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TD Ameritrade Holding 10-K 2008 Documents found in this filing:
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Commission file
number: 0-49992
4211 South 102nd Street,
Omaha, Nebraska 68127
(Address of principal executive
offices and zip code)
(402) 331-7856
Securities registered pursuant to Section 12(b) of the
Act:
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) of
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 registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule
12b-2 of the
Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the common stock held by
non-affiliates of the registrant was approximately
$3.7 billion computed by reference to the closing sale
price of the stock on the Nasdaq Global Select Market on
March 31, 2008, the last trading day of the
registrant’s most recently completed second fiscal quarter.
The number of shares of common stock outstanding as of
November 14, 2008 was 591,748,475 shares.
Definitive Proxy Statement relating to the registrant’s
2009 Annual Meeting of Stockholders to be filed hereafter
(incorporated into Part III hereof).
TD
AMERITRADE HOLDING CORPORATION
Unless otherwise indicated, references to “we,”
“us,” “Company,” or “TD
AMERITRADE” mean TD AMERITRADE Holding Corporation and
its subsidiaries, and references to “fiscal” mean the
Company’s fiscal year ended September 30 (for fiscal years
2008 and 2007) or the last Friday of September (for fiscal
years prior to 2007). References to the “parent
company” mean TD AMERITRADE Holding Corporation.
PART I
The Company was established in 1971 as a local investment
banking firm and began operations as a retail discount
securities brokerage firm in 1975. The Company is a Delaware
corporation.
In the U.S., we want to be . . .
We are a leading provider of securities brokerage services and
technology-based financial services to retail investors and
business partners, predominantly through the Internet, a
national branch network and relationships with one of the
largest groups of independent registered investment advisors
(“RIAs”). Our services appeal to a broad market of
independent, value-conscious retail investors, traders,
financial planners and institutions. We use our efficient
platform to offer brokerage services to retail investors and
institutions under a simple, low-cost commission structure.
We have been an innovator in electronic brokerage services since
entering the retail securities brokerage business in 1975. We
believe that we were the first brokerage firm to offer the
following products and services to retail clients: touch-tone
trading; trading over the Internet; unlimited, streaming, free
real-time quotes; extended trading hours; direct access; and
commitment on the speed of order 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.
We intend to capitalize on the growth and consolidation of the
retail brokerage industry in the United States and leverage our
low-cost infrastructure to grow our market share and
profitability. Our long-term growth strategy is to increase our
market share of client assets by providing superior offerings to
long-term investors, RIAs, and active traders. We strive to
enhance the client experience by providing sophisticated asset
management products and services, enhanced technological
capabilities that enable self-directed investors to trade and
invest in new asset classes and a superior, proprietary,
single-platform system to support RIAs. The key elements of our
strategy are as follows:
On February 4, 2008, we purchased a portion of Fiserv,
Inc.’s (“Fiserv”) investment support services
business by acquiring all of the outstanding capital stock of
Fiserv Trust Company, a wholly-owned subsidiary of Fiserv.
The acquisition added approximately $25 billion in client
assets to TD AMERITRADE, including $15 billion held in more
than 75,000 accounts managed by approximately 500 independent
RIAs and $10 billion held in more than 2,000 plans
administered by 80 independent third party administrators
(TPAs). This acquisition is discussed in further detail in
Item 8, Financial Statements and Supplementary
Data — Notes to Consolidated Financial Statements:
Note 2 — Business Combinations.
On January 24, 2006, we acquired the U.S. brokerage
business of TD Waterhouse Group, Inc. (“TD
Waterhouse”) from The Toronto-Dominion Bank
(“TD”). The transaction combined highly complementary
franchises to create a retail broker with the scale, breadth and
financial strength to be a leading player in the increasingly
competitive and consolidating investor services industry. The
acquisition of TD Waterhouse provided us with a national network
of over 100 branches, as well as relationships with one of the
largest groups of independent RIAs. We also now provide our
clients with a Federal Deposit Insurance Corporation
(“FDIC”)-insured money market sweep alternative for
their cash through an arrangement with TD Bank USA, N.A. This
acquisition is discussed in further detail under the heading
“Acquisition of TD Waterhouse” in Item 7,
Management’s Discussion and Analysis of Financial Condition
and Results of Operations.
We deliver products and services aimed at providing a
comprehensive, personalized experience for active traders,
long-term investors and independent RIAs. Our client offerings
are described below:
We strive to provide the best value of retail brokerage services
to our clients. The products and services available to our
clients include:
We provide our clients with an array of channels to access our
products and services. These include the Internet, our network
of retail branches, wireless telephone or personal digital
assistant, interactive voice response and registered
representatives via telephone.
We strive to provide the best client service in the industry as
measured by: (1) speed of response time to telephone calls,
(2) turnaround time responding to client inquiries and
(3) client satisfaction with the account relationship.
We endeavor to optimize our highly-rated client service by:
We provide access to client service and support through the
following means:
Our technological capabilities and systems are central to our
business and are critical to our goal of providing the best
execution at the best value to our clients. Our operations
require reliable, scalable systems that can handle complex
financial transactions for our clients with speed and accuracy.
We maintain sophisticated and proprietary technology that
automates traditionally labor-intensive securities transactions.
Our ability to effectively leverage and adopt new technology to
improve our services is a key component of our success.
We continue to make investments in technology and information
systems. We have spent a significant amount of resources to
increase capacity and improve speed and reliability. To provide
for system continuity during potential power outages, we have
equipped our data centers with uninterruptible power supply
units, as well as
back-up
generators.
We currently have the capacity to process approximately 800,000
trades per day and approximately 33,000 client login
connections per second. During fiscal 2008, our clients averaged
approximately 312,000 trades per day. Our greatest number of
average client trades per day for a single month occurred in
October 2008, when clients averaged approximately 411,000 trades
per day. The greatest number of trades our clients have made in
a single day is 648,000.
We intend to continue to grow and increase our market share by
advertising online, on television, in print and direct mail and
on our own Web sites. We invest heavily in advertising programs
designed to bring greater brand recognition to our services. We
intend to continue to aggressively advertise our services. From
time to time, we may choose to increase our advertising to
target specific groups of investors or to decrease advertising
in response to market conditions.
Advertising for retail clients is generally conducted through
Web sites, financial news networks and other television and
cable networks. We also place print advertisements in a broad
range of business publications and use direct mail advertising.
Advertising for institutional clients is significantly less than
for retail clients and is generally conducted through
highly-targeted media.
To monitor the success of our various marketing efforts, we have
installed a data gathering and tracking system. This system
enables us to determine the type of advertising that best
appeals to our target market so that we can invest in these
programs in the future. Additionally, through the use of our
database tools, we are working to more efficiently determine the
needs of our various client segments and tailor our services to
their individual needs. We intend to utilize this system to
strengthen our client relationships and support marketing
campaigns to attract new clients. All of our methods and uses of
client information are disclosed in our privacy statement.
All of our brokerage-related communications with the public are
regulated by the Financial Industry Regulatory Authority
(“FINRA”).
Our subsidiary, TD AMERITRADE Clearing, Inc. (“TDA
Clearing”) provides clearing and execution services to our
introducing broker-dealer subsidiary, TD AMERITRADE, Inc.
(“TDA Inc.”). Clearing services include the
confirmation, receipt, settlement, delivery and record-keeping
functions involved in processing securities transactions. Our
clearing broker-dealer subsidiary provides the following back
office functions:
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 E*TRADE Financial Corporation, Charles
Schwab & Co., Inc., Fidelity Investments and
Scottrade, Inc. We also encounter competition from established
full-commission brokerage firms such as Merrill Lynch and Smith
Barney, as well as financial institutions, mutual fund sponsors
and other organizations, some of which provide online brokerage
services.
The securities industry is subject to extensive regulation under
federal and state law. Broker-dealers are required to register
with the U.S. Securities and Exchange Commission
(“SEC”) and to be members of FINRA. Our broker-dealer
subsidiaries are subject to the requirements of the Securities
Exchange Act of 1934 (the “Exchange Act”) relating to
broker-dealers. These regulations establish, among other things,
minimum net capital requirements for our broker-dealer
subsidiaries. Certain of our subsidiaries are also registered as
investment advisors under the Investment Advisers Act of 1940.
We are also subject to regulation in all 50 states and the
District of Columbia, including registration requirements.
In its capacity as a securities clearing firm, TDA Clearing is a
member of The Depository Trust & Clearing Corporation
and The Options Clearing Corporation, each of which is
registered as a clearing agency with the SEC. As a member of
these clearing agencies, TDA Clearing is required to comply with
the rules of such clearing agencies, including rules relating to
possession and control of client funds and securities, margin
lending and execution and settlement of transactions.
Margin lending activities are subject to limitations imposed by
regulations of the Federal Reserve System and FINRA. In general,
these regulations provide that in the event of a significant
decline in the value of securities collateralizing a margin
account, we are required to obtain additional collateral from
the borrower or liquidate security positions.
Our success and ability to compete are dependent to a
significant degree on our intellectual property, which includes
our proprietary technology, trade secrets and client base. We
rely on copyright, trade secret, trademark, domain name, patent
and contract laws to protect our intellectual property and have
utilized the various methods available to us, including filing
registrations with the United States Patent and Trademark office
and entering into written licenses and other technology
agreements with third parties. The source and object code for
our proprietary software is also protected using applicable
methods of intellectual property protection and general
protections afforded to confidential information. In addition,
it is our policy to enter into confidentiality and intellectual
property ownership agreements with our employees and
confidentiality and noncompetition agreements with our
independent contractors and business partners, and to control
access to and distribution of our intellectual property.
As of September 30, 2008, we had 4,660 full-time
equivalent employees. This number has increased from
3,882 full-time equivalent employees as of the end of
fiscal 2007, due primarily to increased staffing associated with
growth initiatives and the integration of Fiserv
Trust Company. None of our employees is covered by a
collective bargaining agreement. We believe that our relations
with our employees are good.
See Note 18 of the Notes to Consolidated Financial
Statements included in Item 8 of this
Form 10-K
for segment and geographic area financial information.
Additional information concerning our business can be found on
our Web site at www.amtd.com. We make available free of
charge on our Web site our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports, as soon as reasonably
practicable after we electronically file such material with or
furnish it to the SEC.
In addition to the other information set forth in this report,
you should carefully consider the following factors which could
materially affect our business, financial condition or future
results of operations. Although the risks described below are
those that management believes are the most significant, these
are not the only risks facing our company. Additional risks and
uncertainties not currently known to us or that we currently do
not deem to be material also may materially affect our business,
financial condition or future results of operations.
Risk
Factors Relating to Our Business Operations
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. Recent
events in global financial markets, including failures and
government bailouts of large financial services companies, have
resulted in substantial market volatility and increased client
trading volume. However, any sustained downturn in general
economic conditions or U.S. equity markets would likely
result in reduced client trading volume and net revenues. For
example, events such as the terrorist attacks in the United
States on September 11, 2001 and the invasion of Iraq in
2003 resulted in periods of substantial market volatility and
reductions in trading volume and net revenues. Severe market
fluctuations or weak economic conditions could reduce our
trading volume and net revenues and have a material adverse
effect on our profitability.
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 subject to interest rate risk. Changes in
interest rates could affect the interest earned on assets
differently than interest paid on liabilities. A rising interest
rate environment generally results in our earning a larger net
interest spread. Conversely, a falling interest rate environment
generally results in our earning a smaller net interest spread.
If we are unable to effectively manage our interest rate risk,
changes in interest rates could have a material adverse effect
on our profitability.
Our liquidity needs to support interest-earning assets are
primarily met by client cash balances or financing created from
our securities lending activities. A reduction of funds
available from these sources 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. Our liquidity
could be constrained by an inability to access the capital
markets due to a variety of unforeseen market disruptions. If we
are unable to meet our funding needs on a timely basis, our
business would be adversely affected.
Corporate cash invested in money market mutual funds is subject
to liquidity risk in the event the fund sponsor is unable to
honor redemption requests. For example, during fiscal 2008, we
had substantial corporate cash invested
in the Primary Fund, a money market mutual fund managed by The
Reserve, an independent mutual fund company. In September 2008,
the net asset value of this fund declined below $1.00 per share
and the fund announced it was liquidating under the supervision
of the SEC. In order to facilitate an orderly liquidation, the
SEC allowed the fund to suspend redemptions until the fund could
liquidate portfolio securities without further impairing the net
asset value. This has created short-term liquidity challenges as
we await redemptions of our money market fund positions. On
October 31, 2008, The Reserve redeemed approximately 51% of
the shares of the fund. However, substantial delays in remaining
redemptions could adversely affect our liquidity and require us
to borrow on our holding company’s revolving line of credit
or seek alternative financing.
We make margin loans to clients that are collateralized by
client securities and we borrow and lend securities in
connection with our broker-dealer business. A significant
portion of our net revenues is derived from interest on margin
loans. By permitting clients to purchase securities on margin,
we are subject to risks inherent in extending credit, especially
during periods of rapidly declining markets in which the value
of the collateral held by us could fall below the amount of a
client’s indebtedness. In addition, in accordance with
regulatory guidelines, we collateralize borrowings of securities
by depositing cash or securities with lenders. Sharp changes in
market values of substantial amounts of securities and the
failure by parties to the borrowing transactions to honor their
commitments could have a material adverse effect on our revenues
and profitability.
Our broker-dealer subsidiary, TDA Clearing, provides clearing
and execution services to our introducing broker-dealer
subsidiary. Clearing and execution services include the
confirmation, receipt, settlement and delivery functions
involved in securities transactions. Clearing brokers also
assume direct responsibility for the possession and control of
client securities and other assets and the clearance of client
securities transactions. However, clearing brokers also must
rely on third-party clearing organizations such as The
Depository Trust & Clearing Corporation and The
Options Clearing Corporation in settling client securities
transactions. Self-clearing securities firms are subject to
substantially more regulatory control and examination than
introducing brokers that rely on others to perform clearing
functions. Errors in performing clearing functions, including
clerical and other errors related to the handling of funds and
securities held by us on behalf of clients, could lead to civil
penalties as well as losses and liability in related lawsuits
brought by clients and others.
We receive and process trade orders through a variety of
electronic channels, including the Internet, wireless web,
personal digital assistants and our interactive voice response
system. These methods of trading are heavily dependent on the
integrity of the electronic systems supporting them. Our systems
and operations are vulnerable to damage or interruption from
human error, natural disasters, power loss, computer viruses,
distributed denial of service (“DDOS”) attacks,
spurious spam attacks, intentional acts of vandalism and similar
events. It could take several hours or more to restore full
functionality in the event of an unforeseen disaster.
Extraordinary trading volumes could cause our computer systems
to operate at an unacceptably low speed or even fail.
Extraordinary Internet traffic caused by DDOS or spam attacks
could cause our Web site to be unavailable or slow to respond.
While we have made significant investments to upgrade the
reliability and scalability of our systems and added hardware to
address extraordinary Internet traffic, there can be no
assurance that our systems will be sufficient to handle such
extraordinary circumstances. We may not be able to project
accurately the rate, timing or cost of any increases in our
business or to expand and upgrade our systems and infrastructure
to accommodate any increases in a timely manner. Systems
failures and delays could occur and could cause, among other
things, unanticipated disruptions in service to our clients,
slower system response time resulting in transactions not being
processed as quickly as our clients desire, decreased levels of
client service and client satisfaction and harm to our
reputation. If any of these events were to occur, we could
suffer:
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
financial services industry in general, have experienced losses
related to clients’ login and password information being
compromised while using public computers or due to
vulnerabilities of clients’ private 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 effect on
our results of operations.
The market for electronic brokerage services is continually
evolving and is intensely competitive. The retail brokerage
industry has experienced significant consolidation, which may
continue in the future, and which may increase competitive
pressures in the industry. There has been substantial price
competition in the industry, including various free trade
offers. We expect this competitive environment to continue in
the future. We face direct competition from numerous retail
brokerage firms, including E*TRADE Financial Corporation,
Charles Schwab & Co., Inc., Fidelity Investments and
Scottrade, Inc. We also encounter competition from the
broker-dealer affiliates of established full-commission
brokerage firms as well as from financial institutions, mutual
fund sponsors and other organizations, some of which provide
online brokerage services. Some of our competitors have greater
financial, technical, marketing and other resources, offer a
wider range of services and financial products, and have greater
name recognition and a more extensive client base than we do. We
believe that the general financial success of companies within
the 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.
Our future success depends in part on our ability to develop and
enhance our products and services. In addition, the adoption of
new Internet, networking or telecommunications technologies or
other technological changes could require us to incur
substantial expenditures to enhance or adapt our services or
infrastructure. There are significant technical and financial
costs and risks in the development of new or enhanced products
and services, including the risk that we might be unable to
effectively use new technologies, adapt our services to emerging
industry standards or develop, introduce and market enhanced or
new products and services. An inability to develop new products
and services, or enhance existing offerings, could have a
material adverse effect on our profitability.
Risk
Factors Relating to the Regulatory Environment
The SEC, FINRA and various other regulatory agencies have
stringent rules with respect to the maintenance of specific
levels of net capital by securities broker-dealers. Net capital
is a measure, defined by the SEC, of a broker-dealer’s
readily available liquid assets, reduced by its total
liabilities other than approved subordinated debt. All of
our broker-dealer subsidiaries are required to comply with net
capital requirements. If we fail to maintain the required net
capital, the SEC could suspend or revoke our registration, or
FINRA could expel us from membership, which could ultimately
lead to our liquidation, or they could impose censures, fines or
other sanctions. If the net capital rules are changed or
expanded, or if there is an unusually large charge against net
capital, then our operations that require capital could be
limited. A large operating loss or charge against net capital
could have a material adverse effect on our ability to maintain
or expand our business.
The securities industry is subject to extensive regulation and
broker-dealers are subject to regulations covering all aspects
of the securities business. The SEC, FINRA and other
self-regulatory organizations and state and foreign regulators
can, among other things, censure, fine, issue
cease-and-desist
orders to, suspend or expel a broker-dealer or any of its
officers or employees. We could fail to establish and enforce
procedures to comply with applicable regulations, which could
have a material adverse effect on our business.
While we neither actively solicit new accounts nor have
established offices outside the United States, our websites are
accessible world-wide over the Internet and we currently have
account holders located outside the United States. These
accounts comprise approximately 1.6% of our total accounts and
are spread across many jurisdictions. Adverse action by foreign
regulators with respect to regulatory compliance by us in
foreign jurisdictions could adversely affect our revenues from
clients in such countries or regions.
Various regulatory and enforcement agencies have been reviewing
the following areas related to the brokerage industry:
These reviews could result in enforcement actions, new
regulations or clarification of existing 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 may be
expensive and time-consuming and could limit our ability to use
the Internet as a distribution channel, which would have a
material adverse effect on our profitability.
We are subject to claims and lawsuits in the ordinary course of
business, which can result in settlements, awards and
injunctions. Litigation may include client-initiated claims
related to the purchase or sale of investment securities. It is
inherently difficult to predict the ultimate outcome of these
matters, particularly in cases in which claimants seek
substantial or unspecified damages. A substantial judgment,
settlement, fine or penalty could have a material adverse effect
on our results of operations or cash flows.
Risk
Factors Relating to Strategic Acquisitions and the Integration
of Acquired Operations
We intend to pursue strategic acquisitions of businesses and
technologies. Acquisitions may entail numerous risks, including:
As part of our growth strategy, we regularly consider, and from
time to time engage in, discussions and negotiations regarding
strategic transactions such as acquisitions, mergers and
combinations within our industry. The purchase price for
possible acquisitions could be paid in cash, through the
issuance of common stock or other securities, borrowings or a
combination of these methods.
We cannot be certain that we will be able to continue to
identify, consummate and successfully integrate strategic
transactions, and no assurance can be given with respect to the
timing, likelihood or business effect of any possible
transaction. For example, we could begin negotiations that we
subsequently decide to suspend or terminate for a variety of
reasons. However, opportunities may arise from time to time that
we will evaluate. Any transactions that we consummate would
involve risks and uncertainties to us. These risks could cause
the failure of any anticipated benefits of an acquisition to be
realized, which could have a material adverse effect on our
revenues and profitability.
Risk
Factors Relating to Owning Our Stock
Our common stock, and the U.S. securities markets in
general, experience significant price fluctuations. The market
prices of securities of financial services companies, in
particular, have been especially volatile. The price of our
common stock has recently decreased substantially and could
decrease further. 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 management’s
attention and resources and could have a material adverse effect
on our business and the price of our common stock.
In connection with the acquisition of TD Waterhouse, 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:
As a result of the covenants and restrictions contained in the
credit facilities, we are limited in how we conduct our
business. We cannot guarantee that we will be able to remain in
compliance with these covenants or be able to obtain waivers for
noncompliance in the future. A failure to comply with these
covenants could have a material adverse effect on our financial
condition by impairing our ability to secure and maintain
financing.
As of September 30, 2008, we had approximately
$1.4 billion of long-term debt. Our ability to meet our
cash requirements, including our debt service obligations, is
dependent upon our future performance, which will be subject to
financial, business and other factors affecting our operations,
many of which are or may be beyond our control. We cannot
provide assurance that our business will generate sufficient
cash flows from operations to fund these cash requirements,
including our debt service obligations. If we are unable to meet
our cash requirements from operations, we would be required to
obtain alternative financing. The degree to which we may be
leveraged as a result of the indebtedness we have incurred could
materially and adversely affect our ability to obtain financing
for working capital, acquisitions or other purposes, could make
us more vulnerable to industry downturns and competitive
pressures or could limit our flexibility in planning for, or
reacting to, changes and opportunities in our industry, which
may place us at a competitive disadvantage. There can be no
assurance that we would be able to obtain alternative
financing, that any such financing would be on acceptable terms
or that we would be permitted to do so under the terms of
existing financing arrangements. In the absence of such
financing, our ability to respond to changing business and
economic conditions, make future acquisitions, react to adverse
operating results, meet our debt service obligations, or fund
required capital expenditures, could be materially and adversely
affected.
As of September 30, 2008, TD and J. Joe Ricketts, our
founder, members of his family and trusts held for their benefit
(which we collectively refer to as the Ricketts holders), owned
approximately 39.9% and 21.8%, respectively, of the outstanding
voting securities of TD AMERITRADE. TD is permitted under the
terms of a stockholders agreement to own up to 39.9% of the
outstanding shares of TD AMERITRADE common stock during the
three years following the January 24, 2006 closing of the
TD Waterhouse acquisition, up to 45% of the outstanding shares
of TD AMERITRADE common stock for the remainder of the term of
the stockholders agreement (a maximum of 10 years following
the closing) and an unlimited number of shares of TD AMERITRADE
following the termination of the stockholders agreement. The
Ricketts holders are permitted under the terms of the
stockholders agreement to own up to 29% of the outstanding
shares of TD AMERITRADE. As a result, TD and the Ricketts
holders have the ability to significantly influence the outcome
of any matter submitted for the vote of TD AMERITRADE
stockholders. The stockholders agreement also provides that TD
may designate five of the twelve members of the TD AMERITRADE
board of directors and the Ricketts holders may 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 are able to significantly influence the outcome of all
matters that come before the TD AMERITRADE board. As a result of
their significant share ownership 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 TD’s and the Ricketts
holders’ combined ownership interest.
We transact business and have extensive relationships with TD
and certain of its affiliates. During fiscal 2008, revenues
related to money market sweep arrangements with TD and certain
of its affiliates accounted for approximately 33% of our net
revenues. 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. In
addition, an independent committee of our board of directors
reviews and approves transactions with TD and its affiliates. TD
AMERITRADE and TD have not established any other formal
procedures to resolve potential or actual conflicts of interest
between them. There can be no assurance that any of the
foregoing potential conflicts would 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.
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:
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.
None.
Our corporate headquarters is located in Omaha, Nebraska and
occupies approximately 74,000 square feet of leased space.
The lease expires in April 2019. In the Omaha metropolitan area,
we also lease approximately 327,000 square feet of building
space for administrative and operational facilities. The leases
on these other Omaha-area locations expire on various dates from
2009 through 2019. We are currently establishing a new corporate
campus comprised of six buildings in Omaha. The transition to
the new campus is scheduled to take place in phases between fall
2008 and spring 2011.
We lease approximately 185,000 and 140,000 square feet of
building space 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,
Colorado, Illinois, Maryland, Missouri, New Jersey and
Texas. We also lease over 100 branch offices located in large
metropolitan areas in 34 states. We believe that our
facilities are suitable and adequate to meet our needs.
Spam Litigation — A purported class action,
captioned Elvey v. TD Ameritrade, Inc., was filed on
May 31, 2007 in the United States District Court for the
Northern District of California. The complaint alleges that
there was a breach in TDA Inc.’s systems, which allowed
access to
e-mail
addresses and other personal information of account holders, and
that as a result account holders received unsolicited
e-mail from
spammers promoting certain stocks and have been subjected to an
increased risk of identity theft. The complaint requests
unspecified damages and injunctive and other equitable relief. A
second lawsuit, captioned Zigler v. TD Ameritrade,
Inc., was filed on September 26, 2007, in the same
jurisdiction on behalf of a purported nationwide class of
account holders. The factual allegations of the complaint and
the relief sought are substantially the same as those in the
first lawsuit. The cases were consolidated under the caption
In re TD Ameritrade Accountholders Litigation. The
Company hired an independent consultant to investigate whether
identity theft occurred as a result of the breach. The
consultant has conducted four investigations since August 2007
and reported that it found no evidence of identity theft. The
parties entered into an agreement to settle the lawsuits on a
class basis subject to court approval. A hearing on a motion
requesting preliminary approval of the proposed settlement was
held on June 12, 2008. The court denied the motion without
prejudice. After additional submissions were made by the
parties, the Court held a further hearing on October 7,
2008. The Court has not yet issued a ruling on the matter.
Auction Rate Securities Matters — Beginning in
March 2008, lawsuits were filed against various financial
services firms by customers related to their investments in
auction rate securities (“ARS”). The plaintiffs in
these lawsuits allege that the defendants made material
misrepresentations and omissions in statements to customers
about investments in ARS and the manner in which the ARS market
functioned in violation of provisions of the federal securities
laws. Two purported class action complaints have been filed
alleging such conduct with respect to TDA Inc. and TD AMERITRADE
Holding Corporation. The putative class actions are captioned
Humphrys v. TD Ameritrade Holding Corp. et al. and
Silverstein v. TD Ameritrade Holding Corp. et al.
The complaints seek an unspecified amount of compensatory
damages, injunctive relief, interest and attorneys’ fees.
Both cases are pending in the U.S. District Court for the
Southern District of New York. A motion was filed by some
plaintiffs requesting that the proceedings in the lawsuits
against the various financial services firms in effect be
consolidated for pretrial proceedings before one judge. The
Company and parties in other cases filed oppositions to the
motion. The Judicial Panel on Multidistrict Litigation denied
the motion in October 2008.
The SEC and other regulatory authorities are conducting
investigations regarding the sale of ARS. TDA Inc. has received
subpoenas and other requests for documents and information from
the regulatory authorities. The Company is cooperating with the
investigations and requests. As of September 30, 2008, the
Company’s clients hold ARS with an aggregate par value of
approximately $0.9 billion in TDA Inc. accounts.
Reserve Fund Matters — During September
2008, The Reserve, an independent mutual fund company, announced
that the net asset value of two of its money market mutual funds
(Primary Fund and International Liquidity Fund) declined below
$1.00 per share. In addition, The Reserve announced that the net
asset value of the Reserve Yield Plus Fund, which is not a money
market mutual fund but seeks to maintain a stable net asset
value of $1.00 per share, declined below $1.00 per share. TDA
Inc.’s clients hold shares in these funds, which The
Reserve announced are being liquidated. The SEC and other
regulatory authorities are conducting investigations regarding
TDA Inc.’s offering The Reserve funds to clients. TDA Inc.
is cooperating with the investigations.
Other Legal and Regulatory Matters — The
Company is subject to lawsuits, arbitrations, claims and other
legal proceedings in connection with its business. Some of the
legal actions include claims for substantial or unspecified
compensatory
and/or
punitive damages. A substantial adverse judgment or other
unfavorable resolution of these matters could have a material
adverse effect on the Company’s financial condition,
results of operations and cash flows. Management believes the
Company has adequate legal defenses with respect to the legal
proceedings to
which it is a defendant or respondent and the outcome of these
pending proceedings is not likely to have a material adverse
effect on the financial condition, results of operations or cash
flows of the Company. However, the Company is unable to predict
the outcome of these matters.
In the normal course of business, the Company discusses matters
with its regulators raised during regulatory examinations or
otherwise subject to their inquiry. These matters could result
in censures, fines or other sanctions. Management believes the
outcome of any resulting actions will not be material to the
Company’s financial condition, results of operations or
cash flows. However, the Company is unable to predict the
outcome of these matters.
No matters were submitted to a vote of stockholders during the
fourth quarter of fiscal 2008.
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.
The closing sale price of our common stock as reported on the
Nasdaq Global Select Market on November 14, 2008 was $12.31
per share. As of that date there were 731 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
number of individual or institutional stockholders that
beneficially own our stock because most stock is held in the
name of nominees. Based on information available to us, we
believe there are approximately 91,000 beneficial holders of our
common stock.
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 to our stockholders. 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.
Information about securities authorized for issuance under the
Company’s equity compensation plans is contained in
Item 12 — Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters.
The Company performance information is not deemed to be
“soliciting material” or to be “filed” with
the SEC or subject to the SEC’s proxy rules or to the
liabilities of Section 18 of the Exchange Act, and the
Company performance information shall not be deemed to be
incorporated by reference into any prior or subsequent filing by
the Company under the Securities Act of 1933, as amended, or the
Exchange Act.
The following graph and table set forth information comparing
the cumulative total return through the end of the
Company’s most recent fiscal year from a $100 investment on
September 26, 2003 in the Company’s common stock, a
broad-based stock index and the stocks comprising an industry
peer group.
The Peer Group is comprised of the following companies that have
significant retail brokerage operations:
E*TRADE Financial Corporation
The Charles Schwab Corporation
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
ISSUER
PURCHASES OF EQUITY SECURITIES
Our common stock repurchase program was authorized on
August 2, 2006. Our board of directors originally
authorized the Company to repurchase up to 12 million
shares. On November 15, 2006, the board of directors added
20 million shares to the original authorization, increasing
the total authorization to 32 million shares. This is the
only stock repurchase program currently in effect and there were
no programs that expired during the fourth quarter of fiscal
2008.
This discussion contains forward-looking statements within the
meaning of the U.S. Private Securities Litigation Reform
Act of 1995. Statements that are not historical facts, including
statements about our beliefs and expectations, are
forward-looking statements. Forward-looking statements include
statements preceded by, followed by or that include the words
“may,” “could,” “would,”
“should,” “believe,” “expect,”
“anticipate,” “plan,” “estimate,”
“target,” “project,” “intend” and
similar expressions. In particular, forward-looking statements
contained in this discussion include our expectations regarding:
the effect of client trading activity on our results of
operations; 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, asset-based
revenues and other revenues; amounts of total expenses; our
effective income tax rate; our capital and liquidity needs and
our plans to finance such needs; and the impact of
recently-issued accounting pronouncements.
The Company’s actual results could differ materially from
those anticipated in such forward-looking statements. Important
factors that may cause such differences include, but are not
limited to: general economic and political conditions;
fluctuations in interest rates; stock market fluctuations and
changes in client trading activity; increased competition;
systems failures and capacity constraints; network security
risks; our ability to service debt obligations; regulatory and
legal uncertainties and the other risks and uncertainties set
forth under Item 1A. — Risk Factors of
this
Form 10-K.
The forward-looking statements contained in this report speak
only as of the date on which the statements were made. We
undertake no obligation to publicly update or revise these
statements, whether as a result of new information, future
events or otherwise.
In discussing and analyzing our business, we utilize several
metrics and other terms that are defined in the following
Glossary of Terms. Italics indicate other defined terms
that appear elsewhere in the Glossary. The term “GAAP”
refers to U.S. generally accepted accounting principles.
Activity rate — Average client trades per day
during the period divided by the average number of total
accounts during the period.
Asset-based revenues — Revenues consisting of
(1) net interest revenue, (2) money market
deposit account (“MMDA”) fees and
(3) investment product fees. The primary factors
driving our asset-based revenues are average balances and
average rates. Average balances consist primarily of average
client margin balances, average segregated cash
balances, average client credit balances, average
client MMDA balances, average fee-based investment balances
and average securities borrowing and lending balances.
Average rates consist of the average interest rates and fees
earned and paid on such balances.
21
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 Company’s Consolidated
Statements of Income divided by total trades for the
period. Commissions and transaction fee revenues primarily
consist of trading commissions and revenue-sharing arrangements
with market destinations (also referred to as “payment for
order flow”).
Basis point — When referring to interest rates,
one basis point represents one one-hundredth of one percent.
Beneficiary accounts — Brokerage accounts
managed by a custodian, guardian, conservator or trustee on
behalf of one or more beneficiaries. Examples include accounts
maintained under the Uniform Gift to Minors Act (UGMA) or
Uniform Transfer to Minors Act (UTMA), guardianship,
conservatorship and trust arrangements and pension or profit
plan for small business accounts.
Brokerage accounts — Accounts maintained by the
Company on behalf of clients for securities brokerage
activities. The primary types of brokerage accounts are cash
accounts, margin accounts, IRA accounts and beneficiary
accounts.
Cash accounts — Brokerage accounts that do not
have margin account approval.
Clearing accounts — Accounts for which the
Company served as the clearing broker/dealer on behalf of an
unaffiliated introducing broker/dealer. The Company charged a
fee to the introducing broker/dealer to process trades in
clearing accounts.
Client assets — The total value of cash and
securities in brokerage accounts.
Client cash and money market assets — The sum
of all client cash balances, including client credit balances
and client cash balances swept into money market deposit
accounts or money market mutual funds.
Client credit balances — Client cash held in
brokerage accounts, excluding balances generated by
client short sales on which no interest is paid. Interest paid
on client credit balances is a reduction of net interest
revenue. Client credit balances are included in
“payable to clients” on our 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” on our
Consolidated Balance Sheets.
Conduit-based assets — Deposits paid on
securities borrowing associated with our conduit-based
securities borrowing/lending business. In our conduit business,
we act as an intermediary by borrowing securities from one
counterparty and lending the same securities to another
counterparty. We generally earn a net interest spread equal to
the excess of interest earned on securities borrowing
deposits over the interest paid on securities lending
deposits.
EBITDA and EBITDA excluding investment gains —
EBITDA (earnings before interest, taxes, depreciation and
amortization) and EBITDA excluding investment gains are non-GAAP
financial measures. We consider EBITDA and EBITDA excluding
investment gains to be important measures of our financial
performance and of our ability to generate cash flows to service
debt, fund capital expenditures and fund other corporate
investing and financing activities. EBITDA is used as the
denominator in the consolidated leverage ratio calculation for
our senior credit facilities. The consolidated leverage ratio
determines the interest rate margin charged on the senior credit
facilities. EBITDA eliminates the non-cash effect of tangible
asset depreciation and amortization and intangible asset
amortization. EBITDA excluding investment gains also eliminates
the effect of non-brokerage investment-related gains and losses
that are not likely to be indicative of the ongoing operations
of our business. EBITDA and EBITDA excluding investment gains
should be considered in addition to, rather than as a substitute
for, pre-tax income, net income and cash flows from operating
activities.
EPS excluding investment gains/losses —
Earnings per share (“EPS”) excluding investment
gains/losses is a non-GAAP financial measure. We define EPS
excluding investment gains/losses as earnings (loss) per share,
adjusted to remove the after-tax effect of non-brokerage
investment-related gains and losses. We consider EPS
excluding investment gains/losses an important measure of our
financial performance. Gains/losses on non-brokerage investments
and investment-related derivatives are excluded because we
believe they are not likely to be indicative of the ongoing
operations of our business. EPS excluding investment
gains/losses should be considered in addition to, rather than as
a substitute for, GAAP earnings per share.
EPS from ongoing operations — EPS from ongoing
operations is a non-GAAP financial measure. 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 a non-GAAP financial measure. Expenses
excluding advertising consists of total expenses, adjusted to
remove advertising expense. We consider expenses excluding
advertising an important measure of the financial performance of
our ongoing business. Advertising spending is excluded because
it is largely at the discretion of the Company, varies
significantly from period to period based on market conditions
and generally relates to the acquisition of future revenues
through new accounts rather than current revenues from existing
accounts. Expenses excluding advertising should be considered in
addition to, rather than as a substitute for, total expenses.
Fee-based investment balances — Client assets
invested in money market mutual funds, other mutual funds and
Company programs such as
AdvisorDirect®
and
Amerivest,tm
on which we earn fee revenues. Fee revenues earned on these
balances are included in investment product fees on our
Consolidated Statements of Income.
Funded accounts — All open client accounts with
a total liquidation value greater than zero, except
clearing accounts.
Investment product fees — Revenues earned on
fee-based investment balances. Investment product fees
include fees earned on money market mutual funds, other mutual
funds and through Company programs such as
AdvisorDirect®
and
Amerivesttm.
IRA accounts (Individual Retirement
Arrangements) — A personal trust account for the
exclusive benefit of a U.S. individual (or his or her
beneficiaries) that provides tax advantages in accumulating
funds to save for retirement or other qualified purposes. These
accounts are subject to numerous restrictions on additions to
and withdrawals from the account, as well as prohibitions
against certain investments or transactions conducted within the
account. The Company offers traditional, Roth, Savings Incentive
Match Plan for Employees (SIMPLE) and Simplified Employee
Pension (SEP) IRA accounts.
Liquid assets — Liquid assets is a non-GAAP
financial measure. We define liquid assets as the sum of
(a) corporate cash and cash equivalents, (b) corporate
short-term investments, (c) regulatory net capital of
(i) our clearing broker-dealer subsidiary in excess of 5%
of aggregate debit items and (ii) our introducing
broker-dealer subsidiary in excess of 120% of the minimum dollar
net capital requirement and (d) following the merger of our
trust company subsidiaries in August 2008, Tier 1 capital
of our trust company in excess of the minimum dollar
requirement. We include the excess capital of our broker-dealer
and trust company subsidiaries in liquid assets, rather than
simply including broker-dealer and trust cash and cash
equivalents, because capital requirements may limit the amount
of cash available for dividend from the broker-dealer and trust
subsidiaries to the parent company. Excess capital, as defined
under clauses (c) and (d) above, is generally available for
dividend from the broker-dealer and trust subsidiaries to the
parent company. Prior to the merger of our trust subsidiaries in
August 2008, excess capital from our trust subsidiaries was
excluded from liquid assets because, due to regulatory
limitations, it was generally not available for corporate
purposes. 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
client’s account holdings as of the close of a regular
trading session. Liquidation value includes client cash and the
value of long security positions, less margin balances and the
cost to buy back short security positions.
Margin accounts — Brokerage accounts in which
clients may borrow from the Company to buy securities or for any
other purpose, subject to regulatory and Company-imposed
limitations.
Money market deposit account (“MMDA”)
fees — Revenues resulting from the Money Market
Deposit Account agreement with TD Bank USA, N.A., a subsidiary
of TD, which became effective upon the closing of our
acquisition of TD Waterhouse Group, Inc. (“TD
Waterhouse”). Under the MMDA agreement, TD Bank USA makes
available to clients of our broker-dealer subsidiaries money
market deposit accounts as designated sweep vehicles. With
respect to the MMDA accounts, our broker-dealer subsidiaries
provide marketing and support services and act as recordkeeper
for TD Bank USA and as agent for clients. In exchange for these
services, TD Bank USA pays our broker-dealer subsidiaries a fee
based on the yield earned on the client MMDA assets (including
any gains or losses from sales of investments), less the actual
interest cost paid to clients, actual interest cost incurred on
borrowings, a flat fee to TD Bank USA of 25 basis points
and the cost of FDIC insurance premiums.
Net interest margin (“NIM”) — A
measure of the net yield on our average spread-based
assets. Net interest margin is calculated for a given period
by dividing the annualized sum of net interest revenue
(excluding net interest revenue from conduit-based
assets) and money market deposit account (MMDA) fees
by average spread-based assets.
Net interest revenue — Net interest revenue is
interest revenues less brokerage interest expense. Interest
revenues are generated by charges to clients on margin balances
maintained in margin accounts, the investment of cash
from operations and segregated cash in short-term
marketable securities and interest earned on securities
borrowing. Brokerage interest expense consists of amounts
paid or payable to clients based on credit balances maintained
in brokerage accounts and interest incurred on
securities lending. Brokerage interest expense does not
include interest on Company non-brokerage borrowings.
Net new accounts or Net account growth — The
number of new client accounts (funded and unfunded) opened in a
specified period minus the number of client accounts closed in
the same period.
Net new assets — Consists of total client asset
inflows, less total client asset outflows, excluding activity
from business combinations. Client asset inflows include
interest and dividend payments and exclude changes in client
assets due to market fluctuations. Net new assets are measured
based on the market value of the assets as of the date of the
inflows and outflows.
Return on client assets (ROCA) — Annualized
pre-tax income divided by average client assets during
the period.
Securities borrowing — We borrow securities
temporarily from other broker-dealers in connection with our
broker-dealer business. We deposit cash as collateral for the
securities borrowed, and generally earn interest revenue on the
cash deposited with the counterparty.
Securities lending — We loan securities
temporarily to other broker-dealers in connection with our
broker-dealer business. We receive cash as collateral for the
securities loaned, and generally incur interest expense on the
cash deposited with us.
Segregated cash — Client cash and investments
segregated in compliance with
Rule 15c3-3
of the Securities Exchange Act of 1934 (the Customer Protection
Rule) and other regulations. Interest earned on segregated cash
is a component of net interest revenue.
Spread-based assets (formerly known as 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 (excluding
conduit-based assets) and other cash and interest earning
investment balances. Spread-based assets is used in the
calculation of our net interest margin.
Total accounts — All open client accounts
(funded and unfunded), except clearing accounts.
Total trades — All client securities trades,
which are executed by the Company’s broker/dealer
subsidiaries on an agency basis. Total trades are a significant
source of the Company’s revenues. Such trades include, but
are not limited to, trades in equities, options, mutual funds
and debt instruments. Trades generate revenue from
commissions, transaction fees
and/or
revenue-sharing arrangements with market destinations (also
known as “payment for order flow”).
Trading days — Days in which the
U.S. equity markets are open for a full trading session.
Reduced exchange trading sessions are treated as half trading
days.
Transaction-based revenues — Revenues generated
from client trade execution, consisting primarily of
commissions, transaction clearing fees and revenue sharing
arrangements with market destinations (also known as
“payment for order flow”).
We provide securities brokerage and clearing services to our
clients through our introducing and clearing broker-dealers.
Substantially all of our net revenues are derived from our
brokerage activities and clearing and execution services. Our
primary focus is serving retail clients and independent
registered investment advisors by providing services with
straightforward, affordable pricing.
Our largest sources of revenues are (1) asset-based
revenues and (2) transaction-based revenues. The primary
factors driving our asset-based revenues are average balances
and average rates. Average balances consist primarily of average
client margin balances, average segregated cash balances,
average client credit balances, average client money market
deposit account (“MMDA”) balances, average fee-based
investment balances and average securities borrowing and lending
balances. Average rates consist of the average interest rates
and fees earned and paid on such balances. The primary factors
driving our transaction-based revenues are total client trades
and average commissions and transaction fees per trade. We also
receive payment for order flow, which results from arrangements
we have with many execution agents to receive cash payments in
exchange for routing trade orders to these firms for execution.
Payment for order flow revenue is included in commissions and
transaction fees on our 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 were intended to
economically offset TD Waterhouse stock-based compensation
(assumed in the TD Waterhouse acquisition) that was based on the
value of TD stock. During December 2007, the equity swap
agreements were settled in connection with the settlement of
most of the related restricted stock units. See
“Acquisition of TD Waterhouse” 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 and error losses, gains or losses on disposal
of property, insurance expenses, travel expenses and other
miscellaneous expenses. Advertising costs include production and
placement of advertisements in various media, including online,
television, print and direct mail, as well as client promotion
and development costs. Advertising expenses may increase or
decrease significantly from period to period.
Losses on money market funds include: (a) corporate
investment losses on money market fund holdings and
(b) losses associated with our commitment to mitigate our
clients’ losses, up to $55 million, on their holdings
in certain money market funds in the event clients receive less
than $1.00 per share upon the orderly liquidation of the funds.
These losses resulted from the net asset values of the Primary
Fund and the International Liquidity Fund, two money market
mutual funds managed by The Reserve, declining below $1.00 per
share late in fiscal 2008. See “Guarantees” under
Note 17 of the Notes to Consolidated Financial Statements
for information regarding these funds.
Fair value adjustments of investment-related derivative
instruments consist of changes in the fair value of the embedded
collars within our Knight Capital Group, Inc.
(“Knight”) prepaid variable forward contracts. The
prepaid variable forward contracts were intended to economically
hedge our investment in Knight common stock. In January 2006, we
liquidated our investment in Knight and the prepaid variable
forward contracts.
On February 27, 2007, our board of directors approved
changing our fiscal year-end to September 30. This change
was effective for our fiscal year ended September 30, 2007.
Previously, we reported on a fifty-two/fifty-three week fiscal
year ending on the last Friday in September. Because the
transition period was less than one month, no transition report
was filed. References to “fiscal year” in this
document or in the information incorporated herein by reference
means the Company’s fiscal year ended September 30 (for
fiscal years 2008 and 2007) or the last Friday of September
(for fiscal years prior to 2007). For example, “fiscal
2006” refers to the fiscal year ended September 29,
2006. Fiscal year 2006 was a fifty-two week year.
On January 24, 2006, we acquired TD Waterhouse Group, Inc.,
a Delaware corporation, pursuant to an Agreement of Sale and
Purchase dated June 22, 2005, as amended (the
“Purchase Agreement”), with The Toronto-Dominion Bank
(“TD”). We purchased from TD all of the capital stock
of TD Waterhouse (the “Share Purchase”) in exchange
for 196.3 million shares of Company common stock and
$20,000 in cash. The shares of common stock issued to TD in the
Share Purchase represented approximately 32.5% of the
outstanding shares of the Company after giving effect to the
transaction. Our consolidated financial statements include the
results of operations for TD Waterhouse beginning
January 25, 2006. In addition, on January 24, 2006, we
completed the sale of Ameritrade Canada, Inc. to TD for
$60 million in cash. The purchase price for the acquisition
of TD Waterhouse and the sale price for the sale of Ameritrade
Canada were subject to cash adjustments based on the closing
date balance sheets of the Company, TD Waterhouse and Ameritrade
Canada. On May 5, 2006, we received approximately
$45.9 million from TD for the settlement of cash
adjustments related to the purchase of TD Waterhouse and the
sale of Ameritrade Canada.
Prior to the consummation of the Share Purchase, TD Waterhouse
conducted a reorganization in which it transferred its Canadian
retail securities brokerage business and TD Bank USA, N.A.
(formerly TD Waterhouse Bank, N.A.) to TD such that, at the time
of consummation of the Share Purchase, TD Waterhouse retained
only its United States retail securities brokerage business. TD
Waterhouse also distributed to TD excess capital of TD
Waterhouse prior to the consummation of the Share Purchase. As
contemplated in the Purchase Agreement, on January 24,
2006, we commenced payment of a special cash dividend of $6.00
per share in respect of the shares of our common stock
outstanding prior to the consummation of the Share Purchase. The
total amount of the dividend was approximately $2.4 billion.
At the time of the closing of the TD Waterhouse acquisition, we
expected to realize approximately $678 million of
annualized pre-tax synergies from the acquisition within
18 months of the closing, consisting of $300 million
in revenue opportunities primarily related to our new banking
relationship with TD and $378 million in cost savings
related to the elimination of duplicate expenditures. We
realized the revenue opportunities during fiscal 2006 and fully
realized the operating cost synergies during the fourth quarter
of fiscal 2007.
The preparation of our consolidated financial statements
requires us to make judgments and estimates that may have a
significant impact upon our financial results. Note 1,
under Item 8, Financial Statements and Supplementary
Data — Notes to Consolidated Financial Statements, of
this
Form 10-K
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 management’s judgments and
estimates and could materially affect our results of operations
and financial position.
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 asset’s 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.
We account for stock-based compensation in accordance with
Statement of Financial Accounting Standards (“SFAS”)
No. 123 (Revised 2004), Share-Based Payment
(“No. 123R”). Under the fair value
recognition provisions of SFAS No. 123R, share-based
compensation cost is measured at the grant date based on the
value of the award and is recognized as expense over the
requisite service period based on the number of awards for which
the requisite service is expected to be rendered. We must make
assumptions regarding the number of share-based awards that will
be forfeited. For performance-based awards, we must also make
assumptions regarding the likelihood of achieving performance
goals. If actual results differ significantly from these
estimates, stock-based compensation expense and our results of
operations could be materially affected.
We estimate our income tax expense based on the various
jurisdictions where we conduct business. This requires us to
estimate our current income tax obligations and to assess
temporary differences between the financial statement carrying
amounts and tax bases of assets and liabilities. Temporary
differences result in deferred income tax assets and
liabilities. We must evaluate the likelihood that deferred
income tax assets will be realized. To the extent we determine
that realization is not “more likely than not”, we
establish a valuation allowance. Establishing or increasing a
valuation allowance results in a corresponding increase to
income tax expense in our Consolidated Statements of Income.
Conversely, to the extent circumstances indicate that a
valuation allowance can be reduced or is no longer necessary,
that portion of the valuation allowance is reversed, reducing
income tax expense.
We must make significant judgments to calculate our provision
for income taxes, our deferred income tax assets and liabilities
and any valuation allowance against our deferred income tax
assets. We must also exercise judgment in determining the need
for, and amount of, any accruals for uncertain tax positions.
Because the application of tax laws and regulations to many
types of transactions is subject to varying interpretations,
amounts reported in our consolidated financial statements could
be significantly changed at a later date upon final
determinations by taxing authorities.
We enter into guarantees in the ordinary course of business,
primarily to meet the needs of our clients and to manage our
asset-based revenues. We account for certain guarantees in
accordance with Financial Accounting Standards Board
(“FASB”) Interpretation No. 45,
Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others (“FIN No. 45”).
FIN No. 45 requires us to record a liability for the
estimated fair value of the guarantee at its inception. If
actual results differ significantly from these estimates, our
results of operations could be materially affected. For further
details regarding our guarantees, see the following sections
under Item 8, Financial Statements and Supplementary
Data — Notes to
Consolidated Financial Statements: “Guarantees” under
Note 17 — Commitments and Contingencies and
“Money Market Deposit Account Agreement” under
Note 20 — Related Party Transactions.
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, credit,
MMDA and mutual fund balances, may significantly impact our
results of operations. Changes in interest rates also impact our
results of operations. 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.
Pre-tax income, net income, earnings per share, EBITDA and
EBITDA excluding investment gains are key metrics we use in
evaluating our financial performance. EBITDA and EBITDA
excluding investment gains are non-GAAP financial measures.
We consider EBITDA and EBITDA excluding investment gains to be
important measures of our financial performance and of our
ability to generate cash flows to service debt, fund capital
expenditures and fund other corporate investing and financing
activities. EBITDA is used as the denominator in the
consolidated leverage ratio calculation for our senior credit
facilities. The consolidated leverage ratio determines the
interest rate margin charged on the senior credit facilities.
EBITDA eliminates the non-cash effect of tangible asset
depreciation and amortization and intangible asset amortization.
EBITDA excluding investment gains also eliminates the effect of
non-brokerage investment-related gains and losses that are not
likely to be indicative of the ongoing operations of our
business. EBITDA and EBITDA excluding investment gains should be
considered in addition to, rather than as a substitute for,
pre-tax income, net income and cash flows from operating
activities.
The following table sets forth EBITDA and EBITDA excluding
investment gains in dollars and as a percentage of net revenues
for the periods indicated, and provides reconciliations to
pre-tax income, which is the most directly comparable GAAP
measure (dollars in thousands):
Our pre-tax income and EBITDA excluding investment gains
increased slightly for fiscal 2008 compared to fiscal 2007,
primarily due to a 17% increase in net revenues, partially
offset by an 11% increase in total expenses. The increased
revenues were driven primarily by increased transaction-based
revenue resulting from higher client
trading volumes and, to a lesser extent, increased asset-based
revenues resulting from higher average spread-based asset and
fee-based investment balances and slightly higher net interest
margin. The increase in total expenses was due primarily to
spending on growth initiatives and the impact of
$35.6 million of unusual losses on money market funds,
partially offset by lower interest on borrowings and fiscal 2008
fully reflecting the operating cost synergies resulting from the
TD Waterhouse acquisition. More detailed analysis of net
revenues and expenses is presented later in this discussion.
Our largest sources of revenues are (1) asset-based
revenues and (2) transaction-based revenues. For fiscal
2008, asset-based revenues and transaction-based revenues
accounted for 59% and 40% of our net revenues, respectively.
Asset-based revenues consist of (1) net interest revenue,
(2) MMDA fees and (3) investment product fees. The
primary factors driving our asset-based revenues are average
balances and average rates. Average balances consist primarily
of average client margin balances, average segregated cash
balances, average client credit balances, average client MMDA
balances, average fee-based investment balances and average
securities borrowing and lending balances. Average rates consist
of the average interest rates and fees earned and paid on such
balances. The primary factors driving our transaction-based
revenues are total client trades and average commissions and
transaction fees per trade. We also consider client account and
client asset metrics, although we believe they are generally of
less significance to our results of operations for any
particular period than our metrics for asset-based and
transaction-based revenues.
Asset-Based
Revenue Metrics
We calculate the return on our interest-earning assets
(excluding conduit-based 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 (excluding net interest revenue from
conduit-based assets) and MMDA fees by average spread-based
assets. Spread-based assets consist of client and
brokerage-related asset balances, including client margin
balances, segregated cash, MMDA balances, deposits paid on
securities borrowing (excluding conduit-based assets) and other
cash and interest-earning investment balances. The following
table sets forth net interest margin and average spread-based
assets (dollars in millions):
The following tables set forth key metrics that we use in
analyzing net interest revenue, which, exclusive of the conduit
business, is a component of net interest margin (dollars in
millions):
The following tables set forth key metrics that we use in
analyzing investment product fee revenues (dollars in millions):
The following table sets forth several key metrics regarding
client trading activity, which we utilize in measuring and
evaluating performance and the results of our operations:
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:
In connection with our purchase of Fiserv Trust Company on
February 4, 2008, we acquired approximately 102,000 total
accounts, approximately 81,000 funded accounts and approximately
$25 billion in client assets.
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):
Note: Details may not sum to totals and subtotals due to
rounding differences. Change percentages are based on
non-rounded Consolidated Statements of Income amounts.
Fiscal
Year Ended September 30, 2008 Compared to Fiscal Year Ended
September 30, 2007
Commissions and transaction fees increased 25% to
$1.0 billion, primarily due increased client trading
activity. Total trades increased 24%, as average client trades
per day increased 23% to 311,830 for fiscal 2008 from 253,440
for fiscal 2007, and there were 2.5 more trading days during
fiscal 2008 compared to fiscal 2007. Average
client trades per account (annualized) increased to 11.8 for
fiscal 2008 compared to 10.0 for fiscal 2007. Average
commissions and transaction fees per trade increased slightly to
$12.97 per trade for fiscal 2008 from $12.90 for fiscal 2007,
primarily due to higher percentages of option and fixed income
trades and higher payment for order flow revenue during fiscal
2008. This was partially offset by the closing of our three
Investment Centers during December 2006. The Investment Centers
sold products such as load mutual funds and fixed income
products that generated higher average commissions and
transaction fees per trade than our core business. We expect
revenues from commissions and transaction fees to range from
$0.9 billion to $1.1 billion for fiscal 2009,
depending on the volume of client trading activity, average
commissions and transaction fees per trade and other factors.
Asset-based revenues, which consist of net interest revenue,
MMDA fees and investment product fees, increased 12% to
$1.5 billion during fiscal 2008 compared to fiscal 2007, as
described below. We expect asset-based revenues to range between
$1.4 billion and $1.6 billion for fiscal 2009. We
expect increased average spread-based asset balances to be
offset by a decrease in the expected yield earned on those
assets due to the current lower short-term interest rate
environment compared to the higher average short-term interest
rates experienced during fiscal 2008.
Net interest revenue decreased 2% to $549.6 million, due
primarily to a decrease of 170 basis points in the average
yield earned on client margin balances and a $585 million
decrease in average segregated cash balances for fiscal 2008
compared to fiscal 2007. These decreases were mostly offset by a
$71.2 million increase in net interest revenue from our
securities borrowing/lending program, a decrease of
95 basis points in the average interest rate paid on client
credit balances in fiscal 2008 compared to fiscal 2007 and
approximately $11.5 million of net interest revenue on
balances resulting from the Fiserv Trust Company
acquisition.
MMDA fees increased 17% to $628.7 million, due primarily to
a 5% increase in average MMDA balances and an increase of
42 basis points in the average yield earned on the client
MMDA assets during fiscal 2008 compared to fiscal 2007.
Investment product fees increased 33% to $309.4 million,
primarily due to a 43% increase in average fee-based investment
balances in fiscal 2008 compared to fiscal 2007. The increase
was partially offset by a slightly lower average yield earned on
fee-based investment balances during fiscal 2008 compared to
fiscal 2007.
Other revenues decreased 14% to $32.2 million, due
primarily to lower fees from corporate reorganizations of
issuers during fiscal 2008 and the effect of $2.3 million
of net gains on investments held at our broker-dealer
subsidiaries during fiscal 2007. We expect other revenues to
range between $31.5 million and $35.5 million for
fiscal 2009.
Total expenses increased by 11% to $1.3 billion during
fiscal 2008 compared to fiscal 2007, as described below. We
expect total expenses to range between $1.2 billion and
$1.3 billion for fiscal 2009.
Employee compensation and benefits expense increased 17% to
$503.3 million, due primarily to the increased headcount
associated with our growth initiatives and higher
incentive-based compensation related to actual Company and
individual performance compared to fiscal 2007. Full-time
equivalent employees increased to 4,660 at September 30,
2008 from 3,882 at September 30, 2007. However, the number
of temporary employees decreased to 81 at September 30,
2008 from 354 at September 30, 2007.
Fair value adjustments of compensation-related derivative
instruments represent adjustments to equity swap agreements that
are intended to economically offset former TD Waterhouse
employees’ stock-based compensation that is based on the
value of TD stock. We assumed certain stock-based compensation
arrangements in connection with our acquisition of TD
Waterhouse, which we administer for the former TD Waterhouse
employees. Because the swap agreements were not designated for
hedge accounting, the fair value adjustments are not recorded in
the same category of our Consolidated Statements of Income as
the stock-based compensation expense, which is recorded in the
employee compensation and benefits category. During December
2007, the equity swap agreements were settled in connection with
the settlement of most of the related restricted stock units.
Clearing and execution costs decreased 44% to
$44.6 million, due primarily to cost reductions associated
with the completion of the conversion of legacy TD Waterhouse
clients to the legacy Ameritrade clearing platform during the
third quarter of fiscal 2007.
Communications expense decreased 15% to $69.6 million, due
primarily to the elimination of duplicate telephone, quotes and
market information costs resulting from the completion of the TD
Waterhouse integration during fiscal 2007.
Occupancy and equipment costs increased 21% to
$101.8 million as we continue to invest in our technology
infrastructure, and due to the effect of a favorable legacy TD
Waterhouse litigation settlement of $4.6 million during the
second quarter of fiscal 2007.
Depreciation and amortization increased 41% to
$36.9 million, due primarily to increased depreciation on
leasehold improvements and technology infrastructure related to
our growth initiatives and increased software amortization
related to recently acquired functionality.
Amortization of acquired intangible assets increased 9% to
$59.3 million due to increased amortization on client
relationships related to the acquisition of Fiserv
Trust Company during the second quarter of fiscal 2008.
Professional services increased 29% to $108.3 million,
primarily due to higher usage of consulting and contract
services during fiscal 2008 in connection with new product
development and technology infrastructure upgrades related to
our growth initiatives and due to fees incurred under the
transition services agreements related to the acquisition of
Fiserv Trust Company during the second quarter of fiscal
2008. This was partially offset by consulting and contract
services incurred during fiscal 2007 in connection with the TD
Waterhouse integration, which was completed during the third
quarter of fiscal 2007.
Interest on borrowings decreased 34% to $78.4 million, due
primarily to lower average interest rates incurred on our debt
and lower average debt outstanding during fiscal 2008 compared
to fiscal 2007. The average interest rate incurred on our debt
was 4.99% for fiscal 2008, compared to 6.92% for fiscal 2007.
Our average debt outstanding was approximately $1.5 billion
for fiscal 2008, compared to $1.6 billion for fiscal 2007.
Other expenses increased 34% to $62.9 million, primarily
due to higher bad debt and other client-related trading losses,
losses on disposal of equipment and the effect of unfavorable
litigation settlements during fiscal 2008. These increases were
partially offset by a decrease in client identity fraud losses
during fiscal 2008.
Advertising expense increased 19% to $173.3 million,
primarily due to increased spending during fiscal 2008 in
response to competitive market share opportunities. We generally
adjust our level of advertising spending in relation to stock
market activity and other market conditions in an effort to
maximize the number of new accounts while minimizing the
advertising cost per new account.
Losses on money market funds during fiscal 2008 consists of
$27.0 million and $8.6 million of estimated client and
corporate investment losses, respectively, resulting from the
net asset value of two money market mutual funds managed by The
Reserve, an independent mutual fund company, declining below
$1.00 per share in September 2008. The client losses result from
our announced commitment of up to $55 million to mitigate
client losses in these funds in the event clients receive less
than $1.00 per share upon the orderly liquidation of the funds.
This commitment is discussed further under Item 8,
Financial Statements and Supplementary Data — Notes to
Consolidated Financial Statements: “Guarantees” under
Note 17 — Commitments and Contingencies.
Our effective income tax rate decreased to 36.4% for fiscal 2008
compared to 37.6% for fiscal 2007, due primarily to fiscal 2008
reflecting $7.2 million of favorable resolutions of state
income tax matters and $11.1 million of adjustments to
current and deferred income taxes resulting from a revision to
estimated state income tax expense. The revision was based on
our actual state income tax returns filed for calendar year 2006
and similar adjustments applied to estimated state income tax
rates for calendar 2007 and future years. These items favorably
impacted our earnings for fiscal 2008 by approximately $0.03 per
diluted share. We expect our effective income tax rate to be
approximately 38% for fiscal 2009. However, we expect that our
adoption of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes
(“FIN No. 48”), will result in increased
volatility in our quarterly and annual effective income tax rate
because FIN No. 48 requires that any change in
measurement of a tax position taken in a prior tax year be
recognized as a discrete event in the period in which it occurs.
Fiscal
Year Ended September 30, 2007 Compared to Fiscal Year Ended
September 29, 2006
Commissions and transaction fees increased 10% to
$813.8 million, primarily due to the addition of
approximately 2.25 million accounts on January 24,
2006 in the TD Waterhouse acquisition, partially offset by lower
commissions and transaction fees per trade. Total trades
increased 16%, as average client trades per day increased 17% to
253,440 for fiscal 2007 from 216,970 for fiscal 2006. Average
client trades per account (annualized) were virtually unchanged
at 10.0 for fiscal 2007 compared to 10.1 for fiscal 2006.
Average commissions and transaction fees per trade decreased to
$12.90 per trade for fiscal 2007 from $13.61 for fiscal 2006,
primarily due to our new client offerings announced in April
2006 and the closing of our Investment Centers during December
2006, partially offset by higher payment for order flow revenue
per trade.
Net interest revenue decreased 20% to $558.1 million, due
primarily to the movement of over $6 billion in legacy
Ameritrade client credit balances to our MMDA sweep product in
late September 2006, which resulted in a shift in revenues from
net interest revenue to money market deposit account fees. This
decrease was partially offset by the effect of fiscal 2006 not
reflecting a full period of TD Waterhouse net interest revenue.
MMDA fees increased to $535.4 million for fiscal 2007
compared to $185.0 million for fiscal 2006. This was due
primarily to fiscal year 2006 not reflecting a full period of TD
Waterhouse MMDA fee revenue, the movement of over
$6.0 billion in legacy Ameritrade client credit balances to
our MMDA sweep product in late September 2006 and an increase of
34 basis points in the average yield earned on the client
MMDA assets during fiscal 2007 compared to fiscal 2006.
Investment product fees increased 65% to $232.2 million for
fiscal 2007, primarily due to the full year effect of the TD
Waterhouse acquisition.
Other revenues decreased 13% to $37.5 million, due
primarily to the effect of our elimination of account
maintenance fees for all retail clients in April 2006.
Total expenses increased by 12% to $1.15 billion during
fiscal 2007 compared to fiscal 2006, due primarily to fiscal
2006 not reflecting a full year of TD Waterhouse expenses and to
approximately $27 million of expenses for growth
initiatives during fiscal 2007, partially offset by the expense
synergies realized from the TD Waterhouse acquisition.
Employee compensation and benefits expense increased 23% to
$429.8 million, primarily due to the TD Waterhouse
acquisition, including incentive compensation related to meeting
performance targets for the integration. Full-time equivalent
employees decreased to 3,882 at September 30, 2007 from
3,947 at September 29, 2006. However, the number of
temporary employees increased to 354 at September 30, 2007
from 199 at September 29, 2006.
Fair value adjustments of compensation-related derivative
instruments represent adjustments to equity swap agreements that
are intended to economically offset former TD Waterhouse
employees’ stock-based compensation that is based on the
value of TD stock. We assumed certain stock-based compensation
arrangements in connection with our acquisition of TD
Waterhouse, which we administer for the former TD Waterhouse
employees. Because the swap agreements were not designated for
hedge accounting, the fair value adjustments are not recorded in
the same category of our Consolidated Statements of Income as
the stock-based compensation expense, which is recorded in the
employee compensation and benefits category.
Clearing and execution costs increased 9% to $79.7 million,
due primarily to increased expense for statement and
confirmation processing and other clearing expenses associated
with additional accounts and transaction processing volumes
resulting from the TD Waterhouse acquisition. The increase was
partially offset by cost reductions associated with the
completion of the clearing conversion during the third quarter
of fiscal 2007.
Communications expense increased 26% to $82.2 million, due
primarily to increased expense for telephone, quotes and market
information associated with the additional accounts and
transaction processing volumes resulting from the TD Waterhouse
acquisition.
Occupancy and equipment costs increased 13% to
$84.3 million, due primarily to leased facilities added in
the TD Waterhouse acquisition, partially offset by the effects
of a favorable legacy TD Waterhouse litigation settlement of
$4.6 million during the second quarter of fiscal 2007 and a
$2.3 million early lease termination fee associated with
our facility in Jersey City during the first quarter of fiscal
2006.
Depreciation and amortization increased 24% to
$26.2 million, due primarily to depreciation of assets
recorded in the TD Waterhouse acquisition and increased software
amortization related to recently acquired functionality.
Amortization of acquired intangible assets increased 29% to
$54.5 million due to fiscal 2007 reflecting a full year of
amortization of client relationship intangible assets recorded
in the TD Waterhouse acquisition.
Professional services decreased 4% to $84.0 million. During
fiscal 2006, we incurred client communication costs of
$10.5 million associated with the TD Waterhouse acquisition
and a $5.0 million reimbursement of professional services
related to the TD Waterhouse acquisition pursuant to the terms
of our Chairman’s employment agreement. The effect of these
expenses was partially offset by fiscal 2006 not reflecting a
full period of TD Waterhouse expenses.
Interest on borrowings increased 26% to $118.2 million, due
primarily to higher average debt outstanding during fiscal 2007
compared to fiscal 2006 and slightly higher average interest
rates incurred on our debt during fiscal 2007 compared to fiscal
2006. Our average debt outstanding was approximately
$1.6 billion for fiscal 2007, compared to $1.4 billion
for fiscal 2006. The average interest rate incurred on our debt
was 6.92% for fiscal 2007, compared to 6.50% for fiscal 2006.
Advertising expense decreased 11% to $145.7 million,
primarily due to the higher advertising costs during fiscal 2006
associated with the support of two brands after the TD
Waterhouse acquisition, the promotion of the new TD AMERITRADE
brand and the announcement of our new client offerings and
pricing in April 2006.
Fair value adjustments of investment-related derivative
instruments for fiscal 2006 consisted of $11.7 million of
fair value adjustments on our Knight prepaid variable forward
contracts. There were no such fair value adjustments for fiscal
2007 due to the liquidation of our investment in Knight and the
related prepaid variable forward contracts in January 2006.
Gain on sale of investments was $5.9 million for fiscal
2007, compared to $81.4 million for fiscal 2006. The large
gain for fiscal 2006 resulted primarily from the liquidation of
our investment in Knight and related prepaid variable forward
contracts in January 2006.
Our effective income tax rate decreased to 37.6% for fiscal 2007
compared to 38.6% for fiscal 2006, due primarily to the reversal
of approximately $7.5 million of income taxes payable
related to tax positions of prior years during the fourth
quarter of fiscal 2007. In addition, the integration of TD
Waterhouse resulted in a realignment of our activities from
higher tax jurisdictions into lower tax jurisdictions.
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 2008 were financed primarily from our
earnings and cash on hand. We plan to finance our operational
capital and liquidity needs in fiscal 2009 primarily from our
earnings, cash and short-term investments on hand and borrowings
on our parent company and broker-dealer credit facilities.
As of September 30, 2008, we had holdings with a fair value
of approximately $585.5 million in the Primary Fund, a
money market mutual fund managed by The Reserve, an independent
mutual fund company. During September 2008, the net asset value
of the Primary Fund declined below $1.00 per share and the fund
announced it
was liquidating under the supervision of the SEC. In order to
facilitate an orderly liquidation, the SEC allowed the fund to
suspend redemptions until the fund could liquidate portfolio
securities without further impairing the net asset value. On
October 31, 2008, we received $301.4 million of cash
as The Reserve redeemed approximately 51% of the shares of the
fund. On November 21, 2008, The Reserve announced that it
expects to complete an additional redemption of approximately
27% of the shares of the fund on or about December 5, 2008.
We cannot predict when The Reserve will redeem the remaining
shares of the fund. Substantial delays in redemption of the
remaining shares could adversely affect our liquidity and
require us to utilize our revolving credit facilities or seek
alternative financing.
Dividends from our subsidiaries are another source of liquidity
for the parent company. Some of our subsidiaries are subject to
requirements of the SEC, the Financial Industry Regulatory
Authority (“FINRA”) and other regulators relating to
liquidity, capital standards and the use of client funds and
securities, which may limit funds available for the payment of
dividends to the parent company.
Under the SEC’s Uniform Net Capital Rule
(Rule 15c3-1
under the Securities Exchange Act of 1934), our broker-dealer
subsidiaries are required to maintain at all times at least the
minimum level of net capital required under
Rule 15c3-1.
For clearing broker-dealers, this minimum net capital level is
determined by a calculation described in
Rule 15c3-1
that is primarily based on each broker-dealer’s
“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 parent company may make cash capital
contributions to our broker-dealer subsidiaries, if necessary,
to meet broker-dealer net capital requirements.
We consider liquid assets an important measure of our liquidity
and of our ability to fund corporate investing and financing
activities. Liquid assets is a non-GAAP financial measure. We
define liquid assets as the sum of (a) corporate cash and
cash equivalents, (b) corporate short-term investments,
(c) regulatory net capital of (i) our clearing
broker-dealer subsidiary in excess of 5% of aggregate debit
items and (ii) our introducing broker-dealer subsidiary in
excess of 120% of the minimum dollar net capital requirement and
(d) following the merger of our trust company subsidiaries
in August 2008, Tier 1 capital of our trust company in
excess of the minimum dollar requirement. We include the excess
capital of our broker-dealer and trust company subsidiaries in
liquid assets, rather than simply including broker-dealer and
trust cash and cash equivalents, because capital requirements
may limit the amount of cash available for dividend from the
broker-dealer and trust subsidiaries to the parent company.
Excess capital, as defined under clauses (c) and (d)
above, is generally available for dividend from the
broker-dealer and trust subsidiaries to the parent company.
Prior to the merger of our trust subsidiaries in August 2008,
excess capital from our trust subsidiaries was excluded from
liquid assets because, due to regulatory limitations, it was
generally not available for corporate purposes. Liquid assets
should be considered as a supplemental measure of liquidity,
rather than as a substitute for cash and cash equivalents. The
following table sets forth a reconciliation of cash and cash
equivalents, which is the most directly comparable GAAP measure,
to liquid assets (dollars in thousands):
The increase in liquid assets is summarized as follows (dollars
in thousands):
We entered into a credit agreement on January 23, 2006 for
$2.2 billion in senior credit facilities with a syndicate
of lenders under an unregistered private placement. 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 these borrowings without
penalty.
We used $1.6 billion of the proceeds from the Term A
Facility and Term B Facility to fund a portion of the $6.00 per
share special cash dividend paid in connection with the
acquisition of TD Waterhouse and $300 million for working
capital purposes. No initial borrowings were made on the
Revolving Facility, which was established for general corporate
purposes.
The applicable interest rate under the Revolving Facility and
the Term A Facility is calculated as a per annum rate equal to,
at our option, (a) LIBOR plus an interest rate margin
(“LIBOR loans”) or (b) (i) the greater of
(x) the prime rate or (y) the federal funds effective
rate plus 0.50% plus (ii) an interest rate margin
(“Base Rate loans”). With respect to the Revolving
Facility and the Term A Facility, the interest rate margin for
LIBOR loans is 1.50% if the consolidated leverage ratio (as
defined in the Financings) of the Company is 1.75 to 1.00 or
higher, 1.25% if the consolidated leverage ratio of the Company
is less than 1.75 to 1.00 but greater than or equal to 1.00 to
1.00, and 1.00% if the consolidated leverage ratio of the
Company is less than 1.00 to 1.00. The interest rate margin for
Base Rate loans under the Revolving Facility and the Term A
Facility is 1.00% less than the interest rate margin for LIBOR
loans. The applicable interest rate under the Term B Facility is
calculated as a per annum rate equal to (a) LIBOR plus
1.50% or (b) (i) the greater of (x) the prime rate or
(y) the federal funds effective rate plus 0.50% plus
(ii) 0.50%. On September 30, 2008, the applicable
interest rates on the Term A Facility and the Term B Facility
were 4.70% and 5.20%, respectively, based on
30-day
LIBOR. As of September 30, 2008 and 2007, we had
outstanding indebtedness of approximately $0.2 billion and
$1.3 billion under the Term A Facility and Term B Facility,
respectively. There were no borrowings outstanding under the
Revolving Facility as of September 30, 2008 and 2007. The
Financings also provide that we are obligated to pay letter of
credit fees equal to the applicable margin in respect of LIBOR
advances on each outstanding letter of credit under the
Revolving Credit Facility. In addition, the Financings provide
that we pay fees to the issuing bank in respect of the Letters
of Credit in an amount
agreed to by us and the issuing bank. A commitment fee at the
rate of 0.375% per annum accrues on any unused amount of the
Revolving Facility.
The obligations under the Financings are guaranteed by certain
of our subsidiaries, other than broker-dealer subsidiaries, with
certain exceptions, and are secured by a lien on substantially
all of the assets of each guarantor, including a pledge of the
ownership interests in each first-tier broker-dealer subsidiary
held by a guarantor and 65% of the ownership interests in each
first-tier foreign subsidiary held by a guarantor, with certain
exceptions.
The Financings contain covenants that limit or restrict the
incurrence of liens, investments (including acquisitions), sales
of assets, indebtedness and mergers and consolidations, subject
to certain exceptions. The Financings also restrict the payment
of dividends on our outstanding capital stock and repurchases or
redemptions of our outstanding capital stock, subject to certain
exceptions. We are also required to maintain compliance with a
maximum consolidated leverage ratio covenant and a minimum
consolidated interest coverage ratio covenant, and our
broker-dealer subsidiaries are required to maintain compliance
with a minimum regulatory net capital covenant. We were in
compliance with all covenants under the Financings as of
September 30, 2008.
During fiscal 2007, we entered into two amendments to the
January 23, 2006 credit agreement to allow us to repurchase
additional shares of our outstanding common stock and to change
our fiscal year end to September 30. We paid approximately
$1.2 million of additional debt issuance costs to effect
the amendments.
Our wholly-owned broker-dealer subsidiaries had access to
secured uncommitted credit facilities with financial
institutions of up to $630 million as of September 30,
2008 and 2007. The broker-dealer subsidiaries also had access to
unsecured uncommitted credit facilities of up to
$150 million as of September 30, 2008 and 2007. 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 30, 2008 and 2007. As of September 30, 2008
and 2007, approximately $780 million was available to our
broker-dealer subsidiaries pursuant to uncommitted credit
facilities for either loans or, in some cases, letters of credit.
On August 2, 2006, our board of directors authorized a
program to repurchase up to 12 million shares of our common
stock in the open market and in block trades. On
November 15, 2006, the board of directors added
20 million shares to the original authorization, increasing
the total authorization to 32 million shares. In fiscal
2008, we repurchased approximately 4.1 million shares under
the plan at a weighted average purchase price of $18.08 per
share. From the inception of the program through
September 30, 2008, we have repurchased approximately
23.1 million shares at a weighted average purchase price of
$17.27 per share.
We enter into guarantees and other off-balance sheet
arrangements in the ordinary course of business, primarily to
meet the needs of our clients and to manage our asset-based
revenues. For information on these arrangements, see the
following sections under Item 8, Financial Statements and
Supplementary Data — Notes to Consolidated Financial
Statements: “Guarantees” under Note 17
— Commitments and Contingencies and “Money Market
Deposit Account Agreement” under Note 20 —
Related Party Transactions. The MMDA agreement accounts for a
significant percentage of our total revenues (25% of our net
revenues for the fiscal year ended September 30,
2008) and enables our clients to invest in an FDIC-insured
deposit product without the need for the Company to maintain a
bank charter.
Contractual
Obligations
The following table summarizes our contractual obligations as of
September 30, 2008 (dollars in thousands):
FIN No. 48 — Financial Accounting
Standards Board (“FASB”) Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(“FIN No. 48”) became effective for the
Company on October 1, 2007. FIN No. 48 prescribes
a recognition threshold and measurement approach for a tax
position taken or expected to be taken in a tax return when
there is uncertainty about whether that tax position will
ultimately be sustained. The cumulative effect of adopting
FIN No. 48 was a $4.2 million reduction to the
beginning balance of retained earnings as of October 1,
2007. For additional information regarding the adoption of
FIN No. 48, see Item 8, Financial Statements and
Supplementary Data — Notes to Consolidated Financial
Statements — Note 12 — Income Taxes.
SFAS No. 157 — In September 2006, the
FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 157, Fair Value Measurements.
SFAS No. 157 clarifies the definition of fair value
and the methods used to measure fair value and expands
disclosures about fair value measurements.
SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007. Therefore, SFAS No. 157
will be effective for our fiscal year beginning October 1,
2008. Adoption of SFAS No. 157 is not expected to have
a material impact on our consolidated financial statements.
SFAS No. 141R — In December 2007, the
FASB issued SFAS No. 141(revised 2007), Business
Combinations. SFAS No. 141R generally
requires an acquirer to recognize the identifiable assets
acquired, liabilities assumed, contingent purchase consideration
and any noncontrolling interest in the acquiree at fair value on
the date of acquisition. It also requires an acquirer to
recognize as expense most transaction and restructuring costs as
incurred, rather than include such items in the cost of the
acquired entity. For the Company, SFAS No. 141R will
apply prospectively to business combinations for which the
acquisition date is on or after October 1, 2009. We will
evaluate the impact of SFAS No. 141R on any potential
future business combinations that may occur on or after the
effective date.
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.
Two primary sources of credit risk inherent in our business are
client margin lending and securities lending and borrowing. We
manage risk on client margin lending by requiring clients to
maintain margin collateral in compliance with regulatory and
internal guidelines. We monitor required margin levels daily
and, pursuant to such guidelines, require our clients to deposit
additional collateral, or to reduce positions, when necessary.
We continuously monitor client accounts to detect excessive
concentration, large orders or positions, patterns of day
trading and other activities that indicate increased risk to us.
We manage risks associated with our securities lending and
borrowing activities by requiring credit approvals for
counterparties, by monitoring the market value of securities
loaned and collateral values for securities borrowed on a daily
basis and requiring additional cash as collateral for securities
loaned or return of collateral for securities borrowed when
necessary and by participating in a risk-sharing program offered
through the Options Clearing Corporation.
As a fundamental part of our brokerage business, we invest in
interest-earning assets and are obligated on interest-bearing
liabilities. In addition, we earn fees on our MMDA sweep
arrangement with TD Bank USA, which are subject to interest rate
risk. Changes in interest rates could affect the interest earned
on assets differently than interest paid on liabilities. A
rising interest rate environment generally results in our
earning a larger net interest spread. Conversely, a falling
interest rate environment generally results in our earning a
smaller net interest spread.
Our most prevalent form of interest rate risk is referred to as
“gap” risk. This risk occurs when the interest rates
we earn on our assets change at a different frequency or amount
than the interest rates we pay on our liabilities. We have an
Asset/Liability Committee as the governance body with the
responsibility of managing interest rate risk, including gap
risk.
We use net interest simulation modeling techniques to evaluate
the effect that changes in interest rates might have on pre-tax
income. Our model includes all interest-sensitive assets and
liabilities of the Company and interest-sensitive assets and
liabilities associated with the MMDA agreement. The simulations
involve assumptions that are inherently uncertain and, as a
result, cannot precisely predict the impact that changes in
interest rates will have on pre-tax income. Actual results may
differ from simulated results due to differences in timing and
frequency of rate changes, changes in market conditions and
changes in management strategy that lead to changes in the mix
of interest-sensitive assets and liabilities.
Since September 30, 2008, the Federal Open Market Committee
has lowered the federal funds rate by a total of 1%
(100 basis points). Based on our interest simulation model
applied to our financial position as of September 30, 2008,
we estimate that this decrease in short-term interest rates
could result in a reduction of approximately $87 million in
our annual pre-tax income.
In addition to the analysis above related to the actual decrease
in short-term interest rates, we have performed simulations
related to hypothetical additional changes in interest rates.
These 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 based on our financial
position as of September 30, 2008 indicate that a gradual
1% (100 basis points) increase in interest rates over a
12-month
period would result in approximately $50 million more
pre-tax income, while an additional gradual 0.5% (50 basis
points) decrease in interest rates over a
12-month
period would result in approximately $16 million less
pre-tax income. With the target for the federal funds rate
currently at 1%, we believe a hypothetical simulation of an
additional gradual 0.5% decrease in interest rates over a
12-month
period is more realistic than a 1% decrease because a full 1%
decrease in interest rates would result in the target federal
funds rate being lowered to zero.
Our revenues and financial instruments are denominated in
U.S. dollars. We generally do not invest in derivative
instruments, except for economic hedging purposes.
The Board of Directors and Shareholders
TD AMERITRADE Holding Corporation
We have audited the accompanying consolidated balance sheets of
TD AMERITRADE Holding Corporation (the “Company”) as
of September 30, 2008 and 2007, and the related
consolidated statements of income, stockholders’ equity,
and cash flows for each of the three years in the period ended
September 30, 2008. These financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of TD AMERITRADE Holding Corporation at
September 30, 2008 and 2007, and the consolidated results
of its operations and its cash flows for each of the three years
in the period ended September 30, 2008, 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 Corporation’s
internal control over financial reporting as of
September 30, 2008, 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 25, 2008, expressed an
unqualified opinion thereon.
/s/ ERNST &
YOUNG LLP
Chicago, Illinois
November 25, 2008
TD
AMERITRADE HOLDING CORPORATION
As of
September 30, 2008 and 2007
See notes to consolidated financial statements.
TD
AMERITRADE HOLDING CORPORATION
For the
Years Ended September 30, 2008, September 30, 2007 and
September 29, 2006
See notes to consolidated financial statements.
TD
AMERITRADE HOLDING CORPORATION
For the
Years Ended September 30, 2008, September 30, 2007 and
September 29, 2006
See notes to consolidated financial statements.
TD
AMERITRADE HOLDING CORPORATION
For the
Years Ended September 30, 2008, September 30, 2007 and
September 29, 2006
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