision for income taxes follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate 35% 35% 35%
State taxes, net of federal tax effect 3 3 3
Amortization of goodwill 1 23 1
State credits (4) 0 (4)
Other 1 (1) 0
------------------------------------------------
36% 60% 35%
================================================
</TABLE>
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
1999 1998
--------------------------------
<S> <C> <C>
Unrealized investment gain $(89,147,709) $(11,202,984)
Depreciation and amortization, net (816,724) (575,425)
Prepaid expenses (14,723,282) (4,279,343)
Other deferred tax assets 1,163,278 --
State incentive credits and operating loss carryforwards 5,934,098 1,624,965
Valuation allowance (4,872,395) (1,624,965)
Accrued liabilities 1,752,005 1,124,439
--------------------------------
Net deferred tax assets (liabilities) $(100,710,729) $(14,933,313)
================================
</TABLE>
A valuation allowance has been provided against certain state incentive credit
and net operating loss carryforwards because realization of these amounts is
dependent on generating sufficient state taxable income in future periods. At
the present time, realization of these amounts is not reasonably assured. At
September 24, 1999, state incentive credit carryforwards total approximately
$8.6 million and expire December 31, 2007. At September 24, 1999, state net
operating loss carryforwards total approximately $12.6 million and expire in
2004.
6. NET CAPITAL
The Company's subsidiaries are subject to the Securities and Exchange
Commission Uniform Net Capital Rule (Rule 15c3-1 of the Securities Exchange Act
of 1934), which requires the maintenance of minimum net capital, as defined.
Net capital and the related net capital requirement may fluctuate on a daily
basis.
56
<PAGE> 23
Notes to consolidated financial statements
The Company's broker-dealer subsidiaries had net capital, in the aggregate,
of $104,049,963 and $40,062,733 as of September 24, 1999 and September 25,
1998, respectively, which exceeded aggregate minimum net capital requirements
by $70,041,619 and $25,247,775, respectively. Subsidiary net capital in the
amount of $34,008,344 and $14,814,958 as of September 24, 1999 and September
25, 1998, respectively, was not available for transfer to the Company.
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 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 and shares of 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 four year period, and expire ten
years after the grant date.
A summary of the status of the Company's outstanding stock options as of and
for the years ended September 24, 1999, September 25, 1998 and September 26,
1997 is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted- Weighted- Weighted-
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Options Price Options Price Options Price
------------------------------------------------------------------------
Outstanding at beginning
of year 1,777,200 $ 2.09 96,000 $1.25 -- --
Granted 655,800 $22.86 1,681,200 $2.14 96,000 $1.25
Exercised (262,410) $ (1.93) -- -- -- --
------------------------------------------------------------------------
Outstanding at end of year 2,170,590 $ 8.39 1,777,200 $2.09 96,000 $1.25
Exercisable at end of year 394,008 $ 2.06 96,000 $1.25 -- --
Available for future grant
at end of year 8,127,000 8,782,800 10,464,000
Weighted-average fair value
of options granted during
the year $18.62 $1.23 $1.12
</TABLE>
The following table summarizes information about the stock options outstanding
at September 24, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------ -------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Number of Contractual Exercise Number of Exercise
Range of Exercise Prices Options Life (in years) Price Options Price
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.00 - $ 5.00 1,514,790 8.13 $ 2.12 394,008 $2.06
$ 5.01 - $10.00 -- -- -- -- --
$10.01 - $15.00 60,000 9.46 $14.83 -- --
$15.01 - $20.00 331,500 9.44 $16.14 -- --
$20.01 - $25.00 75,000 9.86 $24.00 -- --
$25.01 - $30.00 -- -- -- -- --
$30.01 - $35.00 -- -- -- -- --
$35.01 - $40.00 189,300 9.72 $36.73 -- --
- ----------------------------------------------------------------------------------------------------
2,170,590 8.43 $ 8.39 394,008 $2.06
</TABLE>
57
<PAGE> 24
Notes to consolidated financial statements
There were no Stock Appreciation Rights or performance units outstanding as
of September 24, 1999, or during the three years then ended.
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 1999, 1998 and 1997, respectively: risk-free interest
rate of 6.00 percent, 5.95 percent and 6.37 percent; dividend yield of zero for
all years; expected volatility of 111 percent for fiscal 1999 and 50 percent
for fiscal 1998 and fiscal 1997; and an expected option life of five years,
eight years and eight years, respectively. The weighted-average fair value of
options granted was $18.62 in fiscal 1999, $1.23 in fiscal 1998 and $1.12 in
fiscal 1997. Pro forma net income (loss) and earnings per share are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) As reported $ 11,539,323 $210,438 $13,822,149
Pro forma 8,782,282 (562,703) 13,787,640
---------------------------------------------
Basic earnings per share As reported $ 0.07 $ 0.00 $ 0.08
Pro forma $ 0.05 $ (0.00) $ 0.08
Diluted earnings per share As reported $ 0.07 $ 0.00 $ 0.08
Pro forma $ 0.05 $ (0.00) $ 0.08
</TABLE>
8. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) and profit-sharing plan under which the annual and
matching contributions are determined at the discretion of the Board of
Directors. Profit-sharing expense was $256,206, $779,657 and $595,222 for the
fiscal years ended 1999, 1998 and 1997, respectively. No 401(k) matching
contributions were made during the fiscal years ended 1999, 1998 and 1997.
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 $284,219, $960,000 and $2,170,000 for the
fiscal years ended 1999, 1998 and 1997, 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>
1999 1998 1997
------------------------------------------------
<S> <C> <C> <C>
Net income $11,539,323 $210,438 $13,822,149
------------------------------------------------
Weighted average shares outstanding - basic 174,341,920 174,187,965 165,226,668
Effect of dilutive securities:
Assumed exercise of stock options 1,402,727 255,632 6,774
------------------------------------------------
Weighted average shares outstanding - diluted 175,744,647 174,443,597 165,233,442
================================================
Basic earnings per share $ 0.07 $ 0.00 $ 0.08
Diluted earnings per share $ 0.07 $ 0.00 $ 0.08
</TABLE>
The Subordinated Convertible Notes are not included in the EPS calculation
above because the effect would be anti-dilutive.
58
<PAGE> 25
Notes to consolidated financial statements
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>
2000 $ 19,563,932
2001 16,958,359
2002 12,226,020
2003 6,225,564
2004 5,914,773
Thereafter (to December 31, 2017) 50,497,475
- ----------------------------------------------------------------------------------------------------
Total $111,386,123
</TABLE>
Prior to and including a portion of fiscal 1999, the Company and certain of its
subsidiaries leased one of their office facilities from the Chairman and
Co-Chief Executive Officer of the Company. During fiscal 1999, the facility was
sold to an unrelated third party. Additionally, the Company and its
subsidiaries lease certain computer equipment, office equipment, and office
facilities under various operating leases. Rental expense was $11,197,022,
$6,225,232 and $3,155,550 for fiscal years ended 1999, 1998 and 1997,
respectively.
Letter of Credit - A letter of credit in the amount of $100 million and $44
million as of September 24, 1999 and September 25, 1998, respectively, 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 24, 1999 and September 25, 1998, no
amounts were outstanding under the letter of credit. 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, regarding the Company's alleged
inability to handle the volume of subscribers to its Internet brokerage
services. After initial proceedings and discovery, the complaint was amended
and, on September 10, 1999, a second amended complaint was filed. The amended
complaint seeks injunctive relief enjoining alleged deceptive, fraudulent and
misleading practices, equitable relief compelling the Company to increase
capacity, and unspecified compensatory damages. The Company believes that it
has viable defenses to the allegations raised in the amended complaint and
intends to assert them vigorously. However, because this proceeding is still 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 operating units are parties to a number of other legal
matters arising in the ordinary course of its business. In management's
opinion, the Company has adequate legal defenses respecting each of these
actions and does not believe that any such matters, either individually or in
the aggregate, 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.
59
<PAGE> 26
Notes to consolidated financial statements
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). 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 records customer transactions on a settlement date basis,
which is generally three business days after trade date. The risk of loss on
unsettled transactions is identical to that of settled transactions and relates
to customers and other counterparties ability to fulfill their contractual
obligations.
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.
Employment Agreements - The Company has entered into employment agreements with
several of its key executive officers. These employment agreements provide for
annual base salary compensation, stock option acceleration and severance
payments in the event of termination of employment under certain defined
circumstances or changes in the Company's control. Salaries are subject to
adjustments according to the Company's financial performance and other factors.
11. ACQUISITION
On August 6, 1999, the Company acquired The R.J. Forbes Group, Inc. for cash of
approximately $7,300,000. The transaction was accounted for as a purchase with
the resulting goodwill of approximately $7,200,000 being amortized over 20
years. The following unaudited pro forma financial information sets forth the
results of operations of Ameritrade Holding Corporation as if the acquisition
of The R.J. Forbes Group, Inc. had occurred on September 27, 1996.
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------------------------------------
Sept. 24, 1999 Sept. 25, 1998 Sept. 26, 1997
---------------------------------------------------------------------------
<S> <C> <C> <C>
Total revenues $328,617,706 $168,337,869 $56,626,170
Net income (loss) $ 16,885,520 $ (138,344) $13,187,209
Basic earnings per share $ 0.09 $ (0.00) $ 0.08
---------------------------------------------------------------------------
</TABLE>
60
<PAGE> 27
QUARTERLY FINANCIAL DATA (UNAUDITED)
in thousands, except per share and stock price data
all per share numbers have been split-adjusted
<TABLE>
<CAPTION>
For the Fiscal Year Ended Sept. 24, 1999
---------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 61,977 $73,920 $90,140 $ 89,213
Interest expense 9,860 10,258 12,046 14,735
---------------------------------------------------------
Net revenues 52,117 63,662 78,094 74,478
Total expenses excluding interest 46,225 51,032 64,204 88,782
---------------------------------------------------------
Income (loss) before provision for
income taxes 5,892 12,630 13,890 (14,304)
Net income (loss) $ 3,742 $ 8,078 $ 8,917 $ (9,198)
=========================================================
Basic earnings (loss) per share $ 0.02 $ 0.05 $ 0.05 $ (0.05)
Diluted earnings (loss) per share $ 0.02 $ 0.05 $ 0.05 $ (0.05)
Stock price data
High $ 6.13 $ 21.43 $ 57.75 $ 41.25
Low $ 2.20 $ 5.34 $ 20.58 $ 16.13
</TABLE>
<TABLE>
<CAPTION>
For the Fiscal Year Ended Sept. 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 $ 3.15 $ 2.51 $ 2.73 $ 3.81
Low $ 1.80 $ 1.90 $ 2.06 $ 2.25
</TABLE>
61
