UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 24, 2004 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM to |
Commission file number: 0-49992
Ameritrade Holding Corporation
Delaware
(State or other jurisdiction of incorporation or organization) |
82-0543156
(I.R.S. Employer Identification Number) |
4211 South 102nd Street,
(402) 331-7856
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
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None
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None |
Securities registered pursuant to Section 12(g) of the Act:
Title of class |
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Common Stock $0.01 par value
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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 þ No o
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 registrants 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. o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes þ No o
The aggregate market value of the Common Stock held by non-affiliates of the registrant was approximately $3.8 billion computed by reference to the closing sale price of the stock on the Nasdaq National Market on March 26, 2004, the last trading day of the registrants most recently completed second fiscal quarter.
The number of shares of Common Stock outstanding as of November 26, 2004 was 405,173,583 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement relating to the registrants 2005 Annual Meeting of Stockholders to be filed hereafter (incorporated into Part III hereof).
AMERITRADE HOLDING CORPORATION
INDEX
1
Unless otherwise indicated, references to we, us or Company mean Ameritrade Holding Corporation and its subsidiaries, and references to fiscal mean the Companys fiscal year ended the last Friday of September. The term GAAP refers to generally accepted accounting principles in the United States of America.
PART I
We are a leading provider of securities brokerage
services, with online transactions representing the vast
majority of our business.
Retail Securities Brokerage Industry
Overview
The retail brokerage industry is comprised of
companies that employ two primary delivery channels: online
delivery and offline delivery utilizing registered
representatives. The number of client accounts in the online
segment of the retail brokerage industry has grown rapidly over
the past several years. A number of factors have contributed to
this growth, including:
Operations
We are a leading provider of securities brokerage
services and technology-based financial services to retail
investors and business partners, predominantly through the
Internet. Our services appeal to a broad market of independent,
value conscious retail investors, traders, financial planners
and institutions. We use our low-cost platform to offer
brokerage services to retail investors and institutions under a
commission structure that is generally lower and simpler than
that of most of our major competitors.
We have been an innovator in electronic brokerage
services since being established in 1975. We believe that we
were the first brokerage firm to offer the following products
and services to retail clients: touch-tone trading; trading over
the Internet; unlimited, streaming, free real-time quotes;
extended trading hours; direct access; and commitment on the
speed of execution. Since initiating online trading, we have
substantially increased our number of brokerage accounts,
average daily trading volume and total assets in client
accounts. We have also built, and continue to invest in, a
proprietary trade processing platform that is both cost
efficient and highly scalable, significantly lowering our
operating costs per trade. In addition, we have made significant
and effective investments in building the Ameritrade brand.
Strategy
Our business strategy is to continue to
capitalize on the projected growth of the online brokerage
industry in the United States and Canada and leverage our
low-cost infrastructure to grow market share and profitability.
We strive to enhance the client experience while delivering
greater value to stockholders. The key elements of our strategy
are as follows:
2
Our corporate and management structure is
organized to meet the specific needs of our growing and diverse
client base. We operate two principal business units, a Private
Client Division and an Institutional Client Division. Both
divisions provide multiple service offerings, each tailored to
specific clients and their respective investing and trading
preferences.
Private Client Division
Our Private Client Division provides tiered
levels of products and services to meet the varying needs and
investing patterns of different retail clients. We have
developed strategies aimed at specific client segments, matching
tools, information and choices to investor priorities. The
private client offerings include:
3
Institutional Client Division
Through the Institutional Client Division, we
seek to grow our account base and expand revenues by targeting
specific segments of the institutional client market with
relevant products, tools and services, and by leveraging our
core competencies of trade execution services, technology and
client service. Our institutional client offerings include:
Products and Services
We strive to provide the best value of online
brokerage services to our clients. Our products include:
We provide our clients with an array of channels
to access our products and services. These include Internet,
wireless telephone or Personal Digital Assistant, Interactive
Voice Response and registered representatives.
Client Service
We endeavor to optimize our highly rated client
service by:
4
We provide client service support through a
variety of access points, including:
We strive to provide the best client service in
the industry as measured by: (1) speed of response time on
telephone calls; (2) turnaround time on responding to
client inquiries; and (3) client satisfaction with the
account relationship.
Technology and Information Systems
Technology is a core function for our business
and is critical to our goal of providing the best execution at
the best value to our clients. Our operations require reliable,
scalable systems that can handle complex financial transactions
for our clients 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 continue to make investments in technology and
information systems. Since 1999, we have spent a significant
amount of resources to increase capacity and improve speed and
reliability. To provide for system continuity during potential
power outages, we also have equipped our data centers with
uninterruptible power supply units, as well as back-up
generators.
Our current capacity for trades is approximately
350,000 trades per day. During fiscal 2004, our clients averaged
approximately 168,000 trades per day. Our highest average client
trades per day for any single month occurred in
January 2004, when clients averaged approximately 254,000
trades per day. Because of the scalability of our system, we
believe that we would be able to increase capacity to
approximately 600,000 trades per day at an estimated cost of
$10 million.
Advertising and Marketing
We intend to continue to grow and increase our
market share by advertising through online avenues, television,
print, direct mail and our own Web sites. In October 1997, we
launched a national marketing campaign to promote the Ameritrade
brand name. Since that date, we have invested approximately
$763 million in advertising programs designed to bring
greater brand recognition to our services. During this
seven-year period, we have added over 2.6 million new
accounts through internal growth. We intend to continue to
aggressively advertise our services. 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.
Growth of the Private Client Division is
primarily driven through advertising and/or acquisitions.
Advertising for retail clients is generally conducted through
Web sites, CNBC and other television and cable
5
Growth of the Institutional Client Division is
primarily driven through our sales force and/or acquisitions.
Advertising for institutional clients is significantly less than
for private clients and is generally conducted through highly
targeted media.
To monitor the success of our various marketing
efforts, we have installed a data gathering and tracking system.
This system enables 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 client segments and tailor our services to their
individual needs. We intend to utilize this system to strengthen
relationships with our clients and support marketing campaigns
to attract new clients. All of our methods and uses of client
information are disclosed in our privacy statement.
All of our brokerage-related communications with
the public are regulated by the NASD.
Ameritrade Clearing
Ameritrade Clearing provides self-clearing and
execution services, as well as services to each of our
affiliated broker-dealers and a number of correspondent firms
such as 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. For third parties, the clearing
function involves a sharing of responsibilities between the
clearing broker and the introducing broker. Our correspondents,
as introducing brokers, are responsible for all client contact,
including opening client accounts, responding to client
inquiries and placing client orders with the clearing broker. As
a clearing broker, we provide the following back office
functions:
We make margin loans to clients collateralized by
client 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
NASD and our own internal policies. By permitting clients 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 clients indebtedness to us.
Under applicable securities laws and regulations, we are
obligated to require the client to maintain net equity in the
account equal to at least 25 percent of the value of the
securities in the account. Our current internal requirement,
however, is that the clients 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
client to increase the accounts 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.
6
Competition
We believe that the principal determinants of
success in the online brokerage market are brand recognition,
size of client base, client trading activity, efficiency of
operations, technology infrastructure and access to financial
resources. We also believe that the principal factors considered
by clients in choosing a broker are price, client service,
quality of trade execution, delivery platform capabilities,
convenience and ease of use, breadth of services, innovation and
overall value. 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 five years and expect this competitive
environment to continue. 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., TD Waterhouse
Group, Inc., E*TRADE Financial Corporation, Fidelity Investments
and Scottrade, Inc. We also encounter competition from
established full-commission brokerage firms including such full
service brokerage firms as Merrill Lynch and Smith Barney as
well as financial institutions, mutual fund sponsors and other
organizations, some of which provide online brokerage services.
Investments
Our investments consist primarily of ownership of
approximately 7.9 million shares of Knight Trading Group,
Inc. (Knight), representing approximately seven
percent of Knights outstanding shares. Knight is a
publicly held company that is a market maker in equity
securities. We account for our investment in Knight as a
marketable equity security available for sale. As of
September 24, 2004 and September 26, 2003, our
investment in Knight was valued at $72.8 million and
$90.0 million, respectively. Our cost basis is
$0.7 million; therefore, the gross unrealized gain was
$72.1 million and $89.3 million at September 24,
2004 and September 26, 2003, respectively.
During fiscal 2003, we entered into a series of
prepaid variable forward contracts (the forward
contracts) with a counterparty with a total notional
amount of approximately $41.4 million on 7.9 million
underlying Knight shares. The forward contracts each contain a
zero-cost embedded collar on the value of the Knight shares,
with a weighted average floor price of $5.13 per share and
a weighted average cap price of $6.17 per share. At the
inception of the forward contracts, we received cash of
approximately $35.5 million, equal to approximately
86 percent of the notional amount. The forward contracts
mature on various dates in fiscal years 2006 and 2007. At
maturity, we may settle the forward contracts in shares of
Knight or in cash, at our option. If the market price of the
Knight stock at maturity is equal to or less than the floor
price, the counterparty will be entitled to receive one share of
Knight or its cash equivalent for each underlying share. If the
market price of the Knight stock at maturity is greater than the
cap price, the counterparty will be entitled to receive the
number of shares of Knight or its cash equivalent equal to the
ratio of the floor price plus the excess of the market price
over the cap price, divided by the market price, for each
underlying share. If the market price at maturity is greater
than the floor price but less than or equal to the cap price,
the counterparty will be entitled to receive the number of
Knight shares or its cash equivalent equal to the ratio of the
floor price divided by the market price for each underlying
share. Regardless of whether the forward contract is settled in
Knight shares or in cash, we intend to sell the underlying
Knight shares at maturity.
We have designated the forward contracts as cash
flow hedges of the forecasted future sales of 7.9 million
Knight shares. The forward contracts are expected to be
perfectly effective hedges against changes in the cash flows
associated with the forecasted future sales outside the price
ranges of the collars. Accordingly, all changes in the fair
value of the embedded collars are recorded in other
comprehensive income, net of income taxes. As of
September 24, 2004 and September 26, 2003, the total
fair value of the embedded collars was approximately
$28.7 million and $46.7 million, respectively, and was
included under the caption Prepaid variable forward
derivative instrument on our Consolidated Balance Sheets.
The $35.5 million of cash received on the
forward contracts is accounted for as an obligation on the
Consolidated Balance Sheets. We are accreting interest on the
obligation to the notional maturity amount of $41.4 million
over the terms of the forward contracts using effective interest
rates with a weighted average of
7
We also have investments in The Nasdaq Stock
Market, Inc. and Adirondack Trading Partners LLC, a development
stage company formed to trade listed equity and index options.
Regulation
The securities industry is subject to extensive
regulation under federal and state law. In general,
broker-dealers are required to register with the Securities and
Exchange Commission (SEC) and to be members of NASD
or the New York Stock Exchange. As members of NASD, our
broker-dealer subsidiaries are subject to the requirements of
the Securities Exchange Act of 1934 and the rules promulgated
thereunder relating to broker-dealers and to the Rules of Fair
Practice of NASD. These regulations establish, among other
things, minimum net capital requirements for our broker-dealer
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,
Ameritrade, Inc. is a member of the National Securities Clearing
Corporation, The Depository Trust & Clearing
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, Ameritrade, Inc. is required to comply
with the rules of such clearing agencies, including rules
relating to possession and control of client funds and
securities, margin lending and execution and settlement of
transactions.
Margin lending activities are subject to
limitations imposed by regulations of the Federal Reserve and
NASD. In general, these regulations provide that in the event of
a significant decline in the value of securities collateralizing
a margin account, we are 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 secrets and client
base. We rely on numerous methods 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 applicable methods of intellectual property protection. In
addition, it is our policy to enter into confidentiality,
intellectual property ownership and/or noncompetition agreements
with our associates, independent contractors and business
partners, and to control access to and distribution of our
intellectual property.
Associates
As of September 24, 2004, we employed
1,961 full-time equivalent employees. The number of
employees has increased from 1,732 full-time equivalent
employees as of the end of fiscal 2003. None of our employees is
covered under a collective bargaining agreement. We believe that
our relations with our employees are good.
Internet Address
We maintain a Web site where additional
information concerning our business can be found. The address of
that Web site is
www.amtd.com
. We make available free of
charge on our Web site our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those reports, as soon as
reasonably practicable after we electronically file or furnish
such materials to the SEC.
8
Our corporate headquarters is located in Omaha,
Nebraska, and occupies approximately 74,000 square feet of
leased space. The lease expires in April 2019. Also in the Omaha
metropolitan area, we lease approximately 154,000 square
feet for the operations center as well as several other
locations totaling approximately 28,000 square feet. The
leases on these Omaha-area locations expire on various dates
from 2004 through 2009. We lease approximately
140,000 square feet for a second operations center in
Ft. Worth, Texas. The Ft. Worth lease expires in
January 2015. We also lease smaller administrative and
operational facilities in Arizona, Illinois, Maryland, Missouri,
New Jersey, Oregon, Utah, Texas and Ontario, Canada. We believe
that our facilities are suitable and adequate to meet our needs.
In September 1998, a putative class action
complaint was filed against the Company by Zannini, et al.
in the District Court of Douglas County, Nebraska, claiming the
Company was not able to handle the volume of subscribers to its
Internet brokerage services. The complaint, as amended, sought
injunctive relief enjoining alleged deceptive, fraudulent and
misleading practices, equitable relief compelling the Company to
increase capacity, and unspecified compensatory damages. In May
2001, the Company filed a motion for summary judgment in the
matter, which the plaintiffs opposed. The District Court granted
summary judgment for the Company on January 2, 2002, and
the plaintiffs appealed. On August 1, 2003, the Nebraska
Supreme Court reversed the District Courts grant of
summary judgment and remanded the case to the District Court for
further proceedings. The Nebraska Supreme Court did not decide
whether the plaintiffs claims have merit. On
October 8, 2003, the Company filed with the District Court
a renewed motion for summary judgment. On August 13, 2004,
the District Court dismissed the plaintiffs class action
allegations and the claims of fraud, misrepresentation, unjust
enrichment and injunction. The District Court stayed the case
pending arbitration of individual claims of breach of contract
under the customer agreements. Plaintiffs appealed. On
November 1, 2004, the Company filed a motion for summary
dismissal of the appeal for lack of jurisdiction on the ground
that the District Courts order is not presently
appealable. The Company believes it has adequate legal defenses
and intends to continue to vigorously defend against this action.
In October 2003, Keener, a pro se plaintiff,
filed a putative class action against the Company, Knight
Trading Group, Inc. and certain individuals in the United States
District Court for the District of Nebraska. The plaintiff
asserted his action on behalf of persons who became clients of
the Company during the period from March 29, 1995 through
September 30, 2003. As it pertains to the Company, the
principal allegations of the complaint were that the Company had
an indirect and direct equity interest in Knight, to which it
directed most of its orders for execution; that the Company
failed to accurately disclose the nature of its relationship
with Knight and the consideration it received from Knight for
directing order flow to Knight; and that clients of Ameritrade
did not receive best execution of their orders from Knight and
the Company. The plaintiff claimed that the Companys
conduct violated certain provisions of the federal securities
laws, including Sections 11Ac, 10(b) and 3(b) of the
Securities Exchange Act of 1934 (the Exchange Act),
and SEC rules promulgated thereunder. Plaintiff further claimed
the individual defendants, including a present director and a
former director of the Company, were liable under
Section 20(a) of the Exchange Act as controlling
persons for the claimed wrongs attributed to the Company
and Knight. In his prayer for relief, plaintiff requested
monetary damages and/or rescissionary relief in the amount of
$4.5 billion against all defendants, jointly and severally.
In January 2004, the Company, Knight and the individual
defendants filed motions to dismiss the complaint and to deny
class certification or strike the class action allegations. In
July 2004 the District Court granted the Company
defendants motion to deny class certification and to stay
the action pending arbitration. The District Court ruled that
plaintiff had to amend the complaint to delete all references to
class members. The District Court ruled that if plaintiff filed
an amended complaint, the Company defendants could reassert a
motion to compel arbitration and, if the motion were filed, the
claims against the Company defendants would be stayed pending
arbitration. The District Court also granted the Knight
defendants motion to dismiss and to strike to the extent
of denying certification of a plaintiff class. The District
Court ruled that plaintiff had to file an amended complaint that
deleted all references to class members and that cured all
additional defects. The plaintiff did not file an amended
complaint as required by
9
The nature of the Companys business
subjects it to lawsuits, arbitrations, claims and other legal
proceedings. We cannot predict with certainty the outcome of
pending legal proceedings. A substantial adverse judgment or
other resolution regarding the proceedings could have a material
adverse effect on the Companys financial condition,
results of operations and cash flows. However, in the opinion of
management, after consultation with legal counsel, the Company
has adequate legal defenses with respect to the legal
proceedings to which it is a defendant or respondent and the
outcome of these pending proceedings is not likely to have a
material adverse effect on the financial condition, results of
operations or cash flows of the Company.
The Company is in discussions with its regulators
about matters raised during regulatory examinations or otherwise
subject to their inquiry. These matters could result in
censures, fines or other sanctions. Management believes the
outcome of any resulting actions will not be material to the
Companys financial condition, results of operations or
cash flows. However, the Company is unable to predict the
outcome of these matters.
No matters were submitted to a vote of
stockholders during the fourth quarter of fiscal 2004.
Item 1.
Business
Increased consumer acceptance of and confidence
in the Internet as a reliable, secure and cost effective medium
for financial transactions;
The availability of financial information online,
including research, real-time quotes, charts, news and company
information;
The growth in high-speed Internet access by US
households;
The appeal of online trading to individual
investors based on lower commissions, greater range of
investment alternatives and greater control over investment
decisions; and
The growth in equity ownership by individual
investors.
Focus on brokerage
services.
We plan to maintain our
focus on attracting independent and active investors to our
online brokerage services. We believe that this focus promotes
efficiencies and
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capitalizes on projected growth in the industry.
This focused strategy is designed to allow us to maintain our
low operating cost structure and still offer our clients
outstanding products and services.
Leverage our infrastructure to add incremental
revenue.
Through our proprietary
technology, we are able to provide a very robust online
experience for investors and traders. Our low-cost, scalable
platform provides speed, reliability and quality trade execution
services for clients. The available capacity in our trading
system allows us to add a significant number of transactions
without incurring additional fixed costs.
Continue to be a low-cost provider of quality
services.
Our operating expense per
trade is among the lowest of any of our publicly traded
competitors. We intend to continue to lower our operating costs
per trade by creating economies of scale, utilizing our
single-platform proprietary system, continuing to automate
processes and locating our operations in low-cost geographical
areas of the United States. This low fixed-cost infrastructure
provides us with significant financial leverage.
Continue to offer innovative technologies and
service enhancements to our clients.
We have been an innovator in our industry over our 29-year
history. We continually strive to provide our clients with
choice and the ability to customize their trading experience. We
provide greater choice by tailoring our features and
functionality to meet the specific needs of institutions and
individual investors.
Continue to aggressively pursue growth through
acquisitions.
During fiscal 2004, we
acquired Bidwell & Company and purchased the retail
client accounts of BrokerageAmerica, LLC and Investex Securities
Group, Inc. In October 2004, we purchased the retail client
accounts of JB Oxford & Company. These
acquisitions followed the merger with Datek in 2002 and the
purchase of National Discount Brokers Corporation
(NDB) in fiscal 2001. When evaluating potential
acquisitions, we look for transactions that will give us
financial leverage, technology leverage or increased market
share. Our recent acquisitions have helped us achieve a pre-tax
margin for fiscal 2004 of 50 percent; the highest of any of
our publicly traded major competitors. We intend to continue to
be an acquirer by searching for other firms that fit one or more
of our criteria.
Leverage the Ameritrade
brand.
We believe that we have a
superior brand identity and offering. Our past advertising has
established Ameritrade as a significant brand in the online
brokerage market. In October 2004, we launched a new ad campaign
that emphasizes the edge Ameritrade delivers through cost,
execution quality, speed and an innovative suite of products and
services.
Ameritrade
® has
historically been our core offering for self-directed retail
investors. We offer sophisticated tools and services, including
Ameritrade Streamer, Ameritrade command center,
SnapTicket, Trade Triggers and Ameritrade Advanced
Analyzer. We offer Ameritrade Apex for clients that
place an average of 10 trades per month over a three-month
period or have a $100,000 total account value. Apex clients
receive free access to services that are normally available on a
subscription basis and access to exclusive services and content.
Ameritrade
Plus
is designed for
self-directed clients seeking long-term portfolio management
tools and a higher degree of personalized client service.
Clients have access to a comprehensive suite of portfolio
management tools for long-term investing strategies. Ameritrade
Plus leverages the features
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and functionality obtained through the
acquisition of NDB. Clients of Ameritrade Plus with an account
value over $5,000 have access to a dedicated account executive.
Freetrade.com
serves self-directed traders who are willing to forgo
traditional support and service in favor of a purely electronic
brokerage experience and lower commissions.
Ameritrade Advisor
Services
offers a low-cost
alternative for independent financial advisors and independent
broker-dealer-affiliated registered investment advisors.
Ameritrade Corporate
Services
provides self-directed
brokerage services to employees and executives of corporations,
either directly in partnership with the corporation or through
joint marketing relationships with third-party administrators,
such as 401(k) providers and employee benefit consultants.
Common and preferred
stock.
Clients can purchase common and
preferred stocks and American Depository Receipts traded on any
United States exchange or quotation system.
Exchange Traded
Funds.
Exchange Traded Funds
(ETFs) are baskets of securities (stocks or bonds)
that track recognized indexes. They are similar to mutual funds,
except they trade the same way that a stock trades, on a stock
exchange. We have launched an online resource dedicated to ETFs,
offering tools, education and information for active and
long-term investors seeking alternatives for pursuing their
investment strategies.
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 Web site.
Mutual funds.
Clients can compare and select from a portfolio of over 11,000
mutual funds. Clients can also easily exchange funds within the
same mutual fund family.
Treasury, corporate, government and municipal
bonds.
We offer our clients access to
a variety of treasury, corporate, government and municipal bonds
as well as collateralized mortgage obligations.
Amerivest.
In
October 2004, we introduced Amerivest, an online advisory
service that tailors a portfolio of ETFs to help long-term
investors pursue their financial goals. Our subsidiary,
Amerivest Investment Management, LLC, recommends an investment
portfolio based on a proprietary five-step process centered
around an investors goals and risk tolerance.
Expanding our use of technology to provide
automated responses to the most typical inquiries generated in
the course of clients securities trading and related
activities;
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Ensuring prompt response to client service calls
through adequate staffing with properly trained and motivated
personnel in our client service departments, many of whom have a
Series 7 license; and
Tailoring client service to the particular
expectations of the clients of each of our client segments.
Web sites.
Web sites
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.
Clients are
encouraged to use e-mail to contact our client service
representatives. Our operating standards require a response
within 24 hours of receipt of the e-mail; however, we
strive to respond within 4 hours of the original message.
Client service
representatives.
For clients who
choose to call or whose inquiries necessitate calling one of our
client service representatives, we provide a toll-free number
that connects to advanced call handling systems. These systems
provide automated answering and directing of calls to the proper
department. Our systems also allow linkage between caller
identification and the client database to give the client
service representative immediate access to the clients
account data at the time the call is received. Client service
representatives are available 24 hours a day, seven days a
week (excluding market holidays).
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Maintaining client accounts;
Extending credit in a margin account to the
client;
Settling securities transactions with clearing
houses such as The Depository Trust & Clearing
Corporation and The Options Clearing Corporation;
Settling commissions and clearing fees;
Preparing client trade confirmations and
statements;
Performing designated cashiering functions,
including the delivery and receipt of funds and securities to or
from the client;
Possession, control and safeguarding funds and
securities in client accounts;
Transmitting tax accounting information to the
client and to the applicable tax authority; and
Forwarding prospectuses, proxies and other
shareholder information to clients.
Table of Contents
Table of Contents
Table of Contents
Item 2.
Properties
Item 3.
Legal Proceedings
Table of Contents
Item 4.
Submission of Matters to a Vote of Security
Holders
PART II
Item 5. | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Price Range of Common Stock
Our Common Stock trades on the Nasdaq National Market under the symbol AMTD. The following table shows the high and low sales prices for the Common Stock for the periods indicated, as reported by the Nasdaq National Market. The prices reflect inter-dealer prices and do not include retail markups, markdowns or commissions.
Common Stock Price | ||||||||||||||||
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For the | For the | |||||||||||||||
Fiscal Year Ended | Fiscal Year Ended | |||||||||||||||
September 24, | September 26, | |||||||||||||||
2004 | 2003 | |||||||||||||||
|
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High | Low | High | Low | |||||||||||||
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|
|
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First Quarter
|
$ | 14.67 | $ | 11.16 | $ | 5.73 | $ | 3.30 | ||||||||
Second Quarter
|
$ | 17.67 | $ | 13.40 | $ | 6.40 | $ | 3.83 | ||||||||
Third Quarter
|
$ | 16.38 | $ | 10.25 | $ | 8.93 | $ | 4.88 | ||||||||
Fourth Quarter
|
$ | 12.73 | $ | 9.35 | $ | 13.24 | $ | 7.15 |
The closing sale price of our Common Stock as reported on the Nasdaq National Market on November 26, 2004 was $14.44 per share. As of that date there were 685 holders of record of our Common Stock based on information provided by our transfer agent. The number of stockholders of record does not reflect the actual number of individual or institutional stockholders that own our stock because most stock is held in the name of nominees. Based on information available to us, there are approximately 98,000 beneficial holders of our 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
10
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
ISSUER PURCHASES OF EQUITY SECURITIES | ||||||||||||||||
|
||||||||||||||||
Total Number of | Maximum Number | |||||||||||||||
Shares Purchased | of Shares that May | |||||||||||||||
Total Number of | Average Price | as Part of Publicly | Yet Be Purchased | |||||||||||||
Period | Shares Purchased | Paid per Share | Announced Program | Under the Program | ||||||||||||
|
|
|
|
|
||||||||||||
June 26, 2004 July 30, 2004
|
1,200,000 | $ | 10.54 | 1,200,000 | 29,582,338 | |||||||||||
July 31, 2004 August 27,
2004
|
1,000,000 | $ | 11.04 | 1,000,000 | 28,582,338 | |||||||||||
August 28, 2004
September 24, 2004
|
950,000 | $ | 11.93 | 950,000 | 27,632,338 | |||||||||||
|
|
|
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Total Three months ended
September 24, 2004
|
3,150,000 | $ | 11.12 | 3,150,000 | 27,632,338 | |||||||||||
|
|
|
The Companys Common Stock repurchase program was announced on September 9, 2002. The Companys Board of Directors authorized the Company to repurchase up to 40 million shares over a two-year period expiring September 9, 2004. On May 5, 2004, the Companys Board of Directors extended the stock repurchase program through May 5, 2006. Under the stock repurchase program, as extended, the Company may repurchase, from time to time, up to 70 million shares of Common Stock, a 30 million-share increase from the previous authorization. The September 9, 2002 program, as extended, is the only program currently in effect and there were no programs that expired during the period covered by this report. The Company did not make any repurchases other than through the publicly announced program during the fourth quarter of fiscal 2004.
11
Item 6. | Selected Financial Data |
Fiscal Year Ended* | |||||||||||||||||||||||
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Sept. 24, | Sept. 26, | Sept. 27, | Sept. 28, | Sept. 29, | |||||||||||||||||||
2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||||||
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(In thousands, except per share amounts) | |||||||||||||||||||||||
Consolidated Statements of Operations
Data:
|
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Revenues:
|
|||||||||||||||||||||||
Commissions and clearing fees
|
$ | 560,052 | $ | 472,760 | $ | 252,526 | $ | 269,384 | $ | 389,742 | |||||||||||||
Interest revenue
|
278,550 | 184,175 | 128,649 | 208,479 | 260,479 | ||||||||||||||||||
Other
|
83,372 | 89,511 | 74,182 | 37,763 | 21,890 | ||||||||||||||||||
|
|
|
|
|
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Total revenues
|
921,974 | 746,446 | 455,357 | 515,626 | 672,111 | ||||||||||||||||||
Brokerage interest expense
|
41,861 | 33,192 | 24,564 | 60,896 | 91,679 | ||||||||||||||||||
|
|
|
|
|
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Net revenues
|
880,113 | 713,254 | 430,793 | 454,730 | 580,432 | ||||||||||||||||||
|
|
|
|
|
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Expenses:
|
|||||||||||||||||||||||
Employee compensation and benefits
|
154,792 | 172,159 | 133,897 | 144,820 | 144,198 | ||||||||||||||||||
Clearing and execution costs
|
30,610 | 35,711 | 19,086 | 18,252 | 17,718 | ||||||||||||||||||
Communications
|
39,853 | 41,420 | 31,429 | 33,880 | 36,230 | ||||||||||||||||||
Occupancy and equipment costs
|
42,353 | 57,091 | 57,060 | 63,661 | 48,480 | ||||||||||||||||||
Depreciation and amortization
|
23,224 | 31,708 | 27,945 | 36,033 | 21,624 | ||||||||||||||||||
Professional services
|
27,381 | 31,121 | 25,753 | 42,502 | 55,574 | ||||||||||||||||||
Interest on borrowings
|
2,581 | 5,076 | 5,110 | 11,067 | 16,412 | ||||||||||||||||||
(Gain)/loss on disposal of property
|
1,166 | (5,093 | ) | 403 | 999 | (552 | ) | ||||||||||||||||
Other
|
16,632 | 20,298 | 12,583 | 11,241 | 15,117 | ||||||||||||||||||
Advertising
|
100,364 | 90,415 | 72,638 | 148,009 | 241,169 | ||||||||||||||||||
Gain on sale of investments
|
| | | (9,692 | ) | | |||||||||||||||||
Restructuring and asset impairment charges
|
| 5,991 | 63,406 | 38,268 | 4,726 | ||||||||||||||||||
Debt conversion expense
|
| | | 62,082 | | ||||||||||||||||||
|
|
|
|
|
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Total expenses
|
438,956 | 485,897 | 449,310 | 601,122 | 600,696 | ||||||||||||||||||
|
|
|
|
|
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Pre-tax income (loss)
|
441,157 | 227,357 | (18,517 | ) | (146,392 | ) | (20,264 | ) | |||||||||||||||
Provision for (benefit from) income taxes
|
168,810 | 90,715 | 10,446 | (55,215 | ) | (6,638 | ) | ||||||||||||||||
|
|
|
|
|
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Net income (loss)
|
$ | 272,347 | $ | 136,642 | $ | (28,963 | ) | $ | (91,177 | ) | $ | (13,626 | ) | ||||||||||
|
|
|
|
|
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Basic earnings (loss) per share
|
$ | 0.65 | $ | 0.32 | $ | (0.13 | ) | $ | (0.49 | ) | $ | (0.08 | ) | ||||||||||
Diluted earnings (loss) per share
|
$ | 0.64 | $ | 0.32 | $ | (0.13 | ) | $ | (0.49 | ) | $ | (0.08 | ) | ||||||||||
Weighted average shares outstanding
basic
|
417,629 | 427,376 | 227,327 | 185,830 | 175,025 | ||||||||||||||||||
Weighted average shares outstanding
diluted
|
426,972 | 432,480 | 227,327 | 185,830 | 175,025 |
* | Fiscal 2000 was a 53-week year. All other periods presented are 52-week years. Certain reclassifications have been made to prior years to conform to the current year presentation. |
As of | |||||||||||||||||||||
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Sept. 24, | Sept. 26, | Sept. 27, | Sept. 28, | Sept. 29, | |||||||||||||||||
2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||||
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|
|
|
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Consolidated Balance Sheet Data:
|
|||||||||||||||||||||
Cash and segregated investments
|
$ | 7,957,917 | $ | 8,127,044 | $ | 5,863,507 | $ | 2,068,391 | $ | 338,307 | |||||||||||
Receivable from clients and correspondents, net
|
3,100,572 | 2,202,170 | 1,419,469 | 971,823 | 2,926,981 | ||||||||||||||||
Total assets
|
15,277,021 | 14,404,268 | 9,800,841 | 3,653,871 | 3,798,236 | ||||||||||||||||
Payable to clients and correspondents
|
10,322,539 | 9,611,243 | 6,374,644 | 2,777,916 | 2,618,157 | ||||||||||||||||
Long-term obligations
|
37,803 | 82,489 | 47,645 | 70,145 | 275,000 | ||||||||||||||||
Stockholders equity
|
1,210,908 | 1,235,774 | 1,098,399 | 371,433 | 264,168 |
12
Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
This report contains forward-looking statements within the meaning of the federal securities laws. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in the federal securities laws. In particular, the following statements contained in this report are examples of forward-looking statements: our expectations regarding the significant trends that will affect our financial condition and results of operations; our expectations regarding the effect of client trading activity on our results of operations; our expectations regarding average commissions and clearing fees per trade; our expectations regarding growth of net interest revenue; our expectations regarding the effect of client trading activity on account maintenance fee revenues; our expected amount of employee compensation and benefits expense, clearing and execution costs, occupancy and equipment costs, professional services, other operating expenses and advertising expenses; our expectations regarding our effective income tax rate; our anticipated capital and liquidity needs and our plans to finance such needs; our expectations regarding our stock repurchase program; and our expectations regarding the impact of recently issued accounting pronouncements. These statements only reflect our expectations and are not guarantees of performance. These statements involve risks, uncertainties and assumptions that could cause actual results or performance to differ materially from our expectations. Important factors that could cause our actual results or performance to differ materially from our expectations are set forth under the heading Risk Factors. The forward-looking statements contained in this report speak only as of the date on which the statements were made. We undertake no obligation to publicly update or revise these statements, whether as a result of new information, future events or otherwise.
Glossary of Terms
In discussing and analyzing our business, we utilize several metrics and other terms that are defined in the following Glossary of Terms. Italics indicate other defined terms that appear elsewhere in the Glossary.
Glossary of Terms
Account maintenance fees A $15 quarterly fee assessed on funded brokerage accounts with less than $2,000 in total liquidation value. This fee is not assessed if:
| the account is a beneficiary account or IRA account, | |
| the account has been open less than six months, or | |
| at least four trades have been executed in the account in the last six months. |
This fee is assessed at the close of business on the last Friday of the second month of each quarter (February, May, August, and November).
Activity rate Average client trades per day during the period divided by the average number of total accounts during the period.
Average client trades per account (annualized) Total trades divided by the average number of total accounts during the period, annualized based on the number of trading days in the fiscal year.
Average client trades per day Total trades divided by the number of trading days in the period.
Average commissions and clearing fees per trade Total commissions and clearing fee revenues as reported on the Companys Consolidated Statements of Operations divided by total trades for the period. Commissions and clearing fee revenues primarily consist of trading commissions and revenue-sharing arrangements with market destinations (also referred to as payment for order flow).
Beneficiary accounts Brokerage accounts managed by a custodian, guardian, conservator or trustee on behalf of one or more beneficiaries. Examples include Uniform Gift to Minors Act (UGMA), Uniform Transfer to Minors Act (UTMA), guardianship, conservatorship, trust, pension or profit plan for small business accounts.
13
Brokerage accounts Accounts maintained by the Company on behalf of clients for securities brokerage activities. The primary types of brokerage accounts are cash accounts, margin accounts, IRA accounts and beneficiary accounts.
Cash accounts Brokerage accounts that do not have margin account approval.
Clearing accounts Accounts for which the Company serves as the clearing broker/ dealer on behalf of an unaffiliated introducing broker/ dealer. The Company charges a fee to the introducing broker/ dealer to process trades in clearing accounts.
Client assets The total value of cash and securities in brokerage accounts.
Client credit balances Client cash held in brokerage accounts, excluding balances generated by client short sales, on which no interest is paid. Interest paid on client credit balances is a reduction of net interest revenue.
Client margin balances The total amount of cash loaned to clients in margin accounts. Such loans are secured by client assets. Interest earned on client margin balances is a component of net interest revenue.
EBITDA EBITDA (earnings before interest, taxes, depreciation and amortization) is considered a Non-GAAP financial measure as defined by SEC Regulation G. We consider EBITDA an important measure of our financial performance and of our ability to generate cash flows to service debt, fund capital expenditures and fund other corporate investing and financing activities. EBITDA eliminates the non-cash effect of tangible asset depreciation and intangible asset amortization. EBITDA should be considered in addition to, rather than as a substitute for, pre-tax income, net income and cash flows from operating activities.
EPS from ongoing operations EPS from ongoing operations is considered a Non-GAAP financial measure as defined by SEC Regulation G. We define EPS from ongoing operations as earnings (loss) per share, adjusted to remove any significant unusual gains or charges. We consider EPS from ongoing operations an important measure of the financial performance of our ongoing business. Unusual gains and charges are excluded because we believe they are not likely to be indicative of the ongoing operations of our business. EPS from ongoing operations should be considered in addition to, rather than as a substitute for, basic and diluted earnings per share.
Expenses excluding advertising Expenses excluding advertising is considered a Non-GAAP financial measure as defined by SEC Regulation G. Expenses excluding advertising consists of total expenses, adjusted to remove advertising expense. We consider expenses excluding advertising an important measure of the financial performance of our ongoing business. Advertising spending is excluded because it is largely at the discretion of the Company, varies significantly from period to period based on market conditions and relates to the acquisition of future revenues through new accounts rather than current revenues from existing accounts. Expenses excluding advertising should be considered in addition to, rather than as a substitute for, total expenses.
IRA accounts (Individual Retirement Arrangements) A personal trust account for the exclusive benefit of a U.S. individual (or his or her beneficiaries) that provides tax advantages in accumulating funds to save for retirement or other qualified purposes. These accounts are subject to numerous restrictions on additions to and withdrawals from the account, as well as prohibitions against certain investments or transactions conducted within the account. The Company offers traditional, Roth, Savings Incentive Match Plan for Employees (SIMPLE) and Simplified Employee Pension (SEP) IRA accounts.
Liquid assets Liquid assets is considered a Non-GAAP financial measure as defined by SEC Regulation G. We define liquid assets as the sum of a) non broker-dealer cash and cash equivalents, b) the market value, net of tax, of our investment in Knight Trading Group, Inc. that is not subject to a prepaid variable forward contract for future sale and c) regulatory net capital of our broker-dealer subsidiaries in excess of 5% of aggregate debit items. We consider liquid assets an important measure of our liquidity and of our ability to fund corporate investing and financing activities. Liquid assets should be considered in addition to, rather than as a substitute for, cash and cash equivalents.
14
Liquidation value The net value of a clients account holdings as of the close of a regular trading session. Liquidation value includes client cash and the value of long security positions, less margin balances and the cost to buy back short security positions.
Margin accounts Brokerage accounts in which clients may borrow from the Company to buy securities or for any other purpose, subject to regulatory and Company-imposed limitations.
Net interest revenue Net interest revenue is interest revenues less brokerage interest expense. Interest revenues are generated by charges to clients on margin balances maintained in margin accounts and the investment of cash from operations and segregated cash in short-term marketable securities. Brokerage interest expense consists of amounts paid or payable to clients based on credit balances maintained in brokerage accounts and other brokerage-related interest expense. Brokerage interest expense does not include interest on Company borrowings.
Operating margin Operating margin is considered a Non-GAAP financial measure as defined by SEC Regulation G. We define operating margin as pre-tax income, adjusted to remove advertising expense and any unusual gains or charges. We consider operating margin an important measure of the financial performance of our ongoing business. Advertising spending is excluded because it is largely at the discretion of the Company, varies significantly from period to period based on market conditions and relates to the acquisition of future revenues through new accounts rather than current revenues from existing accounts. Unusual gains and charges are excluded because we believe they are not likely to be indicative of the ongoing operations of our business. Operating margin should be considered in addition to, rather than as a substitute for, pre-tax income and net income.
Qualified accounts All open client accounts with a total liquidation value greater than or equal to $2,000, except clearing accounts. Historically, qualified accounts have generated the vast majority of the Companys revenues. The Companys normal account-opening requirement for non- IRA accounts is $2,000. Additionally, accounts with $2,000 or more of liquidation value are not subject to account maintenance fees and may be eligible for margin account approval.
Segregated cash Client cash and investments segregated in compliance with SEC Rule 15c3-3 (the Customer Protection Rule) and other regulations. Interest earned on segregated cash is a component of net interest revenue.
Total accounts All open client accounts (funded and unfunded), except clearing accounts.
Total trades All client securities trades, which are executed by the Companys broker/ dealer subsidiaries on an agency basis. Total trades are the principal source of the Companys revenues. Such trades include, but are not limited to, trades in equities, options, mutual funds and debt instruments. Substantially all trades generate revenue from commissions, transaction fees and/or revenue-sharing arrangements with market destinations (also known as payment for order flow).
Trading days Days in which the U.S. equity markets are open for a full trading session. Reduced exchange trading sessions are treated as half trading days.
Overview
We provide securities brokerage and clearing execution services to our clients through our principal retail and clearing broker-dealer, Ameritrade, Inc. Substantially all of our net revenues are derived from our brokerage activities and clearing and execution services.
Our primary focus is serving retail clients by providing services at prices that are generally lower than most of our competitors. Our brokerage clients are able to trade securities with us through a variety of channels, principally the Internet. We provide our clients 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.
15
Our largest sources of revenue are commissions earned from our brokerage activities and associated securities transaction clearing fees. Our other principal source of revenue is net interest revenue. We also receive payment for order flow, which results from arrangements we have with many execution agents to receive cash payments in exchange for routing trade orders to these firms for execution and is included in commissions and clearing fees on the Consolidated Statements of Operations.
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. Clearing and execution costs include incremental third-party expenses that tend to fluctuate as a result of fluctuations in client accounts or trades. Examples of expenses included in this category are statement and confirmation processing and postage costs and clearing expenses paid to the National Securities Clearing Corporation, option exchanges and other market centers. Communications expense includes telecommunications, other postage, news and quote costs. Occupancy and equipment costs include the costs of leasing and maintaining our office spaces and the lease expenses on computer and other equipment. Depreciation and amortization includes depreciation on property and equipment, as well as amortization of intangible assets.
Professional services expense includes costs paid to outside firms for assistance with legal, accounting, technology, marketing and general management issues. Interest on borrowings consists of interest expense on our prepaid variable forward contracts, convertible subordinated notes and other borrowings. Other operating expenses include provision for losses, client trade execution price adjustments, travel expenses and other miscellaneous expenses. Advertising costs are expensed as incurred and include production and placement of advertisements in various media, including online, television, print and direct mail. Advertising expenses may increase or decrease significantly from period to period.
We believe that the online securities brokerage market is currently impacted by four significant trends that may affect our financial condition and results of operations. First, price is an important component of the value proposition for the online securities brokerage market. This trend has resulted in the implementation of various strategies such as tiered pricing, account maintenance fees, order-handling fees and per share charges. Second, technology has increased in importance, as delivery channels such as the Internet have become more prevalent. The vast majority of our trades and a significant percentage of our client support activities are now placed through electronic media, primarily the Internet. This increased use of electronic media has helped to decrease operating expenses per trade over the past several years and we believe this trend will continue. Third, the increasing recognition of the need for scale and required investment in technology have resulted in consolidation in the industry. Finally, we believe 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 2004 refers to the fiscal year ended September 24, 2004.
Business Combination
On September 9, 2002, we completed our merger with Datek. Pursuant to the merger agreement, Ameritrade Online Holdings Corp. (AOH) (formerly Ameritrade Holding Corporation) and Datek each became wholly owned subsidiaries of a newly formed holding company, which was renamed Ameritrade Holding Corporation. Upon the closing of the transaction, stockholders of AOH and Datek each received shares of a single class of Common Stock of the new holding company, with the stockholders of AOH and the stockholders of Datek each receiving approximately 50 percent of the total outstanding Common Stock.
We have completed the integration of Dateks business with ours. Dateks client call center function was moved to call centers in Omaha, Nebraska and Ft. Worth, Texas shortly after completion of the merger. Web site enhancements to both Ameritrades and Dateks front-end Web sites, along with a new pricing schedule, were implemented on October 19, 2002. Effective March 14, 2003, we consolidated the clearing function performed by Datek into the Ameritrade, Inc. clearing platform. During fiscal 2004, we phased in a single web
16
Critical Accounting Policies and Estimates
The preparation of our financial statements requires us to make judgments and estimates that may have a significant impact upon our financial results. Note 1 to the consolidated financial statements contains a summary of our significant accounting policies, many of which require the use of estimates and assumptions. We believe that the following areas are particularly subject to managements judgments and estimates and could materially affect our results of operations and financial position.
Valuation of goodwill and acquired intangible assets
We test goodwill and acquired intangible assets for impairment on at least an annual basis, and whenever events and circumstances indicate that the carrying value of an asset may not be recoverable. In performing the impairment tests, we utilize quoted market prices of our Common Stock to estimate the fair value of the Company as a whole. The estimated fair value is then allocated to our reporting units based on operating revenues, and is compared with the carrying value of the reporting units. We evaluate the remaining useful lives of intangible assets each reporting period to determine if events or trends warrant a revision to the remaining period of amortization. We have had no events or trends that have warranted a revision to the originally estimated useful lives.
No impairment charges have resulted from our annual impairment tests. However, in fiscal 2002, we announced plans to dispose of our TradeCast subsidiaries. An impairment loss of $63.4 million was recorded during fiscal 2002 to reflect the amount by which the carrying value of the TradeCast subsidiaries, including goodwill, exceeded its estimated fair value. The impairment loss consisted of $53.5 million of goodwill and $9.9 million of property and equipment.
Valuation and accounting for derivative financial instruments |
We may utilize derivative financial instruments to manage risks such as interest rate risk, foreign currency risk or market risk. Our derivatives policy prohibits us from using derivatives for speculative or trading purposes.
Accounting for derivatives differs significantly depending on whether a derivative is designated as a hedge, which is a transaction intended to reduce a risk associated with a specific balance sheet item or future expected cash flow at the time it is purchased. In order to qualify as a hedge, a derivative must be designated as such by management, who must also continue to evaluate whether the instrument effectively reduces the risk associated with that item.
During fiscal 2003, we entered into a series of prepaid variable forward contracts, which are described later in this Item under the heading Prepaid Variable Forward Contracts. We have designated the forward contracts as cash flow hedges of the forecasted future sales of our investment in Knight common stock. Accordingly, all changes in the fair value of the derivatives are recorded in other comprehensive income, net of income taxes.
To determine if a derivative instrument continues to be an effective hedge, we must make assumptions and judgments about the continued effectiveness of our hedging strategies and the nature and timing of forecasted transactions. If our hedging strategy were to become ineffective, we could no longer apply hedge accounting and our reported results of operations or financial condition could be materially affected.
Estimates of effective income tax rates, deferred income taxes and valuation allowances |
We estimate our income tax expense based on the various jurisdictions where we conduct business. This requires us to estimate our current income tax obligations and to assess temporary differences between the
17
We must make significant judgments to calculate
our provision for income taxes, our deferred income tax assets
and liabilities and any valuation allowance against our deferred
income tax assets.
Results of Operations
Improved conditions in the U.S. equity
markets significantly impacted our results of operations during
fiscal 2004. There is a positive correlation between the volume
of our clients trading activity and our results of
operations. We cannot predict future trading volumes in the
U.S. equity markets. If client trading activity improves,
we expect that it would have a positive impact on our results of
operations. If client trading activity were to decline, we
expect that it would have a negative impact on our results of
operations.
Financial Performance Metrics
Pre-tax income, operating margin and EBITDA
(earnings before interest, taxes, depreciation and amortization)
are key metrics we use in evaluating our financial performance.
Operating margin and EBITDA are both considered non-GAAP
financial measures as defined by the SEC.
We define operating margin as pre-tax income,
adjusted to remove advertising expense and any unusual gains or
charges. We consider operating margin an important measure of
the financial performance of our ongoing business. Advertising
spending is excluded because it is largely at the discretion of
the Company, varies significantly from period to period based on
market conditions and relates to the acquisition of future
revenues through new accounts rather than current revenues from
existing accounts. Unusual gains and charges are excluded
because we believe they are not likely to be indicative of the
ongoing operations of our business. Operating margin should be
considered in addition to, rather than as a substitute for,
pre-tax income and net income.
We consider EBITDA an important measure of our
financial performance and of our ability to generate cash flows
to service debt, fund capital expenditures and fund other
corporate investing and financing activities. EBITDA eliminates
the non-cash effect of tangible asset depreciation and
intangible asset amortization. EBITDA should be considered in
addition to, rather than as a substitute for, pre-tax income,
net income and cash flows from operating activities.
18
The following tables set forth operating margin
and EBITDA in dollars and as a percentage of net revenues for
the periods indicated, and provide reconciliations to pre-tax
income, which is the most directly comparable GAAP measure
(dollars in thousands):
Our improved pre-tax income, operating margin and
EBITDA for fiscal 2004 compared to fiscal 2003 are largely due
to significantly increased net revenues resulting primarily from
increased client trading volumes and increased client margin and
credit balances. While net revenues increased, we did not incur
corresponding significant increases in expenses. More detailed
analysis of net revenues and expenses is presented later in this
discussion.
Trading Activity and
Account Metrics
The following table sets forth several operating
metrics, which we utilize in measuring and evaluating
performance and the results of our operations:
19
Net Interest Revenue Metrics
The following tables set forth metrics that we
use in analyzing net interest revenue:
Consolidated Statements of Operations
Data
The following table summarizes certain data from
our Consolidated Statements of Operations for analysis purposes
(in millions, except percentages):
20
Net
Revenues
Commissions and clearing fees increased
18 percent, primarily due to higher average client trades
per day and increased average commissions and clearing fees per
trade. Average trades per day increased 17 percent to
167,958 for fiscal 2004 from 143,470 in fiscal 2003. Average
client trades per account were 12.4 during fiscal 2004, compared
to 11.6 during fiscal 2003, while the number of qualified
accounts increased 10 percent to 1.68 million as of
September 24, 2004, compared to 1.52 million as of
September 26, 2003. Historically, qualified accounts have
generated the vast majority of our revenues. Average commissions
and clearing fees per trade increased to $13.42 for fiscal 2004
from $13.21 for fiscal 2003, due primarily to higher payment for
order flow revenue per trade during fiscal 2004 compared to
fiscal 2003. We currently expect average commissions and
clearing fees per trade to range from approximately $12.75 to
$13.25 per trade during fiscal 2005, depending on the mix
of trading activity, level of payment for order flow revenue and
other factors.
Net interest revenue increased 57 percent,
due primarily to a 103 percent increase in average client
margin balances, a 13 percent increase in average
segregated cash and a decrease of eight basis points in the
average interest rate paid on client credit balances during
fiscal 2004 compared to fiscal 2003. The increased net interest
revenue resulting from these factors was partially offset by a
decrease of 10 basis points in the average interest rate
earned on segregated cash, a decrease of 14 basis points in
the average interest rate charged on client margin balances and
an increase of 24 percent in client credit balances during
fiscal 2004 as compared to fiscal 2003. We generally expect net
interest revenue to grow as our account base grows. However, it
will also be affected by changes in interest rates and
fluctuations in the levels of client margin borrowing and
deposits.
Other revenues decreased seven percent, due
primarily to lower account maintenance fee income in fiscal 2004
and decreased licensing fee revenue due to the shutdown of our
Watcher Technologies business in fiscal 2003, partially offset
by higher money market fee income during fiscal 2004. Account
maintenance fees are charged based on client assets and trading
activity, therefore fluctuations in client assets or trades per
account may result in fluctuations in revenues from account
maintenance fees.
Expenses
Employee compensation and benefits expense
decreased 10 percent, due primarily to the elimination of
duplicate clearing and technology functions during fiscal 2003
in connection with the Datek merger integration, partially
offset by client service employees added during fiscal 2004 to
accommodate increased client trading volume. Full-time
equivalent employees totaled 1,961 at September 24, 2004,
compared to 1,732 at the end of fiscal 2003. During fiscal 2003,
we also incurred approximately $9.5 million of expense for
bonuses based on synergies achieved in the Datek merger and
approximately $4.3 million of compensation expense for
stock appreciation rights (SARs) assumed in the
Datek merger, due to increases in our stock price and costs of a
cash-out offer to SAR holders. As of September 24, 2004,
there were approximately 7,000 remaining SARs outstanding,
compared with approximately 3.8 million SARs outstanding at
the beginning of fiscal 2003. We expect total employee
compensation and benefits expense to range between
$184 million and $192 million for fiscal 2005.
Clearing and execution costs decreased
14 percent, due primarily to approximately $3 million
in refunds and adjustments in the second quarter of fiscal 2004
for clearing and execution costs related to previous periods and
the effect of eliminating duplicate clearing and execution costs
subsequent to the Datek merger in fiscal 2003, partially offset
by the effect of higher client trading volumes. We expect
clearing and execution costs to range between $33 million
and $37 million for fiscal 2005, depending on the volume of
client trading and new accounts.
Communications expense decreased four percent,
due primarily to the elimination of duplicate
telecommunications, quotes and market information infrastructure
subsequent to the Datek merger in fiscal 2003, partially offset
by the effect of higher client trading volumes.
21
Occupancy and equipment costs decreased
26 percent, due to facilities and equipment reductions
during fiscal 2003 resulting from the Datek merger and lower
technology licensing costs. We expect occupancy and equipment
costs to be approximately $49 million for fiscal 2005.
Depreciation and amortization decreased
27 percent, due primarily to the effects of noncompete
agreements related to the Datek merger that expired and became
fully amortized by the end of fiscal 2003 and tangible assets
that have become fully depreciated.
Professional services expense decreased
12 percent, primarily due to increased usage of consulting
services during fiscal 2003 in connection with the Datek merger
integration. We expect professional services expense to range
between $29 million and $33 million for fiscal 2005.
Interest on borrowings decreased 49 percent,
primarily due to the redemption of our remaining convertible
subordinated notes in October 2003.
(Gain)/loss on disposal of property includes
approximately $5.9 million of gain recognized on the
sale/leaseback of our Kansas City data center facility in fiscal
2003.
Other operating expenses decreased
18 percent, due primarily to Datek-related litigation and
arbitration matters that were resolved favorably during the
fourth quarter of fiscal 2004. We expect other operating
expenses to range between $20 million and $24 million
for fiscal 2005.
Advertising expenses increased 11 percent.
We increased our advertising spending during fiscal 2004 in an
effort to increase the number of new accounts, due primarily to
improved stock market conditions during fiscal 2004. We
generally adjust our level of advertising spending in relation
to stock market activity, in an effort to maximize the number of
new accounts while minimizing the advertising cost per new
account. We expect approximately $110 million to
$130 million of advertising expenditures for fiscal 2005,
depending on market conditions.
Restructuring and asset impairment charges in
fiscal 2003 consisted of approximately $4.8 million in
severance costs related to the closing of TradeCast and the
integration of the Datek and Ameritrade technology
organizations, and approximately $1.2 million of
non-cancelable lease costs in connection with the closing of
TradeCast.
Our effective income tax rate was approximately
38 percent for fiscal 2004, compared to approximately
40 percent for fiscal 2003. The Datek integration has
resulted in a larger percentage of our payroll and assets being
located in lower income tax states such as Nebraska and Texas as
opposed to higher income tax states such as New York and New
Jersey. The adjustment to our net deferred income tax
liabilities to apply the current 39 percent rate resulted
in a lower than normal effective income tax rate for fiscal
2004. We expect our effective income tax rate to range from
approximately 38.5 percent to 39 percent for fiscal
2005.
Net
Revenues
Commissions and clearing fees increased
87 percent, primarily due to the full year impact of adding
876,000 accounts in the fourth quarter of fiscal 2002 as a
result of the Datek merger, increased client trading activity
and increased commissions and clearing fees per trade. Average
client trades per day increased 70 percent to 143,470 for
fiscal 2003 from 84,564 in fiscal 2002. Clients averaged
approximately 11.6 trades per account during fiscal 2003,
compared to approximately 10.2 trades per account for
fiscal 2002. Average commissions and clearing fees per trade
increased to $13.21 in fiscal 2003 from $11.99 for fiscal 2002,
due primarily to the implementation of a new pricing schedule
effective October 19, 2002 and an increase in the average
number of contracts per options trade, partially offset by
slightly lower payment for order flow revenue per trade during
fiscal 2003 compared to fiscal 2002.
Net interest revenue increased 45 percent.
Average client margin balances increased 34 percent in
fiscal 2003 compared to fiscal 2002, due primarily to the Datek
merger. Average segregated cash increased by 149 percent in
fiscal 2003 from fiscal 2002, due primarily to the Datek merger.
The increased interest income
22
Other revenues increased 21 percent, due
primarily to increased account maintenance, clearing and other
fee income resulting from the Datek merger.
Expenses
Employee compensation and benefits expense
increased 29 percent. Although full-time equivalent
employees decreased 19 percent to 1,732 at the end of
fiscal 2003 from 2,150 at the end of fiscal 2002, the average
number of full-time equivalent employees during fiscal 2003
increased by approximately nine percent compared to fiscal 2002
as a result of the Datek merger. During fiscal 2003, we incurred
approximately $9.5 million of expense for bonuses based on
synergies achieved in the Datek merger and approximately
$4.3 million of compensation expense for stock appreciation
rights assumed in the Datek merger, due to increases in our
stock price and costs of a cash-out offer to SAR holders during
fiscal 2003.
Clearing and execution costs increased
87 percent, primarily due to the significantly increased
transaction volume and accounts added through the Datek merger.
Communications expense increased 32 percent,
due primarily to increased expense for quotes, market
information and telecommunications costs associated with
additional accounts and transaction processing volumes resulting
from the Datek merger.
Occupancy and equipment costs were virtually
unchanged, as facilities and equipment reductions in existing
Ameritrade locations were offset by facilities added in the
Datek merger.
Depreciation and amortization increased
14 percent, due primarily to amortization of intangible
assets recorded in the Datek merger, partially offset by lower
depreciation expense due to the effect of tangible assets that
have become fully depreciated.
Professional services expense increased
21 percent, primarily due to increased usage of consulting
services during fiscal 2003 in connection with the Datek merger
integration.
Interest on borrowings was approximately
$5.1 million for both fiscal 2003 and fiscal 2002. Lower
average borrowings on our revolving credit agreement were offset
by interest expense associated with the forward contracts on our
Knight investment in fiscal 2003. We had no borrowings
outstanding on our revolving credit agreement during
fiscal 2003.
(Gain)/loss on disposal of property includes
approximately $5.9 million of gain recognized on the
sale/leaseback of our Kansas City data center facility in
fiscal 2003.
Other operating expenses increased
61 percent, due primarily to increased transaction volume
and accounts added through the Datek merger.
Advertising expenses increased 25 percent,
principally due to our introduction of a new suite of products
and services and new pricing schedule during the first quarter
of fiscal 2003.
Restructuring and asset impairment charges in
fiscal 2003 consisted of approximately $4.8 million in
severance costs related to the closing of TradeCast and the
integration of the Datek and Ameritrade technology
organizations, and approximately $1.2 million of
non-cancelable lease costs in connection with the closing of
TradeCast. Restructuring and asset impairment charges in fiscal
2002 consisted of a $63.4 million impairment charge to
reflect the amount by which the carrying value of the TradeCast
subsidiaries exceeded its estimated fair value. The impairment
loss consisted of $53.5 million of goodwill and
$9.9 million of property and equipment.
Income tax expense was $90.7 million for
fiscal 2003 compared to $10.4 million for fiscal 2002. The
effective income tax rate was approximately 40 percent for
fiscal 2003. We recorded income tax expense in
23
Liquidity and Capital Resources
We have historically financed our liquidity and
capital needs primarily through the use of funds generated from
operations and from borrowings under our credit agreements. We
have also issued Common Stock and convertible subordinated notes
to finance mergers and acquisitions and for other corporate
purposes. Our liquidity needs during fiscal 2004 were financed
primarily from our earnings and cash on hand, and, to a lesser
extent, borrowings on our credit facilities. We plan to finance
our capital and liquidity needs primarily from our earnings and
cash on hand. In addition, we may utilize our revolving credit
facility or issue equity or debt securities.
Dividends from our subsidiaries are another
source of liquidity for the holding company. Some of our
subsidiaries are subject to requirements of the SEC and NASD
relating to liquidity, capital standards, and the use of client
funds and securities, which may limit funds available for the
payment of dividends to the holding company.
Under the SECs 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 an involved calculation described in Rule 15c3-1
that is primarily based on each broker-dealers
aggregate debits, which primarily are a function of
client margin receivables at our broker-dealer subsidiaries.
Since our aggregate debits may fluctuate significantly, our
minimum net capital requirements may also fluctuate
significantly from period to period. The holding company may
make cash capital contributions to broker-dealer subsidiaries,
if necessary, to meet net capital requirements.
On November 12, 2004, our broker-dealer
subsidiary Ameritrade, Inc. was notified by the staff of the
NASD and the staff of the SEC Division of Market Regulation
(collectively the Staffs) that in their view
Ameritrade, Inc.s net capital was below its minimum amount
required under Exchange Act Rule 15c3-1. The asserted
deficiency was based upon the Staffs concerns regarding a
Federal Deposit Insurance Corporation (FDIC) insured
deposit sweep program available to Ameritrade, Inc.s
clients. Ameritrade, Inc. cured the asserted deficiency the next
business day, November 15, 2004. We continue to discuss
this matter with the Staffs. We are unable to predict the
outcome of this matter. See Note 10 of the Notes to
Consolidated Financial Statements for further discussion of this
matter.
Liquid
Assets
We consider liquid assets an important measure of
our liquidity and of our ability to fund corporate investing and
financing activities. Liquid assets is considered a Non-GAAP
financial measure as defined by the SEC. We define liquid assets
as the sum of a) non broker-dealer cash and cash
equivalents and b) regulatory net capital of our
broker-dealer subsidiaries in excess of 5% of aggregate debit
items. We include the excess regulatory net capital of our
broker-dealer subsidiaries in liquid assets rather than simply
including broker-dealer cash and cash equivalents, because
regulatory net capital requirements may limit the amount of cash
available for dividend from the broker-dealer subsidiaries to
the holding company. Liquid assets should be considered as a
supplemental measure of liquidity, rather than as a substitute
for cash and cash equivalents.
24
The decrease in liquid assets from
September 26, 2003 to September 24, 2004 is primarily
due to cash used in investing and financing activities of
$422.8 million (see Cash Flow below), the
impact of the regulatory matter of $85.4 million and an
increase in aggregate debit items that resulted in increased
regulatory net capital required of $40.1 million, partially
offset by net income of $272.3 million. The remaining
$3.4 million of the change in liquid assets is due to
non-cash expenses that are reflected in net income, changes in
non broker-dealer working capital due to timing of income tax
and other payments, and other miscellaneous changes in excess
regulatory net capital.
Cash provided by operating activities was
$329.6 million for fiscal 2004, compared to
$31.8 million for fiscal 2003. Cash flow activity in fiscal
2003 included substantial reductions in accounts payable and
accrued liabilities assumed in the Datek merger, which were
funded by cash acquired in the Datek merger.
Cash used in investing activities was
$66.6 million for fiscal 2004, compared to cash provided by
investing activities of $9.7 million for fiscal 2003. The
cash used in investing activities in fiscal 2004 consisted
primarily of $56.7 million paid in the acquisition of
Bidwell & Company and two small account acquisition
transactions. The cash provided by investing activities in
fiscal 2003 was due primarily to $23.2 million of proceeds
from the sale/ leaseback of our Kansas City data center
facility. We expect to pay approximately $25.9 million in
fiscal 2005 in connection with our acquisition of the online
retail accounts of JB Oxford & Company.
Cash used in financing activities was
$356.3 million for fiscal 2004, compared to cash provided
by financing activities of $8.5 million for fiscal 2003.
The financing activities consisted mainly of $323.7 million
of stock repurchases and the early redemption of the convertible
subordinated notes for $46.8 million. We also borrowed and
repaid $25.0 million on our revolving credit agreement and
$17.5 million on Ameritrade Northwest, Inc.s
(formerly Bidwell) secured credit facility to fund daily
liquidity needs.
On December 15, 2003, we entered into a
third amended and restated revolving credit agreement. The
revolving credit agreement permitted borrowings of up to
$75 million through December 13, 2004, and was secured
primarily by our stock in our subsidiaries and personal
property. The interest rate on borrowings, determined on a
monthly basis, was equal to the lesser of (i) the national
prime rate or (ii) one month LIBOR plus 2.0 percent.
At September 24, 2004, the interest rate on the revolving
credit agreement would have been 3.84 percent. We also paid
a commitment fee of 0.25 percent of the unused borrowings
through the maturity date. We had no outstanding indebtedness
under the revolving credit agreement at September 24, 2004
and no outstanding indebtedness under the prior revolving credit
agreement at September 26, 2003. The revolving credit
agreement contained certain covenants and restrictions,
including limitations on borrowings
25
On December 3, 2004, the agent for the
lenders under our revolving credit agreement agreed in principle
to increase the credit facility to $105 million from the
current $75 million and extend the term to
December 14, 2005 on substantially similar terms. The
interest rate on borrowings will be equal to one month LIBOR
(determined monthly) plus a spread (determined quarterly) of
1.75 percent or 2.00 percent based on a specified
financial ratio. The spread would currently be
1.75 percent. The revolving credit agreement, as amended,
will contain certain covenants and restrictions, including
maintenance of a minimum level of net worth, requiring prior
written consent of the revolving lenders for certain business
combinations and investments, and prohibiting the payment of
cash dividends to stockholders.
Our wholly owned broker-dealer subsidiaries,
Ameritrade, Inc. and iClearing LLC (iClearing), had
access to secured uncommitted credit facilities with financial
institutions of up to $180 million and $160 million as
of September 24, 2004 and September 26, 2003,
respectively. Ameritrade, Inc. also had access to unsecured
uncommitted credit facilities of up to $310 million as of
September 24, 2004 and September 26, 2003. The
financial institutions may make loans under line of credit
arrangements or, in some cases, issue letters of credit under
these facilities. The secured credit facilities require the
Company to pledge client securities to secure outstanding
obligations under these facilities. Borrowings under the secured
and unsecured credit facilities bear interest at a variable rate
based on the federal funds rate. There were no borrowings
outstanding under the secured or unsecured credit facilities as
of September 24, 2004 or September 26, 2003. Letters
of credit in the amount of $40 million as of
September 26, 2003, were issued on our behalf and reduced
the amount available for borrowings under these credit
facilities. The letters of credit, which were for the benefit of
a securities clearinghouse, were issued for the contingent
purpose of financing and supporting margin requirements. We are
generally required to pledge client securities to secure letters
of credit under these credit facilities. No letters of credit
were issued as of September 24, 2004. As of
September 24, 2004 and September 26, 2003,
approximately $490 million and $430 million,
respectively, was available to the Company for either loans or,
in some cases, letters of credit.
During fiscal 2003, we entered into a series of
prepaid variable forward contracts (the forward
contracts) with a counterparty with a total notional
amount of approximately $41.4 million on 7.9 million
underlying Knight shares. The forward contracts each contain a
zero-cost embedded collar on the value of the Knight shares,
with a weighted average floor price of $5.13 per share and
a weighted average cap price of $6.17 per share. At the
inception of the forward contracts, we received cash of
approximately $35.5 million, equal to approximately
86 percent of the notional amount. The forward contracts
mature on various dates in fiscal years 2006 and 2007. At
maturity, we may settle the forward contracts in shares of
Knight or in cash, at our option. If the market price of the
Knight stock at maturity is equal to or less than the floor
price, the counterparty will be entitled to receive one share of
Knight or its cash equivalent for each underlying share. If the
market price of the Knight stock at maturity is greater than the
cap price, the counterparty will be entitled to receive the
number of shares of Knight or its cash equivalent equal to the
ratio of the floor price plus the excess of the market price
over the cap price, divided by the market price, for each
underlying share. If the market price at maturity is greater
than the floor price but less than or equal to the cap price,
the counterparty will be entitled to receive the number of
Knight shares or its cash equivalent equal to the ratio of the
floor price divided by the market price for each underlying
share. Regardless of whether the forward contract is settled in
Knight shares or in cash, we intend to sell the underlying
Knight shares at maturity.
We have designated the forward contracts as cash
flow hedges of the forecasted future sales of 7.9 million
Knight shares. The forward contracts are expected to be
perfectly effective hedges against changes in the cash flows
associated with the forecasted future sales outside the price
ranges of the collars. Accordingly, all changes in the fair
value of the embedded collars are recorded in other
comprehensive income, net of income taxes. As of
September 24, 2004 and September 26, 2003, the total
fair value of the embedded collars was
26
The $35.5 million of cash received on the
forward contracts is accounted for as an obligation on the
Consolidated Balance Sheets. We are accreting interest on the
obligation to the notional maturity amount of $41.4 million
over the terms of the forward contracts using effective interest
rates with a weighted average of approximately 4.3 percent.
Upon settlement of a forward contract, the fair value of the
collar and the realized gain or loss on the Knight stock
delivered to the counterparty or otherwise sold will be
reclassified from other comprehensive income into earnings.
On September 9, 2002, our Board of Directors
authorized a program to repurchase up to 40 million shares
of our Common Stock from time to time over a two-year period
beginning September 19, 2002. On May 5, 2004, our
Board of Directors extended the stock repurchase program through
May 5, 2006. Under the stock repurchase program, as
extended, we may repurchase, from time to time, up to
70 million shares of our Common Stock, a 30 million
share increase from the previous authorization. Through
September 24, 2004, we have repurchased a total of
approximately 42.4 million shares at a weighted average
purchase price of $9.78 per share. During fiscal 2004, we
repurchased approximately 25.8 million shares at a weighted
average purchase price of $12.56 per share.
Off-Balance Sheet Arrangements
The Company does not have any obligations that
meet the definition of an off-balance sheet arrangement and have
or are reasonably likely to have a material effect on our
financial statements.
Contractual Obligations
The following table summarizes our contractual
obligations as of September 24, 2004. Amounts are in
thousands.
27
New Accounting Pronouncements
FIN No. 46
In January 2003, the Financial Accounting Standards Board
(FASB) issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51
(FIN No. 46). In December 2003, the
FASB issued FASB Interpretation No. 46R, which served to
clarify guidance in FIN No. 46. The FASB deferred the
effective date for applying the provisions of
FIN No. 46 for certain variable interest entities to
periods ending after March 15, 2004. The implementation of
FIN No. 46, as revised, had no impact on our
consolidated financial statements.
Risk Factors
Substantially all of our revenues are derived
from securities brokerage and clearing and execution services.
Like other securities 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. Since May 2000, the
U.S. securities markets have been very volatile, which has
resulted in volatility in trading volume and net revenues. The
terrorist attacks in the United States on September 11,
2001, the invasion of Iraq in 2003 and other events also
resulted in substantial market volatility and accompanying
reductions in trading volume and net revenues. In addition, any
general economic downturn would adversely affect trading volumes
and net revenues. Severe market fluctuations or weak economic
conditions could reduce our trading volume and net revenues and
adversely affect our profitability.
Our Common Stock, and the U.S. securities
markets in general, have experienced significant price
fluctuations in recent years. The market prices of securities of
Internet-related companies, in particular, have been especially
volatile. The price of our Common Stock could decrease
substantially. In addition, because the market price of our
Common Stock tends to fluctuate significantly, we could become
the object of securities class action litigation which could
result in substantial costs and a diversion of managements
attention and resources.
The market for electronic brokerage services is
young, rapidly evolving and intensely competitive. We expect the
competitive environment to continue in the future. We face
direct competition from numerous online brokerage firms,
including Charles Schwab & Co., Inc., E*TRADE Financial
Corporation, TD Waterhouse Group, Inc., Fidelity Investments and
Scottrade, Inc. 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
online brokerage services. Some of our competitors have greater
financial, technical, marketing and other resources, offer a
wider range of services and financial products, and have greater
name recognition and a more extensive client base than we do. We
believe that the general financial success of companies within
the online securities industry will continue to attract new
competitors to the industry, such as banks, software development
companies, insurance companies, providers of online financial
information and others. These companies may provide a more
comprehensive suite of services than we do. In addition, our
clearing operations compete with numerous firms that provide
clearing and execution services to the securities industry. We
may not be able to compete effectively with current or future
competitors.
We receive and process trade orders through a
variety of electronic channels, including the Internet, wireless
web, personal digital assistants and our interactive voice
response system. 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, distributed denial of service (DDOS)
attacks, spurious spam attacks, intentional acts of vandalism and
28
The secure transmission of confidential
information over public networks is a critical element of our
operations. We have not experienced network security problems in
the past that have resulted in significant loss to our clients.
However, our networks could be vulnerable to unauthorized
access, computer viruses, phishing schemes and other security
problems. Persons who circumvent security measures could
wrongfully use our confidential information or our clients
confidential information or cause interruptions or malfunctions
in our operations. We could 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.
If our business increases, we may need to expand
and upgrade our transaction processing systems, network
infrastructure and other aspects of our technology. Many of our
systems are, and much of our infrastructure is, designed to
accommodate additional growth without redesign or replacement;
however, we may need to continue to make significant investments
in additional hardware and software to accommodate growth. We
may not be able to project accurately the rate, timing or cost
of any increases in our business, or to expand and upgrade our
systems and infrastructure to accommodate any increases in a
timely manner. Failure to make necessary expansions and upgrades
to our systems and infrastructure could lead to failures and
delays, which could cause a loss of clients or a reduction in
the growth of the client base, increased operating expenses,
financial losses, additional litigation or client claims, and
regulatory sanctions or additional regulatory burdens.
The securities industry is subject to extensive
regulation and broker-dealers are subject to regulations
covering all aspects of the securities business. The SEC, NASD
and other self-regulatory organizations and state and foreign
regulators can, among other things, censure, fine, issue
cease-and-desist orders to, suspend or expel a broker-dealer or
any of its officers or employees. While we neither actively
solicit new accounts nor
29
Recently, various regulatory and enforcement
agencies have been reviewing mutual fund trading, regulatory
reporting obligations, best execution practices, client privacy,
system security and safeguarding practices, Regulation T
compliance and advertising claims as they relate to the
brokerage industry. These reviews could result in enforcement
actions or new regulations, which could adversely affect our
operations.
In addition, we use the Internet as a major
distribution channel to provide services to our clients. A
number of regulatory agencies have recently adopted regulations
regarding client privacy, system security and safeguarding
practices and the use of client information by service
providers. Additional laws and regulations relating to the
Internet could be adopted in the future, including regulations
regarding the pricing, taxation, content and quality of products
and services delivered over the Internet. Complying with these
laws and regulations is expensive and time consuming and could
limit our ability to use the Internet as a distribution channel.
The Internet has experienced, and is expected to
continue to experience, significant growth in the number of
users and amount of traffic. Our success will depend upon the
development and maintenance of the Internets
infrastructure to cope with this increased traffic. The Internet
has experienced a variety of outages and other delays as a
result of damage to portions of its infrastructure and could
face similar outages and delays in the future. Outages and
delays are likely to affect the level of Internet usage and the
processing of transactions on our Web site. In addition, the
Internet could lose its viability due to delays in the
development or adoption of new standards to handle increased
levels of activity.
As of November 26, 2004, J. Joe Ricketts,
our Chairman and Founder, members of his family and trusts held
for their benefit (collectively, the Ricketts
holders) owned approximately 29.1% of our Common Stock and
investment funds affiliated with Silver Lake Partners and TA
Associates (collectively, the Datek holders) owned
approximately 7.6% of our Common Stock. The Datek holders and
the Ricketts holders are parties to a stockholders agreement,
which terminates in 2007, that obligates the parties to vote
their shares in favor of a board of directors, of which
currently three are to be designated by the Ricketts holders,
two are to be designated by the Datek holders and three are to
be independent directors selected with the agreement of the
parties. The agreement also obligates the parties to vote in
favor of specified merger and sale of the company transactions
that are approved by the requisite directors and to vote against
specified merger and sale of the company transactions unless
they are approved by the requisite directors. Accordingly, these
stockholders have significant influence over the outcome of any
corporate transaction or other matters submitted to our
stockholders for approval, including the election of directors,
mergers, consolidations and the sale of all or substantially all
of our assets. The interests of these stockholders could differ
from the interests of other stockholders. In addition, third
parties could be discouraged from making a tender offer or bid
to acquire us because of this concentration of ownership or the
provisions of the stockholders agreement.
30
Provisions in the stockholders agreement among
the Ricketts holders and the Datek holders, our certificate of
incorporation and bylaws and Delaware law will make it difficult
for any party to acquire control of us in a transaction not
approved by the requisite number of directors. These provisions
include:
These provisions could delay or prevent a change
of control or change in management that might provide
stockholders with a premium to the market price of their Common
Stock.
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 might be unable to effectively use new technologies or adapt
our services to emerging industry standards, or develop,
introduce and market enhanced or new products and services. In
addition, the adoption of new Internet, networking or
telecommunications technologies or other technological changes
could require us to incur substantial expenditures to modify or
adapt our services or infrastructure.
We have arrangements with several execution
agents to receive cash payments in exchange for routing trade
orders to these firms for execution. Competition between
execution agents and the implementation of order handling rules
and decimalization of stock prices have made it less profitable
for execution agents to offer order flow payments to
broker-dealers. On a per trade basis, our payment for order flow
revenue has decreased significantly over the past several years.
These payments could continue to decrease on a per trade basis,
which could have a material adverse effect on our revenues and
profitability. The SEC currently is inquiring into brokerage
industry trade execution practices at the market open, including
any related payment for order flow. The SEC could take action to
prohibit payment for order flow, which could have a material
adverse effect on our revenues and profitability.
The SEC, 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 measure, defined by the SEC, of a
broker-dealers 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 NASD could expel us from membership, which
could ultimately lead to our liquidation, or they could impose
censures, fines or other sanctions. 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
maintain or expand our business. For example, on
November 12, 2004, our broker-dealer subsidiary Ameritrade,
Inc. was notified by the staff of the NASD and the staff of the
SEC Division of Market Regulation (collectively the
Staffs) that in their view Ameritrade, Inc.s
net capital was below its minimum amount required under Exchange
Act Rule 15c3-1. The asserted deficiency was based upon the
Staffs concerns regarding a Federal Deposit Insurance
Corporation (FDIC) insured deposit sweep program
available to Ameritrade, Inc.s clients. Ameritrade, Inc.
cured the asserted deficiency the next business day,
November 15, 2004. We continue to
31
Ameritrade, Inc. 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 and
execution services include the confirmation, receipt, settlement
and delivery functions involved in securities transactions.
Clearing brokers also assume direct responsibility for the
possession and control of client securities and other assets and
the clearance of client 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. Errors in performing clearing
functions, including clerical and other errors related to the
handling of funds and securities held by us on behalf of clients
and introducing brokers, could lead to civil penalties imposed
by applicable authorities as well as losses and liability in
related lawsuits brought by clients and others.
We make margin loans to clients collateralized by
client securities and periodically borrow and lend securities to
cover trades. A significant portion of our net revenues is
derived from interest on margin loans. To the extent that these
margin loans exceed client cash balances maintained with us, we
must obtain financing from third parties. We may not be able to
obtain this financing on favorable terms or in sufficient
amounts. By permitting clients to purchase securities on margin,
we are subject to risks inherent in extending credit, especially
during periods of rapidly declining markets in which the value
of the collateral held by us could fall below the amount of a
clients indebtedness. In addition, in accordance with
regulatory guidelines, we collateralize borrowings of securities
by depositing cash or securities with lenders. Sharp changes in
market values of substantial amounts of securities and the
failure by parties to the borrowing transactions to honor their
commitments could have a material adverse effect on our revenues
and profitability.
We intend to pursue strategic acquisitions of
businesses and technologies. Acquisitions may entail numerous
risks, including:
As part of our growth strategy, we regularly
consider, and from time to time engage in, discussions and
negotiations regarding strategic transactions such as
acquisitions, mergers and combinations within our industry. The
purchase price for possible acquisitions could be paid in cash,
through the issuance of Common Stock or other of our securities,
borrowings or a combination of these methods.
We cannot be certain that we will be able to
continue to identify and to consummate strategic transactions
and no assurance can be given with respect to the timing,
likelihood or business effect of any possible transaction. For
example, in many cases we begin negotiations that we
subsequently decide to suspend or terminate for a variety of
reasons. However, opportunities may arise from time to time that
we will evaluate. Any transactions that we consummate would
involve risks and uncertainties to us. These risks could cause
the failure of any anticipated benefits of an acquisition to be
realized, which could have a material adverse effect on our
revenues and profitability.
32
We are subject to internal control requirements
under the Sarbanes-Oxley Act of 2002, as well as rules and
regulations adopted by the SEC and the Public Company Accounting
Oversight Board. These laws, rules and regulations continue to
evolve and could become increasingly stringent in the future. We
have undertaken actions to enhance our ability to comply with
the requirements of the Sarbanes-Oxley Act of 2002, including,
but not limited to, the increased allocation of internal audit
department resources, documentation of existing controls and
implementation of new controls or modification of existing
controls as deemed appropriate. To date, several control
deficiencies have been identified and we are in the process of
remediating them.
On November 12, 2004, our broker-dealer
subsidiary Ameritrade, Inc. was notified by the staff of the
NASD and the staff of the SEC Division of Market Regulation
(collectively the Staffs) that they believe that for
regulatory purposes certain funds held in banks on behalf of
clients are liabilities and assets of Ameritrade, Inc. rather
than liabilities and assets only of the banks. The resulting
assets have not been allowed for purposes of Ameritrade,
Inc.s regulatory net capital calculation. Accordingly, in
the Staffs view Ameritrade, Inc.s net capital was
below its minimum amount required under Exchange Act
Rule 15c3-1. Our independent registered public accounting
firm has concluded that the controls in place relating to the
matter were not properly designed to provide reasonable
assurance that these funds were properly recorded and disclosed
in the financial statements and assets were appropriately
considered in regulatory net capital computations. In their
judgment, this is a material weakness in internal control over
financial reporting. See Note 10 of the Notes to
Consolidated Financial Statements for further discussion of this
regulatory matter.
We continue to devote substantial time and
resources to the documentation and testing of our controls, and
to planning for and implementation of remedial efforts in those
instances where remediation is indicated. If we fail to maintain
the adequacy of our internal controls, as such standards are
modified, supplemented or amended from time to time, we could be
subject to regulatory actions, civil or criminal penalties or
shareholder litigation. In addition, failure to maintain
adequate internal controls could result in financial statements
that do not accurately reflect our financial condition, results
of operations and cash flows.
Table of Contents
Fiscal Year Ended
September 24, 2004
September 26, 2003
September 27, 2002
$
% of Rev.
$
% of Rev.
$
% of Rev.
$
542,687
61.7%
$
318,670
44.7%
$
117,930
27.4%
(100,364
)
(11.4%
)
(90,415
)
(12.7%
)
(72,638
)
(16.9%
)
(1,166
)
(0.1%
)
5,093
0.7%
(403
)
(0.1%
)
0.0%
(5,991
)
(0.8%
)
(63,406
)
(14.7%
)
$
441,157
50.1%
$
227,357
31.9%
$
(18,517
)
(4.3%
)
$
466,962
53.1%
$
264,141
37.0%
$
14,538
3.4%
(23,224
)
(2.6%
)
(31,708
)
(4.4%
)
(27,945
)
(6.5%
)
(2,581
)
(0.3%
)
(5,076
)
(0.7%
)
(5,110
)
(1.2%
)
$
441,157
50.1%
$
227,357
31.9%
$
(18,517
)
(4.3%
)
Fiscal Year Ended
04 vs. 03
03 vs. 02
September 24,
September 26,
September 27,
%
%
2004
2003
2002
Change
Change
167,958
143,470
84,564
17%
70%
12.4
11.6
10.2
7%
14%
5.0
%
4.7
%
4.1
%
7%
13%
41.74
35.80
21.06
17%
70%
$13.42
$13.21
$11.99
2%
10%
248.5
249.5
249.0
(0%
)
0%
3,520,000
3,171,000
3,001,000
11%
6%
1,677,000
1,520,000
1,211,000
10%
26%
$68.8
$54.8
$33.9
26%
62%
Table of Contents
Average Balance (millions)
Fiscal Year Ended
04 vs. 03
03 vs. 02
%
%
2004
2003
2002
Change
Change
$
7,572
$
6,706
$
2,695
13%
149%
$
3,222
$
1,588
$
1,183
103%
34%
$
8,916
$
7,188
$
3,269
24%
120%
Average Yield/(Cost)
Fiscal Year Ended
04 vs. 03
03 vs. 02
Yield/Cost
Yield/Cost
2004
2003
2002
Inc./(Dec.)
Inc./(Dec.)
1.10%
1.20%
1.83%
(0.10%
)
(0.63%
)
4.90%
5.04%
5.62%
(0.14%
)
(0.58%
)
(0.15%
)
(0.23%
)
(0.35%
)
(0.08%
)
(0.12%
)
Fiscal Year
04 vs. 03
03 vs. 02
2004
2003
2002
% Change
% Change
$
560.1
$
472.8
$
252.5
18%
87%
278.6
184.2
128.6
51%
43%
83.4
89.5
74.2
(7%
)
21%
922.0
746.4
455.4
24%
64%
41.9
33.2
24.6
26%
35%
880.1
713.3
430.8
23%
66%
154.8
172.2
133.9
(10%
)
29%
30.6
35.7
19.1
(14%
)
87%
39.9
41.4
31.4
(4%
)
32%
42.4
57.1
57.1
(26%
)
0%
23.2
31.7
27.9
(27%
)
14%
27.4
31.1
25.8
(12%
)
21%
2.6
5.1
5.1
(49%
)
0%
1.2
(5.1
)
0.4
N/A
N/A
16.6
20.3
12.6
(18%
)
61%
100.4
90.4
72.6
11%
25%
6.0
63.4
(100%
)
(91%
)
439.0
485.9
449.3
(10%
)
8%
441.2
227.4
(18.5
)
94%
N/A
168.8
90.7
10.4
86%
772%
$
272.3
$
136.6
$
(29.0
)
99%
N/A
$
236.7
$
151.0
$
104.1
57%
45%
38.3
%
39.9
%
(56.2
%)
Note:
Details may not sum to totals and subtotals due
to rounding differences.
Table of Contents
Fiscal Year Ended September 24, 2004
Compared to Fiscal Year Ended September 26,
2003
Table of Contents
Fiscal Year Ended September 26, 2003
Compared to Fiscal Year Ended September 27,
2002
Table of Contents
Table of Contents
Table of Contents
September 24,
September 26,
2004
2003
Change
$
155,342
$
248,623
$
(93,281
)
(99,400
)
(55,634
)
(43,766
)
55,942
192,989
(137,047
)
-
142,305
(142,305
)
$
55,942
$
335,294
$
(279,352
)
*
Includes the impact of a regulatory matter
related to an FDIC-insured deposit sweep program as of
September 24, 2004. Excluding the impact of the regulatory
matter, excess broker-dealer regulatory net capital would be
approximately $85.4 million and liquid assets would be
approximately $141.3 million as of September 24, 2004.
See Note 10 of the Notes to Consolidated Financial
Statements for further discussion of the regulatory matter.
Cash Flow
Loan Facilities
Table of Contents
Prepaid Variable Forward
Contracts
Table of Contents
Stock Repurchase Program
Payments due by period (fiscal years):
Less than
More than
1 year
1-3 years
3-5 years
5 years
Contractual Obligations
Total
2005
2006-07
2008-09
After 2009
$
$
$
$
$
87,864
21,460
29,900
12,670
23,834
31,458
15,184
14,727
1,547
25,870
25,870
14,908
14,908
41,362
41,362
$
201,462
$
77,422
$
85,989
$
14,217
$
23,834
(1)
Our obligation to our CEO for deferred
compensation will become payable not sooner than the day after
the CEOs employment with the Company terminates. The
obligation is presented in the fiscal 2005 column as the entire
amount of the compensation has already been earned by the CEO.
(2)
Represents the notional amount of the prepaid
variable forward contracts. The actual amount of the obligation
is dependent on the market value of the underlying Knight shares
at maturity of the contracts and may be settled in Knight shares
or cash, at our option.
Table of Contents
Stock Market Volatility and Other
Securities Industry Risks Could Adversely Affect Our
Business.
The Market Price of Our Common Stock Could
Fluctuate Significantly.
Substantial Competition Could Reduce Our
Market Share and Harm Our Financial Performance.
Systems Failures and Delays Could Harm Our
Business.
Table of Contents
a loss of clients or a reduction in the growth of
our client base;
increased operating expenses;
financial losses;
additional litigation or other client
claims; and
regulatory sanctions or additional regulatory
burdens.
Our Networks Could be Vulnerable to
Security Risks.
Capacity Constraints of Our Systems Could
Harm Our Business.
Regulatory and Legal Uncertainties Could
Harm Our Business.
Table of Contents
The Success of Our Business Will Depend on
Continued Development and Maintenance of the Internet
Infrastructure.
Our Principal Stockholders Are Parties to a
Stockholders Agreement, Which Could Limit the Ability of Other
Stockholders to Influence Corporate Matters.
Table of Contents
The Terms of the Stockholders Agreement,
Our Charter Documents and Delaware Law Could Inhibit a Takeover
That Stockholders May Consider Favorable.
the presence of a classified board of directors;
the ability of the board of directors to issue
and determine the terms of preferred stock;
advance notice requirements for inclusion of
stockholder proposals at stockholder meetings; and
the anti-takeover provisions of Delaware law.
We Will Need to Introduce New Products and
Services to Remain Competitive.
Changes in Payments for Routing Our
Clients Orders Could Adversely Affect Our
Business.
Failure to Comply With Net Capital
Requirements Could Adversely Affect Our Business.
Table of Contents
Our Clearing Operations Expose Us to
Liability for Errors in Clearing Functions.
We Are Exposed to Credit
Risk.
Acquisitions Involve Risks That Could
Adversely Affect Our Business.
difficulties in the integration of acquired
operations, services and products;
diversion of managements attention from
other business concerns;
assumption of unknown material liabilities of
acquired companies;
amortization of acquired intangible assets, which
could reduce future reported earnings;
potential loss of clients or key employees of
acquired companies; and
dilution to existing stockholders.
Table of Contents
Failure to Maintain Adequate Internal
Controls Could Adversely Affect Our Business.
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Market risk generally represents the risk of loss that may result from the potential change in the value of a financial instrument as a result of fluctuations in interest rates and market prices. We have established policies, procedures and internal processes governing our management of market risks in the normal course of our business operations. We do not hold any market risk-sensitive instruments for trading purposes.
We seek to control the risks associated with our client activities by requiring clients to maintain margin collateral in compliance with regulatory and internal guidelines. We monitor required margin levels daily and, pursuant to such guidelines, require our clients to deposit additional collateral, or to reduce positions, when necessary. We seek to control risks associated with our securities lending and borrowing activities by requiring credit approvals for counterparties, by monitoring the market value of securities loaned and collateral values for securities borrowed on a daily basis and requiring additional cash as collateral for securities loaned or return of collateral for securities borrowed when necessary, and by participating in a risk-sharing program offered through a securities clearinghouse.
As a fundamental part of our brokerage business, we hold interest earning assets, mainly funds required to be segregated in compliance with federal regulations. These funds totaled $7.8 billion at September 24, 2004 and $7.9 billion at September 26, 2003. We invest these funds in repurchase agreements, fixed-rate U.S. Treasury securities and other qualified securities. Our interest earning assets are financed primarily by short-term interest bearing liabilities, totaling $10.1 billion at September 24, 2004 and $9.6 billion at September 26, 2003, in the form of client credit balances. We earn a net interest spread on the difference between amounts earned on client margin balances and amounts paid on client credit balances. Because we establish the rate paid on client credit balances and the rate charged on client margin balances, a substantial portion of our interest rate risk is under our direct management. However, changes in interest rates may have a beneficial or adverse affect on our results of operations. We might not change interest rates paid on client credit balances proportionately to changes in interest rates charged on client margin balances. As a result, a
33
At September 24, 2004 and September 26, 2003, we had $0 and $46.3 million, respectively, of convertible subordinated notes outstanding, which bore interest at a fixed rate of 5.75 percent. We had no borrowings outstanding under our $75 million revolving credit agreement, which bears interest at a floating rate, as of September 24, 2004 and September 26, 2003. We hold two marketable equity securities, our investments in approximately 7.9 million shares of Knight and 75,700 shares of The Nasdaq Stock Market, Inc., which were recorded at fair value of $73.3 million ($45.3 million net of tax) at September 24, 2004 and have exposure to market price risk. The same securities were recorded at fair value of $90.6 million ($55.0 million net of tax) at September 26, 2003. The potential loss in fair value resulting from a hypothetical 10 percent adverse change in prices quoted by the stock exchanges was approximately $7.3 million at September 24, 2004. During fiscal 2003, we entered into a series of prepaid variable forward contracts with a total notional amount of approximately $41.4 million on 7.9 million underlying Knight shares. The forward contracts each contain an embedded collar on the value of the Knight shares, with a weighted average floor price of $5.13 per share and a weighted average cap price of $6.17 per share. We have designated the forward contracts as cash flow hedges of the forecasted future sales of 7.9 million Knight shares. As of September 24, 2004 and September 26, 2003, the fair value of the embedded collars was approximately $28.7 million and $46.7 million, respectively, and was included under the caption Prepaid variable forward derivative instrument on the Consolidated Balance Sheets. The forward contracts are expected to be perfectly effective hedges against changes in cash flows associated with changes in the value of Knight shares outside the price ranges of the collars.
At September 26, 2003, we had an equity index swap arrangement for the purpose of hedging our obligation under our deferred compensation plan for our CEO. Changes in the fair value of this instrument were offset by changes in our obligation to our CEO. Effective April 15, 2004, the CEO changed his investment election under the deferred compensation arrangement from an equity index to a group of fixed income securities. Accordingly, we terminated our equity index swap arrangement.
Our revenues and financial instruments are denominated in U.S. dollars, and we generally do not invest, except for hedging purposes, in derivative financial instruments or derivative commodity instruments.
34
Item 8. | Financial Statements and Supplementary Data |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public
Accounting Firm
|
36 | |||
Consolidated Balance Sheets
|
37 | |||
Consolidated Statements of Operations
|
38 | |||
Consolidated Statements of Stockholders
Equity
|
39 | |||
Consolidated Statements of Cash Flows
|
40 | |||
Notes to Consolidated Financial Statements
|
41 |
35
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors and Stockholders of
We have audited the accompanying consolidated
balance sheets of Ameritrade Holding Corporation and its
subsidiaries (collectively, the Company) as of
September 24, 2004 and September 26, 2003, and the
related consolidated statements of operations,
stockholders equity and cash flows for each of the three
years in the period ended September 24, 2004. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial
statements present fairly, in all material respects, the
financial position of Ameritrade Holding Corporation and its
subsidiaries as of September 24, 2004 and
September 26, 2003, and the results of their operations and
their cash flows for each of the three years in the period ended
September 24, 2004 in conformity with accounting principles
generally accepted in the United States of America.
Omaha, Nebraska
36
/s/ DELOITTE & TOUCHE LLP
Table of Contents
AMERITRADE HOLDING CORPORATION AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
2004
2003
(In thousands)
ASSETS
$
155,342
$
248,623
7,802,575
7,878,421
2,818,726
2,921,732
3,100,572
2,202,170
29,870
36,159
770,094
734,903
247,052
238,147
73,759
91,740
279,031
52,373
$
15,277,021
$
14,404,268
LIABILITIES AND STOCKHOLDERS
EQUITY
$
3,441,802
$
3,142,436
10,322,539
9,611,243
131,355
169,569
28,738
46,668
37,803
36,194
46,295
14,753
34,351
89,123
81,738
14,066,113
13,168,494
4,351
4,351
1,195,218
1,188,444
330,519
58,172
(346,060
)
(41,452
)
993
708
25,887
25,551
1,210,908
1,235,774
$
15,277,021
$
14,404,268
See notes to consolidated financial statements.
37
AMERITRADE HOLDING CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
OPERATIONS
2004
2003
2002
(In thousands,
except per share amounts)
$
560,052
$
472,760
$
252,526
278,550
184,175
128,649
83,372
89,511
74,182
921,974
746,446
455,357
41,861
33,192
24,564
880,113
713,254
430,793
154,792
172,159
133,897
30,610
35,711
19,086
39,853
41,420
31,429
42,353
57,091
57,060
23,224
31,708
27,945
27,381
31,121
25,753
2,581
5,076
5,110
1,166
(5,093
)
403
16,632
20,298
12,583
100,364
90,415
72,638
5,991
63,406
438,956
485,897
449,310
441,157
227,357
(18,517
)
168,810
90,715
10,446
$
272,347
$
136,642
$
(28,963
)
$
0.65
$
0.32
$
(0.13
)
$
0.64
$
0.32
$
(0.13
)
417,629
427,376
227,327
426,972
432,480
227,327
See notes to consolidated financial statements.
38
AMERITRADE HOLDING CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY
Total
Retained
Accumulated
Common
Total
Common Stock
Additional
Earnings/
Other
Shares
Stockholders
Common
Paid-In
(Accumulated
Treasury
Deferred
Comprehensive
Outstanding
Equity
Class A
Class B
Stock
Capital
Deficit)
Stock
Compensation
Income
(In thousands)
215,295
$
371,433
$
1,990
$
164
$
$
384,175
$
(49,507
)
$
(1,746
)
$
215
$
36,142
(28,963
)
(28,963
)
(17,459
)
(17,459
)
(46,422
)
(1,210
)
(4,830
)
(4,830
)
60
88
5
123
(40
)
217,342
774,442
(1,992
)
(164
)
4,330
772,268
619
913
6
846
61
1,850
1,850
925
2
1,056
(925
)
792
432,106
1,098,399
4,336
1,160,200
(78,470
)
(7,317
)
967
18,683
136,642
136,642
34,734
34,734
(28,001
)
(28,001
)
135
135
143,510
(15,399
)
(85,769
)
(85,769
)
265
382
(30
)
1,349
(937
)
12,813
68,008
15
17,586
50,407
10,566
10,566
678
122
(122
)
678
429,785
1,235,774
4,351
1,188,444
58,172
(41,452
)
708
25,551
272,347
272,347
(9,686
)
(9,686
)
10,471
10,471
(449
)
(449
)
272,683
(25,760
)
(323,660
)
(323,660
)
8
111
59
52
3,177
24,981
5,837
19,144
428
428
285
144
(144
)
285
306
306
407,210
$
1,210,908
$
$
$
4,351
$
1,195,218
$
330,519
$
(346,060
)
$
993
$
25,887
See notes to consolidated financial statements.
39
AMERITRADE HOLDING CORPORATION AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH
FLOWS
2004
2003
2002
(In thousands)
$
272,347
$
136,642
$
(28,963
)
11,066
13,917
26,170
12,158
17,791
1,775
9,668
30,152
6,125
1,166
(5,093
)
63,809
791
2,639
927
75,846
(2,213,312
)
(896,204
)
106,673
(1,523,870
)
(490,776
)
(755,876
)
(782,701
)
71,174
(225,871
)
10,748
1,975
293,017
1,224,954
692,781
573,754
3,236,599
641,419
(40,403
)
(94,990
)
3,645
(7,361
)
(19,922
)
(4,167
)
329,614
31,842
88,763
(9,810
)
(9,013
)
(1,871
)
26
24,779
692
(56,735
)
(6,055
)
111,230
(36
)
(66,555
)
9,711
110,051
35,489
42,500
(89,328
)
(1,168
)
(22,500
)
13,806
49,419
930
(323,660
)
(85,769
)
(4,830
)
428
10,566
1,850
(356,254
)
8,537
(24,550
)
(86
)
135
(93,281
)
50,225
174,264
248,623
198,398
24,134
$
155,342
$
248,623
$
198,398
$
44,442
$
22,595
$
16,623
$
166,547
$
80,484
$
8,489
$
12,465
$
24,679
$
654
$
$
$
770,112
See notes to consolidated financial statements.
40
AMERITRADE HOLDING CORPORATION AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Basis of
Presentation
The
consolidated financial statements include the accounts of
Ameritrade Holding Corporation, a Delaware corporation, and its
wholly owned subsidiaries (collectively, the
Company). Intercompany balances and transactions
have been eliminated. The Company reports on a
fifty-two/fifty-three week year. Each fiscal year ends on the
last Friday of the month of September. Fiscal years 2004, 2003
and 2002 were each fifty-two week years.
Nature of
Operations
The Company
provides securities brokerage services through its broker-dealer
subsidiaries. The Company also provides trading execution and
clearing services for its own broker-dealer operations and for
unaffiliated broker-dealers through its subsidiary, Ameritrade,
Inc. The Companys broker-dealer subsidiaries are subject
to regulation by the Securities and Exchange Commission
(SEC), NASD, Inc. (NASD) and the various
exchanges in which they maintain membership.
Capital
Stock
Prior to
September 9, 2002, the authorized capital stock of the
Company consisted of Class A Common Stock, Class B
Common Stock and Preferred Stock. Each share of Class A and
Class B Common Stock was entitled to one vote on all
matters, except that the Class B Common Stock was entitled
to elect a majority of the directors of the Company and the
Class A Common Stock was entitled to elect the remainder of
the directors. Each class of Common Stock was equally entitled
to dividends if, as and when declared by the Board of Directors.
Shares of Class A Common Stock were not convertible, while
each share of Class B Common Stock was convertible into one
share of Class A Common Stock at the option of the
Class B holder or upon the occurrence of certain events.
Effective September 9, 2002, the authorized capital stock
of the Company consists of a single class of Common Stock and
one or more series of Preferred Stock as may be authorized for
issuance by the Companys Board of Directors.
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.
Securities
Transactions
Client
securities transactions are recorded on a settlement date basis
with such transactions generally settling three business days
after the trade date. Revenues and expenses related to
securities transactions, including revenues from execution
agents, are recorded on a trade date basis. Securities owned by
clients, including those that collateralize margin or similar
transactions, are not reflected in the accompanying consolidated
financial statements.
Depreciation and
Amortization
Depreciation is provided on a straight-line basis using
estimated useful service lives of three to seven years.
Leasehold improvements are amortized over the lesser of the
economic useful life of the improvement or the term of the
lease. Acquired intangible assets are amortized on a
straight-line basis over their estimated useful lives, ranging
from three to 23 years.
Long-Lived
Assets
The Company
adopted Statement of Financial Accounting Standards
(SFAS) No. 144,
Accounting for the
Impairment or Disposal of Long-Lived Assets,
effective
September 29, 2001. The Company reviews its long-lived
assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of such asset
may not be recoverable. The Company evaluates recoverability by
comparing the undiscounted cash flows associated with the asset
to the assets carrying amount. Long-lived assets
classified as held for sale are reported at the
lesser of carrying amount or fair value less cost to sell.
41
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Cash and Cash
Equivalents
The
Company considers temporary, highly liquid investments with an
original maturity of three months or less to be cash
equivalents, except for amounts required to be segregated in
compliance with federal regulations.
Segregated Cash and
Investments
Cash and
investments, consisting primarily of repurchase agreements,
fixed-rate U.S. Treasury securities and other qualified
securities, at the Companys clearing subsidiaries of
$7.8 billion and $7.9 billion as of September 24,
2004 and September 26, 2003, respectively, have been
segregated in special reserve bank accounts for the benefit of
clients under Rule 15c3-3 of the Securities Exchange Act of
1934 (the Exchange Act) and other regulations.
Securities Borrowed and
Loaned
Securities
borrowed and loaned transactions are recorded at the amount of
cash collateral advanced or received. Securities borrowed
transactions require the Company to provide the counterparty
with collateral in the form of cash or other securities. The
Company receives collateral in the form of cash or other
securities for securities loaned transactions. For these
transactions, the fees received or paid by the Company are
recorded as interest revenue and brokerage interest expense,
respectively.
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 $47.0 million at
September 26, 2003. The Company determined the estimated
fair value of the notes using available market information.
Goodwill and Acquired Intangible
Assets
The Company has
recorded goodwill for purchase business combinations to the
extent the purchase price of each acquisition exceeded the fair
value of the net identifiable assets of the acquired company.
The Company adopted SFAS No. 142,
Goodwill and
Other Intangible Assets,
on September 29, 2001. The
Company completed its transitional impairment test of goodwill
under SFAS No. 142 during the Companys second
fiscal quarter of 2002. The Company tests goodwill for
impairment on at least an annual basis. In performing the
impairment tests, the Company utilizes quoted market prices of
the Companys Common Stock to estimate the fair value of
the Company as a whole. The estimated fair value is then
allocated to the Companys reporting units based on
operating revenues, and is compared with the carrying value of
the reporting units. No impairment charges resulted from the
annual or transitional impairment tests.
Investments
Investments are accounted for under the equity method when the
Company has the ability to exercise significant influence over
the investees operating and financial policies. The cost
method is used for investments that do not meet equity method
criteria. Declines in fair value of cost method investments that
are considered other than temporary are accounted for as
realized losses. The Companys 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
Consolidated 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 Companys normal accounting policies. Software
development costs that do not meet capitalization criteria are
expensed as incurred.
Deferred
Compensation
Company
Common Stock held in a rabbi trust pursuant to a Company
deferred compensation plan is recorded at the fair value of the
stock at the time it is transferred to the rabbi trust and is
classified as treasury stock. The corresponding deferred
compensation liability is recorded as a component of
stockholders equity at the current fair value of the
Common Stock.
42
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Advertising
The Company expenses advertising costs as they are incurred.
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
statement carrying amounts and tax bases of assets and
liabilities using enacted tax rates.
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, except when
such assumed exercise or conversion would have an antidilutive
effect on EPS.
Stock Based
Compensation
Prior to
September 27, 2003, the Company accounted for its
stock-based compensation using the intrinsic-value method in
accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees
(APB
No. 25), and related interpretations. Effective
September 27, 2003, the Company adopted the fair value
based method of accounting for stock-based compensation under
SFAS No. 123,
Accounting for Stock-Based
Compensation,
using the prospective transition method of
SFAS No. 148,
Accounting for Stock-Based
Compensation Transition and Disclosure, an amendment
of FASB Statement No. 123.
Stock-based compensation
expense for fiscal 2004 was $0.3 million. Pro forma
information regarding stock-based compensation expense, net
income (loss) and earnings (loss) per share is required by
SFAS No. 148. This information is required to be
presented as if the Company had accounted for its stock-based
awards to employees under the fair value based method for all
periods presented. The fair value of options was calculated at
the date of the grant using the Black-Scholes option pricing
model with the following weighted average assumptions for fiscal
2004, 2003 and 2002, respectively: risk-free interest rate of
3.25 percent, 3.0 percent and 4.0 percent;
dividend yield of zero for all years; expected volatility of
68 percent, 72 percent and 82 percent; and an
expected option life of five years for all years. Pro forma net
income (loss) and earnings (loss) per share are as follows for
the fiscal years ended:
Foreign Currency
Translation
Assets and
liabilities of the Companys Canadian subsidiaries that are
denominated in Canadian dollars are translated into
U.S. dollars using the exchange rate in effect at each
period end. Revenues and expenses are translated at the average
exchange rate during the period. The functional currency of our
Canadian subsidiaries is the local currency; therefore the
effects of foreign currency translation adjustments arising from
differences in exchange rates from period to period are deferred
and included in accumulated other comprehensive income.
Comprehensive Income
(Loss)
Comprehensive
income (loss) consists of net income (loss); unrealized gains
(losses) on securities available-for-sale and cash flow hedges,
net of related income taxes; and foreign
43
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
currency translation adjustments. These results
are incorporated into the Consolidated Statements of
Stockholders Equity.
Derivatives and Hedging
Activities
The Company
utilizes derivative instruments to manage risks, which may
include market price, interest rate and foreign currency risks.
The Company does not use derivative instruments for speculative
or trading purposes. Derivatives are recorded on the
Consolidated Balance Sheets as assets or liabilities at fair
value. Derivative instruments used to hedge exposure to changes
in the fair value of assets or liabilities are considered fair
value hedges. Derivative instruments used to hedge exposure to
the variability of expected future cash flows or other
forecasted transactions are considered cash flow hedges. The
Company formally documents the risk management objective and
strategy for each hedge transaction.
Reclassifications
Certain items in prior years consolidated financial
statements have been reclassified to conform to the current year
presentation.
FIN No. 46
In January 2003, the Financial Accounting Standards Board
(FASB) issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51
(FIN No. 46). In December 2003, the
FASB issued FASB Interpretation No. 46R, which served to
clarify guidance in FIN No. 46. The FASB deferred the
effective date for applying the provisions of
FIN No. 46 for certain variable interest entities to
periods ending after March 15, 2004. The implementation of
FIN No. 46, as revised, had no impact on the
Companys consolidated financial statements.
On October 8, 2004, the Company completed
the purchase of approximately 45,000 retail client accounts from
JB Oxford & Company, a subsidiary of JB Oxford
Holdings, Inc. The purchase price was approximately
$25.9 million.
On January 2, 2004, the Company completed
the acquisition of Bidwell & Company
(Bidwell) for $55 million, including
$2 million that was deposited into an escrow account for
indemnification purposes. The Company utilized cash on hand to
fund the acquisition. The Company allocated approximately
$19.1 million of the Bidwell purchase price to acquired
intangible assets for the fair value of the Bidwell client
relationships, to be amortized over 10- to 15-year periods; and
$0.3 million to the fair value of a noncompete agreement,
to be amortized over a three-year period. Amounts allocated to
Bidwell acquired intangible assets, and their respective
amortization periods, were based on an independent valuation.
On February 13, 2004, the Company completed
its purchase of approximately 11,000 online brokerage accounts
from BrokerageAmerica, LLC. The purchase price was
$1.25 million. The entire purchase price has been allocated
to acquired intangible assets for the fair value of the
BrokerageAmerica, LLC client relationships. This intangible
asset is being amortized over a 20-year period.
On June 13, 2003, the Company completed its
purchase of approximately 16,500 Mydiscountbroker.com, Inc.
(MDB) client accounts from SWS Group, Inc. The
purchase price was $4.2 million. The entire purchase price
has been allocated to acquired intangible assets for the fair
value of the MDB client relationships. This intangible asset is
being amortized over a 20-year period.
On September 9, 2002, the merger of
Ameritrade Online Holdings Corp. (AOH) (formerly
Ameritrade Holding Corporation), a Delaware corporation, and
Datek Online Holdings Corp. (Datek), a Delaware
corporation, was completed. The merger was accomplished through
corporate reorganizations whereby AOH became a wholly owned
subsidiary of the Company, then Datek was acquired and became a
wholly owned subsidiary of the Company. Pursuant to the terms of
the merger agreement, each share of
44
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Common Stock of AOH was automatically converted
into one share of Common Stock of the Company, and the
stockholders of Datek in the aggregate received
216,341,375 shares of Common Stock of the Company and
approximately $235 million in cash of Datek, which was
distributed concurrently with the closing of the merger.
The following table summarizes changes in the
carrying amount of goodwill by operating segment:
Acquired intangible assets consist of the
following as of the fiscal years ended:
Amortization expense on acquired intangible
assets was $12.2 million, $17.8 million and
$1.8 million for fiscal years 2004, 2003 and 2002,
respectively. The Company estimates amortization expense on
existing acquired intangible assets will be approximately
$12.5 million for each of the five succeeding fiscal years.
45
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Amounts receivable from and payable to brokers,
dealers and clearing organizations consist of the following as
of the fiscal years ended:
Property and equipment consists of the following
as of the fiscal years ended:
In January 2003, the Company completed the sale
of its Kansas City, Missouri data center facility for
$23.5 million in cash. In connection with the sale, the
Company leased back approximately 20 percent of the
facility for a minimum five-year period. The Company realized a
gain on the sale of approximately $9.4 million. In
accordance with sale-leaseback accounting, approximately
$5.3 million of the gain was recognized in earnings as of
the sale date and the remaining $4.1 million was deferred
to be recognized over the term of the leaseback.
Knight Trading Group, Inc.
(Knight)
The Company owns approximately 7.9 million shares of
Knight, representing approximately seven percent of
Knights outstanding common shares as of September 24,
2004. Knight is a publicly held company that is a market maker
in equity securities. The Company accounts for its investment in
Knight as a marketable equity security available-for-sale. As of
September 24, 2004 and September 26, 2003, the
Companys investment in Knight was valued at
$72.8 million and $90.0 million, respectively. The
Companys cost basis is $0.7 million; therefore the
gross unrealized gain was $72.1 million and
$89.3 million at September 24, 2004 and
September 26, 2003, respectively.
46
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
During fiscal 2003, the Company and a
counterparty entered into a series of prepaid variable forward
contracts on the Knight shares (see Note 16).
The Nasdaq Stock Market, Inc.
(Nasdaq)
As of September 24, 2004 and September 26, 2003, the
Company owned 75,700 shares of Nasdaq. The Company accounts
for its investment in Nasdaq as a marketable equity security
available-for-sale.
Adirondack Trading Partners, LLC
(Adirondack)
As of September 24, 2004 and September 26, 2003, the
Company owned a minority interest in Adirondack, a company
formed to trade listed equity and index options. The Company
accounts for its investment in Adirondack under the cost method.
The following table summarizes the Companys
investments, liabilities associated with the prepaid variable
forward contracts, and related deferred income tax effects (see
the Consolidated Statements of Stockholders Equity for a
complete summary of comprehensive income):
On September 9, 2002, the Company announced
plans to dispose of its TradeCast subsidiaries, which provided
direct access trade execution and software designed for active
traders, due to redundancies with Dateks technology. An
impairment loss of $63.4 million was recorded during fiscal
2002 to reflect the amount by which the carrying value of the
TradeCast subsidiaries, including goodwill, exceeded its
estimated fair value. The impairment loss consisted of
$53.5 million of goodwill and $9.9 million of property
and equipment. The Company also recorded restructuring charges
in fiscal 2003 consisting primarily of severance pay and
benefits for approximately 110 employees in connection with the
closing of the TradeCast business and consolidation of the
Ameritrade and Datek technology organizations, and
non-cancelable lease costs in connection with the closing of the
TradeCast business.
During the first six months of fiscal 2001, due
to unfavorable market and economic conditions, the Company
terminated approximately 450 employees, primarily at its Omaha,
Nebraska and Fort Worth, Texas
47
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
call centers, and consolidated office space in
certain facilities. On June 27, 2001, the Company announced
a reorganization of its corporate and management structure. In
connection with the reorganization, a comprehensive facilities
consolidation began and approximately 30 additional employees
were terminated. Offices in Fort Worth, Texas; Omaha,
Nebraska; Baltimore, Maryland; and Purchase, New York were
affected by the consolidation.
The following is a summary of the activity in the
Companys restructuring and acquisition exit liabilities:
The Company expects to utilize the remaining
occupancy and equipment restructuring liabilities during fiscal
2005. Acquisition employee compensation liabilities are expected
to be paid during fiscal 2005. Remaining acquisition occupancy
and equipment exit liabilities are expected to be utilized over
the respective lease periods through fiscal 2011.
On December 15, 2003, the Company entered
into a third amended and restated revolving credit agreement.
The revolving credit agreement permits borrowings of up to
$75 million through December 13,
48
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
2004, and is secured primarily by the
Companys stock in its subsidiaries and personal property.
The interest rate on borrowings, determined on a monthly basis,
is equal to the lesser of (i) the prime rate or
(ii) one month LIBOR plus 2.0 percent. At
September 24, 2004, the interest rate on the revolving
credit agreement would have been 3.84 percent. The Company
also pays a commitment fee of 0.25 percent of the unused
borrowings through the maturity date. The Company had no
outstanding indebtedness under the revolving credit agreement at
September 24, 2004 and no outstanding indebtedness under
the prior revolving credit agreement at September 26, 2003.
The revolving credit agreement contains certain covenants and
restrictions, including limitations on borrowings based on the
amount of excess net capital at the Companys broker-dealer
subsidiaries, requiring prior written consent of the revolving
lenders for certain business combinations and investments, and
prohibiting the payment of cash dividends to stockholders. We
were in compliance with or obtained waivers for all covenants
under the revolving credit agreements.
On December 3, 2004, the agent for the
lenders under the Companys revolving credit agreement
agreed in principle to increase the credit facility to
$105 million from the current $75 million and extend
the term to December 14, 2005 on substantially similar
terms. The interest rate on borrowings will be equal to one
month LIBOR (determined monthly) plus a spread (determined
quarterly) of 1.75 percent or 2.00 percent based on a
specified financial ratio. The spread would currently be
1.75 percent. The revolving credit agreement, as amended,
will contain certain covenants and restrictions, including
maintenance of a minimum level of net worth, requiring prior
written consent of the revolving lenders for certain business
combinations and investments, and prohibiting the payment of
cash dividends to stockholders.
The Company, through its wholly owned
broker-dealer subsidiaries Ameritrade, Inc. and iClearing LLC
(iClearing), had access to secured uncommitted
credit facilities with financial institutions of up to
$180 million and $160 million as of September 24,
2004 and September 26, 2003, respectively. Ameritrade, Inc.
also had access to unsecured uncommitted credit facilities of up
to $310 million as of September 24, 2004 and
September 26, 2003. The financial institutions may make
loans under line of credit arrangements or, in some cases, issue
letters of credit under these facilities. The secured credit
facilities require the Company to pledge client securities to
secure outstanding obligations under these facilities.
Borrowings under the secured and unsecured credit facilities
bear interest at a variable rate based on the federal funds
rate. There were no borrowings outstanding under the secured or
unsecured credit facilities as of September 24, 2004 or
September 26, 2003. Letters of credit in the amount of
$40 million as of September 26, 2003, were issued on
behalf of the Company and reduced the amount available for
borrowings under these credit facilities. The letters of credit,
which were for the benefit of a securities clearinghouse, were
issued for the contingent purpose of financing and supporting
margin requirements. The Company is generally required to pledge
client securities to secure letters of credit under these credit
facilities. No letters of credit were issued as of
September 24, 2004. As of September 24, 2004 and
September 26, 2003, approximately $490 million and
$430 million, respectively, was available to the Company
for either loans or, in some cases, letters of credit.
In August 1999, the Company issued
$200 million of 5.75 percent convertible subordinated
notes due August 1, 2004. The notes were convertible into
6,142,740 shares of Class A Common Stock. The notes
were convertible into shares of 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. The notes were subject to
redemption at a premium on or after August 6, 2002, 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.
In February 2001, $152.4 million of the
Companys convertible subordinated notes were converted for
approximately 4.7 million shares of Class A Common
Stock and $58.7 million of cash. In October 2002, the
49
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Company repurchased and retired approximately
$1.4 million of its convertible subordinated notes for
approximately $1.2 million in cash, resulting in a gain on
debt retirement of approximately $0.2 million. In October
2003, the Company redeemed the remaining $46.3 million of
convertible subordinated notes for an amount equal to
101.15 percent of the principal amount, resulting in a loss
on the redemption of approximately $0.8 million which is
included in other expense in the Consolidated Statement of
Operations.
Provision for income taxes is comprised of the
following for fiscal years ended:
1.
Nature of Operations and Summary of
Significant Accounting Policies
Table of Contents
Table of Contents
2004
2003
2002
$
272,347
$
136,642
$
(28,963
)
186
(14,782
)
(15,739
)
(13,215
)
$
257,751
$
120,903
$
(42,178
)
$
0.65
$
0.32
$
(0.13
)
$
0.62
$
0.28
$
(0.19
)
$
0.64
$
0.32
$
(0.13
)
$
0.60
$
0.28
$
(0.19
)
Table of Contents
Recently Issued Accounting
Pronouncements:
2.
Business Combinations, Goodwill and Acquired
Intangible Assets
Table of Contents
Private
All
Client
Other
Total
$
707,941
$
89
$
708,030
32,539
32,539
(5,666
)
(5,666
)
734,814
89
734,903
36,481
36,481
(1,290
)
(1,290
)
$
770,005
$
89
$
770,094
(1)
Purchase accounting adjustments consist of
approximately $27.5 million of adjustments to assets and
liabilities relating to the Companys merger with Datek,
and an adjustment to reclassify approximately $5.0 million
of the Datek purchase price which was initially allocated to an
intangible asset for the value of a contract associated with
Dateks Watcher Technologies LLC (Watcher)
subsidiary. The Company discontinued the Watcher business during
fiscal 2003 and accordingly reduced the purchase price allocated
to the Watcher contract to zero.
(2)
Represents tax benefit of exercises of
replacement stock options that were issued in connection with
the Datek merger. The tax benefit of an option exercise is
recorded as a reduction of goodwill to the extent the Company
recorded fair value of the replacement option in the purchase
accounting. To the extent any gain realized on an option
exercise exceeds the fair value of the replacement option
recorded in the purchase accounting, the tax benefit on the
excess is recorded as additional paid-in capital.
2004
2003
Gross
Net
Gross
Net
Carrying
Accumulated
Carrying
Carrying
Accumulated
Carrying
Amount
Amortization
Amount
Amount
Amortization
Amount
$
271,176
$
(24,351
)
$
246,825
$
250,413
$
(12,266
)
$
238,147
300
(73
)
227
$
271,476
$
(24,424
)
$
247,052
$
250,413
$
(12,266
)
$
238,147
Table of Contents
3.
Receivable from and Payable to Brokers,
Dealers and Clearing Organizations
2004
2003
$
2,760,352
$
2,817,971
54,064
100,506
4,310
3,255
$
2,818,726
$
2,921,732
$
3,370,610
$
3,091,389
51,113
46,474
20,079
4,573
$
3,441,802
$
3,142,436
4.
Property and Equipment
2004
2003
$
12,589
$
14,020
56,230
54,442
15,957
16,388
15,694
13,052
100,470
97,902
(70,600
)
(61,743
)
$
29,870
$
36,159
5.
Investments
Table of Contents
Difference
(Other
September 24,
September 26,
Comprehensive
2004
2003
Income)
$
72,827
$
89,986
$
(17,159
)
447
624
(177
)
73,274
90,610
$
(17,336
)
485
1,130
N/A
$
73,759
$
91,740
N/A
$
(28,738
)
$
(46,668
)
$
17,930
$
(37,803
)
$
(36,194
)
N/A
$
(27,958
)
$
(35,608
)
$
7,650
11,208
18,667
(7,459
)
$
(16,750
)
$
(16,941
)
$
191
6.
Restructuring and Asset Impairment
Charges
Table of Contents
Employee
Occupancy and
Professional
Compensation
Equipment
Services
Other
Total
$
975
$
11,323
$
2,430
$
4,239
$
18,967
(975
)
(5,604
)
(595
)
(439
)
(7,613
)
5,719
1,835
3,800
11,354
4,772
1,219
5,991
(3,510
)
(4,785
)
(342
)
(622
)
(9,259
)
1,262
2,153
1,493
3,178
8,086
(1,262
)
(2,112
)
(1,493
)
(3,178
)
(8,045
)
$
$
41
$
$
$
41
$
27,663
$
14,128
$
$
5,496
$
47,287
(2,044
)
(389
)
(2,433
)
25,619
14,128
5,107
44,854
2,783
1,396
4,179
(25,695
)
(10,611
)
(5,107
)
(41,413
)
2,707
4,913
7,620
4,172
1,016
5,188
(6,302
)
(816
)
(7,118
)
$
577
$
5,113
$
$
$
5,690
7.
Notes Payable
Table of Contents
8.
Convertible Subordinated Notes
Table of Contents
9.
Income Taxes
2004
2003
2002
$
132,315
$
51,748
$
4,286
25,543
8,815
35
1,284
159,142
60,563
4,321
14,735
23,019
4,152
(5,158
)
7,133
1,973
91
9,668
30,152
6,125
$
168,810
$
90,715
$
10,446
A reconciliation of the federal statutory tax
rate to the effective tax rate applicable to pre-tax income
(loss) follows for the fiscal years ended:
2004
2003
2002
35
%
35
%
(35
)%
3
5
7
80
4
38
%
40
%
56
%
50
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Deferred tax assets (liabilities) are
comprised of the following as of the fiscal years ended:
2004
2003
$
13,999
$
23,533
6,936
1,572
3,485
3,739
24,420
28,844
(4,763
)
19,657
28,844
(90,940
)
(91,936
)
(16,751
)
(16,942
)
(1,089
)
(1,704
)
(108,780
)
(110,582
)
$
(89,123
)
$
(81,738
)
At September 24, 2004, the Company has approximately $3.9 million of federal net operating loss carryforwards, which expire beginning December 31, 2018, and are subject to annual limitation on utilization in future periods. Subsidiaries of the Company also have approximately $95.4 million of separate state operating loss carryforwards, which expire between 2008 and 2010. Because the realization of the tax benefit from state loss carryforwards is dependent on certain subsidiaries generating sufficient state taxable income in future periods, the Company has provided a valuation allowance against the computed benefit in order to reflect the tax benefit expected to be realized.
10. | Net Capital |
The Companys broker-dealer subsidiaries are subject to the SEC Uniform Net Capital Rule (Rule 15c3-1 under the Exchange Act), which requires the maintenance of minimum net capital, as defined. Net capital and the related net capital requirement may fluctuate on a daily basis.
Reflecting the effect of a regulatory matter discussed in the following paragraphs, the Companys broker-dealer subsidiaries had aggregate net capital of $30.6 million and $279.5 million as of September 24, 2004 and September 26, 2003, respectively, resulting in an aggregate net capital deficiency of $40.3 million as of September 24, 2004 and excess aggregate minimum net capital of $224.4 million as of September 26, 2003. Excluding the effect of the regulatory matter, the Companys aggregate net capital would have been $262.3 million as of September 24, 2004, which would have exceeded aggregate minimum net capital requirements by $191.4 million.
On November 12, 2004, the Companys broker-dealer subsidiary Ameritrade, Inc. was notified by the staff of the NASD and the staff of the SEC Division of Market Regulation (collectively the Staffs) that they believe that for regulatory purposes certain funds held in banks on behalf of clients are liabilities and assets of Ameritrade, Inc. rather than liabilities and assets only of the banks. The resulting assets have not been allowed for purposes of Ameritrade, Inc.s regulatory net capital calculation. Accordingly, in the Staffs view Ameritrade, Inc.s net capital was below its minimum amount required under Exchange Act Rule 15c3-1. Ameritrade, Inc. cured the asserted deficiency on November 15, 2004, the first business day following the notification.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The asserted deficiency was based upon the Staffs concerns regarding a Federal Deposit Insurance Corporation (FDIC) insured deposit sweep program available to Ameritrade, Inc.s clients wherein funds were deposited, through an intermediary agent, into FDIC-insured deposit accounts at banks (Program Banks). The Staffs view is that Ameritrade, Inc. did not for regulatory purposes effectively move client free credit balances to bank accounts established in client names at the Program Banks. Ameritrade, Inc. was also notified, on November 5, 2004, by the NASD that client funds deposited in the FDIC-insured sweep program should be included in Ameritrade, Inc.s computation of reserve requirements under Exchange Act Rule 15c3-3. A deposit into Ameritrade, Inc.s reserve account was made to fund the asserted Rule 15c3-3 requirement effective November 5, 2004. As of September 24, 2004, a deposit of $231.7 million into Ameritrade, Inc.s reserve account would have been required in accordance with the Staffs position.
Ameritrade, Inc. informed the Staffs that it believes that the free credit balances were effectively transferred to the Program Banks in accordance with well-established banking law, that the accounts held at the Program Banks were the obligations of the Program Banks to each client and not obligations of Ameritrade, Inc. and that the FDIC insurance passed through to each client in accordance with FDIC regulations. Accordingly, Ameritrade, Inc. believes that it has been in compliance with Rules 15c3-1 and 15c3-3.
At the direction of the NASD, Ameritrade, Inc. filed a notice describing the asserted net capital deficiency as well as Ameritrade, Inc.s position on the matter on November 12, 2004 in accordance with Exchange Act Rule 17a-11. Ameritrade, Inc. cured the asserted deficiency the first business day following the notification by causing the transfer of the cash in the FDIC-insured accounts to a money market fund in accounts in the names of the clients. No client funds were lost and the Company believes that the client balances in the FDIC-insured deposit accounts at the Program Banks were, at all times, protected by FDIC insurance on a pass-through basis and no client balance was at risk. Ameritrade, Inc. has ceased offering the FDIC-insured product pending resolution of this matter. At the direction of the NASD, Ameritrade, Inc. filed, on December 8, 2004, amended Form X-17A-5 Financial and Operational Combined Uniform Single (FOCUS) Reports for the months of May through September 2004 reflecting the Staffs position.
This matter had no impact on the Companys results of operations or net cash flows for any period presented.
The Company continues to discuss this matter with the Staffs. The SEC or NASD may elect to pursue disciplinary or other action with respect to this matter, which could result in censures, fines, suspensions or other sanctions. The Company is unable to predict the outcome of this matter.
11. | Stock Option and Incentive Plans |
The Company has four stock incentive plans. The Ameritrade Holding Corporation 1996 Long-Term Incentive Plan (the Long-Term Incentive Plan) and the 1996 Directors Incentive Plan (the Directors Plan) were established by the Company. The Ameritrade Holding Corporation 1998 Stock Option Plan (the 1998 Plan) (formerly known as the Datek Online Holdings Corp. 1998 Stock Option Plan) and the Ameritrade Holding Corporation 2001 Stock Incentive Plan (the 2001 Plan) (formerly known as the Datek Online Holdings Corp. 2001 Stock Incentive Plan) were established by Datek and amended and restated by the Company effective September 9, 2002 in connection with the Datek merger.
The Long-Term Incentive Plan authorizes the award of options to purchase Common Stock, Common Stock appreciation rights, shares of Common Stock and performance units. The Long-Term Incentive Plan reserves 20,000,000 shares of the Companys Common Stock for issuance to eligible employees. The Directors Plan authorizes the award of options to purchase Common Stock and shares of Common Stock. The Directors Plan reserves 1,460,000 shares of the Companys Common Stock for issuance to non-employee directors. Options are generally granted by the Company at not less than the fair market value at grant date, vest over a one to four year period, and expire 10 years after the grant date.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The 1998 Plan and 2001 Plan authorize the award of options to purchase Common Stock. The 1998 Plan reserves 35,502,818 shares of the Companys Common Stock for issuance to employees or consultants of the Company; non-employee directors of the Company; or employees of a corporation or other business enterprise which has been acquired by the Company, who hold options to purchase the acquired companys stock, if the Company has agreed to assume those options. The 2001 Plan reserves 15,976,268 shares of the Companys Common Stock for issuance to directors or non-voting observers to the Board of Directors, officers and employees of the Company. In connection with the Datek merger, on September 9, 2002 the Company granted 14,179,898 replacement options pursuant to the 1998 Plan, 9,618,010 replacement options pursuant to the 2001 Plan and 1,399,873 replacement options pursuant to individual compensation arrangements.
The following is a summary of the status of the
Companys outstanding stock options as of the fiscal years
ended:
2004
2003
2002
Weighted
Weighted
Weighted
Average
Average
Average
Number of
Exercise
Number of
Exercise
Number of
Exercise
Options
Price
Options
Price
Options
Price
30,144
$
5.98
31,472
$
5.20
6,810
$
9.67
921
$
11.21
15,194
$
5.59
2,610
$
5.41
5,943
$
1.70
19,255
$
4.71
(3,177
)
$
4.35
(12,813
)
$
3.82
(619
)
$
1.36
(519
)
$
6.30
(3,709
)
$
5.19
(2,527
)
$
6.37
27,369
$
6.31
30,144
$
5.98
31,472
$
5.20
17,956
$
6.14
13,925
$
6.06
22,954
$
4.72
28,886
29,319
40,493
$
6.60
$
3.40
$
3.66
$
2.03
$
0.72
(1) | Options granted with exercise prices above and below market value during fiscal 2002 consist of replacement options granted in connection with the Datek merger. |
53
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The following table summarizes information about
the stock options outstanding at September 24, 2004:
Options Outstanding
Options Exercisable
Weighted
Average
Weighted
Weighted
Remaining
Average
Average
Number of
Contractual
Exercise
Number of
Exercise
Range of Exercise Prices
Options
Life (in years)
Price
Options
Price
1,957
2.8
$
2.14
1,917
$
2.10
19,560
7.4
$
5.10
12,368
$
5.07
3,593
7.1
$
9.34
2,559
$
8.78
1,167
8.9
$
12.39
20
$
15.19
909
5.0
$
16.81
909
$
16.81
87
5.5
$
23.19
87
$
23.19
96
4.6
$
36.50
96
$
36.50
27,369
7.0
$
6.31
17,956
$
6.14
From February 2001 to February 2002, Datek issued
to certain employees of a former subsidiary, The Island Holding
Company, Inc. (Island), Stock Appreciation Rights
(SARs) indexed to the value of Dateks common
shares. The Company issued replacement SARs in connection with
the Datek merger. Upon exercise of these SARs, the Company must
deliver cash in an amount equal to the excess, if any, of the
market value of the Companys shares over the exercise
price. The Company includes the market value of SARs in accrued
expenses in the Consolidated Balance Sheets. The Company
recognized compensation expense of $0.1 million,
$4.3 million and $0.9 million during fiscal 2004, 2003
and 2002, respectively, for changes in the market value of these
SARs after the grant date and for premium amounts paid to
repurchase SARs from the holders. The following table summarizes
SARs activity for the fiscal years ended:
2004
2003
2002
Weighted
Weighted
Weighted
Number
Average
Number
Average
Number
Average
of SARs
Exercise Price
of SARs
Exercise Price
of SARs
Exercise Price
42
$
4.71
3,770
$
4.68
5,600
$
3.59
(31
)
$
4.67
(642
)
$
4.53
(1,715
)
$
1.32
(2,869
)
$
4.70
(4
)
$
4.84
(217
)
$
4.86
(115
)
$
1.78
7
$
4.81
42
$
4.71
3,770
$
4.68
4
$
4.76
31
$
4.66
2,792
$
4.62
Included as a reduction of additional paid-in capital are limited recourse notes from stockholders of $0.3 million and related accrued interest of $0.1 million as of September 26, 2003. These notes were secured by the Common Stock issued pursuant to each note, matured in five years from execution and accrued interest at the prime rate. The notes and accrued interest were collected in full from the stockholders during fiscal 2004.
12. | Employee Benefit Plans |
The Company has 401(k) and profit-sharing plans under which the annual and matching contributions are determined at the discretion of the Board of Directors. Profit-sharing and matching contributions expense was $5.6 million, $4.7 million and $0 for fiscal years 2004, 2003 and 2002, respectively.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. | Earnings (Loss) Per Share |
The following is a reconciliation of the
numerator and denominator used in the computation of basic and
diluted earnings (loss) per share for the fiscal years ended:
2004
2003
2002
$
272,347
$
136,642
$
(28,963
)
417,629
427,376
227,327
9,322
5,073
21
31
426,972
432,480
227,327
$
0.65
$
0.32
$
(0.13
)
$
0.64
$
0.32
$
(0.13
)
In fiscal 2004 and fiscal 2003, options to purchase approximately 1.1 million and 4.8 million weighted average shares of Common Stock, respectively, were outstanding but were not included in the computation of diluted earnings per share because the options exercise prices exceeded the average market price of the Common Stock during the period. Because the Company reported a net loss in fiscal 2002, the calculation of diluted loss per share for that year does not include common stock equivalents, as they are anti-dilutive, resulting in a reduction of loss per share. In addition, the convertible subordinated notes are not included in the calculations above because the effect would have been anti-dilutive for all periods.
14. | 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:
Minimum Lease
Sublease
Net Lease
Fiscal Year Ending
Payments
Proceeds
Commitments
$
21,460
$
(1,764
)
$
19,696
18,198
(1,601
)
16,597
11,702
(976
)
10,726
6,722
(957
)
5,765
5,948
(951
)
4,997
23,834
(911
)
22,923
$
87,864
$
(7,160
)
$
80,704
Rental expense was approximately $24.3 million, $34.9 million and $36.2 million for fiscal years 2004, 2003 and 2002, respectively.
Legal In September 1998, a putative class action complaint was filed against the Company by Zannini, et al. in the District Court of Douglas County, Nebraska, claiming the Company was not able to handle the volume of subscribers to its Internet brokerage services. The complaint, as amended, sought injunctive relief enjoining alleged deceptive, fraudulent and misleading practices, equitable relief compelling the Company to increase capacity, and unspecified compensatory damages. In May 2001, the Company filed a motion for summary judgment in the matter, which the plaintiffs opposed. The District Court granted summary judgment for the Company on January 2, 2002, and the plaintiffs appealed. On August 1, 2003, the Nebraska Supreme Court reversed the District Courts grant of summary judgment and remanded the case to the District Court
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
for further proceedings. The Nebraska Supreme Court did not decide whether the plaintiffs claims have merit. On October 8, 2003, the Company filed with the District Court a renewed motion for summary judgment. On August 13, 2004, the District Court dismissed the plaintiffs class action allegations and the claims of fraud, misrepresentation, unjust enrichment and injunction. The District Court stayed the case pending arbitration of individual claims of breach of contract under the customer agreements. Plaintiffs appealed. On November 1, 2004, the Company filed a motion for summary dismissal of the appeal for lack of jurisdiction on the ground that the District Courts order is not presently appealable. The Company believes it has adequate legal defenses and intends to continue to vigorously defend against this action.
In October 2003, Keener, a pro se plaintiff, filed a putative class action against the Company, Knight Trading Group, Inc. and certain individuals in the United States District Court for the District of Nebraska. The plaintiff asserted his action on behalf of persons who became clients of the Company during the period from March 29, 1995 through September 30, 2003. As it pertains to the Company, the principal allegations of the complaint were that the Company had an indirect and direct equity interest in Knight, to which it directed most of its orders for execution; that the Company failed to accurately disclose the nature of its relationship with Knight and the consideration it received from Knight for directing order flow to Knight; and that clients of Ameritrade did not receive best execution of their orders from Knight and the Company. The plaintiff claimed that the Companys conduct violated certain provisions of the federal securities laws, including Sections 11Ac, 10(b) and 3(b) of the Exchange Act, and SEC rules promulgated thereunder. Plaintiff further claimed the individual defendants, including a present director and a former director of the Company, were liable under Section 20(a) of the Exchange Act as controlling persons for the claimed wrongs attributed to the Company and Knight. In his prayer for relief, plaintiff requested monetary damages and/or rescissionary relief in the amount of $4.5 billion against all defendants, jointly and severally. In January 2004, the Company, Knight and the individual defendants filed motions to dismiss the complaint and to deny class certification or strike the class action allegations. In July 2004 the District Court granted the Company defendants motion to deny class certification and to stay the action pending arbitration. The District Court ruled that plaintiff had to amend the complaint to delete all references to class members. The District Court ruled that if plaintiff filed an amended complaint, the Company defendants could reassert a motion to compel arbitration and, if the motion were filed, the claims against the Company defendants would be stayed pending arbitration. The District Court also granted the Knight defendants motion to dismiss and to strike to the extent of denying certification of a plaintiff class. The District Court ruled that plaintiff had to file an amended complaint that deleted all references to class members and that cured all additional defects. The plaintiff did not file an amended complaint as required by the District Court. The defendants filed renewed motions to dismiss. On August 31, 2004, the Court granted the motions and dismissed the case. The plaintiff did not appeal within the time allowed.
In August 2003, the Company, as a successor to National Discount Brokers Corporation (NDB), was served with a lawsuit filed in the District Court of Harris County, Texas, by Robert Ketchand, a court appointed receiver, against a number of defendants including Christopher A. Slaga, a bank, and NDB. The complaint, as amended, alleges that Slaga defrauded investors who invested approximately $21 million in limited partnerships that Slaga created and controlled and converted the moneys entrusted to him for investment. Two of the investors, who allegedly invested approximately $18 million, intervened in the lawsuit. The complaint states that Slaga, presently incarcerated, pled guilty to federal wire fraud violations in connection with the conduct alleged in the complaint and that the federal court in the criminal proceeding ordered Slaga to make restitution to the investors in the amount of approximately $19.7 million. As it pertains to the Company, the complaint alleges that Slaga wire transferred funds from the partnerships bank accounts into his personal brokerage account at NDB and that Slaga used the money for highly speculative investments. The complaint alleges that an inquiry by NDB would have disclosed that money in Slagas personal accounts belonged to the partnerships and that NDB failed to examine the trading activities of Slaga and should have discovered the impropriety of his investments. The complaint includes causes of action against NDB for aiding
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
and abetting Slagas securities fraud under the Texas Securities Act, for unjust enrichment, and for funds transferred to NDB under a theory of implied contract. The receiver and the interveners have requested damages in an amount to be proven at trial, including the amount of the restitution order, plus interest, attorneys fees and costs. An agreement has been reached to settle the claims against the Company as successor to NDB. The settlement is not expected to have a material affect on the Companys results of operations, financial condition or cash flows. The settlement is subject to conditions, including Court approval.
The nature of the Companys business subjects it to lawsuits, arbitrations, claims and other legal proceedings. Management cannot predict with certainty the outcome of pending legal proceedings. A substantial adverse judgment or other resolution regarding the proceedings could have a material adverse effect on the Companys financial condition, results of operations and cash flows. However, in the opinion of management, after consultation with legal counsel, the Company has adequate legal defenses with respect to the legal proceedings to which it is a defendant or respondent and the outcome of these pending proceedings is not likely to have a material adverse effect on the financial condition, results of operations or cash flows of the Company.
The Company is in discussions with its regulators about matters raised during regulatory examinations or otherwise subject to their inquiry. These matters could result in censures, fines or other sanctions. Management believes the outcome of any resulting actions will not be material to the Companys financial condition, results of operations or cash flows. However, the Company is unable to predict the outcome of these matters. See Note 10 for further discussion of a regulatory matter concerning an FDIC-insured deposit sweep program.
General Contingencies In the ordinary course of business, there are various contingencies which are not reflected in the consolidated financial statements. These include Ameritrade, Inc. client activities involving the execution, settlement and financing of various client securities transactions. These activities may expose the Company to credit risk in the event the clients are unable to fulfill their contracted obligations.
Client securities activities are transacted on either a cash or margin basis. In margin transactions, the Company may extend credit to the client, subject to various regulatory and internal margin requirements, collateralized by cash and securities in the clients account. In connection with these activities, the Company also executes and clears client transactions involving the sale of securities not yet purchased (short sales). Such margin-related transactions may expose the Company to credit risk in the event each clients assets are not sufficient to fully cover losses which clients may incur. In the event the client fails to satisfy its obligations, the Company has the authority to purchase or sell financial instruments in the clients account at prevailing market prices in order to fulfill the clients obligations.
The Company seeks to control the risks associated with its client activities by requiring clients to maintain margin collateral in compliance with various regulatory and internal guidelines. The Company monitors required margin levels throughout each trading day and, pursuant to such guidelines, requires clients to deposit additional collateral, or to reduce positions, when necessary.
The Company loans securities temporarily to other broker-dealers in connection with its broker-dealer business. The Company receives cash as collateral for the securities loaned. Increases in securities prices may cause the market value of the securities loaned to exceed the amount of cash received as collateral. In the event the counterparty to these transactions does not return the loaned securities, the Company may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy its client obligations. The Company controls this risk by requiring credit approvals for counterparties, by monitoring the market value of securities loaned on a daily basis and by requiring additional cash as collateral when necessary, and by participating in a risk-sharing program offered through a securities clearinghouse.
The Company borrows securities temporarily from other broker-dealers in connection with its broker-dealer business. The Company deposits cash as collateral for the securities borrowed. Decreases in securities
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
prices may cause the market value of the securities borrowed to fall below the amount of cash deposited as collateral. In the event the counterparty to these transactions does not return the cash deposited, the Company may be exposed to the risk of selling the securities at prevailing market prices. The Company controls this risk by requiring credit approvals for counterparties, by monitoring the collateral values on a daily basis, and by requiring collateral to be returned by the counterparties when necessary.
As of September 24, 2004, client margin securities of approximately $4.3 billion and stock borrowings of approximately $2.8 billion were available to the Company to utilize as collateral on various borrowings or for other purposes. The Company had loaned or repledged approximately $3.8 billion of that collateral as of September 24, 2004.
The Company is a member of and provides guarantees to securities clearinghouses and exchanges. Under related agreements, the Company is generally required to guarantee the performance of other members. Under the agreements, if a member becomes unable to satisfy its obligations to the clearinghouse, other members would be required to meet shortfalls. The Companys liability under these arrangements is not quantifiable and could exceed the cash and securities it has posted as collateral. However, the potential for the Company to be required to make payments under these agreements is remote. Accordingly, no contingent liability is carried on the Consolidated Balance Sheets for these transactions.
Employment Agreements The Company has entered into employment agreements with several of its key executive officers. These employment agreements generally provide for annual base salary and incentive compensation, stock option acceleration and severance payments in the event of termination of employment under certain defined circumstances or changes in control of the Company. Compensation is subject to adjustments according to the Companys financial performance and other factors.
15. | Segment Information |
Beginning in the second quarter of fiscal 2002, the Company had two reportable operating segments: a Private Client Division and an Institutional Client Division. Both divisions provide multiple service offerings tailored to specific clients and their respective investing and trading preferences. The Private Client Division provides brokerage services directly to individual investors. The Institutional Client Division provides brokerage capabilities and advisor tools as co-branded or private-label products to business partners and their customers. The Datek merger on September 9, 2002 resulted in a substantial increase in Private Client Division business. As a result, beginning with the first quarter of fiscal 2003, the Institutional Client Division no longer met the quantitative thresholds to be considered a reportable segment.
Financial information for the Companys
Private Client Division, which is the Companys only
reportable segment, and all other segments, is presented in the
following table. The totals are equal to the Companys
consolidated amounts as reported in the Consolidated Statements
of Operations. Identifiable assets are not disclosed, as they
are not used in evaluating segment performance or in allocating
resources to segments.
2004
2003
2002
Private
Private
Private
Client
All
Client
All
Client
All
Division
Other
Total
Division
Other
Total
Division
Other
Total
$
620,714
$
22,710
$
643,424
$
538,958
$
23,313
$
562,271
$
309,504
$
17,204
$
326,708
232,930
3,759
236,689
145,997
4,986
150,983
101,195
2,890
104,085
$
853,644
$
26,469
$
880,113
$
684,955
$
28,299
$
713,254
$
410,699
$
20,094
$
430,793
$
444,238
$
(3,081
)
$
441,157
$
233,856
$
(6,499
)
$
227,357
$
56,580
$
(75,097
)
$
(18,517
)
The Company has operations in the United States and Canada. Substantially all of the Companys revenues in fiscal years 2004, 2003 and 2002 were generated by the United States operations.
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. | Derivative Financial Instruments and Hedging Activities |
Prior to April 15, 2004, the Company had an equity index swap arrangement for the purpose of hedging its obligation under its Chief Executive Officer (CEO) deferred compensation plan. Effective April 15, 2004, the CEO changed his investment election under the deferred compensation arrangement from an equity index to a group of fixed income securities. Accordingly, the Company terminated its equity index swap arrangement.
During fiscal 2003, the Company and a counterparty entered into a series of prepaid variable forward contracts (the forward contracts) with a total notional amount of approximately $41.4 million on 7.9 million underlying Knight shares. The forward contracts each contain a zero-cost embedded collar on the value of the Knight shares, with a weighted average floor price of $5.13 per share and a weighted average cap price of $6.17 per share. At the inception of the forward contracts, the Company received cash of approximately $35.5 million, equal to approximately 86 percent of the notional amount. The forward contracts mature on various dates in fiscal years 2006 and 2007. At maturity, the Company may settle the forward contracts in shares of Knight or in cash, at the Companys option. If the market price of the Knight stock at maturity is equal to or less than the floor price, the counterparty will be entitled to receive one share of Knight or its cash equivalent for each underlying share. If the market price of the Knight stock at maturity is greater than the cap price, the counterparty will be entitled to receive the number of shares of Knight or its cash equivalent equal to the ratio of the floor price plus the excess of the market price over the cap price, divided by the market price, for each underlying share. If the market price at maturity is greater than the floor price but less than or equal to the cap price, the counterparty will be entitled to receive the number of Knight shares or its cash equivalent equal to the ratio of the floor price divided by the market price for each underlying share. Regardless of whether the forward contract is settled in Knight shares or in cash, the Company intends to sell the underlying Knight shares at maturity.
The Company has designated the forward contracts as cash flow hedges of the forecasted future sales of 7.9 million Knight shares. The forward contracts are expected to be perfectly effective hedges against changes in the cash flows associated with the forecasted future sales outside the price ranges of the collars. Accordingly, all changes in the fair value of the embedded collars are recorded in other comprehensive income, net of income taxes. As of September 24, 2004 and September 26, 2003, the total fair value of the embedded collars was approximately $28.7 million and $46.7 million, respectively, and was included under the caption Prepaid variable forward derivative instrument on the Consolidated Balance Sheets.
The $35.5 million of cash received on the forward contracts is accounted for as an obligation on the Consolidated Balance Sheets. The Company is accreting interest on the obligation to the notional maturity amount of $41.4 million over the terms of the forward contracts using effective interest rates with a weighted average of approximately 4.3 percent. Upon settlement of a forward contract, the fair value of the collar and the realized gain or loss on the Knight stock delivered to the counterparty or otherwise sold will be reclassified from other comprehensive income into earnings.
17. | Related Party Transactions |
Certain Company directors and associates maintain margin accounts with the Companys clearing subsidiaries. The Company had margin loans, secured primarily by Company Common Stock, to Company directors and associates totaling $10.7 million and $30.9 million as of September 24, 2004 and September 26, 2003, respectively. These loans are made in the ordinary course of the Companys business on terms no more favorable than those available on comparable transactions with other parties.
In November 2003, the Company purchased 7.5 million shares of its Common Stock from certain stockholders (and certain donees of those shares) concurrent with a secondary offering by those stockholders of approximately 43.1 million shares of their Common Stock. The Company acquired the 7.5 million shares
59
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
from the selling stockholders at the net public
offering price of $12.159 per share. The selling
stockholders and the respective quantities of shares sold to the
Company are as follows:
Selling Stockholders
Shares
Amount Paid
3,255,035
$
39,577,971
2,208,875
26,857,711
1,480,559
18,002,117
540,726
6,574,687
14,805
180,014
7,500,000
$
91,192,500
The total shares sold by entities affiliated with Bain Capital includes 541,450 shares contributed by certain partners and other employees of the Bain Capital entities to certain charities prior to the offering. The charities sold the donated shares to the Company concurrent with the offering. Stephen G. Pagliuca, a director of the Company, is Managing Director of Bain Capital. Glenn H. Hutchins, a director of the Company, is a Managing Member of Silver Lake Partners. C. Kevin Landry, a director of the Company, is a Managing Director and Chief Executive Officer of TA Associates, Inc. J. Joe Ricketts is Chairman and Founder of the Company. J. Peter Ricketts is the Companys Executive Vice President and Chief Operating Officer and serves as Vice Chairman of the Board of Directors. The secondary offering was conducted pursuant to the terms of a registration rights agreement dated July 26, 2002 entered into among the Company and the selling stockholders, among others, in connection with the Datek merger. In accordance with the terms of the registration rights agreement, the Company paid various expenses of the offering totaling approximately $0.6 million.
18. | Quarterly Data (Unaudited) |
For the Fiscal Year Ended September 24, 2004 | ||||||||||||||||
|
||||||||||||||||
First | Second | Third | Fourth | |||||||||||||
Quarter | Quarter | Quarter | Quarter | |||||||||||||
|
|
|
|
|||||||||||||
Net revenues
|
$ | 226,440 | $ | 246,864 | $ | 219,992 | $ | 186,817 | ||||||||
Pre-tax income
|
$ | 119,956 | $ | 125,199 | $ | 102,021 | $ | 93,981 | ||||||||
Net income
|
$ | 71,937 | $ | 80,958 | $ | 62,258 | $ | 57,194 | ||||||||
Basic earnings per share
|
$ | 0.17 | $ | 0.19 | $ | 0.15 | $ | 0.14 | ||||||||
Diluted earnings per share
|
$ | 0.17 | $ | 0.19 | $ | 0.15 | $ | 0.14 |
For the Fiscal Year Ended September 26, 2003 | ||||||||||||||||
|
||||||||||||||||
First | Second | Third | Fourth | |||||||||||||
Quarter | Quarter | Quarter | Quarter | |||||||||||||
|
|
|
|
|||||||||||||
Net revenues
|
$ | 108,527 | $ | 147,634 | $ | 188,511 | $ | 196,582 | ||||||||
Pre-tax income
|
$ | 36,799 | $ | 16,659 | $ | 81,804 | $ | 92,096 | ||||||||
Net income
|
$ | 22,042 | $ | 9,617 | $ | 49,871 | $ | 55,113 | ||||||||
Basic earnings per share
|
$ | 0.05 | $ | 0.02 | $ | 0.12 | $ | 0.13 | ||||||||
Diluted earnings per share
|
$ | 0.05 | $ | 0.02 | $ | 0.12 | $ | 0.13 |
Quarterly amounts may not sum to year-end totals due to rounding.
60
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None
Item 9A. | Controls and Procedures |
Management, including the Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of the Companys disclosure controls and procedures as of September 24, 2004. Based on that evaluation, and in consideration of the matter described below, management, including the Chief Executive Officer and Chief Financial Officer, has concluded that the Companys disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in its periodic reports is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.
On November 12, 2004, our broker-dealer subsidiary Ameritrade, Inc. was notified by the staff of the NASD and the staff of the SEC Division of Market Regulation (collectively the Staffs) that they believe that for regulatory purposes certain funds held in banks on behalf of clients are liabilities and assets of Ameritrade, Inc. rather than liabilities and assets only of the banks. The resulting assets have not been allowed for purposes of Ameritrade, Inc.s regulatory net capital calculation. Accordingly, in the Staffs view Ameritrade, Inc.s net capital was below its minimum amount required under Exchange Act Rule 15c3-1. Ameritrade, Inc. cured the asserted deficiency on November 15, 2004, the first business day following the notification. The asserted deficiency was based upon the Staffs concerns regarding a Federal Deposit Insurance Corporation (FDIC) insured deposit sweep program (the Program) available to Ameritrade, Inc.s clients wherein funds were deposited, through an intermediary agent, into FDIC-insured deposit accounts at banks (Program Banks). The Staffs view is that Ameritrade, Inc. did not for regulatory purposes effectively move client free credit balances to bank accounts established in client names at the Program Banks. Ameritrade, Inc. informed the Staffs that it believes that the free credit balances were effectively transferred to the Program Banks in accordance with well-established banking law, that the accounts held at the Program Banks were the obligations of the Program Banks to each client and not obligations of Ameritrade, Inc. and that the FDIC insurance passed through to each client in accordance with FDIC regulations. Accordingly, Ameritrade, Inc. believes that it has been in compliance with Rule 15c3-1.
Our independent registered public accounting firm has concluded that the controls in place relating to the Program were not properly designed to provide reasonable assurance that these funds were properly recorded and disclosed in the financial statements and assets were appropriately considered in regulatory net capital computations. On December 8, 2004, our independent registered public accounting firm notified the Audit Committee and management, that in their judgment, this is a material weakness in internal control over financial reporting.
The Companys management is reviewing and evaluating its internal control procedures and the design of those control procedures relating to the Program. Once this review and evaluation is complete, the Company intends to implement any changes required to remediate any identified deficiencies.
There have been no changes in the Companys internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
61
Item 9B. Other Information
Amendment of Revolving Credit Agreement
On December 3, 2004, the agent for the Companys revolving credit agreement agreed in principle to increase the credit facility to $105 million from the previous $75 million and extend the term through December 14, 2005 on substantially similar terms. The revolving credit agreement, as amended, will be with a group of four banks led by First National Bank of Omaha. The revolving credit agreement, as amended, will be secured primarily by the Companys stock in its subsidiaries and personal property. The interest rate on borrowings will be equal to one month LIBOR (determined monthly) plus a spread (determined quarterly) of 1.75 percent or 2.00 percent based on a specified financial ratio. The spread would currently be 1.75 percent. The Company will also pay a commitment fee of 0.25 percent of the unused credit facility through the maturity date. The revolving credit agreement, as amended, will contain certain covenants and restrictions, including maintenance of a minimum level of net worth, requiring prior written consent of the revolving lenders for certain business combinations and investments, and prohibiting the payment of cash dividends to stockholders.
Management Incentive Plan
The Companys executive officers participate in the Ameritrade Holding Corporation 2002 Management Incentive Plan. This shareholder approved plan is based on the achievement of key corporate performance metrics and is intended to be qualified under Section 162(m) of the Internal Revenue Code in order to maximize tax deductibility for the Company, while providing strong incentive for goal achievement at the highest levels of the organization. Each year the Compensation Committee establishes the performance goals that must be achieved for awards under the plan, identifies eligible participants, and establishes target incentive percentages for each participant. For fiscal year 2005, the Compensation Committee identified eligible participants and determined that the performance criteria will be based on the Companys earnings per share (EPS), and established two formulas that permit the determination of different components of each participants bonus award, subject to the CEOs recommendation to the Compensation Committee to award a lesser amount. Under the first component, if the performance criteria up to specified levels are reached, the bonus award is paid in cash and if the performance criteria above specified levels are reached, the bonus award for these excess levels is paid in restricted stock units. If restricted stock units are awarded, they will be vested immediately; however the participant is required to hold the units for at least three years. Under the second component, if the performance criteria meet or exceed the specified level, a cash award not to exceed $2 million in the aggregate may be paid. The Compensation Committee, on December 3, 2004, approved the aforementioned Management Incentive Plan for fiscal year 2005.
62
Part III
Item 10. | Directors and Executive Officers of the Registrant |
The information about Directors and Executive Officers required to be furnished pursuant to this item is incorporated by reference from portions of our definitive proxy statement for our 2005 annual meeting of stockholders, to be held February 16, 2005, to be filed with the SEC pursuant to Regulation 14A within 120 days after September 24, 2004 (the Proxy Statement).
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, with the exception of the equity compensation plan
information presented below, is incorporated by reference from
portions of the Proxy Statement.
Securities Authorized for Issuance Under
Equity Compensation Plans
The following table summarizes, as of
September 24, 2004, information about compensation plans
under which equity securities of the Company are authorized for
issuance:
Number of Securities
Remaining Available
Number of Securities
for Future Issuance
to Be Issued Upon
Weighted-Average
Under Equity
Exercise of
Exercise Price of
Compensation Plans
Outstanding Options,
Outstanding Options,
(Excluding Securities
Warrants and Rights
Warrants and Rights
Reflected in Column (a))
Plan Category
(a)
(b)
(c)
26,833,278
$
6.35
28,885,940
(1)
535,475
$
4.51
N/A
27,368,753
$
6.31
28,885,940
(1) | The Ameritrade Holding Corporation 1996 Long-Term Incentive Plan (the Long-Term Incentive Plan) and the 1996 Directors Incentive Plan (the Directors Plan) authorize the issuance of shares of Common Stock as well as options. As of September 24, 2004, there were, in the aggregate, 4,258,230 shares remaining available for issuance pursuant to the Long-Term Incentive Plan and the Directors Plan. |
The table above includes the following options
assumed in connection with the Companys merger with Datek
in fiscal 2002:
Number of Securities
to Be Issued Upon
Weighted-Average
Exercise of
Exercise Price of
Outstanding Options,
Outstanding Options,
Warrants and Rights
Warrants and Rights
Plan Category
(a)
(b)
3,636,050
$
4.07
535,475
$
4.51
4,171,525
$
4.12
63
The Company does not have any equity compensation plans that were not previously approved by stockholders. At September 24, 2004, the Company had in place individual compensation arrangements assumed in the Datek merger that were not approved by Dateks stockholders as follows:
| Moishe Zelcer, a former employee of Datek, has an option to purchase 502,542 shares of Company Common Stock under a stock option agreement dated December 30, 1999. This option is fully vested and exercisable at an exercise price of $4.51 per share. This option expires on December 29, 2009. | |
| Stern Investment Management LLC, a New Jersey limited liability company leasing premises to Datek, has an option to purchase 32,933 shares of Company Common Stock under a non-qualified stock option agreement dated April 25, 2000. This option is fully vested and exercisable at an exercise price of $4.51 per share. This option expires on April 24, 2010. |
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.
Item 14. | Principal Accounting Fees and Services |
The information required to be furnished pursuant to this item is incorporated by reference from portions of the Proxy Statement.
PART IV
Item 15. | Exhibits, Financial Statement Schedules |
(a) Documents filed as part of this Report
1. Financial Statements |
See Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
2. Financial Statement Schedules |
Schedule I Condensed Financial Information of Registrant (Parent Company Information) is included in 15(c) below. | |
Schedule II Valuation and Qualifying Accounts is included in 15(c) below. |
3. | Exhibits |
See Item 15(b) below. |
(b) Exhibits
2.1
Second Amended and Restated Agreement and Plan of
Merger, dated as of July 26, 2002, by and between Datek
Online Holdings Corp., Ameritrade Holding Corporation, Arrow
Stock Holding Corporation, Arrow Merger Corp. and Dart Merger
Corp. (incorporated by reference to Exhibit 2.1 of the
Companys Registration Statement on Form S-4, File
No. 333-88632, filed on August 5, 2002)
3.1
Restated Certificate of Incorporation of
Ameritrade Holding Corporation (incorporated by reference to
Exhibit 3.1 of the Companys Form 8-A filed on
September 5, 2002)
3.2
Amended and Restated By-Laws of Ameritrade
Holding Corporation (incorporated by reference to
Exhibit 3.2 of the Companys Form 10-K filed on
November 7, 2003)
4.1
Form of Certificate for Common Stock
(incorporated by reference to Exhibit 4.1 of the
Companys Form 8-A filed on September 5, 2002)
64
4.2
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
Companys Registration Statement on Form S-3, File
No. 333-87999, filed on September 28, 1999)
10.1
Securities Clearing Agreement, dated as of
January 28, 1997, between The Bank of New York and
Ameritrade Clearing, Inc. (now known as Ameritrade, Inc.)
(incorporated by reference to Exhibit 10.4 of the
Companys Annual Report on Form 10-K filed on
December 24, 2001)
10.2
Master Promissory Note, dated as of
September 24, 2003, between Ameritrade, Inc. and The Bank
of New York (incorporated by reference to Exhibit 10.2 of
the Companys Annual Report on Form 10-K filed on
November 7, 2003)
10.3
Lease, dated as of January 19, 1998, between
United Investment Joint Venture d/b/a Southroads Mall and
Ameritrade Holding Corporation (incorporated by reference to
Exhibit 10.23 of the Companys 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 Companys 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 Companys
quarterly report on Form 10-Q filed on August 9, 1999)
10.6*
Employment Agreement, dated as of March 1,
2001, between Joseph H. Moglia and Ameritrade Holding
Corporation (incorporated by reference to Exhibit 10.1 of
the Companys quarterly report on Form 10-Q
filed on May 14, 2001)
10.7*
Letter Agreement and Promissory Note, dated as of
September 13, 2001, between Joseph H. Moglia and Ameritrade
Holding Corporation (incorporated by reference to
Exhibit 10.14 of the Companys Annual Report on
Form 10-K filed on December 24, 2001)
10.8*
Employment Agreement Addendum, Waiver of Change
of Control, dated June 25, 2002, between Joseph H. Moglia
and Ameritrade Holding Corporation (incorporated by reference to
Exhibit 10.3 of the Companys quarterly report on
Form 10-Q filed on August 12, 2002)
10.9*
Non-Qualified Stock Option Agreement, dated as of
March 1, 2003, between Joseph H. Moglia and Ameritrade
Holding Corporation
10.10*
Employment Agreement, dated as of October 1,
2001, between J. Joe Ricketts and Ameritrade Holding Corporation
(incorporated by reference to Exhibit 10.1 of the
Companys quarterly report on Form 10-Q filed on
August 12, 2002)
10.11*
Amendment to Employment Agreement, dated as of
August 5, 2004, between J. Joe Ricketts and Ameritrade
Holding Corporation
10.12*
Non-Qualified Stock Option Agreement, dated as of
August 5, 2004, between J. Joe Ricketts and Ameritrade
Holding Corporation
10.13*
Executive Employment Agreement, dated as of
February 1, 2002, between Phylis M. Esposito and Ameritrade
Holding Corporation (incorporated by reference to
Exhibit 10.1 of the Companys quarterly report on
Form 10-Q filed on May 6, 2002)
10.14*
Employment Agreement Addendum, Waiver of Change
of Control, dated June 25, 2002, between Phylis M. Esposito
and Ameritrade Holding Corporation (incorporated by reference to
Exhibit 10.2 of the Companys quarterly report on
Form 10-Q filed on August 12, 2002)
10.15*
Renewal of Executive Employment Agreement, dated
as of July 29, 2004, between Phylis M. Esposito and
Ameritrade Holding Corporation
10.16*
Executive Employment Agreement, dated as of
September 9, 2002, between Kurt D. Halvorson and Ameritrade
Holding Corporation (incorporated by reference to
Exhibit 10.19 of the Companys annual report on
Form 10-K filed on December 13, 2002)
65
10.17*
Executive Employment Agreement, dated as of
September 9, 2002, between Ellen L.S. Koplow and Ameritrade
Holding Corporation (incorporated by reference to
Exhibit 10.20 of the Companys annual report on
Form 10-K filed on December 13, 2002)
10.18*
Executive Employment Agreement, dated as of
September 9, 2002, between John R. MacDonald and Ameritrade
Holding Corporation (incorporated by reference to
Exhibit 10.21 of the Companys annual report on
Form 10-K filed on December 13, 2002)
10.19*
Executive Employment Agreement, dated as of
September 9, 2002, between John P. Ricketts and Ameritrade
Holding Corporation (incorporated by reference to
Exhibit 10.22 of the Companys annual report on
Form 10-K filed on December 13, 2002)
10.20*
Executive Employment Agreement, dated as of
February 28, 2003, between Michael Feigeles and Ameritrade
Holding Corporation (incorporated by reference to
Exhibit 10.2 of the Companys quarterly report on
Form 10-Q filed on May 8, 2003)
10.21*
Executive Employment Agreement, dated as of
April 7, 2003, between Asiff Hirji and Ameritrade Holding
Corporation (incorporated by reference to Exhibit 10.2 of
the Companys quarterly report on Form 10-Q
filed on August 8, 2003)
10.22*
Executive Employment Agreement, dated as of
February 1, 2004, between Anne L. Nelson and Ameritrade
Holding Corporation (incorporated by reference to
Exhibit 10.1 of the Companys quarterly report on
Form 10-Q filed on May 6, 2004)
10.23*
Executive Employment Agreement, dated as of
June 7, 2004, between Kenneth Feldman and Ameritrade
Holding Corporation (incorporated by reference to
Exhibit 10.1 of the Companys quarterly report on
Form 10-Q filed on August 3, 2004)
10.24*
1996 Long-Term Incentive Plan, as amended and
restated effective September 9, 2002 (incorporated by
reference to Exhibit 4.2 of Post-Effective Amendment
No. 1 to the Companys Registration Statement on
Form S-8, File No. 333-86164, filed on
September 10, 2002)
10.25*
Form of 1996 Long Term Incentive Plan
Non-Qualified Stock Option Agreement for Executives
10.26*
1996 Directors Incentive Plan, as amended
and restated effective as of February 12, 2003
(incorporated by reference to Exhibit 10.1 of the
Companys quarterly report on Form 10-Q filed
May 8, 2003)
10.27*
Form of 1996 Directors Incentive Plan
Non-Qualified Stock Option Agreement
10.28*
Form of 1996 Directors Incentive Plan
Restricted Stock Agreement
10.29*
Ameritrade Holding Corporation Executive Deferred
Compensation Program, As Amended and Restated as of
September 25, 2004
10.30*
2002 Management Incentive Plan (incorporated by
reference to Exhibit 10.4 of the Companys quarterly
report on Form 10-Q filed on May 6, 2002)
10.31*
Datek Online Holdings Corp. 1998 Stock Option
Plan, as amended and restated effective as of September 9,
2002 (incorporated by reference to Exhibit 4.2 of the
Companys Registration Statement on Form S-8, File
No. 333-99481, filed on September 13, 2002)
10.32*
First Amendment of Datek Online Holdings Corp.
1998 Stock Option Plan, effective as of September 25, 2004
10.33*
Datek Online Holdings Corp. 2001 Stock Incentive
Plan, as amended and restated effective as of September 9,
2002 (incorporated by reference to Exhibit 4.2 of the
Companys Registration Statement on Form S-8, File
No. 333-99353, filed on September 10, 2002)
10.34*
First Amendment of Datek Online Holdings Corp.
2001 Stock Incentive Plan, effective as of September 25,
2004
66
10.35
Third Amended and Restated Revolving Credit
Agreement, dated as of December 15, 2003, among Ameritrade
Holding Corporation; First National Bank of Omaha, as Agent; and
the Revolving Lenders party thereto (incorporated by reference
to Exhibit 10.1 of the Companys quarterly report on
Form 10-Q filed February 11, 2004)
10.36
Second Amended and Restated Stock Pledge
Agreement, dated as of December 15, 2003, among Ameritrade
Holding Corporation; First National Bank of Omaha, as Agent; and
the Revolving Lenders party thereto (incorporated by reference
to Exhibit 10.2 of the Companys quarterly report on
Form 10-Q filed February 11, 2004)
10.37
Third Amended and Restated Stock Pledge
Agreement, dated as of December 15, 2003, among Ameritrade
Online Holdings Corp.; First National Bank of Omaha, as Agent;
and the Revolving Lenders party thereto (incorporated by
reference to Exhibit 10.3 of the Companys quarterly
report on Form 10-Q filed February 11, 2004)
10.38
Second Amended and Restated Stock Pledge
Agreement, dated as of December 15, 2003, among Datek
Online Holdings Corp.; First National Bank of Omaha, as Agent;
and the Revolving Lenders party thereto (incorporated by
reference to Exhibit 10.4 of the Companys quarterly
report on Form 10-Q filed February 11, 2004)
10.39
Stockholders Agreement, dated April 6, 2002,
by and among Arrow Stock Holding Corporation, the principal
stockholders of Datek Online Holdings Corp. named therein and
the principal stockholders of Ameritrade Holding Corporation
named therein (incorporated by reference to Exhibit 10.1 of
the Companys Registration Statement on Form S-4, File
No. 333-88632, filed on May 17, 2002)
10.40
Registration Rights Agreement, dated
July 26, 2002, by and among Arrow Stock Holding
Corporation, the principal stockholders of Datek Online Holdings
Corp. named therein and the principal stockholders of Ameritrade
Holding Corporation named therein (incorporated by reference to
Exhibit 10.35 of the Companys annual report on
Form 10-K filed on December 13, 2002)
10.41
Master Terms And Conditions For Pre-Paid Share
Forward Transactions Between Citibank, N.A. And Ameritrade
Holding Corporation, dated as of April 25, 2003
(incorporated by reference to Exhibit 10.3 of the
Companys quarterly report on Form 10-Q filed
May 8, 2003)
10.42
ISDA Master Agreement dated as of
November 1, 2001 between Citibank, N.A. and Ameritrade
Holding Corporation (incorporated by reference to
Exhibit 10.4 of the Companys quarterly report on
Form 10-Q filed May 8, 2003)
10.43
ISDA Credit Support Annex to the Schedule to the
Master Agreement dated as of November 1, 2001 between
Citibank, N.A. and Ameritrade Holding Corporation (incorporated
by reference to Exhibit 10.5 of the Companys
quarterly report on Form 10-Q filed May 8, 2003)
10.44
Prepaid Share Forward Transaction Confirmation,
dated as of February 28, 2003, between Citibank, N.A. and
Ameritrade Holding Corporation (incorporated by reference to
Exhibit 10.6 of the Companys quarterly report on
Form 10-Q filed May 8, 2003)
10.45
Pre-Paid Share Forward Transaction Confirmation,
dated as of April 7, 2003, between Citibank, N.A. and
Ameritrade Holding Corporation (incorporated by reference to
Exhibit 10.3 of the Companys quarterly report on
Form 10-Q filed August 8, 2003)
10.46
Pre-Paid Share Forward Transaction Confirmation,
dated as of June 5, 2003, between Citibank, N.A. and
Ameritrade Holding Corporation (incorporated by reference to
Exhibit 10.4 of the Companys quarterly report on
Form 10-Q filed August 8, 2003)
14
Code of Ethics (incorporated by reference to
Exhibit 14 of the Companys quarterly report on
Form 10-Q filed May 6, 2004)
21.1
Subsidiaries of the Registrant
23.1
Consent of Independent Registered Public
Accounting Firm
67
31.1
Certification of Joseph H. Moglia, Principal
Executive Officer, as required pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2
Certification of John R. MacDonald, Principal
Financial Officer, as required pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1
Certification pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
* | Management contracts and compensatory plans and arrangements required to be filed as exhibits under Item 15(b) of this report. |
68
(c) Financial Statement Schedules
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
We have audited the consolidated financial statements of Ameritrade Holding Corporation and its subsidiaries (collectively, the Company) as of September 24, 2004 and September 26, 2003 and for each of the three years in the period ended September 24, 2004 and have issued our report thereon dated December 9, 2004; such report is included elsewhere in this Form 10-K. Our audits also included the financial statement schedules of Ameritrade Holding Corporation, listed in Item 15. These financial statement schedules are the responsibility of the Companys management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP |
Omaha, Nebraska
69
SCHEDULE I CONDENSED FINANCIAL
INFORMATION OF REGISTRANT
AMERITRADE HOLDING CORPORATION (PARENT COMPANY
ONLY)
CONDENSED BALANCE SHEETS
2004
2003
(In thousands)
ASSETS
$
2,390
$
150
1,295,529
1,296,997
72,863
91,313
10,219
59,714
265
234
$
1,381,266
$
1,448,408
LIABILITIES AND STOCKHOLDERS
EQUITY
$
12,220
$
9,435
62,765
28,738
46,668
37,803
36,194
46,295
13,461
57,998
15,371
16,044
170,358
212,634
435,081,860 shares issued
4,351
4,351
1,195,218
1,188,444
330,519
58,172
(346,060
)
(41,452
)
993
708
25,887
25,551
1,210,908
1,235,774
$
1,381,266
$
1,448,408
70
AMERITRADE HOLDING CORPORATION (PARENT COMPANY
ONLY)
CONDENSED STATEMENTS OF OPERATIONS
2004
2003
2002
(In thousands)
$
3,103
$
6,789
$
1,330
90
28
790
3,193
6,789
2,148
14,657
11,146
9,075
1,861
3,829
4,489
5,094
483
5,740
21,612
15,458
19,304
(18,419
)
(8,669
)
(17,156
)
(7,156
)
(3,463
)
(6,372
)
(11,263
)
(5,206
)
(10,784
)
283,610
141,848
(18,179
)
$
272,347
$
136,642
$
(28,963
)
71
AMERITRADE HOLDING CORPORATION (PARENT COMPANY
ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
2004
2003
2002
(In thousands)
$
272,347
$
136,642
$
(28,963
)
(283,610
)
(141,848
)
18,179
(575
)
(457
)
944
2,823
927
48,204
(50,932
)
60,253
(63
)
281
(583
)
3,237
6,089
13,716
62,765
(100,745
)
40,776
(32,071
)
84,635
3,542
73,057
(65,408
)
107,864
(20,428
)
(41,524
)
(106,214
)
361,000
86,938
33,750
(55,100
)
(36
)
285,436
45,414
(72,464
)
35,489
(46,828
)
(1,168
)
(22,500
)
13,807
49,419
930
(323,660
)
(85,769
)
(4,830
)
428
10,566
1,850
(356,253
)
8,537
(24,550
)
2,240
(11,457
)
10,850
150
11,607
757
$
2,390
$
150
$
11,607
$
719
$
2,784
$
3,628
$
162,006
$
15,395
$
1,293
$
(1,422
)
$
20,358
$
$
12,465
$
24,679
$
654
$
$
$
770,112
72
SCHEDULE II
AMERITRADE HOLDING CORPORATION AND
SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Balance at
Charged to
Acquired in
Write-off
Balance at
Beginning of
Costs and
Business
of Doubtful
End of
Period
Expenses
Combinations
Accounts
Period
(In thousands)
$
10,948
$
2,547
$
$
(3,683
)
$
9,812
$
13,815
$
1,996
$
$
(4,863
)
$
10,948
$
3,822
$
870
$
10,490
$
(1,367
)
$
13,815
73
SIGNATURES
Pursuant to the requirements of 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, on this 9th day of December, 2004.
AMERITRADE HOLDING CORPORATION |
By: | /s/ JOSEPH H. MOGLIA |
|
|
Joseph H. Moglia | |
Chief Executive Officer | |
(Principal Executive Officer) |
By: | /s/ JOHN R. MACDONALD |
|
|
John R. MacDonald | |
Executive Vice President, | |
Chief Financial Officer and Treasurer | |
(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 9th day of December, 2004.
/s/ J. JOE RICKETTS
J. Joe Ricketts Chairman of the Board |
/s/ C. KEVIN LANDRY
------------------------------------------ C. Kevin Landry Director |
|
/s/ J. PETER RICKETTS
J. Peter Ricketts Executive Vice President, Chief Operating Officer, Vice Chairman and Corporate Secretary |
/s/ MARK L. MITCHELL
------------------------------------------ Mark L. Mitchell Director |
|
/s/ MICHAEL D. FLEISHER
Michael D. Fleisher Director |
/s/ STEPHEN G. PAGLIUCA
------------------------------------------ Stephen G. Pagliuca Director |
|
/s/ GLENN H. HUTCHINS
Glenn H. Hutchins Director |
/s/ THOMAS S. RICKETTS
------------------------------------------ Thomas S. Ricketts Director |
74
EXHIBIT 10.9
DATEK ONLINE HOLDINGS CORP.
2001 STOCK INCENTIVE PLAN
NON-QUALIFIED STOCK OPTION AGREEMENT
FOR EXECUTIVES
THIS AGREEMENT, made and entered into as of March 1, 2003 (the "Grant Date") by and between Ameritrade Holding Corporation (the "Company") and Joseph H. Moglia (the "Executive");
WITNESSETH THAT:
WHEREAS, the Company maintains the Datek Online Holdings Corp. 2001 Stock Incentive Plan (the "Plan"); and
WHEREAS, the Company and the Executive are parties to an Amended and Restated Employment Agreement dated as of March 1, 2001, as amended from time to time (the "Employment Agreement"), which provides for a grant of an option to the Executive as of March 1, 2003; and
WHEREAS, the Company and the Executive have agreed that the grant of the option required under the terms of the Employment Agreement will be made under the Plan and the Committee (as defined in the Plan) has approved such grant;
NOW, THEREFORE, the Company and the Executive hereby agree as follows;
1. Grant: Option Price. This Agreement evidences the grant to the Executive, pursuant to the terms of the Plan, of an option (the "Option") to purchase a total of 8,199,813 Shares. The Exercise Price of each Share subject to the Option shall be $5.05. The Option is not intended to be, and will not be treated as an "incentive stock option" as that term is used in section 422 of the Code.
2. Vesting. Subject to the terms and conditions of this Agreement, the Option shall become vested and exercisable with respect to 1/731 of the Shares awarded under this Agreement each day beginning with the Grant Date until such time as the Option is fully exercisable; provided, however, that no portion of the Option shall vest or become exercisable after the date on which the Executive's employment with the Company terminates for any reason except to the extent provided in Section 4 of the Employment Agreement. In the event that Section 4 of the Employment Agreement provides for accelerated vesting of the Option in the event of certain events, the provisions of Section 4 of the Employment Agreement shall control and shall be given full force and effect. The provisions of the Employment Agreement relating to the vesting of the Option are hereby incorporated by reference into this Agreement and form a part of this Agreement.
3. Exercise. After the Option becomes vested or exercisable pursuant to paragraph 2 and prior to the Expiration Date (defined below), the Option, to the extent then vested or exercisable, may be exercised in whole or in part by filing a written notice with the Secretary of the Company at its corporate headquarters. The exercise notice must be filed prior to the Expiration Date, must specify the number of Shares which the Executive elects to purchase and must be accompanied by payment of the Option Price (including any applicable withholding taxes) for such Shares indicated by the Executive's election. Payment of the Option Price (and any applicable withholding taxes) shall be by cash or check payable to the Company, by delivery of Shares having an aggregate Fair Market Value (valued as of the date of exercise) that is equal to the Option Price for the Shares, or any combination thereof. The Executive may pay the Option Price by authorizing Ameritrade Clearing, Inc. (or such other suitable party designated by the Company) to sell Shares (or a sufficient portion of the Shares) acquired upon exercise of the Option and remit to the Company a sufficient portion of the sale proceeds to pay the entire Option Price and any tax withholding resulting from such exercise.
4. Expiration of Option. The "Expiration Date" for this Option shall be the ten-year anniversary of the date on which the Option is granted. For purposes of the Plan, there shall be no definition of "Cause" which shall be applied so as to cause the provisions of Section 6(b) of the Plan to apply to the Option. The provisions of the Employment Agreement shall apply for purposes of determining the expiration of the Option in the event the Executive's employment with the Company terminates for Cause (as defined in the Employment Agreement).
5. Restriction on Sale of Shares. The Executive's right to sell any Shares acquired by exercise of this Option shall be subject to the terms, conditions and restrictions of the Company's equity ownership and disposition guidelines.
6. Change in Control Provisions. The provisions of the Plan regarding the effect of a Change in Control (as defined in the Plan) shall not apply to the Option. To the extent applicable, the provisions of the Employment Agreement relating to the effect of a Change in Control (as defined in the Employment Agreement) shall apply to the Option.
7. Nontransferability. The Option shall not be transferable except by will or the laws of descent and distribution and shall be exercisable during the Executive's lifetime only by the Executive.
8. Administration. The authority to manage and control the operation and administration of this Agreement shall be vested in the Committee and the Committee shall have all of the powers with respect to this Agreement that it has with respect to the Plan. Any interpretation of the Agreement by the Committee and any decision made by it with respect to the Agreement is final and binding on all persons. In the event of any conflicting terms between this Agreement and the Employment Agreement, the Employment Agreement shall govern.
9. Plan Governs. The terms of this Agreement shall be subject to the terms of the Employment Agreement and the terms of the Plan, a copy of which may be obtained by the Executive from the office of the Secretary of the Company.
10. Successors. The Agreement hereto shall be binding upon and shall inure to the benefit of any assignee or successor in the interest of the Company, and shall be binding upon and inure to the benefits of any estate, legal representative, beneficiary or heir of the Executive.
11. Employee and Shareholder Status. This Agreement does not constitute a contract of employment or continued service and does not give the Executive the right to be retained as an employee of the Company. This Agreement does not confer upon the Executive or any holder thereof any right as a shareholder of the Company prior to the issuance of Shares pursuant to the exercise of the Option.
12. Amendment. This Agreement may be amended by written agreement of the Executive and the Company, subject to the consent of the Committee, without the consent of any other person. No amendment to the Employment Agreement after the Grant Date shall be given effect with respect to the Option unless the amendment specifically provides otherwise.
13. Defined Terms. Unless the context clearly implies or indicates the contrary, a word, term or phrase used or defined in the Employment Agreement, or the Plan, as applicable, is similarly used or defined for purposes of this Agreement.
IN WITNESS WHEREOF, the Executive has hereunto set his or her hand and the Company has caused these presents to be executed in its name and on its behalf, all as of the date first above written and the Executive hereby acknowledges that the terms and conditions of the Agreement thereto have been read and understood.
EXECUTIVE
/s/ Joseph H. Moglia -------------------------------------- |
AMERITRADE HOLDING CORPORATION
By: /s/ J. Joe Ricketts --------------------------------- Its: /s/ Chairman and Founder --------------------------------- |
EXHIBIT 10.11
AMENDMENT TO
EMPLOYMENT AGREEMENT
WHEREAS, Ameritrade Holding Corporation (the "Company") and J. Joe Ricketts (the "Employee") have heretofore entered into an Employment Agreement (the "Agreement"), initially effective as of October 1, 2001;
WHEREAS, the Company and the Employee desire to further amend the Agreement in certain respects;
NOW, THEREFORE, the Agreement is amended as follows, all effective as of the date of execution of this Amendment:
1. By substituting the following for paragraph 2(B)(iii)(a) of the Agreement:
"(a) to timely make the payments (annual base salary, annual cash bonus (in the annual amount of the higher of the fiscal year 2002 or fiscal year 2003 annual cash bonus payable to the Employee), annual stock option award (in the amount of options to purchase 390,000 shares of the Company's common stock), insurance benefits, employee assistance program payments and tax payments) called for by Section 5 of this Agreement through the end of the stated Term (without giving effect to any early termination of this Agreement), without set-off, off-set or deduction (other than customary federal, state and city withholding taxes, as applicable), and"
2. By substituting the following for Section 2(B)(iv) of the Agreement:
"(iv) In calculating the accrued cash bonus or accrued stock option award payable to the Employee under this Agreement for any partial fiscal year, (a) the calculation of the accrued cash bonus shall be based upon the annual cash bonus payable to the Employee for the higher of fiscal year 2002 or fiscal year 2003, and (b) the accrued annual stock option award shall be based upon options to purchase 390,000 shares of the Company's common stock."
3. By deleting the last paragraph of Section 5(B) of the Agreement and adding the following:
"The Employee and the Company agree that (a) the Employee shall be entitled to receive the grant of a stock option award for fiscal year 2003 with respect to 750,000 shares of common stock of the Company and (b) such amount satisfies the number of options required to be granted to the Employee under this Section 5(B) for fiscal year 2003. The Company agrees to grant such options on the date hereof at an exercise price equal to 100% of the fair market value of a share of the Company's common stock on the date hereof (as determined in accordance with the Ameritrade Holding Corporation 1996 Long-Term Incentive Plan), which grant will be evidenced by the annexed Stock Option Agreement.
Notwithstanding anything in this Section 5(B) to the contrary, the Employee shall not be entitled to an annual stock option award for fiscal years of the Term subsequent to fiscal year
2003 until the Company reinstates the Company's annual stock option award program which existed on October 1, 2001 (the "Old Program") or implements a "New Program" (except that for purposes of Section 2(B)(iii)(a) only, it shall be deemed that this Section 5(B) calls for the Employee to receive annual stock options to purchase 390,000 shares of the Company's common stock). For purposes of this Agreement, a "New Program" shall collectively mean one or more plans, programs or arrangements (formal or informal), including individual grants, which provides after September 26, 2003 equity-based incentive compensation to least one of the other executive officers of the Company (the "Executive Management Team"). A one-time special grant upon and as a result of a person first becoming a member of the Executive Management Team shall be disregarded for purposes of the preceding sentence. The Employee shall be entitled to participate in the Old Program and/or the New Program, as applicable, subject to the reasonable terms of the applicable program (which terms may not discriminate, directly or indirectly, against Employee) and the terms of this Agreement.
For fiscal years of the Term subsequent to fiscal year 2003, the Company shall have the sole and exclusive discretion to determine the annual cash bonus and annual stock option award (or any New Program award) targets and target levels for the Employee; provided, however, that in determining the Employee's annual cash bonus and annual stock option award (or any New Program award), the Employee shall in all respects be treated reasonably, and equitably and comparably to the other members of the Executive Management Team."
4. Each of the Company and Employee acknowledges and agrees (and agrees not to claim to the contrary) that (a) neither this Amendment nor the signing of the stock option agreements by each party in connection with the stock option awards granted or to be granted to the Employee for fiscal years 2001, 2002 and 2003 shall be deemed a waiver by either party of any of its or his rights under the Agreement with respect to the stock option awards granted or to be granted to the Employee for fiscal years 2001, 2002 and 2003, and (b) except as specifically provided in this Amendment, the terms and conditions of the Agreement, including the Employee's rights thereunder, shall continue in full force and effect.
5. For the avoidance of doubt, if, with respect to any termination of the Agreement pursuant to Section 2(B)(iii) or 2(C) thereof, the Committee (as defined in the Ameritrade Holding Corporation 1996 Long-Term Incentive Plan (the "LTIP")) and/or the Company determines not to permit any stock options granted now or hereafter to Employee to (a) continue vesting after the date of such termination, or (b) remain exercisable after the date of such termination, in either case to the extent such options would have continued to vest or remain exercisable, as applicable, in accordance with their terms (without regard to any provision under any applicable agreement entitling the Company and/or the Committee to determine whether any such continued vesting or exercisability after the two-year anniversary of such termination date is required by Section 2(B)(iii) or 2(C) of the Agreement, as applicable) but for termination of the Agreement pursuant to Section 2(B)(iii) or 2(C) thereof, as applicable, then in each such case the Employee shall be entitled to losses and damages, if any, in accordance with Section 2(B)(iii) or Section 2(C) of the Agreement, as applicable.
6. For the avoidance of doubt, without the prior written consent of Employee, the Company may not amend any existing option agreement entered into by and between the Company and Employee prior to or on the date of this Amendment, including without limitation the annexed Stock Option Agreement. Further, any option agreement (or New Program award agreement) entered into by and between the Company and Employee after the date of this Amendment shall effectively provide that any amendment thereto shall not be effective without Employee's prior written consent. Any amendment to any option agreement shall also be subject to the consent of the Committee (as defined in the LTIP or any New Program, as applicable).
IN WITNESS WHEREOF, the parties hereto have executed this Amendment on this 5th day of August, 2004.
Ameritrade Holding Corporation
By: /s/ Ellen Koplow -------------------------------------- Name: /s/ Ellen Koplow --------------------------- Title: /s/ EVP and General Counsel --------------------------- |
J. Joe Ricketts
/s/ John Joe Ricketts ---------------------------------- J. Joe Ricketts |
Exhibit 10.12
AMERITRADE HOLDING CORPORATION
1996 LONG-TERM INCENTIVE PLAN
NON-QUALIFIED STOCK OPTION AGREEMENT
FOR EXECUTIVES
THIS AGREEMENT, made and entered into as of AUGUST 5, 2004(the "Grant Date") by and between Ameritrade Holding Corporation (the "Company") and JOHN J. RICKETTS (the "Participant");
WITNESSETH THAT:
WHEREAS, the Company maintains the Ameritrade Holding Corporation 1996 Long-Term Incentive Plan (the "Plan"); and
WHEREAS, the Participant is an employee of the Company and was selected by the Committee (as defined in the Plan) to receive the grant of an option under the Plan;
NOW, THEREFORE, the Company and the Participant hereby agree as follows;
1. Grant: Option Price. This Agreement evidences the grant to the Participant, pursuant to the terms of the Plan, of an option (the "Option") to purchase a total of 750,000 shares of Stock. The Exercise Price of each share subject to the Option shall be $10.90. The Option is not intended to be, and will not be treated as an "incentive stock option" as that term is used in section 422 of the Code.
2. Vesting. Subject to the terms and conditions of this Agreement, the Option shall become vested and exercisable with respect to 1/4 of the shares of Stock awarded under this Agreement on the first anniversary of the Grant Date, and shall become vested and exercisable with respect to an additional 1/4 of the shares of Stock under this Agreement on each subsequent anniversary until such time as the Option is fully exercisable; provided, however, that no portion of the Option shall vest or become exercisable after the date on which the Participant's employment with the Company terminates for any reason. Notwithstanding the foregoing, if the Participant's employment is terminated pursuant to Section 2(B)(iii) or Section 2(C) of the Employment Agreement between the Company and the Participant (referred to in such agreement as J. Joe Ricketts) made and effective as of October 1, 2001, as amended (the "Employment Agreement'), the Option shall continue to vest and become exercisable until the earlier of the date that the Option is fully exercisable or the expiration of the Term of the Employment Agreement (without giving effect to an early termination of the Employment Agreement), if earlier; provided, however, that this sentence shall apply to provide for vesting of the Option after the Participant's termination of employment only if the Committee determines that such continued vesting is required by Section 2(B)(iii) or Section 2(C) of the Employment Agreement. In the event that the Committee determines not to permit the Option to continue vesting after the date of such termination in accordance with its terms (without
regard to the proviso in the immediately preceding sentence), then the Participant shall be entitled to losses and damages, if any, in accordance with Section 2(B)(iii) or Section 2(C) of the Employment Agreement, as applicable.
3. Exercise. Subject to the restrictions contained herein, after the Option becomes vested or exercisable pursuant to paragraph 2 and prior to the Expiration Date (defined below), the Option, to the extent then vested or exercisable, may be exercised in whole or in part by filing a written notice with the Secretary of the Company at its corporate headquarters. The exercise notice must be filed prior to the Expiration Date, must specify the number of shares of Stock which the Participant elects to purchase and must be accompanied by payment of the Option Price (including any applicable withholding taxes) for such shares of Stock indicated by the Participant's election. Payment of the Option Price (and any applicable withholding taxes) shall be by cash or check payable to the Company, by delivery of shares of Stock having an aggregate Fair Market Value (valued as of the date of exercise) that is equal to the Option Price for the shares of Stock, or any combination thereof. The Participant may pay the Option Price by authorizing Ameritrade, Inc. (or such other suitable party designated by the Company) to sell shares of stock (or a sufficient portion of the shares) acquired upon exercise of the Option and remit to the Company a sufficient portion of the sale proceeds to pay the entire Option Price and any tax withholding resulting from such exercise.
4. Expiration of Option. The "Expiration Date" for this Option shall be the first to occur of the following, as described below, subject to the descriptions, definitions, and/or provisions of the Employment Agreement:
a. Notwithstanding the following, in no event shall the Expiration Date extend beyond the ten-year anniversary of the Grant Date.
b. Upon Death or disability (within the meaning of Section 2(B)(i) of the Employment Agreement), the Option shall immediately become 100% vested and the Expiration Date shall be the one-year anniversary of the Participant's termination date determined under Section 2(B)(i) of the Employment Agreement (after giving effect to the notice period);
c. Upon termination of the Participant's employment by the Company for reasons provided in Section 2(B)(ii) of the Employment Agreement (relating to termination for cause or the achievement of the stock price target), the Option shall be exercisable to the extent vested at the time the Participant's employment is terminated in accordance with in Section 2(B)(ii) of the Employment Agreement and the Expiration Date shall be the three-month anniversary of the Participant's termination date.
d. Upon termination of the Participant's employment by the Company
for reasons provided in Section 2(B)(iii) of the Employment
Agreement, or if the Participant's employment is terminated
pursuant to Section 2(C) of the Employment Agreement, the Option
shall be exercisable to the extent vested in accordance with
Section 2 of this Agreement at the time of exercise and the
Expiration Date shall be the later of the end of the stated Term
of the Employment Agreement (without giving effect to an early
termination of the Employment Agreement) or the two-year
anniversary of the Participant's termination date; provided,
however, that the Option shall be exercisable after the two year
anniversary of the Participant's actual termination date only if
the Committee determines that such exercise is required by
Section 2(B)(iii) or Section 2(C) of the Employment Agreement. In
the event that the Committee determines not to permit the Option
to continue to remain exercisable after the two-year anniversary
of such termination date in accordance with its terms (without
regard to the proviso in the immediately preceding sentence),
then the Participant shall be entitled to losses and damages, if
any, in accordance with Section 2(B)(iii) or Section 2(C) of the
Employment Agreement, as applicable.
e. Upon a Change of Control, as defined in Section 2(A) of the Employment Agreement, the Option shall immediately become 100% vested; provided, however, that while the Participant remains employed by the Company, the Option will only be exercisable to the extent it would have vested according to paragraph 2 of this Agreement absent a Change of Control. If the Participant's employment with the Company is terminated within twelve months from the occurrence of a Change of Control, the Expiration Date of the Option shall be the two-year anniversary of the Participant's termination date if such two-year anniversary would be later than the Expiration Date otherwise determined under the foregoing provisions of this Section 4.
5. Restriction on Sale of Shares. The Participant's right to sell any shares acquired by exercise of this Option shall be subject to the terms, conditions and restrictions of the Ameritrade equity ownership and disposition guidelines.
6. Nontransferability. The Option shall not be transferable except by will or the laws of descent and distribution and shall be exercisable during the Participant's lifetime only by the Participant.
7. Administration. The authority to manage and control the operation and administration of this Agreement shall be vested in the Committee and the Committee shall have all of the powers with respect to this Agreement that it has with respect to the Plan. Any interpretation of the Agreement by the Committee and any decision made by it with respect to the Agreement is final and binding on all persons.
8. Plan Governs. Notwithstanding anything in this Agreement to the contrary, the terms of this Agreement shall be subject to the terms of the Plan, a copy of which may be obtained by the Participant from the office of the Secretary of the Company.
9. Successors. This Agreement shall be binding upon and shall inure to the benefit of any assignee or successor in the interest of the Company, and shall be binding upon and inure to the benefits of any estate, legal representative, beneficiary or heir of the Participant.
10. Employee and Shareholder Status. This Agreement does not constitute a contract of employment or continued service and does not give the Participant the right to be retained as an employee of the Company. This Agreement does not confer upon the Participant or any holder thereof any right as a shareholder of the Company prior to the issuance of Stock pursuant to the exercise of the Option.
11. Amendment and Severability. This Agreement may be amended by written agreement of the Participant and the Company, subject to the consent of the Committee, without the consent of any other person. If any provision, sub-provision or paragraph of this Agreement is found to be unenforceable by a court of competent jurisdiction, it shall not impair the enforceability of the other provisions, sub-provisions, and paragraphs.
12. Defined Terms. Unless the context clearly implies or indicates the contrary, a word, term or phrase used or defined in the Plan is similarly used or defined for purposes of this Agreement.
* * * * * * *
IN WITNESS WHEREOF, the Participant has hereunto set his or her hand and the Company has caused these presents to be executed in its name and on its behalf, all as of the date first above written and the Participant hereby acknowledges that the terms and conditions of this Agreement have been read and understood.
PARTICIPANT
/s/ John Joe Ricketts ------------------------------------ |
AMERITRADE HOLDING CORPORATION
By: /s/ Ellen Koplow ------------------------------- Its: /s/ EVP and General Counsel ------------------------------- |
Exhibit 10.15
July 29, 2004
Phylis M. Esposito
434 East 52nd Street
Penthouse East
New York, New York 10022
Re: Executive Employment Agreement
Dear Phylis:
The purpose of the letter is to set out certain action taken by you and the Company with regard to your employment. In 2003, it was agreed that your Executive Employment Agreement dated February 1, 2002 ("Agreement"), would be renewed for the additional 12 months referred to in the Agreement as the Renewal Term. The full Term of your Agreement (including the initial and the Renewal Term) was to end on June 30, 2004. Recently, you and Joe Moglia, on behalf of Ameritrade, agreed to extend the Term of your Agreement for another 12 months, ending on June 30, 2005.
At the time when your Agreement was renewed for the first 12 month Renewal Term, it was agreed that in addition to continuing your role as head of Investor Relations, you would head-up the newly created Government Relations function and no longer be responsible for corporate communications or marketing.
Please indicate by signing the letter is the space below that the description above accurately represents the understanding reached between you and the Company and return one fully signed letter to me. Please keep one copy for your files.
Very truly yours,
AMERITRADE HOLDING CORPORATION
By: /s/ Kurt Halvorson -------------------------------- Kurt Halvorson Chief Administrative Office |
The undersigned agrees that this letter accurately sets out the agreement reached between the undersigned and Ameritrade.
/s/ Phylis M. Esposito ---------------------- Phylis M. Esposito |
Exhibit 10.25
AMERITRADE HOLDING CORPORATION
1996 LONG-TERM INCENTIVE PLAN
NON-QUALIFIED STOCK OPTION AGREEMENT
FOR EXECUTIVES
THIS AGREEMENT, made and entered into as of ________(the "Grant Date") by and between Ameritrade Holding Corporation (the "Company") and ____________ (the "Participant");
WITNESSETH THAT:
WHEREAS, the Company maintains the Ameritrade Holding Corporation 1996 Long-Term Incentive Plan (the "Plan"); and
WHEREAS, the Participant is an employee of the Company and was selected by the Committee (as defined in the Plan) to receive the grant of an option under the Plan;
NOW, THEREFORE, the Company and the Participant hereby agree as follows;
1. Grant: Option Price. This Agreement evidences the grant to the Participant, pursuant to the terms of the Plan, of an option (the "Option") to purchase a total of ________ shares of Stock. The Exercise Price of each share subject to the Option shall be $_______. The Option is not intended to be, and will not be treated as an "incentive stock option" as that term is used in section 422 of the Code.
2. Vesting. Subject to the terms and conditions of this Agreement, the Option shall become vested and exercisable with respect to 1/4 of the shares of Stock awarded under this Agreement on the first anniversary of the Grant Date, and shall become vested and exercisable with respect to an additional 1/4 of the shares of Stock under this Agreement on each subsequent anniversary until such time as the Option is fully exercisable; provided, however, that no portion of the Option shall vest or become exercisable after the date on which the Participant's employment with the Company terminates for any reason or after the date of a Forfeiture Event (as defined below), whichever is earlier.
3. Exercise. Subject to the restrictions contained herein, after the Option becomes vested or exercisable pursuant to paragraph 2 and prior to the Expiration Date (defined below), the Option, to the extent then vested and exercisable, may be exercised in whole or in part by filing a written notice with the Secretary of the Company at its corporate headquarters. The exercise notice must be filed prior to the Expiration Date, must specify the number of shares of Stock which the Participant elects to purchase and must be accompanied by payment of the Option Price (including any applicable withholding taxes) for such shares of Stock indicated by the Participant's election. Payment of the Option Price (and any applicable withholding taxes) shall be by cash or check payable to the Company, by delivery of shares of Stock having an aggregate Fair Market Value (valued as of the date of exercise) that is equal to the Option Price for the shares of Stock, or any combination thereof. The Participant may pay the Option Price by
authorizing Ameritrade, Inc. (or such other suitable party designated by the Company) to sell shares of stock (or a sufficient portion of the shares) acquired upon exercise of the Option and remit to the Company a sufficient portion of the sale proceeds to pay the entire Option Price and any tax withholding resulting from such exercise.
4. Expiration of Option and Vesting and Exercisability Upon Termination and Change Of Control.
The "Expiration Date" for this Option shall be described below. All italicized terms in this paragraph 4, unless noted, are as defined in the Participant's Employment Agreement, effective September 9, 2002 ("Employment Agreement").
a. Notwithstanding the following, in no event shall the Expiration Date extend beyond the ten-year anniversary of the Grant Date.
b. Upon Death or Disability, the Option shall immediately become 100% vested and the Expiration Date shall be the one-year anniversary of the Participant's Date of Termination. In addition, for purposes of this Option, the Participant's employment with the Company shall be considered to have terminated because of Disability if, at the time of termination, the Participant is eligible for benefits under the applicable Company long-term disability plan.
c. Upon Retirement (as defined below), the Option shall be exercisable to the extent vested at the time of the termination event, in accordance with Section 2 of this Agreement, and the Expiration Date shall be the one-year anniversary of the Participant's Date of Termination of employment with the Company. A Participant's employment with the Company shall be considered to have terminated because of "Retirement" if the Participant's employment terminates, for reasons other than Cause, after the Participant has attained age 55 and completed at least 10 years of continuous service with the Company.
d. Upon Termination by the Company for Reasons Other Than Cause or upon
Voluntary Resignation by the Executive for Good Reason or
Termination of Employment Agreement at the end of the Term, if the
Participant complies with the terms of Sections 4 and 5 of the
Employment Agreement, the Option shall be exercisable to the extent
vested at the time of the termination event, in accordance with
Section 2 of this Agreement and the Expiration Date shall be the
one-year anniversary of the Participant's Date of Termination.
e. Upon Voluntary Resignation, if the Participant complies with Sections 4 and 5 of the Employment Agreement, the Option shall be exercisable to the extent vested at the time of the termination event, in accordance with Section 2 of this Agreement, and the Expiration Date shall be the three-month anniversary of the Participant's Date of Termination of employment with the Company. If the Participant does not comply with Sections 4 and 5 of the Employment
Agreement and the Option is not forfeited, the Expiration Date shall be the one-month anniversary of the Date of Termination.
f. Upon Termination by the Company for Cause, if the Participant complies with Sections 4 and 5 of the Employment Agreement, the Option shall be exercisable to the extent vested at the time of the termination event, in accordance with Section 2 of this Agreement, and the Expiration Date shall be the three-month anniversary of the Participant's Date of Termination.
g. Upon a Change of Control, the Option shall immediately become 100% vested; however while the Participant remains employed by the Company, the Option will only be exercisable to the extent it would have vested according to paragraph 2 of this Agreement absent a Change of Control. If the Participant's employment with the Company is terminated by the Company without Cause or by the Participant for Good Reason within twelve months that a Change of Control has occurred, the Expiration Date of the Option shall be the two-year anniversary of the Participant's Date of Termination. For purposes of this Section g., the Datek transaction which occurred on September 9, 2002 does NOT constitute a Change of Control.
4. Restriction on Sale of Shares. The Participant's right to sell any shares acquired by exercise of this Option shall be subject to the terms, conditions and restrictions of the Ameritrade equity ownership and disposition guidelines.
5. Nontransferability. The Option shall not be transferable except by will or the laws of descent and distribution and shall be exercisable during the Participant's lifetime only by the Participant.
6. Administration. The authority to manage and control the operation and administration of this Agreement shall be vested in the Committee and the Committee shall have all of the powers with respect to this Agreement that it has with respect to the Plan. Any interpretation of the Agreement by the Committee and any decision made by it with respect to the Agreement is final and binding on all persons.
7. Plan Governs. Notwithstanding anything in this Agreement to the contrary, the terms of this Agreement shall be subject to the terms of the Plan, a copy of which may be obtained by the Participant from the office of the Secretary of the Company.
8. Successors. This Agreement shall be binding upon and shall inure to the benefit of any assignee or successor in the interest of the Company, and shall be binding upon and inure to the benefits of any estate, legal representative, beneficiary or heir of the Participant.
9. Employee and Shareholder Status. This Agreement does not constitute a contract of employment or continued service and does not give the Participant the right to be retained as an employee of the Company. This Agreement does not confer upon the Participant or
any holder thereof any right as a shareholder of the Company prior to the issuance of Stock pursuant to the exercise of the Option.
10. Amendment and Severability. This Agreement may be amended by written agreement of the Participant and the Company, subject to the consent of the Committee, without the consent of any other person. If any provision, sub-provision or paragraph of this Agreement is found to be unenforceable by a court of competent jurisdiction, it shall not impair the enforceability of the other provisions, sub-provisions, and paragraphs.
11. Defined Terms. Unless the context clearly implies or indicates the contrary, a word, term or phrase used or defined in the Plan is similarly used or defined for purposes of this Agreement.
12. Forfeiture of Benefits.
a. Forfeiture Event. If a Forfeiture Event occurs, the Participant will immediately forfeit any remaining part of the Option and to the extent that he or she has previously exercised any or all of the Option, the Participant will be immediately obligated to pay the Company the Forfeited Amount (defined below). A Forfeiture Event shall mean the earliest of the following events occurring during the "Forfeiture Period" (defined as the period beginning on the date the Option is granted and ending upon the termination of the Restricted Period, as defined in the Employment Agreement):
i. Non-Competition.
1. If the Participant accepts employment with an employer that is in competition with the Company, unless the Participant's termination of employment is initiated by the Company for reasons other than the Participant's misconduct;
2. If the Participant solicits any employee or customer of the Company to end an existing relationship, contractual or otherwise, with the Company; or
3. If the Participant engages in any other activity harmful to the interests of or in competition with the Company.
ii. Violation of Employment Agreement. With respect to any Participant who is a party to an employment agreement with the Company, the violation of any provision of such employment agreement; provided, however, that if the provisions of this Agreement expressly conflict with the provisions of any employment agreement, the provisions of the employment agreement will control.
The Committee, upon recommendation by the Chief Executive Officer (the "CEO") of the Company (or the senior human resources officer, if so delegated to such individual by the CEO), shall have the sole authority to determine whether a
Forfeiture Event has occurred and, if it has occurred, whether to waive the resulting forfeiture. The determination by the Committee shall be final and binding on all parties.
b. Forfeiture. The exercise of any or all of this Option shall be deemed to be consent to, and authorization of the payment to the Company of any Forfeited Amount. Payment to the Company of any Forfeited Amount will be made by any or all of the following methods, at the sole discretion of the CEO, as required for the Company to recoup the Forfeited Amount:
i. The Company may subtract any Forfeited Amount from any payments payable to the Participant by the Company or any related entity after the Forfeiture Event;
ii. The Participant will pay to the Company any Forfeited Amount which is not repaid to the Company pursuant to the immediately preceding paragraph within 30 days of the Forfeiture Event; and/or
iii. The Participant will return any shares resulting from a stock option exercise, if not previously sold, to the Company.
c. Forfeited Amount. For purposes of this Option, the Forfeited Amount shall mean either exercised Option shares or the aggregate income, including withholding (shall be computed by multiplying the number of shares purchased upon exercise of the Option, or any part of it, during the Forfeiture Period by the excess of (1) the Fair Market Value on the date of exercise of one share of Stock over (2) Exercise Price) realized by the Participant upon the exercise of all or any part of the Option during the 36 months immediately preceding the Forfeiture Event.
* * * * * * *
IN WITNESS WHEREOF, the Participant has hereunto set his or her hand and the Company has caused these presents to be executed in its name and on its behalf, all as of the date first above written and the Participant hereby acknowledges that the terms and conditions of this Agreement have been read and understood.
PARTICIPANT
AMERITRADE HOLDING CORPORATION
Exhibit 10.27
AMERITRADE HOLDING CORPORATION
1996 DIRECTORS INCENTIVE PLAN
NON-QUALIFIED STOCK OPTION AGREEMENT
THIS AGREEMENT, made and entered into as of ______ (the "Grant Date") by and between Ameritrade Holding Corporation (the "Company") and __________ (the "Director");
WITNESSETH THAT:
WHEREAS, the Company maintains the Ameritrade Holding Corporation 1996 Directors Incentive Plan (the "Plan"); and
WHEREAS, the Director is a Non-Employee Director of the Company (as defined in the Plan) and as of the date first above written has been awarded a stock option under the Plan;
NOW, THEREFORE, the Company and the Director hereby agree as follows:
1. Option Price. This Agreement evidences the grant to the Director, pursuant to the terms of the Plan, of an option (the "Option") to purchase a total of _____ shares of Stock. The Exercise Price of each share subject to the Option shall be ____. The Option is not intended to be, and will not be treated as an "incentive stock option" as that term is used in section 422 of the Code.
2. Vesting and Expiration. Subject to the terms and conditions of this Agreement, the Option shall become vested and exercisable with respect to one-third of the shares of Stock awarded under this Agreement on the first anniversary of the Grant Date, and shall become vested and exercisable with respect to an additional one-third of the shares of Stock under this Agreement on each subsequent anniversary until such time as the Option is fully exercisable. The Option shall expire as of the Expiration Date set forth in the Plan which shall be earlier of (a) the ten-year anniversary of the Grant Date or, (b) the one-year anniversary of the date on which the Director's service as a director of the Company terminates for cause.
3. Exercise. After the Option becomes vested or exercisable pursuant to paragraph 2 and prior to the Expiration Date, the Option, to the extent then vested or exercisable, may be exercised in whole or in part by filing a written notice with the Secretary of the Company at its corporate headquarters. The exercise notice must be filed prior to the Expiration Date, must specify the number of shares of Stock which the Director elects to purchase and must be accompanied by payment of the Option Price (including any applicable withholding taxes) for such shares of Stock indicated by the Director's election. Payment of the Option Price (and any applicable withholding taxes) shall be by cash or check payable to the Company, by delivery of shares of Stock having an aggregate Fair Market Value (valued as of the date of exercise) that is equal to the Option Price for the shares of Stock, or any combination thereof. The Director may pay the Option Price by authorizing Ameritrade, Inc. (or such other suitable party designated by the Company) to sell shares of stock (or a sufficient portion of the shares) acquired upon exercise of the Option and remit to the Company a sufficient portion of the sale proceeds to pay the entire Option Price and any tax withholding resulting from such exercise.
4. Restriction on Sale of Shares. The Director's right to sell any shares acquired by exercise of this Option shall be subject to the terms, conditions and restrictions of the Ameritrade equity ownership and disposition guidelines.
5. Nontransferability. The Option shall not be transferable except by will or the laws of descent and distribution and shall be exercisable during the Director's lifetime only by the Director.
6. Administration. The authority to manage and control the operation and administration of this Agreement shall be vested in the Committee and the Committee shall have all of the powers with respect to this Agreement that it has with respect to the Plan. Any interpretation of the Agreement by the Committee and any decision made by it with respect to the Agreement is final and binding on all persons.
7. Plan Governs. Notwithstanding anything in this Agreement to the contrary, the terms of this Agreement shall be subject to the terms of the Plan, a copy of which may be obtained by the Director from the office of the Secretary of the Company.
8. Successors. This Agreement shall be binding upon and shall inure to the benefit of any assignee or successor in the interest of the Company, and shall be binding upon and inure to the benefits of any estate, legal representative, beneficiary or heir of the Director.
9. Director and Shareholder Status. This Agreement does not constitute a contract of continued service and does not give the Director the right to be retained as a director of the Company. This Agreement does not confer upon the Director or any holder thereof any right as a shareholder of the Company prior to the issuance of Stock pursuant to the exercise of the Option.
10. Amendment. This Agreement may be amended by written agreement of the Director and the Company, subject to the consent of the Committee, without the consent of any other person.
11. Defined Terms. Unless the context clearly implies or indicates the contrary, a word, term or phrase used or defined in the Plan is similarly used or defined for purposes of this Agreement.
IN WITNESS WHEREOF, the Director has hereunto set his or her hand and the Company has caused these presents to be executed in its name and on its behalf, all as of the date first above written and the Director hereby acknowledges that the terms and conditions of the Agreement have been read and understood.
DIRECTOR
AMERITRADE HOLDING CORP.
Exhibit 10.28
AMERITRADE HOLDING CORPORATION
1996 DIRECTORS INCENTIVE PLAN
RESTRICTED STOCK AGREEMENT
THIS AGREEMENT, made and entered into as of _____________ (the "Award Date") by and between Ameritrade Holding Corporation (the "Company") and _____________ (the "Director");
WITNESSETH THAT:
WHEREAS, the Company maintains the Ameritrade Holding Corporation 1996 Directors Incentive Plan (the "Plan");
WHEREAS the Director is a Non-Employee Director of the Company (as defined in the Plan) whose first term began on _____________;
WHEREAS, pursuant to the terms of the Plan, each Non-Employee Director is to be awarded shares of the Company's common stock ("Stock") upon his election to the Board of Directors of the Company (the "Board") for his first term, which Stock is subject to certain vesting conditions and the purpose of this Agreement is to evidence that award;
NOW, THEREFORE, the Company and the Participant hereby agree as follows:
1. Award. This Agreement evidences the award to the Director, pursuant to the terms of the Plan, of ______ shares of Stock. The award of Stock is subject in all respects to the terms of this Agreement and the Plan.
2. Earning of Shares. The shares of Stock subject to this Agreement shall be earned (or vested) in three substantially equal annual installments beginning on the first anniversary of the Award Date. Prior to the date on which a share is earned, the Director shall have no rights as a shareholder with respect to such share and such share may not be sold, assigned, transferred, pledged, hypothecated or otherwise encumbered; provided, however, that beginning on the Award Date, the Director shall have the right to vote the shares of Stock subject to the award.
3. Forfeitures. Notwithstanding any other provision of this Agreement, the Director shall forfeit, and thereafter shall have no further rights with respect to, any share which is not earned (or vested) as of the date on which the directors' service as a director ceases for any reason.
4. Nontransferability. The shares of Stock subject to this Agreement shall not be transferable except by will or the laws of descent and distribution unless and until such shares are earned by the Director in accordance with this Agreement.
5. Administration. The authority to manage and control the operation and administration of this Agreement shall be vested in the Committee (other than the Director) and the Committee shall have all of the powers with respect to this Agreement that it has with respect to the Plan. Any interpretation of the Agreement by the Committee and any decision made by it with respect to the Agreement is final and binding on all persons.
6. Plan Governs. Notwithstanding anything in this Agreement to the contrary, the terms of this Agreement shall be subject to the terms of the Plan, a copy of which may be obtained by the Director from the office of the Secretary of the Company.
7. Successors. This Agreement shall be binding upon and shall inure to the benefit of any assignee or successor in the interest of the Company, and shall be binding upon and inure to the benefits of any estate, legal representative, beneficiary or heir of the Director.
8. Director and Shareholder Status. This Agreement does not constitute a contract of continued service and does not give the Director the right to be retained as a director of the Company. Except as specifically provided in paragraph 2, this Agreement does not confer upon the Director or any holder thereof any right as a shareholder of the Company prior to the issuance of Stock hereunder.
9. Amendment. This Agreement may be amended by written agreement of the Director and the Company, subject to the consent of the Committee, without the consent of any other person.
10. Defined Terms. Unless the context clearly implies or indicates the contrary, a word, term or phrase used or defined in the Plan is similarly used or defined for purposes of this Agreement.
IN WITNESS WHEREOF, the Director has hereunto set his hand and the Company has caused these presents to be executed in its name and on its behalf, all as of the date first above written.
AMERITRADE HOLDING CORPORATION
Exhibit 10.29
As Amended and Restated as of September 25, 2004
AMERITRADE HOLDING CORPORATION
EXECUTIVE DEFERRED COMPENSATION PROGRAM
1. ELIGIBILITY. Each full-time executive employee of Ameritrade Holding Corporation ("Ameritrade") or any of its subsidiaries (collectively, the "Company") who participates in the Company's Incentive Compensation Plan or such other incentive compensation plans, as may be designated by the Compensation Committee of Ameritrade's Board of Directors (the "Compensation Committee"), (each, a "Designated Plan") and who has also been selected for participation by the Compensation Committee shall be eligible to participate in the Ameritrade Holding Corporation Executive Deferred Compensation Program (the "Program"). Each eligible employee who files a Deferral Election (as defined in Section 3) and who has a Stock Unit Credit (as defined in Section 6) made to his Deferred Stock Account (as defined in Section 5) shall be deemed to have been awarded a Performance Unit under and in accordance with the terms of the Ameritrade Holding Corporation 1996 Long-term Incentive Plan (the "Incentive Plan") as of the last day of the Performance Period (as defined in Section 3). Such Performance Unit shall be considered fully vested from and after the date of grant and shall be governed by the terms and conditions of the Program and the specific provisions of the Designated Plan to the extent not inconsistent with the terms of the Incentive Plan. Notwithstanding any other provision of the Program to the contrary, if the Compensation Committee determines that participation by one or more Participants shall cause the Program as applied to the Company to be subject to Part 2, 3 or 4 of Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), the entire interest of such Participant under the Program shall be, in the discretion of the Compensation Committee, immediately paid to such Participant or shall otherwise be segregated from the Program, and such Participant(s) shall cease to have any interest under the Program. In the event the Participant has died, the preceding sentence of this Section shall apply to the Participant's interest which is payable to the Participant's beneficiary pursuant to the terms hereof.
2. DEFINED TERMS. To the extent not otherwise specified in the Program, capitalized terms used in the Program shall have the meaning specified in the Plan.
3. DEFERRAL OF INCENTIVE COMPENSATION. An eligible employee may, by filing a "Deferral Election" in accordance with rules established by the Plan Administrator (as defined in Section 12), irrevocably elect to defer all or a portion of any incentive compensation, expressed in whole percentages, that he or she may earn under a Designated Plan (an "Incentive Award") during the Performance Period which shall be the fiscal year following the fiscal year in which the irrevocable Deferral Election is made (the "Deferral Year") or such other period permitted under Section 4 or as otherwise provided by the Compensation Committee. Such Deferral Election shall be made pursuant to Section 4.
4. PARTICIPATION. An eligible employee shall become a "Participant" in the Program by filing a Deferral Election with the Plan Administrator on a form prescribed for that
purpose. A Deferral Election shall be filed in accordance with rules prescribed by the Plan Administrator; provided, however, that no Deferral Election for any Deferral Year shall be given effect unless it is filed prior to the first day of the Deferral Year to which it relates or such earlier time prescribed by the Compensation Committee. A Deferral Election shall specify both the amount to be deferred, expressed as a percentage of the Incentive Award otherwise payable in cash to the Participant under the terms of a Designated Plan, the year in which the amounts deferred shall be paid and the form of distribution (either lump sum or annual installments not exceeding 10 years). A Deferral Election shall be effective only for the Deferral Year to which it relates. A new Deferral Election must be filed for each Deferral Year. Notwithstanding any other provision of the Program other than Sections 16 or 18, once a Deferral Election is filed with the Plan Administrator in accordance with rules established by the Plan Administrator, such Deferral Election shall be irrevocable and no changes to such Deferral Election shall be permitted.
5. SHARE VALUATION. For purposes of the Program, the term "Share Value" shall mean the average of the closing market composite price for one share of Stock as reported on the NASDAQ of all trading days three calendar months prior to the Credit Date (as defined in Section 6) of the Deferral Year. The "Share Value" is used to determine the number of Share Units to be credited to a Participant's Account under Section 6.
6. DEFERRED STOCK ACCOUNT. On the date a Participant would normally receive payments of the Incentive Award if payment had not been deferred (the "Credit Date"), a Participant shall receive a credit ("Stock Unit Credit") to his or her bookkeeping account under the Program (the "Deferred Stock Account"). The credit shall be made in stock units with each unit corresponding to one share of Stock. The amount of the Stock Unit Credit shall be equal to that number of stock units (rounded to the nearest whole share) determined by dividing the amount of the Participant's Incentive Award, specified for deferral pursuant to the Participant's Deferral Election by the Share Valuation.
7. DIVIDEND CREDIT. Each time a dividend is paid on the Stock, a Participant shall receive a credit ("Dividend Credit") to his or her Deferred Stock Account. The amount of the Dividend Credit shall be the number of stock units (rounded to the nearest whole share) determined by multiplying the dividend amount per share by the number of stock units credited to the Participant's Deferred Stock Account as of the record date for the dividend and dividing the product by the closing price of one share of common stock on NASDAQ on the dividend payment date or, if the Stock is not traded on the dividend payment date, the next preceding date on which it was traded.
8. ADJUSTMENTS FOR CERTAIN CHANGES IN CAPITALIZATION. In the event of any merger, consolidation, reorganization, recapitalization, spinoff, stock dividend, stock split, reverse stock split, exchange, or other distribution with respect to shares of Stock or other change in the corporate structure or capitalization affecting the Stock, then the numbers, rights, and privileges of the stock units credited to Participants' Deferred Stock Accounts under the Program shall be increased, decreased, or changed in like manner as if shares corresponding to such stock units had been issued and outstanding, fully paid, and nonassessable at the time of such occurrence.
9. PAYMENT OF DEFERRED STOCK ACCOUNTS. As soon as practicable after the
date elected by the Participant pursuant to his Deferral Election (as determined
in accordance with uniform rules established by the Plan Administrator), that
number of shares of Stock equal to the total whole number of Stock Unit Credits
and Dividend Credits to be distributed to the Participant as of such date shall
be distributed to the Participant (or in the event of his death, his
beneficiary); provided, however, that if the Participant has elected installment
payments, the number of shares of Stock to be distributed as of the first
distribution date and each subsequent installment shall be equal to that number
of Stock Unit Credits and Dividend Credits then credited to the Participant's
Deferred Stock Account divided by the number of installment payments remaining
(rounded down to whole shares); and provided further that, distributions
following the death or disability of the Participant shall be as specified in
Section 16. Such shares of Stock shall be distributed from shares reserved for
issuance under the Incentive Plan. If a Participant dies before receiving all
distributions to which he is entitled under the Program, the Plan Administrator
must be notified in writing. To be effective, any beneficiary designation by a
Participant must be in writing, delivered and accepted by the Plan Administrator
prior to the Participant's death. In default of an effective beneficiary
designation, the Participant's estate shall be treated as his beneficiary for
purposes of the Program.
10. NONASSIGNABILITY. No right to receive distributions under the Program shall be assignable or transferable by a Participant other than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Internal Revenue Code of 1986 as amended, Title I ERISA, or rules thereunder. The designation of a beneficiary by a Participant in accordance with the terms of the Program does not constitute a transfer.
11. FUNDING. The Program constitutes only an unfunded, unsecured promise of the Company to make payments and distributions in the future in accordance with the terms of the Program. No Participant or party claiming an interest under the Program shall have any interest whatsoever in any specific asset of the Company. To the extent that any party acquires a right to receive distribution or payment under the Program, such right shall be equivalent to that of an unsecured general creditor of Ameritrade. Notwithstanding the foregoing, Ameritrade may establish one or more trusts, with such trustee as the Compensation Committee may approve, for the purpose of providing for the payment of deferred amounts under the Program. Such trust or trusts may be irrevocable, but the assets thereof shall be subject to the claims of the general creditors of Ameritrade. Nothing in the Program shall require Ameritrade to establish any trust to provide benefits under the Program. To the extent benefits under the Program are actually paid from any such trust, Ameritrade shall have no further obligation with respect to such benefits.
12. ADMINISTRATION. The Program shall be administered by the Compensation Committee (the "Plan Administrator"), which shall have the authority to interpret the Program and to adopt procedures for implementing the Program. The Plan Administrator may delegate any of its duties hereunder to the extent not inconsistent in the Incentive Plan.
13. AMENDMENT AND TERMINATION. The Compensation Committee may at any time terminate, suspend, or amend this Program. No such action shall deprive any Participant of any benefits to which he or she would have been entitled under the Program if termination of the Participant's employment had occurred on the day prior to the date such action was taken, unless agreed to by the Participant.
14. EFFECTIVE DATE. The effective date of the Program shall be determined upon approval of the Compensation Committee.
15. EMPLOYMENT AND STOCKHOLDER STATUS. Nothing in the Program shall interfere with nor limit in any way the right of the Company to terminate any Participant's employment at any time, nor confer upon any Participant any right to continue in the employ of the Company. The Program will not give any person any right or claim to any benefits under the Program unless such right or claim has specifically accrued under the terms of the Program. Participation in the Program shall not create any rights in a Participant (or any other person) as a stockholder of Ameritrade until shares of Stock are registered in the name of the Participant (or such other person).
16. DISTRIBUTIONS TO PERSONS UNDER DISABILITY OR DEATH. In the event a Participant or his beneficiary is declared incompetent and a conservator or other person legally charged with the care of his person or of his estate is appointed, any benefit to which such Participant or beneficiary is entitled under the Program shall be paid to such conservator or other person legally charged with the care of his person or of his estate. In the event a Participant or his beneficiary is disabled on a long term basis, as determined by the Compensation Committee, or dies prior to receiving all distributions to which he is entitled under the Program, the Participant's beneficiary or estate shall receive the distribution of the Participant's entire remaining Program benefit in a lump sum as soon as practicable following the Participant's disability or death.
17. SUCCESSORS. The obligations of Ameritrade under the Program shall be binding on any assignee or successor in interest thereto.
18. UNFORESEEABLE EMERGENCY. Prior to the date otherwise scheduled for distribution of his Deferred Stock Account under the Program, upon a showing of an unforeseeable emergency, the Compensation Committee may approve a Participant's request to accelerate payment of an amount not exceeding the lesser of (a) the amount necessary to meet the emergency or (b) the balance in his Deferred Stock Account under the Program. For purposes of the Program, the term "unforeseeable emergency" shall mean an unanticipated emergency that is caused by an event beyond the control of the Participant (or the control of the beneficiary, if the amount is payable to a beneficiary) and that would result in severe financial hardship to the individual if early payment were not permitted. The determination of "unforeseeable emergency" shall be made by the Compensation Committee, based on such information as the Compensation Committee shall deem to be necessary.
Exhibit 10.32
FIRST AMENDMENT OF
DATEK ONLINE HOLDINGS CORP. 1998 STOCK OPTION PLAN
WHEREAS, Ameritrade Holding Corporation maintains the Datek Online Holdings Corp. 1998 Stock Option Plan (the "Plan"); and
WHEREAS, amendment of the Plan is now considered desirable;
NOW, THEREFORE, the Plan is hereby amended, effective as of September 25, 2004, in the following particulars:
1. By changing the name of the Plan from "DATEK ONLINE HOLDINGS CORP. 1998 STOCK OPTION PLAN" to "AMERITRADE HOLDING CORPORATION 1998 STOCK OPTION PLAN".
2. By substituting the following for Section 1 of the Plan:
"1. PURPOSE AND GENERAL INFORMATION.
Pursuant to an agreement and plan of merger (the `Merger Agreement'), Datek Online Holdings Corp. (`Datek') became a subsidiary of a newly formed corporation, Ameritrade Holding Corporation (`Ameritrade' or the `Company') effective as of September 9, 2002 (the `Restatement Date') and as of the Restatement Date, Ameritrade assumed the Plan and all outstanding obligations hereunder. The Plan was amended and restated effective as of September 9, 2002. Effective as of September 25, 2004, the name of the Plan was changed to the Ameritrade Holding Corporation 1998 Stock Option Plan (the `Plan').
A. The purposes of the Plan are:
o to induce certain employees, directors and consultants to remain in the employ or service of Ameritrade and its present and future subsidiary corporations (each a `Subsidiary'). The terms in quotes are defined in Section 424(f) of the Internal Revenue Code of 1986, as amended (the `Code').
o to attract new individuals to accept employment or service with Ameritrade and Subsidiaries and to encourage them to own Ameritrade stock.
B. The Company believes that the granting of stock options (the `Options') under the Plan will benefit the Company in several ways. Options will help to retain management. Options create incentives for good performance on the job. Employees with Options should be more interested in the Company's doing well, which in turn should increase the value of their Options.
C. Two kinds of Options can be granted under the Plan. One kind is called an `incentive stock option' (another term that is defined in the Code, specifically Section 422(b) of the Code). The other kind is called a `non-qualified stock option.' Which kind of Option is being granted is decided by the Committee (the `Committee') referred to in Section 4 below at the time the Option is granted. The Committee can grant one, the other, or both kinds of Options to any person eligible to have Options under the Plan."
Exhibit 10.34
FIRST AMENDMENT OF
DATEK ONLINE HOLDINGS CORP.
2001 STOCK INCENTIVE PLAN
WHEREAS, Ameritrade Holding Corporation maintains the Datek Online Holdings Corp. 2001 Stock Incentive Plan (the "Plan"); and
WHEREAS, amendment of the Plan is now considered desirable;
NOW, THEREFORE, the Plan is hereby amended, effective as of September 25, 2004, in the following particulars:
1. By changing the name of the Plan from "DATEK ONLINE HOLDINGS CORP. 2001
STOCK INCENTIVE PLAN" to "AMERITRADE HOLDING CORPORATION 2001 STOCK INCENTIVE
PLAN."
2. By substituting the following for Section 1 of the Plan:
"1. Purpose.
This Plan was originally adopted for the purpose of strengthening Datek Online Holding Corp. (`Datek') by providing an incentive to its employees, officers and directors and to the employees, officers and directors of its Subsidiaries and thereby encouraging them to devote their abilities and industry to the success of the business enterprise of Datek and its Subsidiaries. Pursuant to an agreement and plan of merger (the `Merger Agreement'), Datek Online Holdings Corp. (`Datek') became a subsidiary of a newly formed corporation, Ameritrade Holding Corporation (`Ameritrade' or the `Company') effective as of September 9, 2002 (the `Restatement Date') and as of the Restatement Date, Ameritrade assumed the Plan and all outstanding obligations hereunder. It is intended that the purpose of the Plan be achieved by extending to employees (including future employees who have received a formal written offer of employment), officers and directors of the Company and its affiliates an added long-term incentive for high levels of performance and unusual efforts through the grant of Incentive Stock Options and Nonqualified Stock Options (as each term is herein defined). Effective as of September 25, 2004, the name of the Plan was changed to the Ameritrade Holding Corporation 2001 Stock Incentive Plan (the `Plan')."
3. By substituting the following for Section 2.27 of the Plan:
"2.27 `Plan' means the Ameritrade Holding Corporation 2001 Stock Incentive Plan, as amended from time to time."
.
.
.
EXHIBIT 21.1
Subsidiaries of the Registrant
Subsidiary State or Other Jurisdiction of Domicile ---------- --------------------------------------- Accutrade, Inc. Nebraska AmeriFirst Capital Corp. California Ameritrade Advisory Services, LLC Delaware Ameritrade Canada Financial Services, Inc. Canada Ameritrade Canada, Inc. Canada Ameritrade Development Company, Inc. Delaware Ameritrade Institutional Services, Inc. Florida Ameritrade International Company, Inc. Cayman Islands Ameritrade IP Company, Inc. Delaware Ameritrade Northwest, Inc. Oregon Ameritrade Online Holdings Corp. Delaware Ameritrade Services Company, Inc. Delaware* Ameritrade, Inc. Nebraska Amerivest Investment Management, LLC Delaware Datek Online Financial Services LLC Delaware Datek Online Holdings Corp. Delaware Datek Online Management Corp. Delaware Financial Passport Insurance Agency, Inc. Virginia** Financial Passport, Inc. Delaware Freetrade.com, Inc. New York iCapital Markets LLC New York iClearing LLC Delaware J.P. Securities, Inc. Nebraska Nebraska Hudson Company, Inc. New York OnMoney Financial Services Corporation Delaware PFN Mortgage Services, Inc. Delaware PFN Mortgage Services, LLC Delaware TenBagger, Inc. Nevada ThinkTech, Inc. Delaware*** TradeCast Enterprises LLC Texas TradeCast Inc. Delaware TradeCast Investments Ltd. Texas TradeCast Ltd. Texas TradeCast Management Corp. Texas TradeCast Securities Ltd. Texas Watcher Technologies LLC Delaware |
* In Texas this entity does business as Ameritrade Support Services Corporation ** In North Dakota this entity does business as F.P. Insurance Agency, Inc. *** In Texas this entity does business as T2 Technology Support, Inc.
Unless otherwise noted, each subsidiary does business under its actual name.
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Numbers 333-99481, 333-99353, 333-105336, 333-86164 and 333-77573 on Form S-8, Registration Statement Numbers 333-110170 and 333-87999 on Form S-3 and Post Effective Amendment No. 1 to Registration Statement 333-88632 on Form S-3 to Form S-4 of Ameritrade Holding Corporation of our reports dated December 9, 2004, appearing in this Annual Report on Form 10-K of Ameritrade Holding Corporation for the year ended September 24, 2004.
/s/ Deloitte & Touche LLP Omaha, Nebraska December 9, 2004 |
EXHIBIT 31.1
CERTIFICATION
I, Joseph H. Moglia, certify that:
1. I have reviewed this annual report on Form 10-K of Ameritrade Holding Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: December 9, 2004 /s/Joseph H. Moglia ---------------------------------- Joseph H. Moglia Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION
I, John R. MacDonald, certify that:
1. I have reviewed this annual report on Form 10-K of Ameritrade Holding Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: December 9, 2004 /s/John R. MacDonald ---------------------------------- John R. MacDonald Chief Financial Officer |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certify that the Annual Report on Form 10-K for
the year ended September 24, 2004 filed by Ameritrade Holding Corporation with
the Securities and Exchange Commission fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that
information contained in the report fairly presents, in all material respects,
the financial condition and results of operations of the issuer.
Dated: December 9, 2004 /s/ Joseph H. Moglia --------------------------- Joseph H. Moglia Chief Executive Officer Dated: December 9, 2004 /s/ John R. MacDonald --------------------------- John R. MacDonald Executive Vice President, Chief Financial Officer and Treasurer |