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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
UNDER THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 29, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
UNDER 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)
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DELAWARE 47-0642657
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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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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Securities registered pursuant to Section 12(b) of the Act:
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TITLE OF NAME OF EACH EXCHANGE
EACH CLASS ON WHICH REGISTERED
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None None
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Securities registered Pursuant to Section 12(g) of the Act:
TITLE OF CLASS
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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) under 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 19, 2000, the aggregate market value of the Class A Common
Stock held by non-affiliates of the registrant was approximately $1.4 billion
computed by reference to the final sale price of the stock on December 19, 2000
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 19,
2000 was 160,405,218 shares. The number of shares of Class B Common Stock
outstanding as of December 19, 2000 was 16,372,800 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement relating to the Company's 2001 Annual Meeting to
be filed hereafter (incorporated into Part III hereof).
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AMERITRADE HOLDING CORPORATION
INDEX
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 14
Item 3. Legal Proceedings........................................... 14
Item 4. Submission of Matters to a Vote of Security Holders......... 15
Executive Officers of the Registrant........................ 15
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 18
Item 6. Selected Financial Data..................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 21
Risk Factors................................................ 27
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 31
Item 8. Financial Statements and Supplementary Data................. 32
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 51
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 51
Section 16(a) Beneficial Ownership Reporting Compliance..... 51
Item 11. Executive Compensation...................................... 51
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 51
Item 13. Certain Relationships and Related Transactions.............. 51
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 51
Exhibit Index............................................... 51
Signatures.................................................. 59
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UNLESS OTHERWISE INDICATED, REFERENCES TO "WE," "US" OR "COMPANY" MEAN
AMERITRADE HOLDING CORPORATION ("HOLDING") AND ITS SUBSIDIARIES, AND REFERENCES
TO "FISCAL" MEAN THE COMPANY'S FISCAL YEAR ENDED THE LAST FRIDAY OF SEPTEMBER.
Except for historical information contained herein, the matters discussed
in this report contain certain 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; trading
volumes in excess of our capacity; 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; a significant downturn in the securities
markets over a short period of time or a sustained decline in securities prices
and trading volumes; and the other risks and uncertainties set forth under the
heading "Risk Factors" contained in Item 7.
PART I
ITEM 1. BUSINESS
The Company was established in 1971 and has been engaged in the discount
brokerage industry since 1975. We are a leading provider of online brokerage
services, and this segment of our operations represents the vast majority of our
business. We also operate an Internet-based financial management services
business through our OnMoney Financial Services Corporation ("OnMoney")
subsidiary. OnMoney was created in 1998 and became an operating company during
fiscal 2000.
Online Brokerage Operations
We provide technology-based brokerage services primarily to retail
investors through a variety of mediums, predominantly through the Internet. Our
services appeal to a broad market of self-directed retail investors, financial
planners and organizations who are value conscious. We use our low-cost platform
to offer brokerage services to investors at commissions that are generally lower
than commissions charged by our major competitors. Our goal is to provide the
best execution using the best information at the best price.
We were one of the earliest participants in the growing online brokerage
industry, pioneering online trading with the first Internet trade in 1994. Since
initiating online trading, we have dramatically increased our number of
brokerage accounts, average daily trading volume and total assets in customer
accounts, while significantly lowering our pre-advertising operating costs per
trade. We expect online brokerage activity to continue to expand, creating
opportunities for us to leverage our technology, market position and cost
structure for further growth and profitability.
We operate our brokerage business through five introducing broker-dealer
subsidiaries, including Ameritrade (Inc.) ("Ameritrade"), Accutrade, Inc.
("Accutrade"), AmeriVest, Inc. ("AmeriVest"), Freetrade.com, Inc. ("Freetrade"),
and Ameritrade Institutional Services, Inc. ("AIS"), and one clearing
broker-dealer subsidiary, Advanced Clearing, Inc. ("Advanced Clearing").
Ameritrade is our principal retail broker-dealer and acts as introducing broker
for the vast majority of our retail brokerage customers. Ameritrade's target
market is retail brokerage customers who are price sensitive and comfortable
using the Internet as a primary means to place trades, but who expect a fairly
high level of service and the availability of a number of investment tools.
Accutrade is targeted to customers who desire a higher degree of personalized
service and are willing to pay more to receive this service. Freetrade, which
began operations in the third quarter of fiscal 2000 is targeted at experienced
retail investors who are very price sensitive, are comfortable with online
trading and require very little personalized service. Ameritrade, Accutrade and
Freetrade enable us to target and service retail customers based primarily upon
price sensitivity and level of personalized service sought. AmeriVest and AIS
allow us to target retail customers who also are customers of other financial
institutions or service providers. AmeriVest provides wholesale brokerage
services to depository institutions,
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primarily smaller regional banks, savings and loans and credit unions, and their
customers. AIS, which began operations in the first quarter of fiscal 2001
provides brokerage services to financial planners and investment advisers and
their customers. Advanced Clearing is our clearing broker, and in this capacity
it provides clearing services to Ameritrade, Accutrade, AmeriVest, Freetrade,
and AIS, as well as to independent broker-dealers and other correspondents.
OnMoney Operations
In addition to our brokerage operations, we provide Internet-based personal
financial management services through OnMoney. OnMoney operates a branded
personal finance portal that provides users with tools and products to help them
better manage their financial lives, including tools that allow them to
aggregate their various accounts onto one statement. OnMoney officially launched
its website in the first quarter of fiscal 2000, and currently represents a
small portion of our overall revenues. In July 2000, we acquired Financial
Passport, Inc. ("Financial Passport"), to expand the services provided through
OnMoney. Financial Passport is an Internet-based provider of financial planning
services and an online marketplace for a wide range of financial products and
services.
Business Strategy
Our business strategy is to capitalize on the growth of the online
brokerage industry and leverage our infrastructure to target new sources of
revenue. The key elements of our strategy are as follows:
- Focus on online brokerage services. We plan to maintain our focus on
attracting self-directed investors to our online brokerage services.
Approximately 95 percent of our fiscal 2000 net revenues were derived
from our retail brokerage services. We believe that this focus promotes
efficiencies and capitalizes on projected growth in the industry. We do
not intend to expand our current businesses to include new, non-brokerage
financial services for our customers. Rather, we plan to continue to
establish alliances with leading companies to make non-brokerage services
available to our customers. This focused strategy is designed to allow us
to maintain our low operating cost structure and still offer our
customers outstanding products and services.
- Be the lowest cost provider of quality services. As the volume of online
trading further expands and our online trading volume increases, we
intend to continue to lower our operating costs per trade by creating
economies of scale, using proprietary systems and automation and locating
our operations in low-cost geographical areas. During the past two fiscal
years, we have significantly reduced our pre-advertising operating
expenses per trade and plan to continue to maintain our cost discipline.
- Leverage our infrastructure to add new sources of revenue. We have built
a very powerful trading engine and intend to leverage that system and add
new sources of revenue by targeting product offerings to specific
segments of the investor universe that may not be reached by our
traditional advertising and product offerings. For instance, in fiscal
year 2000, we launched our AIS subsidiary to target investment advisors
and Ameritrade@Work to target potential customers in the business-to-
employer arena.
- Maintain a leadership position in technology. We strive to continually
enhance our systems to provide timely and reliable service to our
customers. In fiscal 1999 and 2000, we made a substantial investment in
technology and infrastructure to increase the speed, reliability and
scalability of our systems. As a result of these investments, our systems
are faster and more efficient than many of our competitors. For instance,
in November 2000, Ameritrade was recognized by Keynote.com, an
independent provider of Internet performance measurement, diagnostic and
consulting services to companies that operate e-commerce websites, as
having the fastest loading home page on the Internet for a record 32
consecutive weeks (since March 19, 2000). During fiscal 2000, Keynote.com
also rated Ameritrade as having the best online execution and Technology
Investor magazine recognized us as having the best online execution. Our
systems currently are able to handle several times our peak volume days,
and we can very quickly and easily add system capacity when needed.
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- Continue to offer innovative technologies and service enhancements to our
customers. We are striving to provide our customers with the best
trading experience available. Having significantly upgraded the speed,
reliability and scalability of our systems, we are now in a position to
focus on increasing the breadth and quality of our product features set
to enhance our customer's overall experience. Product and service
enhancements introduced since the beginning of fiscal 2000 have included
wireless trading, enhancements to our Interactive Voice Response ("IVR")
system to improve customer service, and other value-added services such
as research and alerts. We spend significant resources studying our
customer's experiences with us in order to improve our products and
services. For instance, some of the enhancements recently launched or
currently planned for fiscal 2001 include real-time account updates,
online statements, electronic trade confirmations and express account
openings. During fiscal 2000, Ameritrade was recognized for its
dedication to customer service. Ameritrade received the highest overall
rating (5 stars) in Money magazine's "The Best Online Brokers of 2000"
and the highest rating by Forrester Research for both usability and
customer service.
- Establish Ameritrade as the dominant brand in online trading. We intend
to establish Ameritrade as the dominant brand in the online brokerage
market. We plan to achieve this goal by providing a compelling value
proposition in order to attract and retain customers. We also plan to
aggressively promote the Ameritrade brand name. Since October 1997, we
have invested over $290 million in advertising and brand-building
programs and plan to continue the aggressive marketing program in the
future. We also plan to pursue opportunities to strengthen our brand
positioning and increase our customer base through strategic alliances
and acquisitions.
- Expand our access to international customers. We plan to increase our
customer base by selectively forming strategic alliances with
international financial services leaders. During fiscal 1999, we formed
an alliance with Deutsche Bank in Germany, which provides its Bank-24
customers the ability to trade on the United States markets through
Advanced Clearing. We have recently announced an alliance with SK
Securities in South Korea that would provide similar access for SK
Securities' Korean customers. We intend to continue to grow this segment
of our business by carefully evaluating alliances.
- Leverage our investment in OnMoney. We intend to grow OnMoney by
capitalizing on the increasing acceptance of the Internet as a tool for
individuals to manage their financial lives. We plan on targeting new end
users of OnMoney's financial planning and account aggregation services
through three channels: the business-to-consumer channel; the
business-to-business channel; and the business-to-employer channel. We
also intend to leverage our investment in OnMoney by offering OnMoney's
financial planning and account aggregation services to our brokerage
customers with the goal of increasing their overall customer experience
and the value we provide them.
Online Brokerage Industry Overview
The online brokerage industry in which we compete has grown rapidly in the
past few years. A number of factors have contributed to this growth, including:
- strength and recent growth of the United States equity markets;
- increased accessibility to and affordability of brokerage services made
possible by rapid advances in communications and processing technology
and by increasing competition among brokerage companies;
- increased consumer acceptance of and confidence in the Internet as a
reliable, secure and cost-effective medium for financial transactions;
- the availability of financial information online, including research,
real-time quotes, charts, news and company information;
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- the appeal of online trading to investors based on lower prices, greater
range of investment alternatives and greater control over investment
decisions; and
- the growth in financial assets held by individual investors.
Ameritrade
Ameritrade is a leading provider of low-cost, high-value brokerage services
to the rapidly expanding population of self-directed investors in the United
States and abroad. Ameritrade was formed in 1997 through the consolidation of
the accounts of Ceres Securities, Inc., K. Aufhauser & Company, Inc. and the
eBroker division of All American Brokers, Inc. In October 1997, we launched an
aggressive advertising program to introduce our revolutionary "8 bucks a trade"
campaign and began emphasizing our Ameritrade brand as a major player in the low
commission segment of the online brokerage market. The campaign succeeded in
building brand awareness. From October 1997 through the end of fiscal 2000, we
opened 1.2 million new accounts, added a net $28.7 billion to assets in customer
accounts and increased the average number of trades per day from less than
10,000 to over 100,000. We intend to continue the substantial advertising and
marketing program to establish Ameritrade as the dominant brand in online
trading. We currently have budgeted approximately $200 million for advertising
in fiscal 2001.
AMERITRADE'S PRODUCTS AND SERVICES
Ameritrade is focused on being the best provider of online brokerage
services. The products and services we offer reflect this goal. Our products
include:
- Common and preferred stock. Customers can purchase common and preferred
stocks and American depository receipts traded on any United States
exchange or quotation system. Fees for equity trades placed over the
Internet or wireless device begin at $8 per trade regardless of the
number of shares bought or sold. Additional value-added services, such as
limit orders, are offered at higher rates. Customers can also place
equity trades through the IVR system and over the phone with registered
representatives. Fees for IVR and broker-assisted trades begin at $12 and
$18, respectively, regardless of the number of shares bought or sold.
- Option trades. We offer a full range of option trades, including
spreads, straddles and strangles. All option trades, including complex
trades, are accessible on our Internet site. To help navigate the complex
landscape of option trading, we provide, at no cost, the proprietary
educational tool, Darwin(TM): Survival of the Fittest ("Darwin"), which
is designed to help our customers become comfortable with the options
market. Commissions on Internet option market trades are $8 plus $1.75
per contract. Customers can also place option trades through the IVR
system and over the phone with registered representatives. Fees for IVR
and broker-assisted trades begin at $12 plus $1.75 per contract and $18
plus $1.75 per contract, respectively.
- Mutual funds. Customers can compare and select from a portfolio of over
9,000 mutual funds. Mutual fund orders can be placed over the Internet,
using our IVR system or by calling one of our brokers. Customers can also
easily exchange funds within the same family. Customers pay no commission
when buying a load fund. Fees for selling load funds and trading no-load
funds are $18 per trade.
- Treasury, corporate and municipal bonds. We offer our customers access
to a variety of treasury, corporate, government and municipal bonds as
well as collateralized mortgage obligations via our telephone brokers.
Bond trades begin at $40 per trade and Treasuries are a flat fee of $25.
Other services available to our customers include:
- Free personalized news, alerts and market-related data via e-mail-enabled
mobile telephone, Personal Digital Assistant, pager and e-mail;
- Extended hours trading;
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- Access to initial public offerings through our affiliation with Epoch
Partners, Inc.;
- Financial calculators to assist customers in planning for the future;
- Electronic trade confirmations and monthly statements;
- The ability to access accounts via wireless web phones and
Palm(TM)organizers with multiple wireless service providers;
- A broad range of third party research reports and investment news
tailored to meet customer's specifications provided by Business Wire(TM),
Reuters(R), PR Newswire(R), Market Guide, Briefing.com, CBS MarketWatch,
Morningstar.com, The Motley Fool and Zacks Investment Research, among
others;
- Free real-time stock quotes, customizable quote lists, customizable
charts using BigCharts(R) and daily market summaries;
- Trade entry screens on our website that allow our customers to select the
level of complexity that they desire in placing their trade orders;
- Educational programs to assist our customers such as Darwin, Ameritrade
Investors Cup and the Ameritrade Education Center. Darwin is an options
trading simulator that includes a comprehensive option tutorial designed
to allow investors to learn basic and advanced option trading strategies,
to trade fictional equities and options, to formulate investment
strategies, to track performance and to compete against other players;
Ameritrade Investors Cup is an online game that allows registered users
to "try before they buy" by building fantasy portfolios trading stocks or
options listed on all the major exchanges with the goal of earning the
highest return by the game's end date; and
- Friendly and knowledgeable customer service and technical support
representatives available by phone or Internet 24 hours a day, seven days
a week.
We intend to continue to expand our products and services to meet customer
demand and to provide the best value in the industry.
AMERITRADE'S CUSTOMERS
Our customers are primarily self-directed investors, many of whom use the
Internet to manage their personal finances. Customer accounts primarily include
cash accounts, margin accounts and retirement accounts and generally require a
minimum investment of $2,000, although we have periodically offered a special
$500 minimum investment level. Our customers range in experience from first-time
investors to sophisticated traders. Our initial customer base was comprised of
individuals who tended to be experienced, active investors seeking more control
over their portfolios while reducing their transaction costs. Since then, our
many technology infrastructure enhancements and broadening brokerage product and
service offerings have proven to be attractive to both sophisticated and new
investors. As Internet penetration rates continue to climb and self-directed
investment increases, we expect to attract significantly more of these
customers. As the trend of companies allowing their employees to self-direct
retirement plan assets continues to grow, we expect to attract a significant
number of those customers.
AMERITRADE'S DISTRIBUTION METHODS
We provide our customers with an array of mediums with which to access our
products and services. These mediums include:
- Internet. Customers are attracted to the ease, convenience and value of
stock trading via the Internet. For the quarter ended September 29, 2000,
over 90 percent of our customer transactions were executed through the
Internet, located at www.ameritrade.com. Commissions on Internet equity
market orders are $8 per transaction.
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- Wireless. In November 1999, Ameritrade became the first brokerage to
enable investors to have anytime, anywhere access capabilities to its
website online via wireless telephone. Ameritrade customers can now
access their accounts, obtain real-time quotes, place trades and receive
stock alerts via the Internet using The Sprint PCS Wireless Web and a new
generation of digital phones or Palm VII(TM) and Palm V(TM) Organizers.
Commissions on Wireless Web equity market orders are $8 per transaction.
- Interactive Voice Response (IVR). Users may transact their trades,
retrieve real-time quotes and get account information through an
automated, toll-free telephone system that utilizes voice recognition
capability. Many customers rely on this medium for trading while away
from their computers. Commissions on IVR equity market orders are $12 per
transaction.
- Registered representatives. Customers may gain assistance and make
trades through registered representatives at a toll-free telephone
number. Commissions on broker-assisted equity market orders are $18 per
transaction.
There is an additional $5 fee for executed limit orders through all channels.
Accutrade
Accutrade provides value-added brokerage services to investors who desire a
higher degree of personalized customer service than Ameritrade provides.
Accutrade permits customers to access its services through the Internet,
automated touch-tone telephone and facsimile, and through registered
representatives. Accutrade customers can trade in common and preferred stocks,
mutual funds, options, corporate and municipal bonds, treasury obligations,
foreign securities and certificates of deposit. Accutrade also offers a wide
range of third-party research services to assist its customers in meeting their
investment objectives. Accutrade pioneered trading by touch-tone telephone in
1988.
Accutrade introduced a software package known as Accutrade for Windows in
March 1996 to provide investors with an online investing system and the ability
to manage their financial assets. Customers using Accutrade for Windows may
place orders for stocks, mutual funds and options. Customers also can review
their balances, positions, transaction histories and order statuses and obtain
quotes. One of the advanced features of Accutrade for Windows is the ability to
make program investments. This feature permits customers to create conditions
under which orders will be placed and then to have their personal computer
monitor the market to automatically place the order. Customers can also design
baskets of stocks to track and trade. In October 1997, Accutrade for Windows was
named a finalist by PC Computing magazine in its annual Most Valuable Product
competition.
In addition to its trading department, which is staffed by registered
representatives, Accutrade provides personalized customer service for both
technical and brokerage needs. Customer service representatives respond to
inquiries about the services offered by Accutrade, including securities
transactions and other account activity. We believe that our customer service
representatives provide superior service and assist in maintaining long-term
customer relationships.
Accutrade charges a commission of $29.95 for equity orders of up to 1,000
shares placed over the Internet and requires a minimum of $5,000 to open an
account.
Advanced Clearing
Advanced Clearing provides clearing and execution services to a number of
correspondent firms, including affiliated broker-dealers such as Ameritrade and
Accutrade and independent broker-dealers, depository institutions, registered
investment advisors and financial planners. Clearing services include the
confirmation, receipt, settlement, delivery and record-keeping functions
involved in the processing of securities transactions. The clearing function
involves a sharing of responsibilities between the clearing broker and the
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introducing broker. Advanced Clearing's correspondents, as introducing brokers,
are responsible for all customer contact, including opening customer accounts,
responding to customer inquiries and placing customer orders with the clearing
broker. As a clearing broker, Advanced Clearing provides the following back
office functions:
- maintaining customer accounts;
- extending credit in a margin account to the customer;
- settling security transactions with clearing houses such as the
Depository Trust Clearing Corporation and the Options Clearing
Corporation;
- settling commissions and clearing fees;
- preparing customer trade confirmations and statements;
- performing designated cashiering functions, including the delivery and
receipt of funds and securities to or from the customer;
- possession, control and safeguarding funds and securities in customer
accounts;
- transmitting tax accounting information to the customer and to the
applicable tax authority; and
- forwarding prospectuses, proxies and other shareholder information to
customers.
Advanced Clearing makes margin loans to customers collateralized by
customer securities. Our margin lending is subject to the margin rules of the
Board of Governors of the Federal Reserve System ("Federal Reserve"), the margin
requirements of the National Association of Securities Dealers ("NASD") and our
own internal policies, which in many cases are more stringent than the Federal
Reserve and NASD requirements. By permitting customers to purchase on margin, we
take the risk that a market decline could reduce the value of the collateral
securing our loan to an amount that is less than the customers' indebtedness to
us. Under applicable securities laws and regulations, in the event of a decline
in the market value of the securities in a margin account, we are obligated to
require the customer to deposit additional securities or cash to the account so
that at all times the customer's net equity in the account is at least equal to
25 percent of the value of the securities in the account. Our current internal
requirement, however, is that the customer's net equity not be allowed to fall
below 30 percent of the value of the securities in the account. If it does fall
below 30 percent, we require the customer to increase the account's net equity
to 35 percent of the value of the securities in the account. These requirements
can be, and often are, raised as we deem necessary for certain accounts, groups
of accounts, securities, or groups of securities.
Freetrade
During the third quarter of fiscal 2000, we launched Freetrade aimed at a
niche market of individuals who are already familiar and experienced with using
online brokerages. Customers of Freetrade are generally charged no fees for
market orders. Other types of trades are charged low fees. In exchange for no
fees for trades, customers have limited services. Freetrade has eliminated every
operating cost not necessary for executing stock trades, such as marketing and
customer service employees. Freetrade earns revenues from traditional interest
income and payment for order flow, and, in the future, may also earn revenues
from advertising placed on our website and payment for market information flow.
AmeriVest
AmeriVest is a wholesale provider of brokerage services to depository
institutions, including banks, savings and loans and credit unions. AmeriVest
provides these institutions with a means of providing brokerage services to
their retail customers without the need for the institutions themselves to
register as broker-dealers to provide these services.
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AIS
In the first quarter of fiscal 2001, we launched AIS to provide brokerage
services to financial planners and advisors. AIS allows its customers to conduct
either single account transactions or block trades and interfaces with most
major professional planner software tools. AIS also offers its customers free
Windows(R)-based account management software.
BigEasy Investor
We also provide a number of decision support tools to investors through our
separate subsidiary, Ten Bagger, Inc., which operates the BigEasy Investor
website ("BigEasy Investor"). BigEasy Investor, which we acquired in May 2000,
provides an investor with stock sorting and analysis tools, principally based
upon technical analysis, and an easy way to access general stock market
information and information on specific stocks of interest to investors.
OnMoney
OnMoney, which officially launched its website in the first quarter of
fiscal 2000, provides web-based financial tools and products to help users
better manage their financial lives. OnMoney had over 500,000 registered users
as of September 29, 2000 and had revenues of $0.6 million for fiscal 2000.
OnMoney targets end-users of its services through three principal channels: the
business-to-consumer channel; the business-to-business channel; and the
business-to-employee channel.
The business-to-consumer channel involves targeting end-users through the
OnMoney.com website and co-branded alliances. These sites offer individual users
a personal finance environment featuring a wide variety of products and services
including account consolidation, money management tools, bill payment, financial
planning tools, a marketplace featuring a broad range of products and services
including mortgages, loans and insurance and educational materials. Generally,
OnMoney receives revenues through this channel from advertisers on the OnMoney
website and from referral fees received when a user accesses a third party's
services through the OnMoney website.
The business-to-business channel involves partnering arrangements between
OnMoney and third party service providers in which OnMoney provides its products
and services through an ASP model powered by OnMoney. In this case the partner
can choose the entire suite of features offered by OnMoney or a combination of
toolsets dependent upon its need. OnMoney drives revenue in this area through
up-front set-up fees, customization fees, per user click charges and advertising
and e-commerce revenue sharing.
The business-to-employer channel involves OnMoney offering its web-based
financial services to employers who then provide the OnMoney services as a
benefit to their employee base. Generally, this is achieved through a customized
website that offers the specific services desired by the employer. OnMoney
derives revenue in the employer space as it does in the business-to-business
space.
Generally, OnMoney attempts to provide its users with the tools they need
to make managing their money less frustrating, the information they want to make
more informed decisions about their personal finances and the means to easily
access a broad selection of well known, branded personal finance products and
services such as mortgages, loans, insurance products, and financial planning
tools. OnMoney also provides information to educate the consumer on how to
select and purchase financial products and services, and through its planning
and shopping centers, it makes it easy for them to find and select the products
best suited to their needs. Products and services offered by or through OnMoney
include the following:
- Consolidation and management of financial accounts. We enable our
customers to see and manage their financial accounts all in one place.
With minimal time and effort to setup, our customers can easily access
their aggregate financial information on a daily basis. This eliminates
their need to log onto multiple websites or to sift through multiple
paper statements. This consolidation also provides the starting position
for consumers to review the status of their accounts before making
financial decisions or transactions. Our customers' consolidated
financial information is automatically updated daily. Further, the user
can set up personal financial management ledgers with associated tools
allowing the
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user to automatically track their day-to-day transactions and to run
analytical scenarios against their data. These ledgers and tools exist
for transaction accounts, credit cards and investment portfolios.
Customers can also have their bills presented and paid online.
- Financial planning. We provide personalized financial planning tailored
to each customer's personal goals and financial data. Our customers have
access to powerful tools to assist in planning for their retirement,
college tuition needs and life insurance. Our retirement planner offers
suggestions regarding how to modify the user's strategy in order to reach
retirement goals. In addition, our customers can plan and file their
taxes online.
- E-commerce transactions. We offer a variety of financial products from
mortgages to insurance that are available from multiple third-party
providers. Our customers are able to choose from multiple vendors for a
single product. We believe that the large selection of financial products
available to our customers creates a single destination where a consumer
can shop for virtually any financial product based upon their specific
needs and preferences.
- Information and education. We also have a large selection of
information, news and research. We provide multiple financial guides that
teach customers about financial products or services. OnMoney has
partnered with many of the leading authors and editors in the financial
services space and provides proprietary content from individuals such as
Ric Edelman, Martin Mayer and Jordan Goodman.
Advertising and Marketing Alliances
We intend to increase our market share through an aggressive advertising
program primarily consisting of online advertising, television, print, direct
mail and our own websites. In October 1997, we launched a national marketing
campaign to promote the Ameritrade brand name and our new $8 price point. Since
that date, we have invested over $290 million in advertising programs designed
to bring greater brand recognition to our services. During this three-year
period, our brokerage accounts have increased at a compound annual growth rate
of over 130 percent from approximately 98,000 accounts at September 26, 1997 to
approximately 1,233,000 accounts at September 29, 2000. As a result of this
success, we intend to continue to spend heavily on advertising during fiscal
2001 and currently have budgeted approximately $200 million for advertising and
marketing in fiscal 2001. From time to time, we may choose to increase our
advertising to target specific groups of investors or to decrease advertising in
response to market conditions.
Our marketing program focuses on advertising our online brokerage services
as a fast and reliable way of executing transactions, building awareness of our
brand and selling the full range of our services. Our target market includes
individual investors who want to manage some or all of their funds directly in a
cost-effective manner. We believe that this represents a very broad and growing
segment of the United States population.
Online advertising is conducted through many Internet websites, including
through relationships with America Online, Yahoo! and other providers of popular
websites. Our 18-month contract with America Online, which expires in December
2001, unless renewed, makes us one of the prominent brokerage firms targeting
America Online's customer base. We advertise regularly on CNBC and other major
television networks. We also place print advertisements in a broad range of
business publications, including The Wall Street Journal, Barron's and
Investor's Business Daily, and use direct mail advertising.
To monitor the success of our various marketing efforts, we have installed
a sophisticated data gathering and tracking system. This system allows us to
determine the type of advertising that best appeals to our target market so that
we can invest future dollars in these programs and obtain a greater yield from
our marketing dollars. Additionally, through the use of our database tools, we
are working to more efficiently determine the needs of our various customer
segments and tailor our services to their individual needs. We intend to utilize
this system to strengthen relationships with our customers and support marketing
campaigns to attract new customers.
At our websites, prospective customers are able to obtain detailed
information on our services, use an interactive demonstration system, request
additional information and complete an online account application.
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We also pursue public relations opportunities to build brand awareness. For
example, a number of our executives have made appearances on CNN, CNBC and
various other television networks and have been profiled in Business Week, The
Wall Street Journal, and Kiplinger's. Additionally, we participate on a regular
basis at industry conferences and events.
In addition to advertising, we are aggressively pursuing new customers by
forming marketing alliances with major companies and other players in the
e-commerce space. Our strategy is to partner with other best-of-breed companies
rather than build new lines of business. During fiscal 2000, we entered into
alliances with Sprint, MBNA America Bank, N.A. and NetBank as well as a number
of smaller companies in the financial services and e-commerce business sectors.
We also spent approximately $48.7 million during fiscal 2000 on advertising
to build brand recognition for OnMoney. As a result of this investment, we do
not foresee a need for significant advertising of OnMoney's services during
fiscal 2001. Instead, we expect OnMoney's focus to be on partnering with other
e-commerce companies and service providers.
All of our brokerage-related communications with the public are regulated
by the NASD.
Technology and Information Systems
Technology is the core of our business and is critical to our goal of
providing the best execution at the best value to our customers. Both our
brokerage operations and our OnMoney operations require reliable, scalable
systems that can handle complex financial transactions for our customers with
speed and accuracy. We maintain sophisticated and proprietary technology that
automates traditionally labor-intensive securities transactions. Our ability to
effectively leverage and adopt new technology to improve our services is a key
component to our success.
We combine our sophisticated systems with premier technology personnel. In
early 1999, we hired key executives with extensive technology backgrounds to
strengthen our technology capabilities. Our internal staff of programmers,
developers and operators provides critical support to our technology platform.
In addition, our quality control analysts, website developers, technical writers
and design specialists help ensure that our systems are easy to use, dependable
and reflect the most current enhancements and features. We currently employ
approximately 360 employees in our technology department. From time to time, we
supplement our internal staff with consultants and contract programmers to
strengthen our capabilities in specialized technology disciplines.
We continue to make significant investments in technology and information
systems. Since March 1999, we have spent a significant amount of our resources
to increase capacity and improve reliability. In that time, we have
significantly increased our daily trade and Web capacity and our back office
systems capacity. During fiscal 2001, we will begin operating a second data
center in Kansas City, Missouri that will be a duplicate of our primary data
center. We expect to be able to run our business from this second site, should
our primary site fail, with no service interruption. To provide for system
continuity during potential power outages, we also have equipped all of our
computer facilities with uninterruptible power supply units, as well as back-up
generators.
In general, technology impacts our business on three levels:
- front-end applications are focused on customer contact with us and
ability to place trades through our system;
- middleware technology handles the routing and processing of customer
orders; and
- back office systems facilitate our interaction with third parties such as
clearinghouses, stock exchanges, execution agents and quote providers.
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FRONT-END APPLICATIONS
Each customer interacts with our technology through various delivery
channels, with the primary channel being the Internet. We are continuously
improving the speed and capacity of our website to ensure reliability as we
continue to grow. We believe that the Internet component of our technology and
information system has been a key contributor to our growth to date, and will
remain an important aspect of our growth in the future.
We recognize that privacy in transmitting confidential information over
public networks such as the Internet is critical to our operations. As a result,
we have invested in both proprietary and industry standard security measures to
protect the integrity of our customers' personal information and account data.
Customers are assigned unique account numbers and personal identification
numbers that must be used each time they log on to our system. We use encryption
technology to provide the security and authentication necessary to ensure the
confidential exchange of information between our customers and our system.
MIDDLEWARE
Our middleware is the technology that transfers and processes information
between the customer and the trading system. The middleware unifies the
front-end applications and multiple interfaces, supports different computer
languages, hardware platforms and protocols, and establishes the interface
between our back office system and the customers who execute transactions. We
are investing extensively in the development of our middleware to increase the
speed and reliability to communicate with our customers. We have successfully
implemented BEA Tuxedo, a high-end middleware package. Tuxedo, coupled with our
proprietary trading applications, allows us to handle hundreds of thousands of
transactions and execute them quickly and accurately.
BACK OFFICE SYSTEM
Our proprietary back office systems include customer service workstations,
order entry systems, transaction summaries, data feeds for compliance and risk
management, execution reports, margin calculations, reconciliation of accounts
and trade confirmations. These systems, which run in a batch environment,
contain our customer profile database functions and provide other support to
Advanced Clearing.
Customer Service
We strive to optimize the level of customer service provided to our clients
by:
- expanding our use of technology to provide automated responses to the
most typical inquiries generated in the course of customers' securities
trading and related activities;
- ensuring prompt response to customer service calls through adequate
staffing with properly trained and motivated personnel in our customer
service departments, many of whom have a Series 7 license; and
- tailoring customer service to the particular expectations of the clients
of each of our brokerage businesses.
ACCESS TO CUSTOMER SERVICE
We provide customer service support through a variety of access points,
including websites, e-mail, electronic bulletin boards and customer service
representatives.
- Websites. Websites provide basic information on how to use our services
and an in-depth education center that includes a guide to online
investing and an encyclopedia of finance.
- E-mail. Customers are encouraged to use e-mail to contact our customer
service representatives. Our operating standards require a response
within 24 hours of receipt of the e-mail for such matters; however, we
strive to respond within 60 minutes of the original message.
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- Customer service representatives. For customers who choose to call or
whose inquiries necessitate calling one of our customer service
representatives, we provide a toll-free number that connects to advanced
call handling systems. These systems provide automated answering,
directing of calls to the proper department, information about current
wait times and the capability to exit the voice queue to leave a voice
message for later response or to transfer to an automated system. Our
systems also allow linkage between caller identification and the customer
database to give the customer service representative immediate access to
the customer's account data at the time the call is received. We are
currently implementing technology that will increase call handling
efficiency and enhance the customers' experience when calling for
service, particularly during periods of heavy market activity.
SERVICE AND TRAINING STANDARDS
Many of our customers' inquiries require handling by customer service
representatives. We provide our customers access to customer service
representatives via toll-free numbers 24 hours per day. We strive to provide the
best customer service in the industry as measured by (1) speed of response time
on telephone calls, (2) turnaround time on resolving customer inquiries and (3)
customer satisfaction with the account relationship. We develop hiring plans
that reflect growth projections to ensure that adequate personnel are hired and
trained in advance of customer needs. As of September 29, 2000, we employed over
800 full-time equivalent employees assigned to handle customer service calls in
our brokerage businesses. We have customer service operations centers in Fort
Worth, Texas and Omaha, Nebraska.
Customer service representatives receive training in brokerage operations,
our policies and procedures and basic telephone and clerical skills to ensure
quality and accuracy. Each new representative is monitored closely by a lead
representative, who is supervised by experienced operations managers. All
telephone calls are recorded for purposes of training and supervision and to
assist in the resolution of customer disputes.
We monitor the speed of answering telephone calls from our customers. We
also seek to monitor the level of overall customer satisfaction through the use
of customer response cards sent with trade confirmations and through periodic
surveys. Written comments, e-mails and electronic postings by customers are
regularly reviewed by our senior officers. It is our policy to respond to all
customer questions, comments or complaints, regardless of the manner received.
Competition
ONLINE BROKERAGE COMPETITION
We believe that the principal determinants of success in the online
brokerage market are brand recognition, size of customer base, customer trading
activity, technology infrastructure and access to financial resources. We also
believe that the principal factors considered by customers in choosing a broker
are price, customer service, quality of trade execution, delivery platform
capabilities, convenience and ease of use, breadth of services and innovation.
Based on our experience, focus group research and the success we have enjoyed to
date, we believe that we presently compete successfully in each of these
categories.
The market for brokerage services, particularly electronic brokerage
services, is rapidly evolving and intensely competitive. We have seen a dramatic
increase in competition during the past three years and expect this competitive
environment to continue in the future. We encounter direct competition from
numerous other brokerage firms, many of which provide online brokerage services.
These competitors include such brokerage firms as Charles Schwab & Co., Inc.,
Fidelity Brokerage Services, Inc., TD Waterhouse Securities, Inc., E*TRADE
Securities, Inc., DLJdirect, a Credit Suisse First Boston company, and Datek
Online Brokerage Services LLC. We also encounter competition from established
full-commission brokerage firms as well as financial institutions, mutual fund
sponsors and other organizations, some of which provide or have announced that
they intend to provide online brokerage services.
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ONMONEY COMPETITION
We believe that the primary competitive factors in the online financial
services market are: pricing and breadth of product offering; time of market
entry; brand awareness; ease of use and convenience; speed to market; pricing
and breadth of product offering; variety, quantity and quality of partners and
online relationships; proprietary and scalable technology infrastructure; ease
of use and convenience; and strength of relationships and depth of technology
integration with users.
The market for web-based financial services is rapidly evolving.
Competition for users, advertisers and content providers is intense and is
expected to increase significantly in the future. OnMoney faces competition from
companies that offer single services and products and also from companies that
offer multiple services and products. OnMoney's primary multi-product and
service competitors are Quicken.com, Microsoft Money and the online services
components of major financial institutions such as Citibank Online, the online
division of Citibank, Inc. Portals such as Yahoo! and Alta Vista, which have
dedicated finance channels, also may provide similar services and products. More
focused product providers, such as E-LOAN, Insweb and Mortgage.com, also compete
to provide some similar financial products to consumers. Some of these
competitors are also participants in OnMoney's financial malls.
Investments
Our investments consist primarily of approximately 7.9 million unregistered
shares of Knight Trading Group, Inc. ("Knight"), which represents approximately
six percent of Knight's outstanding stock. Knight is a publicly held company
that is the largest wholesale market maker in U.S. equity securities. Knight is
the successor company to Roundtable Partners L.L.C., in which we had a minority
interest. Knight became a public company in 1998 and trades on The Nasdaq
National Market under the symbol "NITE." J. Joe Ricketts, our Chairman and Chief
Executive Officer, and Gene L. Finn, one of our directors, are on the Board of
Directors of Knight. We derive significant revenues from Knight in exchange for
routing trade orders to them for execution. Revenues from Knight related to such
transactions totaled $26.7 million, $8.2 million and $9.4 million in fiscal
2000, fiscal 1999 and fiscal 1998, respectively. These amounts are included in
Commissions and Clearing Fees.
We also own approximately 10 percent of the preferred stock of Epoch
Partners, Inc. ("Epoch"), a privately-held investment bank that acts as an
underwriter on initial public offerings and secondary offerings of securities,
with its focus being on distributing these shares to retail, online investors.
In connection with this investment, Ameritrade entered into a distribution
agreement with Epoch to allow Ameritrade and its customers to participate in
such distributions.
We also have investments in The Nasdaq Stock Market, Inc., Comprehensive
Software Systems, Inc. ("CSS"), a software development firm for the brokerage
industry, and Adirondack Trading Partners L.L.C., a development stage company
formed to trade listed equity and index options.
Acquisitions
On May 25, 2000, we acquired Ten Bagger, the corporation that developed the
stock analysis tool, the BigEasy Investor(TM). We plan to offer the BigEasy
Investor product to our customers during fiscal 2001.
On July 21, 2000, we acquired Financial Passport. The acquisition of
Financial Passport, which is an Internet-based provider of financial planning
services and an online marketplace for a wide range of financial products and
services, will allow the Company's OnMoney subsidiary to expand the range of
products and services that it offers its customers.
Regulation
The securities industry is subject to extensive regulation under federal
and state law. In general, broker-dealers are required to register with the
Securities and Exchange Commission ("SEC") and to be members of the NASD. As
such, we are subject to the requirements under the Securities Exchange Act of
1934 and the rules promulgated thereunder relating to broker-dealers and to the
Rules of Fair Practice of the NASD. Such
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regulations establish, among other things, regulations establish, among other
things, minimum net capital requirements for our operating subsidiaries. We are
also subject to regulation under various state laws in all 50 states and the
District of Columbia, including registration requirements.
In its capacity as a securities clearing firm, Advanced Clearing is a
member of the National Securities Clearing Corporation, the Depository Trust
Corporation and The Options Clearing Corporation, each of which is registered as
a clearing agency with the SEC. As a member of these clearing agencies, Advanced
Clearing is required to comply with the rules of such clearing agencies,
including rules relating to possession and control of customer funds and
securities, margin lending and execution and settlement of transactions.
Margin lending activities are subject to limitations imposed by the Federal
Reserve and the NASD. In general, these regulations provide that in the event of
a decline in the value of securities collateralizing a margin account, the
Company is required to obtain additional collateral from the borrower.
Intellectual Property Rights
Our success and ability to compete are dependent to a significant degree on
our intellectual property, which includes our proprietary technology, trade
identity and customer base. We rely on numerous modes of intellectual property
protection to protect our intellectual property, including copyright, trade
secret, trademark, domain name, patent and contract law and have utilized the
various methods available to us, including registrations with the Patent and
Trademark office for various properties, as well as entry into written licenses
and other technology agreements with third parties. The source and object code
for our proprietary software is also protected using various applicable modes of
intellectual property protection. In addition, it is our policy to enter into
confidentiality, intellectual property ownership and/or non-competition
agreements with our associates, independent contractors and business partners,
and to generally control access to and distribution of our intellectual
property.
Associates
As of September 29, 2000, we employed 2,573 full-time equivalent employees,
of which approximately 600 were registered representatives. The number of
employees has grown from 2,379 full-time equivalent employees as of the end of
fiscal 1999. None of our employees is covered under a collective bargaining
agreement. We believe that our relations with our employees are good.
ITEM 2. PROPERTIES
Our corporate headquarters is located in Omaha, Nebraska, and occupies
approximately 74,000 square feet of leased space. The existing lease expires in
April 2019. Also in Omaha, we lease 132,000 square feet for the operations
center for Ameritrade as well as seven other locations totaling over 150,000
square feet. The leases on these Omaha locations expire from November 2001
through June 2008. We also lease approximately 140,000 square feet for a second
operations center in Ft. Worth, Texas. The Ft. Worth lease expires in January
2015. We lease approximately 29,000 square feet in White Plains, New York with a
lease that expires in August 2005; 62,000 square feet in Baltimore, Maryland
with a lease that expires in June 2010; 6,400 square feet in Orem, Utah with a
lease that expires in August 2003; 13,000 square feet in Vienna, Virginia with a
lease that expires in January 2005; and 600 square feet in Chicago, Illinois
with a lease that expires in August 2003. We have also purchased an 87,000
square foot facility in Kansas City, Missouri that serves as a backup data
center. All of our facilities are used in our brokerage operations except the
White Plains, New York and Vienna, Virginia facilities, which are used by
OnMoney. We believe that our facilities are suitable and adequate to meet our
needs.
ITEM 3. LEGAL PROCEEDINGS
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
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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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth
quarter of fiscal 2000.
Executive Officers of the Registrant
The Company's executive officers are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
J. Joe Ricketts...... 59 Chairman, Founder and Chief Executive Officer
John R. MacDonald.... 45 Vice President and Chief Financial Officer
J. Peter Ricketts.... 36 Senior Vice President, Strategy and Business Development
and
Vice Chairman
James M. Ditmore..... 40 Chief Information Officer
Jack R. McDonnell.... 47 President, Ameritrade (Inc.)
Kurt D. Halvorson.... 38 President, Advanced Clearing, Inc.
Vincent Passione..... 39 Chief Executive Officer, OnMoney Financial Services
Corporation
Michael J. Head...... 42 Vice President, Corporate Audit and Assistant Corporate
Secretary
Anne L. Nelson....... 47 Vice President, Marketing and Product Development,
Ameritrade (Inc.)
</TABLE>
J. Joe Ricketts is currently a Director, Chairman and Chief Executive
Officer of Ameritrade Holding Corporation. He has held each of these positions
since 1981, except for the period from March 1999 to May 2000, during which he
was Co-Chief Executive Officer, and the period from May 2000 to August 2000,
during which he did not hold the position of Chief Executive Officer. In 1975
Mr. Ricketts became associated with Ameritrade Holding Corporation and served as
a Director, officer and stockholder. By 1981, Mr. Ricketts acquired majority
control of the Company. Prior to 1975, Mr. Ricketts was a registered
representative with a national brokerage firm, an investment advisor with
Ricketts & Co. and a branch manager with The Dun & Bradstreet Corporation, a
financial information firm. Mr. Ricketts is a Director of Securities Industry
Association (SIA), Knight Trading Group, Inc. and Net.B@nk, Inc. Mr. Ricketts
served as a member of the District Committee for District 4 of the NASD from
1996 to 1999. Mr. Ricketts is a member of the Board of Trustees for Father
Flanagan's Girls and Boys Town and serves on the Board of Directors of the
American Enterprise Institute and Creighton University. Mr. Ricketts received
his B.A. in economics from Creighton University.
John R. (Randy) MacDonald has served as Chief Financial Officer of
Ameritrade Holding Corporation since March 2000. Mr. MacDonald is responsible
for all financial operations of the Company, investor relations and Company-wide
fiscal management. Prior to joining the Company in March 2000, Mr. MacDonald
served in a similar capacity with Investment Technology Group, Inc. ("ITG"),
based in New York City. As Chief Financial Officer of ITG, he was responsible
for a wide range of activities for the company, including the planning and
management of several complex financial transactions such as a corporate
spin-off and an initial public offering. He was the executive in charge of
administration, accounting operations, corporate capital management, tax
compliance, risk management, investor relations, and the design and
implementation of improved compensation and benefit plans. Previously, Mr.
MacDonald worked
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with Salomon Brothers in New York where he served as Vice President and Group
Manager responsible for the development and creation of a consulting group for
integrated financial instrument engineering and for providing their clients with
practical accounting solutions. While at Salomon Brothers, he also re-engineered
their internal reporting and budgeting systems. Earlier, he was employed with
Deloitte & Touche as Audit Senior Manager specializing in commercial banking,
joint ventures in real estate, and financial services. Mr. MacDonald began his
career at Ernst & Young, performing financial audits with a concentration in
international operations. He holds a B.S. in accounting from Boston College, and
is a member of the American Institute of Certified Public Accountants as well as
other professional organizations.
J. Peter Ricketts has served as Senior Vice President, Strategy and
Business Development for Ameritrade Holding Corporation since July 2000. Prior
to this position he was Senior Vice President of Marketing and Sales for
Ameritrade (Inc.) from August 1999 to April 2000 and Senior Vice President of
Product Development from April 2000 to July 2000. He has served as a director
since October 1999. Mr. Ricketts was the Secretary of the Company from November
1996 to October 1999. Mr. Ricketts was the General Manager of Accutrade from
October 1997 to August 1999. From August 1996 to October 1997, Mr. Ricketts
served as Director of Corporate Development for the Company. From April 1995 to
August 1996, Mr. Ricketts served as Project Director for Accutrade. From January
1995 to March 1995, Mr. Ricketts served as Vice President of Ceres Securities,
Inc., a predecessor to Ameritrade (Inc.), and from May 1994 to January 1995 as
President of Ceres. Mr. Ricketts was a customer service representative for
Accutrade from December 1993 to May 1994. Mr. Ricketts worked as Manager,
Business Development, for Woodward Clyde Consultants, an environmental
consulting firm, from October 1992 to September 1993. Mr. Ricketts holds a B.A.
in biology and an M.B.A. from the University of Chicago. J. Peter Ricketts is
the son of J. Joe Ricketts.
James M. Ditmore has served as Chief Information Officer for Ameritrade
Holding Corporation since March 1999. Mr. Ditmore is responsible for all
information technology operations for the Company's brokerage business. Prior to
joining the Company, Mr. Ditmore served as Vice President of Applications
Development for Bell Atlantic. While there, he was in charge of wholesale
systems, a key part of Bell Atlantic's thrust to enter the long-distance market.
Before Bell Atlantic, Mr. Ditmore served as Chief Technology Officer of TenFold
Insurance Systems Group, where he was responsible for customer project delivery
and insurance product development and delivery. Previously, Mr. Ditmore served
as Vice President of Enterprise Technology and Architecture for USF&G
Corporation, where he was part of the team responsible for transforming the
financially troubled Baltimore-based property and casualty insurer into a
modern, successful company. Earlier, Mr. Ditmore was employed as Director,
Technology Planning at MCI. For MCI, Mr. Ditmore served as the Senior Technology
Architect, where he contributed to defining and implementing the computing
architecture, re-engineering operations processes, and identifying and
implementing advanced technology opportunities. Mr. Ditmore has a B.S. in math
and science from the College of William & Mary.
Jack R. McDonnell has served as President of Ameritrade since March 1999.
Before joining Ameritrade, Mr. McDonnell served in a variety of positions with
First Data Corporation, the largest credit card processing company in the United
States. Most recently, he was Managing Director of Client Development, Card
Services Group, where he was responsible for all domestic bankcard and private
label client relationships. From 1989 to 1995 Mr. McDonnell was Executive Vice
President and Chief Operating Officer of FirsTier Financial, Inc. of Omaha, a
regional banking firm. Mr. McDonnell is also involved in diverse professional
and civic organizations. He currently serves as Chairman of Children's Memorial
Hospital and is a member of the board of directors for Junior Achievement of the
Midlands; Mid-America Council of Boy Scouts; the Joslyn Art Museum; and the
Kiewit Institute of Information, Science, Technology and Engineering. Mr.
McDonnell is a Certified Public Accountant and has a B.A. in accounting from St.
Ambrose University.
Kurt D. Halvorson has been with the Company since 1987 and President of
Advanced Clearing since 1997. Mr. Halvorson oversees all aspects of clearing
services for broker-dealers, including operations, finance, compliance and
correspondent services, serving correspondents in the online, discount, full
service, investment advisory and banking industries. Prior to becoming President
of Advanced Clearing, he served as Vice President and General Manager of
Advanced Clearing and Vice President and Controller of Advanced Clearing. Before
joining the Company, Mr. Halvorson was a Certified Public Accountant for
Deloitte, Haskins & Sells (now Deloitte & Touche) in Omaha, Nebraska from 1984
to 1987. Mr. Halvorson currently
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serves on the Securities Industry Association Membership Committee and the
United Way Young Leaders Society. He is a past member of the Securities Industry
Association Firm and Industry Analysis Committee (FIAC). Mr. Halvorson obtained
his B.S.B.A. from the University of Nebraska in 1983 and is a Certified Public
Accountant. In March 2000 he graduated from the Securities Industry Institute
from the Wharton School at the University of Pennsylvania.
Vincent Passione has served as Chief Executive Officer of OnMoney since
August 1999. He is responsible for all aspects of OnMoney's operations, which
include the development of the company's business strategy and corporate
development. Previously, Mr. Passione spent six years at Citigroup managing its
U.S. Technology organization. His last assignment was as the Chief Operation
Officer for Citi f/i (now Citibank Online) where he developed and implemented
the strategy, delivery capability and infrastructure for this nationwide
Internet bank. Prior to joining Citi f/i, Mr. Passione served as Chief
Technology Officer for Citigroup's U.S. Consumer Bank. He led a staff of over
500 technologists responsible for the design, development and maintenance of the
entire U.S. technology base. During his tenure Mr. Passione also spearheaded
several major efforts, including the conversion of the U.S. Consumer Bank to a
single technology platform, the implementation of one of the banking industry's
largest customer relationship management systems, and the establishment of the
bank's first Y2K remediation factory, which became the model for the rest of
Citicorp's technology organizations. Mr. Passione has a B.S. in computer science
from New York Polytechnic Institute.
Michael J. Head has served as Vice President of Corporate Audit of
Ameritrade Holding Corporation since September 1999 and as Assistant Corporate
Secretary of the Company since October 1999. Prior to joining the Company, Mr.
Head was Director of Internal Audit Services at PricewaterhouseCoopers L.L.P.
from September 1997 to August 1999. From 1996 to 1997, Mr. Head served as
Corporate Auditing Vice President for The Guarantee Life Companies in Omaha.
From 1991 to 1996, Mr. Head served as Vice President and Manager of Audit
Operations at FirsTier Financial Inc. He also served as a Senior Audit Manager
at KPMG Peat Marwick in Omaha from 1990 to 1991. Mr. Head is a Certified Public
Accountant. He received his B.S. in business administration with an emphasis in
accounting from the University of Missouri-Columbia. Mr. Head is a member of the
American Institute of Certified Public Accountants and the Institute of Internal
Auditors.
Anne Nelson has served as Vice President of Marketing and Product
Development of Ameritrade since November 1999. Mrs. Nelson oversees a $200
million advertising campaign including print, broadcast, direct mail and
E-marketing. She also is responsible for the development of new products and
services to enhance the Ameritrade customer experience. Mrs. Nelson has an
extensive marketing background in financial services, including brand
management, product development, database management and customer marketing.
Previously, she served for six years as the Executive Vice President of
Marketing for HSBC Bank USA, where she headed retail, corporate and investment
marketing for the United States. During her tenure she directed the brand
identity change from Marine Midland to HSBC, which was part of HSBC's global
transition to a single brand name. Prior to HSBC, Nelson spent 10 years with
CoreStates Financial Corp, located in Philadelphia, in a number of senior level
positions in their retail marketing, credit card and acquisition divisions. Mrs.
Nelson received her MBA from Temple University and holds a B.A. from LaSalle
College.
J. Joe Ricketts, the Company's Founder, Chairman and Chief Executive
Officer, has indicated his intention to retire from the position of Chief
Executive Officer upon completion of an executive search that is currently being
undertaken by the Company. The Company has engaged the firm of Heidrick &
Struggles to assist it in this search for a new Chief Executive Officer and
anticipates that this search will be completed in the first half of fiscal 2001.
17
<PAGE> 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price range of Class A Common Stock
Our Class A Common Stock (the "Class A Stock") has been traded on the
Nasdaq National Market under the symbol "AMTD" since our initial public offering
on March 4, 1997. The following table shows the high and low closing sales
prices for the Class A Stock for the period indicated, as reported by the Nasdaq
National Market. The prices do not include retail markups, markdowns, or
commissions and may not represent actual transactions. In August 1998 and
February 1999, we effected two-for-one stock splits, both in the form of a stock
dividend. In July 1999, we effected a three-for-one stock split in the form of a
stock dividend. Accordingly, price information for periods prior to the stock
splits have been adjusted to reflect the stock splits.
<TABLE>
<CAPTION>
CLASS A STOCK PRICE
----------------------------------------------------------
FOR THE FISCAL YEAR ENDED FOR THE FISCAL YEAR ENDED
SEPTEMBER 29, 2000 SEPTEMBER 24, 1999
-------------------------- --------------------------
HIGH LOW HIGH LOW
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Fourth Quarter............................ $20.81 $11.38 $41.25 $16.13
Third Quarter............................. $20.25 $11.00 $57.75 $20.58
Second Quarter............................ $24.25 $15.13 $21.43 $ 5.34
First Quarter............................. $30.75 $16.25 $ 6.13 $ 2.20
</TABLE>
The closing sale price of our Class A Stock as reported on the Nasdaq
National Market on December 19, 2000 was $7.9375 per share. As of that date
there were approximately 3,200 holders of record of our Class A Stock based on
information provided by our transfer agent. The number of stockholders does not
reflect the actual number of individual or institutional stockholders that hold
our stock because certain stock is held in the name of nominees. Based on
information available to us by the transfer agent, there are approximately
105,000 beneficial holders of our Class A Stock.
As of December 19, 2000, 16,372,800 shares of our Class B Common Stock (the
"Class B Stock" together with the Class A stock, the "Common Stock") were
outstanding, all of which are held of record by J. Joe Ricketts and his wife,
Marlene Ricketts, or certain entities controlled by them. The Class B Stock is
not listed on any exchange and is not traded over the counter. Each share of
Class B Stock is convertible into one share of Class A Stock at any time at the
election of the holder thereof. Each share of Class B Stock automatically
converts into one share of Class A Stock in the event of a transfer of such
share of Class B Stock to any person other than J. Joe Ricketts, Marlene
Ricketts, the lineal descendants of J. Joe Ricketts and Marlene Ricketts and
their spouses, or any trust or other person or entity that holds Class B Stock
for the benefit of any of the foregoing (the "Control Group"). In addition, the
Class B Stock automatically converts on a share for share basis into Class A
Stock if the number of shares of outstanding Common Stock held by the Control
Group falls below 20 percent of the number of shares of outstanding Common
Stock.
Dividends
We have not declared or paid cash dividends on our Common Stock. We
currently intend to retain all of our earnings, if any, for use in our business
and do not anticipate paying any cash dividends in the foreseeable future. Our
revolving credit agreement prohibits the payment of cash dividends. The payment
of any future dividends will be at the discretion of our Board of Directors,
subject to the provisions of the revolving credit agreement and will depend upon
a number of factors, including future earnings, the success of our business
activities, capital requirements, the general financial condition and future
prospects of our business, general business conditions and such other factors as
the Board of Directors may deem relevant.
18
<PAGE> 21
Sales of Unregistered Securities during the Fiscal Fourth Quarter
On July 21, 2000, the Company acquired Financial Passport pursuant to the
terms of a merger agreement under which OM Acquisition Sub I, Inc., a
wholly-owned subsidiary of Ameritrade Holding Corporation, was merged with
Financial Passport, with Financial Passport being the surviving company in the
merger and becoming a wholly-owned subsidiary of Ameritrade Holding Corporation.
Pursuant to the terms of the merger agreement, each issued and outstanding share
of Financial Passport common stock was converted into the right to receive
0.2894382 shares of the Company's Class A Common Stock (except that persons
holding 2,000 or fewer shares of Financial Passport common stock had their
shares converted into the right to receive approximately $3.57 for each share of
Financial Passport common stock). The total number of shares of Class A Common
Stock issued or to be issued by the Company as a result of the merger is
1,482,548 shares. The issuance of such shares was exempt from registration
pursuant to Section 4(2) under the Securities Act of 1933, as amended.
19
<PAGE> 22
ITEM 6. SELECTED FINANCIAL DATA
IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS AND OPERATING DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------------------------------
SEPTEMBER 29, SEPTEMBER 24, SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 27,
2000 1999 1998 1997 1996
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues:
Commissions and clearing
fees....................... $ 389,742 $188,874 $ 85,644 $ 51,937 $ 36,470
Interest revenue............. 242,812 116,162 66,716 36,623 22,518
Equity income from
investments................ -- -- 5,083 3,444 3,359
Gain from sale of
investments................ -- -- 795 -- --
Other........................ 21,897 10,213 5,956 3,663 3,032
---------- -------- -------- -------- --------
Total revenues.......... 654,451 315,249 164,194 95,667 65,379
Interest expense............. 89,838 46,898 29,279 18,429 11,040
---------- -------- -------- -------- --------
Net revenues............ 564,613 268,351 134,915 77,238 54,339
Expenses excluding interest:
Employee compensation and
benefits................... 133,339 70,387 34,967 19,027 14,050
Commissions and clearance.... 5,699 8,023 5,762 3,320 2,531
Communications............... 35,234 18,380 12,862 5,623 3,686
Occupancy and equipment
costs...................... 60,969 21,074 10,519 5,398 2,890
Advertising.................. 188,277 59,709 43,595 13,922 7,537
Professional services........ 50,324 29,012 10,351 1,905 1,043
OnMoney development.......... 78,662 7,564 3,095 663 --
Other........................ 32,373 36,094 13,233 5,955 4,185
---------- -------- -------- -------- --------
Total expenses excluding
interest.............. 584,877 250,243 134,384 55,813 35,922
---------- -------- -------- -------- --------
Income (loss) before provision
for (benefit from) income
taxes........................ (20,264) 18,108 531 21,425 18,417
Provision for (benefit from)
income taxes................. (6,638) 6,569 321 7,603 7,259
---------- -------- -------- -------- --------
Net income (loss)............... $ (13,626) $ 11,539 $ 210 $ 13,822 $ 11,158
========== ======== ======== ======== ========
Basic earnings (loss) per share... $ (0.08) $ 0.07 $ 0.00 $ 0.08 $ 0.07
Diluted earnings (loss) per
share........................... $ (0.08) $ 0.07 $ 0.00 $ 0.08 $ 0.07
Weighted average shares
outstanding -- Basic............ 174,862 174,342 174,188 165,228 153,768
Weighted average shares
outstanding -- Diluted.......... 174,862 175,745 174,444 165,234 153,768
OPERATING DATA:
Average customer trades per
day.......................... 114,332 49,305 18,407 6,571 3,670
Number of core accounts(1)...... 1,233,000 560,000 306,000 98,000 52,000
Assets in customer accounts (in
billions).................... $ 36.0 $ 22.9 $ 11.4 $ 7.3 $ 4.0
Net revenue per trade........... $ 18.99 $ 21.68 $ 29.20 $ 46.65 $ 58.76
Pre-advertising, pre-OnMoney
operating expense per
trade........................ $ 10.70 $ 14.78 $ 18.98 $ 24.90 $ 30.69
Pre-advertising, pre-OnMoney
operating margin(2).......... 44% 32% 35% 47% 48%
Return on average equity(3)..... (6)% 8% 0% 28% 44%
</TABLE>
20
<PAGE> 23
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 29, SEPTEMBER 24, SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 27,
2000 1999 1998 1997 1996
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and segregated
investments.................. $ 338,307 $1,019,370 $ 527,982 $373,286 $191,436
Receivable from customers and
correspondents, net.......... 2,926,981 1,526,801 647,122 325,407 166,075
Total assets.................... 3,798,236 3,037,083 1,290,402 757,357 401,679
Payable to customers and
correspondents............... 2,618,157 2,057,346 1,136,082 666,279 356,943
Notes payable................... 275,000 200,000 11,000 -- 4,853
Stockholders' equity............ 264,168 220,463 84,572 66,989 30,662
</TABLE>
---------------
(1) Accounts consist of open accounts in the Company's discount brokerage
subsidiaries.
(2) Pre-advertising, pre-OnMoney operating margin is computed by dividing income
(loss) before provision for income taxes plus advertising and OnMoney
expenses by net revenues.
(3) Return on average equity is computed by dividing net income (loss) by
stockholders' equity averaged on a quarterly basis.
* Fiscal 2000 was a 53-week year. All other periods presented are 52-week
years.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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; trading
volumes in excess of our capacity; 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; a significant downturn in the securities
markets over a short period of time or a sustained decline in securities prices
and trading volumes; and the other risks and uncertainties set forth under the
heading "Risk Factors" below.
Overview
We provide securities brokerage and clearing execution services to our
customers. Our principal operating subsidiaries consist of our brokerage
operating units, Ameritrade and Accutrade, and our wholly-owned securities
clearing firm, Advanced Clearing. During fiscal 2000, almost all of our net
revenues were derived from our retail brokerage activities and clearing and
execution services. In addition, we provide business-to-business (co-branded)
brokerage services to other institutions through our subsidiary AmeriVest and we
have launched, and are continuing to develop, an Internet-based personal
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. Our brokerage customers are
able to trade securities with us through a variety of mediums, principally 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 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
21
<PAGE> 24
customers based on credit balances 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 interests in Roundtable Partners L.L.C.
("Roundtable"), the predecessor to Knight, and Comprehensive Software Systems,
Inc. ("CSS").
Our largest operating expense generally is employee compensation and
benefits. Employee compensation and benefits expense includes salaries, bonuses,
group insurance, contributions to benefit programs, recruitment and other
related employee costs. Commissions and clearance costs include fees paid to
stock and option exchanges for trade executions, as well as settlement and
depository costs associated with our securities clearing activities.
Communications expense includes telephone, postage, news and quote costs.
Occupancy and equipment costs include depreciation charges for fixed assets, the
costs of leasing and maintaining our office spaces and the lease expenses on
computer equipment and other fixed assets. Advertising costs are expensed as
incurred and include production and placement of advertisements on various
mediums, including online, television, print and direct mail. Advertising
expenses may increase or decrease significantly from period to period. We
currently have budgeted approximately $200 million for advertising expenses in
fiscal 2001. Professional services expense includes costs paid to outside
agencies for assistance with legal, accounting, technology, marketing and
general management issues. OnMoney development expense consists of all expenses
of our OnMoney subsidiary, including compensation and benefits, occupancy and
equipment, advertising and other expenses. 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 online 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 online brokerages 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 29,
2000, 96 percent of our trades were placed through electronic mediums, with 91
percent of our trades being placed over the Internet, compared to 87 percent and
82 percent, respectively, for the quarter ended September 24, 1999. This
increased use of electronic mediums has helped to decrease operating expenses
per trade over the past several years and we believe this trend will continue.
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 our major competitors and us 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 or in the information incorporated herein by reference are
to the approximate twelve-month period ended on any such Friday. For example,
"fiscal 2000" refers to the fiscal year ended September 29, 2000.
Results of Operations
NET REVENUES
For the fiscal years ended September 29, 2000, September 24, 1999 and
September 25, 1998, 69 percent, 70 percent and 63 percent, respectively, of our
net revenues were derived from commissions and clearing fees. Commissions and
clearing fees totaled $389.7 million in fiscal 2000, compared to $188.9 million
in fiscal 1999 and $85.6 million in fiscal 1998. This represents a 355 percent
increase between fiscal 1998 and fiscal 2000. The increase was primarily
attributable to an increase in the number of transactions processed, as average
trades per day increased 521 percent between fiscal 1998 and fiscal 2000 in line
with the growth in our customer base. Retail brokerage accounts increased to
approximately 1,233,000 at September 29, 2000 from
22
<PAGE> 25
approximately 560,000 at September 24, 1999 and approximately 306,000 at
September 25, 1998. Offsetting the growth in trades per day was a decrease in
commissions and clearing fees per trade by 32 percent between fiscal 1998 and
fiscal 2000 from an average of $19 per trade in fiscal 1998 to an average of $13
per trade in fiscal 2000. This decrease in commissions per trade resulted
primarily from the fact that our customers are increasingly using the Internet
to place trades, and we charge lower commissions for Internet trades than for
trades placed through other means. We expect this trend to continue during
fiscal 2001, but we believe that the rate of decline in average commissions per
trade will be lower than the rate of decline experienced over the past two years
because the vast majority of our customers' trades are now being submitted using
the Internet. Other factors that may contribute to a decrease in commissions per
trade in the future include the growth of our Freetrade customer base and a
newly announced lower commission for options trades.
We have arrangements with many execution agents to receive cash payments in
exchange for routing trade orders to these firms for execution ("payment for
order flow"). Payment for order flow is a component of the commission and
clearing fees revenue line. In fiscal 2000, approximately $26.7 million of these
revenues were received from execution agents owned by Knight. Revenues generated
by us under these arrangements totaled $51.5 million, or 9 percent of net
revenues for the fiscal year ended September 29, 2000; $22.1 million, or 8
percent of net revenues for the fiscal year ended September 24, 1999; and $10.9
million or 8 percent of net revenues for the fiscal year ended September 25,
1998. This increase is largely a result of increasing trade volume. On a per
trade basis, payment for order flow decreased 26 percent between 1998 and 2000.
As of September 29, 2000, we owned approximately 6 percent of the outstanding
common stock of Knight. 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 $153.0 million in fiscal 2000 from $69.3
million in fiscal 1999 and from $37.4 million in fiscal 1998. This increase was
due primarily to a 352 percent increase in customer and correspondent
broker-dealer receivables, but was partially offset by an increase of 130
percent in amounts payable to customers and correspondent broker-dealers in
fiscal 2000 over fiscal 1998. We generally expect net interest revenue to grow
as our account base grows.
We had no equity income from investments in fiscal 2000 or fiscal 1999,
compared to $5.1 million in fiscal 1998. The equity income in fiscal 1998 was
primarily generated by our ownership in Roundtable (now Knight). In July 1998,
Roundtable was reorganized into Knight Trading Group, Inc. and conducted a
public stock offering. We also sold a portion of our interest in CSS during
fiscal 1998. As a result of these transactions, we began accounting for our
investment in Knight as a marketable equity security held available-for-sale and
for our investment in CSS on the cost method rather than the equity method. We
own less than 10 percent of the voting equity of both Roundtable and CSS. As of
September 29, 2000, we had no investments accounted for under the equity method.
Other revenues increased to $21.9 million in fiscal 2000 from $10.2 million
in fiscal 1999 and $6.0 million in fiscal 1998 due primarily to an increase in
marketing and service fees paid to us by mutual funds as a result of holding
more customer mutual fund assets.
Expenses Excluding Interest
Employee compensation and benefits expense increased to $133.3 million in
fiscal 2000 from $70.4 million in fiscal 1999 and $35.0 million in fiscal 1998,
due primarily to an increase in full-time employees. As of September 29, 2000,
we employed 2,485 full-time equivalent employees versus 2,345 on September 24,
1999 and 968 on September 25, 1998, in each case excluding OnMoney. The increase
in employees was necessary to accommodate the dramatic growth in trading volume
following our advertising campaigns and to provide the capability to handle
anticipated future growth in new accounts and trading volume. We expect
employment expenses to continue to increase to support expected increases in
customer accounts, assets and trades.
Commissions and clearance costs decreased to $5.7 million in fiscal 2000
from $8.0 million in fiscal 1999 and $5.8 million in fiscal 1998. On a per trade
basis, this represents a 48 percent decrease from fiscal 1998 to fiscal 1999 and
a 70 percent decrease from fiscal 1999 to fiscal 2000. The decrease was due to
efforts that we
23
<PAGE> 26
have undertaken to reduce execution, clearance, settlement, and depository costs
with outside entities and to economies of scale associated with these
activities.
Communications expense was $35.2 million in fiscal 2000, compared to $18.4
million in fiscal 1999 and $12.9 million in fiscal 1998. The 173 percent
increase between fiscal 1998 and fiscal 2000 is primarily a result of a 521
percent increase in transaction processing volume between fiscal 1998 and fiscal
2000. The slower growth rate for communications expenses as compared to
transaction volume is primarily due to our customers increasingly using the
Internet as their predominant communication channel, and we expect this trend to
continue during fiscal 2001.
Occupancy and equipment expense was $61.0 million in fiscal 2000, $21.1
million in fiscal 1999, and $10.5 million in fiscal 1998. The increase in fiscal
2000 was due primarily to the lease of equipment and additional office space and
the full-year impact of the leases added in fiscal 1999. The increase in
expenses between fiscal 1998 and fiscal 1999 was due primarily to the lease of
equipment and additional office space during fiscal 1999. In fiscal 2000, we
added approximately 150,000 square feet of additional space in Ft. Worth, Texas,
Baltimore, Maryland, Omaha, Nebraska, Chicago, Illinois and Orem, Utah. In
fiscal 1999, we added approximately 250,000 square feet of additional space in
Omaha, Nebraska, Baltimore, Maryland, Ft. Worth, Texas, Kansas City, Missouri,
Vienna, Virginia and Chicago, Illinois. In fiscal 1998, we added a 132,000
square 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 $188.3 million in fiscal 2000 from $59.7
million in fiscal 1999 and $43.6 million in fiscal 1998. The increase in
advertising expenditures 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. We plan to continue to expand our customer base through
significant advertising efforts and have budgeted approximately $200 million for
advertising in fiscal 2001.
Professional services increased to $50.3 million in fiscal 2000 from $29.0
million in fiscal 1999 and $10.4 million in fiscal 1998. The increase is
primarily due to marketing and technology consulting services to assist us in
operational effectiveness, market research and, during fiscal 1999 and the first
quarter of fiscal 2000, Year 2000 readiness.
OnMoney development expense increased to $78.7 million in fiscal 2000 from
$7.6 million in fiscal 1999 and $3.1 million in fiscal 1998. The significant
increase in OnMoney development expense during fiscal 2000 was primarily the
result of a significant increase in employees and equipment and related
advertising to build brand awareness. As of September 29, 2000, OnMoney employed
88 full-time equivalent employees versus 34 on September 24, 1999 and 17 on
September 25, 1998. For fiscal 2000, advertising made up $48.7 million of total
OnMoney development expense and resulted in approximately 600,000 registered
users, with over 100,000 using account aggregation - making OnMoney one of the
largest aggregators of customer accounts in the world. We currently plan to
continue funding OnMoney operations for at least the first and second quarters
of fiscal 2001 at a rate of between $15 million and $20 million per quarter,
with any future funding being dependent upon a number of factors, including the
success of OnMoney's business and the availability of outside sources of funding
such as third party investments in OnMoney.
Other operating expenses decreased to $32.4 million in fiscal 2000 from
$36.1 million in fiscal 1999 and $13.2 million in fiscal 1998. Impairment
charges amounting to approximately $4.7 million during fiscal 2000 are included
in other expenses and relate to specific software applications discontinued by
the Company.
Income tax benefits were $6.6 million in fiscal 2000 compared to expense of
$6.6 million in fiscal 1999, and $0.3 million in fiscal 1998. The effective tax
rate was 33 percent in fiscal 2000 and 36 percent in fiscal 1999 as a result of
our participation in economic development tax incentive programs offered by the
State of Nebraska. The effective rate was 60 percent in fiscal 1998 due to the
impact of non-deductible goodwill on a relatively small base of pre-tax income.
24
<PAGE> 27
Liquidity and Capital Resources
We have historically financed our growth primarily through the use of funds
generated from operations. We also have raised funds in the past through an
initial public offering of common stock in fiscal 1997, the issuance of
convertible subordinated notes in fiscal 1999 and periodic borrowings under a
revolving credit facility. We plan to finance our capital and liquidity needs
during fiscal 2001 from our operating cash flows and borrowings under our
revolving credit facility, which provides for borrowings up to $75.0 million,
and under a separate line of credit that provides for borrowings up to $75.0
million. As of September 29, 2000, we had $75.0 million outstanding under the
revolving credit facility and $0 outstanding under the separate line of credit.
Dividends from subsidiaries are another source of liquidity for the holding
company. Some of our subsidiaries are subject to requirements of the SEC and the
NASD relating to liquidity, capital standards, and the use of customer funds and
securities, which limit funds available for the payment of dividends to the
Company.
Under the SEC's Uniform Net Capital Rule (Rule 15c3-1 under the Securities
Exchange Act of 1934), our broker-dealer subsidiaries are required to maintain
at all times at least the minimum level of net capital required under Rule
15c3-1. This minimum net capital level is determined based upon a complicated
calculation described in Rule 15c3-1, but takes account of, among other things,
each broker-dealer's "net debit items," which primarily are a function of
customer's margin debt borrowed from our broker-dealer subsidiaries. Since our
net debit items can fluctuate significantly, our minimum net capital
requirements can also fluctuate significantly from period to period.
Historically, we have utilized our revolving credit facility as a mechanism to
provide additional capital as needed to meet net capital requirements, and the
balance on our revolving credit facility often has fluctuated significantly from
period to period due to changes in our net capital requirements.
Operating Cash Flow
Cash used in operating activities was $15.7 million in fiscal 2000, which
compares to cash used in operating activities of $81.6 million in fiscal 1999
and $35.9 million in fiscal 1998.
Cash used in investing activities was $54.4 million in fiscal 2000,
compared to $55.5 million in fiscal 1999 and $4.0 million in fiscal 1998. Uses
of cash in fiscal 1999 and 2000 related primarily to purchases of property and
equipment and, in fiscal 1999, the acquisition of The R.J. Forbes Group, Inc.
and, in fiscal 2000, our investments in Epoch, Ten Bagger and Financial
Passport. Use of cash in fiscal 1998 was primarily related to purchases of
property and equipment, offset by cash distributions received from Roundtable
and CSS.
Cash provided by financing activities was $75.5 million in fiscal 2000,
compared to $189.6 million in fiscal 1999 and $10.9 million in fiscal 1998. The
cash provided by financing activities in fiscal 2000 consisted of proceeds from
draws on our revolving credit agreement (see "Credit Facilities"), offset by
payments of principal and interest on the revolving credit agreement. The cash
provided by financing activities in fiscal 1999 consisted of proceeds from draws
on our revolving credit agreement (see "Credit Facilities"), offset by payments
of principal and interest on the revolving credit agreement, and the net
proceeds from the issuance of $200 million convertible subordinated notes (see
"Convertible Subordinated Notes"). The 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.
Credit Facilities
As of September 29, 2000, the Company maintained a revolving credit
agreement with a bank group that was originally entered into in January 1998 and
was amended and restated in January 2000. The revolving credit agreement, as
amended, permits borrowings up to $75.0 million through December 31, 2001,
subject to reduction under certain circumstances specified in the credit
agreement. The interest rate on borrowings is determined on a monthly basis
based on the greater of (1) the prime rate minus 0.75 percent or (2) 90-day
LIBOR plus 1.50 percent. At September 29, 2000, the interest rate on this
borrowing was 8.75 percent. The
25
<PAGE> 28
Company also pays a maintenance fee of 0.25 percent of the unused borrowings
through the maturity date. The Company had outstanding indebtedness under the
revolving credit agreement of $75.0 million at September 29, 2000. At September
24, 1999, there was no outstanding amount under the revolving credit agreement.
The revolving credit agreement contains certain covenants and restrictions,
including a minimum net worth requirement. As further security for its
obligations under the revolving credit agreement, the Company has pledged 1.65
million shares of its Knight common stock to the bank group. See Notes 3 and 4
to the Consolidated Financial Statements.
The Company also maintains a separate $75.0 million loan facility that is
supported by approximately 6.25 million shares of the Company's Knight stock not
pledged to the bank group. As of September 29, 2000, the Company had no
borrowings outstanding under the loan facility.
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 29, 2000 and September 24, 1999, the financial institutions had issued
letters of credit in the aggregate amount of $198 million and $100 million,
respectively. As of September 29, 2000 and September 24, 1999, no amounts were
outstanding under the letters of credit. Advanced Clearing pays a maintenance
fee of 0.25 to 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.
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 earlier in this paragraph 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 the stockholders
will be reduced, stockholders 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.
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<PAGE> 29
Risk Factors
OUR BUSINESS COULD BE HARMED BY MARKET FLUCTUATIONS AND OTHER SECURITIES
INDUSTRY RISKS
Substantially all of our revenues are derived from securities brokerage and
clearing and execution services. Like other brokerage businesses, we are
directly affected by economic and political conditions, broad trends in business
and finance and changes in volume and price levels of securities transactions.
We are particularly affected by volatility in technology and Internet-related
stocks because significant portions of our customers invest in these types of
stocks. In recent months, the U.S. securities markets have fluctuated
considerably and have witnessed significant declines in a number of key market
indexes. Severe market fluctuations in the future or a sustained period of
falling equity prices could have a material adverse effect on our business,
financial condition and operating results. Such events could, among other
things, cause retail investors to have less confidence in the equity markets or
in their ability to self-direct their investments, and could result in reduced
trading volumes and a slowdown in the growth in online accounts. Reduced trading
volumes and prices have historically resulted in reduced transaction revenues
for us. In addition, when trading volume is low, our profitability may be
adversely affected because our overhead is substantially fixed.
THE MARKET PRICE OF OUR CLASS A COMMON STOCK WILL FLUCTUATE AND COULD
FLUCTUATE SIGNIFICANTLY
Our Class A common stock has experienced significant price fluctuations
recently. The stock market in general also has experienced substantial price and
volume fluctuations. The market prices of securities of Internet-related
companies, in particular, have been especially volatile and, in recent months,
have experienced significant declines. The price of our Class A common stock
could decrease substantially. In addition, because the market price of our Class
A common stock tends to fluctuate significantly, we may become the object of
securities class action litigation. Securities class action litigation may
result in substantial costs and a diversion of management's attention and
resources.
SYSTEMS FAILURES AND DELAYS COULD HARM OUR BUSINESS
We receive and process trade orders through a variety of electronic
mediums, including the Internet, wireless web, personal digital assistants and
IVR systems. These methods of trading are heavily dependent on the integrity of
the electronic systems supporting them. Our systems and operations are
vulnerable to damage or interruption from human error, natural disasters, power
loss, computer viruses, intentional acts of vandalism and similar events which
is why we have spent considerable resources to install redundant systems.
Extraordinary trading volumes could cause our computer systems to operate at an
unacceptably low speed or even fail. While we have invested significant amounts
in the last couple of years to upgrade the reliability and scalability of our
systems, there can be no assurance that our systems will be sufficient to handle
such extraordinary trading volumes. In the past, we have experienced periods of
extremely high trading volume that have caused individual system components or
processes to fail, resulting in the temporary unavailability of our website for
online trading and delays in our telephone systems. On some other occasions,
high trading volume has caused significant delays in executing trading orders,
resulting in some customers' orders being executed at prices they did not
anticipate. We reimburse our customers for losses incurred in connection with
systems failures and delays. In September 1998, we became subject to a putative
class action lawsuit resulting from systems failures and delays (See Note
11 -- Legal). Systems failures and delays may occur again in the future and
could cause, among other things, unanticipated disruptions in service to our
customers, slower system response times resulting in transactions not being
processed as quickly as our customers desire, decreased levels of customer
service and customer satisfaction, and harm to our reputation. If such events
were to occur, we could suffer a loss of customers or a reduction in the growth
of our customer base, increased operating expenses, financial losses, additional
litigation or other customer claims, and regulatory sanctions or additional
regulatory burdens.
CAPACITY CONSTRAINTS OF OUR SYSTEMS COULD HARM OUR BUSINESS
As our business grows, we will need to expand and upgrade our transaction
processing systems, network infrastructure and other aspects of our technology.
Many of our systems are designed to accommodate
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additional growth without redesign or replacement; however, we will need to
continue to make significant investments in additional hardware and software to
accommodate growth. Failure to make necessary expansions and upgrades to our
systems and infrastructure could lead to failures and delays, which could have a
material adverse effect on our business, financial condition and results of
operations.
SUBSTANTIAL COMPETITION COULD REDUCE OUR MARKET SHARE AND HARM OUR FINANCIAL
PERFORMANCE
The market for online brokerage services, particularly electronic brokerage
services, is new, rapidly evolving and intensely competitive. We expect the
competitive environment to continue in the future. We face direct competition
from numerous online brokerage firms. We also encounter competition from the
broker-dealer affiliates of established full-commission brokerage firms as well
as from financial institutions, mutual fund sponsors and other organizations,
some of which provide or have announced that they intend to provide online
brokerage services. Some of our competitors have greater financial, technical,
marketing and other resources than we do. Some of our competitors offer a wider
range of services and financial products than we do and have greater name
recognition and a more extensive customer base than we do. We believe that the
general financial success of companies within the online securities industry
will continue to attract new competitors to the industry, such as banks,
software development companies, insurance companies, providers of online
financial information and others. These companies may provide a more
comprehensive suite of services than we do. In addition, our clearing operations
compete with numerous firms that provide clearing and execution services to the
securities industry.
OUR FUTURE OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY
We may experience significant variation in our future quarterly results of
operations. These fluctuations may result from, among other things, the timing
and size of advertising campaigns, introductions of or enhancements to online
investing services by us or our competitors, changes in trading volume in
securities markets, changes in pricing policies by us or our competitors,
disruptions or problems in our services to customers, changes in our business
strategy, changes in the level of operating expenses needed to support projected
growth, actions taken by us that negatively affect short-term results but may
benefit long-term results, and general economic conditions.
Due to these factors, quarterly revenues and operating results are
difficult to forecast. We believe that period-to-period comparisons of our
operating results will not necessarily be meaningful, and you should not rely on
them as an indication of our future performance.
REGULATORY AND LEGAL UNCERTAINTIES COULD HARM OUR BUSINESS
The securities industry in the United States is subject to extensive
regulation under both federal and state laws. Broker-dealers are subject to
regulations covering all aspects of the securities business. Our operations and
profitability may be directly affected by, among other things, additional
legislation, changes in rules promulgated by the SEC, the NASD, Federal Reserve,
the various stock exchanges and other self-regulatory organizations, or changes
in the interpretation or enforcement of existing laws and rules.
The SEC, the NASD and other self-regulatory organizations and state
securities commissions can censure, fine, issue cease-and-desist orders to,
suspend or expel a broker-dealer or any of its officers or employees. Our
ability to comply with applicable laws and rules is largely dependent on our
internal system to ensure compliance, as well as our ability to attract and
retain qualified compliance personnel. We could be subject to disciplinary or
other actions in the future due to claimed noncompliance, which could have a
material adverse effect on our business, financial condition and results of
operations.
Recently, various regulatory and enforcement agencies have been reviewing
systems capacity, customer access, best execution practices, other service
issues and advertising claims as they relate to the online brokerage industry.
These reviews could result in enforcement actions or new regulations, either of
which could have a material adverse effect on our business, financial condition
and results of operations.
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In addition, we use the Internet as a major distribution channel to provide
services to our customers. A number of regulatory agencies have recently adopted
regulations regarding customer privacy and the use of customer information by
service providers. These regulations may have an adverse impact on our business
in the future, including on our ability to provide customer information to
certain third parties. It is possible that additional laws and regulations
relating to the Internet may be adopted in the future, including regulations
regarding the pricing, content and quality of products and services delivered
over the Internet. Any such laws or regulations might increase our cost of
using, or limit our ability to use, the Internet as a distribution channel. As a
result, the adoption of such laws and regulations could have a material adverse
effect on our business, financial condition and results of operations.
We intend to expand our business in U.S. securities to other countries. We
will need to comply with the relevant regulations of each country in which we
conduct business. Our international expansion may be limited by the compliance
requirements of these jurisdictions.
WE ARE HIGHLY DEPENDENT ON OUR KEY PERSONNEL
We are highly dependent on a number of key executive officers. We have
entered into employment agreements with certain of our key executive officers
but do not maintain "key person" life insurance policies on any of our officers.
In addition, we are currently undertaking an executive search to identify a new
chief executive officer. Our success has been, and will be, dependent to a large
degree on our ability to retain the services of our existing key executive
officers and to attract and retain additional qualified personnel in the future,
including a new chief executive officer. Competition for these personnel is
intense. The loss of the services of any of our key executive officers or the
inability to identify, hire and retain other highly qualified technical and
managerial personnel in the future could have a material adverse effect on our
business, financial condition and results of operations.
THE RICKETTS FAMILY CONTROLS ALL FUNDAMENTAL MATTERS AFFECTING US
J. Joe Ricketts, our Chairman, Founder and Chief Executive Officer, members
of his family and trusts held for their benefit (collectively, the "Ricketts
Family") own approximately 63.8 percent of our Class A common stock and all of
our Class B common stock, which constitute approximately 67.1 percent of our
common stock. As a result, the Ricketts Family has the ability to control all
fundamental matters affecting us, including the election of the majority of our
directors, the sale of substantially all of our assets, the merger of the
Company with another entity; an amendment to our certificate of incorporation,
the future issuance of common stock or other securities, and the declaration of
any dividend payable on our common stock.
In addition, the Ricketts Family could convert a portion of its Class B
common stock into Class A common stock and subsequently dispose of such shares,
thereby substantially reducing its economic interest in the Company while
retaining the ability to elect the majority of our directors.
WE WILL NEED TO INTRODUCE NEW PRODUCTS AND SERVICES TO REMAIN COMPETITIVE
Our future success depends in part on our ability to develop and enhance
our products and services. There are significant technical and financial risks
in the development of new or enhanced products and services, including the risk
that we will be unable to effectively use new technologies, adapt our services
to emerging industry standards, or develop, introduce and market new or enhanced
products and services. If we are unable to develop and introduce enhanced or new
products and services quickly enough to respond to market or customer
requirements, or if our products and services fail to achieve market acceptance,
our business, financial condition and results of operations could be materially
adversely affected.
WE MAY NOT BE ABLE TO KEEP UP WITH RAPID TECHNOLOGICAL AND OTHER CHANGES
The markets in which we compete are characterized by rapidly changing
technology, evolving industry standards, frequent new product and service
announcements, introductions and enhancements and changing consumer demands. If
we are not able to keep up with these rapid changes, we may be at a competitive
disadvantage. In addition, the widespread adoption of new Internet, networking
or telecommunications
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technologies or other technological changes could require us to incur
substantial expenditures to modify or adapt our services or infrastructure.
CHANGES IN PAYMENTS FOR ROUTING OUR CUSTOMERS' ORDERS COULD ADVERSELY AFFECT
OUR BUSINESS
We have arrangements with several execution agents to receive cash payments
in exchange for routing trade orders to these firms for execution. Payments made
to us by execution agents for routing trade orders were $51.5 million, $22.1
million and $10.9 million in fiscal 2000, fiscal 1999 and 1998, respectively.
Competition between execution agents and the implementation by the SEC of order
handling rules in January 1997 has made it less profitable for execution agents
to offer order flow payments to broker-dealers. We expect these payments to
continue to decrease on a per trade basis, which could have a material adverse
effect on our business, financial condition and results of operations. Our per
trade payments decreased to $1.73 in fiscal 2000 from $1.78 in fiscal 1999 and
from $2.35 in fiscal 1998.
OUR NETWORKS MAY BE VULNERABLE TO SECURITY RISKS
The secure transmission of confidential information over public networks is
a critical element of our operations. We have not in the past experienced
network security problems. However, our networks may be vulnerable to criminal
access, computer viruses and other security problems. Persons who circumvent
security measures could wrongfully use our confidential information or our
customers' confidential information or cause interruptions or malfunctions in
our operations. We may be required to expend significant additional resources to
protect against the threat of security breaches or to alleviate problems caused
by any breaches. We may not be able to implement security measures that will
protect against all security risks.
WE MUST COMPLY WITH NET CAPITAL REQUIREMENTS
The SEC, the NASD and various other regulatory agencies have stringent
rules with respect to the maintenance of specific levels of net capital by
securities broker-dealers. Net capital is a SEC-defined measure of a
broker-dealer's readily available liquid assets, reduced by its total
liabilities other than approved subordinated debt. All of our broker-dealer
subsidiaries are required to comply with the net capital requirements. If we
fail to maintain the required net capital, the SEC could suspend or revoke our
registration, or the NASD could expel us from membership, which could ultimately
lead to our liquidation. If the net capital rules are changed or expanded, or if
there is an unusually large charge against net capital, operations that require
the intensive use of capital would be limited. A large operating loss or charge
against net capital could adversely affect our ability to expand or even
maintain our present levels of business, which could have a material adverse
effect on our business, financial condition and results of operations.
OUR CLEARING OPERATIONS EXPOSE US TO LIABILITY FOR ERRORS IN CLEARING
FUNCTIONS
Advanced Clearing provides clearing and execution services to each of our
brokerage businesses, as well as to independent broker-dealers, depository
institutions, registered investment advisors and financial planners. Clearing
services include the confirmation, receipt, settlement and delivery functions
involved in securities transactions. As a clearing broker, Advanced Clearing
also assumes direct responsibility for the possession and control of customer
securities and other assets and the clearance of customer securities
transactions. Self-clearing securities firms are subject to substantially more
regulatory control and examination than brokers that rely on others to perform
those functions, such as many of our competitors. Errors in performing clearing
functions, including clerical and other errors related to the handling of funds
and securities held by us on behalf of customers and introducing brokers, could
lead to civil penalties imposed by applicable authorities as well as losses and
liability in related lawsuits brought by customers and others.
WE ARE EXPOSED TO CREDIT RISK
We make margin loans to customers collateralized by customer securities and
periodically borrow securities to cover trades. By permitting customers to
purchase securities on margin, we are subject to risks inherent in extending
credit, especially during periods of rapidly declining markets in which the
value of the
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collateral held by us could fall below the amount of a customer's indebtedness.
The inability of customers to repay their margin loans could result in material
losses to us. A significant portion of our net revenues is derived from interest
on margin loans. To the extent that these margin loans exceed customer cash
balances maintained with us, we generally must obtain financing from third
parties.
WE MUST PROTECT OUR INTELLECTUAL PROPERTY
Our success and ability to compete are dependent to a significant degree on
fully protecting our intellectual property, which includes our proprietary
technology, trade identity and customer base. We rely on numerous modes of
intellectual property protection to protect our intellectual property, including
copyright, trade secret, trademark, domain name, patent and contract law.
Notwithstanding the precautions taken by us to protect our intellectual
property, it is possible that third parties may misappropriate, obtain, copy or
use without authorization, or otherwise infringe upon, our intellectual
property. It is also possible that third parties may independently develop
intellectual property similar to ours. Policing unauthorized use of our
intellectual property may be difficult because of difficulties in controlling
the ultimate destination or security of information transmitted over the
Internet. In addition, the laws of foreign countries may afford different, and
possibly inadequate, protection of our intellectual property.
ACQUISITIONS AND STRATEGIC RELATIONSHIPS INVOLVE RISKS
We intend to pursue strategic acquisitions of businesses and technologies.
Acquisitions may entail numerous risks, including difficulties in assessing
values for acquired businesses and technologies, difficulties in the
assimilation of acquired operations and products, diversion of management's
attention from other business concerns, assumption of unknown material
liabilities of acquired companies, amortization of acquired intangible assets,
which could reduce future reported earnings, and potential loss of customers or
key employees of acquired companies. We may not be able to integrate
successfully any operations, personnel, services or products that we acquire in
the future. In addition, we have established a number of strategic relationships
with online service providers and information service providers. These
relationships and others we may enter into in the future are and will be
important to our business and growth prospects. We may not be able to maintain
these relationships or develop new strategic alliances.
ONMONEY'S SHORT OPERATING HISTORY, HISTORY OF LOSSES AND CONTINUED ON-GOING
CAPITAL REQUIREMENTS
OnMoney has a very limited operating history, and there can be no assurance
that its business model will be successful, that it will achieve its business
objectives or that it will become profitable in the future. The success of
OnMoney's web-based financial services will be dependent on a number of factors,
many of which are beyond the control of OnMoney, including its ability to
effectively develop the OnMoney brand and obtain additional users, its ability
to enhance its website and develop new products and services that successfully
compete with those offered by current and future competitors, its ability to
develop and maintain strategic alliances with other web-based companies, the
continued development of the Internet as a means for accessing, storing and
transmitting financial and other information in a secure environment, and the
development of Internet advertising as a profitable business model.
OnMoney has incurred significant losses since its inception. We have
invested approximately $90.0 million in developing OnMoney's business, website
and related infrastructure over the past four years, including approximately
$78.7 million during fiscal 2000. While OnMoney began generating revenues during
fiscal 2000, we anticipate a continuing need to make significant capital
investments in OnMoney for the foreseeable future, and there can be no assurance
that OnMoney will achieve profitability in the future or that we will receive an
adequate or any return on our past or future capital investments.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk 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,
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procedures and internal processes governing our management of market risks in
the normal course of our business operations.
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 the
customers to deposit additional collateral, or to reduce positions, when
necessary.
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 $256.0 million at
September 29, 2000 and $942.4 million at September 24, 1999. 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 $2.6 billion at September 29, 2000 and $2.1 billion
at September 24, 1999 in the form of customer cash balances. Additionally, at
September 29, 2000 we had $200.0 million outstanding in convertible subordinated
notes (see "Convertible Subordinated Notes") and $75.0 million outstanding under
a bank note with a floating interest rate arrangement. This compares to $200.0
million outstanding in convertible subordinated notes at September 24, 1999. 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. Our annual
interest payments on our revolving credit facility would increase or decrease by
approximately $750,000 for each one percent change in interest rates based on
the amount outstanding at September 29, 2000.
We hold a marketable equity security at September 29, 2000, which is
recorded at fair value of $284.7 million ($173.9 million net of tax) and has
exposure to market price risk. The same security was recorded at fair value of
$229.3 million ($136.4 million net of tax) at September 24, 1999. 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 $28 million and $23 million at September 29, 2000 and September
24, 1999, respectively. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report................................ 34
Consolidated Balance Sheets................................. 35
Consolidated Statements of Operations....................... 36
Consolidated Statements of Stockholders' Equity............. 37
Consolidated Statements of Cash Flows....................... 38
Notes to Consolidated Financial Statements.................. 39
</TABLE>
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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 29, 2000 and September 24, 1999, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended September 29, 2000. 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 auditing standards generally
accepted in the United States of America. 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 29, 2000 and September 24, 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended September 29, 2000 in conformity with accounting principles
generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Omaha, Nebraska
October 24, 2000
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AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 29, 2000 AND SEPTEMBER 24, 1999
IN THOUSANDS EXCEPT SHARE AMOUNTS
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 82,351 $ 76,943
Cash and investments segregated in compliance with federal
regulations............................................... 255,956 942,427
Receivable from brokers, dealers, and clearing
organizations............................................. 55,154 89,958
Receivable from customers and correspondents -- net of
allowance for doubtful accounts: 2000 -- $4.0 million;
1999 -- $2.9 million...................................... 2,926,981 1,526,801
Refundable income taxes..................................... 4,108 15,947
Property and equipment -- net of accumulated depreciation
and amortization: 2000 -- $34.1 million; 1999 -- $12.9
million................................................... 90,348 68,588
Goodwill -- net of accumulated amortization: 2000 -- $2.4
million; 1999 -- $1.5 million............................. 40,002 12,821
Investments................................................. 292,907 230,619
Other assets................................................ 50,429 72,979
---------- ----------
Total assets...................................... $3,798,236 $3,037,083
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Payable to brokers, dealers and clearing organizations.... $ 433,706 $ 384,960
Payable to customers and correspondents................... 2,618,157 2,057,346
Accounts payable and accrued liabilities.................. 99,239 73,603
Notes payable............................................. 75,000 --
Convertible subordinated notes............................ 200,000 200,000
Deferred income taxes..................................... 107,966 100,711
---------- ----------
Total liabilities................................. 3,534,068 2,816,620
---------- ----------
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;
2000 -- 160,036,664 shares issued; 1999 -- 158,103,480
shares issued......................................... 1,600 1,580
Class B -- 18,000,000 shares authorized; 16,372,800
shares issued......................................... 164 164
---------- ----------
Total common stock................................ 1,764 1,744
Additional paid-in capital.................................. 47,864 24,079
Retained earnings........................................... 41,670 55,296
Treasury stock -- Class A shares at cost: 2000 -- 43,492
shares; 1999 -- 39,624 shares............................. (331) (93)
Accumulated other comprehensive income...................... 173,201 139,437
---------- ----------
Total stockholders' equity........................ 264,168 220,463
---------- ----------
Total liabilities and stockholders' equity........ $3,798,236 $3,037,083
========== ==========
</TABLE>
See notes to consolidated financial statements.
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AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 29, 2000, SEPTEMBER 24, 1999 AND SEPTEMBER 25,
1998
IN THOUSANDS EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Commissions and clearing fees............................. $389,742 $188,874 $ 85,644
Interest revenue.......................................... 242,812 116,162 66,716
Equity income from investments............................ -- -- 5,083
Gain from sale of investment.............................. -- -- 795
Other..................................................... 21,897 10,213 5,956
-------- -------- --------
Total revenues.................................... 654,451 315,249 164,194
Interest expense.......................................... 89,838 46,898 29,279
-------- -------- --------
Net revenues...................................... 564,613 268,351 134,915
Expenses excluding interest:
Employee compensation and benefits........................ 133,339 70,387 34,967
Commissions and clearance................................. 5,699 8,023 5,762
Communications............................................ 35,234 18,380 12,862
Occupancy and equipment costs............................. 60,969 21,074 10,519
Advertising............................................... 188,277 59,709 43,595
Professional services..................................... 50,324 29,012 10,351
OnMoney development....................................... 78,662 7,564 3,095
Other..................................................... 32,373 36,094 13,233
-------- -------- --------
Total expenses excluding interest................. 584,877 250,243 134,384
-------- -------- --------
Income (loss) before provision for income taxes............. (20,264) 18,108 531
Provision for (benefit from) income taxes................... (6,638) 6,569 321
-------- -------- --------
Net income (loss)........................................... $(13,626) $ 11,539 $ 210
======== ======== ========
Basic earnings (loss) per share............................. $ (0.08) $ 0.07 $ 0.00
Diluted earnings (loss) per share........................... $ (0.08) $ 0.07 $ 0.00
Weighted average shares outstanding -- Basic................ 175,025 174,342 174,188
Weighted average shares outstanding -- Diluted.............. 175,025 175,745 174,444
</TABLE>
See notes to consolidated financial statements.
35
<PAGE> 38
AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 29, 2000, SEPTEMBER 24, 1999 AND SEPTEMBER 25,
1998
IN THOUSANDS
<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, September 26, 1997........ $ 66,989 $1,577 $164 $1,741 $21,701 $43,547 $ -- $ --
Net income....................... 210 -- -- -- -- 210 -- --
Net unrealized investment gain... 17,523 -- -- -- -- -- -- 17,523
--------
Total Comprehensive Income....... 17,733
--------
Purchase of treasury stock....... (286) -- -- -- -- -- (286) --
Issuance of treasury stock....... 136 -- -- -- (17) -- 153 --
-------- ------ ---- ------ ------- ------- ----- --------
Balance, September 25, 1998........ 84,572 1,577 164 1,741 21,684 43,757 (133) 17,523
Net income....................... 11,539 -- -- -- -- 11,539 -- --
Net unrealized investment gain... 121,914 -- -- -- -- -- -- 121,914
--------
Total Comprehensive Income....... 133,453
--------
Issuance of treasury stock....... 65 -- -- -- 25 -- 40 --
Options exercised................ 508 3 -- 3 505 -- -- --
Tax benefit of options
exercised...................... 1,865 -- -- -- 1,865 -- -- --
-------- ------ ---- ------ ------- ------- ----- --------
Balance, September 24, 1999........ 220,463 1,580 164 1,744 24,079 55,296 (93) 139,437
Net loss......................... (13,626) -- -- -- -- (13,626) -- --
Net unrealized investment gain... 33,764 -- -- -- -- -- -- 33,764
--------
Total Comprehensive Income....... 20,138
--------
Purchase of treasury stock....... (269) -- -- -- -- -- (269) --
Issuance of treasury stock....... 262 -- -- -- 231 -- 31 --
Acquisition of subsidiaries...... 21,377 17 -- 17 21,360 -- -- --
Options exercised................ 531 3 -- 3 528 -- -- --
Tax benefit of options
exercised...................... 1,666 -- -- -- 1,666 -- -- --
-------- ------ ---- ------ ------- ------- ----- --------
Balance, September 29, 2000........ $264,168 $1,600 $164 $1,764 $47,864 $41,670 $(331) $173,201
======== ====== ==== ====== ======= ======= ===== ========
</TABLE>
See notes to consolidated financial statements.
36
<PAGE> 39
AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 29, 2000, SEPTEMBER 24, 1999 AND SEPTEMBER 25,
1998
IN THOUSANDS
<TABLE>
<CAPTION>
2000 1999 1998
----------- --------- ---------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss)......................................... $ (13,626) $ 11,539 $ 210
Adjustments to reconcile net income (loss) to net cash
flows from operating activities:
Depreciation and amortization............................. 19,987 6,390 2,999
Provision for loan losses................................. 3,637 2,155 815
Deferred income taxes..................................... (10,782) 7,833 3,770
Equity income from investments............................ -- -- (5,083)
Gain from sale of investment.............................. -- -- (795)
Loss on disposal and impairment of property............... 4,174 -- --
Amortization of goodwill.................................. 1,637 363 363
Changes in operating assets and liabilities:
Cash and investments segregated in compliance with
federal regulations................................... 686,471 (438,972) (183,691)
Receivable from brokers, dealers and clearing
organizations......................................... 34,803 (64,225) (7,909)
Receivable from customers and correspondents............ (1,403,816) (881,594) (322,530)
Refundable income taxes................................. 11,839 (15,947) --
Other assets............................................ 24,637 (44,410) (13,559)
Payable to brokers, dealers and clearing
organizations......................................... 48,746 373,195 10,361
Payable to customers and correspondents................. 560,811 921,264 469,803
Accounts payable and accrued liabilities................ 15,809 40,802 9,365
----------- --------- ---------
Net cash used in operating activities.............. (15,673) (81,607) (35,881)
----------- --------- ---------
Cash Flows From Investing Activities:
Acquisition of subsidiaries, net of cash and cash
equivalents acquired.................................... (5,995) (6,917) --
Purchase of property and equipment........................ (41,512) (48,632) (20,405)
Purchase of investments................................... (6,936) -- (1,653)
Distributions received from investments................... -- -- 12,265
Proceeds from sale of investments......................... -- -- 5,828
----------- --------- ---------
Net cash used in investing activities.............. (54,443) (55,549) (3,965)
----------- --------- ---------
Cash Flows From Financing Activities:
Proceeds from notes payable............................... 160,000 294,000 22,500
Principal payments on notes payable....................... (85,000) (105,000) (11,500)
Proceeds from exercise of stock options................... 531 508 --
Purchase of treasury stock................................ (269) -- (286)
Issuance of treasury stock................................ 262 65 136
----------- --------- ---------
Net cash provided by financing activities.......... 75,524 189,573 10,850
----------- --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents........ 5,408 52,417 (28,996)
Cash and Cash Equivalents at Beginning of Year.............. 76,943 24,526 53,522
----------- --------- ---------
Cash and Cash Equivalents at End of Year.................... $ 82,351 $ 76,943 $ 24,526
=========== ========= =========
Supplemental Cash Flow Information:
Interest paid............................................. $ 101,793 $ 43,744 $ 28,259
Income taxes paid (refunds received)...................... $ (9,361) $ 14,149 $ (1,419)
Noncash Financing Activities:
Tax benefit on exercise of stock options.................. $ 1,666 $ 1,865 $ --
Issuance of common stock in acquisition of subsidiaries... $ 21,377 $ -- $ --
</TABLE>
See notes to consolidated financial statements.
37
<PAGE> 40
AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 29, 2000, SEPTEMBER 24, 1999 AND SEPTEMBER 25,
1998
(COLUMNAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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"), Freetrade.com, Inc. ("Freetrade") (formerly K. Aufhauser and
Company, Inc.), Ameritrade Institutional Services, Inc. ("AIS") (formerly The
R.J. Forbes Group, Inc.), OnMoney Financial Services Corporation ("OnMoney"),
Ten Bagger, Inc. ("Ten Bagger"), and Financial Passport, Inc. ("Financial
Passport"). All intercompany balances and transactions have been eliminated.
The Company's Board of Directors have declared stock splits, all effected
as stock dividends, as follows: August 1998 -- two-for-one; February
1999 -- two-for-one; and July 1999 -- three-for-one. 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. Fiscal year 2000
was a fifty-three week year. Fiscal years 1999 and 1998 were each fifty-two week
years.
Nature of Operations -- The Company provides securities brokerage services
through its Ameritrade, Accutrade, AmeriVest, Freetrade and AIS 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. Ten Bagger is the developer of the stock analysis tool the BigEasy
Investor(TM). Financial Passport is an Internet-based provider of financial
planning products and services that will allow the Company's OnMoney subsidiary
to expand the range of products and services that it offers its customers. The
Company's broker-dealer subsidiaries are subject to regulation by the Securities
and Exchange Commission ("SEC"), the National Association of Securities Dealers,
the International Stock Exchange and the Chicago Stock Exchange, Inc. During
fiscal 1999, the Company purchased The R.J. Forbes Group, Inc. ("Forbes") and
subsequently consolidated Forbes' brokerage operation with Accutrade. During
fiscal 2000, the Company purchased Ten Bagger and Financial Passport.
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 accounting principles generally accepted in the United States of
America 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.
38
<PAGE> 41
AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 recorded on trade date.
Depreciation and Amortization -- Depreciation is provided on a
straight-line basis using estimated useful service lives of 3 to 7 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 periods ranging from 7 to 20 years.
Impairment of Long-Lived Assets -- 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. An evaluation of recoverability is performed by
comparing the undiscounted cash flows associated with the asset to the asset's
carrying amount to determine if a write-down is required. Impairment charges
amounted to approximately $4.7 million during fiscal 2000 and related to
specific software applications discontinued by the Company. The impairment
charges are included in Other Expenses in the Statements of Operations.
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 $256.0 million and $942.4 million as of September 29, 2000 and September 24,
1999, respectively, have been segregated in a special reserve bank account for
the benefit of customers under Rule 15c3-3 under 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, except
for the convertible subordinated notes, to be reasonable estimates of fair value
based on maturity dates and repricing characteristics. The estimated fair value
of the convertible subordinated notes was approximately $115 million and $200
million at September 29, 2000 and September 24, 1999, respectively. The
estimated fair value of the notes has been determined by the Company using
available market information.
Investments -- Investments 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 operations.
Software Development -- Software development costs are capitalized and
included in property and equipment at the point technological feasibility has
been established until beta testing is complete. Once the product is fully
functional, such costs are amortized in accordance with the Company's normal
accounting policies. Software development costs incurred in the development and
enhancement of software used in connection with services provided by the Company
that do not meet capitalization criteria are expensed as incurred. Software
costs included in property and equipment were approximately $24.0 million and
$15.0 million at September 29, 2000 and September 24, 1999, respectively.
Advertising -- The Company expenses advertising costs as they are incurred.
Advertising expenses for brokerage operations and OnMoney operations totaled
$237.0 million, $59.9 million and $43.6 million during the fiscal years ended
September 29, 2000, September 24, 1999 and September 25, 1998, respectively.
Income Taxes -- The Company files a consolidated income tax return with its
subsidiaries on a calendar year basis. Deferred tax liabilities and assets are
determined based on the differences between the financial
39
<PAGE> 42
AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
statement carrying amounts and tax bases of assets and liabilities using enacted
tax rates. The principal temporary differences arise from depreciation, bad
debts, prepaid expenses, and certain accrued liabilities.
Earnings (Loss) Per Share -- Basic earnings (loss) per share ("EPS") is
computed by dividing net income (loss) 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 ("APB 25"), Accounting for Stock Issued to Employees. The Company
provides pro forma disclosures of net income (loss) and earnings (loss) per
share as required under SFAS 123.
Comprehensive Income -- Comprehensive income for all periods presented
consists of net income (loss) and unrealized gains on securities
available-for-sale, net of related income taxes. These results are incorporated
into the consolidated statements of stockholders' equity.
Reclassifications -- Certain items in prior years' consolidated financial
statements have been reclassified to conform to the current year presentation.
Recently Issued Accounting Pronouncements:
SFAS No. 133 -- In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting
for Derivatives and Similar Financial Instruments and for Hedging Activities, as
amended by SFAS No. 137 and SFAS No. 138. This statement revises the accounting
for the recognition and measurement of derivatives and hedging transactions and
was adopted by the Company on September 30, 2000. The impact of this statement
was not material to the Company's financial statements.
SAB No. 101 -- The SEC has issued Staff Accounting Bulletin No. 101 ("SAB
101") regarding revenue recognition. Management does not expect the impact of
SAB 101 to be material to the Company.
2. RECEIVABLE FROM AND PAYABLE TO BROKERS, DEALERS AND CLEARING ORGANIZATIONS
Amounts receivable from and payable to brokers, dealers and clearing
organizations are comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 29, SEPTEMBER 24,
2000 1999
------------- -------------
<S> <C> <C>
Receivable:
Securities borrowed..................................... $ 52,398 $ 81,764
Securities failed to deliver............................ 2,640 8,082
Clearing organizations.................................. 116 112
-------- --------
Total........................................... $ 55,154 $ 89,958
======== ========
Payable:
Securities loaned....................................... $424,699 $371,214
Securities failed to receive............................ 2,833 3,865
Clearing organizations.................................. 6,174 9,881
-------- --------
Total........................................... $433,706 $384,960
======== ========
</TABLE>
40
<PAGE> 43
AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVESTMENTS
Knight Trading 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. (later renamed Knight
Trading Group, Inc.) ("Knight") coincident with an initial public offering of
Knight common stock. As a result of this reorganization, all of the Company's
ownership interest in Roundtable was converted to common stock of Knight. In
fiscal 1998, the Company also received a cash distribution of $7.8 million 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 and subsequent initial public
offering in 1998, the Company accounts for its investment in Knight as a
marketable equity security available-for-sale. As of September 29, 2000, the
Company owned approximately 6 percent of the outstanding shares of common stock
of Knight. On September 29, 2000 and September 24, 1999, the Company's
investment in Knight was valued at $284.7 million and $229.3 million,
respectively. The Company's cost basis was $0.7 million, therefore the gross
unrealized gain was $284.0 million and $228.6 million at September 29, 2000 and
September 24, 1999, respectively.
The Company executes a portion of its securities transactions through
subsidiaries of Knight. Revenues related to such transactions totaled $26.7
million, $8.2 million and $9.4 million in fiscal 2000, fiscal 1999 and fiscal
1998, respectively. These amounts are included as commissions and clearing fees
in the statements of operations.
Comprehensive Software Systems, Inc. ("CSS") -- As of September 29, 2000,
the Company owned approximately 7 percent of CSS, a joint venture formed for the
purpose of developing software for securities broker-dealers, banks and other
financial institutions. On October 20, 1999, CSS was reorganized into a
corporation. On June 3, 1998, the Company earned $0.8 million 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 approximately 14 percent
to approximately 7 percent. Accordingly, the Company began accounting for its
investment in CSS under the cost method as of that date, and therefore, no
longer recognizes income or loss based on the operations of CSS.
Adirondack Trading Partners, LLC ("Adirondack") -- As of September 29,
2000, 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.
Epoch Partners, Inc. ("Epoch") -- As of September 29, 2000, the Company
owned approximately 10 percent of the preferred stock of Epoch, a privately-held
investment bank that acts as an underwriter on initial public offerings and
secondary offerings of securities, with its focus being on distributing these
shares to retail, online investors. The Company accounts for its ownership in
Epoch under the cost method. In connection with this investment, Ameritrade
entered into a distribution agreement with Epoch to allow Ameritrade and its
customers to participate in such distributions.
4. NOTES PAYABLE
As of September 29, 2000, the Company maintained a revolving credit
agreement with a bank group that was originally entered into in January 1998 and
was amended and restated in January 2000. The revolving credit agreement, as
amended, permits borrowings up to $75.0 million through December 31, 2001,
subject to reduction under certain circumstances specified in the credit
agreement. The interest rate on borrowings is determined on a monthly basis
based on the greater of (1) the prime rate minus .75 percent or (2) 90-day LIBOR
plus 1.50 percent. At September 29, 2000, the interest rate on this borrowing
was 8.75 percent. The
41
<PAGE> 44
AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company also pays a maintenance fee of 0.25 percent of the unused borrowings
through maturity date. The Company had outstanding indebtedness of $75.0 million
under the revolving credit agreement at September 29, 2000. At September 24,
1999, there was no outstanding amount under the revolving credit agreement. The
revolving credit agreement contains certain covenants and restrictions,
including a minimum net worth requirement. The Company's management believes it
was in compliance with all covenants and restrictions at September 29, 2000. As
further security for its obligations under the revolving credit agreement, the
Company has pledged 1.65 million shares of its Knight common stock (See Note 3)
to the bank group.
The Company also maintains a separate $75.0 million loan facility that was
established in fiscal 2000 and is supported by approximately 6.25 million shares
of the Company's Knight stock not pledged to the bank group. As of September 29,
2000, the Company had no borrowings outstanding under the loan facility.
5. 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, August 1, 2004, 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, beginning February of 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.
6. INCOME TAXES
Provision for (benefit from) income taxes is comprised of the following for
fiscal years ended:
<TABLE>
<CAPTION>
2000 1999 1998
-------- ------- -------
<S> <C> <C> <C>
Current expense (benefit):
Federal.............................................. $ 4,144 $(1,264) $(3,051)
State................................................ -- -- (398)
-------- ------- -------
4,144 (1,264) (3,449)
Deferred expense (benefit):
Federal.............................................. (9,974) 8,063 3,383
State................................................ (808) (230) 387
-------- ------- -------
(10,782) 7,833 3,770
-------- ------- -------
Provision for (benefit from) income taxes.............. $ (6,638) $ 6,569 $ 321
======== ======= =======
</TABLE>
A reconciliation of the federal statutory tax rate to the effective tax
rate applicable to income before provision for (benefit from) income taxes
follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate...................................... (35)% 35% 35%
State taxes, net of federal tax effect...................... (3) 3 3
Amortization of goodwill.................................... 2 1 23
State credits............................................... 2 (4) --
Other....................................................... 1 1 (1)
--- -- --
(33)% 36% 60%
=== == ==
</TABLE>
42
<PAGE> 45
AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Deferred tax assets:
State incentive credits and operating loss
carryforwards.......................................... $ 5,601 $ 5,934
Accrued liabilities....................................... 2,194 1,752
Depreciation and amortization, net........................ 687 --
Other deferred tax assets................................. 5,049 1,163
--------- ---------
Total deferred tax assets......................... 13,531 8,849
--------- ---------
Deferred tax liabilities:
Unrealized investment gain................................ (110,735) (89,148)
Prepaid expenses.......................................... (5,575) (14,723)
Depreciation and amortization, net........................ -- (817)
--------- ---------
Total deferred tax liabilities.................... (116,310) (104,688)
--------- ---------
Less: Valuation allowance......................... (5,187) (4,872)
--------- ---------
Net deferred tax liabilities...................... $(107,966) $(100,711)
========= =========
</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 more likely than not. At
September 29, 2000, state incentive credit carryforwards total approximately
$8.0 million and expire beginning December 31, 2007 and state net operating
losses total approximately $10.4 million and expire December 31, 2004.
7. NET CAPITAL
The Company's subsidiaries are subject to the SEC Uniform Net Capital Rule
(Rule 15c3-1 under 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.
The Company's broker-dealer subsidiaries had net capital, in the aggregate,
of $226.8 million and $104.0 million as of September 29, 2000 and September 24,
1999, respectively, which exceeded aggregate minimum net capital requirements by
$164.0 million and $70.0 million, respectively. Subsidiary net capital in the
amount of $62.7 million and $34.0 million as of September 29, 2000 and September
24, 1999, respectively, was not available for transfer to the Company.
8. 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 1 to 4 year period, and expire 10 years
after the grant date.
43
<PAGE> 46
AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's outstanding stock options as of
September 29, 2000, September 24, 1999 and September 25, 1998 is presented
below:
<TABLE>
<CAPTION>
2000 1999 1998
-------------------------- -------------------------- --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-------------- --------- -------------- --------- -------------- ---------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year... 2,171 $ 8.39 1,777 $ 2.09 96 $1.25
Granted............. 2,147 16.95 656 22.86 1,681 2.14
Exercised........... (251) (2.11) (262) (1.93) -- --
Canceled............ (378) (20.22) -- -- -- --
----- ------- ----- ------ ----- -----
Outstanding at end of
year................ 3,689 $ 12.59 2,171 $ 8.39 1,777 $2.09
Exercisable at end of
year................ 874 $ 5.96 394 $ 2.06 96 $1.25
Available for future
grant at end of
year................ 6,358 8,127 8,783
Weighted-average fair
value of options
granted during the
year................ $ 12.68 $18.62 $1.23
</TABLE>
The following table summarizes information about the stock options
outstanding at September 29, 2000:
<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 PRICE OPTIONS PRICE
------------------------ -------------- ----------- --------- -------------- ---------
(IN THOUSANDS) (IN YEARS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
$ 1.00-$ 5.00..................... 1,255 7.11 $ 2.12 703 $ 2.11
$ 5.01-$10.00..................... -- -- -- -- --
$10.01-$15.00..................... 60 8.44 14.83 20 14.83
$15.01-$20.00..................... 2,143 7.62 16.61 103 16.20
$20.01-$25.00..................... 87 9.50 23.19 -- --
$25.01-$30.00..................... -- -- -- -- --
$30.01-$35.00..................... -- -- -- -- --
$35.01-$40.00..................... 144 6.69 36.64 48 36.64
----- ---- ------ --- ------
$ 1.00-$40.00..................... 3,689 7.47 $12.59 874 $ 5.96
</TABLE>
There were no Stock Appreciation Rights or performance units outstanding as
of September 29, 2000 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 (loss) and earnings (loss)
per share is required by SFAS 123. This information is required as if the
Company had accounted for its stock-based awards to
44
<PAGE> 47
AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 2000, 1999 and 1998,
respectively: risk-free interest rate of 6.00 percent, 6.00 percent and 5.95
percent; dividend yield of zero for all years; expected volatility of 85 percent
for fiscal 2000, 111 percent for fiscal 1999 and 50 percent for fiscal 1998; and
an expected option life of five years, five years and eight years, respectively.
The weighted average fair value of options granted was $12.68 in fiscal 2000,
$18.62 in fiscal 1999 and $1.23 in fiscal 1998. Pro forma net income (loss) and
earnings (loss) per share are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
-------- ------- ------
<S> <C> <C> <C> <C>
Net income (loss) As reported.............. $(13,626) $11,539 $ 210
Pro forma................ (18,135) 8,782 (563)
-------- ------- ------
Basic earnings (loss) per share As reported.............. $ (0.08) $ 0.07 $ 0.00
Pro forma................ $ (0.10) $ 0.05 $(0.00)
Diluted earnings (loss) per share As reported.............. $ (0.08) $ 0.07 $ 0.00
Pro forma................ $ (0.10) $ 0.05 $(0.00)
</TABLE>
9. 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 $0, $0.3 million, and $0.8 million for
fiscal years 2000, 1999, and 1998, respectively. No 401(k) matching
contributions were made during fiscal years 2000, 1999, and 1998.
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 $0, $0.3 million, and $1.0 million for fiscal
years 2000, 1999, and 1998, respectively. The executive bonus plan was
terminated at the end of fiscal 2000.
10. EARNINGS (LOSS) PER SHARE
Reconciliation between the weighted average shares outstanding used in the
basic and diluted EPS computation is presented below.
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Net income (loss)........................................... $(13,626) $ 11,539 $ 210
-------- -------- --------
Weighted average shares outstanding -- basic................ 175,025 174,342 174,188
Effect of dilutive securities:
Assumed exercise of stock options......................... -- 1,403 256
-------- -------- --------
Weighted average shares outstanding -- diluted.............. 175,025 175,745 174,444
======== ======== ========
Earnings (loss) per share -- basic.......................... $ (0.08) $ 0.07 $ 0.00
Earnings (loss) per share -- diluted........................ $ (0.08) $ 0.07 $ 0.00
</TABLE>
Because the Company reported a net loss in fiscal 2000, the calculation of
diluted earnings (loss) per share does not include common stock equivalents as
they are anti-dilutive, resulting in a reduction of loss per share. If the
Company had reported net income in fiscal 2000, there would have been 1,222,000
additional shares for options outstanding in the calculation of diluted earnings
per share. In addition, the subordinated convertible notes are not included in
the EPS calculations above because the effect would also be anti-dilutive.
45
<PAGE> 48
AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. 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>
2001..................................................... $ 34,598
2002..................................................... 29,918
2003..................................................... 17,007
2004..................................................... 7,053
2005..................................................... 5,635
Thereafter (to April 2019)............................... 38,818
--------
Total.......................................... $133,029
========
</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
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 approximately $31.5 million, $11.2
million and $6.2 million for fiscal years 2000, 1999 and 1998, respectively.
Letter of Credit -- Letters of credit in the amount of $198 million and
$100 million as of September 29, 2000 and September 24, 1999, respectively, have
been issued by several financial institutions on behalf of Advanced Clearing, a
wholly-owned subsidiary of the Company which acts as a securities clearing firm.
The letters of credit have been issued to finance margin debits and support
margin requirements. Advanced Clearing pays a maintenance fee of 0.25 to 0.5
percent of the committed amount for the letters of credit. In addition, the same
financial institutions may make loans to Advanced Clearing if requested under
note agreements. Advanced Clearing has pledged customer securities, the amount
of which fluctuates from time to time, to secure its obligations under the
letters of credit and the notes. As of September 29, 2000 and September 24,
1999, no amounts were outstanding under the notes.
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 financial statements. These
include Advanced Clearing's customer activities involving the execution,
settlement and financing of various customer securities transactions. These
activities may expose Advanced Clearing to off-balance-sheet credit risk in the
event the customers are unable to fulfill their contracted obligations.
46
<PAGE> 49
AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Advanced Clearing 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 the
customers to deposit additional collateral, or to reduce positions, when
necessary.
Advanced Clearing records transactions on a settlement date basis, which
are 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 parties ability to fulfill their contractual obligations.
Advanced Clearing borrows and loans securities both to cover short sales
and to complete customer transactions in the event that a customer fails to
deliver or receive securities by the required date. Securities borrowed and
securities loaned transactions are reported as collateralized financings except
where other securities are used as collateral. Securities borrowed transactions
require the Advanced Clearing to deposit cash with the lender. With respect to
securities loaned, Advanced Clearing receives all collateral in the form of cash
in an amount generally in excess of the market value of securities loaned.
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 monitors the market value of
securities borrowed and loaned on a daily basis with additional collateral
obtained or refunded as 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.
12. SEGMENT INFORMATION
Commencing in fiscal 2000, OnMoney, the Company's personal financial
management subsidiary, was a reportable business segment. The Company now has
two reportable business segments. Financial information for the Company's
reportable segments are presented in the table below, and the totals are equal
to the Company's consolidated amounts as reported in the consolidated financial
statements.
<TABLE>
<CAPTION>
BROKERAGE
OPERATIONS ONMONEY TOTAL
---------- -------- ----------
<S> <C> <C> <C>
Year Ended September 29, 2000:
Interest -- net of interest expense............. $ 152,967 $ 7 $ 152,974
Non-interest revenue............................ 411,044 595 411,639
---------- -------- ----------
Net revenues.................................... $ 564,011 $ 602 $ 564,613
========== ======== ==========
Pre-tax income (loss)........................... $ 58,398 $(78,662) $ (20,264)
Identifiable assets at period end............... $3,763,034 $ 35,202 $3,798,236
</TABLE>
47
<PAGE> 50
AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
BROKERAGE
OPERATIONS ONMONEY TOTAL
---------- -------- ----------
<S> <C> <C> <C>
Year Ended September 24, 1999:
Interest -- net of interest expense............. $ 69,264 $ -- $ 69,264
Non-interest revenue............................ 199,087 -- 199,087
---------- -------- ----------
Net revenues.................................... $ 268,351 $ -- $ 268,351
========== ======== ==========
Pre-tax income (loss)........................... $ 25,672 $ (7,564) $ 18,108
Identifiable assets at period end............... $3,035,499 $ 1,584 $3,037,083
Year Ended September 25, 1998:
Interest -- net of interest expense............. $ 37,437 $ -- $ 37,437
Non-interest revenue............................ 97,478 -- 97,478
---------- -------- ----------
Net revenues.................................... $ 134,915 $ -- $ 134,915
========== ======== ==========
Pre-tax income (loss)........................... $ 3,626 $ (3,095) $ 531
</TABLE>
OnMoney losses are comprised primarily of advertising expense, employee
compensation and benefits expense and professional services expense.
13. ACQUISITIONS
On May 25, 2000, the Company issued 267,000 shares of its Class A Common
Stock to the stockholders of Ten Bagger, the corporation that developed the
stock analysis tool, the BigEasy Investor(TM), in connection with the
acquisition by the Company for all the issued and outstanding shares of common
stock of Ten Bagger. Under the purchase agreement, the Company shall issue
additional shares of its Class A Common Stock with a value between a minimum of
$8.0 million and a maximum of $13.3 million to the former stockholders of Ten
Bagger during the 18-month period following the acquisition date, depending upon
the achievement of certain performance targets, the satisfaction of certain
indemnification obligations and the market price of the Company's Class A Common
Stock at the time of issuance. The performance targets had not been achieved at
September 29, 2000. The transaction was accounted for as a purchase with the
resulting goodwill of approximately $10.9 million being amortized over 7 years.
On July 21, 2000, the Company acquired Financial Passport. The acquisition
of Financial Passport, which is an Internet-based provider of financial planning
services and an online marketplace for a wide range of financial products and
services, will allow the Company's OnMoney subsidiary to expand the range of
products and services that it offers its customers. Under the terms of the
merger agreement, the Company issued 1,482,548 shares of its Class A Common
Stock (and paid cash of $136,921 in lieu of small stockholders and fractional
shares) in exchange for the outstanding shares of Financial Passport common
stock. The transaction was accounted for as a purchase with the resulting
goodwill of approximately $17.9 million being amortized over 10 years.
The purchase price for Ten Bagger and Financial Passport was comprised of
the following consideration:
<TABLE>
<S> <C>
Cash paid, net of cash acquired............................. $ 5,995
Common stock issued......................................... 21,377
Common stock issuable in Ten Bagger transaction............. 7,995
Liabilities assumed......................................... 1,101
-------
Total consideration............................... $36,468
=======
</TABLE>
48
<PAGE> 51
AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The purchase price allocation is summarized as follows:
<TABLE>
<S> <C>
Fair value of tangible assets acquired...................... $ 4,128
Deferred income taxes....................................... 3,550
Goodwill.................................................... 28,790
-------
Total............................................. $36,468
=======
</TABLE>
The following unaudited pro forma financial information sets forth the
results of operations of the Company as if the acquisitions of Ten Bagger and
Financial Passport had occurred on September 27, 1997.
Pro forma financial information (unaudited)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------
SEPT. 29, 2000 SEPT. 24, 1999 SEPT. 25, 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Net revenues.................................. $564,773 $268,546 $135,019
Net income (loss)............................. $(24,523) $ 1,444 $ (4,924)
Basic earnings (loss) per share............... $ (0.14) $ 0.01 $ (0.03)
</TABLE>
On August 6, 1999, the Company acquired The R.J. Forbes Group, Inc. for
cash of approximately $7.3 million. The transaction was accounted for as a
purchase with resulting goodwill of approximately $7.2 million being amortized
over 20 years. The following unaudited pro forma financial information sets
forth the results of operations of the Company as if the acquisition of The R.J.
Forbes Group, Inc. had occurred on September 27, 1997.
Pro forma financial information (unaudited)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------
SEPT. 24, 1999 SEPT. 25, 1998
-------------- --------------
<S> <C> <C>
Net revenues............................................... $328,618 $168,338
Net income (loss).......................................... $ 16,886 $ (138)
Basic earnings (loss) per share............................ $ 0.09 $ (0.00)
</TABLE>
49
<PAGE> 52
AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. QUARTERLY DATA (UNAUDITED)
IN THOUSANDS EXCEPT PER SHARE AMOUNTS
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED SEPTEMBER 29, 2000
---------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues........................................... $131,238 $194,031 $172,277 $156,303
Interest expense................................... 20,385 23,726 23,192 22,535
-------- -------- -------- --------
Net revenues............................. 110,853 170,305 149,085 133,768
Total expenses excluding interest.................. 144,546 164,753 141,493 133,483
-------- -------- -------- --------
Income (loss) before provision for income taxes.... (33,693) 5,552 7,592 285
Net income (loss).................................. $(21,711) $ 3,201 $ 4,598 $ 286
======== ======== ======== ========
Basic earnings (loss) per share.................... $ (0.12) $ 0.02 $ 0.03 $ 0.00
Diluted earnings (loss) per share.................. $ (0.12) $ 0.02 $ 0.03 $ 0.00
Stock price data
High............................................. $ 30.75 $ 24.25 $ 20.25 $ 20.81
Low.............................................. $ 16.25 $ 15.13 $ 11.00 $ 11.38
</TABLE>
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED SEPTEMBER 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>
---------------
Quarterly amounts may not sum to year end totals due to rounding.
50
<PAGE> 53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Section 16(a) Beneficial Ownership Reporting Compliance
Based upon the Company's review of forms filed by directors, officers and
certain beneficial owners of the Company's common stock (the "Section 16
Reporting Persons") pursuant to Section 16 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), the Company has identified the following
filings that were filed late by the Section 16 Reporting Persons during fiscal
2000: (i) J. Peter Ricketts was late in filing one form 4 with respect to one
transaction; and (ii) Vincent Passione was late in filing form 3. The Company is
not aware of any failures by the Section 16 Reporting Persons to file the forms
required to be filed by them pursuant to Section 16 of the Exchange Act.
The other information about Directors required to be furnished pursuant to
this item is incorporated by reference from portions of our definitive proxy
statement for our 2001 annual meeting of stockholders, to be held February 21,
2001, to be filed with the SEC pursuant to Regulation 14A within 120 days after
September 29, 2000 (the "Proxy Statement"). Other information about Executive
Officers is shown starting on page 15 of this filing.
ITEM 11. EXECUTIVE COMPENSATION
The information required to be furnished pursuant to this item is
incorporated by reference from portions of the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required to be furnished pursuant to this item is
incorporated by reference from portions of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required to be furnished pursuant to this item is
incorporated by reference from portions of the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this Report
1. Financial Statements
2. Financial Statement Schedules Condensed Parent Company Only Financial
Statements are included in 14(d) below.
3. Exhibits
<TABLE>
<C> <S>
2.1 -- Merger Agreement, dated as of June 30, 2000, among
Ameritrade Holding Corporation, Financial Passport, Inc.,
OM Acquisition Sub I, Inc. and OnMoney Financial Services
Corporation (incorporated by reference to Exhibit 2.1 to
the Company's current report on Form 8-K filed on August
11, 2000)
</TABLE>
51
<PAGE> 54
<TABLE>
<C> <S>
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 (incorporated by
reference to Exhibit 4.2 of the Company's Annual Report
on Form 10-K and amendments thereto filed on December 23,
1999)
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)
4.6 -- Registration Rights Agreement dated July 21, 2000,
between Ameritrade Holding Corporation and J. Roderick
Heller, III and Dennis Hooks as representatives of each
stockholder of Financial Passport, Inc.
10.1 -- 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)
10.2 -- 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)
10.3 -- 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)
10.4 -- 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)
10.5 -- 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)
10.6 -- 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)
</TABLE>
52
<PAGE> 55
<TABLE>
<C> <S>
10.7 -- 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)
10.8 -- 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)
*10.9 -- 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)
*10.10 -- 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)
*10.11 -- Employment Agreement, dated as of August 2, 1999, between
Vincent Passione and OnMoney Financial Services
Corporation as supplemented by Addendum to Employment
Agreement
*10.12 -- Employment Contract, dated as of March 27, 2000, between
John R. MacDonald and Ameritrade Holding Corporation
(incorporated by reference to Exhibit 10.1 of the
Company's quarterly report on Form 10-Q filed May 15,
2000)
*10.13 -- Employment Contract, dated as of February 15, 1999,
between Thomas K. 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)
*10.14 -- 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)
*10.15 -- Amended and Restated 1996 Long-Term Incentive Plan dated
October 23, 1999 (incorporated by reference to Exhibit
10.22 of the Company's Annual Report on Form 10-K and
amendments thereto filed on December 23, 1999)
*10.16 -- 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)
*10.17 -- 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)
10.18 -- 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)
10.19 -- Amended and Restated Revolving Credit Agreement dated as
of January 25, 2000 between Ameritrade Holding
Corporation and the banks a party thereto (incorporated
by reference to Exhibit 10.23 of the Company's quarterly
report on Form 10-Q filed February 14, 2000)
10.20 -- First Amendment to Amended and Restated Revolving Credit
Agreement dated as of April 28, 2000 (incorporated by
reference to Exhibit 10.1 of the Company's quarterly
report on Form 10-Q filed August 14, 2000)
10.21 -- Second Amendment to Amended and Restated Revolving Credit
Agreement
21.1 -- Subsidiaries of the Registrant
</TABLE>
53
<PAGE> 56
<TABLE>
<C> <S>
23 -- Independent Auditors' Consent
24.1 -- Power of Attorney authorizing J. Peter Ricketts to sign
the annual report on Form 10-K on behalf of Gene L. Finn
24.2 -- Power of Attorney authorizing J. Peter Ricketts to sign
the annual report on Form 10-K on behalf of Thomas Y.
Hartley
24.3 -- Power of Attorney authorizing J. Peter Ricketts to sign
the annual report on Form 10-K on behalf of Charles L.
Marinaccio
24.4 -- Power of Attorney authorizing J. Peter Ricketts to sign
the annual report on Form 10-K on behalf of Mark L.
Mitchell
24.5 -- Power of Attorney authorizing J. Peter Ricketts to sign
the annual report on Form 10-K on behalf of John W. Ward
24.6 -- Power of Attorney authorizing J. Peter Ricketts to sign
the annual report on Form 10-K on behalf of Robert T.
Slezak
27.1 -- Financial Data Schedule (EDGAR filing only)
</TABLE>
*Management contracts and compensatory plans and arrangements required to be
filed as exhibits under Item 14(c) of this report.
(b) Reports on Form 8-K
On August 8, 2000, a Form 8-K was filed with the SEC under Item 5
announcing the resignation of then Chief Executive Officer, Thomas Lewis.
On August 11, 2000, a Form 8-K was filed with the SEC under Item 2
announcing the merger of a wholly-owned subsidiary of Ameritrade Holding
Corporation with and into Financial Passport, Inc.
On September 26, 2000, a Form 8-K/A was filed with the SEC under Item 7
presenting the financial information related to the merger of wholly-owned
subsidiary of Ameritrade Holding Corporation with and into Financial Passport,
Inc. ("FPI"). The Form 8-K/A included the following financial statements:
- Audited Consolidated Financial Statements of Pace Financial Network LLC
for the years ended December 31, 1999 and December 31, 1998 with
accompanying Report of Independent Auditors (Pace Financial Network LLC
was a predecessor entity of FPI)
- Unaudited Consolidated Condensed Financial Statements of FPI for the six
months ended June 30, 2000 and June 30, 1999
- Ameritrade Holding Corporation Unaudited Pro Forma Combined Condensed
Balance Sheet as of June 30, 2000
- Ameritrade Holding Corporation Unaudited Pro Forma Combined Condensed
Statement of Operations for the Year Ended September 24, 1999
- Ameritrade Holding Corporation Unaudited Pro Forma Combined Condensed
Statement of Operations for the Nine Months Ended June 30, 2000
54
<PAGE> 57
(d) Condensed Parent Company Only Financial Statements
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Ameritrade Holding Corporation and Subsidiaries
Omaha, Nebraska
We have audited the consolidated financial statements of Ameritrade Holding
Corporation and subsidiaries (collectively, the "Company") as of September 29,
2000 and September 24, 1999 and for each of the three years in the period ended
September 29, 2000 and have issued our report thereon dated October 24, 2000;
such report is included elsewhere in this Form 10-K. Our audits also included
the financial statement schedule of Ameritrade Holding Corporation, listed in
Item 14. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Omaha, Nebraska
October 24, 2000
55
<PAGE> 58
AMERITRADE HOLDING CORPORATION (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
AS OF SEPTEMBER 29, 2000 AND SEPTEMBER 24, 1999
IN THOUSANDS EXCEPT SHARE AMOUNTS
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 248 $ 51,941
Investments in subsidiaries................................. 321,878 193,896
Property and equipment -- net of accumulated depreciation
and amortization: 2000 -- $10,046; 1999 -- $3,365......... 46,993 36,192
Investments................................................. 292,907 230,619
Other assets................................................ 12,370 7,643
-------- --------
Total assets...................................... $674,396 $520,291
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued liabilities.................. $ 24,635 $ 10,268
Notes payable............................................. 275,000 200,000
Deferred income taxes..................................... 110,593 89,560
-------- --------
Total liabilities................................. 410,228 299,828
-------- --------
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;
2000 -- 160,036,664 shares issued; 1999 -- 158,103,480
shares issued......................................... 1,600 1,580
Class B -- 18,000,000 shares authorized; 16,372,800
shares issued......................................... 164 164
-------- --------
Total common stock................................ 1,764 1,744
Additional paid in capital.................................. 47,864 24,079
Retained earnings........................................... 41,670 55,296
Treasury stock -- Class A shares at cost: 2000 -- 43,492
shares; 1999 --39,624 shares.............................. (331) (93)
Accumulated other comprehensive income...................... 173,201 139,437
-------- --------
Total stockholders' equity........................ 264,168 220,463
-------- --------
Total liabilities and stockholders' equity........ $674,396 $520,291
======== ========
</TABLE>
56
<PAGE> 59
AMERITRADE HOLDING CORPORATION (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 29, 2000, SEPTEMBER 24, 1999 AND SEPTEMBER 25,
1998
IN THOUSANDS
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- -------
<S> <C> <C> <C>
Revenues:
Interest revenue.......................................... $ 999 $ 699 $ 45
Equity income from investments............................ -- -- 5,083
Gain from sale of investment.............................. -- -- 795
Management fee............................................ 49,554 20,570 9,360
Other..................................................... 43 93 252
-------- -------- -------
Total revenues.................................... 50,596 21,362 15,535
Interest expense.......................................... 16,417 3,821 689
-------- -------- -------
Net revenues...................................... 34,179 17,541 14,846
Expenses excluding interest:
Employee compensation and benefits........................ 13,718 10,792 6,626
Professional services..................................... 10,930 11,612 4,179
Other..................................................... 13,211 7,526 3,625
-------- -------- -------
Total expenses excluding interest................. 37,859 29,930 14,430
-------- -------- -------
Income (loss) from operations before income taxes and equity
in earnings of subsidiaries............................... (3,680) (12,389) 416
Provision for (benefit from) income taxes................... (1,271) (4,485) 170
-------- -------- -------
Income before equity in earnings (loss) of subsidiaries..... (2,409) (7,904) 246
Equity in earnings (loss) of subsidiaries................... (11,217) 19,443 (36)
-------- -------- -------
Net income (loss)........................................... $(13,626) $ 11,539 $ 210
======== ======== =======
</TABLE>
57
<PAGE> 60
AMERITRADE HOLDING CORPORATION (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 29, 2000, SEPTEMBER 24, 1999 AND SEPTEMBER 25,
1998
IN THOUSANDS
<TABLE>
<CAPTION>
2000 1999 1998
--------- --------- --------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss)........................................ $ (13,626) $ 11,539 $ 210
Adjustments to reconcile net income (loss) to net cash
flows from operating activities:
Equity in earnings (loss) of subsidiaries................ 11,217 (19,443) 36
Depreciation and amortization............................ 6,687 2,225 715
Deferred income taxes.................................... (554) 1,149 436
Equity income from investments........................... -- -- (5,083)
Gain from sale of investment............................. -- -- (795)
Changes in operating assets and liabilities:
Other assets.......................................... (3,061) (6,495) (373)
Accounts payable and accrued liabilities.............. 14,366 5,754 1,715
--------- --------- --------
Net cash provided by (used in) operating
activities..................................... 15,029 (5,271) (3,139)
--------- --------- --------
Cash Flows From Investing Activities:
Acquisition of subsidiaries, net of cash and cash
equivalents........................................... (5,995) (6,917) --
Investment in subsidiaries............................... (263,981) (131,976) (40,570)
Dividends from subsidiaries.............................. 152,153 31,370 15,350
Purchase of property and equipment....................... (17,487) (24,839) (12,033)
Purchase of investments.................................. (6,936) -- (1,653)
Distributions received from investments.................. -- -- 12,265
Proceeds from sale of investments........................ -- -- 5,828
--------- --------- --------
Net cash used in investing activities............ (142,246) (132,362) (20,813)
--------- --------- --------
Cash Flows From Financing Activities:
Proceeds from notes payable.............................. 160,000 294,000 22,500
Principal payments on notes payable...................... (85,000) (105,000) (11,500)
Proceeds from exercise of stock options.................. 531 507 --
Purchase of treasury stock............................... (269) -- (286)
Reissuance of treasury stock............................. 262 66 136
--------- --------- --------
Net cash provided by financing activities........ 75,524 189,573 10,850
--------- --------- --------
Net Increase (Decrease) in Cash and Cash Equivalents....... (51,693) 51,940 (13,102)
Cash and Cash Equivalents at Beginning of Year............. 51,941 1 13,103
--------- --------- --------
Cash and Cash Equivalents at End of Year................... $ 248 $ 51,941 $ 1
========= ========= ========
Supplemental Cash Flow Information:
Interest paid............................................ $ 14,292 $ 2,258 $ 591
Income taxes paid (refunds received)..................... $ (9,361) $ 14,149 $ (1,419)
Noncash Financing Activities:
Tax benefit on exercise of stock options................. $ 1,666 $ 1,865 $ --
Issuance of common stock in purchase of subsidiaries..... $ 21,377 $ -- $ --
</TABLE>
58
<PAGE> 61
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 20th day of December, 2000.
AMERITRADE HOLDING CORPORATION
By: /s/ J. JOE RICKETTS
----------------------------------
J. Joe Ricketts
Chairman, Chief Executive Officer
and
Director (Principal Executive
Officer)
By: /s/ JOHN R. MACDONALD
----------------------------------
John R. MacDonald
Vice President and Chief Financial
Officer
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on this 20th day of December, 2000.
<TABLE>
<C> <S>
/s/ J. JOE RICKETTS Chairman, Chief Executive Officer and Director
-----------------------------------------------------
J. Joe Ricketts
/s/ J. PETER RICKETTS Senior Vice President of Business Development
----------------------------------------------------- and Vice Chairman
J. Peter Ricketts
/s/ ROBERT T. SLEZAK(1) Director
-----------------------------------------------------
Robert T. Slezak
/s/ GENE L. FINN(1) Director
-----------------------------------------------------
Gene L. Finn
/s/ THOMAS Y. HARTLEY(1) Director
-----------------------------------------------------
Thomas Y. Hartley
/s/ CHARLES L. MARINACCIO(1) Director
-----------------------------------------------------
Charles L. Marinaccio
/s/ MARK L. MITCHELL(1) Director
-----------------------------------------------------
Mark L. Mitchell
/s/ JOHN W. WARD(1) Director
-----------------------------------------------------
John W. Ward
(1) By: /s/ J. PETER RICKETTS
---------------------------------------------
J. Peter Ricketts
Attorney-In-Fact
</TABLE>
59
