e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
September 30, 2007
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file
number: 0-49992
TD AMERITRADE Holding
Corporation
(Exact name of registrant as
specified in its charter)
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Delaware
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82-0543156
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification Number)
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4211 South 102nd Street,
Omaha, Nebraska 68127
(Address of principal executive
offices and zip code)
(402) 331-7856
(Registrants telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock $0.01 par value
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The NASDAQ Stock Market LLC
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Securities registered pursuant to Section 12(g) of the
Act:
Title of class
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 a large
accelerated filer, an accelerated filer or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act (Check one):
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the common stock held by
non-affiliates of the registrant was approximately
$3.4 billion computed by reference to the closing sale
price of the stock on the Nasdaq Global Select Market on
March 30, 2007, the last trading day of the
registrants most recently completed second fiscal quarter.
The number of shares of common stock outstanding as of
November 12, 2007 was 595,371,882 shares.
DOCUMENTS
INCORPORATED BY REFERENCE
Definitive Proxy Statement relating to the registrants
2008 Annual Meeting of Stockholders to be filed hereafter
(incorporated into Part III hereof).
TD
AMERITRADE HOLDING CORPORATION
INDEX
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Unless otherwise indicated, references to we,
us or Company mean TD AMERITRADE Holding
Corporation and its subsidiaries, and references to
fiscal mean the Companys fiscal year ended
September 30 (for fiscal year 2007) or the last Friday of
September (for fiscal years prior to 2007). References to the
parent company mean TD AMERITRADE Holding
Corporation.
We are a leading provider of securities brokerage services, with
retail brokerage representing the vast majority of our business.
The Company was established in 1971 as a local investment
banking firm and began operations as a retail discount
securities brokerage firm in 1975. The Company is a Delaware
corporation.
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, a
national branch network and relationships with one of the
largest groups of independent Registered Investment Advisors
(RIAs). Our services appeal to a broad market of
independent, value-conscious retail investors, traders,
financial planners and institutions. We use our efficient
platform to offer brokerage services to retail investors and
institutions under a simple, low-cost commission structure.
We have been an innovator in electronic brokerage services since
entering the retail securities brokerage business 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 TD AMERITRADE brand.
Strategy
We intend to capitalize on the growth and consolidation of the
retail brokerage industry in the United States and leverage our
low-cost infrastructure to grow our market share and
profitability. Our long-term growth strategy is to increase our
market share of client assets by providing superior offerings to
long-term investors, RIAs, and active traders. We strive to
enhance the client experience by providing sophisticated asset
management products and services, enhanced technological
capabilities that enable self-directed investors to trade and
invest in new asset classes and a superior, proprietary,
single-platform system to support RIAs. The key elements of our
strategy are as follows:
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Focus on retail brokerage services. We plan to
focus on attracting active traders, long-term investors and RIAs
to our retail brokerage services. This focused strategy is
designed to enable us to maintain our low operating cost
structure while offering our clients outstanding products and
services.
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Provide a comprehensive long-term investor
solution. We continue to expand our suite of
diversified investment products and services to best serve
investors needs. We help families make investment
decisions by providing simple-to-use investment tools and
objective research, guidance and education.
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Maintain industry leadership and market share with active
traders. We help traders make better-informed
investment decisions by offering fast access to markets, insight
into market trends and innovative tools such as strategy
back-testing and comprehensive options research and trading
capabilities.
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Continue to be a trusted advocate and leader in the RIA
industry. We provide RIAs with comprehensive
brokerage and custody services supported by our robust
integrated technology platform, customized personal service and
practice management solutions.
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Leverage our infrastructure to add incremental
revenue. Through our proprietary technology, we
are able to provide a very robust online experience for
long-term investors and active traders. Our low-cost, scalable
platform provides speed, reliability and quality trade execution
services for clients. The scalable capacity of our trading
system allows us to add a significant number of transactions
while incurring minimal additional fixed costs.
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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 much of our operations in low-cost geographical areas.
This low fixed-cost infrastructure provides us with significant
financial flexibility.
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Continue to differentiate our offerings through innovative
technologies and service enhancements. We have
been an innovator in our industry over our
30-year
history. We continually strive to provide our clients with the
ability to customize their trading experience. We provide our
clients greater choice by tailoring our features and
functionality to meet their specific needs.
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Leverage the TD AMERITRADE brand. We believe
that we have a superior brand identity and that our advertising
has established TD AMERITRADE as a leading brand in the retail
brokerage market.
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Continue to aggressively pursue growth through
acquisitions. When evaluating potential
acquisitions, we look for transactions that will give us
operational leverage, technological leverage, increased market
share or other strategic opportunities.
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On May 24, 2007, we entered into a stock purchase agreement
with Fiserv, Inc. (Fiserv) pursuant to which one of
our wholly-owned subsidiaries agreed to purchase a portion of
Fiservs investment support services business by acquiring
all of the outstanding capital stock of Fiserv
Trust Company, a wholly-owned subsidiary of Fiserv. Under
the stock purchase agreement, the initial purchase price payable
at closing is $225 million in cash plus Fiserv
Trust Companys regulatory capital, subject to certain
pre- and post-closing adjustments. An additional earn-out
payment of up to $100 million in cash could be payable
following the first anniversary of the acquisition based on the
achievement of certain revenue targets. The closing of the
transaction is conditioned upon obtaining certain regulatory
approvals, Fiserv completing an internal reorganization of
Fiserv Trust Company to transfer the investment
administration services business, which we are not acquiring, to
Fiserv, and other customary conditions. At the closing, we will
enter into a transition services agreement with Fiserv under
which Fiserv will service client accounts for up to six months
(subject to extension) and will be compensated based on revenue
earned during the term of the transition services agreement.
Fiserv has agreed not to compete with the acquired business for
three years, subject to certain exceptions. Each partys
indemnification obligations are generally limited to losses in
excess of $3 million and less than $50 million. Either
party can terminate the agreement if the closing has not
occurred by January 24, 2008.
On January 24, 2006, we acquired the U.S. brokerage
business of TD Waterhouse Group, Inc.
(TD Waterhouse). The transaction combined
highly complementary franchises to create a retail broker with
the scale, breadth and financial strength to be a leading player
in the increasingly competitive and consolidating investor
services industry. The acquisition of TD Waterhouse provided us
with a national network of over 100 branches, as well as
relationships with one of the largest groups of independent
RIAs. We also now provide our clients with a Federal Deposit
Insurance Corporation (FDIC)-insured money market
sweep alternative for their cash through an arrangement with TD
Bank USA, N.A. See Acquisition of TD Waterhouse
below for further information about this acquisition.
Prior to acquiring TD Waterhouse, we completed several other
acquisitions, the two largest of which were a merger with Datek
Online Holdings Corp. (Datek) in fiscal 2002 and the
acquisition of National Discount Brokers Corporation
(NDB) in fiscal 2001.
Acquisition
of TD Waterhouse
On January 24, 2006, we acquired TD Waterhouse, a Delaware
corporation, pursuant to an Agreement of Sale and Purchase dated
June 22, 2005, as amended (the Purchase
Agreement), with The Toronto-Dominion Bank
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(TD). We purchased from TD all of the capital stock
of TD Waterhouse (the Share Purchase) in exchange
for 196,300,000 shares of Company common stock and $20,000
in cash. The shares of common stock issued to TD in the Share
Purchase represented approximately 32.5% of the outstanding
shares of the Company after giving effect to the transaction.
Our consolidated financial statements include the results of
operations for TD Waterhouse beginning January 25, 2006. In
addition, on January 24, 2006, we completed the sale of
Ameritrade Canada, Inc. to TD. We agreed not to compete or own
any portion of a business that competes with TD in Canada
(including in the retail securities brokerage business) after
the consummation of the Share Purchase. We also generally agreed
not to operate an insured depository institution in competition
with TD.
Prior to the consummation of the Share Purchase, TD Waterhouse
conducted a reorganization in which it transferred its Canadian
retail securities brokerage business and TD Bank USA, N.A.
(formerly TD Waterhouse Bank, N.A.) to TD such that, at the time
of consummation of the Share Purchase, TD Waterhouse retained
only its United States retail securities brokerage business. TD
Waterhouse also distributed to TD excess capital of
TD Waterhouse prior to the consummation of the Share
Purchase. As contemplated in the Purchase Agreement, on
January 24, 2006, we commenced payment of a special cash
dividend of $6.00 per share in respect of the shares of our
common stock outstanding prior to the consummation of the Share
Purchase. The total amount of the dividend was approximately
$2.4 billion.
In connection with the Share Purchase, TD was given rights to
have its shares of Company common stock registered for resale
and TD licensed to us the right to use the TD name
in connection with the operation of our business. The parties
also entered into agreements regarding bank sweep accounts and
mutual funds. A summary of the bank sweep and mutual fund
agreements, as well as other transactions with TD, appears in
Note 18 of our Notes to Consolidated Financial Statements
under Item 8 of this
Form 10-K.
Also in connection with the Share Purchase, the Company, TD, J.
Joe Ricketts, our Chairman and Founder, and certain of his
affiliates also entered into a Stockholders Agreement, as
amended (the Stockholders Agreement). The
Stockholders Agreement sets forth governance arrangements and
contains provisions relating to stock ownership, voting,
election of directors and other matters. Our certificate of
incorporation and bylaws were amended and restated as of
January 24, 2006, to give effect to and facilitate the
provisions contained in the Stockholders Agreement.
At the time of the closing of the TD Waterhouse acquisition, we
expected to realize approximately $678 million of
annualized pre-tax synergies from the acquisition within
18 months of the closing, consisting of $300 million
in revenue opportunities primarily related to our new banking
relationship with TD and $378 million in cost savings
related to the elimination of duplicate expenditures. We
realized the revenue opportunities during fiscal 2006 and fully
realized the operating cost synergies during the fourth quarter
of fiscal 2007.
Growth
Initiatives
During the third quarter of fiscal 2007, our Board of Directors
approved expending up to $100 million in ongoing annualized
incremental operating expenses for growth initiatives. Our Chief
Executive Officer is authorized to approve growth initiatives to
strengthen our sales, develop new products or enhance the
functionality of existing products. During the fourth quarter of
fiscal 2007, we expended approximately $20 million (or
$80 million annualized) for growth initiatives, which
consisted primarily of employee compensation and benefits and
professional service expenses. We expect to reach the
$100 million level of annualized incremental expenditures
during fiscal 2008, consisting of:
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approximately $50 million of employee compensation and
benefits for additional retail and institutional sales/service
employees;
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approximately $10 million of employee compensation and
benefits for additional client group and technology employees;
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approximately $18 million of professional services for
development of new products and functionality and
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approximately $22 million of amortization of acquired or
internally developed products and functionality.
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Client
Offerings
We deliver products and services aimed at providing a
comprehensive, personalized experience for active traders,
long-term investors and independent RIAs. Our client offerings
are described below:
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TD
AMERITRADE®
is our core offering for self-directed retail investors. We
offer sophisticated tools and services, including Streamer
Suite,tm
TD AMERITRADE command center,
SnapTicket,tm
Trade
Triggers,tm
QuoteScope,tm
Advanced
Analyzer,tm
Market Motion Detector,
StrategyDesktm
and
WealthRulertm
. We offer Ameritrade
Apextm
for clients who place an average of five 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.
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TD AMERITRADE Institutional is a leading provider of
comprehensive brokerage and custody services to more than 4,000
independent RIAs and their clients. Our advanced technology
platform, coupled with personal support from our dedicated
service teams, allows investment advisors to run their practices
more effectively and efficiently while optimizing time with
clients. Additionally, TD AMERITRADE Institutional provides a
robust offering of products, programs and services. These
services are all designed to help advisors build their
businesses while helping their clients reach their financial
goals.
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TD AMERITRADE Izone serves self-directed traders who are
willing to forgo traditional support and service in favor of a
purely electronic brokerage experience and lower commissions.
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Amerivesttm
is an online advisory service that develops a portfolio of
exchange-traded funds (ETFs) to help long-term
investors pursue their financial goals. Our subsidiary,
Amerivest Investment Management, LLC, recommends an investment
portfolio based on our proprietary automated five-step process
centered on an investors goals and risk tolerance.
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TDAX Independence ETFs were launched in October 2007. Our
subsidiary, Amerivest Investment Management, LLC, is a
sub-advisor to XShares Advisors LLC for TDAX Funds, Inc. TDAX
Funds, Inc. is a new investment company that provides
diversified goal-based investing options through five
lifecycle ETFs. The target-date funds begin by
focusing on asset growth through a higher weighting of stocks,
shifting to capital preservation over time through historically
less-risky allocations, thus creating what we believe to be the
first lifecycle ETFs. These ETFs seek to replicate
certain lifecycle indexes created by Zacks
Investment Research.
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TD AMERITRADE Corporate Services provides self-directed
brokerage services to employees and executives of corporations,
either directly in partnership with the employer or through
joint marketing relationships with third-party administrators,
such as 401(k) providers and employee benefit consultants.
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Products
and Services
We strive to provide the best value of retail brokerage services
to our clients. The products available to our clients include:
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Common and preferred stock. Clients can
purchase common and preferred stocks and American Depository
Receipts traded on any United States exchange or quotation
system.
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Exchange-Traded Funds. ETFs are baskets of
securities (stocks or bonds) that typically track recognized
indices. 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.
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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 trading
platform.
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Mutual funds. Clients can compare and select
from a portfolio of over 13,000 mutual funds from leading fund
families, including a broad range of no-transaction-fee
(NTF) funds. Clients can also easily exchange funds
within the same mutual fund family.
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Fixed income. We offer our clients access to a
variety of Treasury, corporate, government agency and municipal
bonds, as well as mortgage-backed securities and certificates of
deposit.
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Margin lending. We extend credit to clients
that maintain margin accounts.
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Cash management services. Through third-party
banking relationships, we offer money market deposit accounts
and money market mutual funds to our clients as cash sweep
alternatives. We also offer checking and ATM services.
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We provide our clients with an array of channels to access our
products and services. These include the Internet, our network
of retail branches, wireless telephone or personal digital
assistant, interactive voice response and registered
representatives via telephone.
Client
Service and Support
We strive to provide the best client service in the industry as
measured by: (1) speed of response time to telephone calls;
(2) turnaround time responding to client inquiries and
(3) client satisfaction with the account relationship.
We endeavor to optimize our highly-rated client service by:
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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 hold a
Series 7 license;
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Tailoring client service to the particular expectations of the
clients of each of our client segments and
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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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We provide access to client service and support through the
following means:
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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.
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Branches. We offer a nationwide network of
over 100 retail branches, located primarily in large
metropolitan areas.
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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 four hours after receiving
the original message.
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Telephone. 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 when the call
is received. Client service representatives are available
24 hours a day, seven days a week (excluding market
holidays).
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Technology
and Information Systems
Our technological capabilities and systems are central to our
business and are 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 of our success.
We continue to make investments in technology and information
systems. 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 have
equipped our data centers with uninterruptible power supply
units, as well as
back-up
generators.
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We currently have the capacity to process approximately 600,000
trades per day. During fiscal 2007, our clients averaged
approximately 253,000 trades per day. Our greatest number of
average client trades per day for a single month occurred in
October 2007, when clients averaged approximately 336,000 trades
per day. The greatest number of trades our clients have made in
a single day is 505,000. Because of the scalability of our
system, we believe that we would be able to increase our
capacity to approximately one million trades per day at an
estimated technology cost of $5 to $10 million.
Advertising
and Marketing
We intend to continue to grow and increase our market share by
advertising online, on television, in print and direct mail and
on our own Web sites. We invest heavily in advertising programs
designed to bring greater brand recognition to our services. 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.
Advertising for retail clients is generally conducted through
Web sites, financial news networks and other television and
cable networks. We also place print advertisements in a broad
range of business publications and use direct mail advertising.
Advertising for institutional clients is significantly less than
for retail 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 in these
programs in the future. 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 our client relationships 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 Financial Industry Regulatory Authority
(FINRA).
Clearing
Operations
Our subsidiary, TD AMERITRADE Clearing, Inc. (TDA
Clearing) (formerly known as Ameritrade, Inc.) provides
clearing and execution services to our introducing broker-dealer
subsidiary, TD AMERITRADE, Inc. (TDA Inc.). Clearing
services include the confirmation, receipt, settlement, delivery
and record-keeping functions involved in processing securities
transactions. Our clearing broker-dealer subsidiary provides the
following back office functions:
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Maintaining client accounts;
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Extending credit in a margin account to the client;
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Engaging is securities lending and borrowing transactions;
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Settling securities transactions with clearing houses such as
The Depository Trust & Clearing Corporation and The
Options Clearing Corporation;
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Settling commissions and transaction fees;
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Preparing client trade confirmations and statements;
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Performing designated cashiering functions, including the
delivery and receipt of funds and securities to or from the
client;
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Possession, control and safeguarding funds and securities in
client accounts;
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Transmitting tax accounting information to the client and to the
applicable tax authority and
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Forwarding prospectuses, proxy materials and other shareholder
information to clients.
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8
Competition
We believe that the principal determinants of success in the
retail brokerage market are brand recognition, size of client
base and client assets, 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, continues to evolve and is intensely
competitive. We have seen intense 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 Charles Schwab & Co., Inc.,
E*TRADE Financial Corporation, Fidelity Investments and
Scottrade, Inc. We also encounter competition from established
full-commission brokerage firms such as Merrill Lynch and Smith
Barney, as well as financial institutions, mutual fund sponsors
and other organizations, some of which provide online brokerage
services.
Regulation
The securities industry is subject to extensive regulation under
federal and state law. Broker-dealers are required to register
with the U.S. Securities and Exchange Commission
(SEC) and to be members of FINRA. Our broker-dealer
subsidiaries are subject to the requirements of the Securities
Exchange Act of 1934 (the Exchange Act) relating to
broker-dealers. These regulations establish, among other things,
minimum net capital requirements for our broker-dealer
subsidiaries. We are also subject to regulation in all
50 states and the District of Columbia, including
registration requirements.
In its capacity as a securities clearing firm, TDA Clearing is a
member of 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, TDA Clearing 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 System and FINRA. 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 copyright, trade secret, trademark, domain name, patent
and contract laws to protect our intellectual property and have
utilized the various methods available to us, including filing
registrations with the United States Patent and Trademark office
and entering 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 and general
protections afforded to confidential information. In addition,
it is our policy to enter into confidentiality and intellectual
property ownership agreements with our employees and
confidentiality and noncompetition agreements with our
independent contractors and business partners, and to control
access to and distribution of our intellectual property.
Employees
As of September 30, 2007, we had 3,882 full-time
equivalent employees. This number has decreased slightly from
3,947 full-time equivalent employees as of the end of
fiscal 2006, primarily due to the integration of
TD Waterhouse. None of our employees is covered by a
collective bargaining agreement. We believe that our relations
with our employees are good.
9
Financial
Information about Segments and Geographic Areas
See Note 16 of the Notes to Consolidated Financial
Statements included in Item 8 of this
Form 10-K
for segment and geographic area financial information.
Internet
Address
Additional information concerning our business can be found on
our Web site at 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 such material with or
furnish it to the SEC.
In addition to the other information set forth in this report,
you should carefully consider the following factors which could
materially affect our business, financial condition or future
results of operations. Although the risks described below are
those that management believes are the most significant, these
are not the only risks facing our company. Additional risks and
uncertainties not currently known to us or that we currently do
not deem to be material also may materially affect our business,
financial condition or future results of operations.
Risk
Factors Relating to Our Business Operations
Stock
market volatility and other securities industry risks could
adversely affect our business.
Substantially all of our revenues are derived from our
securities brokerage business. 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. For example,
events such as the terrorist attacks in the United States on
September 11, 2001 and the invasion of Iraq in 2003 have
resulted in periods of substantial market volatility and
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.
We
have exposure to interest rate risk.
As a fundamental part of our brokerage business, we invest in
interest-earning assets and are obligated on interest-bearing
liabilities. In addition, we earn fees on our money market
deposit account (MMDA) sweep arrangement with TD Bank USA that
are based on the actual net yield earned at TD Bank USA. Changes
in interest rates could affect the interest earned on assets
differently than interest paid on liabilities. A rising interest
rate environment generally results in our earning a larger net
interest spread. Conversely, a falling interest rate environment
generally results in our earning a smaller net interest spread.
If we are unable to effectively manage of our interest rate
risk, changes in interest rates could have a material adverse
effect on our profitability.
We
have exposure to liquidity risk.
Substantially all of our interest-earning assets are readily
convertible to cash or subject to immediate repayment by our
clients and broker-dealer counterparties. Our liquidity needs to
support interest-earning assets are primarily met by client
credit balances or financing created from our securities lending
activities. A reduction of funds available from client credit
balances or securities lending may require us to seek other
potentially more expensive forms of financing, such as
borrowings on our uncommitted lines of credit. Because our
broker-dealer lines of credit are uncommitted, there can be no
assurance that such financing would be available.
We are
exposed to credit risk with clients and
counterparties.
We make margin loans to clients that are collateralized by
client securities and we borrow and lend securities in
connection with our broker-dealer business. A significant
portion of our net revenues is derived from interest on margin
loans. 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
10
fall below the amount of a clients indebtedness. 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. 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.
Our
clearing operations expose us to liability for errors in
clearing functions.
Our broker-dealer subsidiary, TDA Clearing, provides clearing
and execution services to our introducing broker-dealer
subsidiary. 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. However, clearing brokers also must
rely on third-party clearing organizations such as The
Depository Trust & Clearing Corporation and The
Options Clearing Corporation in settling client securities
transactions. Self-clearing securities firms are subject to
substantially more regulatory control and examination than
introducing brokers that rely on others to perform clearing
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, could lead to civil
penalties as well as losses and liability in related lawsuits
brought by clients and others.
Changes
in payments for routing our clients orders could adversely
affect our business.
We have arrangements with several execution agents to receive
cash payments in exchange for routing trade orders to these
firms for execution. 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 fluctuated
significantly over the past several years. These payments could
decrease on a per-trade basis, which could have an adverse
effect on our revenues and profitability. The SEC could take
action to prohibit payment for order flow, which could also have
an adverse effect on our revenues and profitability.
Systems
failures, delays and capacity constraints could harm our
business.
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 similar
events. It could take several hours or more to restore full
functionality in the event of an unforeseen disaster.
Extraordinary trading volumes could cause our computer systems
to operate at an unacceptably low speed or even fail.
Extraordinary Internet traffic caused by DDOS or spam attacks
could cause our Web site to be unavailable or slow to respond.
While we have made significant investments to upgrade the
reliability and scalability of our systems and added hardware to
address extraordinary Internet traffic, there can be no
assurance that our systems will be sufficient to handle such
extraordinary circumstances. 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. Systems
failures and delays could occur and could cause, among other
things, unanticipated disruptions in service to our clients,
slower system response time resulting in transactions not being
processed as quickly as our clients desire, decreased levels of
client service and client satisfaction and harm to our
reputation. If any of these events were to occur, we could
suffer:
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a loss of clients or a reduction in the growth of our client
base;
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increased operating expenses;
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financial losses;
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additional litigation or other client claims and
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11
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regulatory sanctions or additional regulatory burdens.
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Our
networks and client information could be vulnerable to security
risks.
The secure transmission of confidential information over public
networks is a critical element of our operations. Our networks
could be vulnerable to unauthorized access, computer viruses,
phishing schemes and other security problems. We, along with the
online brokerage industry in general, experienced increased
losses during fiscal 2006 related to clients login and
password information being compromised while using public
computers. During fiscal 2007, we discovered and eliminated
unauthorized code from our computer systems that allowed access
to an internal database. Information such as client email
addresses, names, addresses and phone numbers was retrieved from
this database. More sensitive information like account numbers,
date of birth and Social Security numbers were also stored in
this database, but we discovered no evidence that it was taken.
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. Because we provide a security
guarantee under which we reimburse clients for losses resulting
from unauthorized activity in their accounts, significant
unauthorized activity could have a material adverse effect on
our results of operations.
The
success of our business will depend on continued development and
maintenance of the Internet infrastructure.
The Internet has experienced, and is expected to continue to
experience, significant growth in the number of users and amount
of traffic. Our success will depend upon the ability of third
parties to provide a reliable Internet infrastructure with the
speed, data capacity, security and hardware necessary for
reliable Internet access and services. To the extent that the
Internet continues to experience increased numbers of users,
increased frequency of use or increased bandwidth requirements,
the Internet infrastructure may not be able to support the
demands placed on it and the performance or reliability of the
Internet could suffer, which could have a material adverse
effect on our profitability.
Substantial
competition could reduce our market share and harm our financial
performance.
The market for electronic brokerage services is continually
evolving and is intensely competitive. The retail brokerage
industry has experienced significant consolidation, which may
continue in the future, and which may increase competitive
pressures in the industry. There has been substantial price
competition in the industry recently, including various free
trade offers. We expect this competitive environment to continue
in the future. We face direct competition from numerous retail
brokerage firms, including Charles Schwab & Co., Inc.,
E*TRADE Financial Corporation, 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 retail 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. Increased
competition, including pricing pressure, could have a material
adverse effect on our results of operations and financial
condition.
We
will need to introduce new products and services and enhance
existing products and services to remain
competitive.
Our future success depends in part on our ability to develop and
enhance our products and services. In addition, the adoption of
new Internet, networking or telecommunications technologies or
other technological changes could
12
require us to incur substantial expenditures to enhance or adapt
our services or infrastructure. There are significant technical
and financial costs and risks in the development of new or
enhanced products and services, including the risk that we might
be unable to effectively use new technologies, adapt our
services to emerging industry standards or develop, introduce
and market enhanced or new products and services. An inability
to develop new products and services, or enhance existing
offerings, could have a material adverse effect on our
profitability.
Risk
Factors Relating to the Regulatory Environment
Failure
to comply with net capital requirements could adversely affect
our business.
The SEC, FINRA 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 net
capital requirements. If we fail to maintain the required net
capital, the SEC could suspend or revoke our registration, or
FINRA 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, then our operations that require capital could be
limited. A large operating loss or charge against net capital
could adversely affect our ability to maintain or expand our
business.
Regulatory
and legal uncertainties could harm our business.
The securities industry is subject to extensive regulation and
broker-dealers are subject to regulations covering all aspects
of the securities business. The SEC, FINRA 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. We could fail to establish and enforce
procedures to comply with applicable regulations, which could
have a material adverse effect on our business.
While we neither actively solicit new accounts nor have
established offices outside the United States, our websites are
accessible world-wide over the Internet and we currently have
account holders located outside the United States. These
accounts comprise approximately 1.6% of our total accounts and
are spread across many jurisdictions. Any adverse action by
foreign regulators with respect to regulatory compliance by us
in foreign jurisdictions could adversely affect our revenues
from clients in such countries or regions.
Various regulatory and enforcement agencies have been reviewing
mutual fund trading, regulatory reporting obligations, best
execution practices, client privacy, system security and
safeguarding practices 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 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 and safeguarding practices
could be adopted in the future, including laws related to
identity theft and 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, which would have a material
adverse effect on our profitability.
Failure
to maintain adequate internal controls could adversely affect
our business.
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. Control deficiencies have been
identified from time to time, and we have undertaken actions to
remediate them.
13
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. 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. 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, which could have a material adverse
effect on our financial condition and results of operations.
Risk
Factors Relating to Strategic Acquisitions and the Integration
of Acquired Operations
Acquisitions
involve risks that could adversely affect our
business.
We intend to pursue strategic acquisitions of businesses and
technologies. Acquisitions may entail numerous risks, including:
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difficulties in the integration of acquired operations, services
and products;
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failure to achieve expected synergies;
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diversion of managements attention from other business
concerns;
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assumption of unknown material liabilities of acquired companies;
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amortization of acquired intangible assets, which could reduce
future reported earnings;
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potential loss of clients or key employees of acquired
companies and
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dilution to existing stockholders.
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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 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, we
could 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.
Risk
Factors Relating to Owning Our Stock
The
market price of our common stock could fluctuate
significantly.
Our common stock, and the U.S. securities markets in
general, experience significant price fluctuations. 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 and could
have a material adverse effect on our business and the price of
our common stock.
We are
restricted by the terms of our senior credit
facilities.
We entered into a credit agreement, as amended, on
January 23, 2006 for $2.2 billion in senior credit
facilities with a syndicate of lenders. These credit facilities
contain various covenants and restrictions that may limit our
ability to:
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incur additional indebtedness;
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create liens;
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sell assets and make capital expenditures;
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pay dividends or make distributions;
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repurchase our common stock;
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make investments;
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merge or consolidate with another entity and
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conduct transactions with affiliates.
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As a result of the covenants and restrictions contained in the
credit facilities, we are limited in how we conduct our
business. We cannot guarantee that we will be able to remain in
compliance with these covenants or be able to obtain waivers for
noncompliance in the future. A failure to comply with these
covenants could have a material adverse effect on our financial
condition by impairing our ability to secure and maintain
financing.
Our
corporate debt level may limit our ability to obtain additional
financing.
During fiscal 2006, we borrowed approximately $1.9 billion
to fund a portion of the payment of a special cash dividend of
$6.00 per share and to fund working capital requirements after
the acquisition of TD Waterhouse. Our ability to meet our cash
requirements, including our debt service obligations, is
dependent upon our future performance, which will be subject to
financial, business and other factors affecting our operations,
many of which are or may be beyond our control. We cannot
provide assurance that our business will generate sufficient
cash flows from operations to fund these cash requirements,
including our debt service obligations. If we are unable to meet
our cash requirements from operations, we would be required to
obtain alternative financing. The degree to which we may be
leveraged as a result of the indebtedness we have incurred could
materially and adversely affect our ability to obtain financing
for working capital, acquisitions or other purposes, could make
us more vulnerable to industry downturns and competitive
pressures or could limit our flexibility in planning for, or
reacting to, changes and opportunities in our industry, which
may place us at a competitive disadvantage. There can be no
assurance that we would be able to obtain alternative financing,
that any such financing would be on acceptable terms or that we
would be permitted to do so under the terms of existing
financing arrangements. In the absence of such financing, our
ability to respond to changing business and economic conditions,
make future acquisitions, react to adverse operating results,
meet our debt service obligations, or fund required capital
expenditures, could be materially and adversely affected.
TD and
the Ricketts holders exercise significant influence over TD
AMERITRADE.
As of September 30, 2007, TD and J. Joe Ricketts, our
Chairman and Founder, members of his family and trusts held for
their benefit, which we collectively refer to as the Ricketts
holders, owned approximately 39.9% and 21.5%, respectively, of
the outstanding voting securities of TD AMERITRADE. TD is
permitted under the terms of a stockholders agreement to own up
to 39.9% of the outstanding shares of TD AMERITRADE common stock
during the three years following the January 24, 2006
closing of the TD Waterhouse acquisition, up to 45% of the
outstanding shares of TD AMERITRADE common stock for the
remainder of the term of the stockholders agreement (a maximum
of 10 years following the closing) and an unlimited number
of shares of TD AMERITRADE following the termination of the
stockholders agreement. The Ricketts holders are permitted under
the terms of the stockholders agreement to own up to 29% of the
outstanding shares of TD AMERITRADE. As a result, TD and the
Ricketts holders have the ability to significantly influence the
outcome of any matter submitted for the vote of TD AMERITRADE
stockholders. The stockholders agreement also provides that TD
will designate five of the twelve members of the TD AMERITRADE
Board of Directors and the Ricketts holders will designate three
of the twelve members of the TD AMERITRADE Board of Directors,
subject to adjustment based on their respective ownership
positions in TD AMERITRADE. Accordingly, TD and the Ricketts
holders will be able to significantly influence the outcome of
all matters that come before the TD AMERITRADE board. As a
result of their significant interest in TD AMERITRADE, TD or the
Ricketts holders may have the power, subject to applicable law,
to significantly influence actions that might be favorable to TD
or the Ricketts holders, but not necessarily favorable to other
TD AMERITRADE stockholders. In addition, the ownership position
and governance rights of TD and the Ricketts holders could
discourage a third party from proposing a change of control or
other strategic transaction
15
concerning TD AMERITRADE. As a result, the common stock of TD
AMERITRADE could trade at prices that do not reflect a
takeover premium to the same extent as do the stocks
of similarly situated companies that do not have a stockholder
with an ownership interest as large as TDs and the
Ricketts holders combined ownership interest.
Conflicts
of interest may arise between TD AMERITRADE and TD, which may be
resolved in a manner that adversely affects TD AMERITRADEs
business, financial condition or results of
operations.
We transact business and have extensive relationships with TD
and certain of its affiliates. Conflicts of interest may arise
between TD AMERITRADE and TD in areas relating to past, ongoing
and future relationships, including corporate opportunities,
potential acquisitions or financing transactions, sales or other
dispositions by TD of its interests in TD AMERITRADE and the
exercise by TD of its influence over the management and affairs
of TD AMERITRADE. Some of the directors on the TD AMERITRADE
board are persons who are also officers or directors of TD or
its subsidiaries. Service as a director or officer of both TD
AMERITRADE and TD or its other subsidiaries could create
conflicts of interest if such directors or officers are faced
with decisions that could have materially different implications
for TD AMERITRADE and for TD. Our amended and restated
certificate of incorporation contains provisions relating to the
avoidance of direct competition between TD AMERITRADE and TD. TD
AMERITRADE and TD have not established any other formal
procedures to resolve potential or actual conflicts of interest
between them. There can be no assurance that any of the
foregoing conflicts will be resolved in a manner that does not
adversely affect the business, financial condition or results of
operations of TD AMERITRADE. In addition, the provisions of the
stockholders agreement related to non-competition are subject to
numerous exceptions and qualifications and may not prevent TD
AMERITRADE and TD from competing with each other to some degree
in the future.
The
terms of the stockholders agreement, our charter documents and
Delaware law could inhibit a takeover that stockholders may
consider favorable.
Provisions in the stockholders agreement among TD and the
Ricketts 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:
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the presence of a classified board of directors;
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the ability of the board of directors to issue and determine the
terms of preferred stock;
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advance notice requirements for inclusion of stockholder
proposals at stockholder meetings; and
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the anti-takeover provisions of Delaware law.
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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.
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Item 1B.
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Unresolved
Staff Comments
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None.
Our corporate headquarters is located in Omaha, Nebraska and
occupies approximately 74,000 square feet of leased space.
The lease expires in April 2019. In the Omaha metropolitan area,
we also lease approximately 154,000 square feet for an
operations center as well as other locations totaling
approximately 124,000 square feet. The leases on these
other Omaha-area locations expire on various dates from 2008
through 2013. We lease approximately 185,000 and
140,000 square feet for additional operations centers in
Jersey City, New Jersey and Ft. Worth, Texas, respectively.
The Jersey City and Ft. Worth leases expire in 2015. We
lease smaller administrative and operational facilities in
California, Illinois, Maryland, Missouri and New Jersey. We also
lease over 100 branch offices located in large metropolitan
areas in 35 states. We believe that our facilities are
suitable and adequate to meet our needs.
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Item 3.
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Legal
Proceedings
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Legal Matthew Elvey filed a purported class
action complaint against TDA Inc. on May 31, 2007 in the
United States District Court for the Northern District of
California. The complaint alleges that TDA Inc. disclosed,
inadvertently or intentionally, the
e-mail
addresses of Elvey and other account holders to spammers, who
then sent the account holders
e-mail
solicitations promoting certain stocks. The complaint includes
claims of alleged violations of California and federal statutes
and alleged breach of fiduciary duty and requests injunctive and
other equitable relief and damages. On July 10, 2007, the
plaintiff filed a motion for preliminary injunction, which TDA,
Inc. has opposed. On July 18, 2007, TDA Inc. filed a motion
to dismiss the plaintiffs amended complaint, which the
plaintiff has opposed. The parties, through counsel, have been
discussing the matter and exchanging information. As disclosed
in a press release dated September 14, 2007, the Company
discovered and eliminated unauthorized code from its systems
that allowed access to an internal database. The discovery was
made as the result of an internal investigation of stock-related
spam. Further, the Company commissioned forensic data experts to
assist in its investigation of this issue and results of their
combined efforts revealed that: (a) client assets held in
accounts with the Company remain secure as User IDs, personal
identification numbers and passwords were not stored in this
particular database; (b) information such as client
e-mail
addresses, names, addresses and phone numbers was retrieved from
this database; and (c) while more sensitive information
like account numbers, date of birth and social security numbers
is stored in this database, the Company has discovered no
evidence that it was taken. The Company hired a third party to
investigate and monitor for identity theft. The third party
found no evidence of identity theft as a result of this issue.
Brad Zigler filed a lawsuit against TDA, Inc. on
September 26, 2007, in the same jurisdiction. Ziglers
complaint is on behalf of a purported nationwide class of
accountholders. The factual allegations of the complaint and the
relief sought are substantially the same as those in the Elvey
lawsuit.
The Company is subject to lawsuits, arbitrations, claims and
other legal proceedings in connection with its business. Some of
the legal actions include claims for substantial or unspecified
compensatory
and/or
punitive damages. A substantial adverse judgment or other
unfavorable resolution of these matters could have a material
adverse effect on the Companys financial condition,
results of operations and cash flows. Management believes 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. However, the Company is
unable to predict the outcome of these matters.
Regulatory Matters In the normal course of
business the Company discusses matters with its regulators
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.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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No matters were submitted to a vote of stockholders during the
fourth quarter of fiscal 2007.
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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Price
Range of Common Stock
Our common stock trades on the Nasdaq Global Select 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
17
Global Select Market. The prices reflect inter-dealer prices and
do not include retail markups, markdowns or commissions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Price
|
|
|
|
For the Fiscal Year
|
|
|
For the Fiscal Year
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30, 2007
|
|
|
September 29, 2006*
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
19.69
|
|
|
$
|
15.51
|
|
|
$
|
25.00
|
|
|
$
|
18.93
|
|
Second Quarter
|
|
$
|
18.67
|
|
|
$
|
14.80
|
|
|
$
|
26.37
|
|
|
$
|
18.86
|
|
Third Quarter
|
|
$
|
21.31
|
|
|
$
|
14.67
|
|
|
$
|
22.19
|
|
|
$
|
13.50
|
|
Fourth Quarter
|
|
$
|
20.94
|
|
|
$
|
13.82
|
|
|
$
|
19.18
|
|
|
$
|
13.30
|
|
|
|
|
* |
|
In connection with our acquisition of TD Waterhouse during the
second quarter of fiscal 2006, we declared and paid a special
cash dividend of $6.00 per share. |
The closing sale price of our common stock as reported on the
Nasdaq Global Select Market on November 12, 2007 was $18.89
per share. As of that date there were 677 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, we believe there
are approximately 83,000 beneficial holders of our common stock.
Dividends
We have not declared or paid regular cash dividends on our
common stock. In connection with our acquisition of TD
Waterhouse in January 2006, we declared and paid a special cash
dividend of $6.00 per share. We currently intend to retain all
of our earnings, if any, for use in our business and do not
anticipate paying any other cash dividends in the foreseeable
future. Our credit agreement prohibits the payment of cash
dividends. The payment of any future dividends will be at the
discretion of our Board of Directors, subject to the provisions
of the credit agreement, and will depend upon a number of
factors, including future earnings, the success of our business
activities, capital requirements, the general financial
condition and future prospects of our business, general business
conditions and such other factors as the Board of Directors may
deem relevant.
Securities
Authorized for Issuance Under Equity Compensation
Plans
Information about securities authorized for issuance under the
Companys equity compensation plans is contained in
Item 12 Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters.
18
Performance
Graph
The Company performance information is not deemed to be
soliciting material or to be filed with
the SEC or subject to the SECs proxy rules or to the
liabilities of Section 18 of the Exchange Act, and the
Company performance information shall not be deemed to be
incorporated by reference into any prior or subsequent filing by
the Company under the Securities Act of 1933 Act, as
amended, or the Exchange Act.
The following graph and table set forth information comparing
the cumulative total return through the end of the
Companys most recent fiscal year from a $100 investment on
September 27, 2002 in the Companys common stock, a
broad-based stock index and the stocks comprising an industry
peer group.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ended
|
Index
|
|
9/27/02
|
|
9/26/03
|
|
9/24/04
|
|
9/30/05
|
|
9/29/06
|
|
9/30/07
|
TD AMERITRADE Holding Corporation
|
|
|
100.00
|
|
|
|
306.92
|
|
|
|
299.49
|
|
|
|
550.51
|
|
|
|
632.97
|
|
|
|
611.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S&P 500
|
|
|
100.00
|
|
|
|
122.69
|
|
|
|
139.03
|
|
|
|
156.69
|
|
|
|
173.60
|
|
|
|
202.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peer Group
|
|
|
100.00
|
|
|
|
146.60
|
|
|
|
120.81
|
|
|
|
191.53
|
|
|
|
244.77
|
|
|
|
257.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Peer Group is comprised of the following companies that have
significant retail brokerage operations:
The Charles Schwab Corporation
E*TRADE Financial Corporation
19
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
ISSUER
PURCHASES OF EQUITY SEQURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Maximum Number
|
|
|
|
|
|
|
|
|
|
Shares Purchased as
|
|
|
of Shares that May
|
|
|
|
Total Number of
|
|
|
Average Price
|
|
|
Part of Publicly
|
|
|
Yet Be Purchased
|
|
Period
|
|
Shares Purchased
|
|
|
Paid per Share
|
|
|
Announced Program
|
|
|
Under the Program
|
|
|
July 1, 2007 July 31, 2007
|
|
|
285,000
|
|
|
$
|
18.73
|
|
|
|
285,000
|
|
|
|
14,421,200
|
|
August 1, 2007 August 31, 2007
|
|
|
975,000
|
|
|
$
|
16.50
|
|
|
|
975,000
|
|
|
|
13,446,200
|
|
September 1, 2007 September 30, 2007
|
|
|
475,115
|
|
|
$
|
18.02
|
|
|
|
475,000
|
|
|
|
12,971,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Three months ended September 30, 2007
|
|
|
1,735,115
|
|
|
$
|
17.28
|
|
|
|
1,735,000
|
|
|
|
12,971,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our common stock repurchase program was authorized on
August 2, 2006. Our Board of Directors originally
authorized the Company to repurchase up to 12 million
shares. On November 15, 2006, the Board of Directors added
20 million shares to the original authorization, increasing
the total authorization to 32 million shares. This is the
only stock repurchase program currently in effect and there were
no programs that expired during the fourth quarter of fiscal
2007. During the month ended September 30, 2007,
115 shares were repurchased from an employee for income tax
withholding in connection with a restricted stock unit
distribution.
20
|
|
Item 6.
|
Selected
Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended*
|
|
|
|
Sept. 30,
|
|
|
Sept. 29,
|
|
|
Sept. 30,
|
|
|
Sept. 24,
|
|
|
Sept. 26,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Consolidated Statements of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions and transaction fees
|
|
$
|
813,786
|
|
|
$
|
738,380
|
|
|
$
|
533,921
|
|
|
$
|
571,526
|
|
|
$
|
486,416
|
|
Asset-based revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest revenue
|
|
|
1,013,600
|
|
|
|
1,031,971
|
|
|
|
540,348
|
|
|
|
278,550
|
|
|
|
184,175
|
|
Brokerage interest expense
|
|
|
(455,467
|
)
|
|
|
(335,820
|
)
|
|
|
(141,399
|
)
|
|
|
(41,861
|
)
|
|
|
(33,192
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest revenue
|
|
|
558,133
|
|
|
|
696,151
|
|
|
|
398,949
|
|
|
|
236,689
|
|
|
|
150,983
|
|
Money market deposit account fees
|
|
|
535,381
|
|
|
|
185,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment product fees
|
|
|
232,177
|
|
|
|
140,699
|
|
|
|
25,188
|
|
|
|
21,425
|
|
|
|
15,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total asset-based revenues
|
|
|
1,325,691
|
|
|
|
1,021,864
|
|
|
|
424,137
|
|
|
|
258,114
|
|
|
|
166,972
|
|
Other revenues
|
|
|
37,469
|
|
|
|
43,287
|
|
|
|
45,095
|
|
|
|
50,473
|
|
|
|
59,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
2,176,946
|
|
|
|
1,803,531
|
|
|
|
1,003,153
|
|
|
|
880,113
|
|
|
|
713,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
429,820
|
|
|
|
350,079
|
|
|
|
180,579
|
|
|
|
154,792
|
|
|
|
172,159
|
|
Fair value adjustments of compensation-related derivative
instruments
|
|
|
(3,193
|
)
|
|
|
(1,715
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Clearing and execution costs
|
|
|
79,681
|
|
|
|
73,049
|
|
|
|
26,317
|
|
|
|
30,610
|
|
|
|
35,711
|
|
Communications
|
|
|
82,173
|
|
|
|
65,445
|
|
|
|
35,663
|
|
|
|
39,853
|
|
|
|
41,420
|
|
Occupancy and equipment costs
|
|
|
84,294
|
|
|
|
74,638
|
|
|
|
43,411
|
|
|
|
42,353
|
|
|
|
57,091
|
|
Depreciation and amortization
|
|
|
26,237
|
|
|
|
21,199
|
|
|
|
10,521
|
|
|
|
11,066
|
|
|
|
13,917
|
|
Amortization of acquired intangible assets
|
|
|
54,469
|
|
|
|
42,286
|
|
|
|
13,887
|
|
|
|
12,158
|
|
|
|
17,791
|
|
Professional services
|
|
|
83,995
|
|
|
|
87,521
|
|
|
|
30,630
|
|
|
|
27,381
|
|
|
|
31,121
|
|
Interest on borrowings
|
|
|
118,173
|
|
|
|
93,988
|
|
|
|
1,967
|
|
|
|
2,581
|
|
|
|
5,076
|
|
Other
|
|
|
46,809
|
|
|
|
45,383
|
|
|
|
22,689
|
|
|
|
17,798
|
|
|
|
15,205
|
|
Advertising
|
|
|
145,666
|
|
|
|
164,072
|
|
|
|
92,312
|
|
|
|
100,364
|
|
|
|
90,415
|
|
Fair value adjustments of investment-related derivative
instruments
|
|
|
|
|
|
|
11,703
|
|
|
|
(8,315
|
)
|
|
|
(17,930
|
)
|
|
|
46,668
|
|
Restructuring and asset impairment charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1,148,124
|
|
|
|
1,027,648
|
|
|
|
449,661
|
|
|
|
421,026
|
|
|
|
532,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before other income and income taxes
|
|
|
1,028,822
|
|
|
|
775,883
|
|
|
|
553,492
|
|
|
|
459,087
|
|
|
|
180,689
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of investments
|
|
|
5,881
|
|
|
|
81,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income
|
|
|
1,034,703
|
|
|
|
857,305
|
|
|
|
553,492
|
|
|
|
459,087
|
|
|
|
180,689
|
|
Provision for income taxes
|
|
|
388,803
|
|
|
|
330,546
|
|
|
|
213,739
|
|
|
|
176,269
|
|
|
|
72,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
645,900
|
|
|
$
|
526,759
|
|
|
$
|
339,753
|
|
|
$
|
282,818
|
|
|
$
|
108,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
1.08
|
|
|
$
|
0.97
|
|
|
$
|
0.84
|
|
|
$
|
0.68
|
|
|
$
|
0.25
|
|
Diluted earnings per share
|
|
$
|
1.06
|
|
|
$
|
0.95
|
|
|
$
|
0.82
|
|
|
$
|
0.66
|
|
|
$
|
0.25
|
|
Weighted average shares outstanding basic
|
|
|
598,503
|
|
|
|
544,307
|
|
|
|
404,215
|
|
|
|
417,629
|
|
|
|
427,376
|
|
Weighted average shares outstanding diluted
|
|
|
608,263
|
|
|
|
555,465
|
|
|
|
413,167
|
|
|
|
426,972
|
|
|
|
432,480
|
|
Dividends declared per share
|
|
$
|
0.00
|
|
|
$
|
6.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
|
|
* |
|
Fiscal 2005 was a 53-week year. All other periods presented are
52-week years. |
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
Sept. 30,
|
|
|
Sept. 29,
|
|
|
Sept. 30,
|
|
|
Sept. 24,
|
|
|
Sept. 26,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
413,787
|
|
|
$
|
363,650
|
|
|
$
|
171,064
|
|
|
$
|
137,392
|
|
|
$
|
248,623
|
|
|
|
|
|
Short-term investments
|
|
|
76,800
|
|
|
|
65,275
|
|
|
|
229,819
|
|
|
|
17,950
|
|
|
|
|
|
|
|
|
|
Segregated cash and investments
|
|
|
|
|
|
|
1,561,910
|
|
|
|
7,595,359
|
|
|
|
7,802,575
|
|
|
|
7,878,421
|
|
|
|
|
|
Receivable from clients, net
|
|
|
7,727,969
|
|
|
|
6,970,834
|
|
|
|
3,784,688
|
|
|
|
3,100,572
|
|
|
|
2,202,170
|
|
|
|
|
|
Total assets
|
|
|
18,092,327
|
|
|
|
16,558,469
|
|
|
|
16,417,110
|
|
|
|
15,277,021
|
|
|
|
14,404,268
|
|
|
|
|
|
Payable to clients
|
|
|
5,313,576
|
|
|
|
5,412,981
|
|
|
|
10,095,837
|
|
|
|
10,322,539
|
|
|
|
9,611,243
|
|
|
|
|
|
Long-term obligations
|
|
|
1,481,948
|
|
|
|
1,710,712
|
|
|
|
45,736
|
|
|
|
37,803
|
|
|
|
82,489
|
|
|
|
|
|
Stockholders equity
|
|
|
2,154,921
|
|
|
|
1,730,234
|
|
|
|
1,518,867
|
|
|
|
1,210,908
|
|
|
|
1,235,774
|
|
|
|
|
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
This discussion contains forward-looking statements within the
meaning of the U.S. Private Securities Litigation Reform
Act of 1995. Statements that are not historical facts, including
statements about our beliefs and expectations, are
forward-looking statements. Forward-looking statements include
statements preceded by, followed by or that include the words
may, could, would,
should, believe, expect,
anticipate, plan, estimate,
target, project, intend and
similar expressions. In particular, forward-looking statements
contained in this discussion include our expectations regarding:
incremental operating expenses for growth initiatives; the
effect of client trading activity on our results of operations;
the effect of changes in interest rates on our net interest
spread; the effect of changes in the number of qualified
accounts on our results of operations; average commissions and
transaction fees per trade; amounts of commissions and
transaction fees, net interest revenue, money market deposit
account fees, investment product fees and other revenues;
amounts of total expenses; our capital and liquidity needs and
our plans to finance such needs; and the impact of
recently-issued accounting pronouncements.
The Companys actual results could differ materially from
those anticipated in such forward-looking statements. Important
factors that may cause such differences include, but are not
limited to: general economic and political conditions; interest
rates; stock market fluctuations and changes in client trading
activity; increased competition; systems failures and capacity
constraints; network security risks; ability to service debt
obligations; regulatory and legal matters and uncertainties and
the other risks and uncertainties set forth under Item 1A.
Risk Factors of this
Form 10-K.
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.
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. The term GAAP
refers to U.S. generally accepted accounting principles.
Activity rate Average client trades per day
during the period divided by the average number of total
accounts during the period.
Asset-based revenues Revenues consisting of
(1) net interest revenue, (2) money market
deposit account (MMDA) fees and
(3) investment product fees. The primary factors
driving our asset-based revenues are average balances and
average rates. Average balances consist primarily of average
client margin balances, average segregated cash
balances, average client credit balances, average
client MMDA balances, average fee-based investment balances
and average securities borrowing and lending balances.
Average rates consist of the average interest rates and fees
earned and paid on such balances.
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.
22
Average client trades per day Total trades
divided by the number of trading days in the period.
Average commissions and transaction fees per trade
Total commissions and transaction fee revenues
as reported on the Companys Consolidated Statements of
Income divided by total trades for the period.
Commissions and transaction fee revenues primarily consist of
trading commissions and revenue-sharing arrangements with market
destinations (also referred to as payment for order
flow).
Basis point When referring to interest rates,
one basis point represents one one-hundredth of one percent.
Beneficiary accounts Brokerage accounts
managed by a custodian, guardian, conservator or trustee on
behalf of one or more beneficiaries. Examples include accounts
maintained under the Uniform Gift to Minors Act (UGMA) or
Uniform Transfer to Minors Act (UTMA), guardianship,
conservatorship and trust arrangements and pension or profit
plan for small business accounts.
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 served as the clearing broker/dealer on behalf of an
unaffiliated introducing broker/dealer. The Company charged 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 cash and money market assets The sum
of all client cash balances, including client credit balances
and client cash balances swept into money market deposit
accounts or money market mutual funds.
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 credit balances are included in
payable to clients in the Consolidated Balance
Sheets.
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. Client
margin balances are included in receivable from
clients in the Consolidated Balance Sheets.
EBITDA and EBITDA excluding investment gains
EBITDA (earnings before interest, taxes,
depreciation and amortization) and EBITDA excluding investment
gains are considered non-GAAP financial measures as defined by
Securities and Exchange Commission (SEC)
Regulation G. We consider EBITDA and EBITDA excluding
investment gains to be important measures 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 is used as the
denominator in the consolidated leverage ratio calculation for
our senior credit facilities. The consolidated leverage ratio
determines the interest rate margin charged on the senior credit
facilities. EBITDA eliminates the non-cash effect of tangible
asset depreciation and amortization and intangible asset
amortization. EBITDA excluding investment gains also eliminates
the effect of non-brokerage investment-related gains and losses
that are not likely to be indicative of the ongoing operations
of our business. EBITDA and EBITDA excluding investment gains
should be considered in addition to, rather than as a substitute
for, pre-tax income, net income and cash flows from operating
activities.
EPS excluding investment gains/losses
Earnings per share (EPS) excluding investment
gains/losses is considered a non-GAAP financial measure as
defined by SEC Regulation G. We define EPS excluding
investment gains/losses as earnings (loss) per share, adjusted
to remove the after-tax effect of non-brokerage
investment-related gains and losses. We consider EPS excluding
investment gains/losses an important measure of our financial
performance. Gains/losses on non-brokerage investments and
investment-related derivatives are excluded because we believe
they are not likely to be indicative of the ongoing operations
of our business. EPS excluding investment gains/losses should be
considered in addition to, rather than as a substitute for, GAAP
earnings per share.
23
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 generally
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.
Fee-based investment balances Client assets
invested in money market mutual funds, other mutual funds and
Company programs such as
AdvisorDirect®
and Amerivest,TM on which we earn fee revenues. Fee revenues
earned on these balances are included in investment product
fees in the Consolidated Statements of Income.
Investable assets Client and
brokerage-related asset balances, including client margin
balances, segregated cash, money market deposit
account (MMDA) balances, deposits paid on securities
borrowing and other free cash and short-term investment
balances. Investable assets is used in the calculation of our
net interest margin.
Investment product fees Revenues earned on
fee-based investment balances. Investment product fees
include fees earned on money market mutual funds, other mutual
funds and through Company programs such as
AdvisorDirect®
and
AmerivestTM.
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) non broker-dealer short-term
investments and c) regulatory net capital of (i) our
clearing broker-dealer subsidiaries in excess of 5% of aggregate
debit items and (ii) our introducing broker-dealer
subsidiary in excess of
81/3%
of aggregate indebtedness. 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 as a supplemental measure of liquidity,
rather than as a substitute for cash and cash equivalents.
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.
Money market deposit account (MMDA) fees
Revenues resulting from the Money Market Deposit
Account agreement with TD Bank USA, N.A., a subsidiary of TD,
which became effective upon the closing of our acquisition of TD
Waterhouse Group, Inc. (TD Waterhouse). Under the
MMDA agreement, TD Bank USA makes available to clients of our
broker-dealer subsidiaries money market deposit accounts as
designated sweep vehicles. With respect to the MMDA accounts,
our broker-dealer subsidiaries provide marketing and support
services and act as recordkeeper for TD Bank USA and as agent
for clients. In exchange for these services, TD Bank USA pays
our broker-dealer subsidiaries a fee based on the actual yield
earned by TD Bank USA on the client MMDA assets (including any
gains or losses from sales of investments), less the actual
interest cost paid to clients, actual interest cost incurred on
borrowings, a flat fee to TD Bank USA of 25 basis points
and the cost of FDIC insurance premiums.
Net interest margin (NIM) A
measure of the net yield on our average investable
assets. Net interest margin is calculated for a given period
by dividing the annualized sum of net interest revenue
and money market deposit account (MMDA) fees by
average investable assets.
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, the investment of
24
cash from operations and segregated cash in short-term
marketable securities and interest earned on securities
borrowing. Brokerage interest expense consists of amounts paid
or payable to clients based on credit balances maintained in
brokerage accounts and interest incurred on securities
lending. Brokerage interest expense does not include interest on
Company non-brokerage borrowings.
Net new accounts or Net account growth The
number of new client accounts (funded and unfunded) opened in a
specified period minus the number of client accounts closed in
the same period.
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 may be eligible for
margin account approval.
Segregated cash Client cash and investments
segregated in compliance with
Rule 15c3-3
of the Securities Exchange Act of 1934 (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 a significant
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.
Transaction-based revenues Revenues generated
from client trade execution, consisting primarily of
commissions, transaction clearing fees and revenue sharing
arrangements with market destinations (also known as
payment for order flow).
We provide securities brokerage and clearing services to our
clients through our introducing and clearing broker-dealers.
Substantially all of our net revenues are derived from our
brokerage activities and clearing and execution services. Our
primary focus is serving retail clients and independent
registered investment advisors by providing services under a
simple, low-cost commission structure.
Our largest sources of revenues are (1) asset-based
revenues and (2) transaction-based revenues. The primary
factors driving our asset-based revenues are average balances
and average rates. Average balances consist primarily of average
client margin balances, average segregated cash balances,
average client credit balances, average client money market
deposit account (MMDA) balances, average fee-based
investment balances and average securities borrowing and lending
balances. Average rates consist of the average interest rates
and fees earned and paid on such balances. The primary factors
driving our transaction-based revenues are total client trades
and average commissions and transaction fees per trade. 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.
Payment for order flow revenue is included in commissions and
transaction fees on the Consolidated Statements of Income.
Our largest operating expense generally is employee compensation
and benefits. Employee compensation and benefits expense
includes salaries, bonuses, stock-based compensation, group
insurance, contributions to benefit programs, recruitment and
other related employee costs. Fair value adjustments of
compensation-related derivative instruments represent
adjustments to equity swap agreements that are intended to
economically offset TD Waterhouse stock-based compensation
(assumed in the TD Waterhouse acquisition) that is based on the
value of TD stock. See Business Combination below
for a discussion of the acquisition of TD Waterhouse.
25
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 outsourced clearing services, 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 and amortization
of leasehold improvements. Amortization of acquired intangible
assets consists of amortization of amounts allocated to the
value of intangible assets acquired in business combinations.
Professional services expense includes costs paid to outside
firms for assistance with legal, accounting, technology,
regulatory, marketing and general management issues. Interest on
borrowings consists of interest expense on our long-term debt,
capital leases, prepaid variable forward contracts and other
borrowings. Other operating expenses include provision for bad
debt losses, fraud and error losses, gains or losses on disposal
of property, insurance, travel expenses and other miscellaneous
expenses. Advertising costs include production and placement of
advertisements in various media, including online, television,
print and direct mail, as well as client promotion and
development costs. Advertising expenses may increase or decrease
significantly from period to period.
Fair value adjustments of investment-related derivative
instruments consist of changes in the fair value of the embedded
collars within our Knight Capital Group, Inc.
(Knight) prepaid variable forward contracts. The
prepaid variable forward contracts were intended to economically
hedge our investment in Knight common stock. In January 2006, we
liquidated our investment in Knight and the prepaid variable
forward contracts.
On February 27, 2007, our Board of Directors approved
changing our fiscal year-end to September 30. Previously,
we reported on a fifty-two/fifty-three week fiscal year ending
on the last Friday in September. This change was effective for
our fiscal year ended September 30, 2007. Because the
transition period is less than one month, no transition report
will be filed. References to fiscal year in this
document or in the information incorporated herein by reference
means the Companys fiscal year ended September 30 (for
fiscal year 2007) or the last Friday of September (for
fiscal years prior to 2007). For example, fiscal
2006 refers to the fiscal year ended September 29,
2006. Fiscal year 2006 was a fifty-two week year and fiscal 2005
was a fifty-three week year.
On January 24, 2006, we acquired TD Waterhouse Group, Inc.,
a Delaware corporation, pursuant to an Agreement of Sale and
Purchase dated June 22, 2005, as amended (the
Purchase Agreement), with The Toronto-Dominion Bank
(TD). We purchased from TD all of the capital stock
of TD Waterhouse (the Share Purchase) in exchange
for 196,300,000 shares of Company common stock and $20,000
in cash. The shares of common stock issued to TD in the Share
Purchase represented approximately 32.5% of the outstanding
shares of the Company after giving effect to the transaction.
Our consolidated financial statements include the results of
operations for TD Waterhouse beginning January 25,
2006. In addition, on January 24, 2006, we completed the
sale of Ameritrade Canada, Inc. to TD for $60 million in
cash. The purchase price for the acquisition of TD Waterhouse
and the sale price for the sale of Ameritrade Canada were
subject to cash adjustments based on the closing date balance
sheets of the Company, TD Waterhouse and Ameritrade Canada. On
May 5, 2006, we received approximately $45.9 million
from TD for the settlement of cash adjustments related to the
purchase of TD Waterhouse and the sale of Ameritrade Canada.
Prior to the consummation of the Share Purchase, TD Waterhouse
conducted a reorganization in which it transferred its Canadian
retail securities brokerage business and TD Bank USA, N.A.
(formerly TD Waterhouse Bank, N.A.) to TD such that, at the time
of consummation of the Share Purchase, TD Waterhouse retained
only its United States retail securities brokerage business. TD
Waterhouse also distributed to TD excess capital of
TD Waterhouse prior to the consummation of the Share
Purchase. As contemplated in the Purchase Agreement, on
January 24, 2006, we commenced payment of a special cash
dividend of $6.00 per share in respect of the shares of our
common stock outstanding prior to the consummation of the Share
Purchase. The total amount of the dividend was approximately
$2.4 billion.
26
At the time of the closing of the TD Waterhouse acquisition, we
expected to realize approximately $678 million of
annualized pre-tax synergies from the acquisition within
18 months of the closing, consisting of $300 million
in revenue opportunities primarily related to our new banking
relationship with TD and $378 million in cost savings
related to the elimination of duplicate expenditures. We
realized the revenue opportunities during fiscal 2006 and fully
realized the operating cost synergies during the fourth quarter
of fiscal 2007.
During the third quarter of fiscal 2007, our Board of Directors
approved expending up to $100 million in ongoing annualized
incremental operating expenses for growth initiatives. Our Chief
Executive Officer is authorized to approve growth initiatives to
strengthen our sales, develop new products or enhance the
functionality of existing products. During the fourth quarter of
fiscal 2007, we expended approximately $20 million (or
$80 million annualized) for growth initiatives, which
consisted primarily of employee compensation and benefits and
professional service expenses. We expect to reach the
$100 million level of annualized incremental expenditures
during fiscal 2008, consisting of:
|
|
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|
|
approximately $50 million of employee compensation and
benefits for additional retail and institutional sales/service
employees;
|
|
|
|
approximately $10 million of employee compensation and
benefits for additional client group and technology employees;
|
|
|
|
approximately $18 million of professional services for
development of new products and functionality and
|
|
|
|
approximately $22 million of amortization of acquired or
internally developed products and functionality.
|
Critical
Accounting Policies and Estimates
The preparation of our consolidated 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 for impairment on at least an annual basis, or
whenever events and circumstances indicate that the carrying
value 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, if
applicable, based on operating revenues, and is compared with
the carrying value of the reporting units. No impairment charges
have resulted from our annual impairment tests. We review our
acquired intangible assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of
such asset may not be recoverable. We evaluate recoverability by
comparing the undiscounted cash flows associated with the asset
to the assets carrying amount. We also 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.
Valuation
of stock-based compensation
We account for stock-based compensation in accordance with
Statement of Financial Accounting Standards (SFAS)
No. 123 (Revised 2004), Share-Based Payment
(No. 123R). Under the fair value
recognition provisions of SFAS No. 123R, share-based
compensation cost is measured at the grant date based on the
value of the award and is recognized as expense over the
requisite service period based on the number of awards for which
the requisite service is expected to be rendered. We must make
assumptions regarding the number of share-based awards that will
be forfeited. For performance-based awards, we must also make
assumptions regarding the likelihood of achieving performance
goals. If actual results differ significantly from these
estimates, stock-based compensation expense and our results of
operations could be materially affected.
27
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 financial statement carrying
amounts and tax bases of assets and liabilities. Temporary
differences result in deferred income tax assets and
liabilities. We must evaluate the likelihood that deferred
income tax assets will be realized. To the extent we determine
that realization is not more likely than not, we establish a
valuation allowance. Establishing or increasing a valuation
allowance results in a corresponding increase to income tax
expense in our Consolidated Statements of Income. Conversely, to
the extent circumstances indicate that a valuation allowance can
be reduced or is no longer necessary, that portion of the
valuation allowance is reversed, reducing income tax expense.
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. We must also exercise judgment in determining the need
for, and amount of, any accruals for taxes relating to results
of examinations of current and prior years returns by
taxing authorities. Because the application of tax laws and
regulations to many types of transactions is subject to varying
interpretations, amounts reported in the consolidated financial
statements could be significantly changed at a later date upon
final determinations by taxing authorities.
Conditions in the U.S. equity markets significantly impact
the volume of our clients trading activity. There is a
direct 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 increases, 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.
Changes in average balances, especially client margin, credit,
MMDA and mutual fund balances, may also significantly impact our
results of operations. Changes in interest rates impact our
results of operations to a lesser extent because we seek to
mitigate interest rate risk by aligning the average duration of
our interest-earning assets with that of our interest-bearing
liabilities. We cannot predict the direction of interest rates
or the levels of client balances. If interest rates rise, we
generally expect to earn a larger net interest spread.
Conversely, a falling interest rate environment generally would
result in our earning a smaller net interest spread.
Financial
Performance Metrics
Pre-tax income, net income, earnings per share, EBITDA and
EBITDA excluding investment gains are key metrics we use in
evaluating our financial performance. EBITDA and EBITDA
excluding investment gains are considered non-GAAP financial
measures as defined by SEC Regulation G.
We consider EBITDA and EBITDA excluding investment gains to be
important measures 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 is used as the denominator in the
consolidated leverage ratio calculation for our senior credit
facilities. The consolidated leverage ratio determines the
interest rate margin charged on the senior credit facilities.
EBITDA eliminates the non-cash effect of tangible asset
depreciation and amortization and intangible asset amortization.
EBITDA excluding investment gains also eliminates the effect of
non-brokerage investment-related gains and losses that are not
likely to be indicative of the ongoing operations of our
business. EBITDA and EBITDA excluding investment gains should be
considered in addition to, rather than as a substitute for,
pre-tax income, net income and cash flows from operating
activities.
28
The following table sets forth EBITDA and EBITDA excluding
investment gains in dollars and as a percentage of net revenues
for the periods indicated, and provides reconciliations to
pre-tax income, which is the most directly comparable GAAP
measure (dollars in thousands):
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Fiscal Year Ended
|
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|
September 30, 2007
|
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September 29, 2006
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September 30, 2005
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$
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% of Rev.
|
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$
|
|
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% of Rev.
|
|
|
$
|
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% of Rev.
|
|
|
EBITDA and EBITDA Excluding Investment Gains
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EBITDA excluding investment gains
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$
|
1,227,701
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56.4
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%
|
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$
|
933,356
|
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51.8
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%
|
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$
|
579,867
|
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57.8
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%
|
Plus: Gain on sale of investments
|
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5,881
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0.3
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%
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81,422
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4.5
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%
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
1,233,582
|
|
|
|
56.7
|
%
|
|
|
1,014,778
|
|
|
|
56.3
|
%
|
|
|
579,867
|
|
|
|
57.8
|
%
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(26,237
|
)
|
|
|
(1.2
|
)%
|
|
|
(21,199
|
)
|
|
|
(1.2
|
)%
|
|
|
(10,521
|
)
|
|
|
(1.0
|
)%
|
Amortization of acquired intangible assets
|
|
|
(54,469
|
)
|
|
|
(2.5
|
)%
|
|
|
(42,286
|
)
|
|
|
(2.3
|
)%
|
|
|
(13,887
|
)
|
|
|
(1.4
|
)%
|
Interest on borrowings
|
|
|
(118,173
|
)
|
|
|
(5.4
|
)%
|
|
|
(93,988
|
)
|
|
|
(5.2
|
)%
|
|
|
(1,967
|
)
|
|
|
(0.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income
|
|
$
|
1,034,703
|
|
|
|
47.5
|
%
|
|
$
|
857,305
|
|
|
|
47.5
|
%
|
|
$
|
553,492
|
|
|
|
55.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The dollar amounts of our pre-tax income and EBITDA excluding
investment gains increased for fiscal 2007 compared to fiscal
2006, reflecting a full year of results including TD Waterhouse.
EBITDA excluding investment gains increased as a percentage of
net revenues for fiscal 2007 primarily due to operating cost
synergies realized from the TD Waterhouse integration.
Operating
Metrics
Our largest sources of revenues are (1) asset-based
revenues and (2) transaction-based revenues. For fiscal
2007, asset-based revenues and commissions and transaction fees
accounted for 61% and 37% of our net revenues, respectively.
Asset-based revenues consist of (1) net interest revenue,
(2) MMDA fees and (3) investment product fees. The
primary factors driving our asset-based revenues are average
balances and average rates. Average balances consist primarily
of average client margin balances, average segregated cash
balances, average client credit balances, average client MMDA
balances, average fee-based investment balances and average
securities borrowing and lending balances. Average rates consist
of the average interest rates and fees earned and paid on such
balances. The primary factors driving our transaction-based
revenues are total client trades and average commissions and
transaction fees per trade. We also consider client account and
client asset metrics, although we believe they are generally of
less significance to our results of operations for any
particular period than our asset-based revenue and trading
activity metrics.
29
Asset-Based
Revenue Metrics
We calculate the return on our interest-earning assets and our
MMDA balances using a measure we refer to as net interest
margin. Net interest margin is calculated for a given period by
dividing the annualized sum of net interest revenue and MMDA
fees by average investable assets. Investable assets consist of
client and brokerage-related asset balances, including client
margin balances, segregated cash, MMDA balances, deposits paid
on securities borrowing and other free cash and short-term
investment balances. The following table sets forth net interest
margin and average investable assets (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
07 vs. 06
|
|
|
06 vs. 05
|
|
|
|
Fiscal Year
|
|
|
Increase/
|
|
|
Increase/
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Average interest-earning assets
|
|
$
|
14,569
|
|
|
$
|
17,543
|
|
|
$
|
15,355
|
|
|
$
|
(2,974
|
)
|
|
$
|
2,188
|
|
Average money market deposit account balances
|
|
|
14,898
|
|
|
|
5,734
|
|
|
|
N/A
|
|
|
|
9,164
|
|
|
|
5,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average investable assets
|
|
$
|
29,467
|
|
|
$
|
23,277
|
|
|
$
|
15,355
|
|
|
$
|
6,190
|
|
|
$
|
7,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest revenue
|
|
$
|
558.1
|
|
|
$
|
696.2
|
|
|
$
|
398.9
|
|
|
$
|
(138.1
|
)
|
|
$
|
297.3
|
|
Money market deposit account fee revenue
|
|
|
535.4
|
|
|
|
185.0
|
|
|
|
N/A
|
|
|
|
350.4
|
|
|
|
185.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue earned on investable assets
|
|
$
|
1,093.5
|
|
|
$
|
881.2
|
|
|
$
|
398.9
|
|
|
$
|
212.3
|
|
|
$
|
482.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (NIM)
|
|
|
3.65
|
%
|
|
|
3.74
|
%
|
|
|
2.52
|
%
|
|
|
(0.09
|
)%
|
|
|
1.22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables set forth key metrics that we use in
analyzing net interest revenue, which is a component of net
interest margin (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Revenue (Expense)
|
|
|
07 vs. 06
|
|
|
06 vs. 05
|
|
|
|
Fiscal Year
|
|
|
Increase/
|
|
|
Increase/
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Segregated cash
|
|
$
|
31.2
|
|
|
$
|
324.9
|
|
|
$
|
208.8
|
|
|
$
|
(293.7
|
)
|
|
$
|
116.1
|
|
Client margin balances
|
|
|
615.3
|
|
|
|
500.8
|
|
|
|
210.1
|
|
|
|
114.5
|
|
|
|
290.7
|
|
Securities borrowing
|
|
|
340.4
|
|
|
|
178.9
|
|
|
|
113.4
|
|
|
|
161.5
|
|
|
|
65.5
|
|
Other free cash and short-term investments
|
|
|
24.6
|
|
|
|
25.3
|
|
|
|
8.1
|
|
|
|
(0.7
|
)
|
|
|
17.2
|
|
Client credit balances
|
|
|
(53.9
|
)
|
|
|
(98.9
|
)
|
|
|
(45.9
|
)
|
|
|
45.0
|
|
|
|
(53.0
|
)
|
Securities lending
|
|
|
(399.5
|
)
|
|
|
(234.8
|
)
|
|
|
(95.6
|
)
|
|
|
(164.7
|
)
|
|
|
(139.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest revenue
|
|
$
|
558.1
|
|
|
$
|
696.2
|
|
|
$
|
398.9
|
|
|
$
|
(138.1
|
)
|
|
$
|
297.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balance
|
|
|
07 vs. 06
|
|
|
06 vs. 05
|
|
|
|
Fiscal Year
|
|
|
%
|
|
|
%
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
Segregated cash
|
|
$
|
597
|
|
|
$
|
7,235
|
|
|
$
|
7,801
|
|
|
|
(92
|
)%
|
|
|
(7
|
)%
|
Client margin balances
|
|
|
7,501
|
|
|
|
6,397
|
|
|
|
3,512
|
|
|
|
17
|
%
|
|
|
82
|
%
|
Securities borrowing
|
|
|
5,999
|
|
|
|
3,435
|
|
|
|
3,824
|
|
|
|
75
|
%
|
|
|
(10
|
)%
|
Other free cash and short-term investments
|
|
|
472
|
|
|
|
476
|
|
|
|
218
|
|
|
|
(1
|
)%
|
|
|
118
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets
|
|
$
|
14,569
|
|
|
$
|
17,543
|
|
|
$
|
15,355
|
|
|
|
(17
|
)%
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Client credit balances
|
|
$
|
3,456
|
|
|
$
|
9,814
|
|
|
$
|
9,482
|
|
|
|
(65
|
)%
|
|
|
4
|
%
|
Securities lending
|
|
|
8,441
|
|
|
|
5,731
|
|
|
|
4,621
|
|
|
|
47
|
%
|
|
|
24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities
|
|
$
|
11,897
|
|
|
$
|
15,545
|
|
|
$
|
14,103
|
|
|
|
(23
|
)%
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
07 vs. 06
|
|
|
06 vs. 05
|
|
|
|
Average Yield (Cost)
|
|
|
Net Yield
|
|
|
Net Yield
|
|
|
|
Fiscal Year
|
|
|
Increase/
|
|
|
Increase/
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
(Decrease)
|
|
|
(Decrease)
|
|
|
Segregated cash
|
|
|
5.14
|
%
|
|
|
4.44
|
%
|
|
|
2.60
|
%
|
|
|
0.70
|
%
|
|
|
1.84
|
%
|
Client margin balances
|
|
|
8.07
|
%
|
|
|
7.74
|
%
|
|
|
5.81
|
%
|
|
|
0.33
|
%
|
|
|
1.93
|
%
|
Securities borrowing
|
|
|
5.58
|
%
|
|
|
5.15
|
%
|
|
|
2.88
|
%
|
|
|
0.43
|
%
|
|
|
2.27
|
%
|
Other free cash and short-term investments
|
|
|
5.15
|
%
|
|
|
5.26
|
%
|
|
|
3.61
|
%
|
|
|
(0.11
|
)%
|
|
|
1.65
|
%
|
Client credit balances
|
|
|
(1.53
|
)%
|
|
|
(1.00
|
)%
|
|
|
(0.47
|
)%
|
|
|
(0.53
|
)%
|
|
|
(0.53
|
)%
|
Securities lending
|
|
|
(4.66
|
)%
|
|
|
(4.05
|
)%
|
|
|
(2.01
|
)%
|
|
|
(0.61
|
)%
|
|
|
(2.04
|
)%
|
Net interest revenue
|
|
|
3.77
|
%
|
|
|
3.92
|
%
|
|
|
2.52
|
%
|
|
|
(0.15
|
)%
|
|
|
1.40
|
%
|
The following tables set forth key metrics that we use in
analyzing other asset-based revenues (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee Revenue
|
|
07 vs. 06
|
|
06 vs. 05
|
|
|
Fiscal Year
|
|
Increase/
|
|
Increase/
|
|
|
2007
|
|
2006
|
|
2005
|
|
(Decrease)
|
|
(Decrease)
|
|
Money market deposit account fees
|
|
$
|
535.4
|
|
|
$
|
185.0
|
|
|
|
N/A
|
|
|
$
|
350.4
|
|
|
$
|
185.0
|
|
Investment product fees
|
|
$
|
232.2
|
|
|
$
|
140.7
|
|
|
$
|
25.2
|
|
|
$
|
91.5
|
|
|
$
|
115.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balance
|
|
07 vs. 06
|
|
06 vs. 05
|
|
|
Fiscal Year
|
|
%
|
|
%
|
|
|
2007
|
|
2006
|
|
2005
|
|
Change
|
|
Change
|
|
Money market deposit account fees
|
|
$
|
14,898
|
|
|
$
|
5,734
|
|
|
|
N/A
|
|
|
|
160
|
%
|
|
|
N/A
|
|
Investment product fees
|
|
$
|
49,665
|
|
|
$
|
29,374
|
|
|
$
|
6,014
|
|
|
|
69
|
%
|
|
|
388
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
07 vs. 06
|
|
06 vs. 05
|
|
|
Average Yield
|
|
Yield
|
|
Yield
|
|
|
Fiscal Year
|
|
Increase/
|
|
Increase/
|
|
|
2007
|
|
2006
|
|
2005
|
|
(Decrease)
|
|
(Decrease)
|
|
Money market deposit account fees
|
|
|
3.53
|
%
|
|
|
3.19
|
%
|
|
|
N/A
|
|
|
|
0.34
|
%
|
|
|
N/A
|
|
Investment product fees
|
|
|
0.46
|
%
|
|
|
0.47
|
%
|
|
|
0.41
|
%
|
|
|
(0.01
|
)%
|
|
|
0.06
|
%
|
Trading
Activity Metrics
The following table sets forth several metrics regarding client
trading activity, which we utilize in measuring and evaluating
performance and the results of our operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
07 vs. 06
|
|
|
06 vs. 05
|
|
|
|
Fiscal Year
|
|
|
%
|
|
|
%
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change
|
|
|
Total trades (in millions)
|
|
|
63.11
|
|
|
|
54.24
|
|
|
|
39.94
|
|
|
|
16
|
%
|
|
|
36
|
%
|
Average commissions and transaction fees per trade
|
|
$
|
12.90
|
|
|
$
|
13.61
|
|
|
$
|
13.37
|
|
|
|
(5
|
)%
|
|
|
2
|
%
|
Average client trades per day
|
|
|
253,440
|
|
|
|
216,970
|
|
|
|
155,696
|
|
|
|
17
|
%
|
|
|
39
|
%
|
Average client trades per account (annualized)
|
|
|
10.0
|
|
|
|
10.1
|
|
|
|
11.0
|
|
|
|
(1
|
)%
|
|
|
(8
|
)%
|
Activity rate
|
|
|
4.0
|
%
|
|
|
4.0
|
%
|
|
|
4.3
|
%
|
|
|
0
|
%
|
|
|
(7
|
)%
|
Trading days
|
|
|
249.0
|
|
|
|
250.0
|
|
|
|
256.5
|
|
|
|
(0
|
)%
|
|
|
(3
|
)%
|
31
Client
Account and Client Asset Metrics
The following table sets forth certain metrics regarding client
accounts and client assets, which we use to analyze growth and
trends in our client base:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Qualified accounts (beginning of year)
|
|
|
3,242,000
|
|
|
|
1,735,000
|
|
|
|
1,677,000
|
|
Qualified accounts (end of year)
|
|
|
3,272,000
|
|
|
|
3,242,000
|
|
|
|
1,735,000
|
|
Percentage change during year
|
|
|
1
|
%
|
|
|
87
|
%
|
|
|
3
|
%
|
Total accounts (beginning of year)
|
|
|
6,191,000
|
|
|
|
3,717,000
|
|
|
|
3,520,000
|
|
Total accounts (end of year)
|
|
|
6,380,000
|
|
|
|
6,191,000
|
|
|
|
3,717,000
|
|
Percentage change during year
|
|
|
3
|
%
|
|
|
67
|
%
|
|
|
6
|
%
|
Client assets (beginning of year, in billions)
|
|
$
|
261.7
|
|
|
$
|
83.3
|
|
|
$
|
68.8
|
|
Client assets (end of year, in billions)
|
|
$
|
302.7
|
|
|
$
|
261.7
|
|
|
$
|
83.3
|
|
Percentage change during year
|
|
|
16
|
%
|
|
|
214
|
%
|
|
|
21
|
%
|
Qualified accounts are all open client accounts with a total
liquidation value of $2,000 or more, except clearing accounts.
Qualified accounts are our most significant measure of client
accounts because they have historically generated the vast
majority of our revenues. Total accounts are all open client
accounts (funded and unfunded), except clearing accounts.
Our qualified accounts increased slightly for the full fiscal
year 2007. We are carefully monitoring the number of qualified
accounts and are taking actions designed to increase the number
of qualified accounts. We expect that the integration of the TD
Waterhouse clearing platform into the legacy Ameritrade clearing
platform, which was completed during the third quarter of fiscal
2007, will enable us to offer more comprehensive product
offerings. We are investing up to $100 million in
annualized incremental operating expenses for growth
initiatives, as discussed under Growth Initiatives
above. If we were to experience significant decreases in the
number of qualified accounts, it could have a material adverse
effect on our future results of operations.
32
Consolidated
Statements of Income Data
The following table summarizes certain data from our
Consolidated Statements of Income for analysis purposes (in
millions, except percentages and interest days):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
07 vs. 06
|
|
|
06 vs. 05
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
% Change
|
|
|
% Change
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions and transaction fees
|
|
$
|
813.8
|
|
|
$
|
738.4
|
|
|
$
|
533.9
|
|
|
|
10
|
%
|
|
|
38
|
%
|
Asset-based revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest revenue
|
|
|
1,013.6
|
|
|
|
1,032.0
|
|
|
|
540.3
|
|
|
|
(2
|
)%
|
|
|
91
|
%
|
Brokerage interest expense
|
|
|
(455.5
|
)
|
|
|
(335.8
|
)
|
|
|
(141.4
|
)
|
|
|
36
|
%
|
|
|
137
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest revenue
|
|
|
558.1
|
|
|
|
696.2
|
|
|
|
398.9
|
|
|
|
(20
|
)%
|
|
|
74
|
%
|
Money market deposit account fees
|
|
|
535.4
|
|
|
|
185.0
|
|
|
|
|
|
|
|
189
|
%
|
|
|
N/A
|
|
Investment product fees
|
|
|
232.2
|
|
|
|
140.7
|
|
|
|
25.2
|
|
|
|
65
|
%
|
|
|
459
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total asset-based revenues
|
|
|
1,325.7
|
|
|
|
1,021.9
|
|
|
|
424.1
|
|
|
|
30
|
%
|
|
|
141
|
%
|
Other revenues
|
|
|
37.5
|
|
|
|
43.3
|
|
|
|
45.1
|
|
|
|
(13
|
)%
|
|
|
(4
|
)%
|
Net revenues
|
|
|
2,176.9
|
|
|
|
1,803.5
|
|
|
|
1,003.2
|
|
|
|
21
|
%
|
|
|
80
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
429.8
|
|
|
|
350.1
|
|
|
|
180.6
|
|
|
|
23
|
%
|
|
|
94
|
%
|
Fair value adjustments of compensation-related derivative
instruments
|
|
|
(3.2
|
)
|
|
|
(1.7
|
)
|
|
|
|
|
|
|
86
|
%
|
|
|
N/A
|
|
Clearing and execution costs
|
|
|
79.7
|
|
|
|
73.0
|
|
|
|
26.3
|
|
|
|
9
|
%
|
|
|
178
|
%
|
Communications
|
|
|
82.2
|
|
|
|
65.4
|
|
|
|
35.7
|
|
|
|
26
|
%
|
|
|
84
|
%
|
Occupancy and equipment costs
|
|
|
84.3
|
|
|
|
74.6
|
|
|
|
43.4
|
|
|
|
13
|
%
|
|
|
72
|
%
|
Depreciation and amortization
|
|
|
26.2
|
|
|
|
21.2
|
|
|
|
10.5
|
|
|
|
24
|
%
|
|
|
101
|
%
|
Amortization of acquired intangible assets
|
|
|
54.5
|
|
|
|
42.3
|
|
|
|
13.9
|
|
|
|
29
|
%
|
|
|
205
|
%
|
Professional services
|
|
|
84.0
|
|
|
|
87.5
|
|
|
|
30.6
|
|
|
|
(4
|
)%
|
|
|
186
|
%
|
Interest on borrowings
|
|
|
118.2
|
|
|
|
94.0
|
|
|
|
2.0
|
|
|
|
26
|
%
|
|
|
4678
|
%
|
Other
|
|
|
46.8
|
|
|
|
45.4
|
|
|
|
22.7
|
|
|
|
3
|
%
|
|
|
100
|
%
|
Advertising
|
|
|
145.7
|
|
|
|
164.1
|
|
|
|
92.3
|
|
|
|
(11
|
)%
|
|
|
78
|
%
|
Fair value adjustments of investment-related derivative
instruments
|
|
|
|
|
|
|
11.7
|
|
|
|
(8.3
|
)
|
|
|
(100
|
)%
|
|
|
(241
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1,148.1
|
|
|
|
1,027.6
|
|
|
|
449.7
|
|
|
|
12
|
%
|
|
|
129
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before other income and income taxes
|
|
|
1,028.8
|
|
|
|
775.9
|
|
|
|
553.5
|
|
|
|
33
|
%
|
|
|
40
|
%
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of investments
|
|
|
5.9
|
|
|
|
81.4
|
|
|
|
|
|
|
|
(93
|
)%
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income
|
|
|
1,034.7
|
|
|
|
857.3
|
|
|
|
553.5
|
|
|
|
21
|
%
|
|
|
55
|
%
|
Provision for income taxes
|
|
|
388.8
|
|
|
|
330.5
|
|
|
|
213.7
|
|
|
|
18
|
%
|
|
|
55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
645.9
|
|
|
$
|
526.8
|
|
|
$
|
339.8
|
|
|
|
23
|
%
|
|
|
55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of interest days in period
|
|
|
366
|
|
|
|
364
|
|
|
|
371
|
|
|
|
1
|
%
|
|
|
(2
|
)%
|
Effective income tax rate
|
|
|
37.6
|
%
|
|
|
38.6
|
%
|
|
|
38.6
|
%
|
|
|
|
|
|
|
|
|
Note: Details may not sum to totals and subtotals due to
rounding differences. Change percentages are based on
non-rounded Consolidated Statements of Income amounts.
Fiscal
Year Ended September 30, 2007 Compared to Fiscal Year Ended
September 29, 2006
Net
Revenues
Commissions and transaction fees increased 10% to
$813.8 million, primarily due to the addition of
approximately 2.25 million accounts on January 24,
2006 in the TD Waterhouse acquisition, partially offset by lower
commissions and transaction fees per trade. Total trades
increased 16%, as average client trades per day increased 17% to
253,440 for fiscal 2007 from 216,970 for fiscal 2006. Average
client trades per account (annualized) were virtually unchanged
at 10.0 for fiscal 2007 compared to 10.1 for fiscal 2006.
Average
33
commissions and transaction fees per trade decreased to $12.90
per trade for fiscal 2007 from $13.61 for fiscal 2006, primarily
due to our new client offerings announced in April 2006 and the
closing of our Investment Centers during December 2006,
partially offset by higher payment for order flow revenue per
trade. We expect average commissions and transaction fees to
range from approximately $12.57 to $13.07 per trade during
fiscal 2008, depending on the mix of client trading activity,
level of payment for order flow revenue and other factors. We
expect revenues from commissions and transaction fees to range
from $737.0 million to $931.0 million for fiscal 2008,
depending on the volume of client trading activity, average
commissions and transaction fees per trade and other factors.
Net interest revenue decreased 20% to $558.1 million, due
primarily to the movement of over $6 billion in legacy
Ameritrade client credit balances to our MMDA sweep product in
late September 2006, which resulted in a shift in revenues from
net interest revenue to money market deposit fees. This decrease
was partially offset by the effect of fiscal 2006 not reflecting
a full period of TD Waterhouse net interest revenue. We expect
net interest revenue to range between $558.5 million and
$584.0 million for fiscal 2008, depending primarily on the
level of client margin balances and short-term interest rates.
MMDA fees increased to $535.4 million for fiscal 2007
compared to $185.0 million for fiscal 2006. This was due
primarily to fiscal year 2006 not reflecting a full period of TD
Waterhouse MMDA fee revenue, the movement of over
$6.0 billion in legacy Ameritrade client credit balances to
our MMDA sweep product in late September 2006 and an increase of
34 basis points in the average yield earned on the client
MMDA assets during fiscal 2007 compared to fiscal 2006. We
expect MMDA fees to increase to between $591.6 million and
$623.1 million for fiscal 2008 primarily due to expected
growth in average MMDA balances.
Investment product fees increased 65% to $232.2 million for
fiscal 2007, primarily due to the full year effect of the TD
Waterhouse acquisition. We expect investment product fees to
increase to between $269.4 million and $322.2 million
for fiscal 2008 primarily due to expected growth in fee-based
investment balances.
Other revenues decreased 13% to $37.5 million, due
primarily to the effect of our elimination of account
maintenance fees for all retail clients in April 2006. We expect
other revenues to decrease to between $19.1 million and
$35.1 million for fiscal 2008.
Expenses
and Other Income
Total expenses increased by 12% to $1.15 billion during
fiscal 2007 compared to fiscal 2006, due primarily to fiscal
2006 not reflecting a full year of TD Waterhouse expenses and to
approximately $27 million of expenses for growth
initiatives during fiscal 2007, partially offset by the expense
synergies realized from the TD Waterhouse acquisition. We expect
total expenses to decrease to between $1.03 billion and
$1.13 billion for fiscal 2008, reflecting the full year
impact of the conversion of the legacy TD Waterhouse clearing
operations to the Ameritrade clearing platform, which was
completed in the third quarter of fiscal 2007, partially offset
by the full year impact of the $100 million of annual
expenditures for growth initiatives (see Growth
Initiatives above).
Employee compensation and benefits expense increased 23% to
$429.8 million, primarily due to the TD Waterhouse
acquisition, including incentive compensation related to meeting
performance targets for the integration. Full-time equivalent
employees decreased to 3,882 at September 30, 2007, from
3,947 at September 29, 2006. However, the number of
temporary employees increased to 354 at September 30, 2007,
from 199 at September 29, 2006.
Fair value adjustments of compensation-related derivative
instruments represent adjustments to equity swap agreements that
are intended to economically offset former TD Waterhouse
employees stock-based compensation that is based on the
value of TD stock. We assumed certain stock-based compensation
arrangements in connection with our acquisition of TD
Waterhouse, which we administer for the former TD Waterhouse
employees. Because the swap agreements were not designated for
hedge accounting, the fair value adjustments are not recorded in
the same category of the Consolidated Statements of Income as
the stock-based compensation expense, which is recorded in the
employee compensation and benefits category.
Clearing and execution costs increased 9% to $79.7 million,
due primarily to increased expense for statement and
confirmation processing and other clearing expenses associated
with additional accounts and transaction
34
processing volumes resulting from the TD Waterhouse acquisition.
The increase was partially offset by cost reductions associated
with the completion of the clearing conversion during the third
quarter of fiscal 2007.
Communications expense increased 26% to $82.2 million, due
primarily to increased expense for telephone, quotes and market
information associated with the additional accounts and
transaction processing volumes resulting from the TD Waterhouse
acquisition.
Occupancy and equipment costs increased 13% to
$84.3 million, due primarily to leased facilities added in
the TD Waterhouse acquisition, partially offset by the effects
of a favorable legacy TD Waterhouse litigation settlement of
$4.6 million during the second quarter of fiscal 2007 and a
$2.3 million early lease termination fee associated with
our facility in Jersey City during the first quarter of fiscal
2006.
Depreciation and amortization increased 24% to
$26.2 million, due primarily to depreciation of assets
recorded in the TD Waterhouse acquisition and increased software
amortization related to recently acquired functionality.
Amortization of acquired intangible assets increased 29% to
$54.5 million due to fiscal 2007 reflecting a full year of
amortization of client relationship intangible assets recorded
in the TD Waterhouse acquisition.
Professional services decreased 4% to $84.0 million. During
fiscal 2006, we incurred client communication costs of
$10.5 million associated with the TD Waterhouse acquisition
and a $5.0 million reimbursement of professional services
related to the TD Waterhouse acquisition pursuant to the terms
of our Chairmans employment agreement. The effect of these
expenses was partially offset by fiscal 2006 not reflecting a
full period of TD Waterhouse expenses.
Interest on borrowings increased 26% to $118.2 million, due
primarily to higher average debt outstanding during fiscal 2007
compared to fiscal 2006 and slightly higher average interest
rates paid on our long-term debt during fiscal 2007 compared to
fiscal 2006. Our average debt outstanding was approximately
$1.6 billion for fiscal 2007, compared to $1.4 billion
for fiscal 2006.
Advertising expense decreased 11% to $145.7 million,
primarily due to the higher advertising costs during fiscal 2006
associated with the support of two brands after the TD
Waterhouse acquisition, the promotion of the new TD AMERITRADE
brand and the announcement of our new client offerings and
pricing in April 2006.
Fair value adjustments of investment-related derivative
instruments for fiscal 2006 consisted of $11.7 million of
fair value adjustments on our Knight prepaid variable forward
contracts. There were no such fair value adjustments for fiscal
2007 due to the liquidation of our investment in Knight and the
related prepaid variable forward contracts in January 2006.
Gain on sale of investments was $5.9 million for fiscal
2007, compared to $81.4 million for fiscal 2006. The large
gain for fiscal 2006 resulted primarily from the liquidation of
our investment in Knight and related prepaid variable forward
contracts in January 2006.
Our effective income tax rate decreased to 37.6% for fiscal 2007
compared to 38.6% for fiscal 2006, due primarily to the reversal
of approximately $7.5 million of income taxes payable
related to tax positions of prior years during the fourth
quarter of fiscal 2007. In addition, the integration of TD
Waterhouse resulted in a realignment of our activities from
higher tax jurisdictions into lower tax jurisdictions.
Fiscal
Year Ended September 29, 2006 Compared to Fiscal Year Ended
September 30, 2005
Net
Revenues
Commissions and transaction fees increased 38% to
$738.4 million, primarily due to the addition of
approximately 2.25 million accounts on January 24,
2006 in the TD Waterhouse acquisition. Total trades increased
36% and average client trades per day increased 39% to 216,970
for fiscal 2006 from 155,696 for fiscal 2005. Average client
trades per account were 10.1 for fiscal 2006, compared to 11.0
for fiscal 2005. The number of qualified accounts, which have
historically generated the vast majority of our revenues,
increased by 87% from September 30, 2005 to
September 30, 2006, primarily due to the acquisition of TD
Waterhouse. Average commissions and transaction fees per trade
increased to $13.61 per trade for fiscal 2006 from $13.37 for
fiscal
35
2005, primarily due to the acquired TD Waterhouse accounts
earning higher average commissions and transaction fees per
trade than existing Ameritrade accounts until the implementation
of our new pricing structure in April 2006, which was partially
offset by the effect of lowering our options contract pricing
from $1.50 to $0.75 per contract in March 2005 and decreased
payment for order flow revenue per trade. The increased revenue
resulting from the increased number of accounts and higher
commissions and transaction fees per trade was partially offset
by 3% fewer trading days in fiscal 2006 compared to fiscal 2005,
due to fiscal 2005 being a 53-week year.
Net interest revenue increased 74% to $696.2 million, due
primarily to an increase in average client margin balances to
$6.4 billion for fiscal 2006 from $3.5 billion for
fiscal 2005, an increase of 193 basis points in the average
interest rate charged on client margin balances and an increase
of 184 basis points in the average interest rate earned on
segregated cash during fiscal 2006 compared to fiscal 2005. The
increased client margin balances are primarily due to the TD
Waterhouse acquisition. The increased net interest revenue
resulting from these factors was partially offset by an increase
of 53 basis points in the average interest rate paid on
client credit balances and a $73.7 million decrease in net
interest from our securities borrowing/lending program for
fiscal 2006 compared to the fiscal 2005.
MMDA fees became a new revenue category resulting from the Money
Market Deposit Account Agreement with TD Bank USA, N.A. (a
subsidiary of TD), which became effective upon the closing of
our acquisition of TD Waterhouse on January 24, 2006.
Investment product fees increased to $140.7 million for
fiscal 2006 compared to $25.2 million for fiscal 2005,
primarily due to an increase in average fee-based investment
balances primarily resulting from the TD Waterhouse acquisition.
Other revenues decreased slightly to $43.3 million for
fiscal 2006, as increases in account maintenance, transfer and
other fee revenue associated with additional accounts and
transaction processing volumes resulting from the TD Waterhouse
acquisition were offset by the effect of our elimination of
account maintenance fees in April 2006.
Expenses
and Other Income
Employee compensation and benefits expense increased 94% to
$350.1 million, primarily due to the TD Waterhouse
acquisition. Full-time equivalent employees increased to 3,947
at September 29, 2006, from 2,058 at September 30,
2005. The number of temporary employees also increased to 199 at
September 29, 2006, from 120 at September 30, 2005,
due to TD Waterhouse integration efforts. In fiscal 2006, we
also incurred approximately $5.6 million in severance costs
for legacy Ameritrade employees, primarily related to the TD
Waterhouse integration. Stock-based compensation expense
increased by $12.7 million, as we began recognizing
additional compensation cost for the unvested portion of past
stock option awards upon our adoption of SFAS No. 123R
on October 1, 2005 and because we issued a broad-based
grant of Restricted Stock Units in March 2006.
Clearing and execution costs increased 178% to
$73.0 million, due primarily to increased expense for
statement and confirmation processing, clearing expenses and
order routing associated with additional accounts and
transaction processing volumes resulting from the TD Waterhouse
acquisition.
Communications expense increased 84% to $65.4 million, due
primarily to increased expense for telephone, quotes and market
information associated with the additional accounts and
transaction processing volumes resulting from the TD Waterhouse
acquisition.
Occupancy and equipment costs increased 72% to
$74.6 million, due primarily to leased facilities added in
the TD Waterhouse acquisition and a $2.3 million early
lease termination fee associated with our facility in Jersey
City, New Jersey during the fiscal 2006. Operations in the
Jersey City facility have been moved into TD Waterhouse
facilities.
Depreciation and amortization increased 101% to
$21.2 million, due primarily to depreciation of assets
recorded in the TD Waterhouse acquisition and increased software
amortization related to recently developed functionality.
36
Amortization of acquired intangible assets increased 205% to
$42.3 million due to amortization of client relationship
intangible assets recorded in the TD Waterhouse acquisition.
Professional services increased 186% to $87.5 million. This
increase was primarily due to increased use of consulting and
contract services during fiscal 2006 in connection with the TD
Waterhouse acquisition and integration. During fiscal 2006,
there was also a $5.0 million reimbursement of professional
services related to the TD Waterhouse acquisition pursuant to
the terms of our Chairmans employment agreement.
Interest on borrowings increased to $94.0 million for
fiscal 2006, compared to $2.0 million for fiscal 2005, due
primarily to interest on the $1.9 billion of long-term debt
issued to fund a portion of the $6.00 per share special cash
dividend paid in January 2006 and working capital needs in
connection with the TD Waterhouse acquisition.
Other expenses increased 100% to $45.4 million, due
primarily to additional business resulting from the
TD Waterhouse acquisition, client identity fraud losses of
$4.2 million during the fourth quarter of fiscal 2006
reimbursed pursuant to our asset protection guarantee and the
effect of a favorable litigation settlement during fiscal 2005.
Advertising expense increased 78% to $164.1 million, due
primarily to the promotion of the new TD AMERITRADE brand
and our new client offerings and pricing announced
April 24, 2006.
Fair value adjustments of investment-related derivative
instruments resulted in an $11.7 million charge for fiscal
2006 compared to an $8.3 million gain fiscal 2005, due to
fluctuations in the market price of the Knight stock underlying
the prepaid forward contracts. As discussed in Note 17 to
the consolidated financial statements, we liquidated our
investment in Knight and the related prepaid variable forward
contracts in January 2006, resulting in a one-time pre-tax net
gain of approximately $78.8 million, which is included in
gains on sale of investments in the Consolidated Statements of
Income.
Gain on sale of investments was $81.4 million for fiscal
2006. This large gain primarily resulted from the liquidation of
our investment in Knight and related prepaid variable forward
contracts in January 2006.
Our effective income tax rate was 38.6% for both fiscal 2006 and
fiscal 2005. The effect of a larger percentage of our payroll
and assets being located in higher tax states in fiscal 2006
following the acquisition of TD Waterhouse was partially offset
by the reversal of approximately $4 million of income taxes
payable related to tax positions of prior years in fiscal 2006.
During fiscal 2005, we also recorded a $1.8 million benefit
resulting from the amalgamation of our Canadian subsidiaries,
which allowed previously unrealizable tax loss carryforwards to
be realized.
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 long-term debt to finance mergers and
acquisitions and for other corporate purposes. Our liquidity
needs during fiscal 2007 were financed primarily from our
earnings and cash on hand. We plan to finance our operational
capital and liquidity needs in fiscal 2008 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 parent company. Some of our subsidiaries are subject to
requirements of the SEC and the Financial Industry Regulatory
Authority (FINRA) 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 parent
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.
For clearing broker-dealers, this minimum net capital level is
determined by a calculation described in
Rule 15c3-1
that is primarily based on each broker-dealers
aggregate debits, which primarily are a function of
client margin balances 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
37
parent company may make cash capital contributions to our
broker-dealer subsidiaries, if necessary, to meet broker-dealer
net capital requirements.
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 SEC Regulation G. We define liquid
assets as the sum of a) non broker-dealer cash and cash
equivalents, b) non broker-dealer short-term investments
and c) regulatory net capital of (i) our clearing
broker-dealer subsidiaries in excess of 5% of aggregate debit
items and (ii) our introducing broker-dealer subsidiary in
excess of
81/3%
of aggregate indebtedness. 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 parent company. Liquid assets
should be considered as a supplemental measure of liquidity,
rather than as a substitute for cash and cash equivalents. The
following table sets forth a reconciliation of cash and cash
equivalents, which is the most directly comparable GAAP measure,
to liquid assets (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 29,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
Cash and cash equivalents
|
|
$
|
413,787
|
|
|
$
|
363,650
|
|
|
$
|
50,137
|
|
Less: Broker-dealer cash and cash equivalents
|
|
|
(183,103
|
)
|
|
|
(263,054
|
)
|
|
|
79,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non broker-dealer cash and cash equivalents
|
|
|
230,684
|
|
|
|
100,596
|
|
|
|
130,088
|
|
Plus: Non broker-dealer short term investments
|
|
|
76,800
|
|
|
|
65,275
|
|
|
|
11,525
|
|
Plus: Excess broker-dealer regulatory net capital
|
|
|
314,280
|
|
|
|
333,514
|
|
|
|
(19,234
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquid assets
|
|
$
|
621,764
|
|
|
$
|
499,385
|
|
|
$
|
122,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in liquid assets from September 29, 2006 to
September 30, 2007 is primarily due to $646 million of
net income, substantially offset by $518 million of net
cash used in financing and investing activities, excluding
short-term investment activity (see Cash Flow below).
Cash
Flow
Cash provided by operating activities was $578.8 million
for fiscal 2007, compared to $485.0 million for fiscal
2006. The increase was primarily due to higher net income in
fiscal 2007, excluding gains on the sale of investments in
equity securities, partially offset by net changes in
broker-dealer working capital.
Cash used in investing activities was $61.7 million for
fiscal 2007, compared to cash provided by investing activities
of $743.5 million for fiscal 2006. The cash used in
investing activities in fiscal 2007 consisted primarily of
$60.0 million of property and equipment purchases and
$11.5 million of net purchases of short-term investments in
auction rate securities, partially offset by $10.4 million
of proceeds from the sale of investments in equity securities.
The cash provided by investing activities in fiscal 2006
consisted primarily of $580.1 million of net cash acquired
in the TD Waterhouse acquisition and $164.5 million of net
sales of short-term investments in auction rate securities.
Cash used in financing activities was $467.4 million for
fiscal 2007, compared to $1.0 billion for fiscal 2006. The
financing activities in fiscal 2007 consisted primarily of
$258.6 million of stock repurchases and $225.0 million
of principal payments on our long-term debt. The financing
activities in fiscal 2006 consisted primarily of
$2.4 billion for payment of the $6.00 per share special
cash dividend, $496.6 million of principal payments on debt
and $67.7 million of stock repurchases, partially offset by
$1.9 billion of proceeds from issuance of long-term debt.
Loan
Facilities
We entered into a credit agreement on January 23, 2006 for
$2.2 billion in senior credit facilities with a syndicate
of lenders. The senior credit facilities include: (a) a
senior secured term loan facility in the aggregate principal
amount of $250 million (the Term A Facility),
(b) a senior secured term loan facility in the aggregate
principal amount of $1.65 billion (the Term B
Facility) and (c) a senior secured revolving credit
facility in the
38
aggregate principal amount of $300 million (the
Revolving Facility) (together, the
Financings). The maturity date of the Term A
Facility is December 31, 2011. The maturity date of the
Term B Facility is December 31, 2012. The maturity date of
the Revolving Facility is December 31, 2010. The Financings
are subject to certain mandatory prepayments, which include
prepayments based on leverage ratios and amounts of excess cash
flow and from the net cash proceeds of asset sales and debt
issuances, subject to certain exceptions. Under the terms of the
Financings, the Company may prepay these borrowings without
penalty.
We used $1.6 billion of the proceeds from the Term A
Facility and Term B Facility to fund a portion of the $6.00 per
share special cash dividend paid in connection with the
acquisition of TD Waterhouse and $300 million for working
capital purposes. No initial borrowings were made on the
Revolving Facility, which was established for general corporate
purposes.
The applicable interest rate under the Revolving Facility and
the Term A Facility is calculated as a per annum rate equal to,
at our option, (a) LIBOR plus an interest rate margin
(LIBOR loans) or (b) (i) the greater of
(x) the prime rate or (y) the federal funds effective
rate plus 0.50% plus (ii) an interest rate margin
(Base Rate loans). With respect to the Revolving
Facility and the Term A Facility, the interest rate margin for
LIBOR loans is 1.50% if the consolidated leverage ratio (as
defined in the Financings) of the Company is 1.75 to 1.00 or
higher, 1.25% if the consolidated leverage ratio of the Company
is less than 1.75 to 1.00 but greater than or equal to 1.00 to
1.00, and 1.00% if the consolidated leverage ratio of the
Company is less than 1.00 to 1.00. The interest rate margin for
Base Rate loans under the Revolving Facility and the Term A
Facility is 1.00% less than the interest rate margin for LIBOR
loans. The applicable interest rate under the Term B Facility is
calculated as a per annum rate equal to (a) LIBOR plus
1.50% or (b) (i) the greater of (x) the prime rate or
(y) the federal funds effective rate plus 0.50% plus
(ii) 0.50%. On September 30, 2007, the applicable
interest rates on the Term A Facility and the Term B Facility
were 6.38% and 6.63%, respectively, based on
30-day
LIBOR. As of September 30, 2007, we had outstanding
indebtedness of $0.2 billion and $1.3 billion under
the Term A Facility and Term B Facility, respectively. As of
September 29, 2006, we had outstanding indebtedness of
$0.2 billion and $1.5 billion under the Term A
Facility and Term B Facility, respectively. We have not made any
borrowings under the Revolving Facility. The Financings also
provide that we are obligated to pay letter of credit fees equal
to the applicable margin in respect of LIBOR advances on each
outstanding letter of credit under the Revolving Credit
Facility. In addition, the Financings provide that we pay fees
to the issuing bank in respect of the Letters of Credit in an
amount agreed to by us and the issuing bank. A commitment fee at
the rate of 0.375% per annum accrues on any unused amount of the
Revolving Facility.
The obligations under the Financings are guaranteed by certain
of our subsidiaries, other than broker-dealer subsidiaries, with
certain exceptions, and are secured by a lien on substantially
all of the assets of each guarantor, including a pledge of the
ownership interests in each first-tier broker-dealer subsidiary
held by a guarantor and 65% of the ownership interests in each
first-tier foreign subsidiary held by a guarantor, with certain
exceptions.
The Financings contain covenants that limit or restrict the
incurrence of liens, investments (including acquisitions), sales
of assets, indebtedness and mergers and consolidations, subject
to certain exceptions. The Financings also restrict the payment
of dividends on our outstanding capital stock and repurchases or
redemptions of our outstanding capital stock, subject to certain
exceptions. We are also required to maintain compliance with a
maximum consolidated leverage ratio covenant and a minimum
consolidated interest coverage ratio covenant, and our
broker-dealer subsidiaries are required to maintain compliance
with a minimum regulatory net capital covenant. We were in
compliance with all covenants under the Financings as of
September 30, 2007.
During fiscal 2007, we entered into two amendments to the
January 23, 2006 credit agreement to allow us to repurchase
additional shares of our outstanding common stock and to change
our fiscal year end to September 30. We paid approximately
$1.2 million of additional debt issuance costs to effect
the amendments.
Our wholly-owned broker-dealer subsidiaries had access to
secured uncommitted credit facilities with financial
institutions of up to $630 million and $740 million as
of September 30, 2007 and September 29, 2006,
respectively. The broker-dealer subsidiaries also had access to
unsecured uncommitted credit facilities of up to
$150 million and $435 million as of September 30,
2007 and September 29, 2006, respectively. 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 us to pledge
qualified client securities to secure outstanding
39
obligations under these facilities. Borrowings under the secured
and unsecured credit facilities bear interest at a variable rate
based on the federal funds rate. Covenants under the Financings
limit the broker-dealer subsidiaries to an aggregate outstanding
principal balance of $1.0 billion in borrowings on
uncommitted lines of credit, excluding securities lending. There
were no borrowings outstanding or letters of credit issued under
the secured or unsecured credit facilities as of
September 30, 2007 and September 29, 2006. As of
September 30, 2007 and September 29, 2006,
approximately $780 million and $1.0 billion,
respectively, was available to our broker-dealer subsidiaries
pursuant to uncommitted credit facilities for either loans or,
in some cases, letters of credit.
Stock
Repurchase Program
On August 2, 2006, our Board of Directors authorized a
program to repurchase up to 12 million shares of our common
stock in the open market and in block trades. On
November 15, 2006, the Board of Directors added
20 million shares to the original authorization, increasing
the total authorization to 32 million shares. In fiscal
2007, we repurchased approximately 15.2 million shares
under the plan at a weighted average purchase price of $16.96
per share. From the inception of the program through
September 30, 2007, we have repurchased approximately
19.0 million shares at a weighted average purchase price of
$17.10 per share.
Off-Balance
Sheet Arrangements
We enter into guarantees and other off-balance sheet
arrangements in the ordinary course of business, primarily to
meet the needs of our clients and manage our asset-based
revenues. For information on these arrangements, see the
following sections under PART II, Item 8. Financial
Statements and Supplementary Data Notes to
Consolidated Financial Statements: Guarantees under
Note 15 COMMITMENTS AND CONTINGENCIES and
Money Market Deposit Account Agreement under
Note 18 RELATED PARTY TRANSACTIONS. The MMDA
agreement accounts for a significant percentage of our total
revenues (25% of our net revenues for the fiscal year ended
September 30, 2007) and enables our clients to invest
in an FDIC-insured deposit product without the need for the
Company to maintain a bank charter.
The following table summarizes our contractual obligations as of
September 30, 2007 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period (Fiscal Years):
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
|
|
|
1 year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
Contractual Obligations
|
|
Total
|
|
|
2008
|
|
|
2009-10
|
|
|
2011-12
|
|
|
After 2012
|
|
|
Long-term debt obligations(1)
|
|
$
|
1,997,385
|
|
|
$
|
140,410
|
|
|
$
|
297,249
|
|
|
$
|
270,979
|
|
|
$
|
1,288,747
|
|
Capital lease obligations
|
|
|
3,958
|
|
|
|
3,259
|
|
|
|
699
|
|
|
|
|
|
|
|
|
|
Operating lease obligations
|
|
|
202,405
|
|
|
|
39,744
|
|
|
|
65,161
|
|
|
|
42,967
|
|
|
|
54,533
|
|
Purchase obligations
|
|
|
74,229
|
|
|
|
62,886
|
|
|
|
9,835
|
|
|
|
1,508
|
|
|
|
|
|
Deferred compensation(2)
|
|
|
16,979
|
|
|
|
16,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee severance and involuntary termination costs(3)
|
|
|
7,390
|
|
|
|
4,840
|
|
|
|
1,200
|
|
|
|
1,200
|
|
|
|
150
|
|
Contract termination costs(3)
|
|
|
5,231
|
|
|
|
5,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business combination obligations(4)
|
|
|
365,000
|
|
|
|
265,000
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
Income taxes payable
|
|
|
76,816
|
|
|
|
76,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,749,393
|
|
|
$
|
615,165
|
|
|
$
|
474,144
|
|
|
$
|
316,654
|
|
|
$
|
1,343,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents scheduled principal payments, estimated interest
payments and commitment fees pursuant to the Financings. The
Financings are also subject to certain mandatory prepayments,
which include prepayments based on amounts of excess cash flow
and from the net cash proceeds of asset sales and debt
issuances, subject to certain exceptions. Pursuant to the
Financings, we may prepay borrowings without penalty. Because
mandatory prepayments are based on future operating results and
events, we cannot predict the amount or |
40
|
|
|
|
|
timing of such prepayments. Actual amounts of interest may vary
depending on principal prepayments and changes in variable
interest rates. |
|
(2) |
|
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 2008 column as the entire amount of the compensation has
already been earned by the CEO. |
|
(3) |
|
Represents exit and involuntary termination costs incurred in
connection with the planned consolidation of certain facilities
and functions following the TD Waterhouse acquisition. |
|
(4) |
|
On May 24, 2007, we entered into a stock purchase agreement
with Fiserv, Inc. (Fiserv) pursuant to which our
wholly-owned subsidiary agreed to purchase a portion of
Fiservs investment support services business by acquiring
all of the outstanding capital stock of Fiserv
Trust Company, a wholly-owned subsidiary of Fiserv. Under
the stock purchase agreement, the initial purchase price payable
at closing is $225 million in cash plus regulatory capital
estimated to be approximately $40 million, subject to
certain pre-
and
post-closing
adjustments. An additional
earn-out
payment of up to $100 million in cash could be payable
following the first anniversary of the acquisition based on the
achievement of certain revenue targets. |
New
Accounting Pronouncements
FIN No. 48 In July 2006, the
Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes (FIN No. 48).
FIN No. 48 clarifies the accounting for uncertainty in
income taxes recognized in an enterprises financial
statements in accordance with SFAS No. 109,
Accounting for Income Taxes. FIN No. 48
prescribes a recognition threshold and measurement approach for
the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN No. 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN No. 48
establishes a two-step process for evaluation of tax positions.
The first step is recognition, under which the enterprise
determines whether it is more likely than not that a tax
position will be sustained upon examination, including
resolution of any related appeals or litigation processes, based
on the technical merits of the position. The enterprise is
required to presume the position will be examined by the
appropriate taxing authority that has full knowledge of all
relevant information. The second step is measurement, under
which a tax position that meets the more-likely-than-not
recognition threshold is measured to determine the amount of
benefit to recognize in the financial statements. The tax
position is measured at the largest amount of benefit that is
greater than 50% likely of being realized upon ultimate
settlement. FIN No. 48 is effective for fiscal years
beginning after December 15, 2006. Therefore,
FIN No. 48 will be effective for our fiscal year 2008,
which began October 1, 2007. The cumulative effect of
adopting FIN No. 48 is required to be reported as an
adjustment to the opening balance of retained earnings (or other
appropriate components of equity) for that fiscal year,
presented separately. We are analyzing the impact of adopting
FIN No. 48.
SFAS No. 157 In September
2006, FASB issued SFAS No. 157, Fair Value
Measurements. SFAS No. 157 clarifies the
definition of fair value and the methods used to measure fair
value and expands disclosures about fair value measurements.
SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007. Therefore, SFAS No. 157
will be effective for our fiscal year beginning October 1,
2008. Adoption of SFAS No. 157 is not expected to have
a material impact on our consolidated financial statements.
|
|
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
material market risk-sensitive instruments for trading purposes.
Credit
Risk
Two primary sources of credit risk inherent in our business are
client margin lending and securities lending and borrowing. We
manage risk on client margin lending by requiring clients to
maintain margin collateral in compliance with regulatory and
internal guidelines. We monitor required margin levels daily
and, pursuant to
41
such guidelines, require our clients to deposit additional
collateral, or to reduce positions, when necessary. We
continuously monitor client accounts to detect excessive
concentration, large orders or positions, patterns of day
trading and other activities that indicate increased risk to us.
We manage 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.
Interest
Rate Risk
As a fundamental part of our brokerage business, we invest in
interest-earning assets and are obligated on interest-bearing
liabilities. In addition, we earn fees on our MMDA sweep
arrangement with TD Bank USA, which are based on the actual net
yield earned at TD Bank USA. Changes in interest rates could
affect the interest earned on assets differently than interest
paid on liabilities. A rising interest rate environment
generally results in our earning a larger net interest spread.
Conversely, a falling interest rate environment generally
results in our earning a smaller net interest spread.
Our most prevalent form of interest rate risk is referred to as
gap risk. This risk occurs when the interest rates
we earn on our assets change at a different frequency or amount
than the interest rates we pay on our liabilities. We have an
Asset/Liability Committee as the governance body with the
responsibility of managing interest rate risk, including gap
risk.
We use net interest simulation modeling techniques to evaluate
the effect that changes in interest rates might have on pre-tax
income. Our model includes all interest-sensitive assets and
liabilities of the Company and interest-sensitive assets and
liabilities associated with the MMDA agreement. The simulations
involve assumptions that are inherently uncertain, and as a
result, cannot precisely predict the impact that changes in
interest rates will have on pre-tax income. Actual results may
differ from simulated results due to differences in timing and
frequency of rate changes, changes in market conditions, and
changes in management strategy that lead to changes in the mix
of interest-sensitive assets and liabilities.
The simulations assume that the asset and liability structure of
the Consolidated Balance Sheet and the MMDA arrangement would
not be changed as a result of simulated changes in interest
rates. The results of the simulations as of September 30,
2007 indicate that an immediate 1% (100 basis point)
increase or decrease in short-term interest rates would result
in approximately $30 million more or less annual pre-tax
income, respectively.
Other
Market Risks
Our revenues and financial instruments are denominated in
U.S. dollars. We generally do not invest in derivative
instruments, except for economic hedging purposes.
42
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
TD AMERITRADE Holding Corporation
We have audited the accompanying consolidated balance sheets of
TD AMERITRADE Holding Corporation (the Company) as
of September 30, 2007 and September 29, 2006, and the
related consolidated statements of income, stockholders
equity, and cash flows for the years then ended. 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 the 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, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of TD AMERITRADE Holding Corporation at
September 30, 2007 and September 29, 2006, and the
consolidated results of its operations and its cash flows for
the years then ended in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of TD AMERITRADE Holding Corporations
internal control over financial reporting as of
September 30, 2007, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
and our report dated November 23, 2007, expressed an
unqualified opinion thereon.
Chicago, Illinois
November 23, 2007
43
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
TD AMERITRADE Holding Corporation
Omaha, Nebraska
We have audited the accompanying consolidated statements of
income, stockholders equity and cash flows of TD
AMERITRADE Holding Corporation and subsidiaries, formerly
Ameritrade Holding Corporation, (the Company) for
the fiscal year ended September 30, 2005. These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on the
financial statements based on our audit.
We conducted our audit in accordance with the 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 audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements of TD
AMERITRADE Holding Corporation and subsidiaries present fairly,
in all material respects, the results of their operations and
their cash flows for the fiscal year ended September 30,
2005, in conformity with accounting principles generally
accepted in the United States of America.
/s/ DELOITTE &
TOUCHE LLP
Omaha, Nebraska
December 13, 2005
44
TD
AMERITRADE HOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
As of September 30, 2007 and September 29, 2006
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
413,787
|
|
|
$
|
363,650
|
|
Short-term investments
|
|
|
76,800
|
|
|
|
65,275
|
|
Cash and investments segregated in compliance with federal
regulations
|
|
|
|
|
|
|
1,561,910
|
|
Receivable from brokers, dealers and clearing organizations
|
|
|
6,749,588
|
|
|
|
4,566,525
|
|
Receivable from clients, net of allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
2007 $19.1 million; 2006
$20.3 million
|
|
|
7,727,969
|
|
|
|
6,970,834
|
|
Receivable from affiliates
|
|
|
84,903
|
|
|
|
19,191
|
|
Other receivables
|
|
|
92,346
|
|
|
|
89,038
|
|
Property and equipment, net of accumulated depreciation and
amortization: 2007 $118.3 million;
2006 $96.3 million
|
|
|
92,448
|
|
|
|
57,346
|
|
Goodwill
|
|
|
1,768,867
|
|
|
|
1,731,718
|
|
Acquired intangible assets, net of accumulated amortization:
|
|
|
|
|
|
|
|
|
2007 $134.8 million; 2006
$80.6 million
|
|
|
1,002,430
|
|
|
|
1,056,899
|
|
Investments in equity securities
|
|
|
8,013
|
|
|
|
16,536
|
|
Other assets
|
|
|
75,176
|
|
|
|
59,547
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
18,092,327
|
|
|
$
|
16,558,469
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
Payable to brokers, dealers and clearing organizations
|
|
$
|
8,386,988
|
|
|
$
|
7,022,601
|
|
Payable to clients
|
|
|
5,313,576
|
|
|
|
5,412,981
|
|
Accounts payable and accrued liabilities
|
|
|
427,063
|
|
|
|
371,024
|
|
Payable to affiliates
|
|
|
13,294
|
|
|
|
1,596
|
|
Long-term debt
|
|
|
1,478,375
|
|
|
|
1,703,375
|
|
Capitalized lease obligations
|
|
|
3,573
|
|
|
|
7,337
|
|
Deferred income taxes, net
|
|
|
314,537
|
|
|
|
309,321
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
15,937,406
|
|
|
|
14,828,235
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred Stock, $0.01 par value, 100 million shares
authorized; none issued
|
|
|
|
|
|
|
|
|
Common Stock, $0.01 par value, one billion shares
authorized; 631,381,860 shares issued; 2007
594,688,031 outstanding;
2006 607,626,040 outstanding
|
|
|
6,314
|
|
|
|
6,314
|
|
Additional paid-in capital
|
|
|
1,598,451
|
|
|
|
1,591,610
|
|
Retained earnings
|
|
|
1,086,662
|
|
|
|
440,762
|
|
Treasury stock, common, at cost: 2007
36,693,829 shares;
2006 23,755,820 shares
|
|
|
(537,547
|
)
|
|
|
(312,410
|
)
|
Deferred compensation
|
|
|
431
|
|
|
|
662
|
|
Accumulated other comprehensive income
|
|
|
610
|
|
|
|
3,296
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
2,154,921
|
|
|
|
1,730,234
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
18,092,327
|
|
|
$
|
16,558,469
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
45
TD
AMERITRADE HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended September 30, 2007,
September 29, 2006 and September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions and transaction fees
|
|
$
|
813,786
|
|
|
$
|
738,380
|
|
|
$
|
533,921
|
|
Asset-based revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest revenue
|
|
|
1,013,600
|
|
|
|
1,031,971
|
|
|
|
540,348
|
|
Brokerage interest expense
|
|
|
(455,467
|
)
|
|
|
(335,820
|
)
|
|
|
(141,399
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest revenue
|
|
|
558,133
|
|
|
|
696,151
|
|
|
|
398,949
|
|
Money market deposit account fees
|
|
|
535,381
|
|
|
|
185,014
|
|
|
|
|
|
Investment product fees
|
|
|
232,177
|
|
|
|
140,699
|
|
|
|
25,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total asset-based revenues
|
|
|
1,325,691
|
|
|
|
1,021,864
|
|
|
|
424,137
|
|
Other revenues
|
|
|
37,469
|
|
|
|
43,287
|
|
|
|
45,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
2,176,946
|
|
|
|
1,803,531
|
|
|
|
1,003,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
429,820
|
|
|
|
350,079
|
|
|
|
180,579
|
|
Fair value adjustments of compensation-related derivative
instruments
|
|
|
(3,193
|
)
|
|
|
(1,715
|
)
|
|
|
|
|
Clearing and execution costs
|
|
|
79,681
|
|
|
|
73,049
|
|
|
|
26,317
|
|
Communications
|
|
|
82,173
|
|
|
|
65,445
|
|
|
|
35,663
|
|
Occupancy and equipment costs
|
|
|
84,294
|
|
|
|
74,638
|
|
|
|
43,411
|
|
Depreciation and amortization
|
|
|
26,237
|
|
|
|
21,199
|
|
|
|
10,521
|
|
Amortization of acquired intangible assets
|
|
|
54,469
|
|
|
|
42,286
|
|
|
|
13,887
|
|
Professional services
|
|
|
83,995
|
|
|
|
87,521
|
|
|
|
30,630
|
|
Interest on borrowings
|
|
|
118,173
|
|
|
|
93,988
|
|
|
|
1,967
|
|
Other
|
|
|
46,809
|
|
|
|
45,383
|
|
|
|
22,689
|
|
Advertising
|
|
|
145,666
|
|
|
|
164,072
|
|
|
|
92,312
|
|
Fair value adjustments of investment-related derivative
instruments
|
|
|
|
|
|
|
11,703
|
|
|
|
(8,315
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1,148,124
|
|
|
|
1,027,648
|
|
|
|
449,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before other income and income taxes
|
|
|
1,028,822
|
|
|
|
775,883
|
|
|
|
553,492
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of investments
|
|
|
5,881
|
|
|
|
81,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income
|
|
|
1,034,703
|
|
|
|
857,305
|
|
|
|
553,492
|
|
Provision for income taxes
|
|
|
388,803
|
|
|
|
330,546
|
|
|
|
213,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
645,900
|
|
|
$
|
526,759
|
|
|
$
|
339,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share basic
|
|
$
|
1.08
|
|
|
$
|
0.97
|
|
|
$
|
0.84
|
|
Earnings per share diluted
|
|
$
|
1.06
|
|
|
$
|
0.95
|
|
|
$
|
0.82
|
|
Weighted average shares outstanding basic
|
|
|
598,503
|
|
|
|
544,307
|
|
|
|
404,215
|
|
Weighted average shares outstanding diluted
|
|
|
608,263
|
|
|
|
555,465
|
|
|
|
413,167
|
|
Dividends declared per share
|
|
$
|
0.00
|
|
|
$
|
6.00
|
|
|
$
|
0.00
|
|
See notes to consolidated financial statements.
46
TD
AMERITRADE HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS EQUITY
For the Years Ended September 30, 2007,
September 29, 2006 and September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Common
|
|
|
Total
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
Shares
|
|
|
Stockholders
|
|
|
Common
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Treasury
|
|
|
Deferred
|
|
|
Comprehensive
|
|
|
|
Outstanding
|
|
|
Equity
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Stock
|
|
|
Compensation
|
|
|
Income
|
|
|
|
(In thousands)
|
|
|
Balance, September 24, 2004
|
|
|
407,210
|
|
|
$
|
1,210,908
|
|
|
$
|
4,351
|
|
|
$
|
1,195,218
|
|
|
$
|
312,989
|
|
|
$
|
(346,060
|
)
|
|
$
|
993
|
|
|
$
|
43,417
|
|
Net income
|
|
|
|
|
|
|
339,753
|
|
|
|
|
|
|
|
|
|
|
|
339,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized investment loss, net of $2.1 million tax
|
|
|
|
|
|
|
(2,418
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,418
|
)
|
Foreign currency translation
|
|
|
|
|
|
|
613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
337,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchases of common stock
|
|
|
(6,052
|
)
|
|
|
(77,229
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(77,229
|
)
|
|
|
|
|
|
|
|
|
Issuances of common stock
|
|
|
14
|
|
|
|
214
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
|
|
160
|
|
|
|
|
|
|
|
|
|
Options exercised, including tax benefit
|
|
|
4,874
|
|
|
|
45,258
|
|
|
|
|
|
|
|
(12,903
|
)
|
|
|
|
|
|
|
58,161
|
|
|
|
|
|
|
|
|
|
Deferred compensation
|
|
|
13
|
|
|
|
146
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
174
|
|
|
|
(41
|
)
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
1,622
|
|
|
|
|
|
|
|
1,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2005 . . . .
|
|
|
406,059
|
|
|
|
1,518,867
|
|
|
|
4,351
|
|
|
|
1,184,004
|
|
|
|
652,742
|
|
|
|
(364,794
|
)
|
|
|
952
|
|
|
|
41,612
|
|
Net income
|
|
|
|
|
|
|
526,759
|
|
|
|
|
|
|
|
|
|
|
|
526,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized investment gain, net of $5.9 million tax
|
|
|
|
|
|
|
9,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,591
|
|
Reclassification adjustment for realized gain on investment
securities included in net income, net of $29.8 million tax
.
|
|
|
|
|
|
|
(47,647
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(47,647
|
)
|
Amount transferred from cumulative foreign currency translation
adjustments due to disposal of Ameritrade Canada, Inc.
|
|
|
|
|
|
|
(513
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(513
|
)
|
Foreign currency translation
|
|
|
|
|
|
|
253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
488,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of TD Waterhouse Group, Inc.
|
|
|
196,300
|
|
|
|
2,123,181
|
|
|
|
1,963
|
|
|
|
2,121,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend on common stock, $6.00 per share
|
|
|
|
|
|
|
(2,442,780
|
)
|
|
|
|
|
|
|
(1,704,041
|
)
|
|
|
(738,739
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchases of common stock
|
|
|
(3,827
|
)
|
|
|
(67,697
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67,697
|
)
|
|
|
|
|
|
|
|
|
Issuances of common stock
|
|
|
3
|
|
|
|
72
|
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
Options exercised, including tax benefit
|
|
|
9,020
|
|
|
|
95,270
|
|
|
|
|
|
|
|
(24,125
|
)
|
|
|
|
|
|
|
119,395
|
|
|
|
|
|
|
|
|
|
Deferred compensation
|
|
|
71
|
|
|
|
549
|
|
|
|
|
|
|
|
196
|
|
|
|
|
|
|
|
643
|
|
|
|
(290
|
)
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
14,329
|
|
|
|
|
|
|
|
14,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 29, 2006 . . . .
|
|
|
607,626
|
|
|
|
1,730,234
|
|
|
|
6,314
|
|
|
|
1,591,610
|
|
|
|
440,762
|
|
|
|
(312,410
|
)
|
|
|
662
|
|
|
|
3,296
|
|
Net income
|
|
|
|
|
|
|
645,900
|
|
|
|
|
|
|
|
|
|
|
|
645,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized investment gain, net of $10,000 tax
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
Reclassification adjustment for realized gain on investment
securities included in net income, net of $1.8 million tax
|
|
|
|
|
|
|
(2,939
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,939
|
)
|
Foreign currency translation .
|
|
|
|
|
|
|
230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
643,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchases of common stock
|
|
|
(15,254
|
)
|
|
|
(258,637
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(258,637
|
)
|
|
|
|
|
|
|
|
|
Issuances of common stock
|
|
|
10
|
|
|
|
149
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
141
|
|
|
|
|
|
|
|
|
|
Options exercised, including tax benefit
|
|
|
2,204
|
|
|
|
20,881
|
|
|
|
|
|
|
|
(11,754
|
)
|
|
|
|
|
|
|
32,635
|
|
|
|
|
|
|
|
|
|
Deferred compensation
|
|
|
102
|
|
|
|
898
|
|
|
|
|
|
|
|
412
|
|
|
|
|
|
|
|
724
|
|
|
|
(238
|
)
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
18,182
|
|
|
|
|
|
|
|
18,175
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2007 . . . .
|
|
|
594,688
|
|
|
$
|
2,154,921
|
|
|
$
|
6,314
|
|
|
$
|
1,598,451
|
|
|
$
|
1,086,662
|
|
|
$
|
(537,547
|
)
|
|
$
|
431
|
|
|
$
|
610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
47
TD
AMERITRADE HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 2007,
September 29, 2006 and September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
645,900
|
|
|
$
|
526,759
|
|
|
$
|
339,753
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
26,237
|
|
|
|
21,199
|
|
|
|
10,521
|
|
Amortization of intangible assets
|
|
|
54,469
|
|
|
|
42,286
|
|
|
|
13,887
|
|
Deferred income taxes
|
|
|
20,564
|
|
|
|
45,475
|
|
|
|
2,277
|
|
Gain on sale of investments
|
|
|
(5,881
|
)
|
|
|
(81,422
|
)
|
|
|
|
|
Gain on sale of businesses
|
|
|
(2,677
|
)
|
|
|
(2,382
|
)
|
|
|
|
|
Loss (gain) on disposal of property
|
|
|
657
|
|
|
|
(769
|
)
|
|
|
(428
|
)
|
Fair value adjustments of derivative instruments
|
|
|
(3,193
|
)
|
|
|
9,988
|
|
|
|
(8,315
|
)
|
Stock-based compensation
|
|
|
18,182
|
|
|
|
14,329
|
|
|
|
1,622
|
|
Other, net
|
|
|
(2,346
|
)
|
|
|
(1,946
|
)
|
|
|
1,875
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and investments segregated in compliance with federal
regulations
|
|
|
1,561,910
|
|
|
|
6,109,449
|
|
|
|
207,216
|
|
Receivable from brokers, dealers and clearing organizations
|
|
|
(2,183,063
|
)
|
|
|
(997,662
|
)
|
|
|
(601,500
|
)
|
Receivable from clients
|
|
|
(757,135
|
)
|
|
|
685,055
|
|
|
|
(684,083
|
)
|
Receivable from/payable to affiliate, net
|
|
|
(54,014
|
)
|
|
|
31,939
|
|
|
|
|
|
Other receivables
|
|
|
(3,004
|
)
|
|
|
(10,481
|
)
|
|
|
193,892
|
|
Proceeds from sale of broker-dealer investments in equity
securities
|
|
|
1,726
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
(11,065
|
)
|
|
|
21,639
|
|
|
|
2,257
|
|
Payable to brokers, dealers and clearing organizations
|
|
|
1,364,387
|
|
|
|
526,103
|
|
|
|
1,007,884
|
|
Payable to clients
|
|
|
(99,405
|
)
|
|
|
(6,314,596
|
)
|
|
|
(226,702
|
)
|
Accounts payable and accrued liabilities
|
|
|
6,507
|
|
|
|
(139,984
|
)
|
|
|
69,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
578,756
|
|
|
|
484,979
|
|
|
|
330,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(59,957
|
)
|
|
|
(21,697
|
)
|
|
|
(7,981
|
)
|
Cash (paid) received in business combinations, net
|
|
|
(3,307
|
)
|
|
|
580,056
|
|
|
|
(25,919
|
)
|
Proceeds from sale of businesses
|
|
|
2,677
|
|
|
|
9,382
|
|
|
|
|
|
Purchase of short-term investments
|
|
|
(507,050
|
)
|
|
|
(1,001,250
|
)
|
|
|
(605,924
|
)
|
Proceeds from sale of short-term investments
|
|
|
495,525
|
|
|
|
1,165,794
|
|
|
|
394,055
|
|
Proceeds from sale of investments in equity securities
available-for-sale
|
|
|
10,402
|
|
|
|
11,239
|
|
|
|
807
|
|
Other
|
|
|
(16
|
)
|
|
|
18
|
|
|
|
(175
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(61,726
|
)
|
|
|
743,542
|
|
|
|
(245,137
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
|
|
|
|
|
1,900,000
|
|
|
|
|
|
Payment of debt issuance costs
|
|
|
(1,245
|
)
|
|
|
(20,992
|
)
|
|
|
|
|
Principal payments on long-term debt and notes payable
|
|
|
(225,000
|
)
|
|
|
(496,625
|
)
|
|
|
|
|
Principal payments on capitalized lease obligations
|
|
|
(3,764
|
)
|
|
|
(3,903
|
)
|
|
|
(2,545
|
)
|
Proceeds from exercise of stock options
|
|
|
10,887
|
|
|
|
46,881
|
|
|
|
28,142
|
|
Payment of cash dividend
|
|
|
|
|
|
|
(2,442,780
|
)
|
|
|
|
|
Purchase of treasury stock .
|
|
|
(258,637
|
)
|
|
|
(67,697
|
)
|
|
|
(77,229
|
)
|
Excess tax benefits on stock-based compensation
|
|
|
10,337
|
|
|
|
48,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(467,422
|
)
|
|
|
(1,036,252
|
)
|
|
|
(51,632
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
529
|
|
|
|
317
|
|
|
|
417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
50,137
|
|
|
|
192,586
|
|
|
|
33,672
|
|
Cash and cash equivalents at beginning of year
|
|
|
363,650
|
|
|
|
171,064
|
|
|
|
137,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
413,787
|
|
|
$
|
363,650
|
|
|
$
|
171,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
575,925
|
|
|
$
|
423,468
|
|
|
$
|
131,249
|
|
Income taxes paid
|
|
$
|
308,734
|
|
|
$
|
241,163
|
|
|
$
|
167,399
|
|
Tax benefit on exercises and distributions of stock-based
compensation
|
|
$
|
10,463
|
|
|
$
|
49,256
|
|
|
$
|
18,471
|
|
Noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of capitalized lease obligations
|
|
$
|
|
|
|
$
|
5,022
|
|
|
$
|
8,763
|
|
Settlement of prepaid variable forward contract liabilities in
exchange for investment
|
|
$
|
|
|
|
$
|
72,077
|
|
|
$
|
|
|
Issuance of common stock in acquisition
|
|
$
|
|
|
|
$
|
2,123,181
|
|
|
$
|
|
|
See notes to consolidated financial statements.
48
TD
AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended September 30, 2007, September 29, 2006 and
September 30, 2005
|
|
1.
|
Nature of
Operations and Summary of Significant Accounting
Policies
|
Basis of Presentation The consolidated
financial statements include the accounts of TD AMERITRADE
Holding Corporation, a Delaware corporation, and its
wholly-owned subsidiaries (collectively, the
Company). Intercompany balances and transactions
have been eliminated. On February 27, 2007, the
Companys Board of Directors approved changing the
Companys fiscal year-end to September 30. Previously,
the Company reported on a fifty-two/fifty-three week fiscal year
ending on the last Friday of September. This change was
effective for the Companys fiscal year ended
September 30, 2007. Because the transition period was less
than one month, no transition report will be filed. Fiscal year
2006 was a fifty-two week year and fiscal year 2005 was a
fifty-three week year.
Nature of Operations The Company
provides securities brokerage services, including trade
execution, clearing services and margin lending, through its
broker-dealer subsidiaries. The Company also provides cash sweep
products through third-party banking relationships. The
Companys broker-dealer subsidiaries are subject to
regulation by the Securities and Exchange Commission
(SEC), the Financial Industry Regulatory Authority
(FINRA) and the various exchanges in which they
maintain membership. Dividends from the Companys
broker-dealer subsidiaries are a source of liquidity for the
holding company. Requirements of the SEC and FINRA relating to
liquidity, net capital standards, and the use of client funds
and securities may limit funds available for the payment of
dividends from the broker-dealer subsidiaries to the holding
company.
Capital Stock 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
U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Securities Transactions 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 (also referred to as payment for order flow), are
recorded on a trade-date basis. Revenues related to securities
transactions are recorded net of promotional allowances.
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.
Amortization of Acquired Intangible
Assets Acquired intangible assets are
amortized on a straight-line basis over their estimated useful
lives, ranging from 10 to 23 years. The acquired intangible
asset associated with a trademark license agreement is not
subject to amortization because the term of the agreement is
considered to be indefinite.
Long-Lived Assets and Acquired Intangible
Assets The Company reviews its long-lived
assets and acquired intangible 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, if any, are reported at the lesser of carrying
amount or fair value less cost to sell.
49
TD
AMERITRADE HOLDING CORPORATION
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.
Short-term Investments Short-term
investments generally consist of investments in auction rate
securities. Auction rate securities are long-term variable rate
bonds tied to short-term interest rates that are reset through a
Dutch auction process which occurs every seven to
35 days. Holders of auction rate securities may liquidate
their holdings to prospective buyers by participating in the
auctions. Auction rate securities do not qualify as cash
equivalents because they have long-term maturity dates and there
is no guarantee that holders will be able to liquidate their
holdings through the auction process. Purchases and sales of
auction rate securities are presented as investing activities in
the Consolidated Statements of Cash Flows.
Segregated Cash and Investments Cash and
investments, consisting primarily of reverse repurchase
agreements, fixed-rate U.S. Treasury securities and other
qualified securities, at the Companys clearing
subsidiaries of $1.6 billion as of September 29, 2006
were segregated in special reserve bank accounts for the
exclusive benefit of clients under
Rule 15c3-3
of the Securities Exchange Act of 1934 (the Exchange
Act) and other regulations. No cash and investments was
required to be segregated as of September 30, 2007. Reverse
repurchase agreements (securities purchased under agreements to
resell), generally collateralized by U.S. government and
agency obligations, are treated as collateralized financing
transactions and are carried at amounts at which the securities
will be subsequently resold, plus accrued interest.
Securities Borrowed and Securities
Loaned Securities borrowed and securities
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. The Company receives
collateral in the form of cash 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, in the Consolidated Statements
of Income. The related interest receivable from and the
brokerage interest payable to broker-dealers are included in
other receivables and in accounts payable and accrued
liabilities, respectively, in the Consolidated Balance Sheets.
Fair Value of Financial Instruments The
Companys long-term debt had an estimated fair value based
on quoted market prices of $1.46 billion as of
September 30, 2007, compared to a carrying value of
$1.48 billion. The Company considers the amounts presented
for other financial instruments on the Consolidated Balance
Sheets to be reasonable estimates of fair value based on
maturity dates, repricing characteristics and, where applicable,
quoted market prices.
Goodwill The Company has recorded
goodwill for purchase business combinations to the extent the
purchase price of each completed acquisition exceeded the fair
value of the net identifiable assets of the acquired company.
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, if applicable, based on operating revenues, and is
compared with the carrying value of the reporting units. No
impairment charges have resulted from the annual impairment
tests.
Investments in Equity Securities The
Companys investments in marketable equity securities are
carried at fair value and are designated as available-for-sale,
except for investments held by the Companys broker-dealer
subsidiaries, which are accounted for as trading investments.
Unrealized gains and losses on available-for-sale investments,
net of deferred income taxes, are reflected as accumulated other
comprehensive income. Realized gains and losses on
available-for-sale investments are determined on the specific
identification method and are reflected in the Consolidated
Statements of Income. Unrealized gains and losses on investments
accounted for as trading investments are reflected currently in
the Consolidated Statements of Income. Investments in equity
securities 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 non-marketable
50
TD
AMERITRADE HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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.
Software Development Software
development costs from the point technological feasibility has
been established until beta testing is complete are capitalized
and included in property and equipment. 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.
Advertising The Company expenses
advertising costs the first time the advertising takes place.
Income Taxes The Company files a
consolidated U.S. income tax return with its subsidiaries
on a calendar year basis, combined returns for state tax
purposes where required and certain of its subsidiaries file
separate state income tax returns where required. Deferred tax
assets and liabilities are determined based on the differences
between the financial statement carrying amounts and tax bases
of assets and liabilities using enacted tax rates expected to
apply to taxable income in the periods in which the deferred tax
asset or liability is expected to be settled or realized.
Accruals for expected tax deficiencies are recorded in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 5, Accounting for
Contingencies, when management determines that a tax
deficiency is both probable and reasonably estimable.
Earnings Per Share Basic earnings per
share (EPS) is computed by dividing net income by
the weighted average common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were
exercised or converted into common stock, except when such
assumed exercise or conversion would have an antidilutive effect
on EPS.
Stock-Based Compensation 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. Effective October 1,
2005, the Company adopted SFAS No. 123 (revised 2004),
Share-Based Payment (No. 123R) using a
modified version of the prospective transition method. Under the
transition method, compensation cost is recognized on or after
the required effective date for the portion of outstanding
awards for which the requisite service has not yet been
rendered, based on the grant-date fair value of those awards
calculated under SFAS No. 123 for either recognition
or pro forma disclosures. Stock-based compensation expense for
fiscal 2007, fiscal 2006 and fiscal 2005 was $18.2 million
($11.5 million net of tax), $14.3 million
($8.9 million net of tax) and $1.6 million
($1.0 million net of tax), respectively. Pro forma
information regarding stock-based compensation expense, net
income and earnings per share is required for periods prior to
the adoption of SFAS No. 123R. This information is
presented as if the Company had accounted for its stock-based
awards to employees under the fair value based method. Pro forma
net
51
TD
AMERITRADE HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
income and earnings per share were as follows for the fiscal
year indicated (dollars in thousands, except per share amounts):
|
|
|
|
|
|
|
2005
|
|
|
Net income, as reported
|
|
$
|
339,753
|
|
Add: Stock-based compensation expense included in reported net
income, net of related income tax effects
|
|
|
998
|
|
Less: Total stock-based compensation determined under the fair
value based method, net of related income tax effects
|
|
|
(9,830
|
)
|
|
|
|
|
|
Pro forma net income
|
|
$
|
330,921
|
|
|
|
|
|
|
Basic earnings per share, as reported
|
|
$
|
0.84
|
|
Basic earnings per share, pro forma
|
|
$
|
0.82
|
|
Diluted earnings per share, as reported
|
|
$
|
0.82
|
|
Diluted earnings per share, pro forma
|
|
$
|
0.80
|
|
Foreign Currency Translation Assets and
liabilities of the Companys Canadian subsidiary 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 subsidiary is the local currency; therefore, the
effects of foreign currency translation adjustments arising from
differences in exchange rates from period to period are included
in accumulated other comprehensive income in the Consolidated
Balance Sheets.
Comprehensive Income Comprehensive
income consists of net income; unrealized gains (losses) on
securities available-for-sale, net of related income taxes; and
foreign currency translation adjustments. These results are
incorporated into the Consolidated Statements of
Stockholders Equity.
Derivatives and Hedging Activities The
Company occasionally 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 properly designated to hedge
exposure to changes in the fair value of assets or liabilities
are accounted for as fair value hedges. Derivative instruments
properly designated to hedge exposure to the variability of
expected future cash flows or other forecasted transactions are
accounted for as cash flow hedges. The Company formally
documents the risk management objective and strategy for each
hedge transaction. Derivative instruments that do not qualify
for hedge accounting are carried at fair value on the
Consolidated Balance Sheets with unrealized gains and losses
recorded currently in the Consolidated Statements of Income. The
Company had no derivative instruments that qualified for hedge
accounting as of September 30, 2007.
Reclassifications The revenue caption
formerly known as Money market and other mutual fund
fees on the Consolidated Statements of Income has been
renamed Investment product fees and now also
includes certain other asset-based fee revenues. Other
asset-based fee revenues of approximately $1.1 million and
$0.1 million for fiscal 2006 and 2005, respectively, have
been reclassified to investment product fees from other revenues
in the Consolidated Statements of Income. Approximately
$11.0 million and $9.9 million of transaction-based
revenues for fiscal 2006 and 2005, respectively, have been
reclassified to commissions and transaction fees from other
revenues in the Consolidated Statements of Income. Each of these
reclassifications was made in order to conform to the current
financial statement presentation.
Recently
Issued Accounting Pronouncements:
FIN No. 48 In July 2006, the
Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes (FIN No. 48).
FIN No. 48 clarifies the accounting for
52
TD
AMERITRADE HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
uncertainty in income taxes recognized in an enterprises
financial statements in accordance with SFAS No. 109,
Accounting for Income Taxes. FIN No. 48
prescribes a recognition threshold and measurement approach for
the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN No. 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN No. 48
establishes a two-step process for evaluation of tax positions.
The first step is recognition, under which the enterprise
determines whether it is more likely than not that a tax
position will be sustained upon examination, including
resolution of any related appeals or litigation processes, based
on the technical merits of the position. The enterprise is
required to presume the position will be examined by the
appropriate taxing authority that has full knowledge of all
relevant information. The second step is measurement, under
which a tax position that meets the more-likely-than-not
recognition threshold is measured to determine the amount of
benefit to recognize in the financial statements. The tax
position is measured at the largest amount of benefit that is
greater than 50% likely of being realized upon ultimate
settlement. FIN No. 48 is effective for fiscal years
beginning after December 15, 2006. Therefore,
FIN No. 48 will be effective for the Companys
fiscal year 2008, which began October 1, 2007. The
cumulative effect of adopting FIN No. 48 is required
to be reported as an adjustment to the opening balance of
retained earnings (or other appropriate components of equity)
for that fiscal year, presented separately. The Company is
analyzing the impact of adopting FIN No. 48.
SFAS No. 157 In September
2006, FASB issued SFAS No. 157, Fair Value
Measurements. SFAS No. 157 clarifies the
definition of fair value and the methods used to measure fair
value and expands disclosures about fair value measurements.
SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007. Therefore, SFAS No. 157
will be effective for the Companys fiscal year beginning
October 1, 2008. Adoption of SFAS No. 157 is not
expected to have a material impact on the Companys
consolidated financial statements.
On May 24, 2007, the Company and Fiserv, Inc.
(Fiserv) entered into a stock purchase agreement
pursuant to which a wholly-owned subsidiary of the Company
agreed to purchase a portion of Fiservs investment support
services business by acquiring all of the outstanding capital
stock of Fiserv Trust Company, a wholly-owned subsidiary of
Fiserv. Under the stock purchase agreement, the initial purchase
price payable at closing is $225 million in cash plus
Fiserv Trust Companys regulatory capital, subject to
certain pre- and post-closing adjustments. An additional
earn-out payment of up to $100 million in cash could be
payable following the first anniversary of the acquisition based
on the achievement of certain revenue targets. The closing of
the transaction is conditioned upon obtaining certain regulatory
approvals, Fiserv completing an internal reorganization of
Fiserv Trust Company to transfer the investment
administration services business, which the Company is not
acquiring, to Fiserv, and other customary conditions. At the
closing, the Company and Fiserv will enter into a transition
services agreement under which Fiserv will service client
accounts for up to six months (subject to extension) and will be
compensated based on revenue earned during the term of the
transition services agreement. Fiserv has agreed not to compete
with the acquired business for three years, subject to certain
exceptions. Each partys indemnification obligations are
generally limited to losses in excess of $3 million and
less than $50 million. Either party can terminate the
agreement if the closing has not occurred by January 24,
2008.
On January 24, 2006, the Company acquired TD Waterhouse
Group, Inc. (TD Waterhouse), a Delaware corporation,
pursuant to an Agreement of Sale and Purchase dated
June 22, 2005, as amended (the TDW Purchase
Agreement), with The Toronto-Dominion Bank
(TD). The Company purchased from TD all of the
capital stock of TD Waterhouse (the Share Purchase)
in exchange for 196,300,000 shares of Company common stock
and $20,000 in cash. The shares of common stock issued to TD in
the Share Purchase represented approximately 32.5% of the
outstanding shares of the Company after giving effect to the
transaction. The Companys consolidated financial
statements include the results of operations for TD Waterhouse
beginning January 25, 2006. In addition, on
January 24, 2006, the Company completed the sale of
Ameritrade Canada, Inc. to TD for $60 million in cash. The
Company agreed not to compete or own any portion of a business
that competes with TD in Canada (including in the
53
TD
AMERITRADE HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
retail securities brokerage business) after the consummation of
the Share Purchase. The Company also generally agreed not to
operate an insured depository institution in competition with TD.
The purchase price for the acquisition of TD Waterhouse and the
sale price for the sale of Ameritrade Canada were subject to
cash adjustments based on the closing date balance sheets of the
Company, TD Waterhouse and Ameritrade Canada. On May 5,
2006, the Company received approximately $45.9 million from
TD for the settlement of cash adjustments related to the
purchase of TD Waterhouse and the sale of Ameritrade Canada.
Prior to the consummation of the Share Purchase, TD Waterhouse
conducted a reorganization in which it transferred its Canadian
retail securities brokerage business and TD Bank USA, N.A.
(formerly TD Waterhouse Bank, N.A.) to TD such that, at the time
of consummation of the Share Purchase, TD Waterhouse retained
only its United States retail securities brokerage business. TD
Waterhouse also distributed to TD excess capital of TD
Waterhouse prior to the consummation of the Share Purchase. As
contemplated in the TDW Purchase Agreement, on January 24,
2006, the Company commenced payment of a special cash dividend
of $6.00 per share in respect of the shares of Company common
stock outstanding prior to the consummation of the Share
Purchase. The total amount of the dividend was approximately
$2.4 billion.
On October 8, 2004, the Company purchased 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.
|
|
3.
|
Goodwill
and Acquired Intangible Assets
|
The Company has recorded goodwill for purchase business
combinations to the extent the purchase price of each completed
acquisition exceeded the fair value of the net identifiable
tangible and intangible assets of the acquired company. The
following table summarizes changes in the carrying amount of
goodwill (dollars in thousands):
|
|
|
|
|
Balance as of September 30, 2005
|
|
$
|
769,215
|
|
Goodwill recorded in purchase of TD Waterhouse Group, Inc.
|
|
|
969,253
|
|
Purchase accounting adjustments(1)
|
|
|
(6,358
|
)
|
Tax benefit of option exercises(2)
|
|
|
(392
|
)
|
|
|
|
|
|
Balance as of September 29, 2006
|
|
|
1,731,718
|
|
Purchase accounting adjustments(3)
|
|
|
37,275
|
|
Tax benefit of option exercises(2)
|
|
|
(126
|
)
|
|
|
|
|
|
Balance as of September 30, 2007
|
|
$
|
1,768,867
|
|
|
|
|
|
|
|
|
|
(1) |
|
Purchase accounting adjustments for fiscal year 2006 consist of
reductions to accruals for uncertain tax positions relating to
the Datek Online Holdings Corp. (Datek) merger. |
|
(2) |
|
Represents the tax benefit of exercises of replacement stock
options that were issued in connection with the Datek merger in
fiscal 2002. 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. |
|
(3) |
|
Purchase accounting adjustments for fiscal 2007 primarily
consist of adjustments to liabilities for exit and involuntary
termination costs relating to the acquisition of TD Waterhouse.
The purchase price allocation for the TD Waterhouse acquisition
was finalized as of January 24, 2007, the one-year
anniversary of the acquisition. Differences between purchase
accounting estimates and actual results that arose prior to
January 24, 2007 resulted in adjustments to the purchase
price allocation. Any such adjustments arising on or after
January 24, 2007 were recorded currently in earnings. |
54
TD
AMERITRADE HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Acquired intangible assets consist of the following (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
September 29, 2006
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Client relationships
|
|
$
|
991,522
|
|
|
$
|
(134,766
|
)
|
|
$
|
856,756
|
|
|
$
|
991,522
|
|
|
$
|
(80,323
|
)
|
|
$
|
911,199
|
|
Non-competition agreement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300
|
|
|
|
(274
|
)
|
|
|
26
|
|
Trademark license TD
|
|
|
145,674
|
|
|
|
|
|
|
|
145,674
|
|
|
|
145,674
|
|
|
|
|
|
|
|
145,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,137,196
|
|
|
$
|
(134,766
|
)
|
|
$
|
1,002,430
|
|
|
$
|
1,137,496
|
|
|
$
|
(80,597
|
)
|
|
$
|
1,056,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense on acquired intangible assets was
$54.5 million, $42.3 million and $13.9 million
for fiscal years 2007, 2006 and 2005, respectively. The Company
estimates amortization expense on acquired intangible assets
outstanding as of September 30, 2007 will be approximately
$54.6 million for each of the five succeeding fiscal years.
|
|
4.
|
Receivable
from and Payable to Brokers, Dealers and Clearing
Organizations
|
Amounts receivable from and payable to brokers, dealers and
clearing organizations consist of the following (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 29,
|
|
|
|
2007
|
|
|
2006
|
|
|
Receivable:
|
|
|
|
|
|
|
|
|
Deposits paid for securities borrowed
|
|
$
|
6,534,760
|
|
|
$
|
4,441,896
|
|
Broker-dealers
|
|
|
32,156
|
|
|
|
16,449
|
|
Clearing organizations
|
|
|
93,630
|
|
|
|
85,999
|
|
Securities failed to deliver
|
|
|
89,042
|
|
|
|
22,181
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,749,588
|
|
|
$
|
4,566,525
|
|
|
|
|
|
|
|
|
|
|
Payable:
|
|
|
|
|
|
|
|
|
Deposits received for securities loaned
|
|
$
|
8,289,353
|
|
|
$
|
6,942,123
|
|
Broker-dealers
|
|
|
26,816
|
|
|
|
44,423
|
|
Clearing organizations
|
|
|
49,667
|
|
|
|
7,663
|
|
Securities failed to receive
|
|
|
21,152
|
|
|
|
28,392
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,386,988
|
|
|
$
|
7,022,601
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Allowance
for Doubtful Accounts on Receivable from Clients
|
The following table summarizes activity in the Companys
allowance for doubtful accounts on receivable from clients for
the fiscal years indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Beginning balance
|
|
$
|
20,290
|
|
|
$
|
12,925
|
|
|
$
|
9,812
|
|
Provision for doubtful accounts
|
|
|
5,273
|
|
|
|
2,647
|
|
|
|
8,773
|
|
Acquired in business combinations
|
|
|
|
|
|
|
8,795
|
|
|
|
|
|
Write-off of doubtful accounts
|
|
|
(6,443
|
)
|
|
|
(4,077
|
)
|
|
|
(5,660
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
19,120
|
|
|
$
|
20,290
|
|
|
$
|
12,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
TD
AMERITRADE HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
6.
|
Property
and Equipment
|
Property and equipment consists of the following (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 29,
|
|
|
|
2007
|
|
|
2006
|
|
|
Leasehold improvements
|
|
$
|
35,348
|
|
|
$
|
24,340
|
|
Software
|
|
|
94,444
|
|
|
|
73,769
|
|
Computer equipment
|
|
|
48,766
|
|
|
|
29,059
|
|
Other equipment, furniture and fixtures
|
|
|
32,214
|
|
|
|
26,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
210,772
|
|
|
|
153,653
|
|
Less: Accumulated depreciation and amortization
|
|
|
(118,324
|
)
|
|
|
(96,307
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
92,448
|
|
|
$
|
57,346
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
Investments
in Equity Securities
|
The Companys investments in equity securities are
summarized in the following table (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 29,
|
|
|
|
2007
|
|
|
2006
|
|
|
Available-for-sale investments, at fair value:
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
$
|
4,232
|
|
|
$
|
6,040
|
|
Trading investments, at fair value:
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
|
|
|
|
|
10,404
|
|
Other investments, at cost
|
|
|
3,781
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
Total investments in equity securities
|
|
$
|
8,013
|
|
|
$
|
16,536
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale investments in equity securities included
gross unrealized gains of $0.5 million and
$5.2 million as of September 30, 2007 and
September 29, 2006, respectively, which are included in
accumulated other comprehensive income on the Consolidated
Balance Sheets. Other investments, at cost, include an
investment with a cost of $3.7 million and a fair value of
$4.2 million as of September 30, 2007. This other
investment is subject to a transfer restriction that expires in
March 2009.
56
TD
AMERITRADE HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
8.
|
Acquisition
Exit Liabilities
|
The Company has recorded exit liabilities associated with
acquisitions, which are included in accounts payable and accrued
liabilities in the Consolidated Balance Sheets. These exit
liabilities consist principally of severance pay and other
termination benefits and contract termination costs. The
following is a summary of the activity in the Companys
acquisition exit liabilities (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
|
|
|
Clearing and
|
|
|
|
|
|
Occupancy
|
|
|
Professional
|
|
|
|
|
|
|
Compensation
|
|
|
Execution
|
|
|
Communications
|
|
|
and Equipment
|
|
|
Services
|
|
|
Total
|
|
|
Balance, Sept. 24, 2004
|
|
$
|
577
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,113
|
|
|
$
|
|
|
|
$
|
5,690
|
|
Fiscal 2005 activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exit costs recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
226
|
|
|
|
|
|
|
|
226
|
|
Utilized
|
|
|
(456
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,122
|
)
|
|
|
|
|
|
|
(2,578
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, Sept. 30, 2005
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
3,217
|
|
|
|
|
|
|
|
3,338
|
|
Fiscal 2006 activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exit costs recorded
|
|
|
59,335
|
|
|
|
10,073
|
|
|
|
|
|
|
|
46,936
|
|
|
|
1,734
|
|
|
|
118,078
|
|
Utilized
|
|
|
(32,780
|
)
|
|
|
|
|
|
|
|
|
|
|
(26,985
|
)
|
|
|
(400
|
)
|
|
|
(60,165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, Sept. 29, 2006
|
|
|
26,676
|
|
|
|
10,073
|
|
|
|
|
|
|
|
23,168
|
|
|
|
1,334
|
|
|
|
61,251
|
|
Fiscal 2007 activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exit costs recorded
|
|
|
20,569
|
|
|
|
579
|
|
|
|
57
|
|
|
|
3,393
|
|
|
|
9,674
|
|
|
|
34,272
|
|
Utilized
|
|
|
(38,408
|
)
|
|
|
(3,851
|
)
|
|
|
(57
|
)
|
|
|
(4,121
|
)
|
|
|
(8,103
|
)
|
|
|
(54,540
|
)
|
Adjustments
|
|
|
(1,447
|
)
|
|
|
(1,801
|
)
|
|
|
|
|
|
|
(1,401
|
)
|
|
|
(2,674
|
)
|
|
|
(7,323
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, Sept. 30, 2007
|
|
$
|
7,390
|
|
|
$
|
5,000
|
|
|
$
|
|
|
|
$
|
21,039
|
|
|
$
|
231
|
|
|
$
|
33,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The exit costs recorded during fiscal 2006 relate to the
acquisition of TD Waterhouse described in Note 2. The exit
costs recorded during fiscal 2007 relate to purchase accounting
adjustments for the acquisition of TD Waterhouse.
Adjustments to purchase accounting estimates arising prior to
January 24, 2007 (the one-year anniversary of the TD
Waterhouse acquisition) are reflected in the exit costs
recorded row as adjustments to the cost of acquiring TD
Waterhouse, and therefore adjusted the amount of goodwill
recorded. Adjustments arising on or after January 24, 2007
are reflected in the adjustments row and were
included in the determination of net income for the period.
Acquisition employee compensation liabilities are expected to be
paid over contractual periods ending in fiscal 2013. Clearing
and execution and professional services contract termination
costs are expected to be paid during the first half of fiscal
2008. Remaining acquisition occupancy and equipment exit
liabilities are expected to be utilized over the related lease
periods through fiscal 2016.
The Company entered into a credit agreement on January 23,
2006 for $2.2 billion in senior credit facilities with a
syndicate of lenders. The senior credit facilities include:
(a) a senior secured term loan facility in the aggregate
principal amount of $250 million (the Term A
Facility), (b) a senior secured term loan facility in
the aggregate principal amount of $1.65 billion (the
Term B Facility) and (c) a senior secured
revolving credit facility in the aggregate principal amount of
$300 million (the Revolving Facility)
(together, the Financings). The maturity date of the
Term A Facility is December 31, 2011. The maturity date of
the Term B Facility is December 31, 2012. The maturity date
of the Revolving Facility is December 31, 2010. The
Financings are subject to certain mandatory prepayments, which
include prepayments based on leverage ratios and amounts of
excess cash flow and from the net cash proceeds of asset sales
and debt issuances, subject to certain exceptions. Under the
terms of the Financings, the Company may prepay borrowings
without penalty.
57
TD
AMERITRADE HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company used $1.6 billion of the proceeds from the Term
A Facility and Term B Facility to fund a portion of the $6.00
per share special cash dividend paid in connection with the
acquisition of TD Waterhouse and $300 million for working
capital purposes. No initial borrowings were made on the
Revolving Facility, which was established for general corporate
purposes.
The applicable interest rate under the Revolving Facility and
the Term A Facility is calculated as a per annum rate equal to,
at the Companys option, (a) LIBOR plus an interest
rate margin (LIBOR loans) or (b) (i) the
greater of (x) the prime rate or (y) the federal funds
effective rate plus 0.50% plus (ii) an interest rate margin
(Base Rate loans). With respect to the Revolving
Facility and the Term A Facility the interest rate margin for
LIBOR loans is 1.50% if the consolidated leverage ratio (as
defined in the Financings) of the Company is 1.75 to 1.00 or
higher, 1.25% if the consolidated leverage ratio of the Company
is less than 1.75 to 1.00 but greater than or equal to 1.00 to
1.00, and 1.00% if the consolidated leverage ratio of the
Company is less than 1.00 to 1.00. The interest rate margin for
Base Rate loans under the Revolving Facility and the Term A
Facility is 1.00% less than the interest rate margin for LIBOR
loans. The applicable interest rate under the Term B Facility is
calculated as a per annum rate equal to (a) LIBOR plus
1.50% or (b) (i) the greater of (x) the prime rate or
(y) the federal funds effective rate plus 0.50% plus
(ii) 0.50%. On September 30, 2007, the applicable
interest rates on the Term A Facility and the Term B Facility
were 6.38% and 6.63%, respectively, based on
30-day
LIBOR. As of September 30, 2007, the Company had
outstanding indebtedness of $0.2 billion and
$1.3 billion under the Term A Facility and Term B Facility,
respectively. As of September 29, 2006, the Company had
outstanding indebtedness of $0.2 billion and
$1.5 billion under the Term A Facility and Term B Facility,
respectively. The Company has not made any borrowings under the
Revolving Facility. The Financings also provide that the Company
is obligated to pay from time to time letter of credit fees
equal to the applicable margin in respect of LIBOR advances on
each outstanding letter of credit under the Revolving Credit
Facility. In addition, the Financings provide that the Company
pays fees to the issuing bank in respect of the Letters of
Credit in an amount agreed to by the Company and the issuing
bank. A commitment fee at the rate of 0.375% per annum accrues
on any unused amount of the Revolving Facility.
The obligations under the Financings are guaranteed by certain
of the Companys subsidiaries, other than broker-dealer
subsidiaries, with certain exceptions, and are secured by a lien
on substantially all of the assets of each guarantor, including
a pledge of the ownership interests in each first-tier
broker-dealer subsidiary held by a guarantor and 65% of the
ownership interests in each first-tier foreign subsidiary held
by a guarantor, with certain exceptions.
The Financings contain covenants that limit or restrict the
incurrence of liens, investments (including acquisitions), sales
of assets, indebtedness and mergers and consolidations, subject
to certain exceptions. The Financings also restrict the payment
of dividends on the Companys outstanding capital stock and
repurchases or redemptions of the Companys outstanding
capital stock, subject to certain exceptions. The Company is
also required to maintain compliance with a maximum consolidated
leverage ratio covenant and a minimum consolidated interest
coverage ratio covenant, and the Companys broker-dealer
subsidiaries are required to maintain compliance with a minimum
regulatory net capital covenant. The Company was in compliance
with all covenants under the Financings as of September 30,
2007.
During fiscal 2007, the Company entered into two amendments to
its January 23, 2006 credit agreement to allow the Company
to repurchase additional shares of its outstanding common stock
and to change its fiscal year end to September 30. The
Company paid approximately $1.2 million of additional debt
issuance costs to effect the amendments.
58
TD
AMERITRADE HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Fiscal year maturities on long-term debt outstanding at
September 30, 2007 are as follows (dollars in thousands):
|
|
|
|
|
2008
|
|
$
|
34,375
|
|
2009
|
|
|
37,500
|
|
2010
|
|
|
56,250
|
|
2011
|
|
|
62,500
|
|
2012
|
|
|
21,875
|
|
Thereafter
|
|
|
1,265,875
|
|
|
|
|
|
|
Total
|
|
$
|
1,478,375
|
|
|
|
|
|
|
The Company, through its wholly-owned broker-dealer
subsidiaries, had access to secured uncommitted credit
facilities with financial institutions of up to
$630 million and $740 million as of September 30,
2007 and September 29, 2006, respectively. The
broker-dealer subsidiaries also had access to unsecured
uncommitted credit facilities of up to $150 million and
$435 million as of September 30, 2007 and
September 29, 2006, respectively. 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 qualified 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. Covenants under the Financings
limit the broker-dealer subsidiaries to an aggregate outstanding
principal balance of $1.0 billion in borrowings on
uncommitted lines of credit. There were no borrowings
outstanding or letters of credit issued under the secured or
unsecured credit facilities as of September 30, 2007 and
September 29, 2006. As of September 30, 2007 and
September 29, 2006, approximately $780 million and
$1.0 billion, respectively, was available to the
Companys broker-dealer subsidiaries pursuant to
uncommitted credit facilities for either loans or, in some
cases, letters of credit.
Provision for income taxes is comprised of the following for
fiscal years indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Current expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
324,315
|
|
|
$
|
242,511
|
|
|
$
|
180,733
|
|
State
|
|
|
43,630
|
|
|
|
42,392
|
|
|
|
29,479
|
|
Foreign
|
|
|
294
|
|
|
|
168
|
|
|
|
1,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
368,239
|
|
|
|
285,071
|
|
|
|
211,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
15,296
|
|
|
|
35,518
|
|
|
|
2,813
|
|
State
|
|
|
5,268
|
|
|
|
9,225
|
|
|
|
325
|
|
Foreign
|
|
|
|
|
|
|
732
|
|
|
|
(861
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,564
|
|
|
|
45,475
|
|
|
|
2,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
388,803
|
|
|
$
|
330,546
|
|
|
$
|
213,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company is subject to examination by the Internal Revenue
Service, states in which the Company has significant business
operations, and other taxing authorities. The tax years subject
to examination vary by jurisdiction. The Company regularly
assesses the likelihood of additional tax deficiencies in each
of the taxing jurisdictions. Included in current income tax
expense are changes to accruals for expected tax deficiencies,
along with applicable interest and penalties, in accordance with
SFAS No. 5.
59
TD
AMERITRADE HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
A reconciliation of the federal statutory tax rate to the
effective tax rate applicable to pre-tax income follows for the
fiscal years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State taxes, net of federal tax effect
|
|
|
3.2
|
|
|
|
4.0
|
|
|
|
3.6
|
|
Reversal of accruals for contingent tax liabilities, net
|
|
|
(0.4
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
Other
|
|
|
(0.2
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37.6
|
%
|
|
|
38.6
|
%
|
|
|
38.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets (liabilities) are comprised of the following
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 29,
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
36,381
|
|
|
$
|
48,979
|
|
Stock-based compensation
|
|
|
16,522
|
|
|
|
15,001
|
|
Allowance for doubtful accounts
|
|
|
7,075
|
|
|
|
7,609
|
|
Unrealized tax gain on MMDA agreement
|
|
|
6,942
|
|
|
|
|
|
Operating loss carryforwards
|
|
|
9,503
|
|
|
|
6,348
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
76,423
|
|
|
|
77,937
|
|
Less: Valuation allowance
|
|
|
(9,453
|
)
|
|
|
(6,174
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
66,970
|
|
|
|
71,763
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and intangible assets
|
|
|
(379,262
|
)
|
|
|
(373,784
|
)
|
Unrealized investment and derivative gains/losses, net
|
|
|
(200
|
)
|
|
|
(4,657
|
)
|
Other deferred tax liabilities
|
|
|
(2,045
|
)
|
|
|
(2,643
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(381,507
|
)
|
|
|
(381,084
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(314,537
|
)
|
|
$
|
(309,321
|
)
|
|
|
|
|
|
|
|
|
|
At September 30, 2007, subsidiaries of the Company have
approximately $181 million of separate state operating loss
carryforwards, which expire between fiscal 2013 and 2014.
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. The
increase in the valuation allowance of approximately
$3.3 million from September 29, 2006 to
September 30, 2007 was due to additional net operating
losses generated at the separate subsidiaries, and was charged
to income tax expense.
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 is calculated for
each broker-dealer subsidiary individually. Excess net capital
of one broker-dealer subsidiary may not be used to offset a net
capital deficiency of another broker-dealer subsidiary. Net
capital and the related net capital requirement may fluctuate on
a daily basis.
60
TD
AMERITRADE HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Net capital and net capital requirements for the Companys
broker-dealer subsidiaries are summarized in the following table
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
September 29, 2006
|
|
|
|
|
|
|
Minimum
|
|
|
|
|
|
|
|
|
Minimum
|
|
|
|
|
|
|
|
|
|
Net Capital
|
|
|
Excess
|
|
|
|
|
|
Net Capital
|
|
|
Excess
|
|
|
|
Net Capital
|
|
|
Required
|
|
|
Net Capital
|
|
|
Net Capital
|
|
|
Required
|
|
|
Net Capital
|
|
|
TD AMERITRADE Clearing, Inc.
|
|
$
|
678,042
|
|
|
$
|
171,796
|
|
|
$
|
506,246
|
|
|
$
|
397,034
|
|
|
$
|
88,891
|
|
|
$
|
308,143
|
|
TD AMERITRADE, Inc.
|
|
|
75,723
|
|
|
|
7,996
|
|
|
|
67,727
|
|
|
|
48,932
|
|
|
|
26,146
|
|
|
|
22,786
|
|
National Investor Services Corp.
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
333,134
|
|
|
|
77,548
|
|
|
|
255,586
|
|
TD Waterhouse Capital Markets, Inc.
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
4,397
|
|
|
|
1,000
|
|
|
|
3,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
753,765
|
|
|
$
|
179,792
|
|
|
$
|
573,973
|
|
|
$
|
783,497
|
|
|
$
|
193,585
|
|
|
$
|
589,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TD AMERITRADE Clearing, Inc. (TDA Clearing) is a
clearing broker-dealer and TD AMERITRADE, Inc. (TDA
Inc.) is an introducing broker-dealer. Prior to
September 14, 2007, National Investor Services Corp.
(NISC) was a clearing broker-dealer. On May 14,
2007, the clearing functions performed by NISC on behalf of TDA
Inc. were transferred to TDA Clearing. In connection with this
transfer, NISC transferred to TDA Clearing substantially all
client-related assets and liabilities previously carried by
NISC. On September 14, 2007, the Company withdrew
NISCs registration as a broker-dealer. TD Waterhouse
Capital Markets, Inc. (TDWCM) was registered as a
market-maker in over-the-counter equity securities until January
2007, at which time it registered as an introducing
broker-dealer. On September 14, 2007, the Company withdrew
TDWCMs registration as a broker-dealer.
|
|
12.
|
Stock-based
Compensation
|
The Company has four stock incentive plans under which Company
stock-based awards may be granted. The Ameritrade Holding
Corporation 1996 Long-Term Incentive Plan (the 1996
Plan) authorizes the award of options to purchase common
stock, common stock appreciation rights, shares of common stock,
restricted stock units, performance shares and performance
units. Under the 1996 Plan, 42,104,174 shares of the
Companys common stock are reserved for issuance to
eligible employees. The 2006 Directors Incentive Plan (the
Directors Plan) authorizes the award of options to
purchase common stock, common stock appreciation rights,
restricted stock units and shares of common stock. Under the
Directors Plan, 1,830,793 shares of the Companys
common stock are reserved for issuance to non-employee
directors. The Ameritrade Holding Corporation 1998 Stock Option
Plan (the 1998 Plan) and the Ameritrade Holding
Corporation 2001 Stock Incentive Plan (the 2001
Plan) authorize the award of options to purchase common
stock. Under the 1998 Plan, 15,502,818 shares of the
Companys common stock are reserved for issuance to
employees, consultants or non-employee directors of the Company.
Under the 2001 Plan, 18,628,031 shares of the
Companys common stock are reserved for issuance to
directors or non-voting observers to the Board of Directors,
officers and employees of the Company.
Stock options, except for replacement options granted in
connection with business combinations, are granted by the
Company with an exercise price not less than the fair market
value of the Companys common stock on the grant date.
Stock options generally vest over a one-to four-year period and
expire 10 years after the grant date. Restricted Stock
Units (RSUs) are awards that entitle the holder to
receive shares of Company common stock following a vesting
period. RSUs granted to employees generally vest after the
completion of a three-year period. RSUs granted to non-employee
directors generally vest ratably over a three-year period.
Performance Restricted Stock Units (PRSUs) are a
form of RSUs in which the number of shares ultimately received
depends on the performance of the Company against specified
performance goals, generally over a three-year period. At the
end of the performance period, the number of shares of common
stock issued is determined by adjusting upward or downward from
the target in a range between 0% and 120%. Shares of common
stock are issued following the end of the performance period.
61
TD
AMERITRADE HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Effective October 1, 2005, the Company adopted
SFAS No. 123R using a modified version of the
prospective transition method. Under the transition method,
compensation cost is recognized on or after the required
effective date for the portion of outstanding awards for which
the requisite service has not yet been rendered, based on the
grant-date fair value of those awards calculated under
SFAS No. 123 for either recognition or pro forma
disclosures. Stock-based compensation expense was
$18.2 million, $14.3 million and $1.6 million for
fiscal years 2007, 2006 and 2005, respectively. The related
income tax benefits were $6.7 million, $5.4 million
and $0.6 million for fiscal years 2007, 2006 and 2005,
respectively. The cumulative effect of initially adopting
SFAS No. 123R was not material.
The following is a summary of option activity in the
Companys stock incentive plans for the fiscal year ended
September 30, 2007 (in thousands, except exercise prices
and years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Term (Years)
|
|
|
Value
|
|
|
Outstanding at beginning of year
|
|
|
18,019
|
|
|
$
|
4.76
|
|
|
|
|
|
|
|
|
|
Granted(1)
|
|
|
565
|
|
|
$
|
9.41
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(2,204
|
)
|
|
$
|
4.94
|
|
|
|
|
|
|
|
|
|
Canceled(1)
|
|
|
(565
|
)
|
|
$
|
9.01
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(109
|
)
|
|
$
|
6.64
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(13
|
)
|
|
$
|
21.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
15,693
|
|
|
$
|
4.72
|
|
|
|
4.8
|
|
|
$
|
211,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
15,427
|
|
|
$
|
4.65
|
|
|
|
4.7
|
|
|
$
|
209,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
During fiscal 2007, the Company determined that certain stock
options granted during fiscal years 2002 and 2003 were issued
with an exercise price less than the fair market value of the
underlying common stock on the measurement date for accounting
purposes, therefore subjecting the option holders to adverse tax
consequences. On February 22, 2007, in order to avoid the
negative tax implications, the Company commenced a tender offer
in which employees had the right to exchange their existing
employee stock options for new stock options with a higher
exercise price. The entire amount of stock options granted and
canceled, included in the table above, represent stock options
exchanged under the tender offer. The Company compensated the
employees for the reduced value of new stock options by making a
cash payment. The exchange of options under the tender offer was
considered a modification of the original options for accounting
purposes. As a result, the Company recorded incremental
compensation expense to the extent that the combination of the
fair value of the modified option plus the cash payment exceeded
the fair value of the original option. The incremental
compensation cost was not significant. |
The weighted-average grant-date fair value of options granted
during fiscal years 2007, 2006 and 2005 was $9.40, $11.97 and
$6.88, respectively. The total intrinsic value of options
exercised during fiscal years 2007, 2006 and 2005 was
$28.7 million, $128.0 million and $49.7 million,
respectively. As of September 30, 2007, the total
compensation cost related to nonvested stock option awards was
approximately $1.1 million and is expected to be recognized
over a weighted average period of six months.
62
TD
AMERITRADE HOLDING CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The fair value of stock options granted was estimated using a
Black-Scholes valuation model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Risk-free interest rate
|
|
|
4.67
|
%
|
|
|
4.40
|
%
|
|
|
3.50
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
54
|
%
|
|
|
58
|
%
|
|
|
62
|
%
|
Expected option life (years)
|
|
|
3.2
|
|
|
|
5.0
|
|
|
|
5.0
|
|
The risk free interest rate assumptions are based on
5-year
U.S. Treasury note yields. The expected volatility is based
on historical daily price changes of the Companys stock
since April 2001. The expected option life is the average number
of years that the Company estimates that options will be
outstanding, based primarily on historical employee option
exercise behavior.
Immediately prior to the January 25, 2006 ex-dividend date
for the $6.00 per share special cash dividend discussed in
Note 2, in accordance with the terms of the stock plans,
the Company adjusted outstanding equity awards under the plans
to preserve their pre-dividend economic value. These adjustments
did not result in any additional compensation expense because
the aggregate fair value of each award before and after the
modifications to the equity awards was the same as calculated
pursuant to SFAS No. 123R. The exercise price, if any,
was adjusted downward and the number of shares covered by equity
awards was adjusted upward pursuant to the following formulas,
where Average Market Price means the volume-weighted
average market price of a share of Ameritrade common stock on
January 24, 2006, the last trading day before the
ex-dividend date for the special dividend.
The exercise price, if any, of equity awards outstanding
immediately before the ex-dividend date was adjusted downward by
the ratio of the Average Market Price less the $6.00 per share
special dividend, to the Average Market Price. The number of
shares covered by each equity award was adjusted upward by the
ratio of the Average Market Price to the Average Market Price
less the $6.00 per share special dividend. The Average Market
Price was $26.1983, which resulted in an exercise price
adjustment ratio of 0.7710 to 1.00 and a shares covered
adjustment ratio of 1.2971 to 1.00. The adjustment resulted in
an incremental 6.0 million stock options outstanding
immediately prior to the ex-dividend date and affected
1,293 employees and directors.
The Company measures the fair value of RSUs and PRSUs based upon
the volume-weighted average market price of the underlying
common stock as of the date of grant. RSUs and PRSUs are
amortized over their applicable vesting period using the
straight-line method, reduced by expected forfeitures.
The following is a summary of RSU activity in the Companys
stock incentive plans for the fiscal year ended
September 30, 2007 (in thousands, except per unit amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|