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 29, 2006
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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
(State or other
jurisdiction of
incorporation or organization)
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82-0543156
(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
$4.9 billion computed by reference to the closing sale
price of the stock on the Nasdaq Stock Market on March 31,
2006, the last trading day of the registrants most
recently completed second fiscal quarter.
The number of shares of common stock outstanding as of
November 30, 2006 was 600,538,184 shares.
DOCUMENTS
INCORPORATED BY REFERENCE
Definitive Proxy Statement relating to the registrants
2007 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 the
last Friday of September.
PART I
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. The Company began operations as a retail discount
securities brokerage firm in 1975.
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 networks of independent registered investment advisors.
Our services appeal to a broad market of independent, value
conscious retail investors, traders, financial planners and
institutions. We use our low-cost platform to offer brokerage
services to retail investors and institutions under a low-cost
commission structure that is generally simpler than that of most
of our major competitors.
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 market share and profitability.
Our long-term growth strategy includes increasing our focus
beyond active traders to obtain a greater market share from
long-term investors and registered investment advisors. We
strive to enhance the client experience while delivering greater
value to stockholders. 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
registered investment advisors to our retail brokerage services.
This focused strategy is designed to allow us to maintain our
low operating cost structure and still offer our clients
outstanding products and services.
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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
investors and 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 leverage.
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Continue to offer innovative technologies and service
enhancements to our clients. We have been an
innovator in our industry over our
30-year
history. We continually strive to provide our clients with
choice
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and the ability to customize their trading experience. We
provide greater choice by tailoring our features and
functionality to meet the specific needs of investors.
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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. On January 24,
2006, we completed our acquisition of 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 networks of independent registered investment
advisors. We also now provide our clients with an 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 the
acquisition of TD Waterhouse.
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During fiscal 2004, we acquired Bidwell & Company and
purchased the retail client accounts of BrokerageAmerica, LLC
and Investex Securities Group, Inc. In fiscal 2005, we purchased
the retail client accounts of JB Oxford & Company.
These acquisitions followed the merger with Datek Online
Holdings Corp. (Datek) in fiscal 2002 and the
purchase of National Discount Brokers Corporation
(NDB) in fiscal 2001. We intend to continue to be an
acquirer by searching for other firms that fit one or more of
our criteria.
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Leverage the TD AMERITRADE brand. We believe
that we have a superior brand identity and offering. Our
advertising has established TD AMERITRADE as a significant brand
in the retail brokerage market.
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Acquisition
of TD Waterhouse
On January 24, 2006, we completed the acquisition of 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
(TD). We purchased from TD (the Share
Purchase) all of the capital stock of TD Waterhouse 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 percent
of the outstanding shares of the Company after giving effect to
the transaction. Upon the completion of the transaction, we
changed our name to TD AMERITRADE Holding Corporation and
the authorized shares of common stock of the Company were
increased from 650 million to one billion. 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. We have 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. 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.
Pursuant to the Purchase Agreement, 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 above certain thresholds
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 Purchase Agreement, TD was given rights
to have its shares of common stock of the Company registered for
resale and TD licensed 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.
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In connection with the Purchase Agreement, the Company, TD and
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 certain governance
arrangements and contains various 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 of TD
Waterhouse 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. As of September 29, 2006, we estimate that we
have realized annualized pre-tax revenue opportunities of over
$300 million and annualized pre-tax cost savings of
approximately $143 million.
Client
Offerings
We deliver products and services aimed at providing a
comprehensive, personalized experience for active traders,
long-term investors and registered investment advisors. Our
client offerings include:
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TD
AMERITRADE®
is our core offering for self-directed retail investors. We
offer sophisticated tools and services, including Streamer
Suitetm,
TD AMERITRADE command center,
SnapTickettm,
Trade
Triggerstm,
QuoteScopetm,
Advanced
Analyzertm
and Market Motion Detector. 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 Registered Investment Advisors (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 business, and at the same
time help 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 introduced in October 2004 that
tailors 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 a proprietary automated five-step
process centered on an investors goals and risk tolerance.
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Ameritrade Corporate Services provides self-directed
brokerage services to employees and executives of corporations,
either directly in partnership with the corporation or through
joint marketing relationships with third-party administrators,
such as 401(k) providers and employee benefit consultants.
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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 track recognized indexes. They
are similar to mutual funds, except they trade the same way that
a stock trades, on a stock exchange. We have launched an online
resource dedicated to ETFs, offering tools, education and
information for active and long-term investors seeking
alternatives for pursuing their investment strategies.
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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 Web site.
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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 and municipal bonds
as well as mortgage-backed securities and certificates of
deposit.
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Margin lending. We extend credit to clients
who 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.
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We provide our clients with an array of channels to access our
products and services. These include 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 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 have 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 client service and support through a variety of
access points, such as:
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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 of the original
message.
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Client service representatives. For clients
who choose to call or whose inquiries necessitate calling one of
our client service representatives, we provide a toll-free
number that connects to advanced call handling systems. These
systems provide automated answering and directing of calls to
the proper department. Our systems also allow linkage between
caller identification and the client database to give the client
service representative immediate access to the clients
account data at the time the call is received. Client service
representatives are available 24 hours a day, seven days a
week (excluding market holidays).
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We strive to provide the best client service in the industry as
measured by: (1) speed of response time on telephone calls;
(2) turnaround time on responding to client inquiries; and
(3) client satisfaction with the account relationship.
Technology
and Information Systems
Technology is a core function for our business and is critical
to our goal of providing the best execution at the best value to
our clients. Our operations require reliable, scalable systems
that can handle complex financial transactions for our clients
with speed and accuracy. We maintain sophisticated and
proprietary technology that automates traditionally
labor-intensive securities transactions. Our ability to
effectively leverage and adopt new technology to improve our
services is a key component of our success.
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We continue to make investments in technology and information
systems. Since 1999, we have spent a significant amount of
resources to increase capacity and improve speed and
reliability. To provide for system continuity during potential
power outages, we also have equipped our data centers with
uninterruptible power supply units, as well as
back-up
generators.
Our current capacity for trades is approximately 600,000 trades
per day. During fiscal 2006, our clients averaged approximately
217,000 trades per day. Our highest average client trades per
day for any single month occurred in May 2006, when clients
averaged approximately 280,000 trades per day. The highest
number of trades our clients have made in any single day is
349,000. Because of the scalability of our system, we believe
that we would be able to increase capacity to approximately one
million trades per day at an estimated technology cost of
$5 million.
Advertising
and Marketing
We intend to continue to grow and increase our market share by
advertising through online avenues, television, print, direct
mail and our own Web sites. 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 future
dollars in these programs and obtain a greater yield from our
marketing dollars. Additionally, through the use of our database
tools, we are working to more efficiently determine the needs of
our various client segments and tailor our services to their
individual needs. We intend to utilize this system to strengthen
relationships with our clients and support marketing campaigns
to attract new clients. All of our methods and uses of client
information are disclosed in our privacy statement.
All of our brokerage-related communications with the public are
regulated by the National Association of Securities Dealers,
Inc. (NASD) or New York Stock Exchange, Inc.
(NYSE).
Clearing
Operations
Our subsidiaries, Ameritrade, Inc. and National Investor
Services Corp. (NISC), provide clearing and
execution services to our introducing broker-dealer subsidiary,
TD AMERITRADE, Inc. Clearing services include the confirmation,
receipt, settlement, delivery and record-keeping functions
involved in the processing of securities transactions. Our
clearing broker-dealer subsidiaries provide 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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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, proxies and other shareholder
information to clients.
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We make margin loans to clients collateralized by client
securities. Our margin lending is subject to the margin rules of
the Board of Governors of the Federal Reserve System
(Federal Reserve), the margin requirements of the
NASD and our own internal policies. By permitting clients to
purchase on margin, we take the risk that a market decline could
reduce the value of the collateral securing our loan to an
amount that is less than the clients indebtedness to us.
Under applicable securities laws and regulations, we are
obligated to require the client to maintain net equity in the
account equal to at least 25 percent of the value of the
securities in the account. Our current internal requirement,
however, is that the clients net equity not be allowed to
fall below 30 percent of the value of the securities in the
account. If it does fall below 30 percent, we require the
client to increase the accounts net equity to
35 percent of the value of the securities in the account.
These requirements can be, and often are, raised as we deem
necessary for certain accounts, groups of accounts, individual
securities or groups of securities.
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 such brokerage firms as Charles
Schwab & Co., Inc., E*TRADE Financial Corporation,
Fidelity Investments and Scottrade, Inc. We also encounter
competition from established full-commission brokerage firms
including such full service brokerage firms as Merrill Lynch and
Smith Barney as well as financial institutions, mutual fund
sponsors and other organizations, some of which provide online
brokerage services.
Regulation
The securities industry is subject to extensive regulation under
federal and state law. In general, broker-dealers are required
to register with the SEC and to be members of the NASD or the
NYSE. Our broker-dealer subsidiaries are subject to the
requirements of the Securities Exchange Act of 1934 (the
Exchange Act) and the rules promulgated thereunder
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
under various state laws in all 50 states and the District
of Columbia, including registration requirements.
In their capacity as securities clearing firms, Ameritrade, Inc.
and NISC are members of The Depository Trust & Clearing
Corporation and The Options Clearing Corporation, each of which
is registered as a clearing agency with the SEC. As members of
these clearing agencies, Ameritrade, Inc. and NISC are required
to comply with the rules of such clearing agencies, including
rules relating to possession and control of client funds and
securities, margin lending and execution and settlement of
transactions.
Margin lending activities are subject to limitations imposed by
regulations of the Federal Reserve and the NASD. In general,
these regulations provide that in the event of a significant
decline in the value of securities collateralizing a margin
account, we are required to obtain additional collateral from
the borrower.
Intellectual
Property Rights
Our success and ability to compete are dependent to a
significant degree on our intellectual property, which includes
our proprietary technology, trade secrets and client base. We
rely on numerous methods of intellectual property protection to
protect our intellectual property, including copyright, trade
secret, trademark, domain name,
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patent and contract law and have utilized the various methods
available to us, including registrations with the
United States Patent and Trademark office for various
properties, as well as entry into written licenses and other
technology agreements with third parties. The source and object
code for our proprietary software is also protected using
applicable methods of intellectual property protection and
general protections afforded to confidential information. In
addition, it is our policy to enter into confidentiality and
intellectual property ownership agreements with our associates
and confidentiality and noncompetition agreements with our
independent contractors and business partners, and to control
access to and distribution of our intellectual property.
Associates
As of September 29, 2006, we employed 3,947 full-time
equivalent employees. The number of employees has increased from
2,052 full-time equivalent employees as of the end of
fiscal 2005, primarily due to the acquisition of TD Waterhouse.
None of our employees is covered under a collective bargaining
agreement. We believe that our relations with our employees are
good.
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 financial information about the Companys segments and
geographic areas.
Internet
Address
We maintain a Web site where additional information concerning
our business can be found. The address of that Web site is
www.amtd.com. We make available free of charge on our Web site
our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports, as soon as reasonably
practicable after we electronically file or furnish such
materials to the SEC.
Item 1A. Risk
Factors
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, the invasion of Iraq in 2003 and other
events have resulted in 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, 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.
9
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 collateralized by client
securities and periodically borrow and lend securities to cover
trades. A significant portion of our net revenues is derived
from interest on margin loans. By permitting clients to purchase
securities on margin, we are subject to risks inherent in
extending credit, especially during periods of rapidly declining
markets in which the value of the collateral held by us could
fall below the amount of a clients indebtedness. 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 subsidiaries, Ameritrade, Inc. and NISC,
provide 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. Self-clearing securities firms
are subject to substantially more regulatory control and
examination than brokers that rely on others to perform those
functions. Errors in performing clearing functions, including
clerical and other errors related to the handling of funds and
securities held by us on behalf of clients, could lead to civil
penalties imposed by applicable authorities 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 decreased
significantly over the past several years. These payments could
continue to 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 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. Though all of our core computer systems and applications
are fully redundant and distributed over two sites, 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 invested significant amounts
to upgrade the reliability and scalability of our systems and
added hardware to
10
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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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, have experienced increased
losses during fiscal 2006 related to clients login and
password information being compromised while using public
computers. 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 affect 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.
Substantial
competition could reduce our market share and harm our financial
performance.
The market for electronic brokerage services is continually
evolving and intensely competitive. There has been substantial
price competition, including various free trade offers, in the
industry recently. We expect the 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.
11
We
will need to introduce new products and services to remain
competitive.
Our future success depends in part on our ability to develop and
enhance our products and services. There are significant
technical and financial risks in the development of new or
enhanced products and services, including the risk that we might
be unable to effectively use new technologies or adapt our
services to emerging industry standards, or develop, introduce
and market enhanced or new products and services. In addition,
the adoption of new Internet, networking or telecommunications
technologies or other technological changes could require us to
incur substantial expenditures to modify or adapt our services
or infrastructure.
Risk
Factors Relating to the Regulatory Environment
Failure
to comply with net capital requirements could adversely affect
our business.
The SEC, NASD and various other regulatory agencies have
stringent rules with respect to the maintenance of specific
levels of net capital by securities broker-dealers. Net capital
is a measure, defined by the SEC, of a broker-dealers
readily available liquid assets, reduced by its total
liabilities other than approved subordinated debt. All of our
broker-dealer subsidiaries are required to comply with net
capital requirements. If we fail to maintain the required net
capital, the SEC could suspend or revoke our registration, or
the NASD could expel us from membership, which could ultimately
lead to our liquidation, 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 operations that require the intensive use of
capital would be limited. A large operating loss or charge
against net capital could adversely affect our ability to
maintain or expand our business.
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, NASD and other
self-regulatory organizations and state and foreign regulators
can, among other things, censure, fine, issue
cease-and-desist
orders to, suspend or expel a broker-dealer or any of its
officers or employees. While we neither actively solicit new
accounts nor 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 make up approximately 1.5 percent of
our 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 country or region.
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.
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.
12
We continue to devote substantial time and resources to the
documentation and testing of our controls, and to planning for
and implementation of remedial efforts in those instances where
remediation is indicated. If we fail to maintain the adequacy of
our internal controls, as such standards are modified,
supplemented or amended from time to time, we could be subject
to regulatory actions, civil or criminal penalties or
shareholder litigation. In addition, failure to maintain
adequate internal controls could result in financial statements
that do not accurately reflect our financial condition, results
of operations and cash flows.
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 of our securities, borrowings
or a combination of these methods.
We cannot be certain that we will be able to continue to
identify and to consummate strategic transactions and no
assurance can be given with respect to the timing, likelihood or
business effect of any possible transaction. For example, in
many cases we begin negotiations that we subsequently decide to
suspend or terminate for a variety of reasons. However,
opportunities may arise from time to time that we will evaluate.
Any transactions that we consummate would involve risks and
uncertainties to us. These risks could cause the failure of any
anticipated benefits of an acquisition to be realized, which
could have a material adverse effect on our revenues and
profitability.
Although
we expect benefits to result from the acquisition of TD
Waterhouse, we may not fully realize those benefits because of
remaining integration challenges.
Our failure to meet the challenges involved in integrating the
operations of Ameritrade and TD Waterhouse successfully or
otherwise to realize any of the anticipated benefits of the
acquisition of TD Waterhouse, including anticipated cost
savings, could seriously harm our results of operations.
Realizing the benefits of the acquisition of TD Waterhouse will
depend in part on completing the integration of technology,
operations and personnel. The integration of the companies is a
complex, time-consuming and expensive process that, without
proper planning and effective and timely implementation, could
significantly disrupt our business.
The ongoing challenges in this integration include the following:
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demonstrating to the clients of Ameritrade and to the clients of
TD Waterhouse that the integration of TD Waterhouse will
not result in adverse changes in client service standards or
business focus and helping clients conduct business easily with
the combined company;
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consolidating and rationalizing technology platforms and
administrative infrastructures;
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coordinating sales and marketing efforts to effectively
communicate the capabilities of the combined company;
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13
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integrating and rationalizing clearing platforms;
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minimizing the diversion of management attention from ongoing
business concerns; and
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combining the corporate cultures, maintaining employee morale
and retaining key employees.
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We may not successfully integrate the operations of Ameritrade
and TD Waterhouse in a timely manner, or at all, and we may not
realize the anticipated benefits or synergies of the acquisition
of TD Waterhouse to the extent, or in the timeframe, forecasted.
The anticipated benefits and synergies include cost savings
associated with anticipated restructurings and other operational
efficiencies, greater economies of scale and revenue enhancement
opportunities. However, these anticipated benefits and synergies
assume a successful integration and are based on projections,
which are inherently uncertain, and other assumptions. Even if
integration is successful, anticipated benefits and synergies
may not be achieved. In addition to the integration risks
discussed above, our ability to realize these benefits and
synergies could be adversely impacted by practical or legal
constraints on our ability to combine operations or implement
workforce reductions.
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.
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.
Our
corporate debt level may limit our ability to obtain additional
financing.
In connection with the payment of the special cash dividend of
$6.00 per share and to fund working capital requirements
after the acquisition of TD Waterhouse, we borrowed
approximately $1.9 billion. 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
fund these cash requirements by alternative financing. The
degree to which we
14
may be leveraged as a result of the indebtedness incurred in
connection with payment of the special dividend or otherwise
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 29, 2006, 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, own approximately 39.6 percent and
20.4 percent of the outstanding voting securities of TD
AMERITRADE, respectively. TD is permitted under the terms of a
stockholders agreement to own up to 39.9 percent of the
outstanding shares of TD AMERITRADE common stock during the
three years following the January 24, 2006 closing of the
transaction, up to 45 percent 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 percent of the
outstanding shares of TD AMERITRADE. As a result, TD and the
Ricketts holders generally 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 generally 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
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.
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. The parties have not
established any other formal procedures for TD AMERITRADE and TD
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.
15
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.
Item 1B. Unresolved
Staff Comments
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. Also in the Omaha metropolitan
area, we lease approximately 154,000 square feet for an
operations center as well as other locations totaling
approximately 23,000 square feet. The leases on these other
Omaha-area locations expire on various dates from 2008 through
2009. 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,
Florida, Illinois, Kansas, Maryland, Missouri, New Jersey, New
York, Oregon, Pennsylvania, Texas and Utah. 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 The nature of the Companys
business subjects it to lawsuits, arbitrations, claims and other
legal proceedings. We cannot predict with certainty the outcome
of pending legal proceedings. A substantial adverse judgment or
other resolution regarding the proceedings could have a material
adverse effect on the Companys financial condition,
results of operations and cash flows. However, in the opinion of
management, after consultation with legal counsel, the Company
has adequate legal defenses with respect to the legal
proceedings to which it is a defendant or respondent and the
outcome of these pending proceedings is not likely to have a
material adverse effect on the financial condition, results of
operations or cash flows of the Company.
Net Capital Matter In November 2004, the NASD
initiated an inquiry into a transfer of client cash balances
held at the Companys broker-dealer subsidiary, Ameritrade,
Inc., to FDIC-insured deposit accounts held at banks. On
November 12, 2004, the Companys broker-dealer
subsidiary, Ameritrade, Inc., was notified by the staff of the
NASD and the staff of the SEC Division of Market Regulation
(collectively the Staffs) that they believed that
for regulatory purposes certain funds held in banks on behalf of
clients are liabilities and assets of Ameritrade, Inc. rather
than liabilities and assets only of the banks. The resulting
assets have not been allowed for purposes of Ameritrade,
Inc.s regulatory net capital calculation. Accordingly, in
the Staffs view Ameritrade, Inc.s net capital was
below its minimum amount required under Exchange Act
Rule 15c3-1.
Ameritrade, Inc. cured the asserted deficiency on
November 15, 2004, the first business day following the
notification.
On November 14, 2005, the NASD advised Ameritrade, Inc.
that the NASD Staff made a preliminary determination to
recommend disciplinary action against the Company based on
allegations that it violated SEC net capital and customer
protection rules and NASD conduct rules. Ameritrade, Inc.
submitted a response setting forth the reasons it believes that
the NASD should not bring a disciplinary action. Conditioned
upon the final agreement
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of the NASD, the Company currently expects Ameritrade, Inc. to
settle this matter for an amount that is not expected to have a
material effect on the Companys financial condition,
results of operations, or cash flows. This matter had no impact
on the Companys results of operations or net cash flows
for any period presented in this annual report on
Form 10-K.
Other Regulatory Matters The Company is in
discussions with its regulators about other matters raised
during regulatory examinations or otherwise subject to their
inquiry. These matters could result in censures, fines or other
sanctions. Management believes the outcome of any resulting
actions will not be material to the Companys financial
condition, results of operations or cash flows. However, the
Company is unable to predict the outcome of these matters.
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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 2006.
PART II
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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 Global Select Market. The
prices reflect inter-dealer prices and do not include retail
markups, markdowns or commissions.
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Common Stock Price
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For the Fiscal Year Ended
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For the Fiscal Year Ended
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September 29, 2006
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September 30, 2005
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High
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Low
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High
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Low
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First Quarter
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$
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25.00
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$
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18.93
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$
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14.61
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$
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11.21
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Second Quarter*
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$
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26.37
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$
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18.86
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$
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14.38
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$
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10.02
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Third Quarter
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$
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22.19
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$
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13.50
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$
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19.00
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$
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9.91
|
|
Fourth Quarter
|
|
$
|
19.18
|
|
|
$
|
13.30
|
|
|
$
|
22.25
|
|
|
$
|
18.04
|
|
|
|
|
* |
|
In connection with the 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 27, 2006 was
$17.09 per share. As of that date there were 730 holders of
record of our common stock based on information provided by our
transfer agent. The number of stockholders of record does not
reflect the actual number of individual or institutional
stockholders that own our stock because most stock is held in
the name of nominees. Based on information available to us,
there are approximately 131,000 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.
17
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuer Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
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, 2006
July 28, 2006
|
|
|
7,951
|
|
|
$
|
15.78
|
|
|
|
|
|
|
|
N/A
|
|
July 29, 2006
August 25, 2006
|
|
|
1,080,000
|
|
|
$
|
17.66
|
|
|
|
1,080,000
|
|
|
|
10,920,000
|
|
August 26, 2006
September 29, 2006
|
|
|
2,720,000
|
|
|
$
|
17.66
|
|
|
|
2,720,000
|
|
|
|
8,200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Three months
ended September 29, 2006
|
|
|
3,807,951
|
|
|
$
|
17.66
|
|
|
|
3,800,000
|
|
|
|
8,200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 from 12 million shares to
32 million shares. This program is the only program
currently in effect and there were no programs that expired
during the fourth quarter of fiscal 2006. The shares repurchased
during July 2006 were repurchased from an employee for income
tax withholding in connection with a stock distribution from the
Companys Executive Deferred Compensation Program.
J. Joe Ricketts, Chairman and Founder of the Company, made
open-market purchases during the fourth quarter of fiscal 2006.
The following table summarizes purchases reported by J. Joe
Ricketts on Forms 4:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
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, 2006
July 28, 2006
|
|
|
7,288,342
|
|
|
$
|
15.62
|
|
|
|
|
|
|
|
|
|
July 29, 2006
August 25, 2006
|
|
|
6,800,000
|
|
|
$
|
17.90
|
|
|
|
|
|
|
|
|
|
August 26, 2006
September 29, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Three months
ended September 29, 2006
|
|
|
14,088,342
|
|
|
$
|
16.72
|
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
Item 6.
|
Selected
Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended*
|
|
|
|
Sept. 29,
|
|
|
Sept. 30,
|
|
|
Sept. 24,
|
|
|
Sept. 26,
|
|
|
Sept. 27,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Consolidated Statements of
Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions and transaction fees
|
|
$
|
727,407
|
|
|
$
|
523,985
|
|
|
$
|
560,052
|
|
|
$
|
472,760
|
|
|
$
|
252,526
|
|
Asset-based revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest revenue
|
|
|
1,031,971
|
|
|
|
540,348
|
|
|
|
278,550
|
|
|
|
184,175
|
|
|
|
128,649
|
|
Brokerage interest expense
|
|
|
(335,820
|
)
|
|
|
(141,399
|
)
|
|
|
(41,861
|
)
|
|
|
(33,192
|
)
|
|
|
(24,564
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest revenue
|
|
|
696,151
|
|
|
|
398,949
|
|
|
|
236,689
|
|
|
|
150,983
|
|
|
|
104,085
|
|
Money market deposit account fees
|
|
|
185,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market and other mutual fund
fees
|
|
|
139,586
|
|
|
|
25,051
|
|
|
|
21,425
|
|
|
|
14,662
|
|
|
|
13,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total asset-based revenues
|
|
|
1,020,751
|
|
|
|
424,000
|
|
|
|
258,114
|
|
|
|
165,645
|
|
|
|
118,074
|
|
Other revenues
|
|
|
55,373
|
|
|
|
55,168
|
|
|
|
61,947
|
|
|
|
74,849
|
|
|
|
60,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
1,803,531
|
|
|
|
1,003,153
|
|
|
|
880,113
|
|
|
|
713,254
|
|
|
|
430,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
350,079
|
|
|
|
180,579
|
|
|
|
154,792
|
|
|
|
172,159
|
|
|
|
133,897
|
|
Fair value adjustments of
compensation- related derivative instruments
|
|
|
(1,715
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clearing and execution costs
|
|
|
73,049
|
|
|
|
26,317
|
|
|
|
30,610
|
|
|
|
35,711
|
|
|
|
19,086
|
|
Communications
|
|
|
65,445
|
|
|
|
35,663
|
|
|
|
39,853
|
|
|
|
41,420
|
|
|
|
31,429
|
|
Occupancy and equipment costs
|
|
|
74,638
|
|
|
|
43,411
|
|
|
|
42,353
|
|
|
|
57,091
|
|
|
|
57,060
|
|
Depreciation and amortization
|
|
|
21,199
|
|
|
|
10,521
|
|
|
|
11,066
|
|
|
|
13,917
|
|
|
|
26,170
|
|
Amortization of acquired
intangible assets
|
|
|
42,286
|
|
|
|
13,887
|
|
|
|
12,158
|
|
|
|
17,791
|
|
|
|
1,775
|
|
Professional services
|
|
|
87,521
|
|
|
|
30,630
|
|
|
|
27,381
|
|
|
|
31,121
|
|
|
|
25,753
|
|
Interest on borrowings
|
|
|
93,988
|
|
|
|
1,967
|
|
|
|
2,581
|
|
|
|
5,076
|
|
|
|
5,110
|
|
Other
|
|
|
45,383
|
|
|
|
22,689
|
|
|
|
17,798
|
|
|
|
15,205
|
|
|
|
12,986
|
|
Advertising
|
|
|
164,072
|
|
|
|
92,312
|
|
|
|
100,364
|
|
|
|
90,415
|
|
|
|
72,638
|
|
Fair value adjustments of
investment-related derivative instruments
|
|
|
11,703
|
|
|
|
(8,315
|
)
|
|
|
(17,930
|
)
|
|
|
46,668
|
|
|
|
|
|
Restructuring and asset impairment
charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,991
|
|
|
|
63,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1,027,648
|
|
|
|
449,661
|
|
|
|
421,026
|
|
|
|
532,565
|
|
|
|
449,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before other income
and income taxes
|
|
|
775,883
|
|
|
|
553,492
|
|
|
|
459,087
|
|
|
|
180,689
|
|
|
|
(18,517
|
)
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on disposal of investments
|
|
|
81,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income (loss)
|
|
|
857,305
|
|
|
|
553,492
|
|
|
|
459,087
|
|
|
|
180,689
|
|
|
|
(18,517
|
)
|
Provision for income taxes
|
|
|
330,546
|
|
|
|
213,739
|
|
|
|
176,269
|
|
|
|
72,048
|
|
|
|
10,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
526,759
|
|
|
$
|
339,753
|
|
|
$
|
282,818
|
|
|
$
|
108,641
|
|
|
$
|
(28,963
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
0.97
|
|
|
$
|
0.84
|
|
|
$
|
0.68
|
|
|
$
|
0.25
|
|
|
$
|
(0.13
|
)
|
Diluted earnings (loss) per share
|
|
$
|
0.95
|
|
|
$
|
0.82
|
|
|
$
|
0.66
|
|
|
$
|
0.25
|
|
|
$
|
(0.13
|
)
|
Weighted average shares
outstanding basic
|
|
|
544,307
|
|
|
|
404,215
|
|
|
|
417,629
|
|
|
|
427,376
|
|
|
|
227,327
|
|
Weighted average shares
outstanding diluted
|
|
|
555,465
|
|
|
|
413,167
|
|
|
|
426,972
|
|
|
|
432,480
|
|
|
|
227,327
|
|
Dividends declared per share
|
|
$
|
6.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
|
|
* |
|
Fiscal 2005 was a
53-week
year. All other periods presented are
52-week
years. |
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
Sept. 29,
|
|
|
Sept. 30,
|
|
|
Sept. 24,
|
|
|
Sept. 26,
|
|
|
Sept. 27,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
363,650
|
|
|
$
|
171,064
|
|
|
$
|
137,392
|
|
|
$
|
248,623
|
|
|
$
|
198,398
|
|
Short-term investments
|
|
|
65,275
|
|
|
|
229,819
|
|
|
|
17,950
|
|
|
|
|
|
|
|
|
|
Segregated cash and investments
|
|
|
1,561,910
|
|
|
|
7,595,359
|
|
|
|
7,802,575
|
|
|
|
7,878,421
|
|
|
|
5,665,109
|
|
Receivable from clients, net
|
|
|
6,970,834
|
|
|
|
3,784,688
|
|
|
|
3,100,572
|
|
|
|
2,202,170
|
|
|
|
1,419,469
|
|
Total assets
|
|
|
16,558,469
|
|
|
|
16,417,110
|
|
|
|
15,277,021
|
|
|
|
14,404,268
|
|
|
|
9,800,841
|
|
Payable to clients
|
|
|
5,412,981
|
|
|
|
10,095,837
|
|
|
|
10,322,539
|
|
|
|
9,611,243
|
|
|
|
6,374,644
|
|
Long-term obligations
|
|
|
1,710,712
|
|
|
|
45,736
|
|
|
|
37,803
|
|
|
|
82,489
|
|
|
|
47,645
|
|
Stockholders equity
|
|
|
1,730,234
|
|
|
|
1,518,867
|
|
|
|
1,210,908
|
|
|
|
1,235,774
|
|
|
|
1,098,399
|
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
This discussion contains forward-looking statements that involve
risks and uncertainties that could cause actual results to
differ materially from those anticipated in such forward-looking
statements. 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, integration
associated with the TD Waterhouse acquisition, realization
of synergies from the TD Waterhouse acquisition, 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 particular, forward-looking statements contained in this
discussion include our expectations regarding: the amount of
annualized pre-tax synergies to be realized from the integration
of TD Waterhouse; the effect of changes in interest rates on our
net interest spread; average commissions and transaction fees
per trade; amounts of commissions and transaction fees, net
interest revenue, money market deposit account fees, money
market and other mutual fund fees and other revenues; amounts of
employee compensation and benefits, clearing and execution
costs, communications, occupancy and equipment costs,
depreciation and amortization, amortization of acquired
intangible assets, professional services, interest on
borrowings, other operating expenses and advertising expenses;
our effective income tax rate; our capital and liquidity needs
and our plans to finance such needs; our stock repurchase
program; and the impact of recently issued accounting
pronouncements.
20
Glossary
of Terms
In discussing and analyzing our business, we utilize several
metrics and other terms that are defined in the following
Glossary of Terms. Italics indicate other defined terms
that appear elsewhere in the Glossary. The term GAAP
refers to U.S. generally accepted accounting principles.
Glossary
of Terms
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) money
market and other mutual fund fees. The primary factors driving
our asset-based revenues are average client margin balances,
average segregated cash balances, average client credit
balances, average client MMDA balances and 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.
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 Uniform
Gift to Minors Act (UGMA), Uniform Transfer to Minors Act
(UTMA), guardianship, conservatorship, trust, 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 serves as the clearing broker/dealer on behalf of an
unaffiliated introducing broker/dealer. The Company charges a
fee to the introducing broker/dealer to process trades in
clearing accounts.
Client assets The total value of cash and
securities in brokerage accounts.
Client 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 SEC
Regulation G. We consider EBITDA and EBITDA excluding
investment gains 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
21
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 intangible
asset amortization. EBITDA excluding investment gains also
eliminates the effect of unusual gains 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 EPS
excluding investment gains/losses is 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 investment-related
gains and losses. We consider EPS excluding investment
gains/losses an important measure of our financial performance.
Gains/losses on 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.
EPS from ongoing operations EPS from ongoing
operations is considered a Non-GAAP financial measure as defined
by SEC Regulation G. We define EPS from ongoing operations
as earnings (loss) per share, adjusted to remove any significant
unusual gains or charges. We consider EPS from ongoing
operations an important measure of the financial performance of
our ongoing business. Unusual gains and charges are excluded
because we believe they are not likely to be indicative of the
ongoing operations of our business. EPS from ongoing operations
should be considered in addition to, rather than as a substitute
for, GAAP earnings per share.
Expenses excluding advertising Expenses
excluding advertising is considered a Non-GAAP financial measure
as defined by SEC Regulation G. Expenses excluding
advertising consists of total expenses, adjusted to remove
advertising expense. We consider expenses excluding advertising
an important measure of the financial performance of our ongoing
business. Advertising spending is excluded because it is largely
at the discretion of the Company, varies significantly from
period to period based on market conditions and 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.
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.
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 five percent of
aggregate debit items and (ii) our introducing
broker-dealer subsidiary in excess of
81/3 percent
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.
22
Money market deposit account (MMDA)
fees Revenues resulting from the Money Market
Deposit Account Agreement with TD Bank USA, N.A. (TD
Bank USA), a subsidiary of TD, which became effective upon
the closing of our acquisition of 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 act 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, less the
actual interest cost paid to clients, actual interest cost
incurred on borrowings, a flat fee to TD Bank USA of
20 basis points and certain direct expenses.
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 and the investment of cash
from operations and segregated cash in short-term
marketable securities. Brokerage interest expense consists of
amounts paid or payable to clients based on credit balances
maintained in brokerage accounts and other
brokerage-related interest expense. Brokerage interest expense
does not include interest on Company borrowings.
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.
Non-GAAP net income and Non-GAAP EPS
Non-GAAP net income and Non-GAAP EPS are Non-GAAP financial
measures as defined by SEC Regulation G. We define Non-GAAP
net income as net income, adjusted to remove the after-tax
effect of amortization of acquired intangible assets, interest
on borrowings, fair value adjustments of investment-related
derivative instruments and any unusual gains or charges. We
consider Non-GAAP net income and Non-GAAP EPS 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.
Amortization of acquired intangible assets and fair value
adjustments of investment-related derivative instruments are
excluded because they are non-cash expenses that do not require
further cash investment. Interest on borrowings is excluded
because we use these measures as an indicator of the earnings
available to service debt. Unusual gains and charges are
excluded because we believe they are not likely to be indicative
of the ongoing operations of our business. Non-GAAP net income
and EPS should be considered in addition to, rather than as a
substitute for, GAAP net income and earnings per share.
Operating margin Operating margin is
considered a Non-GAAP financial measure as defined by SEC
Regulation G. We define operating margin as pre-tax income,
adjusted to remove advertising expense, fair value adjustments
of investment-related derivative instruments and any unusual
gains or charges. We consider operating margin an important
measure of the financial performance of our ongoing business.
Advertising spending is excluded because it is largely at the
discretion of the Company, varies significantly from period to
period based on market conditions and relates to the acquisition
of future revenues through new accounts rather than current
revenues from existing accounts. Fair value adjustments of
investment-related derivative instruments and unusual gains and
charges are excluded because we believe they are not likely to
be indicative of the ongoing operations of our business.
Operating margin should be considered in addition to, rather
than as a substitute for, pre-tax income, net income and
earnings per share.
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 SEC
Rule 15c3-3
(the Customer Protection Rule) and other regulations. Interest
earned on segregated cash is a component of net interest
revenue.
Total accounts All open client accounts
(funded and unfunded), except clearing accounts.
23
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).
Overview
We provide securities brokerage and clearing execution 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 registered
investment advisors by providing services at low prices that are
generally simpler than most of our competitors. Our brokerage
clients are able to trade securities with us through a variety
of channels, principally the Internet. We provide our clients
with investment news and information as well as educational
services. We also provide clearing and execution services to our
brokerage operations.
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 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 and 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.
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 losses, client trade execution price
adjustments, gains or losses on disposal of property, travel
expenses and other miscellaneous expenses. Advertising costs are
24
expensed as incurred and 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 prepaid
variable forward contracts. In January 2006, we liquidated our
position in Knight and the prepaid variable forward contracts.
Our fiscal year ends on the last Friday in September. References
to fiscal year in this document or in the information
incorporated herein by reference are to the fifty-two or
fifty-three week period ended on any such Friday. For example,
fiscal 2006 refers to the fiscal year ended
September 29, 2006. Fiscal years 2006 and 2004 were each
fifty-two week years. Fiscal 2005 was a fifty-three week year.
Business
Combination
On January 24, 2006, we completed the acquisition of TD
Waterhouse Group, Inc. (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
(TD). We purchased from TD (the Share
Purchase) all of the capital stock of TD Waterhouse 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 percent
of the outstanding shares of the Company after giving effect to
the transaction. Upon the completion of the transaction, we
changed our name to TD AMERITRADE Holding Corporation and the
authorized shares of common stock of the Company were increased
from 650 million to one billion. 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. We have 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. 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.
Pursuant to the Purchase Agreement, 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 above certain thresholds
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 Purchase Agreement, TD was given rights
to have its shares of common stock of the Company registered for
resale. TD licensed 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.
In connection with the Purchase Agreement, the Company, TD and
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 certain governance
arrangements and contains various 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 of TD
Waterhouse 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. As of September 29, 2006, we estimate that we
have realized annualized pre-tax revenue opportunities of over
$300 million and annualized pre-tax cost savings of
approximately $143 million.
25
Client
Segmentation Strategy and New Client Offerings
The TD Waterhouse acquisition is part of our long-term growth
strategy that includes increasing our focus beyond active
traders to obtain greater market share from long-term investors
and independent financial advisors. This acquisition gives us a
nationwide branch network, a sales force that focuses on
acquiring long-term investors and client assets and also gives
us access to TD Waterhouses network of registered
investment advisors.
Following a study, we announced new client offerings on
April 24, 2006 that are intended to help increase market
share from these three client segments. Our new client offerings
include a $9.99 per trade flat-rate price for online equity
trades and elimination of quarterly account maintenance fees.
Our client survey research indicated that clients want simple,
understandable pricing, coupled with innovative tools,
comprehensive research, outstanding service and excellent
execution. Our new flat-rate commission is not intended to
compete solely based on price-point, but rather to be considered
as a proposition for great value when combined with the products
and services that we have designed with the goal of improving
market share.
Critical
Accounting Policies and Estimates
The preparation of our financial statements requires us to make
judgments and estimates that may have a significant impact upon
our financial results. Note 1 to the consolidated financial
statements contains a summary of our significant accounting
policies, many of which require the use of estimates and
assumptions. We believe that the following areas are
particularly subject to managements judgments and
estimates and could materially affect our results of operations
and financial position.
Valuation
of goodwill and acquired intangible assets
We test goodwill 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
and accounting for derivative financial
instruments
We may utilize derivative financial instruments to manage risks
such as interest rate risk, foreign currency risk or market
risk. Our derivatives policy prohibits us from using derivatives
for speculative or trading purposes.
Accounting for derivatives differs significantly depending on
whether a derivative is designated as a hedge, which
is a transaction intended to reduce a risk associated with a
specific balance sheet item or future expected cash flow at the
time it is purchased. In order to qualify as a hedge, a
derivative must be designated as such by management, who must
also continue to evaluate whether the instrument effectively
reduces the risk associated with that item.
To determine if a derivative instrument continues to be an
effective hedge, we must make assumptions and judgments about
the continued effectiveness of our hedging strategies and the
nature and timing of forecasted transactions. If our hedging
strategy were to become ineffective, we could no longer apply
hedge accounting and our reported results of operations or
financial condition could be materially affected.
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
26
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.
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 corresponding income tax expense in our
Consolidated Statements of Income. Conversely, to the extent
circumstances indicate that a valuation allowance 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.
Results
of Operations
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 balances,
client credit balances and client MMDA 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, operating margin
and EBITDA (earnings before interest, taxes, depreciation and
amortization) and EBITDA excluding investment gains are key
metrics we use in evaluating our financial performance.
Operating margin, EBITDA and EBITDA excluding investment gains
are considered non-GAAP financial measures as defined by SEC
Regulation G.
We define operating margin as pre-tax income, adjusted to remove
advertising expense, fair value adjustments of
investment-related derivative instruments and any unusual gains
or charges. We consider operating margin an important measure of
the financial performance of our ongoing business. Advertising
spending is excluded because it is largely at the discretion of
the Company, varies significantly from period to period based on
market conditions and generally relates to the acquisition of
future revenues through new accounts rather than current
revenues from existing accounts. Fair value adjustments of
investment-related derivative instruments and unusual gains and
charges are excluded because we believe they are not likely to
be indicative of the ongoing operations of our business.
Operating margin should be considered in addition to, rather
than as a substitute for, pre-tax income, net income and
earnings per share.
27
We consider EBITDA and EBITDA excluding investment gains
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 intangible asset amortization. EBITDA excluding
investment gains also eliminates the effect of unusual gains
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.
The following tables set forth operating margin, EBITDA and
EBITDA excluding investment gains in dollars and as a percentage
of net revenues for the periods indicated, and provide
reconciliations to pre-tax income, which is the most directly
comparable GAAP measure (dollars in thousands):
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Fiscal Year Ended
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September 29, 2006
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September 30, 2005
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September 24, 2004
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Operating Margin
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
$
|
951,658
|
|
|
|
52.8
|
%
|
|
$
|
637,489
|
|
|
|
63.5
|
%
|
|
$
|
541,521
|
|
|
|
61.5
|
%
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
|
(164,072
|
)
|
|
|
(9.1
|
)%
|
|
|
(92,312
|
)
|
|
|
(9.2
|
)%
|
|
|
(100,364
|
)
|
|
|
(11.4
|
)%
|
Fair value adjustments of
investment-related derivative instruments
|
|
|
(11,703
|
)
|
|
|
(0.6
|
)%
|
|
|
8,315
|
|
|
|
0.8
|
%
|
|
|
17,930
|
|
|
|
2.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before other income and
income taxes
|
|
|
775,883
|
|
|
|
43.0
|
%
|
|
|
553,492
|
|
|
|
55.2
|
%
|
|
|
459,087
|
|
|
|
52.2
|
%
|
Gain on disposal of investments
|
|
|
81,422
|
|
|
|
4.5
|
%
|
|
|
0
|
|
|
|
0.0
|
%
|
|
|
0
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income
|
|
$
|
857,305
|
|
|
|
47.5
|
%
|
|
$
|
553,492
|
|
|
|
55.2
|
%
|
|
$
|
459,087
|
|
|
|
52.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA and EBITDA Excluding
Investment Gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA excluding investment gains
|
|
$
|
933,356
|
|
|
|
51.8
|
%
|
|
$
|
579,867
|
|
|
|
57.8
|
%
|
|
$
|
484,892
|
|
|
|
55.1
|
%
|
Plus: Gain on disposal of
investments
|
|
|
81,422
|
|
|
|
4.5
|
%
|
|
|
0
|
|
|
|
0.0
|
%
|
|
|
0
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
1,014,778
|
|
|
|
56.3
|
%
|
|
|
579,867
|
|
|
|
57.8
|
%
|
|
|
484,892
|
|
|
|
55.1
|
%
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(21,199
|
)
|
|
|
(1.2
|
)%
|
|
|
(10,521
|
)
|
|
|
(1.0
|
)%
|
|
|
(11,066
|
)
|
|
|
(1.3
|
)%
|
Amortization of acquired
intangible assets
|
|
|
(42,286
|
)
|
|
|
(2.3
|
)%
|
|
|
(13,887
|
)
|
|
|
(1.4
|
)%
|
|
|
(12,158
|
)
|
|
|
(1.4
|
)%
|
Interest on borrowings
|
|
|
(93,988
|
)
|
|
|
(5.2
|
)%
|
|
|
(1,967
|
)
|
|
|
(0.2
|
)%
|
|
|
(2,581
|
)
|
|
|
(0.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income
|
|
$
|
857,305
|
|
|
|
47.5
|
%
|
|
$
|
553,492
|
|
|
|
55.2
|
%
|
|
$
|
459,087
|
|
|
|
52.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The dollar amounts of our pre-tax income, operating margin and
EBITDA excluding investment gains increased for fiscal 2006,
compared to fiscal 2005, primarily due to increased business
resulting from the TD Waterhouse acquisition. However,
pre-tax income, operating margin and EBITDA excluding investment
gains all decreased as a percentage of net revenues for fiscal
2006 primarily due to the TD Waterhouse acquisition. Total
expenses were higher as a percentage of net revenues in fiscal
2006 due to the effect of operating two back-office clearing
platforms following the TD Waterhouse acquisition, higher
interest on borrowings due to the debt issued to fund the
special cash dividend and higher amortization of intangible
assets due to the value assigned to the TD Waterhouse
client relationships.
28
Operating
Metrics
Our largest sources of revenues are (1) asset-based
revenues and (2) transaction-based revenues. For fiscal
2006, asset-based revenues and commissions and transaction fees
accounted for 57 percent and 40 percent of our net
revenues, respectively. Asset-based revenues consist of
(1) net interest revenue, (2) MMDA fees and
(3) money market and other mutual fund 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 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.
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 money
market deposit account (MMDA) fees by average investable assets.
Investable assets consist of 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. The following table sets forth net interest
margin and average investable assets (dollar amounts in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
06 vs. 05
|
|
|
05 vs. 04
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Inc. (Dec.)
|
|
|
Inc. (Dec.)
|
|
|
Average interest-earning assets
|
|
$
|
17,543
|
|
|
$
|
15,355
|
|
|
$
|
13,814
|
|
|
$
|
2,188
|
|
|
$
|
1,541
|
|
Average money market deposit
account balances
|
|
|
5,734
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
5,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average investable assets
|
|
$
|
23,277
|
|
|
$
|
15,355
|
|
|
$
|
13,814
|
|
|
$
|
7,922
|
|
|
$
|
1,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest revenue
|
|
$
|
696.2
|
|
|
$
|
398.9
|
|
|
$
|
236.7
|
|
|
$
|
297.3
|
|
|
$
|
162.2
|
|
Money market deposit account fee
revenue
|
|
|
185.0
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
185.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue earned on investable
assets
|
|
$
|
881.2
|
|
|
$
|
398.9
|
|
|
$
|
236.7
|
|
|
$
|
482.3
|
|
|
$
|
162.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (NIM)
|
|
|
3.74
|
%
|
|
|
2.52
|
%
|
|
|
1.69
|
%
|
|
|
1.22
|
%
|
|
|
0.83
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables set forth key metrics that we use in
analyzing net interest revenue, which is a component of net
interest margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Revenue (Expense)
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
06 vs. 05
|
|
|
05 vs. 04
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Inc. (Dec.)
|
|
|
Inc. (Dec.)
|
|
|
|
(millions)
|
|
|
(millions)
|
|
|
(millions)
|
|
|
Segregated cash
|
|
$
|
324.9
|
|
|
$
|
208.8
|
|
|
$
|
84.5
|
|
|
$
|
116.1
|
|
|
$
|
124.3
|
|
Client margin balances
|
|
|
500.8
|
|
|
|
210.1
|
|
|
|
159.7
|
|
|
|
290.7
|
|
|
|
50.4
|
|
Securities borrowing
|
|
|
178.9
|
|
|
|
113.4
|
|
|
|
32.7
|
|
|
|
65.5
|
|
|
|
80.7
|
|
Other free cash and short-term
investments
|
|
|
25.3
|
|
|
|
8.1
|
|
|
|
0.4
|
|
|
|
17.2
|
|
|
|
7.7
|
|
Client credit balances
|
|
|
(98.9
|
)
|
|
|
(45.9
|
)
|
|
|
(13.8
|
)
|
|
|
(53.0
|
)
|
|
|
(32.1
|
)
|
Securities lending
|
|
|
(234.8
|
)
|
|
|
(95.6
|
)
|
|
|
(26.8
|
)
|
|
|
(139.2
|
)
|
|
|
(68.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest revenue
|
|
$
|
696.2
|
|
|
$
|
398.9
|
|
|
$
|
236.7
|
|
|
$
|
297.3
|
|
|
$
|
162.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balance
|
|
|
06 vs. 05
|
|
|
05 vs. 04
|
|
|
|
Fiscal Year Ended
|
|
|
%
|
|
|
%
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Change
|
|
|
Change
|
|
|
|
(millions)
|
|
|
|
|
|
|
|
|
Segregated cash
|
|
$
|
7,235
|
|
|
$
|
7,801
|
|
|
$
|
7,572
|
|
|
|
(7
|
)%
|
|
|
3
|
%
|
Client margin balances
|
|
|
6,397
|
|
|
|
3,512
|
|
|
|
3,222
|
|
|
|
82
|
%
|
|
|
9
|
%
|
Securities borrowing
|
|
|
3,435
|
|
|
|
3,824
|
|
|
|
2,868
|
|
|
|
(10
|
)%
|
|
|
33
|
%
|
Other free cash and short-term
investments
|
|
|
476
|
|
|
|
218
|
|
|
|
152
|
|
|
|
118
|
%
|
|
|
43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets
|
|
$
|
17,543
|
|
|
$
|
15,355
|
|
|
$
|
13,814
|
|
|
|
14
|
%
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Client credit balances
|
|
$
|
9,814
|
|
|
$
|
9,482
|
|
|
$
|
8,916
|
|
|
|
4
|
%
|
|
|
6
|
%
|
Securities lending
|
|
$
|
5,731
|
|
|
$
|
4,621
|
|
|
$
|
3,716
|
|
|
|
24
|
%
|
|
|
24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities
|
|
$
|
15,545
|
|
|
$
|
14,103
|
|
|
$
|
12,632
|
|
|
|
10
|
%
|
|
|
12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Yield (Cost)
|
|
|
06 vs. 05
|
|
|
05 vs. 04
|
|
|
|
Fiscal Year Ended
|
|
|
Net Yield
|
|
|
Net Yield
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Inc. (Dec.)
|
|
|
Inc. (Dec.)
|
|
|
Segregated cash
|
|
|
4.44
|
%
|
|
|
2.60
|
%
|
|
|
1.10
|
%
|
|
|
1.84
|
%
|
|
|
1.50
|
%
|
Client margin balances
|
|
|
7.74
|
%
|
|
|
5.81
|
%
|
|
|
4.90
|
%
|
|
|
1.93
|
%
|
|
|
0.91
|
%
|
Securities borrowing
|
|
|
5.15
|
%
|
|
|
2.88
|
%
|
|
|
1.13
|
%
|
|
|
2.27
|
%
|
|
|
1.75
|
%
|
Other free cash and short-term
investments
|
|
|
5.26
|
%
|
|
|
3.61
|
%
|
|
|
0.26
|
%
|
|
|
1.65
|
%
|
|
|
3.35
|
%
|
Client credit balances
|
|
|
(1.00
|
)%
|
|
|
(0.47
|
)%
|
|
|
(0.15
|
)%
|
|
|
(0.53
|
)%
|
|
|
(0.32
|
)%
|
Securities lending
|
|
|
(4.05
|
)%
|
|
|
(2.01
|
)%
|
|
|
(0.71
|
)%
|
|
|
(2.04
|
)%
|
|
|
(1.30
|
)%
|
Net interest revenue
|
|
|
3.92
|
%
|
|
|
2.52
|
%
|
|
|
1.69
|
%
|
|
|
1.40
|
%
|
|
|
0.83
|
%
|
The following tables set forth key metrics that we use in
analyzing other asset-based revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee Revenue
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
06 vs. 05
|
|
|
05 vs. 04
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Inc. (Dec.)
|
|
|
Inc. (Dec.)
|
|
|
|
(millions)
|
|
|
(millions)
|
|
|
(millions)
|
|
|
Money market deposit account
|
|
$
|
185.0
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
185.0
|
|
|
|
N/A
|
|
Money market mutual fund
|
|
$
|
96.0
|
|
|
$
|
21.0
|
|
|
$
|
18.3
|
|
|
$
|
75.0
|
|
|
$
|
2.7
|
|
Other mutual fund
|
|
$
|
43.6
|
|
|
$
|
4.1
|
|
|
$
|
3.1
|
|
|
$
|
39.5
|
|
|
$
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balance
|
|
|
06 vs. 05
|
|
|
05 vs. 04
|
|
|
|
Fiscal Year Ended
|
|
|
%
|
|
|
%
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Change
|
|
|
Change
|
|
|
|
(millions)
|
|
|
|
|
|
|
|
|
Money market deposit account
|
|
$
|
5,734
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Money market mutual fund
|
|
$
|
12,671
|
|
|
$
|
2,735
|
|
|
$
|
2,387
|
|
|
|
363
|
%
|
|
|
15
|
%
|
Other mutual fund
|
|
$
|
24,866
|
|
|
$
|
3,247
|
|
|
$
|
2,342
|
|
|
|
666
|
%
|
|
|
39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Yield
|
|
|
06 vs. 05
|
|
|
05 vs. 04
|
|
|
|
Fiscal Year Ended
|
|
|
Yield
|
|
|
Yield
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Inc. (Dec.)
|
|
|
Inc. (Dec.)
|
|
|
Money market deposit account
|
|
|
3.19
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Money market mutual fund
|
|
|
0.75
|
%
|
|
|
0.74
|
%
|
|
|
0.76
|
%
|
|
|
0.01
|
%
|
|
|
(0.02
|
)%
|
Other mutual fund
|
|
|
0.17
|
%
|
|
|
0.12
|
%
|
|
|
0.13
|
%
|
|
|
0.05
|
%
|
|
|
(0.01
|
)%
|
30
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
06 vs. 05
|
|
|
05 vs. 04
|
|
|
|
September 29,
|
|
|
September 30,
|
|
|
September 24,
|
|
|
%
|
|
|
%
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Change
|
|
|
Change
|
|
|
Total trades (in millions)
|
|
|
54.24
|
|
|
|
39.94
|
|
|
|
41.74
|
|
|
|
36
|
%
|
|
|
(4
|
)%
|
Average commissions and
transaction fees per trade
|
|
$
|
13.41
|
|
|
$
|
13.12
|
|
|
$
|
13.42
|
|
|
|
2
|
%
|
|
|
(2
|
)%
|
Average client trades per day
|
|
|
216,970
|
|
|
|
155,696
|
|
|
|
167,958
|
|
|
|
39
|
%
|
|
|
(7
|
)%
|
Average client trades per account
(annualized)
|
|
|
10.1
|
|
|
|
11.0
|
|
|
|
12.4
|
|
|
|
(8
|
)%
|
|
|
(11
|
)%
|
Activity rate
|
|
|
4.0
|
%
|
|
|
4.3
|
%
|
|
|
5.0
|
%
|
|
|
(7
|
)%
|
|
|
(14
|
)%
|
Trading days
|
|
|
250.0
|
|
|
|
256.5
|
|
|
|
248.5
|
|
|
|
(3
|
)%
|
|
|
3
|
%
|
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 Ended
|
|
|
|
September 29,
|
|
|
September 30,
|
|
|
September 24,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Qualified accounts (beginning of
period)
|
|
|
1,735,000
|
|
|
|
1,677,000
|
|
|
|
1,520,000
|
|
Qualified accounts (end of period)
|
|
|
3,242,000
|
|
|
|
1,735,000
|
|
|
|
1,677,000
|
|
Percentage change during period
|
|
|
87
|
%
|
|
|
3
|
%
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accounts (beginning of
period)
|
|
|
3,717,000
|
|
|
|
3,520,000
|
|
|
|
3,171,000
|
|
Total accounts (end of period)
|
|
|
6,191,000
|
|
|
|
3,717,000
|
|
|
|
3,520,000
|
|
Percentage change during period
|
|
|
67
|
%
|
|
|
6
|
%
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Client assets (beginning of
period, in billions)
|
|
$
|
83.3
|
|
|
$
|
68.8
|
|
|
$
|
54.8
|
|
Client assets (end of period, in
billions)
|
|
$
|
261.7
|
|
|
$
|
83.3
|
|
|
$
|
68.8
|
|
Percentage change during period
|
|
|
214
|
%
|
|
|
21
|
%
|
|
|
26
|
%
|
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 total and qualified accounts increased for the full fiscal
year 2006, primarily due to the net addition of approximately
2.25 million total accounts in connection with the TD
Waterhouse acquisition. However, our total number of qualified
accounts decreased by approximately 1.5 percent during the
second half of fiscal 2006. We are carefully monitoring the
number of qualified accounts and are taking actions designed to
increase the number of qualified accounts. Such actions include
the realignment of our management team in September 2006 to
further our client segmentation strategy and the implementation
of our new pricing structure announced in April 2006. We also
expect that the integration of the TD Waterhouse clearing
platform into the legacy Ameritrade clearing platform during
fiscal 2007 will enable us to offer more comprehensive product
offerings. 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.
31
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
|
|
|
06 vs. 05
|
|
|
05 vs. 04
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
% Change
|
|
|
% Change
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions and transaction fees
|
|
$
|
727.4
|
|
|
$
|
524.0
|
|
|
$
|
560.1
|
|
|
|
39
|
%
|
|
|
(6
|
)%
|
Asset-based revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest revenue
|
|
|
1,032.0
|
|
|
|
540.3
|
|
|
|
278.6
|
|
|
|
91
|
%
|
|
|
94
|
%
|
Brokerage interest expense
|
|
|
(335.8
|
)
|
|
|
(141.4
|
)
|
|
|
(41.9
|
)
|
|
|
137
|
%
|
|
|
238
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest revenue
|
|
|
696.2
|
|
|
|
398.9
|
|
|
|
236.7
|
|
|
|
74
|
%
|
|
|
69
|
%
|
Money market deposit account fees
|
|
|
185.0
|
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Money market and other mutual fund
fees
|
|
|
139.6
|
|
|
|
25.1
|
|
|
|
21.4
|
|
|
|
457
|
%
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total asset-based revenues
|
|
|
1,020.8
|
|
|
|
424.0
|
|
|
|
258.1
|
|
|
|
141
|
%
|
|
|
64
|
%
|
Other
|
|
|
55.4
|
|
|
|
55.2
|
|
|
|
61.9
|
|
|
|
0
|
%
|
|
|
(11
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
1,803.5
|
|
|
|
1,003.2
|
|
|
|
880.1
|
|
|
|
80
|
%
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
350.1
|
|
|
|
180.6
|
|
|
|
154.8
|
|
|
|
94
|
%
|
|
|
17
|
%
|
Fair value adjustments of
compensation-related derivative instruments
|
|
|
(1.7
|
)
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Clearing and execution costs
|
|
|
73.0
|
|
|
|
26.3
|
|
|
|
30.6
|
|
|
|
178
|
%
|
|
|
(14
|
)%
|
Communications
|
|
|
65.4
|
|
|
|
35.7
|
|
|
|
39.9
|
|
|
|
84
|
%
|
|
|
(11
|
)%
|
Occupancy and equipment costs
|
|
|
74.6
|
|
|
|
43.4
|
|
|
|
42.4
|
|
|
|
72
|
%
|
|
|
2
|
%
|
Depreciation and amortization
|
|
|
21.2
|
|
|
|
10.5
|
|
|
|
11.1
|
|
|
|
101
|
%
|
|
|
(5
|
)%
|
Amortization of acquired
intangible assets
|
|
|
42.3
|
|
|
|
13.9
|
|
|
|
12.2
|
|
|
|
205
|
%
|
|
|
14
|
%
|
Professional services
|
|
|
87.5
|
|
|
|
30.6
|
|
|
|
27.4
|
|
|
|
186
|
%
|
|
|
12
|
%
|
Interest on borrowings
|
|
|
94.0
|
|
|
|
2.0
|
|
|
|
2.6
|
|
|
|
4678
|
%
|
|
|
(24
|
)%
|
Other
|
|
|
45.4
|
|
|
|
22.7
|
|
|
|
17.8
|
|
|
|
100
|
%
|
|
|
27
|
%
|
Advertising
|
|
|
164.1
|
|
|
|
92.3
|
|
|
|
100.4
|
|
|
|
78
|
%
|
|
|
(8
|
)%
|
Fair value adjustments of
investment-related derivative instruments
|
|
|
11.7
|
|
|
|
(8.3
|
)
|
|
|
(17.9
|
)
|
|
|
(241
|
)%
|
|
|
(54
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1,027.6
|
|
|
|
449.7
|
|
|
|
421.0
|
|
|
|
129
|
%
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before other income and
income taxes
|
|
|
775.9
|
|
|
|
553.5
|
|
|
|
459.1
|
|
|
|
40
|
%
|
|
|
21
|
%
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on disposal of investments
|
|
|
81.4
|
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income
|
|
|
857.3
|
|
|
|
553.5
|
|
|
|
459.1
|
|
|
|
55
|
%
|
|
|
21
|
%
|
Provision for income taxes
|
|
|
330.5
|
|
|
|
213.7
|
|
|
|
176.3
|
|
|
|
55
|
%
|
|
|
21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
526.8
|
|
|
$
|
339.8
|
|
|
$
|
282.8
|
|
|
|
55
|
%
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of interest days in period
|
|
|
364
|
|
|
|
371
|
|
|
|
364
|
|
|
|
(2
|
)%
|
|
|
2
|
%
|
Effective income tax rate
|
|
|
38.6
|
%
|
|
|
38.6
|
%
|
|
|
38.4
|
%
|
|
|
|
|
|
|
|
|
|
|
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.
|
32
Fiscal
Year Ended September 29, 2006 Compared to Fiscal Year Ended
September 30, 2005
Net
Revenues
Commissions and transaction fees increased 39 percent to
$727.4 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 percent and average client trades per day increased
39 percent 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, has increased by 87 percent since
September 2005, primarily due to the acquisition of TD
Waterhouse. Average commissions and transaction fees per trade
increased to $13.41 per trade for fiscal 2006 from $13.12
for fiscal 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 three percent fewer trading days in
fiscal 2006 compared to fiscal 2005, due to fiscal 2005 being a
53-week
year. We expect average commissions and transaction fees to
range from approximately $12.85 to $13.35 per trade during
fiscal 2007, 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 $738.5 million to $939.8 million for fiscal 2007,
depending on the volume of client trading activity, average
commissions and transaction fees per trade and other factors.
Net interest revenue increased 74 percent 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. The movement of over $6 billion in legacy Ameritrade
client credit balances to our MMDA sweep product in late
September 2006 will result in a shift in revenues from net
interest revenue to money market deposit account fees in fiscal
2007. The MMDA product is described further in the next
paragraph. We expect net interest revenue to range between
$526.8 million and $560.5 million for fiscal 2007.
Money market deposit account (MMDA) fees is 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. 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, the broker-dealer subsidiaries
provide marketing and support services and act as recordkeeper
for TD Bank USA, and act as agent for clients. In exchange for
these services, TD Bank USA pays the broker-dealer subsidiaries
a fee based on the actual yield earned by TD Bank USA on the
client MMDA assets, less the actual interest cost paid to
clients, actual interest cost incurred on borrowings, a flat fee
to TD Bank USA of 20 basis points and certain direct
expenses. We expect money market deposit account fees to
increase to between $515.6 million and $537.8 million
for fiscal 2007, reflecting a full year of legacy TD Waterhouse
MMDA balances and the transfer of over $6 billion of legacy
Ameritrade client credit balances to the product in late
September 2006.
Money market and other mutual fund fees increased to
$139.6 million for fiscal 2006 compared to
$25.1 million for fiscal 2005, primarily due to an increase
in average money market and other mutual fund balances primarily
resulting from the TD Waterhouse acquisition. We expect money
market and other mutual fund fees to range between
$222.0 million and $243.3 million for fiscal 2007.
Other revenues were virtually unchanged at $55.4 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
33
April 2006. We expect other revenues to decrease to
$33.4 million to $41.4 million for fiscal 2007,
reflecting the full year impact of eliminating account
maintenance fees.
Expenses
Employee compensation and benefits expense increased
94 percent 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. We expect employee
compensation and benefits expense to range between
$392.3 million and $400.5 million for fiscal 2007.
Fair value adjustments of compensation-related derivative
instruments of $1.7 million for fiscal 2006 represent
adjustments to equity swap agreements that are intended to
economically offset TD Waterhouse stock-based compensation that
is based on the value of TD stock. 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. The related
$1.7 million of TD Waterhouse stock-based compensation
expense is included in employee compensation and benefits in the
Consolidated Statements of Income.
Clearing and execution costs increased 178 percent 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. We expect clearing and execution costs to range
between $70.2 million and $72.2 million for fiscal
2007, as the full year effect of the TD Waterhouse business is
expected to be offset by the elimination of the duplicate TD
Waterhouse back-office clearing platform during fiscal 2007.
Communications expense increased 84 percent 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. We expect communications
expense to range between $68.7 million and
$72.7 million for fiscal 2007, as the full year effect of
the TD Waterhouse business is expected to be partially offset by
the elimination of duplicate telephone, quotes, and market
information costs during fiscal 2007.
Occupancy and equipment costs increased 72 percent 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. We expect occupancy and equipment costs to range
between $79.7 million and $83.7 million for fiscal
2007.
Depreciation and amortization increased 101 percent 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. We
expect depreciation and amortization expense to range from
$19.5 million to $21.9 million for fiscal 2007.
Amortization of acquired intangible assets increased
205 percent to $42.3 million due to amortization of
client relationship intangible assets recorded in the TD
Waterhouse acquisition. We expect amortization of acquired
intangible assets outstanding as of September 29, 2006 to
be approximately $54.6 million for fiscal 2007.
Professional services increased 186 percent to
$87.5 million. This increase was primarily due to increased
usage 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. We expect professional
services expense to range between $69.2 million and
$77.2 million for fiscal 2007.
34
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. We expect
interest on borrowings to be approximately $105 million for
fiscal 2007, depending on variability in short-term interest
rates and the amount and timing of discretionary prepayments on
our long-term debt.
Other expenses increased 100 percent 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.
The online brokerage industry has experienced increased client
identity fraud losses during the second half of fiscal 2006. We
are implementing additional processes and technologies, as well
as working with our peers, regulators and law enforcement to
develop strategies to minimize such losses. We expect other
expense to range between $36.5 million and
$38.1 million for fiscal 2007. However, if client identity
fraud losses were to continue at the rate experienced during the
fourth quarter of fiscal 2006 or at an increased rate, we could
experience higher other expenses.
Advertising expense increased 78 percent 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. We expect approximately
$136.2 million to $156.2 million of advertising
expenditures for fiscal 2007, depending in part on market
conditions. We generally adjust our level of advertising
spending in relation to stock market activity, in an effort to
maximize the number of new accounts while minimizing the
advertising cost per new account.
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.
Our effective income tax rate was 38.6 percent 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 accruals for uncertain tax positions due to
favorable resolution of such items 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. We expect our effective income tax rate to range from
approximately 39 percent to 40 percent for fiscal
2007, depending in part on the timing and extent of the TD
Waterhouse integration and our ability to realize related
expense synergies.
Fiscal
Year Ended September 30, 2005 Compared to Fiscal Year Ended
September 24, 2004
Net
Revenues
Commissions and transaction fees decreased six percent to
$524.0 million, primarily due to a four percent decrease in
total trades and a two percent decrease in average commissions
and transaction fees per trade. Average trades per day decreased
seven percent to 155,696 for fiscal 2005 from 167,958 for fiscal
2004. Average client trades per account were 11.0 during fiscal
2005, compared to 12.4 during fiscal 2004. The decreased revenue
resulting from these factors was partially offset by three
percent more trading days in fiscal 2005 compared to fiscal
2004, due to fiscal 2005 being a
53-week
year. The number of qualified accounts increased three percent
to 1.74 million as of September 30, 2005, compared to
1.68 million as of September 24, 2004. Historically,
qualified accounts have generated the vast majority of our
revenues. Average commissions and transaction fees per trade
decreased to $13.12 for fiscal 2005 from $13.42 for fiscal 2004,
due primarily to a decrease in our options contract pricing and
decreased payment for order flow revenue per trade. In March
2005, we lowered our options contract pricing from $1.50 to
$0.75 per contract.
Net interest revenue increased 69 percent to
$398.9 million, due primarily to an increase of
150 basis points in the average interest rate earned on
segregated cash, an increase of 91 basis points in the
average interest rate charged
35
on client margin balances, a nine percent increase in average
client margin balances, seven more interest days due to fiscal
2005 being a
53-week year
and an $11.9 million increase in net interest earned on our
securities lending program in fiscal 2005 compared to fiscal
2004. The increased net interest revenue resulting from these
factors was partially offset by an increase of 32 basis
points in the average interest rate paid on client credit
balances in fiscal 2005 from fiscal 2004.
Money market and other mutual fund fees increased
17 percent to $25.1 million, due primarily to a
15 percent increase in average money market mutual fund
balances and a 39 percent increase in average other mutual
fund balances.
Other revenues decreased 11 percent to $55.2 million,
due primarily to a decrease in account maintenance, confirm and
other fee revenue, partially offset by higher solicitation and
tender offer fees. Prior to our elimination of quarterly account
maintenance fees in April 2006, account maintenance fees were
charged based on client assets and trading activity; therefore,
fluctuations in client assets or trades per account resulted in
fluctuations in revenues from account maintenance fees.
Expenses
Employee compensation and benefits expense increased
17 percent to $180.6 million, due primarily to an
increase in full-time equivalent employees to 2,058 at
September 30, 2005 from 1,961 at September 24, 2004,
increased incentive compensation due to improved financial
results, annual merit increases and approximately
$5 million of severance costs for departing executives in
the fourth quarter of fiscal 2005.
Clearing and execution costs decreased 14 percent to
$26.3 million, due primarily to lower client trading
volumes, decreased order routing costs resulting from our
implementation of a single web architecture trading platform
during fiscal 2004 and a non-recurring refund of Nasdaq trading
activity fees of approximately $1 million during the first
quarter of fiscal 2005.
Communications expense decreased 11 percent to
$35.7 million, due primarily to reduced telecommunications
costs resulting from contract negotiations in fiscal 2005.
Occupancy and equipment costs increased two percent to
$43.4 million, due primarily to costs associated with
moving technology employees to a larger facility in New Jersey
during the third quarter of fiscal 2005, partially offset by
slightly lower computer equipment leasing costs.
Amortization of acquired intangible assets increased
14 percent to $13.9 million, due primarily to
additional amortization of acquired intangible assets related to
the acquisition of client accounts from JB Oxford &
Company in October 2004.
Professional services expense increased 12 percent to
$30.6 million, due primarily to increased spending on
corporate development initiatives in fiscal 2005 and increased
legal fees incurred for regulatory matters, partially offset by
decreased client communications consulting expenses.
Other operating expenses increased 27 percent to
$22.7 million, due primarily to increased bad debt expense
during fiscal 2005 and the effect of Datek-related litigation
and arbitration matters that were resolved favorably during the
fourth quarter of fiscal 2004.
Advertising expenses decreased eight percent to
$92.3 million, as we reduced expenditures in response to
lackluster stock market conditions.
Fair value adjustments of investment-related derivative
instruments consisted of an $8.3 million unrealized gain
for fiscal 2005 compared to a $17.9 million unrealized gain
for fiscal 2004, due to decreases in the market price of the
Knight stock underlying our prepaid variable forward contracts
in both fiscal 2005 and fiscal 2004. Because the embedded
collars within the prepaid variable forward contracts were
accounted for as non-hedging derivatives, changes in the fair
value of the embedded collars were recognized in the statement
of income, along with the related income tax effects. We
liquidated our investment in Knight and the related prepaid
variable forward contracts in January 2006.
36
Our effective income tax rate was approximately
38.6 percent for fiscal 2005 compared to 38.4 percent
for fiscal 2004. The Datek integration resulted in a larger
percentage of our payroll and assets being located in lower
income tax states. An adjustment to our net deferred income tax
liabilities to apply the lower income tax rate resulted in a
lower than normal effective income tax rate for fiscal 2004.
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 2006 have been financed primarily from our
earnings, cash on hand, cash acquired in the acquisition of TD
Waterhouse and the issuance of long-term debt. We plan to
finance our operational capital and liquidity needs primarily
from our earnings and cash on hand. In addition, we may utilize
our revolving credit facility or issue equity or debt securities.
To complete our acquisition of the U.S. brokerage business
of TD Waterhouse, we issued 196.3 million shares of common
stock on January 24, 2006. We also paid a $6.00 per
share special cash dividend. We funded the approximately
$2.4 billion special dividend with approximately
$0.4 billion from cash and short-term investments on hand,
approximately $0.4 billion from excess capital in TD
Waterhouse at closing and the remaining $1.6 billion by
issuing private long-term debt. We also issued another
$0.3 billion of private long-term debt, and entered into a
$0.3 billion revolving credit agreement, for working
capital purposes. As a result of these debt issuances and other
debt assumed in connection with the acquisition of TD
Waterhouse, our ratio of total debt to total stockholders
equity increased from three percent as of September 30,
2005 to 99 percent as of September 29, 2006. See
Note 2 of the Notes to Consolidated Financial Statements
for further information about the TD Waterhouse acquisition.
Dividends from our subsidiaries are another source of liquidity
for the holding company. Some of our subsidiaries are subject to
requirements of the SEC and NASD relating to liquidity, capital
standards, and the use of client funds and securities, which may
limit funds available for the payment of dividends to the
holding company.
Under the SECs Uniform Net Capital Rule
(Rule 15c3-1
under the Securities Exchange Act of 1934), our broker-dealer
subsidiaries are required to maintain at all times at least the
minimum level of net capital required under
Rule 15c3-1.
This minimum net capital level is determined based upon an
involved calculation described in
Rule 15c3-1
that is primarily based on each broker-dealers
aggregate debits, which primarily are a function of
client margin 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 holding company may make cash capital
contributions to broker-dealer subsidiaries, if necessary, to
meet net capital requirements.
37
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 five percent of
aggregate debit items and (ii) our introducing
broker-dealer subsidiary in excess of
81/3 percent
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 holding 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 to liquid assets for the periods indicated (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 29,
|
|
|
September 30,
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Cash and cash equivalents
|
|
$
|
363,650
|
|
|
$
|
171,064
|
|
|
$
|
192,586
|
|
Less: Broker-dealer cash and cash
equivalents
|
|
|
(263,054
|
)
|
|
|
(107,236
|
)
|
|
|
(155,818
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non broker-dealer cash and cash
equivalents
|
|
|
100,596
|
|
|
|
63,828
|
|
|
|
36,768
|
|
Plus: Non broker-dealer short term
investments
|
|
|
65,275
|
|
|
|
229,819
|
|
|
|
(164,544
|
)
|
Plus: Excess broker-dealer
regulatory net capital
|
|
|
333,514
|
|
|
|
103,061
|
|
|
|
230,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquid assets
|
|
$
|
499,385
|
|
|
$
|
396,708
|
|
|
$
|
102,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in liquid assets from September 30, 2005 to
September 29, 2006 is primarily due to $527 million of
net income, approximately $46 million of excess
broker-dealer net capital acquired in the TD Waterhouse
acquisition, approximately $407 million of non
broker-dealer cash provided by TD Waterhouse to fund
approximately $1.00 of the $6.00 per share special dividend
and a decrease in aggregate debit items that resulted in
decreased regulatory net capital required of $16 million,
offset by $1,036 million of net cash used in financing
activities (see Cash Flow below). The remaining
$142 million of the positive net change in liquid assets is
due to timing of income tax and other payments, non-cash gains
and expenses that are reflected in net income, and other
miscellaneous changes in excess regulatory net capital.
Cash
Flow
Cash provided by operating activities was $485.0 million
for fiscal 2006, compared to $330.0 million for fiscal
2005. The increase was primarily due to higher net income in
fiscal 2006, partially offset by changes in broker-dealer
working capital.
Cash provided by investing activities was $743.5 million
for fiscal 2006, compared to cash used in investing activities
of $245.1 million for fiscal 2005. 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. The cash used in
investing activities in fiscal 2005 consisted primarily of
$211.9 million of net short-term investments in auction
rate securities and $25.9 million paid in the acquisition
of the online retail client accounts of JB Oxford &
Company.
Cash used in financing activities was $1.0 billion for
fiscal 2006, compared to $51.6 million for fiscal 2005. 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. The financing activities in fiscal 2005 included
$77.2 million of stock repurchases.
Loan 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. The senior credit
facilities include: (a) a senior secured term loan facility
in the
38
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 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 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 percent 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 percent if the consolidated
leverage ratio (as defined in the Financings) of the Company is
1.75 to 1.00 or higher, 1.25 percent 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 percent 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 percent
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 percent or
(b) (i) the greater of (x) the prime rate or
(y) the federal funds effective rate plus 0.50 percent
plus (ii) 0.50 percent. On September 29, 2006,
the applicable interest rate on the Term A Facility and the Term
B Facility was 6.57 percent and 6.82 percent,
respectively, based on
30-day
LIBOR. As of September 29, 2006, we had outstanding
indebtedness of $0.2 billion, $1.5 billion and $0
under the Term A Facility, Term B Facility and Revolving
Facility, respectively. We have not made any borrowings under
the Revolving Facility. The Financings also provide that we are
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 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 percent 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 percent of the ownership
interests in each first-tier foreign subsidiary held by a
guarantor, with certain exceptions.
The Financings contain certain 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 29, 2006, except for a failure to timely notify
the lenders of name changes of certain guarantor subsidiaries.
We have requested a waiver from the lenders for the lack of
timely notification.
Prior to the closing of our acquisition of TD Waterhouse, TD
Waterhouse and an affiliate of TD executed a promissory note
whereby TD Waterhouse borrowed $270 million from TD (the
Bridge Loan). The purpose of the Bridge Loan was to
monetize non-cash assets of TD Waterhouse to enable TD
Waterhouse to retain cash equal to $1.00 per share of the
$6.00 per share special cash dividend declared by us, as
required by the Purchase Agreement. We assumed the Bridge Loan
obligation upon the closing of our acquisition of TD Waterhouse.
The Bridge Loan
39
was scheduled to mature on July 24, 2006 and bore interest
at the daily effective federal funds rate until the completion
of the closing date balance sheet adjustments as specified in
the Purchase Agreement, and after that time bore interest at the
federal funds rate plus 150 basis points. We repaid
$200 million of the Bridge Loan during March 2006 and the
remaining $70 million balance during June 2006.
Upon the closing of our acquisition of TD Waterhouse, we assumed
$30 million of Subordinated Debt Series B Notes (the
Subordinated Notes), which were payable to an
affiliate of TD. The Subordinated Notes were unsecured and were
redeemable in November 2012. The Subordinated Notes bore
interest at a fixed rate of 6.64 percent. During June 2006,
we repaid the entire $30 million of Subordinated Notes.
Our wholly owned broker-dealer subsidiaries had access to
secured uncommitted credit facilities with financial
institutions of up to $740 million and $180 million as
of September 29, 2006 and September 30, 2005,
respectively. The broker-dealer subsidiaries also had access to
unsecured uncommitted credit facilities of up to
$435 million and $310 million as of September 29,
2006 and September 30, 2005, 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 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 29, 2006 and September 30, 2005. As of
September 29, 2006 and September 30, 2005,
approximately $1.0 billion and $490 million,
respectively, was available to our broker-dealer subsidiaries
pursuant to uncommitted credit facilities for either loans or,
in some cases, letters of credit.
Prepaid
Variable Forward Contracts
During fiscal 2003, we executed a series of prepaid variable
forward contracts (the forward contracts) with a
total notional amount of approximately $41.4 million on
7.9 million underlying Knight shares. The forward contracts
each contained a zero-cost embedded collar on the value of the
Knight shares, with a weighted average floor price of
$5.13 per share and a weighted average cap price of
$6.17 per share. At the inception of the forward contracts,
we received cash of approximately $35.5 million, equal to
approximately 86 percent of the notional amount. The
forward contracts were scheduled to mature on various dates in
fiscal years 2006 and 2007. We liquidated our position in Knight
and the prepaid variable forward contracts in January 2006,
resulting in a one-time pre-tax net gain of approximately
$78.8 million.
The embedded collars did not qualify for hedge accounting
treatment, and were therefore accounted for as non-hedging
derivatives in the consolidated financial statements. The total
fair value of the embedded collars was included under the
caption Prepaid variable forward derivative
instrument in the Consolidated Balance Sheets and changes
in the fair value of the embedded collars were included under
the caption Fair value adjustments of investment-related
derivative instruments in the Consolidated Statements of
Income.
The $35.5 million of cash received on the forward contracts
was accounted for as an obligation in the Consolidated Balance
Sheets. We were accreting interest on the obligation to the
notional maturity amount of $41.4 million over the terms of
the forward contracts using effective interest rates with a
weighted average of approximately 4.3 percent. Upon
settlement of each forward contract in January 2006, the
realized gain on the Knight stock delivered to the counterparty
or otherwise sold was reclassified from other comprehensive
income into earnings, net of taxes.
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 from 12 million shares to
32 million shares. In fiscal 2006, we repurchased
approximately 3.8 million shares under the plan at a
weighted average purchase price of $17.66 per share. See
Contractual Obligations below for information
regarding our obligation to repurchase common stock pursuant to
the Stockholders Agreement.
40
Off-Balance
Sheet Arrangements
The Company does not have any obligations that meet the
definition of an off-balance sheet arrangement and have, or are
reasonably likely to have, a material effect on our financial
statements.
Contractual
Obligations
The following table summarizes our contractual obligations as of
September 29, 2006 (amounts 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
|
|
|
2007
|
|
|
2008-09
|
|
|
2010-11
|
|
|
After 2011
|
|
|
Long-term debt obligations(1)
|
|
$
|
2,397,818
|
|
|
$
|
143,755
|
|
|
$
|
302,725
|
|
|
$
|
335,832
|
|
|
$
|
1,615,506
|
|
Capital lease obligations
|
|
|
8,088
|
|
|
|
4,134
|
|
|
|
3,954
|
|
|
|
|
|
|
|
|
|
Operating lease obligations
|
|
|
200,631
|
|
|
|
42,127
|
|
|
|
64,328
|
|
|
|
43,426
|
|
|
|
50,750
|
|
Purchase obligations
|
|
|
47,876
|
|
|
|
38,063
|
|
|
|
6,979
|
|
|
|
2,834
|
|
|
|
|
|
Deferred compensation(2)
|
|
|
16,087
|
|
|
|
16,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee severance and involuntary
termination costs(3)
|
|
|
26,676
|
|
|
|
23,526
|
|
|
|
1,200
|
|
|
|
1,200
|
|
|
|
750
|
|
Contract termination costs(3)
|
|
|
11,407
|
|
|
|
11,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock repurchase obligation(4)
|
|
|
71,022
|
|
|
|
71,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,779,605
|
|
|
$
|
350,121
|
|
|
$
|
379,186
|
|
|
$
|
383,292
|
|
|
$
|
1,667,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 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 2007 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) |
|
Pursuant to the Stockholders Agreement, as amended, we are
obligated to repurchase our common stock from time to time to
offset dilution resulting from stock option exercises and other
stock awards subsequent to the acquisition of TD Waterhouse on
January 24, 2006. Based on stock options exercised from
January 24, 2006 through September 29, 2006, we were
obligated to repurchase approximately 8.0 million shares of
common stock. Through September 29, 2006, we had
repurchased approximately 3.8 million shares. The
repurchase obligation presented in the table is based on the
actual repurchase of 4.2 million additional shares of our
common stock at a weighted-average price of $16.91 per
share from October 2, 2006 through November 3, 2006.
As of November 3, 2006, we have fulfilled the stock
repurchase obligation that existed at September 29, 2006.
We cannot estimate the amount and timing of repurchases that may
be required as a result of future stock option exercises. |
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 FASB Statement
41
No. 109, Accounting for Income Taxes.
FIN No. 48 prescribes a recognition threshold 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 percent 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
beginning September 29, 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
September 27, 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. 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 such guidelines, require our clients to deposit
additional collateral, or to reduce positions, when necessary.
We assess and monitor the suitability of investors to engage in
various trading activities. 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 money market
deposit account (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
42
have established an Asset/Liability Committee (ALCO)
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 with TD Bank USA.
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 29,
2006 indicate that an immediate one percent (100 basis point)
increase or decrease in short-term interest rates would result
in approximately $43 million more or less annual pre-tax
income, respectively.
Other
Market Risks
Our revenues and financial instruments are denominated in
U.S. dollars, and we generally do not invest, except for
economic hedging purposes, in derivative instruments.
43
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
44
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
TD AMERITRADE Holding Corporation
We have audited the accompanying consolidated balance sheet of
TD AMERITRADE Holding Corporation (the Company) as
of September 29, 2006, and the related consolidated
statements of income, stockholders equity, and cash flows
for the year 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 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, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of TD AMERITRADE Holding Corporation at
September 29, 2006, and the consolidated results of their
operations and their cash flows for the year 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 29, 2006, 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 15, 2006,
expressed an unqualified opinion thereon.
Chicago, Illinois
November 15, 2006
45
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 balance sheet of
TD AMERITRADE Holding Corporation and subsidiaries, formerly
Ameritrade Holding Corporation, (collectively the
Company) as of September 30, 2005, and the
related consolidated statements of income, stockholders
equity and cash flows for each of the fiscal years ended
September 30, 2005 and September 24, 2004. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on the 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, such consolidated financial statements present
fairly, in all material respects, the financial position of TD
AMERITRADE Holding Corporation as of September 30, 2005 and
the results of their operations and their cash flows for each of
the fiscal years ended September 30, 2005 and
September 24, 2004, in conformity with accounting
principles generally accepted in the United States of America.
/s/ DELOITTE &
TOUCHE LLP
Omaha, Nebraska
December 13, 2005
46
TD
AMERITRADE HOLDING CORPORATION
As of
September 29, 2006 and September 30,
2005
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
363,650
|
|
|
$
|
171,064
|
|
Short-term investments
|
|
|
65,275
|
|
|
|
229,819
|
|
Cash and investments segregated in
compliance with federal regulations
|
|
|
1,561,910
|
|
|
|
7,595,359
|
|
Receivable from brokers, dealers
and clearing organizations
|
|
|
4,566,525
|
|
|
|
3,420,226
|
|
Receivable from
clients net of allowance for doubtful accounts:
2006 $20.3 million; 2005
$12.9 million
|
|
|
6,970,834
|
|
|
|
3,784,688
|
|
Receivable from affiliate
|
|
|
19,191
|
|
|
|
|
|
Other receivables
|
|
|
89,038
|
|
|
|
70,036
|
|
Property and equipment
net of accumulated depreciation and amortization:
2006 $96.3 million; 2005
$75.9 million
|
|
|
57,346
|
|
|
|
33,259
|
|
Goodwill
|
|
|
1,731,718
|
|
|
|
769,215
|
|
Acquired intangible
assets net of accumulated amortization:
|
|
|
|
|
|
|
|
|
2006
$80.6 million; 2005 $38.3 million
|
|
|
1,056,899
|
|
|
|
259,759
|
|
Investments in equity securities
|
|
|
16,536
|
|
|
|
68,575
|
|
Other assets
|
|
|
59,547
|
|
|
|
15,110
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
16,558,469
|
|
|
$
|
16,417,110
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
Payable to brokers, dealers and
clearing organizations
|
|
$
|
7,022,601
|
|
|
$
|
4,449,686
|
|
Payable to clients
|
|
|
5,412,981
|
|
|
|
10,095,837
|
|
Accounts payable and accrued
liabilities
|
|
|
368,996
|
|
|
|
171,290
|
|
Payable to affiliate
|
|
|
1,596
|
|
|
|
|
|
Securities sold, not yet purchased
|
|
|
2,028
|
|
|
|
26,002
|
|
Prepaid variable forward
derivative instrument
|
|
|
|
|
|
|
20,423
|
|
Prepaid variable forward contract
obligation
|
|
|
|
|
|
|
39,518
|
|
Long-term debt
|
|
|
1,703,375
|
|
|
|
|
|
Capitalized lease obligations
|
|
|
7,337
|
|
|
|
6,218
|
|
Deferred income taxes, net
|
|
|
309,321
|
|
|
|
89,269
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
14,828,235
|
|
|
|
14,898,243
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred Stock, $0.01 par
value, 100,000,000 shares authorized; none issued
|
|
|
|
|
|
|
|
|
Common Stock, $0.01 par
value, 1,000,000,000 shares authorized;
2006 631,381,860 shares issued and 607,626,040
outstanding;
2005 435,081,860 shares issued and 406,058,970
outstanding
|
|
|
6,314
|
|
|
|
4,351
|
|
Additional paid-in capital
|
|
|
1,591,610
|
|
|
|
1,184,004
|
|
Retained earnings
|
|
|
440,762
|
|
|
|
652,742
|
|
Treasury stock, common, at cost:
2006 23,755,820 shares;
2005 29,022,890 shares
|
|
|
(312,410
|
)
|
|
|
(364,794
|
)
|
Deferred compensation
|
|
|
662
|
|
|
|
952
|
|
Accumulated other comprehensive
income
|
|
|
3,296
|
|
|
|
41,612
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,730,234
|
|
|
|
1,518,867
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
16,558,469
|
|
|
$
|
16,417,110
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
47
TD
AMERITRADE HOLDING CORPORATION
For the
Years Ended September 29, 2006, September 30, 2005 and
September 24, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction-based revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions and transaction fees
|
|
$
|
727,407
|
|
|
$
|
523,985
|
|
|
$
|
560,052
|
|
Asset-based revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest revenue
|
|
|
1,031,971
|
|
|
|
540,348
|
|
|
|
278,550
|
|
Brokerage interest expense
|
|
|
(335,820
|
)
|
|
|
(141,399
|
)
|
|
|
(41,861
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest revenue
|
|
|
696,151
|
|
|
|
398,949
|
|
|
|
236,689
|
|
Money market deposit account fees
|
|
|
185,014
|
|
|
|
|
|
|
|
|
|
Money market and other mutual fund
fees
|
|
|
139,586
|
|
|
|
25,051
|
|
|
|
21,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total asset-based revenues
|
|
|
1,020,751
|
|
|
|
424,000
|
|
|
|
258,114
|
|
Other revenues
|
|
|
55,373
|
|
|
|
55,168
|
|
|
|
61,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
1,803,531
|
|
|
|
1,003,153
|
|
|
|
880,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
350,079
|
|
|
|
180,579
|
|
|
|
154,792
|
|
Fair value adjustments of
compensation-related derivative instruments
|
|
|
(1,715
|
)
|
|
|
|
|
|
|
|
|
Clearing and execution costs
|
|
|
73,049
|
|
|
|
26,317
|
|
|
|
30,610
|
|
Communications
|
|
|
65,445
|
|
|
|
35,663
|
|
|
|
39,853
|
|
Occupancy and equipment costs
|
|
|
74,638
|
|
|
|
43,411
|
|
|
|
42,353
|
|
Depreciation and amortization
|
|
|
21,199
|
|
|
|
10,521
|
|
|
|
11,066
|
|
Amortization of acquired
intangible assets
|
|
|
42,286
|
|
|
|
13,887
|
|
|
|
12,158
|
|
Professional services
|
|
|
87,521
|
|
|
|
30,630
|
|
|
|
27,381
|
|
Interest on borrowings
|
|
|
93,988
|
|
|
|
1,967
|
|
|
|
2,581
|
|
Other
|
|
|
45,383
|
|
|
|
22,689
|
|
|
|
17,798
|
|
Advertising
|
|
|
164,072
|
|
|
|
92,312
|
|
|
|
100,364
|
|
Fair value adjustments of
investment-related derivative instruments
|
|
|
11,703
|
|
|
|
(8,315
|
)
|
|
|
(17,930
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1,027,648
|
|
|
|
449,661
|
|
|
|
421,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before other income and
income taxes
|
|
|
775,883
|
|
|
|
553,492
|
|
|
|
459,087
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of investments
|
|
|
81,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax income
|
|
|
857,305
|
|
|
|
553,492
|
|
|
|
459,087
|
|
Provision for income taxes
|
|
|
330,546
|
|
|
|
213,739
|
|
|
|
176,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
526,759
|
|
|
$
|
339,753
|
|
|
$
|
282,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
basic
|
|
$
|
0.97
|
|
|
$
|
0.84
|
|
|
$
|
0.68
|
|
Earnings per share
diluted
|
|
$
|
0.95
|
|
|
$
|
0.82
|
|
|
$
|
0.66
|
|
Weighted average shares
outstanding basic
|
|
|
544,307
|
|
|
|
404,215
|
|
|
|
417,629
|
|
Weighted average shares
outstanding diluted
|
|
|
555,465
|
|
|
|
413,167
|
|
|
|
426,972
|
|
Dividends declared per share
|
|
$
|
6.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
See notes to consolidated financial statements.
48
TD
AMERITRADE HOLDING CORPORATION
For the
Years Ended September 29, 2006, September 30, 2005 and
September 24, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 26, 2003
|
|
|
429,785
|
|
|
$
|
1,235,774
|
|
|
$
|
4,351
|
|
|
$
|
1,188,444
|
|
|
$
|
30,171
|
|
|
$
|
(41,452
|
)
|
|
$
|
708
|
|
|
$
|
53,552
|
|
Net income
|
|
|
|
|
|
|
282,818
|
|
|
|
|
|
|
|
|
|
|
|
282,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized investment loss, net
of $7.7 million tax
|
|
|
|
|
|
|
(9,686
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,686
|
)
|
Foreign currency translation
|
|
|
|
|
|
|
(449
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(449
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
272,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchases of common stock
|
|
|
(25,760
|
)
|
|
|
(323,660
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(323,660
|
)
|
|
|
|
|
|
|
|
|
Issuances of common stock
|
|
|
8
|
|
|
|
111
|
|
|
|
|
|
|
|
59
|
|
|
|
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
Options exercised, including tax
benefit
|
|
|
3,177
|
|
|
|
24,981
|
|
|
|
|
|
|
|
5,837
|
|
|
|
|
|
|
|
19,144
|
|
|
|
|
|
|
|
|
|
Stockholder loan activity
|
|
|
|
|
|
|
428
|
|
|
|
|
|
|
|
428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation
|
|
|
|
|
|
|
285
|
|
|
|
|
|
|
|
144
|
|
|
|
|
|
|
|
(144
|
)
|
|
|
285
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
306
|
|
|
|
|
|
|
|
306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
49
TD
AMERITRADE HOLDING CORPORATION
For the Years Ended September 29, 2006,
September 30, 2005 and September 24, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
526,759
|
|
|
$
|
339,753
|
|
|
$
|
282,818
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
21,199
|
|
|
|
10,521
|
|
|
|
11,066
|
|
Amortization of intangible assets
|
|
|
42,286
|
|
|
|
13,887
|
|
|
|
12,158
|
|
Deferred income taxes
|
|
|
45,475
|
|
|
|
2,277
|
|
|
|
17,127
|
|
Gain on sale of investments in
equity securities
|
|
|
(81,422
|
)
|
|
|
|
|
|
|
|
|
Gain on sale of businesses
|
|
|
(2,382
|
)
|
|
|
|
|
|
|
|
|
(Gain) loss on disposal of property
|
|
|
(769
|
)
|
|
|
(428
|
)
|
|
|
1,166
|
|
Fair value adjustments of
derivative instruments
|
|
|
9,988
|
|
|
|
(8,315
|
)
|
|
|
(17,930
|
)
|
Stock-based compensation
|
|
|
14,329
|
|
|
|
1,622
|
|
|
|
306
|
|
Other
|
|
|
(1,946
|
)
|
|
|
1,875
|
|
|
|
3,124
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and investments segregated in
compliance with federal regulations
|
|
|
6,109,449
|
|
|
|
207,216
|
|
|
|
75,846
|
|
Receivable from brokers, dealers
and clearing organizations
|
|
|
(997,662
|
)
|
|
|
(601,500
|
)
|
|
|
106,673
|
|
Receivable from clients
|
|
|
685,055
|
|
|
|
(684,083
|
)
|
|
|
(755,876
|
)
|
Receivable from/payable to
affiliate, net
|
|
|
31,939
|
|
|
|
|
|
|
|
|
|
Other receivables
|
|
|
(10,481
|
)
|
|
|
193,892
|
|
|
|
(222,717
|
)
|
Other assets
|
|
|
21,639
|
|
|
|
2,257
|
|
|
|
(3,154
|
)
|
Payable to brokers, dealers and
clearing organizations
|
|
|
526,103
|
|
|
|
1,007,884
|
|
|
|
293,017
|
|
Payable to clients
|
|
|
(6,314,596
|
)
|
|
|
(226,702
|
)
|
|
|
573,754
|
|
Accounts payable and accrued
liabilities
|
|
|
(113,593
|
)
|
|
|
43,866
|
|
|
|
(47,764
|
)
|
Securities sold, not yet purchased
|
|
|
(26,391
|
)
|
|
|
26,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
484,979
|
|
|
|
330,024
|
|
|
|
329,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(21,697
|
)
|
|
|
(7,981
|
)
|
|
|
(9,810
|
)
|
Cash received (paid) in business
combinations, net
|
|
|
580,056
|
|
|
|
(25,919
|
)
|
|
|
(56,735
|
)
|
Proceeds from sale of businesses
|
|
|
9,382
|
|
|
|
|
|
|
|
|
|
Purchase of short-term investments
|
|
|
(1,001,250
|
)
|
|
|
(605,924
|
)
|
|
|
(102,450
|
)
|
Proceeds from sale of short-term
investments
|
|
|
1,165,794
|
|
|
|
394,055
|
|
|
|
84,500
|
|
Proceeds from sale of investments
in equity securities
|
|
|
11,239
|
|
|
|
807
|
|
|
|
|
|
Other
|
|
|
18
|
|
|
|
(175
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
743,542
|
|
|
|
(245,137
|
)
|
|
|
(84,505
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term
debt
|
|
|
1,900,000
|
|
|
|
|
|
|
|
|
|
Payment of debt issuance costs
|
|
|
(20,992
|
)
|
|
|
|
|
|
|
|
|
Principal payments on long-term
debt and notes payable
|
|
|
(496,625
|
)
|
|
|
|
|
|
|
(46,828
|
)
|
Principal payments on capitalized
lease obligations
|
|
|
(3,903
|
)
|
|
|
(2,545
|
)
|
|
|
|
|
Proceeds from exercise of stock
options
|
|
|
46,881
|
|
|
|
28,142
|
|
|
|
13,806
|
|
Payment of cash dividend
|
|
|
(2,442,780
|
)
|
|
|
|
|
|
|
|
|
Purchase of treasury stock
|
|
|
(67,697
|
)
|
|
|
(77,229
|
)
|
|
|
(323,660
|
)
|
Excess tax benefits on stock-based
compensation
|
|
|
48,864
|
|
|
|
|
|
|
|
|
|
Payments received on stockholder
loans
|
|
|
|
|
|
|
|
|
|
|
428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing
activities
|
|
|
(1,036,252
|
)
|
|
|
(51,632
|
)
|
|
|
(356,254
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash and cash equivalents
|
|
|
317
|
|
|
|
417
|
|
|
|
(86
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and
cash equivalents
|
|
|
192,586
|
|
|
|
33,672
|
|
|
|
(111,231
|
)
|
Cash and cash equivalents at
beginning of period
|
|
|
171,064
|
|
|
|
137,392
|
|
|
|
248,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of
period
|
|
$
|
363,650
|
|
|
$
|
171,064
|
|
|
$
|
137,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
423,468
|
|
|
$
|
131,249
|
|
|
$
|
44,442
|
|
Income taxes paid
|
|
$
|
241,163
|
|
|
$
|
167,399
|
|
|
$
|
166,547
|
|
Tax benefit on exercises and
distributions of stock-based compensation
|
|
$
|
49,256
|
|
|
$
|
18,471
|
|
|
$
|
12,465
|
|
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.
50
TD
AMERITRADE HOLDING CORPORATION
For the Years Ended September 29, 2006,
September 30, 2005 and September 24, 2004
(Columnar amounts in thousands, except percentages and per
share amounts)
|
|
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 (formerly Ameritrade Holding Corporation), a
Delaware corporation, and its wholly owned subsidiaries
(collectively, the Company). Intercompany balances
and transactions have been eliminated. The Company reports on a
fifty-two/fifty-three week year. Each fiscal year ends on the
last Friday of the month of September. Fiscal years 2006 and
2004 were each fifty-two week years. 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
National Association of Securities Dealers, Inc.
(NASD), the New York Stock Exchange, Inc.
(NYSE) 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, NASD and NYSE 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 three 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.
51
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 and $7.6 billion as of
September 29, 2006 and September 30, 2005,
respectively, have been 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. 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.
Securities Owned and Securities Sold, Not Yet
Purchased Securities owned and securities sold,
not yet purchased in the Companys securities brokerage
business are carried at fair value and the resulting unrealized
gains or losses are included in other revenues in the
Consolidated Statements of Income.
Fair Value of Financial Instruments The
Company considers the amounts presented for financial
instruments on the Consolidated Balance Sheets to be reasonable
estimates of fair value 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 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 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 investments
that do not meet equity method criteria. Declines in fair value
of cost method investments that are considered other than
temporary are accounted for as realized losses. The
Companys investments in marketable equity securities are
carried at fair value and are designated as
available-for-sale,
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
52
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of Income. Unrealized gains and losses on investments accounted
for as trading investments are reflected currently in the
Consolidated Statements of Income.
Software Development Software development
costs are capitalized and included in property and equipment at
the point technological feasibility has been established until
beta testing is complete. Once the product is fully functional,
such costs are amortized in accordance with the Companys
normal accounting policies. Software development costs that do
not meet capitalization criteria are expensed as incurred.
Deferred Compensation Company common stock
held in a rabbi trust pursuant to a Company deferred
compensation plan is recorded at the fair value of the stock at
the time it is transferred to the rabbi trust and is classified
as treasury stock. The corresponding deferred compensation
liability is recorded as a component of stockholders
equity.
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. 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 2006, fiscal 2005 and fiscal 2004 was $14.3 million
($8.9 million net of tax), $1.6 million
($1.0 million net of tax) and $0.3 million
($0.2 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
53
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Company had accounted for its stock-based awards to employees
under the fair value based method for all periods presented. Pro
forma net income and earnings per share are as follows for the
fiscal years ended:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Net income, as reported
|
|
$
|
339,753
|
|
|
$
|
282,818
|
|
Add: Stock-based compensation
expense included in reported net income, net of related income
tax effects
|
|
|
998
|
|
|
|
186
|
|
Less: Total stock-based
compensation determined under the fair value based method, net
of related income tax effects
|
|
|
(9,830
|
)
|
|
|
(14,782
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
330,921
|
|
|
$
|
268,222
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share, as
reported
|
|
$
|
0.84
|
|
|
$
|
0.68
|
|
Basic earnings per share, pro forma
|
|
$
|
0.82
|
|
|
$
|
0.64
|
|
Diluted earnings per share, as
reported
|
|
$
|
0.82
|
|
|
$
|
0.66
|
|
Diluted earnings per share, pro
forma
|
|
$
|
0.80
|
|
|
$
|
0.63
|
|
Foreign Currency Translation Assets and
liabilities of the Companys Canadian subsidiaries that are
denominated in Canadian dollars are translated into
U.S. dollars using the exchange rate in effect at each
period end. Revenues and expenses are translated at the average
exchange rate during the period. The functional currency of our
Canadian subsidiaries is the local currency; therefore the
effects of foreign currency translation adjustments arising from
differences in exchange rates from period to period are 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 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.
Reclassifications Other receivables of
approximately $70.0 million as of September 30, 2005
have been reclassified from other assets in the Consolidated
Balance Sheet. Money market and other mutual fund fees of
approximately $25.1 million and $21.4 million for
fiscal 2005 and 2004, respectively, have been reclassified from
other revenues in the Consolidated Statements of Income.
Amortization of acquired intangible assets of approximately
$13.9 million and $12.2 million for fiscal 2005 and
2004, respectively, has been reclassified from depreciation and
amortization in the Consolidated Statements of Income. Gains on
disposal of property of approximately $0.4 million for
fiscal 2005 and losses on disposal of property of approximately
$1.1 million for fiscal 2004 have been reclassified to
other expense in the Consolidated Statements of Income. Each of
the aforementioned 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
54
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 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 percent 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 beginning September 29, 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
September 27, 2008. Adoption of SFAS No. 157 is
not expected to have a material impact on the Companys
consolidated financial statements.
On January 24, 2006, the Company completed the acquisition
of TD Waterhouse Group, Inc. (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
(TD). The Company purchased from TD (the Share
Purchase) all of the capital stock of TD Waterhouse 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 percent of
the outstanding shares of the Company after giving effect to the
transaction. Upon the completion of the transaction, the Company
changed its name to TD AMERITRADE Holding Corporation and the
authorized shares of common stock of the Company were increased
from 650 million to one billion. 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 has 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. 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.
Pursuant to the Purchase Agreement, 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 above certain thresholds
prior to the consummation of the Share Purchase. As contemplated
in the 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.
55
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In connection with the Purchase Agreement, TD was given rights
to have its shares of common stock of the Company registered for
resale. TD licensed the Company the right to use the
TD name in connection with the operation of the
Companys business. The parties also entered into
agreements regarding bank sweep accounts and mutual funds. See
Note 18 for discussion of related party transactions.
In connection with the Purchase Agreement, the Company, TD and
J. Joe Ricketts, the Companys Chairman and Founder, and
certain of his affiliates also entered into a Stockholders
Agreement, as amended (the Stockholders Agreement).
The Stockholders Agreement sets forth certain governance
arrangements and contains various provisions relating to stock
ownership, voting, election of directors and other matters. The
Companys 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.
The Companys board of directors considered various factors
in approving the acquisition of TD Waterhouse and the related
agreements, including significant synergy opportunities
identified by the Companys management, the likelihood that
the acquisition would enhance the Companys strategic goal
of increasing the scale of the Companys business and
expanding its operations into the long-term investor and
registered investment advisor markets, the financial terms of
the transaction and the financial analysis and fairness opinion
of the transaction performed by the Companys investment
banking firm.
The preliminary purchase price for TD Waterhouse was comprised
of the following:
|
|
|
|
|
TD AMERITRADE common stock issued
|
|
$
|
2,123,181
|
|
Cash acquired, net of cash paid
|
|
|
(580,056
|
)
|
Closing date capital adjustments
|
|
|
(45,915
|
)
|
Acquisition costs
|
|
|
20,740
|
|
Exit and involuntary termination
costs
|
|
|
118,078
|
|
|
|
|
|
|
Total preliminary purchase price
|
|
$
|
1,636,028
|
|
|
|
|
|
|
The value of the 196,300,000 shares of common stock issued
is calculated using the $16.816 average closing market price of
Company common stock for the period beginning two business days
before and ending two business days after June 22, 2005,
the date the proposed acquisition of TD Waterhouse was agreed to
and announced, less the $6.00 per share special cash
dividend. The special dividend is deducted from the average
market price because the shares issued to TD did not include the
right to receive the special dividend.
56
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The preliminary purchase price allocation for TD Waterhouse is
summarized as follows:
|
|
|
|
|
Cash and investments segregated in
compliance with federal regulations
|
|
$
|
76,000
|
|
Receivable from broker, dealers
and clearing organizations
|
|
|
148,637
|
|
Receivable from clients, net
|
|
|
3,871,184
|
|
Receivable from affiliate
|
|
|
5,712
|
|
Other receivables
|
|
|
8,521
|
|
Property and equipment
|
|
|
18,735
|
|
Goodwill
|
|
|
969,253
|
|
Acquired intangible assets
|
|
|
839,426
|
|
Investments in equity securities
|
|
|
9,420
|
|
Other assets
|
|
|
70,065
|
|
|
|
|
|
|
Total assets acquired
|
|
|
6,016,953
|
|
|
|
|
|
|
Payable to brokers, dealers and
clearing organizations
|
|
|
(2,046,812
|
)
|
Payable to clients
|
|
|
(1,631,740
|
)
|
Accounts payable and accrued
liabilities
|
|
|
(188,308
|
)
|
Payable to affiliate
|
|
|
(2,093
|
)
|
Securities sold, not yet purchased
|
|
|
(2,417
|
)
|
Notes payable to affiliate
|
|
|
(300,000
|
)
|
Deferred income taxes
|
|
|
(210,068
|
)
|
|
|
|
|
|
Total liabilities assumed
|
|
|
(4,381,438
|
)
|
|
|
|
|
|
Other comprehensive income
|
|
|
513
|
|
|
|
|
|
|
Total preliminary purchase price
allocated
|
|
$
|
1,636,028
|
|
|
|
|
|
|
Approximately $134.5 million of the goodwill associated
with the TD Waterhouse acquisition is expected to be deductible
for income tax purposes, resulting from the carryover tax basis
of businesses previously acquired by TD Waterhouse. The
remainder of the goodwill is not expected to be deductible for
income tax purposes because the transaction was not treated as a
purchase of assets for income tax purposes. The purchase price
is preliminary, primarily due to estimates included for exit and
involuntary termination costs and deferred income taxes.
Differences between these estimates and actual results may
result in adjustments to the purchase price. The Company began
formulating plans to consolidate certain facilities and
functions prior to the closing of the acquisition of TD
Waterhouse. Although the Company believes its plans are
reasonable, minor changes may still be made to the scope or
timing of such plans, which may result in changes to estimated
exit and involuntary termination costs. Exit and involuntary
termination costs consist primarily of severance and other
involuntary termination costs for approximately 900 TD
Waterhouse employees, costs associated with unfavorable leases
and other contract termination costs. See Note 8 for a
summary of acquisition exit cost activity.
The following table summarizes the major classes of TD
Waterhouse acquired intangible assets and the respective
amortization periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
Amount
|
|
|
Period (Years)
|
|
|
Client relationships
|
|
$
|
693,752
|
|
|
|
17
|
|
Trademark license TD
|
|
|
145,674
|
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
839,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The amounts allocated to acquired intangible assets were based
on the results of an independent valuation. The weighted average
amortization period of the acquired intangible assets subject to
amortization is 17 years. The initial term of the trademark
license agreement with TD is ten years and the agreement is
automatically renewable for additional ten-year periods. The
acquired intangible asset associated with the trademark license
agreement is not subject to amortization because the term of the
agreement is considered to be indefinite.
The following unaudited pro forma financial information sets
forth the results of operations of the Company as if the
acquisition of TD Waterhouse had occurred at the beginning of
the periods presented. The pro forma results for periods prior
to the acquisition date do not reflect any potential operating
cost savings that may result from the consolidation of
operations of the Company with the acquired company and are not
necessarily indicative of the results of future operations.
Pro forma financial information (unaudited) for the fiscal years
ended:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Net revenues
|
|
$
|
2,101,574
|
|
|
$
|
1,828,084
|
|
Net income
|
|
$
|
555,531
|
|
|
$
|
366,088
|
|
Basic earnings per share
|
|
$
|
0.92
|
|
|
$
|
0.61
|
|
Diluted earnings per share
|
|
$
|
0.90
|
|
|
$
|
0.60
|
|
On October 8, 2004, the Company completed the purchase of
approximately 45,000 retail client accounts from JB
Oxford & Company, a subsidiary of JB Oxford Holdings,
Inc. The purchase price was approximately $25.9 million.
The entire purchase price has been allocated to acquired
intangible assets for the fair value of the JB Oxford client
relationships. This intangible asset is being amortized over a
20-year
period.
On January 2, 2004, the Company completed the acquisition
of Bidwell & Company (Bidwell) for
$55 million. The Company utilized cash on hand to fund the
acquisition. The Company allocated approximately
$19.8 million of the Bidwell purchase price to acquired
intangible assets for the fair value of the Bidwell client
relationships, to be amortized over 10- to
15-year
periods; and $0.3 million to the fair value of a noncompete
agreement, to be amortized over a three-year period. Amounts
allocated to Bidwell acquired intangible assets, and their
respective amortization periods, were based on an independent
valuation.
On February 13, 2004, the Company completed its purchase of
approximately 11,000 retail brokerage accounts from
BrokerageAmerica, LLC. The purchase price was
$1.25 million. The entire purchase price has been allocated
to acquired intangible assets for the fair value of the
BrokerageAmerica, LLC client relationships. This intangible
asset is being amortized over a
20-year
period.
|
|
3.
|
Goodwill
and Acquired Intangible Assets
|
The Company has recorded goodwill for purchase business
combinations to the extent the purchase price of each
acquisition exceeded the fair value of the net identifiable
tangible and intangible assets of the acquired company. The
following table summarizes changes in the carrying amount of
goodwill:
|
|
|
|
|
Balance as of September 24,
2004
|
|
$
|
770,094
|
|
Purchase accounting adjustments,
net of income taxes(1)
|
|
|
476
|
|
Tax benefit of option exercises(2)
|
|
|
(1,355
|
)
|
|
|
|
|
|
Balance as of September 30,
2005
|
|
|
769,215
|
|
Goodwill recorded in purchase of
TD Waterhouse (see Note 2)
|
|
|
969,253
|
|
Purchase accounting adjustments(3)
|
|
|
(6,358
|
)
|
Tax benefit of option exercises(2)
|
|
|
(392
|
)
|
|
|
|
|
|
Balance as of September 29,
2006
|
|
$
|
1,731,718
|
|
|
|
|
|
|
58
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(1) |
|
Purchase accounting adjustments for fiscal year 2005 consist of
approximately $1.2 million of adjustments to liabilities
relating to the acquisition of Bidwell, partially offset by an
adjustment to reclassify approximately $0.7 million of the
purchase price of the Bidwell acquisition to acquired intangible
assets for the Bidwell client relationships. |
|
(2) |
|
Represents the tax benefit of exercises of replacement stock
options that were issued in connection with the Datek Online
Holdings Corp. (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 year 2006 consist of
reductions to accruals for uncertain tax positions relating to
the Datek merger. |
Acquired intangible assets consist of the following as of the
fiscal years ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Client relationships
|
|
$
|
991,522
|
|
|
$
|
(80,323
|
)
|
|
$
|
911,199
|
|
|
$
|
297,770
|
|
|
$
|
(38,137
|
)
|
|
$
|
259,633
|
|
Non-competition agreement
|
|
|
300
|
|
|
|
(274
|
)
|
|
|
26
|
|
|
|
300
|
|
|
|
(174
|
)
|
|
|
126
|
|
Trademark license TD
|
|
|
145,674
|
|
|
|
|
|
|
|
145,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,137,496
|
|
|
$
|
(80,597
|
)
|
|
$
|
1,056,899
|
|
|
$
|
298,070
|
|
|
$
|
(38,311
|
)
|
|
$
|
259,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense on acquired intangible assets was
$42.3 million, $13.9 million and $12.2 million
for fiscal years 2006, 2005 and 2004, respectively. The Company
estimates amortization expense on acquired intangible assets
outstanding as of September 29, 2006 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 as of the fiscal
years ended:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Receivable:
|
|
|
|
|
|
|
|
|
Deposits paid for securities
borrowed
|
|
$
|
4,441,896
|
|
|
$
|
3,366,645
|
|
Broker-dealers
|
|
|
16,449
|
|
|
|
|
|
Clearing organizations
|
|
|
85,999
|
|
|
|
48,298
|
|
Securities failed to deliver
|
|
|
22,181
|
|
|
|
5,283
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,566,525
|
|
|
$
|
3,420,226
|
|
|
|
|
|
|
|
|
|
|
Payable:
|
|
|
|
|
|
|
|
|
Deposits received for securities
loaned
|
|
$
|
6,942,123
|
|
|
$
|
4,429,518
|
|
Broker-dealers
|
|
|
44,423
|
|
|
|
|
|
Clearing organizations
|
|
|
7,663
|
|
|
|
13,855
|
|
Securities failed to receive
|
|
|
28,392
|
|
|
|
6,313
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,022,601
|
|
|
$
|
4,449,686
|
|
|
|
|
|
|
|
|
|
|
59
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Beginning balance
|
|
$
|
12,925
|
|
|
$
|
9,812
|
|
|
$
|
10,948
|
|
Provision for doubtful accounts
|
|
|
2,647
|
|
|
|
8,773
|
|
|
|
2,547
|
|
Acquired in business combinations
|
|
|
8,795
|
|
|
|
|
|
|
|
|
|
Write-off of doubtful accounts
|
|
|
(4,077
|
)
|
|
|
(5,660
|
)
|
|
|
(3,683
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
20,290
|
|
|
$
|
12,925
|
|
|
$
|
9,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Property
and Equipment
|
Property and equipment consists of the following as of the
fiscal years ended:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Leasehold improvements
|
|
$
|
24,340
|
|
|
$
|
15,824
|
|
Software
|
|
|
73,769
|
|
|
|
60,921
|
|
Computer equipment
|
|
|
29,059
|
|
|
|
15,282
|
|
Other equipment, furniture and
fixtures
|
|
|
26,485
|
|
|
|
17,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
153,653
|
|
|
|
109,115
|
|
Less: Accumulated depreciation and
amortization
|
|
|
(96,307
|
)
|
|
|
(75,856
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment
net
|
|
$
|
57,346
|
|
|
$
|
33,259
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
Investments
in Equity Securities
|
The Companys investments in equity securities are
summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
September 29,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
Available-for-sale
investments, at fair value:
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
$
|
6,040
|
|
|
$
|
68,354
|
|
Trading investments, at fair value:
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
|
10,404
|
|
|
|
|
|
Other investments, at cost
|
|
|
92
|
|
|
|
221
|
|
|
|
|
|
|
|
|
|
|
Total investments in equity
securities
|
|
$
|
16,536
|
|
|
$
|
68,575
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2005, the Company owned approximately
7.9 million common shares of Knight Capital Group, Inc.
(Knight), representing approximately eight percent
of Knights outstanding common shares. In January 2006, the
Company liquidated its position in Knight and the prepaid
variable forward contracts described in Note 17, resulting
in a one-time pre-tax net gain of approximately
$78.8 million. The Company accounted for its investment in
Knight as a marketable equity security
available-for-sale;
therefore, the unrealized gain was reflected in other
comprehensive income, net of taxes, in the Consolidated Balance
Sheets. Upon the sale of the Knight investment, the unrealized
gain was reclassified from other comprehensive income into
earnings, net of taxes. See the Consolidated Statements of
Stockholders Equity for a complete summary of
comprehensive income.
60
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Available-for-sale
investments in equity securities included gross unrealized gains
of $5.2 million and $67.2 million as of
September 29, 2006 and September 30, 2005,
respectively, which are included in accumulated other
comprehensive income on the Consolidated Balance Sheets.
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
|
|
|
Clearing and
|
|
|
Occupancy
|
|
|
Professional
|
|
|
|
|
|
|
Compensation
|
|
|
Execution
|
|
|
and Equipment
|
|
|
Services
|
|
|
Total
|
|
|
Balance, Sept 26, 2003
|
|
$
|
2,707
|
|
|
$
|
|
|
|
$
|
4,913
|
|
|
$
|
|
|
|
$
|
7,620
|
|
Fiscal 2004 activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exit costs recorded
|
|
|
4,172
|
|
|
|
|
|
|
|
1,016
|
|
|
|
|
|
|
|
5,188
|
|
Utilized
|
|
|
(6,302
|
)
|
|
|
|
|
|
|
(816
|
)
|
|
|
|
|
|
|
(7,118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
8,850
|
|
|
|
46,936
|
|
|
|
2,957
|
|
|
|
118,078
|
|
Utilized
|
|
|
(32,780
|
)
|
|
|
|
|
|
|
(26,985
|
)
|
|
|
(400
|
)
|
|
|
(60,165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, Sept 29, 2006
|
|
$
|
26,676
|
|
|
$
|
8,850
|
|
|
$
|
23,168
|
|
|
$
|
2,557
|
|
|
$
|
61,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The exit costs recorded during fiscal 2006 relate to the
acquisition of TD Waterhouse described in Note 2.
Acquisition employee compensation liabilities and professional
services contract termination costs are expected to be
substantially paid over the course of the TD Waterhouse
integration during fiscal 2007. Remaining acquisition occupancy
and equipment exit liabilities are expected to be utilized over
the respective lease periods through fiscal 2015.
The Company entered into a credit agreement, as amended, 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.
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 per share special cash dividend paid in connection with
the acquisition of TD Waterhouse and $300 million
61
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 percent 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 percent if the consolidated
leverage ratio (as defined in the Financings) of the Company is
1.75 to 1.00 or higher, 1.25 percent 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 percent 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 percent
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 percent or (b) (i) the greater of
(x) the prime rate or (y) the federal funds effective
rate plus 0.50 percent plus (ii) 0.50 percent. On
September 29, 2006, the applicable interest rate on the
Term A Facility and the Term B Facility was 6.57 percent
and 6.82 percent, respectively, based on
30-day
LIBOR. As of September 29, 2006, the Company had
outstanding indebtedness of $0.2 billion, $1.5 billion
and $0 under the Term A Facility, Term B Facility and Revolving
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 percent
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 percent
of the ownership interests in each first-tier foreign subsidiary
held by a guarantor, with certain exceptions.
The Financings contain certain 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 29, 2006, except for a failure to timely notify
the lenders of name changes of certain guarantor subsidiaries.
The Company has requested a waiver from the lenders for the lack
of timely notification.
Fiscal year maturities on long-term debt outstanding at
September 29, 2006 are as follows:
|
|
|
|
|
2007
|
|
$
|
25,000
|
|
2008
|
|
|
34,375
|
|
2009
|
|
|
37,500
|
|
2010
|
|
|
56,250
|
|
2011
|
|
|
62,500
|
|
Thereafter
|
|
|
1,487,750
|
|
|
|
|
|
|
Total
|
|
$
|
1,703,375
|
|
|
|
|
|
|
62
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company, through its wholly owned broker-dealer
subsidiaries, had access to secured uncommitted credit
facilities with financial institutions of up to
$740 million and $180 million as of September 29,
2006 and September 30, 2005, respectively. The
broker-dealer subsidiaries also had access to unsecured
uncommitted credit facilities of up to $435 million and
$310 million as of September 29, 2006 and
September 30, 2005, 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 29, 2006 and
September 30, 2005. As of September 29, 2006 and
September 30, 2005, approximately $1.0 billion and
$490 million, 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 ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Current expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
242,511
|
|
|
$
|
180,733
|
|
|
$
|
132,315
|
|
State
|
|
|
42,392
|
|
|
|
29,479
|
|
|
|
25,543
|
|
Foreign
|
|
|
168
|
|
|
|
1,250
|
|
|
|
1,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
285,071
|
|
|
|
211,462
|
|
|
|
159,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
35,518
|
|
|
|
2,813
|
|
|
|
20,374
|
|
State
|
|
|
9,225
|
|
|
|
325
|
|
|
|
(3,338
|
)
|
Foreign
|
|
|
732
|
|
|
|
(861
|
)
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,475
|
|
|
|
2,277
|
|
|
|
17,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
330,546
|
|
|
$
|
213,739
|
|
|
$
|
176,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 resulting from ongoing and
subsequent years examinations. 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.
A reconciliation of the federal statutory tax rate to the
effective tax rate applicable to pre-tax income follows for the
fiscal years ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State taxes, net of federal tax
effect
|
|
|
4.0
|
|
|
|
3.6
|
|
|
|
3.3
|
|
Reversal of accruals for
contingent tax liabilities
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38.6
|
%
|
|
|
38.6
|
%
|
|
|
38.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
TD AMERITRADE HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred tax assets (liabilities) are comprised of the following
as of the fiscal years ended:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
48,979
|
|
|
$
|
14,877
|
|
Stock-based compensation
|
|
|
15,001
|
|
|
|
688
|
|
Allowance for doubtful accounts
|
|
|
7,609
|
|
|
|
4,976
|
|
Operating loss carryforwards
|
|
|
6,348
|
|
|
|
6,502
|
|
Other deferred tax assets
|
|
|
|
|
|
|
2,205
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
77,937
|
|
|
|
29,248
|
|
Less: Valuation allowance
|
|
|
(6,174
|
)
|
|
|
(5,164
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
71,763
|
|
|
|
24,084
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|