10-Q 1 c67507e10-q.txt QUARTERLY REPORT ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- FORM 10-Q (Mark One) (X) Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended December 31, 2001 OR ( ) Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ___________ to ___________ Commission file number: 0-22163 ------------------ AMERITRADE HOLDING CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 47-0642657 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 4211 SOUTH 102ND STREET, OMAHA, NEBRASKA 68127 (Address of principal executive offices) (Zip Code) (402) 331-7856 (Registrant's telephone number, including area code) ------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months, and (2) has been subject to such filing requirements for the past ninety days: Yes (X) No ( ) As of January 30, 2002, there were 215,912,056 outstanding shares of the registrant's common stock, consisting of 199,539,256 outstanding shares of Class A Common Stock and 16,372,800 outstanding shares of Class B Common Stock. ================================================================================ AMERITRADE HOLDING CORPORATION INDEX Page No. -------- PART I - FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS: Independent Accountants' Review Report 3 Balance Sheets 4 Statements of Operations 5 Statements of Cash Flows 6 Notes to Financial Statements 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 14 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 15 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K: (a) Exhibits 15 (b) Reports on Form 8-K 16 Signatures 17 2 PART I - FINANCIAL INFORMATION ITEM 1. - CONSOLIDATED FINANCIAL STATEMENTS INDEPENDENT ACCOUNTANTS' REVIEW REPORT To the Board of Directors Ameritrade Holding Corporation Omaha, Nebraska We have reviewed the accompanying condensed consolidated balance sheet of Ameritrade Holding Corporation and subsidiaries (collectively "the Company") as of December 31, 2001, and the related condensed consolidated statements of operations and cash flows for the three-month periods ended December 31, 2001 and 2000. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Ameritrade Holding Corporation and subsidiaries as of September 28, 2001, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated October 23, 2001 (December 12, 2001, as to Note 6), we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of September 28, 2001 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Deloitte & Touche LLP February 11, 2002 Omaha, Nebraska 3 AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In thousands, except share amounts)
DECEMBER 31, SEPTEMBER 28, 2001 2001 ------------ ------------- ASSETS Cash and cash equivalents $ 41,713 $ 24,134 Cash and investments segregated in compliance with federal regulations 2,425,956 2,044,257 Receivable from brokers, dealers and clearing organizations 300,241 178,169 Receivable from clients and correspondents - net of allowance for doubtful accounts 1,287,848 971,823 Property and equipment - net of accumulated depreciation and amortization 77,695 83,671 Goodwill - net of accumulated amortization 214,723 210,794 Acquired intangible assets - net of accumulated amortization 14,872 15,067 Investments 88,890 62,717 Other assets 64,310 63,239 ----------- ----------- Total assets $ 4,516,248 $ 3,653,871 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Payable to brokers, dealers and clearing organizations $ 581,236 $ 304,301 Payable to clients and correspondents 3,323,155 2,777,916 Accounts payable and accrued liabilities 127,575 121,933 Notes payable 12,500 22,500 Convertible subordinated notes 47,645 47,645 Deferred income taxes 23,448 8,143 ----------- ----------- Total liabilities 4,115,559 3,282,438 ----------- ----------- Commitments and contingencies Stockholders' equity: Preferred Stock, $1 par value; 3,000,000 shares authorized, none issued - - Common Stock, $0.01 par value: Class A - 270,000,000 shares authorized; Dec. 31, 2001 - 199,831,081 shares issued; Sept. 28, 2001 - 198,922,132 shares issued 1,998 1,990 Convertible Class B - 18,000,000 shares authorized; 16,372,800 shares issued and outstanding 164 164 ----------- ----------- Total Common Stock 2,162 2,154 Additional paid-in capital 388,733 384,175 Accumulated deficit (40,503) (49,507) Treasury stock - Class A shares at cost (Dec. 31, 2001 - 292,639 shares; Sept. 28, 2001 - 116,821 shares) (2,649) (1,746) Deferred compensation 1,100 215 Accumulated other comprehensive income 51,846 36,142 ----------- ----------- Total stockholders' equity 400,689 371,433 ----------- ----------- Total liabilities and stockholders' equity $ 4,516,248 $ 3,653,871 =========== ===========
See notes to condensed consolidated financial statements. 4 AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (In thousands, except per share amounts)
THREE MONTHS ENDED --------------------------------------- DECEMBER 31, 2001 DECEMBER 31, 2000 ----------------- ----------------- Revenues: Commissions and clearing fees $ 65,659 $ 82,081 Interest revenue 29,126 61,376 Other 16,500 4,989 --------- --------- Total revenues 111,285 148,446 Client interest expense 3,095 17,524 --------- --------- Net revenues 108,190 130,922 --------- --------- Operating expenses: Employee compensation and benefits 32,925 39,372 Communications 9,960 8,990 Occupancy and equipment costs 13,566 16,205 Depreciation and amortization 6,737 8,120 Professional services 7,290 17,478 Interest on borrowings 1,826 4,682 Other 6,066 9,748 --------- --------- Total operating expenses 78,370 104,595 --------- --------- Operating margin 29,820 26,327 Advertising 14,580 63,489 --------- --------- Income (loss) before income taxes 15,240 (37,162) Income tax expense (benefit) 6,237 (14,130) --------- --------- Net income (loss) $ 9,003 $ (23,032) ========= ========= Basic earnings (loss) per share $ 0.04 $ (0.13) Diluted earnings (loss) per share $ 0.04 $ (0.13) Weighted average shares outstanding - basic 215,538 176,558 Weighted average shares outstanding - diluted 216,397 176,558
See notes to condensed consolidated financial statements. 5 AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (In thousands)
THREE MONTHS ENDED -------------------------------------- DECEMBER 31, 2001 DECEMBER 31, 2000 ----------------- ----------------- Cash flows from operating activities: Net income (loss) $ 9,003 $ (23,032) Adjustments to reconcile net income (loss) to net cash from operating activities: Depreciation and amortization 6,539 7,097 Deferred income taxes 5,538 (11,977) Loss on disposal of property 193 618 Amortization of goodwill and intangible assets 197 1,021 Changes in operating assets and liabilities: Cash and investments segregated in compliance with federal regulations (381,699) (856,531) Brokerage receivables (438,097) 909,361 Other assets (2,878) 5,227 Brokerage payables 822,174 (55,869) Accounts payable and accrued liabilities 9,232 37,784 --------- --------- Net cash flows from operating activities 30,202 13,699 --------- --------- Cash flows from investing activities: Purchase of property and equipment (1,289) (14,520) Proceeds from sale of property and equipment 533 - Cash paid in business combinations, net (1,913) - Purchase of investments - (165) --------- --------- Net cash flows from investing activities (2,669) (14,685) --------- --------- Cash flows from financing activities: Principal payments on notes payable (10,000) (58,000) Proceeds from exercise of stock options and other 64 405 Purchase of treasury stock (18) - Issuance of treasury stock - 137 --------- --------- Net cash flows from financing activities (9,954) (57,458) --------- --------- Net increase (decrease) in cash and cash equivalents 17,579 (58,444) Cash and cash equivalents at beginning of period 24,134 122,351 --------- --------- Cash and cash equivalents at end of period $ 41,713 $ 63,907 ========= ========= Supplemental cash flow information: Interest paid $ 4,306 $ 24,348 Income taxes paid (refunds received) $ 675 $ (7,609) Noncash investing and financing activities: Tax benefit on exercise of stock options $ 25 $ 869 Issuance of common stock in acquisition of subsidiaries $ 3,553 $ 2,792
See notes to condensed consolidated financial statements. 6 AMERITRADE HOLDING CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (COLUMNAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION The condensed consolidated financial statements include the accounts of Ameritrade Holding Corporation and its wholly-owned subsidiaries (collectively, the "Company"). All intercompany balances and transactions have been eliminated. These financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and, in the opinion of management, reflect all adjustments, which are all of a normal recurring nature, necessary to present fairly the financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States of America. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's annual report filed on Form 10-K for the fiscal year ended September 28, 2001. Certain items in prior year condensed consolidated financial statements have been reclassified to conform to the current presentation. 2. BUSINESS COMBINATIONS, GOODWILL AND ACQUIRED INTANGIBLE ASSETS The Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets", on September 29, 2001. The Company will complete its transitional impairment test of goodwill under SFAS No. 142 during the Company's second fiscal quarter of 2002, upon determination of its reportable operating segments, if any (see Note 8). In accordance with SFAS No. 142, the Company discontinued goodwill amortization effective September 29, 2001. The following table presents pro forma financial information assuming that amortization expense associated with goodwill was excluded for the three months ended December 31: 2001 2000 --------- --------- NET INCOME (LOSS): Net income (loss), as reported $ 9,003 $ (23,032) Goodwill amortization - 1,021 Tax benefit of goodwill amortization - (34) --------- --------- Adjusted net income (loss) $ 9,003 $ (22,045) ========= ========= BASIC AND DILUTED EARNINGS (LOSS) PER SHARE: Earnings (loss) per share, as reported $ 0.04 $ (0.13) Goodwill amortization - 0.01 Tax benefit of goodwill amortization - - --------- --------- Adjusted earnings (loss) per share $ 0.04 $ (0.12) ========= ========= On December 5, 2001, the Company issued 599,264 shares of its Class A Common Stock with a fair value of approximately $3.6 million in connection with its May 25, 2000 acquisition of Ten Bagger, Inc. ("Ten Bagger"), which developed the stock analysis tool, The BigEasy Investor(TM). These shares represent the third and final post-closing payment required under the purchase agreement during the 18-month period following the acquisition date. 7 The following table summarizes changes in the carrying amount of goodwill for the three months ended December 31, 2001: Balance as of September 28, 2001 $ 210,794 Goodwill acquired during period 2,099 Reclassification of intangible assets that do not meet the criteria for recognition apart from goodwill 1,830 --------- Balance as of December 31, 2001 $ 214,723 ========= Accumulated amortization on acquired intangible assets was $0.3 million and $0.1 million at December 31, 2001 and September 28, 2001, respectively. Amortization expense on acquired intangible assets was $0.2 million for the three months ended December 31, 2001. The Company expects amortization expense on acquired intangible assets to be $0.6 million for the remainder of fiscal 2002 and $0.8 million for each of the five succeeding fiscal years. 3. INVESTMENTS The Company's investments consist primarily of ownership of approximately 7.9 million shares of Knight Trading Group, Inc. ("Knight"), representing approximately six percent of Knight's outstanding shares. Knight is a publicly held company that is a market maker in equity securities. The Company accounts for its investment in Knight as a marketable equity security available for sale. As of December 31, 2001 and September 28, 2001, the Company's investment in Knight was valued at $87.1 million and $61.0 million, respectively. The Company's cost basis is $0.7 million; therefore the gross unrealized gain was $86.4 million and $60.3 million at December 31, 2001 and September 28, 2001, respectively. As of December 31, 2001, the Company had pledged 4.0 million shares of its Knight common stock to support its obligations under a revolving credit agreement (see Note 5) and had also pledged approximately 0.9 million shares of its Knight common stock as collateral under an equity index swap arrangement related to the Company's deferred compensation plan for its Chief Executive Officer. The remaining 3.0 million shares not pledged as collateral are available for use as collateral on other potential loan agreements or for other corporate purposes. 4. RESTRUCTURING AND EXIT LIABILITIES The following is a summary of activity in the Company's restructuring and acquisition exit cost liabilities for the three months ended December 31, 2001:
PAID AND BALANCE AT CHARGED AGAINST BALANCE AT RESTRUCTURING LIABILITIES: SEPT. 28, 2001 LIABILITY DEC. 31, 2001 ----------------------------------- -------------- --------------- ------------- Employee compensation and benefits $ 975 $ (365) $ 610 (1) Occupancy and equipment costs 11,323 (1,551) 9,772 (2) Professional services 2,430 (511) 1,919 (2) Other 4,239 (204) 4,035 (2) ------- ------- ------- Total restructuring liabilities $18,967 $(2,631) $16,336 ======= ======= ======= NDB.COM EXIT LIABILITIES: ----------------------------------- Employee compensation and benefits $ 6,399 $(3,104) $ 3,295 (1) Communications 1,551 (1,029) 522 (3) Occupancy and equipment costs 1,164 (705) 459 (3) Other 2,010 (2,010) - ------- ------- ------- Total NDB.com exit liabilities $11,124 $(6,848) $ 4,276 ======= ======= =======
(1) The Company expects to pay remaining severance costs during fiscal 2002. (2) The Company expects to utilize the remaining liability over the respective lease periods through fiscal 2005. (3) The Company expects to pay remaining NDB.com communications and occupancy costs during fiscal 2002. 8 5. NOTES PAYABLE On December 28, 2001, the Company entered into an amended and restated revolving credit agreement. The revolving credit agreement, as amended, permits borrowings up to $20 million through December 27, 2002, and is secured primarily by 4.0 million shares of the Company's Knight common stock (see Note 3) and the Company's stock in its subsidiaries. The Company may borrow up to 70 percent of the fair market value of the pledged Knight stock, subject to certain limitations. If, on any day, the principal loan amount outstanding exceeds 80 percent of the fair market value of the pledged Knight stock, the Company is required, within two business days, to pay down the loan or pledge additional Knight stock such that the principal loan amount then outstanding would not exceed 70 percent of the then current fair market value of the pledged Knight stock. The interest rate on borrowings, determined on a monthly basis, is equal to the greater of (i) the national prime rate or (ii) 90-day LIBOR plus 2.5 percent, subject to a minimum rate of 5.0 percent. At December 31, 2001, the interest rate on this borrowing was 5.0 percent. The Company also pays a maintenance fee of 0.375 percent of the unused borrowings through the maturity date. The Company had outstanding indebtedness under the revolving credit agreement of $12.5 million at December 31, 2001 and outstanding indebtedness under the prior revolving credit agreement of $22.5 million at September 28, 2001. In January 2002, the Company repaid the remaining $12.5 million of its outstanding indebtedness under the revolving credit agreement. The revolving credit agreement contains certain covenants and restrictions, including a minimum net worth requirement, and prohibits the payment of cash dividends. The Company was in compliance with or has obtained waivers for all covenants under the revolving agreement for all periods presented in the condensed consolidated financial statements. 6. NET CAPITAL The Company's broker-dealer subsidiaries are subject to the Securities and Exchange Commission Uniform Net Capital Rule (Rule 15c3-1 of the Securities Exchange Act of 1934), which requires the maintenance of minimum net capital, as defined. Net capital and the related net capital requirement may fluctuate on a daily basis. The Company's broker-dealer subsidiaries had net capital, in the aggregate, of $93.8 million and $60.2 million as of December 31, 2001 and September 28, 2001, respectively, which exceeded aggregate minimum net capital requirements by $65.4 million and $38.8 million, respectively. Subsidiary net capital in the amount of $28.4 million and $21.4 million as of December 31, 2001 and September 28, 2001, respectively, was not available for transfer to Ameritrade Holding Corporation. 7. COMMITMENTS AND CONTINGENCIES Legal - In September 1998, a putative class action complaint was filed against the Company by Zannini, et al. in the District Court of Douglas County, Nebraska, claiming the Company was not able to handle the volume of subscribers to its Internet brokerage services. The complaint, as amended, seeks injunctive relief enjoining alleged deceptive, fraudulent and misleading practices, equitable relief compelling the Company to increase capacity, and unspecified compensatory damages. In May 2001, the Company filed a motion for summary judgment in the matter, which the plaintiffs opposed. The court granted summary judgment for the Company on January 2, 2002. The plaintiffs have filed a notice of appeal. The Company and its subsidiaries are parties to a number of other legal actions. In management's opinion, the Company has adequate legal defenses respecting each of these actions and does not believe that any such matters, either individually or in the aggregate, would materially affect the Company's results of operations or its financial position. Letters of Credit - Letters of credit in the amount of $113 million and $105 million as of December 31, 2001 and September 28, 2001, respectively, have been issued by several financial institutions on behalf of Advanced Clearing, Inc. ("Advanced Clearing"), the Company's wholly-owned securities clearing subsidiary. (Effective January 2, 2002, the Company consolidated six of its other broker-dealer subsidiaries into Advanced Clearing, and changed the name of Advanced Clearing to Ameritrade, Inc.) The letters of credit, which are for the benefit of a securities clearinghouse, have been issued for the contingent purpose of financing and supporting margin requirements. Ameritrade, Inc. pays a maintenance fee of 0.25 to 0.45 percent of the issued amount for the letters of credit. In addition, the same financial institutions may make loans to Ameritrade, Inc. if requested under note agreements. Ameritrade, Inc. has pledged client securities, the amount of which fluctuates from time to time, to secure its obligations under the letters of credit and the notes. As of December 31, 2001 and September 28, 2001, no amounts were outstanding under the note agreements. General Contingencies - In the ordinary course of business, there are various contingencies which are not reflected in the condensed consolidated financial statements. These include Ameritrade, Inc.'s client activities involving the execution, 9 settlement and financing of various client securities transactions. These activities may expose Ameritrade, Inc. to off-balance-sheet credit risk in the event the clients are unable to fulfill their contracted obligations. Ameritrade, Inc.'s client securities activities are transacted on either a cash or margin basis. In margin transactions, Ameritrade, Inc. extends credit to the client, subject to various regulatory and internal margin requirements, collateralized by cash and securities in the client's account. In connection with these activities, Ameritrade, Inc. also executes and clears client transactions involving the sale of securities not yet purchased ("short sales"). Such margin related transactions may expose Ameritrade, Inc. to off-balance-sheet risk in the event each client's assets are not sufficient to fully cover losses which clients may incur. In the event the client fails to satisfy its obligations, Ameritrade, Inc. may be required to purchase or sell financial instruments at prevailing market prices in order to fulfill the client's obligations. Ameritrade, Inc. seeks to control the risks associated with its client activities by requiring clients to maintain margin collateral in compliance with various regulatory and internal guidelines. Ameritrade, Inc. monitors required margin levels daily and, pursuant to such guidelines, requires clients to deposit additional collateral, or to reduce positions, when necessary. Ameritrade, Inc. borrows and loans securities both to cover short sales and to complete client transactions in the event that a client fails to deliver or receive securities by the required date. Securities borrowed and securities loaned transactions are reported as collateralized financings except where other securities are used as collateral. Securities borrowed transactions require Ameritrade, Inc. to deposit cash with the lender. With respect to securities loaned, Ameritrade, Inc. receives all collateral in the form of cash in an amount generally in excess of the market value of securities loaned. Failure to maintain levels of cash deposits or pledged securities at all times at least equal to the value of the related securities can subject Ameritrade, Inc. to risk of loss. Ameritrade, Inc. monitors the market value of securities borrowed and loaned on a daily basis with additional collateral obtained or refunded as necessary. As of December 31, 2001, client margin securities of approximately $1.8 billion and stock borrowings of approximately $286 million were available to Ameritrade, Inc. to utilize as collateral on various borrowings or for other purposes. Ameritrade, Inc. had sold or repledged approximately $536 million of that collateral as of December 31, 2001. Employment Agreements - The Company has entered into employment agreements with several of its key executive officers. These employment agreements generally provide for annual base salary compensation, stock option acceleration and severance payments in the event of termination of employment under certain defined circumstances or changes in control of the Company. Salaries are subject to adjustments according to the Company's financial performance and other factors. 8. SEGMENT INFORMATION On June 27, 2001, the Company announced a reorganization of its corporate and management structure. The new structure created two principal business units, a Private Client Division and an Institutional Client Division. Both divisions provide multiple service offerings, tailored to specific clients and their respective investing and trading preferences. OnMoney, the Company's personal financial management subsidiary, which was previously considered a reportable business segment, became a product offering supporting the two business units. During the remainder of fiscal 2001 and first quarter of fiscal 2002, the Company operated in one reportable business segment as the new organizational structure was implemented. In connection with the reorganization, the Company is developing a new management financial reporting structure. The Company will reevaluate its segment reporting in light of the new reporting structure upon its completion, which is expected during the second quarter of fiscal 2002. The Company anticipates that the new reporting structure may result in two reportable business segments. 10 9. COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) is as follows:
THREE MONTHS ENDED ------------------------------------- DECEMBER 31, 2001 DECEMBER 31, 2000 ----------------- ----------------- Net income (loss) $ 9,003 $ (23,032) Other comprehensive income (loss) Net unrealized holding gains (losses) on investment securities available-for-sale arising during the period 26,173 (174,436) Adjustment for deferred income taxes (10,469) 68,030 --------- --------- Total other comprehensive income (loss), net of tax 15,704 (106,406) --------- --------- Comprehensive income (loss) $ 24,707 $(129,438) ========= =========
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the Selected Financial Data and the Consolidated Financial Statements and Notes thereto included in the Company's annual report on Form 10-K for the fiscal year ended September 28, 2001. This discussion contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those anticipated in such forward-looking statements. Factors that may cause such differences include, but are not limited to: the effect of client trading patterns on Company revenues and earnings; computer system failures; trading volumes in excess of our capacity; the effects of competitors' pricing, product and service decisions and intensified competition; evolving regulation and changing industry customs and practices adversely affecting the Company; adverse results of litigation; changes in revenues and profit margin due to cyclical securities markets and interest rates; a significant downturn in the securities markets over a short period of time or a sustained decline in securities prices and trading volumes; and the other risks and uncertainties set forth under the heading "Risk Factors" in Item 7 of the Company's annual report on Form 10-K for the fiscal year ended September 28, 2001. In particular, the following statements contained in this discussion are forward-looking statements: our expectations regarding average commission and clearing fees per trade; our expectations regarding growth of net interest revenue; our estimation of annualized employee compensation and benefits savings; our expectation regarding the growth in communication expenses; our expected amount of advertising expenses; our estimation of savings in annualized cash interest payments on the convertible subordinated notes; and our anticipated capital and liquidity needs and our plans to finance such needs. Our significant accounting policies are disclosed in the Notes to Consolidated Financial Statements for the fiscal year ended September 28, 2001. In the opinion of management, we do not have any critical accounting policies which involve unusually difficult, subjective or complex judgments. The terms "we" and "us" as used in this document refer to Ameritrade Holding Corporation and its operating subsidiaries. RESULTS OF OPERATIONS THREE MONTH PERIODS ENDED DECEMBER 31, 2001 AND DECEMBER 31, 2000 NET REVENUES. Commissions and clearing fees decreased 20 percent to $65.7 million in the first quarter of fiscal 2002 from $82.1 million in the first quarter of fiscal 2001. This decrease was primarily attributable to a decrease in the number of securities transactions processed, as average trades per day decreased 23 percent to 86,000 in the first quarter of fiscal 2002 from 111,000 in the first quarter of fiscal 2001. Clients averaged approximately three trades per account during the first quarter of fiscal 2002, compared to approximately 5 trades per account during the first quarter of fiscal 2001. The decreased volume per account was partially offset by a significant increase in client accounts resulting from the substantial advertising expenditures made by us during the past few years, and 215,000 core accounts added during the fourth quarter of fiscal 2001 through our acquisition of National Discount Brokers Corporation ("NDB.com"). Client accounts increased to approximately 1,829,000 at December 31, 2001 from approximately 1,356,000 at December 31, 2000. Commissions and clearing fees per trade increased slightly to $11.93 in the first quarter of fiscal 2002 from $11.77 in the first quarter of fiscal 2001. This increase was due primarily to increased option trading by our clients, which generates higher commissions than equity trades, and the 11 addition of the NDB.com accounts which became part of our Ameritrade Plus(TM) product offering. These increases were partially offset by lower payment for order flow revenues. We expect our client segmentation strategy, which includes the Ameritrade Plus and Ameritrade Pro(TM) products, to continue to help mitigate the downward pressure on commissions and clearing fees per trade from lower payment for order flow revenues and other factors. Net interest revenue (interest revenue less client interest expense) decreased 41 percent to $26.0 million in the first quarter of fiscal 2002 from $43.9 million in the first quarter of fiscal 2001. This decrease was due primarily to a decrease of 56 percent in average client and correspondent receivables, a decrease of approximately 320 basis points in the average interest rate charged on such receivables, and an increase of 17 percent in average amounts payable to clients and correspondents in the first quarter of fiscal 2002 from the first quarter of fiscal 2001. These factors were partially offset by a 257 percent increase in average cash and investments, including cash and investments segregated in compliance with federal regulations, and a decrease of approximately 240 basis points in the average interest rate paid on client and correspondent payables in the first quarter of fiscal 2002 from the first quarter of fiscal 2001. We generally expect net interest revenue to grow as our account base grows. However, it will also be affected by changes in interest rates and fluctuations in the levels of client margin borrowing and deposits. Other revenues increased to $16.5 million in the first quarter of fiscal 2002 from $5.0 million in the first quarter of fiscal 2001, due primarily to the implementation during the second half of fiscal 2001 of a $2 per transaction fee for paper confirmations and a $15 per quarter fee on accounts that do not meet certain minimum levels of trading activity or assets. In addition, fees charged to third party broker-dealers for orders placed through the TradeCast licensed order entry software system also contributed to the increase. We acquired TradeCast effective April 2, 2001. EXPENSES EXCLUDING CLIENT INTEREST. Employee compensation and benefits expense decreased 16 percent to $32.9 million in the first quarter of fiscal 2002 from $39.4 million in the first quarter of fiscal 2001, due primarily to the effect of staff reductions during fiscal 2001. Full-time equivalent employees decreased 35 percent to 1,737 at the end of December 2001 from 2,676 at the end of December 2000. Through staff reductions during fiscal 2001, we estimate we will achieve approximately $25 million in annualized employee compensation and benefits savings. Communications expense increased 11 percent to $10.0 million in the first quarter of fiscal 2002 compared to $9.0 million in the first quarter of fiscal 2001, due primarily to additional communication expenses for TradeCast. Communication expenses are expected to increase at a slower rate than accounts and transactions processed, as the lower-cost Internet continues to be the predominant communication channel with our clients. We implemented electronic confirmations and statements during fiscal 2001, which we expect will further slow the growth of communications expense. Occupancy and equipment costs decreased 16 percent to $13.6 million in the first quarter of fiscal 2002 from $16.2 million in the first quarter of fiscal 2001. This decrease was due primarily to the effect of our facilities consolidation and related restructuring charge in the fourth quarter of fiscal 2001, partially offset by additional occupancy and equipment costs in Houston, Texas related to TradeCast. Depreciation and amortization decreased 17 percent to $6.7 million in the first quarter of fiscal 2002 from $8.1 million in the first quarter of fiscal 2001, due primarily to the discontinuation of goodwill amortization upon our adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", in the first quarter of fiscal 2002. The effect of the facilities consolidation and resulting restructuring charge in the fourth quarter of fiscal 2001 also contributed to the decrease. Professional services expense decreased 58 percent to $7.3 million in the first quarter of fiscal 2002 from $17.5 million in the first quarter of fiscal 2001. This decrease was primarily due to decreased usage of marketing and technology consulting services during the first quarter of fiscal 2002, compared to the first quarter of fiscal 2001. Interest on borrowings decreased 62 percent to $1.8 million in the first quarter of fiscal 2002, from $4.7 million in the first quarter of fiscal 2001, due to the conversion of $152.4 million of convertible subordinated notes in February 2001 and lower average interest rates and borrowings on our revolving credit agreements. As a result of the debt conversion, we will save approximately $8.8 million in annualized cash interest payments on the convertible subordinated notes. Other operating expenses decreased 37 percent to $6.1 million in the first quarter of fiscal 2002 from $9.7 million in the first quarter of fiscal 2001, primarily due to lower transaction processing volumes and the implementation of electronic statements and confirmations as an option for our clients. Advertising expenses decreased 77 percent to $14.6 million in the first quarter of fiscal 2002 from $63.5 million in the first quarter of fiscal 2001. The reduced level of advertising expenditures was principally due to adverse stock market conditions and lower media costs due to the slow economy. We have budgeted approximately $55 to $70 million for advertising for the remainder of fiscal 2002. 12 Income tax expense was $6.2 million in the first quarter of fiscal 2002 compared to income tax benefit of $14.1 million in the first quarter of fiscal 2001. The effective income tax rate in the first quarter of fiscal 2002 increased to approximately 41 percent compared to approximately 38 percent in the first quarter of fiscal 2001, due primarily to nondeductible items, which have the effect of increasing the effective rate during periods of profitability and decreasing the effective rate during periods of losses. LIQUIDITY AND CAPITAL RESOURCES We have historically financed the Company primarily through the use of funds generated from operations and from borrowings under our credit agreements. Our liquidity needs during the first three months of fiscal 2002 were financed primarily by operating cash flows. We plan to finance our capital and liquidity needs for the remainder of fiscal 2002 primarily from our operating cash flows and borrowings on our revolving credit facility. In addition, we may issue equity or debt securities. We may also consider selling, or entering into a forward contract to sell, some or all of our interest in Knight Trading Group, Inc. ("Knight"). If additional funds are raised through the issuance of equity securities, the percentage ownership of the stockholders may be reduced, stockholders may experience additional dilution in net book value per share or such equity securities may have rights, preferences or privileges senior to those of the holders of our common stock. There can be no assurance that additional financing will be available when needed on terms favorable to us, if at all. If adequate funds are not available on acceptable terms, we may be unable to develop or enhance our services and products, take advantage of future opportunities or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and operating results. Dividends from subsidiaries are another source of liquidity for the holding company. Some of our subsidiaries are subject to requirements of the Securities and Exchange Commission and the National Association of Securities Dealers relating to liquidity, capital standards, and the use of client funds and securities, which limit funds available for the payment of dividends to the Company. Under the SEC's Uniform Net Capital Rule (Rule 15c3-1 under the Securities Exchange Act of 1934), our broker-dealer subsidiaries are required to maintain at all times at least the minimum level of net capital required under Rule 15c3-1. This minimum net capital level is determined based upon an involved calculation described in Rule 15c3-1, but takes account of, among other things, each broker-dealer's "net debit items" which primarily are a function of client margin receivables at our broker-dealer subsidiaries. Since our net debit items can fluctuate significantly, our minimum net capital requirements can also fluctuate significantly from period to period. Historically, we have utilized our revolving credit facility as a mechanism to provide additional capital as needed to meet net capital requirements, and the balance on our revolving credit facility often has fluctuated significantly from period to period due to changes in our net capital requirements. CASH FLOW Cash provided by operating activities was $30.2 million in the first quarter of fiscal 2002, compared to $13.7 million in the first quarter of fiscal 2001. The increase in cash provided by operations during the first quarter of fiscal 2002 compared to the first quarter of fiscal 2001 was primarily due to the substantial reduction in advertising expenditures and a higher operating margin compared to the same period of the previous year. Cash used in investing activities was $2.7 million in the first quarter of fiscal 2002, compared to $14.7 million in the first quarter of fiscal 2001, due primarily to substantially lower capital expenditures during the first quarter of fiscal 2002 compared to the same period of the previous year. Cash used in financing activities was $10.0 million in the first quarter of fiscal 2002, compared to $57.5 million in the first quarter of fiscal 2001. The financing activities in both periods consisted primarily of net repayments on our loan agreements (see "Loan Agreement"). LOAN AGREEMENT On December 28, 2001, we entered into an amended and restated revolving credit agreement. The revolving credit agreement, as amended, permits borrowings up to $20 million through December 27, 2002, and is secured primarily by 4.0 million shares of our Knight common stock and our stock in our subsidiaries. We may borrow up to 70 percent of the fair market value of the pledged Knight stock, subject to certain limitations. If, on any day, the principal loan amount outstanding exceeds 80 percent of the fair market value of the pledged Knight stock, we are required, within two business days, to pay down the loan or pledge additional Knight stock such that the principal loan amount then outstanding would not exceed 70 percent of the then current fair market value of the pledged Knight stock. The interest rate on borrowings, determined on a monthly basis, is equal to the greater of (i) the national prime rate or (ii) 90-day LIBOR plus 2.5 percent, subject to a minimum rate of 5.0 percent. At December 31, 2001, the interest rate on this borrowing was 5.0 percent. We also pay a maintenance fee of 0.375 percent of the 13 unused borrowings through the maturity date. We had outstanding indebtedness under the revolving credit agreement of $12.5 million at December 31, 2001 and outstanding indebtedness under the prior revolving credit agreement of $22.5 million at September 28, 2001. In January 2002, we repaid the remaining $12.5 million of our outstanding indebtedness under the revolving credit agreement. CONVERTIBLE SUBORDINATED NOTES In August 1999, we issued $200 million of 5.75 percent convertible subordinated notes due August 1, 2004. The holders of the notes may convert the notes into shares of Class A Common Stock at any time prior to the close of business on the maturity date of the notes, unless previously redeemed or repurchased, at a conversion rate of 30.7137 shares per $1,000 principal amount of notes (equivalent to an approximate conversion price of $32.56 per share), subject to adjustment in certain circumstances. Interest on the notes is payable on February 1 and August 1 of each year. The notes are not subject to redemption prior to August 6, 2002, and we may, at our option, redeem the notes at a premium on or after such date, in whole or in part, upon notice to each holder not less than 30 days nor more than 60 days prior to the redemption date. In February 2001, $152.4 million of our convertible subordinated notes were converted for approximately 4.7 million shares of Class A Common Stock and $58.7 million of cash. As of December 31, 2001, the Company had approximately $47.6 million of the 5.75 percent convertible subordinated notes outstanding. These notes are convertible into approximately 1.5 million shares of Class A Common Stock. OTHER CONTRACTUAL OBLIGATIONS We are obligated to pay our Chief Executive Officer ("CEO") $15.6 million in deferred compensation, adjusted for investment income or losses on the $15.6 million amount, pursuant to our employment agreement with the CEO. Such payment will be made not sooner than the day after the CEO's employment with the Company terminates. At December 31, 2001 and September 28, 2001, we had an equity index swap arrangement with a notional amount of $15.6 million for the purpose of hedging our obligation under this deferred compensation plan. Changes in the fair value of this instrument are offset by changes in our obligation to our CEO. As of December 31, 2001, our obligations under operating leases had not changed significantly from the amounts disclosed in our consolidated financial statements as of September 28, 2001. ITEM 3. - 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 seek to control the risks associated with our client activities by requiring clients to maintain margin collateral in compliance with various regulatory and internal guidelines. We monitor required margin levels daily and, pursuant to such guidelines, require our clients to deposit additional collateral, or to reduce positions, when necessary. As a fundamental part of our brokerage business, we hold short-term interest earning assets, mainly funds required to be segregated in compliance with federal regulations for clients. Such funds totaled $2.4 billion at December 31, 2001 and $2.0 billion at September 28, 2001. We invest such funds primarily in short-term fixed-rate U.S. Treasury Bills and repurchase agreements. Our interest earning assets are financed by short-term interest bearing liabilities totaling $3.3 billion at December 31, 2001 and $2.8 billion at September 28, 2001 in the form of client cash balances. At December 31, 2001, we had an additional $60.1 million of interest bearing indebtedness outstanding, consisting of $47.6 million of convertible subordinated notes, which bear interest at a fixed rate of 5.75 percent, and $12.5 million under our revolving credit agreement, which bears interest at a floating rate. At September 28, 2001, we had $70.1 million of other interest bearing indebtedness outstanding, consisting of $47.6 million of convertible subordinated notes and $22.5 million under our revolving credit agreement. We earn a net interest spread on the difference between amounts earned on client margin loans and amounts paid on client credit balances. Since we establish the rate paid on client cash balances, a substantial portion of our interest rate risk is under our direct management. Our annual interest payments on our revolving credit agreement would increase or decrease by approximately $125,000 for each one percent change in interest rates based on the amount outstanding at December 31, 2001. We hold a marketable equity security, which is recorded at fair value of $87.1 million ($52.6 million net of tax) at December 31, 2001 and has exposure to market price risk. The same security was recorded at fair value of $61.0 million ($36.9 million net of tax) at September 28, 2001. This risk is estimated as the potential loss in fair value resulting from a hypothetical 10 percent adverse change in prices quoted by the stock exchanges and was approximately $8.7 million at December 31, 2001. Actual results may differ. 14 Our revenues and financial instruments are denominated in U.S. dollars, and we generally do not invest in derivative financial instruments or derivative commodity instruments. At December 31, 2001 and September 28, 2001, we had an equity index swap arrangement with a notional amount of $15.6 million for the purpose of hedging our obligation under our deferred compensation plan for our CEO. Changes in the fair value of this instrument are offset by changes in our obligation to our CEO. PART II - OTHER INFORMATION ITEM 1. - LEGAL PROCEEDINGS In September 1998, a putative class action complaint was filed against the Company by Zannini, et al. in the District Court of Douglas County, Nebraska claiming the Company was not able to handle the volume of subscribers to its Internet brokerage services. The complaint, as amended, seeks injunctive relief enjoining alleged deceptive, fraudulent and misleading practices, equitable relief compelling the Company to increase capacity, and unspecified compensatory damages. In May 2001, the Company filed a motion for summary judgment in the matter, which the plaintiffs opposed. The court granted summary judgment for the Company on January 2, 2002. The plaintiffs have filed a notice of appeal. The Company and its subsidiaries are parties to a number of other legal actions. In management's opinion, the Company has adequate legal defenses respecting each of these actions and does not believe that any such matters, either individually or in the aggregate, will materially affect the Company's results of operations or its financial position. ITEM 2. - CHANGES IN SECURITIES AND USE OF PROCEEDS On December 5, 2001, the Company issued 599,264 shares of its Class A Common Stock with a fair value of approximately $3.6 million in connection with its May 25, 2000 acquisition of Ten Bagger, Inc. ("Ten Bagger"). These shares represent the third and final post-closing payment required under the purchase agreement during the 18-month period following the acquisition date. The issuance of such shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. Such shares were issued to the 19 former shareholders of Ten Bagger. ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS: 3.1 Restated Certificate of Incorporation of Ameritrade Holding Corporation dated July 1, 1999 (incorporated by reference to Exhibit 3.6 of the Company's quarterly report on Form 10-Q filed on August 9, 1999) 3.2 Bylaws (incorporated by reference to Exhibit 3.2 of the Company's Registration Statement on Form S-1 (Registration No. 333-17495) filed on February 7, 1997) 10.1 Amended and Restated Revolving Credit Agreement dated as of December 28, 2001, among Ameritrade Holding Corporation and First National Bank of Omaha 10.2 Amended and Restated Stock Pledge Agreement dated as of December 28, 2001, among Ameritrade Holding Corporation and First National Bank of Omaha 15.1 Independent accountants' awareness letter 15 (b) REPORTS ON FORM 8-K: On November 20, 2001, a Form 8-K/A was filed under Item 7 presenting the financial information related to the Company's acquisition of all the shares of common stock of National Discount Brokers Corporation. The Form 8-K/A included the following financial statements: - Unaudited Condensed Financial Statements of National Discount Brokers Corporation for the six months ended June 30, 2001 and 2000 - Audited Financial Statements and Schedules of National Discount Brokers Corporation as of December 31, 2000 and for the seven months then ended with accompanying Independent Auditors' Report - Audited Financial Statements and Schedules of National Discount Brokers Corporation as of May 31, 2000 and for the year then ended with accompanying Report of Independent Accountants - Audited Financial Statements and Schedules of Triak Services Corp. (predecessor of National Discount Brokers Corporation) as of May 31, 1999 and for the year then ended with accompanying Report of Independent Accountants - Audited Financial Statements and Schedules of Triak Services Corp. (predecessor of National Discount Brokers Corporation) as of May 31, 1998 and for the year then ended with accompanying Independent Auditors' Report - Ameritrade Holding Corporation Unaudited Pro Forma Combined Condensed Balance Sheet as of June 29, 2001 - Ameritrade Holding Corporation Unaudited Pro Forma Combined Condensed Statement of Operations for the Year Ended September 29, 2000 - Ameritrade Holding Corporation Unaudited Pro Forma Combined Condensed Statement of Operations for the Nine Months Ended June 29, 2001 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: February 13, 2002 Ameritrade Holding Corporation (Registrant) by: /s/ Joseph H. Moglia -------------------- Joseph H. Moglia Chief Executive Officer (Principal Executive Officer) by: /s/ John R. MacDonald --------------------- John R. MacDonald Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 17